Tanzania - Financial Institutions Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 20252 IMPLEMENTATION COMPLETION REPORT UNITED REPUBLIC OF TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (Credit No. 2771-TA) March 30, 2000 Private Sector and Finance Economic Management and Social Policy Department Africa Region 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 Currency unit: Tanzania Shilling US$1 = TShs 800 (February, 2000) Weights and Measures Metric System Fiscal Year of Borrower July 1-June 30 Abbreviations and Acronyms BOT - Bank of Tanzania CRDB - Cooperative and Rural Development Bank DBS - Directorate of Banking Supervision DCA - Development Credit Agreement GOT - Government of Tanzania GOZ - Government of Zanzibar IDA - International Development Association MOF - Ministry of Finance MOU - Memorandum of Understanding NBC - National Bank of Commerce NIC - National Insurance Corporation NMB - National Microfmance Bank PBZ - People's Bank of Zanzibar SAC - Structural Adjustment Credit SME - Small and Medium Enterprise SOE - State-owned Enterprise ZIC - Zanzibar Insurance Corporation Vice President : Callisto E. Madavo Country Director . James W. Adams Sector Manager : Gerard A. Byain Task Team Leader . Antony Thompson  Table of Contents FOR OFFICIAL USE ONLY EVALUATION SUMMARY Project Objectives Implementation Experience and Results i Future Operations 1ii Key Lessons learned iv PART l: PROGRAM IMPLEMENTATION ASSESSMENT I A. Background ] B. Statement of Project Objectives and Evaluation of Design 2 C. Achievement of Project Objectives 3 D. Major Factors Affecting the Program 5 E. Implementation Record 6 F. Program Sustainability 7 G. Bank Performance 7 H. Borrower Performance 8 1. Assessment of Outcome 8 J. Future Operations 8 K. Key Lessons Learned 9 PART II: STATISTICAL ANNEXES 11 Table 1: Summary of Assessments 13 Table 2: Related Bank Loans and Credits 1 4 Table 3: Project Timetable 15 Table 4: Credit Disbursements: Cumulative Estimated and Actual Disbursements 1 5 Table 5: Key Indicators for Project Implementation 16 Table 6: Status of Legal Covenants 17 Table 7: Bank Resources; Staff Inputs 20 Table 8: Bank Resources; Missions 20 PART HII: APPENDIXES I APPENDIX I: 3 BORROWER'S CONTRIBUTION TO THE IMPLEMENTATION COMPLETION REPORT 3 MAP 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.  i i  TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (CR. 2771-TA) PREFACE This is the Implementation Completion Report (ICR) for the Financial Institutions Development Project in Tanzania for which IDA Credit 2771-TA in the amount of SDR7.5 million (US$10.9 million equivalent) was approved on August 3, 1995 and made effective on February 23, 1996. The credit, which was fully disbursed, was closed on June 30, 1999. The last disbursement was on June 28, 1999. The credit was fully funded by IDA and had no co-financiers. The ICR was prepared by John Byamukama with the guidance of Gerard Byam, Antony Thompson and Paul Murgatroyd, Task Team Leaders for the Financial histitutions Development Project and Lead Specialist respectively. It is based on discussions with the Government during an ICR mission, supervision reports and material in the project files. In addition to commenting on the draft ICR, the Borrower also contributed their own evaluation of the project's preparation and execution, which is attached as an appendix to the ICR.  i I  TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (CR. 2771-TA) EVALUATION SUMMARY Project Objectives 1. The Financial Institutions Development Project was designed to build upon the limited achievements under FSAC and to provide technical assistance required for the implementation of the remaining reforms in the financial sector. The project would support measures to enable the Government to regain the momentum for financial sector reform by addressing the fundamental weaknesses in the sector. It would also build the foundation for diversification of financial instruments. 2. Specifically, FIDP was meant to support the following: (a) the restructuring and privatization of the National Bank of Commerce (NBC) and the restructuring of the smaller People's Bank of Zanzibar (PBZ) so as to encourage competition and efficiency in the banking sector; (b) continued strengthening of the Bank Supervision Directorate (BSD); (c) improvements to the payments system; (d) the creation of a private credit information bureau; and (e) the development of the insurance industry and capital markets. Of these, the restructuring of NBC was clearly of the greatest importance and priority. The objectives of FIDP were appropriate and in line with the Bank's country assistance strategy which aimed at assisting the Government to reduce poverty through an acceleration in the pace of structural reform and the provision of infrastructure and social services (especially targeted to the poor). Implementation Experience and Results 3. The implementation record early in the project was strong as evidenced by actions taken prior to Credit effectiveness. A diagnostic evaluation of NBC was carried out at the beginning of 1995 following which a business plan and memorandum of understanding with the Government were prepared and agreed with IDA. Consultants were appointed to manage the bank and a banking advisor to the Ministry of Finance was also appointed. 4. The implementation of all the components of the project, except the bank restructuring component, had started off well and were only interupted when resources were shifted to the more urgent task of first restructuring and then privatizing NBC. Training in Bank supervision in the handling of problem institutions and on-site examination was carried out under the project together with the assistance of Bank Supervision Advisors provided under theIMF's technical assistance program. At the same time, the Capital Markets and Securities Authority became  operational and the first phase of the payments system modernization component was completed. The study on the feasibility of a credit information bureau was also completed. 