Tanzania - Rural and Micro Financial Services Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 32836 IMPLEMENTATION COMPLETION REPORT (IDA-32780 PPFI-Q1130) ON A CREDIT IN THE AMOUNT OF US$2 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR A RURAL AND MICRO FINANCIAL SERVICES PROJECT June 30, 2005 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective May 31, 2005) Currency Unit = TSh TSh 1 = US$ 0.0008898 US$ 1 = TSh 1123.80 FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS AROA Average Return on Assets AROE Average Return on Equity BOT Bank of Tanzania CAMEL Capital, Assets, Management, Earnings, and Liquidity CAS Country Assistance Strategy CBO Community Based Organization CGAP Consultative Group to Assist the Poorest DMFI Directorate of Microfinance Institutions FIDP II Second Financial Institutions Development Project FSAP Financial Sector Assessment Program GDP Gross Domestic Product IDA International Development Association MCM Ministry of Cooperatives and Marketing MFI Microfinance Institution NGO Non-Governmental Organization NMB National Microfinance Bank NMP National Microfinance Policy PAD Project Appraisal Document PHRD Population and Human Resource Development PPF Project Preparation Facility QAG Quality Assurance Group PEARLS Protection, Effective financial structure, Asset quality, Rates of return and cost, Liquidity, and Signs of growth PTF Presidential Trust Fund RFSP Rural Financial Services Project RMFSP Rural and Microfinancial Services Project SACCOS Savings and Credit Cooperatives Society TAMFI Tanzania Association of Microfinance Institutions WDF Women Development Fund YDF Youth Development Fund Vice President: Gobind T. Nankani Country Director Judy M. O'Connor Sector Manager Antony Thompson Task Team Leader/Task Manager: Korotoumou Ouattara  TANZANIA RURAL & MICROFINANCIAL SERVICES PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 6 6. Sustainability 8 7. Bank and Borrower Performance 8 8. Lessons Learned 10 9. Partner Comments 11 10. Additional Information 14 Annex 1. Key Performance Indicators/Log Frame Matrix 15 Annex 2. Project Costs and Financing 16 Annex 3. Economic Costs and Benefits 18 Annex 4. Bank Inputs 19 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 21 Annex 6. Ratings of Bank and Borrower Performance 22 Annex 7. List of Supporting Documents 23 Annex 8. Borrower's Contribution to the ICR 23  Project ID: P050441 Project Name: RURAL& MICRO FIN SVC Team Leader: John Byamukama TL Unit: AFTFS ICR Type: Core ICR Report Date: June 30, 2005 1. Project Data Name: RURAL& MICRO FIN SVC L/C/TF Number: IDA-32780; PPFI-Q1130 Country/Department: TANZANIA Region: Africa Regional Office Sector/subsector: Central government administration (50%); Banking (39%); Micro- and SME finance (11%) Theme: Small and medium enterprise support (P); Legal institutions for a market economy (P); Rural markets (P) KEY DATES Original Revised/Actual PCD: 12/01/1997 Effective: 07/01/1999 06/15/2000 Appraisal: 10/16/1998 MTR: 02/28/2001 02/11/2002 Approval: 08/26/1999 Closing: 12/31/2002 12/31/2004 Borrower/Implementing Agency: GOVT OF TANZANIA/BANK OF TANZANIA Other Partners: STAFF Current At Appraisal Vice President: Gobind T. Nankani Callisto E. Madavo Country Director: Judy M. O'Connor James W. Adams Sector Manager: Antony Thompson Gerard A. Byam Team Leader at ICR: Korotoumou Ouattara Antony Thompson ICR Primary Author: John P. Byamukama 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objective of this project, as stated in the project appraisal document (PAD), is the development of a common policy framework, based on Internationally recognized best practices, for Rural and Microfinance in Tanzania which will establish an enabling environment for rural and microfinance and increase the quality and returns of the many follow-on investments planned by Government agencies and other donors. The project will also seek to increase the level of knowledge and skills within the industry and institute a program of systematic tracking and analyzing all initiatives against common criteria. The lessons derived from that analysis will be fed back to the industry and other stakeholders. The effectiveness of this initiative will be measured by monitoring Government and donor compliance with the policy framework and the quality and quantity of new investments in the sector. The development objective of the Rural and Microfinancial Services Project (RMFSP) was consistent with the government's policy of increasing access by small savers and micro entrepreneurs to financial services. The project was designed in the context of a liberalized financial sector and bank privatization in order to address Government concerns that bank branches in rural areas would be closed and most of the new entrants into the sector were already focusing their attention on the high-value end of the market concentrated primarily in Dar es Salaam. The Government was therefore interested in establishing a conducive environment for the development of a sustainable rural and microfinance system with wide outreach, thereby contributing to broad-based growth and poverty reduction through expansion of financial intermediation to small-scale rural and urban clients. This was a Learning and Innovation Loan (LIL) that was supposed to be implemented fast so that lessons of experience could be fed back into the industry for the benefit of stakeholders. It was not complex as it had only five relatively small components with two institutions involved in its implementation. The majority of the activities fell under the Bank of Tanzania (BOT) and one small component fell under the Cooperatives Department of the Ministry of Cooperatives and Marketing (MCM). 3.2 Revised Objective: There were no revisions 3.3 Original Components: Component; (i) DEVELOPMENT OF A NATIONAL POLICY ON RURAL AND MICROFINANCE; (Cost: $100,000.00) This component was to support preparation of a national microfinance policy based on wide stakeholders consultation and international best practice. This would encourage donors to make substantial investments into the sector. (ii) DESIGN OF AN APPROPRIATE LEGAL,REGULATORY, AND SUPERVISORY FRAMEWORK; (Cost: $295,000.00) This component was to support the review of the legal, regulatory and supervisory framework of rural and microfinance and develop laws and regulations as well as detailed proposals for strengthening supervisory arrangements. (iii) DEVELOP OPERATIONAL GUIDELINES SETTING STANDARDS FOR GOVERNMENT AND DONORS; (Cost: $70,000.00) The component was to develop a set of operational guidelines and standards for banks, cooperative financial institutions, NGOs and capacity building initiatives to ensure that each government and donor - 2 -  initiative maintains certain quality standards, uses a consistent set of performance indicators and focuses on sustainability of the interventions. (iv) CAPACITY BUILDING FOR DIRECTORATE OF MICROFINANCE, BANK OF TANZANIA AND COOPERATIVES DEPARTMENT; (Cost: $1,532,000) The component was to build the capacity of the Directorate of Microfinance (DMFI) at Bank of Tanzania to coordinate, track and analyze development activities in rural and microfinance. DMFI would coordinate donor and government initiatives and track progress on each initiative using a common set of performance indicators and feed back the results to stakeholders through workshop and conferences. The component was also to build the capacity of the Cooperatives Department at the Ministry of Cooperatives and Marketing and develop operational guidelines and standards as well as a supervisory framework for Savings and Credit Cooperatives Societies (SACCOS). (v) ENHANCE KNOWLEDGE AND SKILLS BUILDING IN THE MICROFINANCE INDUSTRY; (Cost: $200,000.00) This component was to support a series of technical workshops to disseminate research work and technical handbooks prepared by the Consultative Group to Assist the Poorest (CGAP) on various topics, and to support a series of annual conferences bringing together all stakeholders in the industry which would be a forum for exposing participants to international developments and experiences within the country. 3.4 Revised Components: There were no revisions. 3.5 Quality at Entry: The quality at entry is rated as satisfactory in the ICR. There has been no assessment by the Quality Assurance Group (QAG) on the project. The project's objective was consistent with one of the objectives of the Country Assistance Strategy (CAS) to build needed capacity in areas critical for sound economic management.This was meant to support one of the Government's priorities to restart progress in poverty reduction by raising growth performance and extending access to basic social and economic services. The Government had realized that there was potential for growth in the informal manufacturing sector (tailoring, bakery, beverages, pottery, metal products, wood products and jewelry) if there were improvements in the availability of microfinance, training in business skills and basic infrastructure facilities. This sub-sector accounted for 16 percent of the total informal sector value added (the urban informal sector accounted for about 15 percent of GDP). The project was responding to the Government's realization that there was great interest on the part of donors, NGOs and others to invest in the development of sustainable rural and microfinance institutions to provide financial services to the informal sector. However, there was no common framework to guide investment in the sector in a consistent and complementary manner under a common set of principles and uniform regulation and supervision. The project was thus designed to address this shortcoming. Project design, preparation and appraisal benefitted from wide consultations and detailed comments from Peer Reviewers and microfinance specialists from CGAP. Despite the small size of the credit, project design and preparation received the highest attention from Bank management as well as senior procurement and financial management staff. The assessment of the risk associated with building capacity to implement the project was rated as Modest on the understanding that the knowledge already existing in the BOT would be shared with the DMFI staff. The risk was actually substantial and the minimization measure identified was thus not adequate to deal with the limited implementation capacity at the beginning of the - 3 -  project when the risk became real. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project outcome is rated satisfactory. The main objective of the project to establish an enabling environment for rural and microfinance was first achieved by the adoption of a National Microfinance Policy (NMP) through a broad consultative process among stakeholders. Before the start of the project, Tanzania had no national policy or strategy for developing a viable and sustainable microfinance sector. The new policy was crafted along international best practice standards and set the stage for helping the Government and the donor community to appreciate the importance of developing sustainable rural and microfinance institutions providing a range of financial services to small scale clients as opposed to the previous practices of directed credit to target sections of the population which had a poor record of sustainability and development impact. The NMP provided guidelines for the microfinance sector regarding pricing, delinquency control, financial reporting and information management, as well as gender equity and governance. The microfinance environment was further enhanced with the amendment of the banking law to take into account microfinance companies as well as SACCOS and make them part of the financial landscape in Tanzania and provide for their effective licensing and supervision by the Bank of Tanzania (BOT). Although delayed, the drafting and adoption of regulations for microfinance companies and SACCOS that emulate international best practice completed the set up of the legal and regulatory framework for the development of microfinance in Tanzania. As was envisaged under the project, donor compliance with the new microfinance policy could already be witnessed with Government of Tanzania no longer being a direct provider of microfinance services as it gradually divested from several projects including Presidential Trust Fund (PTF), Self, Women Development Fund (WDF), Youth Development Fund (YDF), and Rural Financial Services Project (RFSP). Tracking and analysis of the largest microfinance providers by BOT has also shown an improvement in the performance of microfinance institutions with: (i) increased profitability and improved CAMEL ratings; (ii) increased loan portfolio and reduced delinquency rates; (iii) reduced level of subsidies for on-lending; (iv) increased number of institutions and services outlets; and (v) increased number of customers. Between 2001 and 2003, the number of new retail outlets increased by 20 percent, clientele grew by 72 percent on average, outstanding loan portfolio and savings deposits grew by 88 percent and 52 percent respectively, with a low non-performing loan ratio of less than 5 percent on average. Profitability indicators were also on the rise with average adjusted return on assets (AROA) and adjusted return on equity (AROE) increasing 26 percent and 46 percent respectively. Operational and financial self-sufficiency, though still low at below 50 percent, were increasing as well. The tracking and analysis program has been mainstreamed into the BOT's work program and is likely to be sustainable and continue to provide information about the industry in future. An improvement in the quality and quantity of new investments in the microfinance sector was also noticeable with an increase in resources available in the sector with US$1 million raised by the donor community to set up the Financial Sector Deepening Trust which will be used to build the capacity of microfinance institutions (MFIs) in accordance with the recommendations of the microfinance policy. In addition to establishing an enabling environment for rural and microfinance, the project was also supposed to increase the level of knowledge and skills within the industry which was successfully achieved through annual conferences and technical workshops that were conducted for industry participants and stakeholders exposing participants to international developments and experiences within the country. - 4 -  One major positive outcome from the project activities is that microfinance in Tanzania has achieved high visibility and is no longer on the periphery of the financial sector. A number of commercial banks have recently become involved either in the provision of microfinance services to individuals, especially loans to salaried workers, or wholesale lending to microfinance institutions, thus taking advantage of a new enabling environment created by the project. 4.2 Outputs by components: (i) Approved National Policy on Rural and Microfinance: Highly Satisfactory. The policy was prepared and adopted efficiently in a timely manner and with wide stakeholder consultations. This included customer and industry surveys, participatory workshops, study tours for policy makers, and a joint review of the rural and microfinance sector by the various Government agencies and donors active in the sector. The policy was the first major step in putting in place the right environment for a viable and sustainable microfinance system in Tanzania. It provided a vision, as well as guidelines for both practitioners and donors in several areas including pricing, delinquency control, financial reporting and information management, appropriate techniques and products, as well as gender equity and governance. Tanzania National Policy for Rural and Microfinance is internationally recognized as best practice and has attracted a number of visitors from other countries who have come to learn from the Tanzanian experience. (ii) Appropriate legal, regulatory and supervisory framework: Satisfactory. The Microfinance law was passed in April 2003 by amending the Banking and Financial Institutions Act 1991 instead of passing a specialized law. Amending the banking law to include microfinance institutions as another category of financial institution alongside commercial banks and other non-bank financial institutions has the advantage of bringing microfinance into the mainstream of the financial sector and allowing it the visibility it deserves. The regulations to accompany the microfinance law took, however, a long time to complete. There were a number of contentious issues on which the stakeholders could not agree and the process of building a consensus was slow. In the end, stakeholders comments, including detailed comments from the joint World Bank/IMF Financial Sector Assessment Program (FSAP) report, were taken on board in the final draft of the regulations. Although the project closed two months before the regulations were gazetted, i.e., officially published, the final output of the regulations was worthy of best practice. The regulations as approved by the Government deal in a satisfactory manner with key areas in microfinance regulation including the definition of microcredit, a clear list of activities that microfinance companies (MFCs) are allowed to carry out, capital adequacy norms, and minimum capital requirements. These regulations will help with better supervision of the microfinance industry by BOT and the transformation of newly licensed microfinance companies into viable institutions. Already, the largest MFIs in Tanzania have been making adjustments to their operations to comply with the new regulations as they prepare to be licensed and supervised by BOT. (iii) Operational guidelines providing standards for Government and donor investments in rural and microfinance: Marginally Satisfactory. This activity started towards the closing of the project and the guidelines were ready in March 2005 after the project was closed. The guidelines cover principles for supporting organizations engaged in microfinance in Tanzania in accordance with the microfinance policy as well as the new legal, regulatory, and supervisory framework. However, due to its late finalization, it was not possible to witness donor and government compliance with the guidelines as was envisaged under the project. (iv) Capacity Enhanced in the Directorate of Microfinance Institutions (Bank of Tanzania) to enable it coordinate effectively the functions of microfinance: Satisfactory. - 5 -  Specialized training provided to the staff of the Directorate of Microfinance (DMFI) to monitor the microfinance industry was followed by the adoption of a tracking and analysis tool developed by the world-renowned former Micro Banking Bulletin (MBB), now MIX consultant. This unique tool originally developed for microfinance networks to monitor the performance of their members, allowed DMFI to collect, input, and analyze information on 24 MFIs including banks, NGOs and SACCOS. Although it has been difficult for DMFI to collect information and financial data on the majority of MFIs which remain unlicensed, DMFI was still able to undertake the evaluation of the five largest direct providers of microfinance services (NMB, Pride, SEDA, FINCA, and PTF) which account for about 90 percent of the market share of total loans granted