Tanzania - Rural and Micro-Financial Services Project

Document of The World Bank Report No. 19615 - TA PROJECT APPRAISAL DOCUMENT ONA PROPOSED CREDIT IN THE AMOUNT OF SDR 1.5 MILLION (US$2 MILLION EQUIVALENT) TO THE UNITED REPUBLIC OF TANZANIA FOR A RURAL AND MICRO-FINANCIAL SERVICES PROJECT August 4, 1999 Private Sector and Finance Unit Country Department AFC04 Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective July.12, 1999) Currency Unit = TSH TSH 1 = US$0.001353 US$1 = TSH 739 FISCAL YEAR ABBREVIATIONS AND ACRONYMS AWP Annual Work Plan BOT Bank of Tanzania CAMEL Capital, Assets, Management, Earnings and Liquidity CAS Country Assistance Strategy CGAP Consultative Group to Assist the Poorest EDI Economic Development Institute ESAF Enhanced Structural Adjustment Facility ESAMI Eastern and Southern Africa Management Institute IDA International Development Association IFM Institute of Financial Management MEDA Mennonite Economic Development Association MF Micro-finance MFI Micro-finance Institution MIS Management Information System NGO Non-Government Institution NMB National Microfinance Bank PHRD Population and Human Resource Development PPF Project Preparation Facility PRIDE Promotion of Rural Initiatives and Development Enterprises REDI Rural Enterprise Development Institute SAC Structural Adjustment Credit SACCO Savings and Credit Cooperative Organization TA Technical Assistance TOR Terms of reference TPB Tanzania Postal Bank WB World Bank Vice President Callisto Madavo Country Director James W. Adams Sector Manager Gerard Byam Team Leader Antony Thompson  Tanzania Rural and Micro-financial Services Project CONTENTS A. Project Development Objective ................................................................. 2 1. Project development objective and key performance indicators . . 2 B. Strategic Context .............................................................. 2 1. Sector-related CAS goal supported by the project ............................................. 2 2. Main sector issues and Government strategy .............................................. .....2 3. Sector issues to be addressed by the project and strategic choices 3 C. Project Description Summary ................................................................ 4 1. Project components ...........................................4.................... ........ .. 4 2. Key policy and institutional reforms supported by the project ............................... 5 3. Benefits and target population ............................................................... 5 4. Institutional and implementation arrangements .............................................. 6 D. Project Rationale ................................................................ 6 1. Project alternatives considered and reasons for rejection. .... .6........... ............. 6 2. Major related projects financed by the Bank andlor other development agencies ......... 7 3. Lessons learned and reflected in the project design . ......................................... 7 4. Indications of borrower commitment and ownership .......................................... 7 5. Value added of Bank support in this project. ................................ ........ . . 8 E. Summary Project Analysis ................................................................. 8 1. Economic ...................................................... 8 2. Financial Assessment 9 3. Technical ...............9................................. 9 4. Institutional ...........................................9..................................... 9 5.Social ............................................................... 9 6. Environment assessment .............. 10 7. Participatory Approach ................................................................ 11 F. Sustainability and Risks ................................................................ 11 1. Sustainability ....................1................. I 1 2. Critical risks ............................................. 12 3. Possible controversial aspects ........................................... .. 12 G. Main Loan Conditions ................................................................ 12 1. Effectiveness conditions .......................................................................... 12 2. Other .... ......................................................................................... .. 13  H. Readiness for Implementation ................................................................ 13 I. Compliance with Bank Policies ................................................................ 13 Annexes: Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 3. Estimated Project Costs Annex 4. Financial Summary Annex 5. Procurement and Disbursement Arrangements Annex 6. Project Processing Budget and Schedule Annex 7. Documents in the Project File Annex 8. Statements of Loans and Credits Annex 9. Country at a Glance MAP  Tanzania Rural and Micro-financial Services Project Project Appraisal Document Africa Regional Office AFCO4 Date: August 4, 1999 Task Team Leader/Task Manager: Tony Thompson Country Director: James W. Adams Sector Manager: Gerard Byain Project ID: TZ-PE-50441 Sector: Financial Progran Objective Category: Economic Management Lending Instrument: Learning and Innovation Lending Program of Targeted Intervention: a Yes [XI No Project Financing Data [I] Loan [X] Credit [I Guarantee [] Other [Specify] For Loans/Credits/Others: Amount): US$2.0 million/SDR 1.5 million Proposed termns: X Multicurrency [] Single currency, specify Grace period (years): 10 [1 Standard Variable [ Fixed [ LIBOR-based Years to maturity: 40 Commnitment fee: Standard IDA Service charge: Standard IDA Financing plan (US$m): Source Local Foreign Total Government (BOT) 0.45 0.45 0 0.45 IDA 2.0 0.21 1.79 2.0 Total 0.66 1.79 2.45 Borrower: United Republic of Tanzania Guarantor: Responsible agency: Bank of Tanzania Estimated disbursements (Bank FY/US$m): 2000 2001 2002 Annual 1.20 0.63 0.62 Cumulative 1.20 1.83 2.45 Project implementation period: 3 years Expected effectiveness date: September 30, 1999 Expected Closing Date: December 30, 2002  Page 2 A: PROJECT DEVELOPMENT OBJECTIVE 1. Project development objective and key performance indicators (see Annex 1): The objective of this project is the development of a common policy framework, based on Internationally recognized best practices, for Rural and Micro-finance in Tanzania which will establish an enabling environment for rural and micro-finance 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 commnon 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 into the sector. B: STRATEGIC CONTEXT 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 16554-TA Date of latest CAS discussion: May 6, 1997 The goal of this project is to contribute to the development of a diversified and sustainable Rural and Micro-finance 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. Sustainability will be measured inter alia by the overall profitability of those institutions operating in the sector and the traditional "CAMEL" banking indicators. Outreach will be measured by the number of customers served, the value of their business and the number of institutions or service outlets established throughout the country. 