5. After initial resistance to the goal of privatizing NBC throughout the project preparation period, considerable time was spent developing consensus on the privatization strategy for NBC. Despite the retrenchment of roughly 3,000 employees, a doubling of commissions and a 50 percent reduction in deposit rates, and the recruitment of professional bankers in managerial positions, the bank did not achieve the profitability target nor was credit management sufficiently improved. The Memorandum of Understanding (MOU) was successful, however, in constraining NBC's activities and minimizing the bank's losses. A secondary impact was to reduce its market share. Nevertheless, it became increasingly difficult to maintain the political consensus for restructuring the former NBC given the contraction in the provision of financial services. The Government in the end adopted a more radical restructuring plan aimed at facilitating privatization while improving and expanding the delivery of financial services to small savers. This strategy culminated in the split of NBC in October 1997 into two banks, the NBC (1997) and the National Microfinance Bank (NMB). 6. Overall, the main project development objective was to encourage competition in the commercial banking sector through the restructuring and privatization of government-owned banks and continued entry of new private banks. While some considerable competition had been introduced in the sector, especially in the capital Dares Salaam, through the entry of several private banks, the project's objective was considerably advanced by the split of NBC into two banks, NBC (1997) and NMB, and a holding company in October 1997. The Borrower made satisfactory progress in reducing the market share of deposits for both banks to about 54 percent by the end of 1998 and also in identifying a strategic buyer for NBC (1997). Amalgamated Bank of South Africa (ABSA) won the bid to purchase 70 percent of NBC (1997) in early 1999 and negotiations for the final sale agreement are scheduled to be completed in April 2000. 7. The initial attempt to privatize NMB was not successful. The Government recognized that the privatization of NMB was premature given the need to transformNMB's basic business line to cater for small-scale financial services and its weak financial foundation. A bond issue to bring the bank's net worth to zero, donor financing of a substantial portion of the start-up costs, and the recruitment of professional bankers and microfinance experts under a management contract, were all viewed as essential elements of the privatization strategy. However, these actions were delayed and this, together with the unusual business franchise of NMB, contributed significantly to the lack of serious interest by potential investors. The Government has of recent moved to address these issues. The management contractors were recruited and started work at NMB in July 1999, the Government issued 90 percent of the requiredrecapitalization bonds in September 1998, and the bank's final accounts have been prepared. 8. Due to the amount of resources and effort required to restructure NBC, caused primarily by delays in finalizing the restructuring strategy, the planned restructuring of People's Bank of Zanzibar (PBZ) was put on hold. The PBZ is the principal commercial banking institution in Zanzibar but it represented only 1.6 percent of the assets of the Tanzania banking system at the end of 1999. It is a small bank, 100 percent owned by the Zanzibar Ministry of Finance. The original objective under the project was to convert PBZ into a viable bank and place it under private management. When this plan did not materialize, BOT placed two supervisors in PBZ and withheld the decision to renew its banking license (it expired on December 31, 1998) until fundamental decisions have been made and implemented to resolve PBZ's insolvency. The ii  Government has now decided to address the problems at PBZ under the Second Financial Institutions Development Project which is expected to become effective in the first half of calendar 2000. 9. IDA's performance is assessed as highly satisfactory. The Bank was flexible especially in terms of resource allocation and when it became obvious that more funds were required for the critical component of NBC privatization, funds were re-allocated from other components to the NBC activities. The Bank consulted extensively with the Government and all stakeholders at preparation and implementation stages (including joint participation of the Swiss Development Corporation) as can be evidenced from the staff inputs and resources that were committed to the project throughout its lifetime (see Table 7 in the Annex). Although there was no formal mid-term review at which the project was restructured, the intensive supervision combined with the flexibility of the Bank resulted in a continuous restructuring throughout the life of the project which resulted in the positive outcome of resolving the important NBC privatization. 10. Borrower performance was satisfactory despite the length of time it took to reach decision on the NBC privatization strategy. Because of the importance of the NBC to the Tanzanian financial sector, the Borrower concentrated most of its efforts and resources under the Project on NBC's restructuring and privatization. Even then, there was lack of agreement on which strategy was best suited for the downsizing of the bank and it took almost two years to reach a final decision. Procurement under the project was coordinated by the Bank Supervision Department of BOT with assistance from the staff of the Resident Mission. This aspect of the project was generally properly managed, except in a few instances where the World Bank procedures were not followed. 