to low income clients in Tanzania. The results of the evaluation, done for the first time in Tanzania, showed significant progress being made in outreach, profitability, as well as sustainability. The gathering of information by the DMFI using its tracking and analysis tool is going to be an invaluable tool in future when it is used to effectively monitor and supervise soon to be licensed MFIs. Both the gathering and dissemination of information on the majority of MFIs (both licensed and unlicensed) could also be accomplished in the future with closer collaboration of DMFI with TAMFI, the professional association of microfinance institutions. (v) Capacity Building for the Cooperatives Department: Satisfactory The capacity and knowledge of staff of the Ministry of Cooperatives and Marketing (MCM) in microfinance and SACCOS was enhanced through various training courses aimed at supervision of financial cooperatives. The establishment and adoption of operational guidelines and standards as well as a supervisory framework for SACCOS was delayed but finally approved by the Ministry of Cooperatives and Marketing (MCM) after the project closed. The approved operational guidelines reflect international best practice in the financial cooperative and microfinance world and include: (a) the adoption of PEARLS prudential ratios (a system of standards developed by the World Council of Credit Unions to monitor performance); (b) a modern MIS (Management Information System); (c) a code of ethics and governance structure; and (d) rules/regulations as well as Model bylaws for SACCOS. The Ministry of Cooperatives and Marketing (MCM) also approved detailed recommendations on how to organize itself to successfully supervise SACCOS. The project was able to deliver on its promise to set the stage for the development of a viable SACCOS industry by setting up the needed standards. The implementation of the operational guidelines and enforcement of the regulations which have not yet started, however, will be supported by the ongoing and planned financial sector operations in Tanzania. (vi) Enhancing Knowledge and Skills within the Microfinance Industry: Satisfactory In order to enhance public awareness on issues related to rural and microfinance, the project organized two workshops on Operational Risk Management for Microfinance Auditors and Accountants, and on Business Planning and Financial Modelling for Microfinance Institutions in 2002. These highly technical workshops were intended to enhance the skills of not only microfinance practitioners but of the support network of the sector as well. In addition, three annual conferences bringing together local as well as international stakeholders in the industry were held between 2001 and 2004 and helped enhance and share knowledge as well as shape Government policy in microfinance. The last conference held in March 2004 discussed the future of rural finance in Tanzania. It concluded that past direct government interventions seem to have failed and that efforts by Government should be directed at creating an enabling environment and mitigating market failures. These conclusions are being used as inputs in defining the Government's planned second generation financial sector reforms. 4.3 Net Present Value/Economic rate of return: Not Applicable. 4.4 Financial rate of return: - 6 -  Not Applicable. 4.5 Institutional development impact: The Project had a substantial impact on all the institutions with which it was involved. It was instrumental in enhancing the capacity of the staff of the Directorate of Microfinance Institutions (DMFI) as well as the Department of Cooperatives (MCM) in understanding the issues of rural and microfinance by facilitating their participation in highly recommended international courses in microfinance as well as hands-on local training. The tracking and analysis tool has strengthened the monitoring and evaluation capacity of the DMFI which is going to be handy in future for monitoring licensed MFIs. The approved operational guidelines and supervisory framework for SACCOS have provided the foundation on which the Cooperatives Department will be able to monitor the SACCOS sector once the guidelines have been operationalized. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Generally, there were no factors outside the control of the government or the implementing agency that affected the implementation and outcome of the project. 5.2 Factors generally subject to government control: Macroeconomic policies and conditions were right and Government commitment to the development of sustainable rural and microfinance was strong. Counterpart funding, in the form of contribution in-kind by Bank of Tanzania, was also readily available. The main factor that was subject to Government control and affected project implementation and outcome was the delays in approvals of laws, regulations and guidelines once they were prepared and submitted to the Government. While the National Microfinance Policy was approved in a timely manner, subsequent pieces of legislation and regulations encountered approval delays.The microfinance law had to be enacted by Parliament and the Regulations had to get the approval of the Minister of Finance and Minister of Cooperatives and Marketing. Both of these processes were out of the control of the implementing agency. 5.3 Factors generally subject to implementing agency control: At the time of project design, Bank of Tanzania had just successfully implemented an IDA financial sector project and there was an understanding that the implementing agency would draw on this expertise in the BOT to quickly build its implementation capacity. During project implementation, there was however little collaboration between the DMFI and the BOT department experienced in IDA procedures which led to DMFI staff taking long to grasp IDA procedures. This contributed to delays in procurement of goods and services. Eventually towards the mid term of the project, the staff of the implementing agency learnt the Bank procedures and there was some improvement in the pace of implementation. Overall, the implementing agency prepared annual work plans but their implementation was not well planned. Sufficient lead time was not provided for to allow for procurement of necessary services or goods for implementing the annual work plan in a timely manner. There was also limited delegation of responsibilities in the implementing agency. Valuable time was lost when reports or procurement documents were ready but could not be released because the only official to give the seal of approval was not available. 5.4 Costs and financing: The original cost estimate of the project was US$2.45 million, with IDA providing US$2 million and the Government providing US$0.45 million. A PHRD grant of US$500,000 was provided for the initial activities of research into rural and microfinance in Tanzania as a foundation for the preparation of the National Microfinance Policy. In addition, a Project Preparation Facility (PPF) of US$145,000 was provided for initial project activities. The funds provided for the project were adequate to cover all of the - 7 -  activities, including a contingency fund of US$200,000 (under Unallocated Category). The delays in project implementation caused disbursements to be slow. Even for funds that were already utilized, project management was not submitting Withdrawal Applications on a timely basis. The project was initially supposed to become effective on December 26, 1999 but preparation of the Project Implementation Plan took longer than expected and the project eventually became effective on June 15, 2000. Its original closing date was December 31, 2002, but because of the delay in effectiveness and the slow rate of implementation, the closing date was extended twice to December 31, 2003 and then to December 31, 2004. At the closing of the project, total disbursements amounted to US$1.55 million with an undisbursed balance of US$0.65 million (differences in total amounts due to exchange rate movements) which is to be cancelled. 6. Sustainability 6.1 Rationale for sustainability rating: The probability that the project will maintain the achievements generated is high. The provision of financial services to under-served sections of the population as part of a strategy for increased income generation activities to fight poverty is still a government priority. Some of the activities initiated under the project, such as the tracking and analysis tool, have been incorporated into the regular work plan of the Bank of Tanzania. In addition, the project team agreed with the Government that activities which were not completed under the project would be financed under the ongoing Second Financial Institutions Development Project (FIDP II). This included completion of studies that were ongoing and dissemination of their findings, as well as developing the supervisory framework for enforcement of the various regulations and guidelines that were developed during the project. The supervision of licensed MFIs and large SACCOS is to be mainstreamed into the work of the Directorate of Banking Supervision of BOT. In addition, the Government is in the process of initiating second generation financial sector reforms based on the recommendations of the joint Bank/Fund Financial Sector Assessment Program (FSAP) to be funded by various donors. Among the activities envisaged under rural and microfinance are: (i) conducting a needs assessment for MFI umbrella organizations and strengthening them; (ii) putting in place the supervisory framework for the smaller MFIs (SACCOS, and CBOs); and (iii) supporting capacity building and financial infrastructure for financial cooperatives. These activities are all building upon the foundation laid by the project. 