2. Main sector issues and Government strategy: Over the last five years, Tanzania has successfully liberalized its financial sector. Numerous new private financial institutions have been established including entry by several well-known and highly regarded international banks including Citibank, Standard Chartered and Stanbic. These banks have focused their attention on the high-value end of the market concentrated primarily in Dar es Salaam. Gradually they are spreading their operations into other, economically significant parts of the country. However, the vast majority of Tanzanians remain untouched by the entry of these new banks. At the same time, the Government has been involved in a tough program of parastatal bank restructuring and privatization. As these banks have been forced to concentrate on the financial viability of their operations and to recognize the losses of previous lending activities, branches have been closed and business activities have been rationalized. While the longer term objective of these measures is to improve access, the immediate impact has  Page 3 been an overall reduction in the availability of financial services to ordinary Tanzanians provided by these banks. The reform of the agriculture sector has resulted in the dismantling of single chain agricultural marketing institutions, i.e. the cooperatives, which previously provided credit for agricultural inputs with repayment to be made through deduction from payments made for crops later sold through the cooperatives. While small-scale cooperative savings and credit cooperatives have emerged in a few parts of the country to fill this gap, their coverage is limited and they remain weak and vulnerable to both fraud and mis- management. Various government agencies responded in different ways, but usually by advocating the use of directed lines of credit targeted at different groups identified according to the special interests and agendas of the particular agencies involved. At the same time the Bank of Tanzania, following a review of its experience with such schemes, had rejected this kind of approach and, after some initial experimentation with the concept of community banks, shifted its focus to the immediate task of restructuring the troubled parastatal banks. Donors, too, were intervening in a variety of ways, through multiple entry points both within Government and elsewhere, e.g. the NGO community. The donor involvement was uncoordinated, not based on internationally recognized best practices, and reflected each individual donor's particular priorities. As such, donor initiatives often contributed little to sustainable development of micro-level financial services and undermined the efforts of others. 3. Sector issues to be addressed by the project and strategic choices: This project intends to address the lack of access to appropriate financial services by ordinary Tanzanians by creating an enabling environment for the development of a broad- based, sustainable rural and micro-finance system. It will seek to do this by developing a common policy framework which will provide both a structure for the development activities of Government agencies and donors active in the sector, and by providing a way to learn from those experiences through the dissemination the results of extensive monitoring and evaluation to the private sector institutions, Government agencies and donors. The Government has recognized that there is great interest on the part of donors, NGOs and others to invest in the development of a sustainable (i.e. profitable) rural and micro- finance sector. As part of this objective, the Government has recognized the need to develop a common framework approach that will guide investment into the sector in a consistent and complementary manner under a common set of principles and a unified system of regulation and supervision. The Government agency given responsibility for this process, the Bank of Tanzania, has from the very outset adopted a thoroughly participatory approach which has included the use of customer and industry surveys, participatory workshops, study tours, and a joint review of the sector by the various Government agencies concerned working together with almost all the donors active in rural and micro-finance in Tanzania.  Page 4 C: PROJECT DESCRIPTION SUMMARY 1. Project Components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project will have the following components:-- 1. Development and approval of a National Micro-finance Policy. Following exposure to international examples of successful MFIs and training in micro-finance, a Tanzanian Task force has prepared a draft national policy for Rural and Micro-finance. The draft was reviewed by an international expert and was presented for further review to a workshop of Tanzanian stakeholders. A revised draft will soon be presented to Cabinet for approval. 2. Design of an appropriate legal, regulatory and supervisory framework for micro-finance. A Tanzanian Task Force representing stakeholders will oversee a review by international experts of the legal, regulatory and supervisory framework as it pertains to Rural and Micro-finance. The consultants will develop recommendations for revisions in the law and regulations and will make detailed proposals for strengthening supervisory arrangements. These recommendations will be reviewed by a wider group of stakeholders before being finalized. 3. Preparation of operational standards/guidelines for Government and Donor support to rural and micro-finance. A team of consultants will be recruited to draft four sets of operational guidelines/standards covering (i) banks, (ii) cooperative financial institutions, (iii) NGOs, and (iv) capacity building initiatives. The guidelines will be used to ensure that each Government and donor initiative maintains certain quality standards, uses a consistent set of performance indicators and focuses on the sustainability of the interventions. 