11. The outcome of the project is rated highly satisfactory. The most important component of the project central to financial sector development in Tanzania was the bank restructuring and privatization component. The challenge of doing. this, given the political and economic environment obtaining, should not be under-estimated. This component was implemented successfully with the split of NBC and finding a potential buyer for NBC (1997) together with the appointment of a management contractor to turn NMB into a sustainable micro-finance institution. Although a number of the other components of the project were left uncompleted, this is understandable given that resources originally allocated to them were shifted to the core and all important bank restructuring component. Moreover, the issue of NBC dominance in the banking sector has got settled thereby setting the process of financial sector development in Tanzania on a sustainable path. Privatization was notmentionable during the preparation stages of FIDP. Now the Govemment's policy is to privatize all the remaining state-owned banks. Future Operations 12. The Govemment approached the Bank seeking assistance for a second FIDP which would provide support as the Government pursues its bank privatization program to conclusion. The FIDP II program was approved by the Board in August 1999. Specifically, under FIDP II, the focus shifted to: (i) restructuring and/or privatizing all the remaining state-owned banks including transforming the NMB into a private micro-finance bank; (ii) strengthening the supporting financial infrastructure by, inter-alia, enhancing the capacity of the central bank to supervise iii  banks and by improving the efficiency of the national payments system; and (iii) increasing savings and investment opportunities by promoting the development of contractual savings and capital markets. The Government has also received assistance from IDA to prepare a Rural and Micro-financial Services Project which is expected to become effective in April 2000. Its objective is to develop a common policy framework which will establish an enabling environment for rural and micro-finance and facilitate the inflow of quality investments into the sector. These actions would lead to increased access by rural savers and micro entrepreneurs to the formal financial system, reduced Government ownership of the banking sector, and improved soundness of the banking system. Another anticipated future activity is a financial sector assessment which will undertake a comprehensive assessment of Tanzania's financial sector. Key Lessons learned 13. Several main lessons can be drawn from this operation: (i) Boards of Directors of state-owned banks who are publicly appointed have no commercial objectives to run the banks and tend to have political agendas, advocating for increased services and growth without regard to the growth of profits (ii) Commitment of the Borrower to and ownership of the reform program is key to successfil implementation of reforms. At the same time, the Government requires some champions within its ranks who will sell the benefits of the program to both the politicians and the general populace. (iii)A lot of time and resources are required to build consensus among the key decision makers and the population at large on the strategy to be followed in privatizing state-owned banks. Similarly, capacity building in the in the Central Bank to supervise the financial system is also a long term rather than short term exercise. (iv) Management contracts for distressed state-owned banks can only work if the Government and the Central Bank are in agreement on what the final output from the management contract should be. This includes a willingness to enforce compliance with the business plan targets and effective oversight of the performance of the management contractor. Such oversight may consume considerable supervision resources. iv  TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (CR. 2771-TA) PART I: PROGRAM IMPLEMENTATION ASSESSMENT A. Background 1. The Government of Tanzania initiated its financial sector reform program in 1991 with the support of an IDA financial sector adjustment credit (FSAC). The aim of the program was to create a financial system that operates on the basis of market-oriented principles, is efficient in mobilizing and allocating resources, and effective in fostering long-term economic growth. Specifically, the program envisaged the passing of new banking laws and prudential regulations, allowing the entry of private foreign and domestic banks into the sector, restructuring of the then three state-owned commercial banks, legislation to promote private sector participation in insurance, and initial steps to promote the emergence of a capital market in Tanzania. 2. The reform program under the previous FSAC proceeded much slower than expected partly because of a slow pace of associated reforms in the real sector and a deterioration in macroeconomic management in 1992/93, and partly because of the difficulties in changing the behavior of managers of the state-owned financial institutions. FSAC thus attained only partial success. The program legally deregulated and liberalized the banking system. However, it failed to accomplish the intended restructuring of the National Bank of Commerce (NBC) with the effect that despite the opening of private banks, meaningful competition in the sector was still lacking. Table 1: Selected Economic Indicators, 1991-98 (in percent) Indicator FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 GDP growth rate 2.8 1.8 1.2 0.6 3.6 4.2 3.3 3.7 Budget deficit/surplus (percent of GDP) -5.5 1.1 -8.2 -11.8 -7.0 -1.4 8.7 -2.8 Annual inflation (period average) 28.7 21.8 25.2 33.1 29.8 19.7 16.1 12.8 M2 growth 22.8 34.1 32.9 33.3 29.9 4.9 9.1 10.5 Source: International Financial Statistics  B. Statement of Project Objectives and Evaluation of Design 3. Statement of Objectives. The Financial Institutions Development Project was designed to build upon the limited achievements under FSAC and to provide technical assistance required for the implementation of the remaining reforms in the financial sector. The project would support measures to enable the Government to regain the momentum for financial sector reform by addressing the fundamental weaknesses in the sector. It would also build the foundation for diversification of financial instruments. 