6.2 Transition arrangement to regular operations: As mentioned above, the project's future operation will rely on activities that have been mainstreamed into the BOT's regular work program together with the ongoing IDA-funded FIDP II and the planned multi-donor funded second generation financial sector reforms. A new set of performance indicators is in the process of being developed under the new planned program of reform. As the World Bank will be financing some of the activities in the new program, this will provide an opportunity to monitor the progress of the project's operation. 7. Bank and Borrower Performance Bank 7.1 Lending: The performance of the Bank during lending was satisfactory. The Bank supported the Government in the identification stage by providing a PHRD grant that supported research on the rural and microfinance sector. The results of this research were the basis of a joint Government/donor review of the sector from which the project concept was derived. The Bank team included CGAP and other rural finance experts to ensure that the project reflects internationally recognized best practice in microfinance. There was close - 8 -  collaboration with the Borrower which ensured that project design was consistent with Government's development priorities for the sector. The Bank provided a PPF to support initial preparations for project effectiveness. The costing of the activities was adequate and the project had sufficient funding through its life time. 7.2 Supervision: The performance of the Bank during supervision was satisfactory. The Bank carried out at least 2 supervision missions every year, each lasting about 2 weeks, throughout the life of the project. For each supervision mission, an Aide Memoire that reported in detail project implementation progress was prepared and discussed with the authorities. Appropriate ratings on Implementation Progress were given in Form 590/PSRs following each supervision mission. For example, implementation progress was downgraded at one time when progress on one of the critical components was lagging behind and appeared likely to affect achievement of the project's development objective. The project rating was then upgraded when agreed actions were carried out satisfactorily to rectify implementation problems. The Bank team was flexible and was patient with the Implementing Agency as its staff went through the learning process of Bank procedures. The Development Credit Agreement had to be amended to provide flexibility on the procurement methods that could be used. The team was always ready and available to provide expert advice and assistance both in the field and from headquarters. There was continuity in the team and through the four and a half years of the life of the project. Task team leadership changed only once and the former task team leader remained an active member of the project team. Procurement, financial management and disbursements support was being efficiently provided from the Country Office. 7.3 Overall Bank performance: On the basis of the high quality of the team at lending and the effective supervision efforts, the overall Bank performance in the project was satisfactory. Borrower 7.4 Preparation: The performance of the Borrower at the preparation stage was satisfactory. The Borrower showed a high level of enthusiasm and ownership during the early stages of project preparation and carried out extensive consultations with stakeholders. The very first national conference on microfinance for all financial institutions in Tanzania in April 1997 was sponsored by the Bank of Tanzania. The conference brought in some of the world's leading experts to make presentations at the conference and to selected Parliamentarians and Members of Cabinet. The Borrower was heavily involved in the follow-up activities that culminated in the joint Government /donor review of the microfinance sector. Commitment to development of rural and microfinance was at the highest levels of Government. The President of Tanzania made a specific request in January 1998 in Kampala to then Bank President, Mr. Wolfensohn, for the Bank's support in the development of microfinance services. Mr. Wolfensohn indicated the Bank's willingness to help so long as the support was provided in the context of established microfinance best practice. 7.5 Government implementation performance: The performance of the Government was satisfactory. Macroeconomic policies were conducive to the successful implementation of the project. The Government kept committed to the objectives of the project and did not interfere in operational decisions. The process of approval of laws and regulations was however slow, but all laws and regulations have now been approved. The provision of counterpart funding was timely as this was provided in-kind by Bank of Tanzania (such as provision of office space and staff for project management). - 9 -  7.6 Implementing Agency: The performance of the implementing agency was marginally satisfactory. The collaboration between the DMFI and the Directorate of Banking Supervision (DBS) which had good knowledge of implementation of Bank-funded projects did not take place as envisaged. DBS has already implemented a more complex project and had a wealth of knowledge that would have benefited the implementation capacity of the DMFI. However, when implementation started, there was less consultation and more of a desire to drive the agenda from within the DMFI. Given the high level of collaboration and involvement of stakeholders at the preparation stage, this change in behavior had not been anticipated. As a result, it took longer than expected for the staff of the DMFI to grasp Bank procedures thus leading to implementation delays. The situation improved slightly when the implementing agency started seeking for guidance from the members of the project team that were based in the Country Office. In general, the planning for the various activities did not take into account the lead time necessary to procure services or goods required to carry out those activities. This was the reason why some activities were started a few months before the closing date of the project and could only be completed after the project had closed. The recommendations of the Bank team were not addressed in a timely manner with the result that it was common for a similar set of issues from one supervision mission to still be outstanding six months later at the next mission. For example, closer collaboration with donors involved in rural and microfinance and with TAMFI was not carried out consistently despite repeated suggestions from the Bank team. 7.7 Overall Borrower performance: The overall performance of the Borrower was satisfactory. The initial commitment and involvement of the Borrower was high but the level of collaboration among stakeholders levelled off during implementation. The Government continued to give improved access to finance a high priority in its program. 8. Lessons Learned (i) The project was designed as a Learning and Innovation Loan (LIL). It was meant to be executed quickly so that the outputs could be applied to the rural and microfinance industry and the lessons learnt from there re-applied to the industry to catalyze further development. This was an ambitious target for a project that was reform-oriented to be completed in three years. A number of activities, such as reviewing and amending laws, involved consensus building among stakeholders which takes a long time. In the end, this project turned out to be like a normal investment project. A LIL was thus not the right instrument to carry out some of the envisaged long term reforms. (ii) For a policy-oriented operation, the benefits of the policy can best benefit the industry participants if there is close collaboration between the implementing agency and other stakeholders in the industry. At the preparation stage, the wide collaboration led to a good design. Implementation is normally a difficult stage where a number of vested interests in the industry have to be brought on board to support the proposed reforms. In this project, there was limited collaboration during implementation between the implementing agency and other interested parties, such as other departments of BOT, development partners, Ministry of Finance and the umbrella associations, which led to delays and lack of clear channels of communication with the practitioners. For example, as the MFIs were not licensed by BOT, the implementing agency had no leverage in its requests for information from the MFIs. This would have been better addressed if there had been close collaboration with TAMFI which is the interface between the policymakers and the MFIs. (iii) The project showed that a suitable enabling environment is essential for a sustainable rural and microfinance system. The adoption of the National Microfinance Policy at an early stage brought order into the Tanzania system and ensured that Government did not get involved in the provision of subsidized directed microfinance lending which undermines the operations of MFIs. Even with some other elements, - 10 -  such as supervision, yet to be put in place, the industry is already showing substantial improvements in outreach and profitability. (iv) It is important for project sustainability to use existing Government capacity in implementing the project. Because the project was mainstreamed into the normal BOT operations, activities that were initiated under the project are still being carried out even after the project has closed. (v) The project raised the profile of rural and microfinance in Tanzania and attracted a number of development partners into the sector. The Bank's agenda tends to define or set the trend for what the other development partners will focus on in a given sector. As part of the harmonization process, the Bank clearly has a leadership role in mapping out the needs of the financial sector within a sector-wide approach whereupon all development partners can agree on the areas to which they can provide their support. 