4. Capacity building to enable the Bank of Tanzania to coordinate, monitor, and evaluate development activities in the Micro-finance sector. The Bank of Tanzania will coordinate Government and donor initiatives and will systematically track and analyze progress under each rural and micro- finance initiative using a common set of performance indicators feeding the lessons from this analysis back to the industry and other stakeholders through workshops and conferences so that positive experiences can be replicated and scaled up as appropriate 5 . Micro-finance Industry Knowledge and Skills Building This will consist of two main activities. The first is a series of bi-annual technical workshops to disseminate research work and technical handbooks prepared by CGAP on such topics as MIS, Business Planning, etc.. The second is a series of annual conferences bringing together all stakeholders  Page 5 in the industry which will be a forum for exposing participants to international developments and experiences within the country. Component Categorv Cost Incl. % of Bank- % of Contingencies Total finan Bank- (US $M) (US$M) financing 1. Development of a National Policy 0.100 4.1% 0.090 4.5% Policy Formulation 2. Design of Regulatory Framework Capacity 0.295 12.0% 0.285 14.3% Building 3. Provision of Operating Capacity 0.070 2.9% 0.07 3.5% Guidelines Building 4. (a) Bank of Tanzania Capacity 1.132 46.2% 0.70 35% Development and Activities Building 4. (b) Development of Cooperative Capacity 0.40 16.3% 0.4 20.0% Department Building 5. Knowledge and Skills Building Capacity 0.20 8.2% 0.20 10.0% Building 6. Other (PPF Costs not included Project 0.055 2.2% 0.055 2.8% above) Preparation 7. Unallocated 0.20 8.2% 0.20 10.0% I__ _ _ _ Total 2.452 100% 2.00 100% 2. Key policy and institutional reforms supported by the project: The primary policy and institutional reforms are threefold. First, the project has supported the development of a national policy on rural and microfinance through a Project Preparation Facility (PPF), endorsing principles of international best practice, which will direct future Government activity in the sector and will diffuse unwelcome and inappropriate political interference. Secondly, the project will assist in the strengthening of the regulatory and supervisory environment for rural and micro finance. Finally, the project will support capacity building to enable the Bank of Tanzania to implement the activities supported by the project, coordinate other donor activities and rigorously monitor and evaluate different initiatives as they are implemented. Some modest capacity building support will also be provided to the Cooperative Department. 3. Benefits and target population: This project will facilitate increased, higher quality and complementary investments into the rural and micro-finance sector by enhancing donor and intra-Government coordination and by ensuring that funds flowing into the sector are invested in accordance with internationally accepted best practices in micro finance and in ways that complement other initiatives. By so doing it will increase the level of donor and private resources invested in the sector and enhance the returns on those investments. The primary beneficiaries will be the Microfinance Institutions who will gain from strengthened business planning capacity, enhanced training and other learning  Page 6 opportunities, other capacity building measures, an improved emphasis on sustainability, and a more consistent and business-oriented relationship with both the Government and the donor community. The ultimate beneficiaries will be the customers of the emerging rural and microfinance institutions who will enjoy improved access to a variety of financial services specially targeted at small-scale savers and borrowers throughout the country. 4. Institutional and implementation arrangements: Primary responsibility for development of rural and micro-finance policy was given to the Bank of Tanzania. The Bank of Tanzania implemented a series of nationwide studies on Rural and Micro finance and managed a series of study tours and workshops, supported by a PHRD grant, aimed at exposing key policy makers and practitioners to international best practices in Microfinance. It is recognized that other stakeholders need to be completely integrated into the policy process as it moves forward. For this reason, the Bank of Tanzania has commissioned an institutional study to recommend an appropriate institutional set-up that will both provide the necessary resources for project implementation and will ensure broad-based participation by all stakeholders. D: PROJECT RATIONALE 1. Project alternatives considered and reasons for rejection: The historical approach to rural and micro finance by IDA in Tanzania has been to support directed line of credit projects to certain target sections of the overall population. This approach has been rejected by the Tanzanian authorities owing its very poor track record of sustainability and development impact. Instead, it has been replaced with an approach that emphasizes the development of a variety of sustainable (i.e. profitable) rural and micro-finance intermediaries providing a range of financial services to small scale client including savings, credit, transfer payments, and others. Within that approach IDA could have chosen to support the development of particular institutions rather than support the development of an enabling environment by itself. In fact, IDA is already providing support to one financial intermediary, the National Microfinance Bank, as part of its overall program of support for the restructuring and privatization of National Bank of Commerce under the Financial Institutions Development Project. Beyond this single instance, and in the context of very strong donor interest in supporting the development of micro finance intermediaries, it is felt that IDA can add most value by facilitating the establishment of the framework while other donors can engage more effectively with individual financial institutions, including NGOs, once that framework is in place. A large number of donors have been collaborating in the process of developing the framework to date and have indicated their intentions to make substantial investments in the development of the sector.  