4. Specifically, FIDP was meant to support the following: (a) the restructuring and privatization of the National Bank of Commerce (NBC) and the restructuring of the smaller People's Bank of Zanzibar (PBZ) so as to encourage competition and efficiency in the banking sector; (b) continued strengthening of the Bank Supervision Directorate (BSD); (c) improvements to the payments system; (d) the creation of a private credit information bureau; and (e) the development of the insurance industry and capital markets. 5. Evaluation. The concept and design of FIDP were appropriate and in line with the Bank's country assistance strategy which aimed at assisting the Government to reduce poverty through an acceleration in the pace of structural reform and the provision of infrastructure and social services (especially targeted to the poor). The former included continual restructuring of the banking sector which, because of substantial losses, had diverted public funds away from higher priority social expenditures. One of the criteria for determining Tanzania's eligibility for substantial IDA support under the country assistance strategy was improvements in the operation of public sector banks, including stemming losses, increases in the quality of their portfolios, the introduction of private management and eventual divestiture. 6. The FIDP was designed with the lessons learnt from the failure to restructure the banking system under FSAC in mind. It was no longer assumed that the emergence of competitive private banks would gradually erode NBC's market share. Instead a more aggressive strategy to downsize the NBC and slow its growth was adopted. In 1995, NBC's market share in terms of deposits of the banking system was slightly over 80 percent. The project also was to finance a management team for NBC whose performance would be evaluated on the basis of the bank's financial performance as measured by time-bound and monitorable performance targets. However, given the experience in difficulties involved in restructuring a state-owned bank in Tanzania and elsewhere in Africa, the project design seems to have underestimated the amount of effort and resources necessary to complete the exercise. Maybe the project should have focused its energies on the bank restructuring and left out some of the other components for consideration in a future operation. With the benefit of hindsight, this is what eventually materialized. However, an advantage of the project design having multiple components was that this allowed for diversification of risk making it possible to quickly re-direct resources into the faster moving components as was the case when the NBC restructuring component became more demanding. 7. The risks facing the program were identified at the design stage, taking into account Tanzania's financial sector reform experience under FSAC. The risks were evaluated and deemed to be manageable. Most notable was a possible reversal of the Government's stated commitment to the NBC's commercialization. Actions required for the significant downsizing of NBC were started early in the project's implementation. In addition, NBC management was to be required to 2  enter into a memorandum of understanding with the Government which would be strictly monitored and enforced by Bank of Tanzania. Another risk addressed by the project was guarding against the rapid opening up of Tanzania's capital market in the absence of an appropriate regulatory framework. The project would support the gradual evolution of the capital market while putting in place an appropriate regulatory framework. The third risk identified was the possible lack of sufficient technical capacity within Tanzania to address the project's complex issues, especially with regard to bank restructuring. The project provided for regular supervision visits by IDA staff, including staff at the Resident Mission, who would liaise closely with Government officials during the project's implementation. C. Achievement of Project Objectives 8. Overall, the main project development objective was to encourage competition in the commercial banking sector through the restructuring and privatization of government owned banks and continued entry of new private banks. While some considerable competition had been introduced in the sector, especially in the capital Dares Salaam, through the entry of several private banks, the project's objective was considerably advanced by the split of NBC into two banks, NBC (1997) and National Microfinance Bank, and a holding company in October 1997. The Borrower made satisfactory progress in reducing the market share of deposits for both banks to about 54 percent by the end of 1998 and also in identifying a strategic buyer for NBC (1997). Amalgamated Bank of South Africa (ABSA) won the bid to purchase 70 percent of NBC (1997) in early 1999 and negotiations for the final sale agreement are scheduled to be completed in April 2000. The IFC recently agreed to take a 20 percent equity stake in NBC (1997) thereby reducing ABSA's stake to 50 percent. 9. Due to the amount of resources and effort required to restructure NBC, caused primarily by delays in finalizing the restructuring strategy, the planned restructuring of People's Bank of Zanzibar (PBZ) was put on hold. The PBZ is the principal commercial banking institution in Zanzibar but it represented only 1.6 percent of the assets of the Tanzania banking system at the end of 1999. It is a small bank, 100 percent owned by the Zanzibar Ministry of Finance but with a high political profile and symbolic importance. It currently has three branches and 238 employees. The main reasons for its poor financial status included a very weak loan portfolio resulting from very poor credit policies, a failure to previously recognize non-performing assets and make provisions for them, and up to 1993, performing functions on behalf of the Government of Zanzibar which were not traditionally associated with commercial banking. The original objective under the project was to convert PBZ into a viable bank and place it under private management. When this plan did not materialize, BOT placed two supervisors in PBZ and withheld the decision to renew its banking license (it expired on December 31, 1998) until fundamental decisions have been made and implemented to resolve PBZ's insolvency. The Government has now decided to address the problems at PBZ under the Second Financial Institutions Development Project which is expected to become effective in the first half of calendar 2000. 