9. Partner Comments (a) Borrower/implementing agency: The Borrower has provided a contribution to the ICR and the full text of the report is included in Annex 8. The section of the Executive Summary of the Borrower's contribution covering the main findings, conclusions, lessons learnt, and recommendations is included in this section. Main Findings of the Study The RMFSP (components or objectives) had evolved and were incorporated in BOT's corporate strategic plans. This is an indicator of internalisation of the project activities into the mainstream activities of the BOT. Overall, the RMFSP has generally performed the intended activities as planned and achieved its objectives in spite of some delays. Based on field interviews, the overall effectiveness is rated as substantial. The World Bank has participated in the RMFSP as financier through IDA window as well as through providing technical assistance. The World Bank ensured compliance with World Bank's procurement, payment, and accounting procedures and internal control systems. Actual disbursement of resources was generally consistent with planned allocations. World Bank financing of this project did not crowd out other donors since provision for co-financing was made. There is concern over delays attributed to the complexity of the World Bank procurement procedures. For instance, concern has been expressed over delays in procurement of the consultants attributed to the complexity of procurement procedures involving application for "no objection" in at least four stages. One lesson to be learned from this experience is that project implementation would have been simplified if the World bank/IDA had made efforts to align its procurement procedures to the national procurement systems. The need to align donor systems to national systems is a principle that has now been agreed upon as expressed in the Rome Declaration (2003) and the Paris Declaration (2005). In future the World Bank should make the necessary adjustments to accommodate the principles of Rome and Paris conventions. This would save efforts and resources spent learning new procedures associated with project of this kind. The preparations for the development of the NMP provided the foundation for the evolution of an efficient and effective microfinance system that would serve the low-income segment of the society, and thereby contribute to broad based economic growth and reduction of poverty in Tanzania. The process of formulating the policy was broadly participatory, involving a wide spectrum of stakeholders. - 11 -  The exercise of reviewing current financial sector regulations and proposing appropriate legal and regulatory framework as well as the supervisory arrangements for the MF industry was completed satisfactorily although some components of it were delayed due to delays in procuring consultancy services. Development of the operational guidelines for government and donor investments in the microfinance industry has prepared ground for ensuring that support initiatives maintain certain quality standards, use consistent sets of performance indicators and focus on ensuring sustainability. The major concern is that this component has not been completed during the life of the project. However, alternative arrangements were made to ensure its completion. Capacity building focused on DMFI of BOT and CDD of MCM, which oversees the SACCOs. Major achievements were made in building capacity in DMFI and CDD in terms of human capital development through training courses, technical workshops and conferences and in providing the necessary equipment and working facilities. While initiatives taken to build the capacity of the regulating bodies, notably BOT and MCM the project design did not explicitly include one important player, MOF. Tracking and analysis of the MF industry is being carried out. Two challenges have been identified in establishing a comprehensive picture of the MF industry in Tanzania. First, many MFIs have not developed the culture of being transparent and some do not feel obliged to provide information to the DMFI since they are not licensed by the BOT. Second, the MFIs adhere to varying standards and different systems and formats of record keeping. The RMFSP facilitated stakeholders to acquire knowledge and skills in microfinance by providing exposure to information on international practice and other best practices. This knowledge was imparted through various workshops and conferences. RMFSP is relevant to the current concerns over poverty reduction and broad based growth as reflected in key government policy and strategy documents. Overall, based on the field interviews, the relevance of the RMFSP is rated as substantial. The resources allocated for various activities in the project were spent according to plan. By developing capacity in DMFI, duplication of effort within government departments in matters of microfinance has been reduced most likely resulting in reduced transaction costs. The overall efficiency is rated as substantial. The RMFSP's benefits are likely to be sustainable overtime considering that the process adopted was largely participatory and ownership was high. Financially, the fact that the project was mainstreamed in the structures of BOT points towards sustainability even after the project has ended. It is expected the Financial Sector Deepening Programme, established as a Trust as one outcome of this project, will help to sustain this trend. Overall, the RMFSP's activities and outputs are likely to be sustainable The RMFSP has just been completed so it may be too early to measure its impact. However, there are indications that the project has laid the foundation for impacts to be felt in terms of enhanced access to microfinancial services in the country especially by people with small means. Broad based access to microfinancial services is likely to generate broad based income generation and employment and ultimately contribute to poverty reduction in the country. Conclusion and Lessons Learnt - 12 -  Overall Assessment: The RMFSP has performed its activities as planned. The various components of the projects were found to be complementary and internally consistent. The World Bank was found to have carried out its responsibilities as planned except for concerns over delay in implementation of some activities that was attributed to the complexity of the World Bank procurement procedures. Lessons Learned Mainstreaming of project implementation in the main activities of the DMFI is a strength. The fact that project implementation was mainstreamed into the corporate plan of the Bank of Tanzania facilitated internalisation of the project into regular activities of the implementing institution. Complementarity among different components is a strength: A well-prepared microfinance policy has been completed followed by a legal and regulatory framework and operational guidelines and standards coupled with capacity building and knowledge enhancing initiatives. Putting in place these complementary instruments has made a major contribution towards laying the foundations of the enabling environment for development of micro finance in the country. Ensuring complementarity among different components is a strength of this project. Adaptation of Best Practices and Standards: The project recognised that the microfinance industry has gone through a major evolution in recent years. Therefore, the design of the project provided for learning from international experience and enhancing knowledge in developments in the microfinance industry. This strength of the project is amenable to replication in other projects. Inclusivity of the project in terms of permitting co-financing is a strength of the project. It has been learned that providing for inclusivity, permitting co-financing of project related components has enhanced cooperation of other donors in project implementation. Participation in project design and implementation has enhanced ownership of the project outcomes by the key stakeholders, a situation which is conducive to attaining sustainability. Simplification of Procurement procedures One lesson to be learned from this experience is that project implementation would have been simplified if the World bank/IDA had made efforts to permit simplification of its procedures or to align its procurement procedures to the national procurement systems. Recommendations Capacity Building. The project has focused more on capacity building within the DMFI and CDD of MCM. The way forward should ensure that capacity of regulating institutions is complemented by directing capacity building to the MOF and the operators and practitioners. Project implementation should be mainstreamed into the activities of the implementing agency. The project design should be part of the strategic plan of the implementing agency. This approach in project design and implementation would facilitate internalisation and enhance ownership and sustainability. In the era of globalisation it is important to build in mechanisms of learning and knowledge generation in project activities. The design of projects should recognise that the many industries are - 13 -  going through considerable changes