Page 7 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Financial Sector Restructuring Financial Institutions S S Development Project Agriculture Sector Restructuring Agriculture Sector S S Management Project Other development agencies Micro-finance Institutional Various Development Provision of Micro-finance Credit Various IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: There are three main lessons which have been learnt as a result of previous experience in Tanzania. First, the previous approach using directed lines of credit was ineffective, costly, unsustainable and of limited impact due to poor outreach. The new approach emphasizes sustainability, distinguishes clearly between effective and ineffective institutions, and maximizes outreach on a sustainable basis by leveraging deposits as the source of funds for lending. Secondly, uncoordinated initiatives, whether donor-led or Government-led, tend to undermine each other where there is no common adherence to a mutually agreed set of principles. The approach under this project encourages all stakeholders to participate in the development of a common framework made up of an agreed set of principles and based on internationally recognized best practice as a way to maximize the impact of all Government and donor investment in the sector. Thirdly, experience from the joint Government/donor review mission in September 1997 in which 13 different donors participated, indicates that there is strong and broad-based donor interest in supporting the development of sustainable rural and micro finance services. This project has been designed to facilitate and leverage donor investment in the sector rather than displace it, by using a modest level of IDA funds strategically to finance a few key activities which will then enhance the economic and social impact of the much larger collective contributions provided by other parties. 4. Indications of borrower commitment and ownership: Since 1994 the Bank of Tanzania has been responsible for leading the process of analysis, policy development and project preparation. Work took on a new level of seriousness in December 1995 when President Mkapa called on the Bank of Tanzania to find ways to  Page 8 make financial services more widely available to ordinary Tanzanians throughout the country, At its own expense, the Bank of Tanzania organized a national conference in April 1997 on microfinance for all financial institutions present in the country. It brought in some of the world's leading experts to make presentations both to the conference and also to selected Parliamentarians and Members of the Cabinet. The Bank of Tanzania requested and managed a $500,000 PHRD grant to further its research into rural and micro finance policy which, in turn, became the basis for a joint Govermnent of Tanzania/multi-donor review of the sector. The Bank of Tanzania took the lead in organizing the comprehensive Government participation in that mission which involvecd 9 different Tanzanian agencies and departmnents and 13 different donors. Most recently, the Bank of Tanzania organized a retreat for Govermment officials to prepare a Logical Framework Analysis for this project. This Project Proposal is a reflection of their discussions during the retreat. They are now firmly committed to full and timely implementation of the project described here. When Mr. Wolfensohn met with President Mkapa in Kanpala in January 1998, President Mkapa asked for the Banks' support in the development of microfinance services. Mr. Wolfensohn indicated that we were indeed ready to help on the basis that any support would be provided in the context of already established microfinance best practice. 5. Value added of Bank support in this project: First, it will institutionalize best practice approaches to the development of microfinance in Tanzania, Secondly, it will help to further consolidate Tanzanian ownership of the microfinance program and, thirdly, it will facilitate the inflow of substantial donor resources in a way that will be consistent with international best practices in microfinance. E: SUMMARY PROJECT ANALYSIS (detailed assessments are in the Project File (See Annex 7) 1. Economic (supported by Annex 4): This project will facilitate increased, higher quality and complementary investments into the rural and micro-finance sector by enhancing donor and intra-Govenmuent coordination and by ensuring that funds flowing into the sector are invested in accordance with internationally accepted best practices in micro finance and in ways that complement other initiatives. By so doing it will increase the level of donor and private resources invested in the sector and enhance the returns on those investments. Microfinance Institutions who will gain from strengthened business planning capacity, enhanced training and other learning opportunities, other capacity building measures, an improved emphasis on sustainability, and a more consistent and business-oriented relationship with both the Government and the donor community. The ultimate  Page 9 beneficiaries will be the customers of the emerging rural and microfinance institutions who will enjoy improved access to a variety of financial services specially targeted at small- scale savers and borrowers throughout the country. Against this, project costs are modest and it is expected that the anticipated benefits far outweigh the costs involved. 2. Financial Assessment: The project implementing agencies will maintain financial management systems, including accounting, financial reporting, and auditing systems- adequate to ensure that they can provide accurate and timely information regarding project resources and expenditures. The Financial Management Specialist based in the Resident Mission, as part of her contribution to the preparation work, is working with the Bank of Tanzania to ensure compliance with the Bank's financial management requirements as per OP/BP 10.02. 3. Technical: On the Tanzanian side, the technical quality of the project has been enhanced through the use of a rigorously participatory approach which has solicited stakeholder input at each stage of project preparation. The Tanzanian team has exerted strong ownership of the process and this has been complemented by the exposure of key Tanzanians to international best practices and quality training in micro-finance (Economnics Institute at Colorado, Harvard). This has been supplemented by inputs from leading international specialists in micro-finance including Robert Christen, Elizabeth Rhyne, Margeurite Robinson, Pancho Otero and others. On the Bank side, the team is working in close partnership with CGAP, represented by Brigit Helms, to ensure that the project reflects internationally recognized best practice in micro-finance. Carlos Cuevas, Senior Rural Finance Specialist, has been appointed as Technical Anchor to the Task Team. He is responsible for ensuring that the project is thoroughly reviewed within the AFTP 1 and Financial Network families and that all technical aspects are addressed appropriately. The team also includes a Procurement Specialist (V. S. Krishnakumar) and a Financial Management Specialist (Mercy Sabai). 