10. Associated with the improvement of the health of banks was the need to create a formal mechanism for sharing credit information among financial institutions. The project financed a feasibility study to determine if there was a potential market for a credit information bureau in Tanzania and whether it could become self-sustaining within a three year time frame. The study was carried out and concluded that such a market exists and the new FIDP project has included a 3  component that would finance the start up costs of the bureau if the local Bankers' Association is ready to invest in the bureau. 11. The other major objective of the FIDP was the strengthening of banking supervision and regulation. This objective was also achieved. The Banking Supervision Directorate evolved strongly as a result of a series of banking laws and prudential regulations developed during project implementation. The number of qualified bank supervisors increased from 37 in 1995 to 57 by the middle of 1999, responsible for supervising the existing 17 commercial banks. With training courses financed under FIDP and additional assistance from the IMF, the Directorate developed most of the basic skills necessary to conduct banking examinations and now systematically conducts on-site examinations of all financial institutions under its authority. Examination methodologies for both on-site and off-site inspection were developed and a basic set of regulations to support the legislative framework, including policy and procedural guidelines for the licensing of new banks and other financial institutions, was put in place. In addition, the implementation of an effective off-site monitoring system was improved through systematic analysis of standardized weekly, monthly and quarterly reporting forms for financial institutions. 12. The third project development objective was the establishment of a regulatory structure for securities markets and insurance, as well as developing a corporate securities market. Due to the high demand for resources for the restructuring of NBC beyond what was originally envisaged, only the regulatory structure for securities markets was set up under the project. The Capital Markets and Securities Authority was set up with funding from the FIDP. The project provided technical assistance to promote the development of a capital market keeping in mind the Government's preference for a simple and evolutionary approach. Specially, assistance was provided for: * the drafting and completion of a core set of enabling regulations * an external advisor to provide regular assistance over the course of two years to the Authority on a wide variety of regulatory and market development matters; * basic training of would-be stock brokers; * basic publicity and education program for the general public, including nationwide distribution of information; * technical assistance to complete the first public issue including design of distribution procedures, determination of offer prices, determination of allotment procedures; provision of short 1-2 hour training sessions for personnel nationwide on how to handle the public issue, supervision of the allotment processing and so forth; and * the preparation of a stock exchange blue print and item-by-item action plan together with donor funding requests for start-up costs. 13. The CMSA successfully established the Dares Salaam Stock Exchange (DSE) to the point where two Initial Public Offerings (IPOs) took place during the first half of 1998. The DSE now has a small pipeline of furtherIPOs. The listing fees from these IPOs should be able to allow the DSE to generate some revenue to cover part of its operating expenses over the next few years. The ICR mission asked the CMSA to draw a business plan showing financial projections over the next five years in order to determine the viability of the DSE operations. 4  14. Although the regulatory framework and supervisory methodology for the insurance sector were not put in place under the project, the Government was able to pass legislation opening up the sector to private participation and to set up the institutional framework (the Insurance Supervisory Department in the Ministry of Finance) for regulating the sector. Nine private insurance companies have since been set up in addition to the two existing state-owned ones; the National Insurance Corporation (NIC) and Zanzibar Insurance Corporation (ZIC). The share of the public sector insurance market, though still large, had reduced to 55.4 percent by October 1999. 