and provide for learning from international experience and enhancing knowledge in developments in the respective sectors. Aligning Procurement Procedures to National Procedures The need to align donor systems to national systems is a principle that has now been agreed upon as expressed in the Rome Declaration (2003) and the Paris Declaration (2005). In future the World Bank should make the necessary adjustments to accommodate the principles of Rome and Paris conventions and align its procedures to national procedures. Raising the Institutional Profile for Microfinance Policy. The study has found that much as Tanzania has a huge potential for microfinance, the MOF which has the mandate to take formulate and take the lead in presenting the microfinance policy through Cabinet is itself rather weak. It is therefore recommended that a microfinance unit be established within the MOF to oversee policy and regulatory matters relating to microfinance in the country. Priority should be given to building the capacity of that unit. (b) Cofinanciers: Not applicable (c) Other partners (NGOs/private sector): Not applicable 10. Additional Information - 14 -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate An enabling environment for rural and The effectiveness of the NMP will be NMP adopted in May 2000 and followed by micro-finance that facilitate the inflow of measured by monitoring Government and several investments including the rural quality investments into the sector is donor compliance with the policy framework finance program by African Development achieved with the development of a common and the quality and quantity of new Bank and Financial Sector Deepening Trust, policy framework. investments in the sector. the donor joint initiative. Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate National Policy on Rural & Micro-Finance is Policy is being implemented by all Policy was approved in May 2000. Action approved. stakeholders. plan for policy implementation was developed. Appropriate legal, regulatory and supervisory Legal, regulatory, and supervisory framework Legal framework for microfinance adopted in framework is established. is in place. Feb. 03 with amendment of the Banking law. Regulations for microfinance companies, financial cooperatives and SACCOS were drafted, cleared by the ministry of Finance and published in the official Gazette in March 2005. Operational Guidelines providing standards Operational Guidelines are developed for Guidelines have been drafted and for Government and donor investment in rural banks, cooperative financial institutions, arrangements have been made for their and micro-finance are developed and NGOs and capacity building initiatives. dissemination to be financed by FIDPII implemented. Compliance by Government, donors and NGOs to the operational guidelines is achieved by December 2004. Capacity enhanced in the Bank of Tanzania Staff training is completed and staff is able to 26 DMFI & CDD staff attended various enabling them to coordinate effectively the successfully use tracking and analysis tool to courses. DMFI Staff now able to use tracking functions of micro-finance. monitor MFIs as well as according to a list of and analysis tool after training to monitor best practice monitorable indicators selected MFIs. from the Nationwide Policy. Knowledge in the Micro-Finance Institutions Three Annual conferences and three Two technical workshops organized by DMFI Sector is increased. bi-annual technical workshops have been and held in May and October 2002, held. respectively. Also, three annual conferences on microfinance were held in March 2001, December 2002 and March 2004. Sustainable rural and micro finance - Increased profitability and CAMEL rating Analysis of 7 major MFIs (Pride, FINCA, institutions with a wide outreach. - Reduced delinquency rates SEDA, PTF, NMB, Mucoba, Kibaigwa) from - Improved quality of subsidies 2001 to 2003 show that:-Increase in AROA - Increased number of institutions/service by 26% and AROE by 46% outlets - Delinquency rates fell to 5% and below - Increased number of clients - Reduced lines of credit - Number of retail outlets up 20% and Number of clients up 72%. 1End of project - 15 -  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Develop a National Microfinance Policy 0.15 0.10 66 Develop Legal, Regulatory and Supervisory Framework 0.30 0.33 110 Develop Guidelines for Government and Donors 0.07 0.08 114 Capacity Building for DMFI and MCM 1.53 1.36 89 Enhance Knowledge and Skills in Microfinance 0.20 0.16 80 Total Baseline Cost 2.25 2.03 Physical Contingencies 0.20 0.00 0 Total Project Costs 2.45 2.03 Total Financing Required 2.45 2.03 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 0.00 0.00 0.16 0.00 0.16 (0.00) (0.00) (0.16) (0.00) (0.16) 3. Services 0.00 0.00 1.57 0.00 1.57 (0.00) (0.00) (1.57) (0.00) (1.57) 4. Operating Expenses 0.00 0.00 0.07 0.45 0.52 (0.00) (0.00) (0.07) (0.45) (0.52) 5. Unallocated 0.00 0.00 0.20 0.00 0.20 (0.00) (0.00) (0.20) (0.00) (0.20) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.00 0.00 2.00 0.45 2.45 (0.00) (0.00) (2.00) (0.45) (2.45) Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 0.00 0.00 0.16 0.00 0.16 (0.00) (0.00) (0.16) (0.00) (0.16) 3. Services 0.00 0.00 1.41 0.00 1.41 (0.00) (0.00) (1.41) (0.00) (1.41) 4. Operating Expenses 0.00 0.00 0.01 0.45 0.46 - 16 -  (0.00) (0.00) (0.01) (0.45) (0.46) 5. Unallocated 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.00 0.00 1.58 0.45 2.03 (0.00) (0.00) (1.58) (0.45) (2.03) 1/Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 17 -  Annex 3. Economic Costs and Benefits Not Applicable - 18 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 9/8/1997 3 TASK TEAM LEADER RURAL FINANCE SPECIALIST FINANCIAL SECTOR SPECIALIST Appraisal/Negotiation 10/28/1998 5 TASK TEAM LEADER RURAL FINANCE SPECIALIST (2) FM SPECIALIST PROCUREMENT SPECIALIST 7/9/1999 5 TASK TEAM LEADER LAWYER FM SPECIALIST FINANCIAL ANALYST PEOCUREMENT SPECIALIST Supervision 02/19/2000 2 TASK TEAM LEADER (1); S S FINANCIAL ANALYST (1) 03/31/2000 2 TASK TEAM LEADER (1); S S FINANCIAL ANALYST (1) 11/07/2000 1 TEAM MEMBER. (1) S S 05/07/2001 1 SR. FINAN. SECTOR SPEC (1) S S 07/20/2001 5 TASK TEAM LEADER (1); S S FINANCIAL ANALYST (1); SR. PROG. & BUDGET OFF (1); FIN. MGT. SPECIALIST (1); PROCUREMENT OFFICER (1) 08/14/2002 3 FIN. ECON/TTL (1); FIN. S S SPECIALIST (1); FIN.SP./COUNTRY ANCHOR (1) 03/07/2003 3 FIN. ECONOMIST/TTL (1); U S LEAD FIN.SECTOR SPEC. (1); FIN. SPECIALIST (1) 11/21/2003 2 TASK LEADER (1); FIN. S U SECTOR ANCHOR (1) 11/21/2003 2 TTL (1); Lead Finance Sec. Spec U S (1) 06/04/2004 3 TTL (1); Country anchor (1); S S - 19 -  Fin. Sector Spec. (1) 11/19/2004 2 TTL,SR. FIN. ECONOMIST (1); S S FINANCIAL ANALYST (1) ICR 4/15/2005 1 FINANCIAL ANALYST S S (1) (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation Not available 97 Appraisal/Negotiation Not available 65 Supervision 96 378 ICR 5 30 Total 570 - 20 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 21 -  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 22 -  Annex 7. List of Supporting Documents (i) Final PSR (ii) Aide Memoire of final supervision mission (iii) Monthly Disbursement Sumnmary, April 2005 Annex 8. Borrower's Contribution to the ICR _______________________________________________________________________ Final Evaluation of the World Bank Support on the Rural and Microfinancial Services Project (RMFSP- Cr. No. 3278 TA) ECONOMIC AND SOCIAL RESEARCH FOUNDATION (ESRF) FINAL EVALUATION OF THE RURAL AND MICROFINANCIAL SERVICES PROJECT (RMFSP- Cr. No. 3278 TA) FOR THE BANK OF TANZANIA Final Report 2nd May 2005 Table of Contents List of Abbreviations ii - 23 -  ACKNOWLEDGEMENT iii Executive Summary iv Section 1: INTRODUCTION 1 1.1 Background and Objectives 1 1.2 Methodology 2 Section 2: Findings 3 2.1 The Performance of the Bank of Tanzania during Evolution and Implementation of the RMFSP 3 2.2 The Performance of the World Bank during Evolution and Implementation of the RMFSP 4 2.3 The Assessment of the RMFSP Objectives, Design, Implementation and Operational Experience 6 2.3.1 Development and Adoption of National Microfinance Policy 6 2.3.2 Development of an Appropriate Legal, Regulatory and Supervisory Framework for Microfinance Operations in Tanzania 6 2.3.3 Development of Operational Guidelines providing Standards for Government and Donor Support into the Micro Finance Sector (Banks, NGOs, Cooperatives and Capacity Building) 8 2.3.4 Capacity Building for Staff and Procurement of Motor Vehicles and Office Equipment for the Directorate of Microfinance (DMFI) and Cooperative Development Department (CDD) of the Ministry of Cooperative and Marketing (MCM) 9 2.3.5 Enhancing Microfinance Knowledge and Skills 11 2.4 The Determination of the Relevance, Effectiveness, Efficiency, Sustainability and Impact of the RMFSP 12 2.4.1 The Relevance of the RMFSP 12 2.4.2 The Effectiveness of the RMFSP 13 2.4.3 The Efficiency of the RMFSP 13 2.4.4 The Sustainability of the RMFSP 13 2.4.5 The Impact of the RMFSP 14 Section 3: Conclusion, LESSONS LEARNT and Recommendations 15 3.1 Conclusion 15 3.2 Lessons Learned 15 3.3 Recommendations for the Way Forward 17 References 19 ANNEXES 20 Annex 1: The List of Persons Interviewed 20 List of Abbreviations BOT Bank of Tanzania BPFMIM Business Planning and Financial Modelling for Micro finance Institutions - 24 -  CDD Cooperative Development Department DCA Development Credit Agreement DMFI Directorate of the Micro Finance ESRF Economic and Social Research Foundation FIDP Financial Institution Development Project FIPED Financial Institutions for Private Enterprise Development ICR Implementation Completion Report