4. Institutional: a. Executing agencies: The Executing Agency will be the Bank of Tanzania b. Project management: The Directorate of Micro-finance of the Bank of Tanzania will be responsible for managing the project. In addition, it will seek representatives of other stakeholders to serve on the two task forces planned under the project. 5. Social: A thorough social analysis was made of equity, gender and participation aspects of this project during the identification mission. The two main issues concern donor perceptions  Page 10 of the social achievements that can be realized through the development of rural and microfinancial services. The impact on gender will be modest but microfinance is able to help poor people who have access to economic opportunities. 6. Environmental Assessment: Environmental Category [ ] A [ ] B [ X I C In view of the very limited size of the project and its capacity building nature, with no inftastructure and little equipment financed, the activities financed are not expected to have any significant negative environmental impact.  Page 11 7. Participatory Approach: a. Primary beneficiaries and other affected groups: All the primary beneficiaries have been involved in the process so far. These have included the banks (NBC, NMB, CRDB, TPB, etc.) the cooperative financial institutions (Kilimanjaro Cooperative Bank, Savings and Credit Union league of Tanzania, SACCOs), financial NGOs (PRIDE, MEDA, Presidential Trust Fund, Gatsby Trust, etc.), educational institutions (ESAMI, REDI, IFM, University of Dar es Salaam, Cooperative College), Government agencies (Bank of Tanzania, Ministry of Finance, Ministry of Agriculture and Cooperatives - Cooperative Department, State House, Vice President's Office, Prime Minister's Office, Ministry of Commnunity Development, Women's Affairs and Children, etc.), and others. They have participated in surveys of their respective institutions, the dissemination workshop, international study tours, interacted or participated in the joint Government/donor review mission, and participated in a review of the Logical Framework Analysis. At each point stakeholder views have been solicited and incorporated into the policy and preparation process. Plans for project preparation and project implementation both include provisions for ongoing consultation and participation throughout the process. b. Other key stakeholders: In addition to the organizations mentioned above, a consortium of local NGOs specializing in gender issues carried out an independent review in FY96 of World Bank-financed activities in Tanzania. In this review they focused their attention on our workprogram for rural and microfinance and made a number of recommendations in this regard. In follow- up to these recommendations, a special team was included in the joint Government/donor review mission with the specific task of exploring equity, gender and participation issues as they related to rural and microfinance. F: SUSTAINABILITY AND RISKS 1. Sustainability: Sustainability has been addressed throughout the project preparation process (1) by encouraging broad Tanzanian participation and commitment during the development of the project concept and, (2) by making sustainability a key measure of overall project effectiveness and development impact. Within the project itself, the policy framework will ensure that future support from donors will only be directed to Microfinance Institutions and Microfinance Institution Service Providers on the basis of both a business plan and performance indicators chosen to measure progress towards sustainability. In addition, resources will be provided to strengthen capacity for monitoring and evaluation of different initiatives in Microfinance and to feed the results of these evaluations back to the industry through regular conferences and workshops, thus encouraging practitioners to build on successful experiences and to discard unsuccessful approaches. Finally, the incentive framework  Page 12 built into the project will be designed in such a way as to reward achievement of sustainability goals and to reallocate resources away from activities which fail to move towards these goals. 2. Critical Risks: Risk Risk Rating Risk Minimization Measure Annex 1, cell "from Outputs to Objective" Macroeconomic stability M ESAF, SAC Private Sector & Donor Resources Mobilized N Strong Broad-based Donor Participation in the process Use of Best Practices in Microfinance M Strong CGAP involvement in the process and reliance on highly esteemed international experts. Effective Regulation and Supervision M Review and reform of regulation and supervision part of project activities. Annex 1, cell "from Components to Outputs" Strong Government Commitment & Ownership. M Ensure Government maintains control of the process. (Strong ownership already demonstrated throughout the process to date.) Relevant people will be released to the project M Nurture ongoing Government commitment. Government will approve the policy. M EDI seminar plus other sensitization measures. Counterpart funding will be available M To be raised from BOT ______________________________________ ___________resources. Overall Risk Rating M resources. Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: There is a possible conflict of interest between BOT's role as both regulator of the sector and coordinator of activities under this project. However, BOT's track record of managing the FIDP project, where a similar potential conflict exists, has minimized any cause for concern. G: MAIN LOAN CONDITIONS 1. Effectiveness Conditions: Adoption of a Project Implementation Plan satisfactory to IDA. Adoption of an Annual Work Plan for the first year's activities satisfactory to IDA.  Page 13 Appointment of independent auditors acceptable to IDA to audit the Special Account. 