15. The fourth and final project development objective was improvement of the Tanzania payments system. The first stage of this component was completed in the early stages before resources were shifted to NBC privatization. This payments system component had envisaged a study to be conducted in two phases: (i) collecting and analyzing data about the payment traffic in Tanzania and assessing the related institutional, legal and financial infrastructure; and (ii) designing improvements to the national payments system including an assessment of the feasibility of the electronic exchange of data. Due to the shortage of resources as a result of re- allocation of resources for the NBC restructuring mentioned above, only the first phase of the payments system modernization was carried out and the second phase is expected to be carried out in a follow-up project to FIDP. The first phase was completed with the production of the final version of the Situational Analysis and Stocktaking Report in January 1998. The document is quite comprehensive and represents a sound basis for moving forward into the next phase. It contains a broad description of the problems and opportunities that must be addressed in the next phase. The document was distributed to all the relevant stakeholders and was endorsed by the Council of Commercial Bank CEOs in March 1998. D. Major Factors Affecting the Program 16. The key factors which affected the implementation of the program were largely due to the underestimation of the time, effort and resources required to reach consensus on the right and politically acceptable strategy to restructure and privatize the NBC. The Government's strategy for privatizing NBC was formulated after a detailed review, extended debate of several options and a subsequent re-consideration of the strategy. However, the drawn out consultations were helpful in strengthening the robustness and political commitment to the decision on how to dispose of NBC leading to the final acceptance of the deal. The length of the consultation process, together with the high costs of implementing the split of the bank into two units, resulted in a doubling of the consulting costs and contributed to the accelerated rate of disbursement from FIDP. The restructuring and privatization of NBC which had been estimated at US$3.6 million ended up costing almost US$ 9 million, with yet some unfinished work in the process of privatizing NMB. This was at the expense of other components of the project that remain incomplete but are all being catered for under a follow-up second FIDP project that will become effective in the first half of calendar 2000. 17. Another factor that affected the implementation of the project was the poor outcome of the public information campaign which was supposed to mobilize public support for the NBC restructuring strategy. The original strategy had called for the spin off of a corporate branch network and formation of a joint venture with a foreign experienced partner. Despite the public information campaign, the strategy caused a public outcry and had to be withdrawn. This set the 5  stage for several rounds of consultation before consensus could be reached on the strategy for NBC. E. Implementation Record 18. The implementation record early in the project was strong as evidenced by actions taken prior to Credit effectiveness. A diagnostic evaluation of NBC was carried out at the beginning of 1995 following which a business plan and memorandum of understanding with the Government were prepared and agreed with IDA. Consultants were appointed to manage the bank and a banking advisor to the Ministry of Finance was also appointed. In addition, the Government agreed with IDA on a letter of sector development policy in which it described the program to be implemented. The Government also prepared and submitted to IDA outstanding audits of the ongoing and previous projects (FSAC and IRTAC) that were implemented by the BOT. 19. The implementation of all the components of the project, except the bank restructuring component, had started off well and were only interrupted when resources were shifted to the more urgent task of restructuring and privatizing NBC. Training in Bank supervision in the handling of problem institutions and on-site examination was carried out under the project with the assistance of Bank Supervision Advisors provided under the IMF's technical assistance program. At the same time, the Capital Markets and Securities Authority became operational and the first phase of the payments system modernization component was completed. The study on the feasibility of a credit information bureau was also completed. 20. As mentioned above, considerable time was spent developing consensus on the NBC. Despite the retrenchment of roughly 3,000 employees, a doubling of commissions and a 50 percent reduction in deposit rates, and the recruitment of professional bankers in managerial positions, the bank did not achieve the profitability target nor was credit management sufficiently improved. The MOU was successful, however, in constraining NBC's activities and minimizing the bank's losses. A secondary impact was to reduce its market share. Nevertheless, it became increasingly difficult to maintain the political consensus for restructuring the former NBC given the contraction in the provision of financial services. The Government therefore adopted a more radical restructuring plan aimed at facilitating privatization while improving and expanding the delivery of financial services to small savers. This strategy culminated in the split of NBC in October 1997 following another round of cost reductions including the retrenchment of another 2,000 employees. The cost reductions were identified as part of a comprehensive operations review of NBC. 21. However, once the decision to split the bank into two was reached,NBC, which consisted of 130 branches by now, was dissolved and three institutions were created: a holding company and two banks: NBC (1997) and the NationalMicrofinance Bank (NMB). NBC (1997) is a full commercial bank consisting of 35 branches with business lines targeted to larger commercial enterprises. NMB consists of 95 branches providing nation-wide coverage with business lines targeted to small depositors. All lending products were assigned to NBC (1997). Both banks were offered for sale in August 1998. In January 1999, Amalgamated Bank of South Africa (ABSA) won the bid to purchase 70 percent of NBC (1997) and negotiations on the final sale agreement are expected to be concluded in April 2000. 