Malawi - Financial Sector and Enterprise Development Project

 ICRR 10503 Report Number : ICRR10503 ICR Review Operations Evaluation Department 1. Project Data : OEDID: OEDID : C2221 Project ID : P001655 Project Name : Financial Sector and Enterprise Development Project Country : Malawi Sector : Financial Sector Development L/C Number : C2221 Partners involved : Prepared by : Michael R. Lav, OEDCR Reviewed by : Anwar Shah Group Manager : Rene Vandendries, Acting Date Posted : 08/13/1999 2. Project Objectives, Financing, Costs and Components : Objectives : To support government efforts to expand exports and improve the policy and institutional framework relevant to private sector investment by : (i) encouraging commercial banks an non -bank finance intermediaries to engage in term financing of viable enterprises in the productive sectors, including SMEs and enterprises owned by women; (ii) improving the institutional framework for export finance and investment promotion, including support for a proposed investment promotion agency and an industrial land and factory shell program; (iii) supporting the strengthening and operational diversification of financial institutions; and (iv) improving monetary policy management. Financing : IDA US$30.5 million, Sub-borrowers, US $6.9 million. Costs and Components : Line of credit US$33.0 million, Industrial sites, US$0.5 million, Institutional Capacity Development, US$ 3.9 million. The credit was approved by the Board on March 26, 1991, was declared effective on August 29, 1991 (one month ahead of the original schedule), and closed on June 30, 1998, one year behind schedule . 3. Achievement of Relevant Objectives : (i) commercial banks and non-bank intermediaries did use the line of credit to finance term -financing, but shortfalls in macro-economic management and other problems caused substantial levels of arrears both to participating financial institutions and to the central bank which managed the loan . There was a lack of data so the shortfalls in the program could not be fully assessed . Record keeping deteriorated during the life of the project . (ii) The project helped get MIPA started, which has successfully assisted over 60 enterprises with projects resulting in 6,347 jobs. (iv) The Reserve Bank of Malawi (RMB) was assisted by the TA component in drafting Securities legislation and associated regulations, and in improved macroeconomic modeling . 4. Significant Achievements : The analytical and technical capacity of the central bank was improved . Unfortunately, this did not have an impact on the management of the economy which suffered from severe inflation during project The Malawi Investment Promotion Agency (MIPA) benefited from the project's technical assistance, the MIPA appears to be effective in assisting entrepreneurs. 5. Significant Shortcomings : (i) Many of the enterprises supported by funds from the project fell into arrears, and poor records did not allow an analysis of the problems. (ii) The industrial sites component failed because of an unresolved issue concerning access to land an administrative barriers to acquiring land in developing the industrial estates, so that only US$ 0.5 million out of the US$7.0 million component was utilized for the intended purpose, while the remainder was reallocated. The value of the training component for SME and SME support institutions could not be established . This assisted 4,610 persons to participate in training, but no evaluation was ever carried out, despite repeated requests by IDA. (iii) The Post Office savings was not converted into an independent full -service commercial bank, the Malawi Savings Bank was not legally incorporated . The Export Credit Guarantee Scheme was not implemented. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Unsatisfactory Institutional Dev .: Partial Modest Although the terminology is different, the rating is the same. The success of project in assisting MIPA and the RBM offset other less successful ID components which would by themselves have warranted a rating of "Negligible". Sustainability : Unlikely Unlikely Bank Performance : Deficient Unsatisfactory Although the terminology is different, the rating is the same Borrower Perf .: Deficient Unsatisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : (1) Financial sector development projects such as this can achieve little in the absence of macroeconomic stability . Indeed, with a good macroeconomic and foreign exchange regime, the benefits of line of credit projects are not clear. (2) Monitoring indicators need to be carefully designed if the project is to be managed adequately over time . These indicators should include indicators concerning the financial viability of the sub -projects as well as that of financial intermediaries. 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR is of satisfactory quality and presents a frank discussion of project design and implementation shortfalls .