2. Other Submission of audited accounts within six months of financial year end. Submission of draft Annual Work Plan three months before the beginning of the year covered. Submission of quarterly reports, including financial information, within one month of the end of each quarter. H: READINESS FOR IMPLEMENTATION [] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [XI Not applicable. [ ] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [I The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [XI The following items are lacking and are discussed under loan conditions (Section G): Project Implementation Plan, including Procurement Plan. I: COMPLIANCE WITH BANK POLICIES This project complies with all applicable Bank policies. Task Team Leader: Antony Thompson Sector Manager: Gerard Byam Country Program Coordinator: Ronald P. Brigish  Page 14 ANNEX 1 Project Design Summary Tanzania: Rural and Micro-financial Services Project Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: (i) Profitability & CAMEL (i) Information provided by (Goal to Bank Mission) Development of a sustainable (ii) Delinquency rate supervisors based on (i) Economic opportunities exist Rural and Micro-finance (iii) Level of Subsidies offsite reporting verified and can be used. system with a wide outreach. (iv) Number of institutions! by on-site visits. (ii) Access to financial services service outlets (ii) Independent industry (savings, credit, etc.) (v) Number of Customers & monitoring (initially improves living standards. Value of their Business. contracted by the Directorate of Micro- finance.) Project Development (Objective to Goal) Objective: Development of a common (i) Adherence by Government (i) Results of tracking and (i) Government agencies and policy framework which will & Donors to the Policy. analysis of Government donors will comply with the establish an enabling (ii) Improved quality of and donor initiaitives policy framework. environment for rural and donors investment into the presented in reports and (ii) Quality of investments will micro-finance and facilitate sector. annual conferences improve significantly. the inflow of quality (iii) Increase in donor investments into the sector resources available Outputs: (Outputs to Objective) 1. Approved National * An approved policy. * Independent mid-term (i) Macroeconomic stability. Policy on Rural and * Effectiveness of National review (MTR) and Project (ii) Private sector and donor Micro-Finance. Policy. Completion Report resources will be mobilized. 2. Appropriate legal, * Legal amendments. (PCR). (iii) People will utilize MF regulatorv and * Introduction of new P Quarterly progress services. supervisory framework. regulations. reporting by Dir. Of (iv) MF can be profitable in 3. Operational guidelines * Agreement and Micro-finance. Tanzania. providing standards for implementation of new vUsofbtprcieinW supervisory arrangements. * Progress reports on (v) Use of best practices in ME. Government and donor * Compliance by Govt., donors specific activities by Dir. (vi) Effective regulation and investment in rural and and NGOs to the Operational of Micro-finance. supervision. micro-finance. Guidelines. * Application of 4. Capacity enhanced in * Attainment of Annual amendments. the Bank of Tanzania Workplan (AWP) * Implementation of new enabling them to objectives/milestones. regulations. coordinate effectively the * Research findings * Implementation of new functions of micro- disseminated.suevor fiiance. * Participation by stakeholders sper ry 5. Knowledgeable WI in Technical Dissemination arrangements. Workshops and Seminars. * Compliance with sector. * Graduation from MF courses operational guidelines. and study tours. * Feedback from * Define list of good and bad supervisors. practices to be monitored. * Dir. of Micro-finance to monitor supervisor reports for evidence good and bad practices in ME.  Page 15 Inputs: (budget for M & E Critical Assumptions Project Components/Sub-components: each component) (Components to Outputs) Preparation (PPF) $55,000 1. To develop a National Policy on Rural and $100,000 Quarterly i) Strong Government Micro-finance. progress reports commitment and (Preparation Phase) prepared by the ownership. Bank of (ii) Relevant people will be * Multidisciplinary team of experts on 4 month $10,000 Tanzania. released to the project. assignment:-- (iii) Policy makers will be 2 from Bank Supervision sensitized. 3 from outside BOT (include. Coop. Dept.) (iv) Government will approve * Short term T.A. of 2 people for 3 weeks $30,000 the policy. * Workshop for discussing the draft policy (100 $14,000 (v) Proper institutional people for 2 days) arrangements will be * Study tour for policy/law makers (7 people x 12 $38,000 created. days) to Asia. (vi) Willingness to amend laws, * Seminar for Parliamentarians (I day) $16,000 regulations and supervisory arrangements exists. 2. To develop an appropriate legal, regulatory and $295, 000 (vii) Capacity to implement supervisory framework. programs. (viii) Relevant experts will be * Task Force to oversee review of legal and $10,000 available. regulatory framework and supervisory (ix) Counterpart funding will be arrangements/capacity:- available from Government Representation from BOT, Coop Dept., (10%). AG Chambers, Practitioners, Ministry of (x) Training will be effective Finance. * International T.A. to review regulations on MFls $180,000 and supervisory (6 months). * Training 10 people for 3 weeks in Boulder, $100,000 Colorado or equivalent. * 1 day workshop, 30 people. $5,000 3. To develop a set of operational guidelines $70,000 providing standards for Govt. and donors. * International T.A. to develop 4 sets of Operating $60,000 Guidelines (4 weeks) I for Banks I for NGOs l for Cooperatives I for capacity building * Dissemination and Review workshop (100 people $10,000 x I day)  Page 16 Project Components/Sub-components: Inputs: (budget M & E Critical Assumptions for each (Components to Outputs) .______________________________________ _c_ com ponent) 4. (a) Capacity Building for the Directorate of $1,132,000 Micro-finance to:-- - implement project - coordinate donor activities - coordinate Govt. initiates in MF - liaise with MF stakeholders -repository of information on MF, including training opportunities - disseminate information on MF, including training opportunities - analyze and track MF initiatives - provide logistical and secretariat support to project activities * Adequate high caliber personnel. * Training in ME Best-Practice, WB procedures, $360,000 etc.. $60,000 * Participation in conferences and seminars abroad. $30,000 * Technical Assistance on Tracking and Analysis. * Training in Tracking and Analysis. $90,000 * Contracting out Appraisal to Consultants * Equipment $90,000 * Office Accommodation & Incremental Operating $250,000 Costs $100,000 $144,000 4. (b) Capacity Building for the Cooperative $400, 000 Department. * T. A. 3 months per year for 2 years. $180,000 * Training and attachments $150,000 * Equipment $60,000 I * Seminars and Conferences $10,000 5 To enhance knowledge and skills within the MF $200, 000 industry. * Technical workshop series (2 days each) 50 people:--(6 workshops over 3 years) $100,000 -MIS - Business Planning - Audit - Appraising MFIs + 2 more. Annual National Conferences - up to 100 people $100,000 (3 over 3 years). 