Madagascar - Financial Institutions Development Technical Assistance Project

 ICRR 10592 Report Number : ICRR10592 ICR Review Operations Evaluation Department 1. Project Data : Date Posted : 05/10/2000 PROJ ID : P001550 OEDID: OEDID : C2497 Appraisal Actual Project Name : Financial Institutions US$M ) Project Costs (US$M) 10.4 7.1 Development Technical Assistance Project Country : Madagascar Loan/ US$M ) Loan /Credit (US$M) 6.3 5.5 Sector, Major Sect .: Financial Sector US$M ) Cofinancing (US$M) 4.1 1.6 Development , Finance L/C Number : C2497 FY ) Board Approval (FY) 93 Partners involved : USAID, Gov't of Closing Date 09/30/1998 09/30/1999 Switzerland, BITS (Sweden) Prepared by : Reviewed by : Group Manager : Group : Elliott Hurwitz M. Gautam Ruben Lamdany OEDCR 2. Project Objectives and Components a. Objectives The project's objective was to facilitate investment and growth in the productive sectors by improving the functioning of the financial system. This would occur through strengthening of key financial institutions and markets, including privatization of the two remaining state banks, thereby enhancing public trust in financial institutions and enabling them to mobilize savings and meet private sector financing needs . b. Components 1. Strengthen and restructure the Central Bank , including subcomponents to (a) strengthen research; (b) improve open market and foreign exchange operations; (c) bolster accounting and IT systems; (d) improve auditing; (e) strengthen human resources utilization; 2. Strengthen Financial Supervisory Commission; 3. Improve accounting and audit environment ; 4. Support privatization of remaining two state banks . c. Comments on Project Cost, Financing and Dates Component 1, strengthening of the Central Bank, accounted for 86% of total project costs. No progress was made on Component 3--improve the audit environment--and it was terminated, with funds reallocated to other components . Component 4, state bank privatization, turned out to be more complex and costly than envisioned, and implementation was moved to another project . The project disbursed around US$ 3.3 million less than envisioned, most of which consisted of shortfalls in contributions from co -financiers (shortfalls included IDA, $0.8 million; USAID $1.2 million; Swiss $0.6 million; and BITS [Sweden] $0.5 million). Project close, originally set for 9/98, was delayed until 9/99 to permit completion of several tasks . 3. Achievement of Relevant Objectives : The strengthening of the Central Bank was substantially achieved : the bank was reorganized; a new IT system was put into place, the bank shifted to indirect methods of monetary control, directed credits were eliminated, and other regulatory reforms were implemented. For component 2, strengthening of financial supervision, the capabilities of the Banking Supervision Agency were strengthened, additional authority was conveyed under a new banking law, and some new regulations were approved . 4. Significant Outcomes /Impacts : The Central Bank significantly improved its capacity, and succeeded in stabilizing the national currency and reducing inflation; the Central Bank also created an Internal Audit Division, under the control of the Governor; and the Banking Supervision Agency considerably improved the supervision of commercial banks . 5. Significant Shortcomings (including non -compliance with safeguard policies ): On-site bank supervision capabilities remain inadequate; due to the unwillingness of the country's auditing and accounting specialists to open the field to competition (as urged by the Bank), much less progress was made than envisioned, and auditing and accounting standards remain deficient; the Central Bank and the Ministry of Finance were unable to agree on a program to improve the management of public debt . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : The project focused on a few key issues identified in a broad financial sector report, and was successful in addressing these. 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR presents sufficient information to evaluate the project, but in a difficult-to-follow manner. It would have been desirable to provide data on investment and growth--the overarching objectives as stated in the SAR. Also, inadequate information is provided on human resource development in the Central Bank, the project’s achievements in bolstering the Central Bank’s research capabilities, and the magnitude and consequences of funding shortfalls by the 3 other co-financiers. Bank privatization--one of the 4 original components--is rated by the ICR as Highly Satisfactory even though this activity was transferred to and completed under another project, and will be accounted for in the ICR for that project. This ICR digests and summarizes the comments of co-financiers. Even though not required by the ICR guidelines, it might have been more valuable to append them, unedited.