MCM Ministry of Cooperatives and Marketing MFI Micro Finance Institutions MKUKUTA Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania MOF Ministry of Finance NBAA National Board of Accounting and Auditing NGO Non Governmental Organisation NMP National Micro finance Policy NPES National Poverty Eradication Strategy NSC National Steering Committee NSGRP National Strategy for Growth and Reduction of Poverty ORMAM Operational Risk Management and Auditing of Micro finance PAD Project Appraisal Document PER Project Evaluation Report PIP Project Implementation Plan PPI Project Performance Indicator PRSP Poverty Reduction Strategy Paper RMFSP Rural Micro finance Services Project SACCOS Savings and Credit Cooperative Societies SCCULT Savings and Credit Cooperative League of Tanzania Ltd SDR Special Drawing Rights TAS Tanzania Assistance Strategy NTF National Task Force TOR Terms of Reference TTL Task Team Leader US$ United States Dollar - 25 -  ACKNOWLEDGEMENT This report has been prepared on behalf of the Economic and Social Research Foundation by Prof. Samuel M. Wangwe as Lead Consultant assisted by Godwill G. Wanga and Prosper Charle. The consultants would like to thank all stakeholders who cooperated in providing the necessary information which enabled this study to be completed. The usual disclaimer applies. - 26 -  Executive Summary Introduction The Rural and Micro-Financial Services Project (RMFSP) was launched in January 2000. The workshop to launch the RMFSP was held in Arusha from 10th to 12th February 2000. The workshop aimed at providing opportunity for each project beneficiary to explain their programmes and learn about procedures associated with the implementation, including responsibilities for achieving project objectives. The workshop participants included leaders of the financial institutions, senior civil servants related to the project, representatives of the World Bank, members from the donor countries and agencies interested in the areas and project. and became effective in mid June 2000 on fulfilling the laid down conditions. The project was financed through IDA credit no.3278-TA of SDR 1.5 million ($2 million) plus counterpart funding from the Government of Tanzania (GOT) of $452,000. General Objectives of the project: The RMFSP intended to create an enabling environment for developing a broad based, sustainable rural and micro-finance system. The strategic goal of the project is to contribute to broad-based growth and poverty reduction through the expansion of financial intermediation to small-scale clients in the rural as well as urban areas of Tanzania. Components of the project (RMFSP): The project has five components: (i) Development of a National Microfinance Policy; (ii)Development of an Appropriate Legal, Regulatory and Supervisory Framework for Microfinance for operations in Tanzania; (iii) Development of operational guidelines providing standards for government and donors support into microfinance sector; (iv) Capacity Building: i. Capacity building for the Directorate of Microfinance of the Bank of Tanzania; ii. Capacity Building for the Cooperative Development Department (CDD) of the Ministry of Cooperatives and Marketing; iii. Procurement of motor vehicles and office equipment for the Directorate of Microfinance and Cooperative Development Department of the Ministry of Cooperatives and Marketing. (v) Enhancing of knowledge and skills within the Microfinance Industry. The Scope of Work for this Assignment (i) To assess the project objectives, design, implementation and operational experience. (ii)To evaluate the performance of the Bank of Tanzania during evolution and implementation of the project with emphasis on lessons learned. (iii) To evaluate the performance of the World Bank or other partners during the evolution and implementation of the project with emphasis on lessons learned. - 27 -  Methodology In undertaking this assignment the study team reviewed project related documents and interviewed representatives of key stakeholders. Main Findings of the Study The RMFSP (components or objectives) had evolved and were incorporated in BOT's corporate strategic plans. This is an indicator of internalisation of the project activities into the mainstream activities of the BOT. Overall, the RMFSP has generally performed the intended activities as planned and achieved its objectives in spite of some delays. Based on field interviews, the overall effectiveness is rated as substantial. The World Bank The World Bank group encompasses 5 development institutions including the IBRD, IDA, IFC, MIGA, and ICSD. has participated in the RMFSP as financier through IDA window as well as through providing technical assistance. The World Bank ensured compliance with World Bank's procurement, payment, and accounting procedures and internal control systems. Actual disbursement of resources was generally consistent with planned allocations. World Bank financing of this project did not crowd out other donors since provision for co-financing was made. There is concern over delays attributed to the complexity of the World Bank procurement procedures. For instance, concern has been expressed over delays in procurement of the consultants attributed to the complexity of procurement procedures involving application for "no objection" in at least four stages. One lesson to be learned from this experience is that project implementation would have been simplified if the World bank/IDA had made efforts to align its procurement procedures to the national procurement systems. The need to align donor systems to national systems is a principle that has now been agreed upon as expressed in the Rome Declaration (2003) and the Paris Declaration (2005). In future the World Bank should make the necessary adjustments to accommodate the principles of Rome and Paris conventions. This would save efforts and resources spent learning new procedures associated with project of this kind. The preparations for the development of the NMP provided the foundation for the evolution of an efficient and effective microfinance system that would serve the low-income segment of the society, and thereby contribute to broad based economic growth and reduction of poverty in Tanzania. The process of formulating the policy was broadly participatory, involving a wide spectrum of stakeholders. The exercise of reviewing current financial sector regulations and proposing appropriate legal and regulatory framework as well as the supervisory arrangements for the MF industry was completed satisfactorily although some components of it were delayed due to delays in procuring consultancy services. Development of the operational guidelines for government and donor investments in the microfinance industry has prepared ground for ensuring that support initiatives maintain certain quality standards, use consistent sets of performance indicators and focus on ensuring sustainability. The major concern is that this component has not been completed during the life of the project. However, alternative arrangements were made to ensure its completion. Capacity building focused on DMFI of BOT and CDD of MCM, which oversees the SACCOs. Major achievements were made in building capacity in DMFI and CDD in terms of human capital development through training courses, technical workshops and conferences and in providing the necessary equipment and working facilities. While initiatives taken to build the capacity of the regulating bodies, notably BOT and MCM the project design did not explicitly include one important player, MOF. - 28 -  Tracking and analysis of the MF industry is being carried out. Two challenges have been identified in establishing a comprehensive picture of the MF industry in Tanzania. First, many MFIs have not developed the culture of being transparent and some do not feel obliged to provide information to the DMFI since they are not licensed by the BOT. Second, the MFIs adhere to varying standards and different systems and formats of record keeping. The RMFSP facilitated stakeholders to acquire knowledge and skills in microfinance by providing exposure to information on international practice and other best practices. This knowledge was imparted through various workshops and conferences. RMFSP is relevant to the current concerns over poverty reduction and broad based growth as reflected in key government policy and strategy documents. Overall, based on the field interviews, the relevance of the RMFSP is rated as substantial. The resources allocated for various activities in the project were spent according to plan. By developing capacity in DMFI, duplication of effort within government departments in matters of microfinance has been reduced most likely resulting in reduced transaction costs. The overall efficiency is rated as substantial. The RMFSP's benefits are likely to be sustainable overtime considering that the process adopted was largely participatory and ownership was high. Financially, the fact that the project was mainstreamed in the structures of BOT points towards sustainability even after the project has ended. It is expected the Financial Sector Deepening Programme, established as a Trust as one outcome of this project, will help to sustain this trend. Overall, the RMFSP's activities and outputs are likely to be sustainable The RMFSP has just been completed so it may be too early to measure its impact. However, there are indications that the project has laid the foundation for impacts to be felt in terms of enhanced access to microfinancial services in the country especially by people with small means. Broad based access to microfinancial services is likely to generate broad based income