6. Unallocated $200,000 TOTAL S2,452,000  Page 17 ANNEX 2 Rural and Micro-financial Services Project Project Description Project Component 1 - US$0.10 million (total cost of component) Development andApproval of a National Micro-finance Policy. With support from a PPF and following exposure to international examples of successful MFIs and training in micro-finance, a Tanzanian Task force has prepared a draft national policy for Rural and Micro-finance. To enhance the quality of the policy, an internationally acknowledged expert was commissioned to review the draft and propose changes to bring it into line with internationally established best practice. It was then presented for further review to a workshop of Tanzanian stakeholders, (including banks, cooperatives, NGOs Governnent agencies, private sector organizations, etc.). A revised draft will soon be presented to Cabinet for approval. The other donors interested in rural and micro-finance have been collaborating closely in the policy review and formulation process to date. They have indicated their intentions to make substantial investments into the sector within the framework of the new policy. Project Component 2 - US$0.30 million (total cost of component) Design of an Appropriate Legal, Regulatory and Supervisory Framework for Micro-finance. A Tanzanian Task Force representing stakeholders will oversee a review by international experts of the legal, regulatory and supervisory framework as it pertains to Rural and Micro-finance. The consultants will develop recommendations for revisions in the law and regulations and will make detailed proposals for strengthening supervisory arrangements. These recommendations will be reviewed by wider group of stakeholders before being finalized. A number of other donors have indicted their intentions to provide support for implementation of these recommendations. Project Component 3 - US$0.07 million (total cost of component) Provision of Operational Standards/Guidelines for Government and Donor Support to Rural and Micro-finance. A team of consultants will be recruited to draft four sets of operational guidelines/standards covering (i) banks, (ii) cooperative financial institutions, (iii) NGOs, and (iv) capacity building initiatives. The guidelines will be used to ensure that each Government and donor initiative maintains certain quality standards, uses a consistent set of performance indicators and focuses on the sustainability of the interventions. Before being finalized, the prposed guidelines will be subject to a review by stakeholders. Project Component 4 - US$1.53 million (total cost of component)  Page 18 A. Capacity Building to the Directorate ofMicro-finance in the Bank of Tanzania. The Directorate of Micro-finance will coordinate, track, and analyze development activities in the sector. It will coordinate Government and donor initiatives and will also track progress under each initiative using a common set of performance indicators and will feed the results back to all stakeholders through workshops and conferences B. Capacity Building Support to the Cooperative Department. Some modest capacity building support will be provided to the Cooperative Department to ensure that it is fully equipped to engage in the policy formulation and regulatory review process as one of the key stakeholders in the sector. This support will consist of short-term Technical Assistance, participation in conferences and seminars and some basic equipment. Project Component 5 - US$0.2 million (total cost of component) Micro-finance Industry Knowledge and Skills Building This will consist of two main activities. The first is a series of bi-annual technical workshops to disseminate research work and technical handbooks prepared by CGAP on such topics as MIS, Business Planning, etc.. The second is a series of annual conferences bringing together all stakeholders in the industry which will be a forum for exposing participants to international developments and experiences within the country.  Page 19 ANNEX 3 Rural and Micro-financial Services Project Estimated Project Costs Proiect ComDonent Local Foreign Total ---------------------Us $s-------------------- Preparation (PPF) 0 55,000 55,000 Short-term Technical Assistance 0 55,000 55,000 1. National Policy Formulation (PPF) 32,000 68,000 100,000 Task Force 10,000 0 10,000 Short-term Technical Assistance 0 30,000 30,000 Study Tours 0 38,000 38,000 Policy Workshop & Seminar 22,000 0 22,000 2. Development of Legal, Regulatory and Supervisory 15,000 280,000 953,000 Framework. Task Force 10,000 0 10,000 Technical Assistance 0 180,000 180,000 Training & Workshops 5,000 100,000 105,000 3. Development of Operational Guidelines. 10,000 60,000 70,000 Technical Assistance 0 60,000 60,000 Dissemination and Review Workshop 10,000 0 10,000 4. (a) Development andActivities of Directorate of 504,000 628,000 1,132,000 Micro-finance. Operational Costs 504,000 0 504,000 Technical Assistance 0 340,000 340,000 Training, Conferences & Seminars 0 188,000 188,000 Equipment 0 100,000 100,000 4. (b) Development of Cooperative Department. 0 400,000 400,000 Technical Assistance 0 180,000 180,000 Training, Conferences & Seminars 0 160,000 160,000 Equipment 0 60,000 60,000 5. Knowledge and Skill-Building. 100,000 100,000 200,000 Conferences and Workshops 100,000 100,000 200,000 6 UJnallocated 0 200,000 200,000 Total Project Costs 661,000 1,791,000 2,452,000  Page 20 ANNEX 4 Rural and Micro-financial Services Project Financial Summary Years Ending June 30 (US$) Implementation Period. 