6  22. The initial attempt to privatize NMB was not successful. The Government recognized that the privatization of NMB was premature given the need to transformNMB's basic business line to cater for small-scale financial services and its weak financial foundation. A bond issue to bring the bank's net worth to zero, donor financing of a substantial portion of the start-up costs, and the recruitment of professional bankers and microfinance experts under a management contract, were all viewed as essential elements of the privatization strategy. However, these actions were delayed and this, together with the unusual business franchise of NMB, contributed significantly to the lack of serious interest by potential investors. The Government has of recent moved to address these issues. The management contractors were recruited and started work at NMB in July 1999, the Government issued 90 percent of the requiredrecapitalization bonds in September 1998, and the bank's final accounts have been prepared. F. Program Sustainability 23. FIDP's sustainability is measured by the irreversibility of the reforms it supported. Laws were enacted setting up the Capital Markets and Securities Authority and opening up the insurance sector for private participation. At the same time, the Government has committed itself by signing a memorandum of understanding to sell 70 percent of NBC (1997) to ABSA. ABSA has carried out due diligence of NBC and is scheduled to take over management in April 2000 after the signing of the final sales agreement. Government commitment in this respect remains firm. As far as NMB is concerned, the Government has entered into a legally binding US$ 4.9 million contract with a management contractor. The contract gives the management team responsibility for running the day to day affairs of the bank and a mandate to transform NMB into a microfinance bank. As of end December 1998, NBC's market share in terms of total deposits of the banking system was about 34 percent while that of NMB was about 20 percent. Finally, the Govenunent has agreed to provide to IDA a time-bound action plan for the privatization of NMB as one of the conditions of effectiveness of the FIDP II. These actions, combined with the fact that the Government has already received the approval for a follow-up FIDP II operation from IDA's Board, affirm that the program initiated under FIDP will be sustainable in the long term. G. Bank Performance 24. Bank performance in the supervision of the FIDP was highly satisfactory. The Bank was flexible especially in terms of resource allocation and when it became obvious that more funds were required for the critical component of NBC privatization, funds were re-allocated from other components to the NBC activities. The FIDP was designed based on lessons learnt from the previous FSAC operation. The Bank consulted extensively with the Government and all stakeholders at preparation and implementation stages (including joint participation of the Swiss Development Corporation) as can be evidenced from the staff inputs and resources that were committed to the project throughout its lifetime (see Table 7 in the Annex). A total of 211 staff weeks costing US$ 880,000 were devoted to the whole project of which 123 staff weeks were devoted to supervision. While this may appear large compared to the norm in the Bank for technical assistance of this size, the drawn-out nature of the NBC consultation process required a constant presence in the field to keep the Government focused on the end product. Although there was no formal mid-term review at which the project was restructured, the intensive supervision combined with the flexibility of the Bank resulted in a continuous restructuring throughout the 7  life of the project which resulted in the positive outcome of resolving the important NBC privatization. H. Borrower Performance 25. Borrower performance was satisfactory despite the length of time it took to reach decision on the NBC privatization strategy. Because of the importance of the NBC to the Tanzanian financial sector, the Borrower concentrated most of its efforts and resources under the Project on NBC's restructuring and privatization. Even then, there was lack of agreement on which strategy was best suited for the downsizing of the bank and it took almost two years to reach a final decision. Throughout the project, the NBC was operating under a memorandium of understanding. The monitoring and enforcement of the memorandum by the BOT was at first very thorough but later on in the process as the focus shifted to the privatization transaction, the enforcement of the MOU became lax and the NBC kept violating the required compliance. 26. Procurement under the project was coordinated by the Bank Supervision Department of BOT with assistance from the staff of the Resident Mission. This aspect of the project was generally properly managed, except in a few instances where the World Bank procedures were not followed. For example, the Borrower incurred a massive cost overrun in the legal services contract for NBC privatization without first getting the required IDA approval. L. Assessment of Outcome 27. Based on the assessment in Sections C and D above, the outcome of the project is rated highly satisfactory. The most important component of the project central to financial sector development in Tanzania was the bank restructuring and privatization component. This was carried out successfully with the split of NBC and finding a potential buyer for NBC (1997) together with the appointment of a management contractor to turn NMB into a sustainable microfinance institution. Although a number of the other components of the project were left uncompleted, this is understandable given that resources originally allocated to them were shifted to the chore and all important bank restructuring component. Moreover, the issue of NBC dominance in the banking sector has got settled thereby setting the process of financial sector development in Tanzania on a sustainable path. Privatization was notmentionable during the preparation stages of FIDP. Now the Government's policy is to privatize all the remaining state- owned banks. This in itself is a major achievement in re-aligning the Government's perception of its role in the financial