generation and employment and ultimately contribute to poverty reduction in the country. Conclusion and Lessons Learnt Overall Assessment: The RMFSP has performed its activities as planned. The various components of the projects were found to be complementary and internally consistent. The World Bank was found to have carried out its responsibilities as planned except for concerns over delay in implementation of some activities that was attributed to the complexity of the World Bank procurement procedures. Lessons Learned Mainstreaming of project implementation in the main activities of the DMFI is a strength. The fact that project implementation was mainstreamed into the corporate plan of the Bank of Tanzania facilitated internalisation of the project into regular activities of the implementing institution. Complementarity among different components is a strength: A well-prepared microfinance policy has been completed followed by a legal and regulatory framework and operational guidelines and standards coupled with capacity building and knowledge enhancing initiatives. Putting in place these complementary instruments has made a major contribution towards laying the foundations of the enabling environment for development of - 29 -  micro finance in the country. Ensuring complementarity among different components is a strength of this project. Adaptation of Best Practices and Standards: The project recognised that the microfinance industry has gone through a major evolution in recent years. Therefore, the design of the project provided for learning from international experience and enhancing knowledge in developments in the microfinance industry. This strength of the project is amenable to replication in other projects. Inclusivity of the project in terms of permitting co-financing is a strength of the project. It has been learned that providing for inclusivity, permitting co-financing of project related components has enhanced cooperation of other donors in project implementation. Participation in project design and implementation has enhanced ownership of the project outcomes by the key stakeholders, a situation which is conducive to attaining sustainability. Simplification of Procurement procedures One lesson to be learned from this experience is that project implementation would have been simplified if the World bank/IDA had made efforts to permit simplification of its procedures or to align its procurement procedures to the national procurement systems. Recommendations Capacity Building. The project has focused more on capacity building within the DMFI and CDD of MCM. The way forward should ensure that capacity of regulating institutions is complemented by directing capacity building to the MOF and the operators and practitioners. Project implementation should be mainstreamed into the activities of the implementing agency. The project design should be part of the strategic plan of the implementing agency. This approach in project design and implementation would facilitate internalisation and enhance ownership and sustainability. In the era of globalisation it is important to build in mechanisms of learning and knowledge generation in project activities. The design of projects should recognise that the many industries are going through considerable changes and provide for learning from international experience and enhancing knowledge in developments in the respective sectors. Aligning Procurement Procedures to National Procedures The need to align donor systems to national systems is a principle that has now been agreed upon as expressed in the Rome Declaration (2003) and the Paris Declaration (2005). In future the World Bank should make the necessary adjustments to accommodate the principles of Rome and Paris conventions and align its procedures to national procedures. Raising the Institutional Profile for Microfinance Policy. The study has found that much as Tanzania has a huge potential for microfinance, the MOF which has the mandate to take formulate and take the lead in presenting the microfinance policy through Cabinet is itself rather weak. It is therefore recommended that a microfinance unit be established within the MOF to oversee policy and regulatory matters relating to microfinance in the country. Priority should be given to building the capacity of that unit. - 30 -  Section 1: INTRODUCTION 1.1 Background and Objectives The Project Background: The Rural and Micro-Financial Services Project (RMFSP) was launched in January 2000 The workshop to launch the RMFSP was held in Arusha from 10th to 12th February 2000. The workshop aimed at providing opportunity for each project beneficiary to explain their programmes and learn about procedures associated with the implementation, including responsibilities for achieving project objectives. The workshop participants included leaders of the financial institutions, senior civil servants related to the project, representatives of the World Bank, members from the donor countries and agencies interested in the areas and project. and became effective in mid June 2000 on fulfilling the laid down conditions. The project was supposed to be completed in December 2002 but due to implementation delays it was completed in December 2004. The project was financed through IDA credit no.3278-TA of SDR 1.5 million ($2 million) plus counterpart funding from the Government of Tanzania (GOT) of $452,000. General Objectives of the Project: The RMFSP intended to create an enabling environment for developing a broad based, sustainable rural and micro-finance system. The objective was to realise a diversified and sustainable rural and micro-finance system with wide outreach in the country. The strategic goal of the project was to contribute to broad-based growth and poverty reduction through the expansion of financial intermediation to small-scale clients in the rural as well as urban areas of Tanzania. Components of the Project (RMFSP): The project has five components: (i) Development of a National Microfinance Policy: The RMFSP intended to finalise a national policy for rural and micro-finance and have it approved. (ii)Development of an Appropriate Legal, Regulatory and Supervisory Framework for Microfinance: The RMFSP determined to oversee a review by international experts of the legal, regulatory and supervisory framework for rural and micro-finance. The review would result in appropriate revisions of the law and regulations and make proposals for strengthening supervisory arrangements. (iii) Development of operational guidelines providing standards for government and donors support into microfinance sector: The RMFSP expected to prepare operational standards/guidelines for banks, cooperative financial institutions, NGOs and capacity building initiatives with a view to ensuring that each initiative by Government and donors adheres to certain quality standards, uses consistent set of performance indicators and focuses on sustainability of the interventions. (iv) Capacity Building i. Capacity building for the Directorate of Microfinance of the Bank of Tanzania; ii. Capacity Building for the Cooperative Development Department (CDD) of the Ministry of Cooperatives and Marketing; iii. Procurement of motor vehicles and office equipment for the Directorate of Microfinance and Cooperative Development Department of the Ministry of Cooperatives and Marketing. (v) Enhancing of knowledge and skills within the Microfinance Industry: This component of the RMFSP was supposed to enhance knowledge and skills in the industry through technical workshops and conferences to expose stakeholders to international developments and best practices in rural and micro-finance activities. - 31 -  The Scope of Work for this Assignment: The scope of work for this assignment covers the following: (i) To assess the project objectives, design, implementation and operational experience. (ii)To evaluate the performance of the Bank of Tanzania during evolution and implementation of the project with emphasis on lessons learned. (iii) To evaluate the performance of the World Bank or other partners during the evolution and implementation of the project with emphasis on lessons learned. 1.2 Methodology In undertaking this assignment the study team reviewed project related documents (detailed in the list of references) and interviewed representatives of key stakeholders (see Annex 1) based on the checklist, which was derived from the terms of reference (TOR) and discussions with the DMFI. The list of interviewees drew from Government, DMFI, CDD, members of the NSC and NTF, participants in technical workshops and training courses and donors. The study team used the collected information to assess the project objectives, design, implementation and operational experience as well as to evaluate the performance of the Bank of Tanzania and World Bank and any co-financed or other partners during the evolution and implementation of the project in accordance with the scope of work for this assignment. - 32 -  Section 2: Findings 2.1 The Performance of the Bank of Tanzania during Evolution and Implementation of the RMFSP In 1997, the BOT commissioned the K-REP to conduct a study to address the rural and microfinance national-wide demand and policy formulation. Findings from that study contributed to the way forward and microfinance activities were explicitly incorporated in BOT's corporate plans for 1998/99-2002/3 and 2003/4-2007/8 as shown in Table 1 below. Table 1: The Summary of Corporate Microfinance Strategic Programmes by BOT Sn Components of the BOT Strategic Programme 1998/99-2002/ 2003/04-2007/08 as similar to RMFSP 03 1 Develop a national policy on rural and microfinance