2000 2001 2002 Total Project Costs Investment Costs 1,032,667 457,667 457,666 1,948,000 Recurrent Costs 168,000 168,000 168,000 504,000 Total 1,200,667 625,667 625,666 2,452,000 Financing Sources IDA 1,036,667 481,667 481,666 2,000,000 Government 164,000 144,000 144,000 452,000 Total 1,200,667 625,667 625,666 2,452,000 This project will facilitate increased, higher quality and complementary investments into the rural and micro-finance sector by enhancing donor and intra-Government coordination and by ensuring that funds flowing into the sector are invested in accordance with intemationally accepted best practices in micro finance and in ways that complement other initiatives. By so doing it will increase the level of donor and private resources invested in the sector and enhance the returns on those investments. Microfinance Institutions who will gain from strengthened business planning capacity, enhanced training and other leaming opportunities, other capacity building measures, an improved emphasis on sustainability, and a more consistent and business-oriented relationship with both the Government and the donor community. The ultimate beneficiaries will be the customers of the emerging rural and microfinance institutions who will enjoy improved access to a variety of financial services specially targeted at small- scale savers and borrowers throughout the country. Against this, project costs are modest and it is expected that the anticipated benefits far outweigh the costs involved.  Page 21 ANNEX 5.A Rural and Micro-financial Services Project Procurement and Disbursement Arrangements Procurement Procurement methods (Table A) Consultant Services: The World Bank-financed consultants will be contracted in accordance with World Bank guidelines: Selection and Employment of Consultants by World Bank Borrowers (Consultant Guidelines), published in January 1997 and revised in September 1997. Prior review thresholds (Table B) All contracts for purchase of goods above the threshold value of US$20,000 will be subject to IDA's prior review procedures. For consultant services, all Terms of Reference (TORs) irrespective of value, will be subject to IDA's prior reviews. Prior review will be required for contracts for services of consulting firms costing US$50,000 and over and for services of individual consultants costing US$25,000 and over and will include the review of budgets, short-lists, selection procedures, request for proposals, evaluation reports and draft contracts. All documents related to procurement not under "prior review" will be maintained by the Borrower for ex-post review by auditors and by IDA supervisions missions. Disbursement Allocation of loan proceeds (Table C) Table C shows the allocation of the proceeds of the credit. The proceeds of the IDA credit of US$2.0 million would be disbursed over a three year period, and a period of four months after the closing date would be allowed to make payments for expenditures actually incurred prior to and including the closing date. The annual estimated disbursements are given in a table on page one of the Project Appraisal Document (PAD). Use of statements of expenses (SOEs): Disbursements for all expenditures would be against full documentation, except for items of expenditures under contracts and purchase orders for (a) good contracts costing less than US$20,000; (b) contracts for services of consulting firms costing less than US$50,000 and for services of individual consultants costing less than US$25,000, (c) all local training; (d) all incremental operating costs, and (e) workshop expenditures costing less than US$5,000 which would be based on statements of expenditure (SOEs). Supporting documents for SOEs should be  Page 22 retained by the borrower for IDA review. Special Account: To facilitate disbursements, a Special Account in US dollars would be established and operated at the Bank of Tanzania, under terms and conditions satisfactory to IDA. Upon project effectiveness, a sum of US$200,000 would be deposited by IDA into this account. Further deposits by IDA into this account would be made against withdrawal applications supported by appropriate documentation. Accounting and Audit: The Bank of Tanzania Directorate of Microfinance will maintain accounting records for the project components that they manage directly. The existing accounting and financial management system, reviewed by the Bank Financial management Specialist, will be used and improved during the first year of the project to prepare for LACI. In addition to their financial statements, the Bank of Tanzania Directorate of Microfinance agreed to submit a quarterly report, one month after the end of each quarter, presenting a summary of sources and uses of funds, procurementlcontracts schedule and statement and summary of expenditures by component and by category. The project accounts, SOEs and the Special Accounts would be audited each year by independent auditors acceptable to IDA. All documentation should be retained by the Focal Point implementing the project activities. The auditors' reports and certificates in respect of each of these three statements of accounts would be furnished to IDA within six months of the close of each financial year.  Page 23 Annex 5.A., Table A: Project Costs by Procurement Arrangements (in US$ equivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB NCB Other N.B.F 1. Goods Vehicles, Office Equipment 160,000 160,000 and Furniture (Note 1) 2. Services Consultant Services, Training, 1,568,000 1,568,000 Studies, Workshops, Study Tours. 3. Incremental Operating Costs Salaries, Office 72,000 452,000 524,000 Accomodation, etc.. (Note 2) 4. Unallocated Total 200,000 200,000 2,000,000 452,000 2,452,000 Note: N.B.F. = Not Bank-financed (includes elements procured under parallel cofinancing procedures, consultancies under trust funds, any reserved procurement, and any other miscellaneous items). The procurement arrangement for the items listed under "Other" and details of the items listed as "N.B.F." need to be explained in footnotes to the table or in the text. Note 1: Goods procurement involves computers, photocopiers, fax machines, office furniture and three vehicles. All of these should be procured using the World Bank's National Shopping Procedures or IAPSO. Note 2: This represents operating costs financed by the Government of Tanzania. lFor details on presentation of Procurement Methods refer to OD1 1.02, "Procurement Anrangements for Investment Operations." Details on Consultant Services can be shown more easily in the Table Al format (additional to Table A, where applicable).  Page 24 ANNEX 5.A., TABLE Al: CONSULTANT SELECTION ARRANGEMENTS (in US$million equivalent) Selection Method Total Cost Consultant Services (including Expenditure Category contingencies) QCBS QBS SFB LCS CQ Other N.B.F. A. Firms 0.8 0.8 B Individuals Total 0.8 0.8 Note: QCBS = Quality- and Cost-Based Selection QBS Quality-based Selection SFB Selection under a Fixed Budget LCS Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan.  Page 25 ANNEX 5.A., TABLE B: THRESHOLDS FOR PROCUREMENT METHODS AND PRIOR REVIEW' Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review / Estimated Total Value Subject to Prior Review US $ thousands US $ millions 1. Goods All equipment and