sector. J. Future Operations 28. The Government approached the Bank seeking assistance for a second FIDP which would provide support as the Government pursues its bank privatization program to conclusion. The FIDP II program was approved by the Board in August 1999. Specifically, under FIDP II , the focus shifted to: (i) restructuring and/or privatizing all the remaining state-owned banks including transforning the NMB into a private microfinance bank; (ii) strengthening the supporting financial infrastructure by, inter-alia, enhancing the capacity of the central bank to supervise banks and by improving the efficiency of the national payments system; and (iii) increasing savings and investment opportunities by promoting the development of contractual savings and 8  capital markets. These actions would lead to increased access by rural savers and micro entrepreneurs to the formal financial system, reduced Government ownership of (as a proxy for intervention in) the banking sector, and improved soundness of the banking system as measured by the extent of non-performing assets in the banking system and enhanced quality of bank supervision and the regulatory environment. This new focus under FIDP 11 reflects the paradigm shift which is a result of the activities under FIDP I. 29. Another anticipated future activity is a financial sector assessment which will undertake a comprehensive assessment of Tanzania's financial sector. The assessment will review the current status and performance of the sector and also identify actions that the Government needs to take in the short, medium and long term to develop a robust financial sector. K. Key Lessons Learned 30. Based on the experience of this Credit, several lessons can be drawn: (i) Boards of Directors of state-owned banks who are publicly appointed have no commercial objectives to run the banks and tend to have political agendas, advocating for increased services and growth without regard to the growth of profits. This is made the more possible because of the Government's implicit guarantee of deposits in state-owned banks. (ii) Commitment of the Borrower to and ownership of the reform program is key to successful implementation of reforms. At the same time, the Govermment requires some champions within its ranks who will sell the benefits of the program to both the politicians and the general populace. These champions should preferably be local technical people or, if need be, carefully selected external technical assistance who would have a well planned public relations program to sell to the public the benefits expected from the project. (iii)A lot of time and resources are required to build consensus among the key decision makers and the population at large on the strategy to be followed in privatizing state-owned banks. Similarly, capacity building in the in the Central Bank to supervise the financial system is also a long term rather than short term exercise. (iv) Management contracts for distressed state-owned banks can only work if the Government and the Central Bank are in agreement on what the final output from the management contract should be. This includes a willingness to enforce compliance with the business plan targets and effective oversight of the performance of the management contractor. Such oversight may consume considerable supervision resources. In order to arrive at decisions on the required optimal output, the Government requires expert technical advice well versed with evaluation of bank performance. Most bank management contractors are trained to grow business not shrink it and end up not implementing what the technical assistance was designed for. They tend to be overly optimistic about the quality of new lending that they can do. 9  'n  TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (CR. 2771-TA) PART II: STATISTICAL ANNEXES 11  12  Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible NA Macro Conditions x Sector Policies x Legal Objectives Institutional Development x Poverty Objectives x Gender Issues x Other Social Objectives Environmental Objectives Public Sector Management x Private Sector Development x Other B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Unsatisfactory Satisfactory Identification x Preparation assistance x Appraisal x Supervision x D. Borrower Performance HS S U Preparation x Implementation x Covenant compliance, x E. Assessment of Outcome HS S U HU x NA: Not Applicable; HS: Highly Satisfactory; S: Satisfactory; U: Unsatisfactory; HU: Highly Unsatisfactory. 13  Table 2: Related Bank Loans and Credits Loan/Credit Title Purpose CY of Status approva . .......... .. ........... 'm . fi . . ....... 1. Financial Sector * To ensure that the macroeconomic framework Adjustment Credit (FSAC) wbauld support financial sector performance, to improve competition within the financial system, strengthen Central Bank super ision capacity, 1991 C and restructure individual banks, including the Closed transfer of bad loans to a Loan and Advances Realization Trust (LART). 2. Financial Institutions and I To improve public sector accounting and Legal Management Project auditing; and the legal and regulatory framework 1993 Ongoing (FILMUP) and the administration of justice 3. Parastatal and Public * Assist Government to tackle financial difficulties 1993 Ongoing Sector Reform Project and encourage growth of the private sector through (i) privatization of PE's (ii) reform of the civil service, including planned staff reductions and (iii) improvements in the macro policy framework, with attention to taxation. 4. Structural Adjustment * To induce greater efficiency in the use of fiscal Credit (SAC) resources, focus the activities of the state while enlarging the role of the private sector, and continue the process of price and market 1997 O liberalization. Ongoing * To support the government's efforts to achieve macro stability, growth, and poverty reduction through a reform of public expenditure policies, efficient provision of social services, accelerated privatization of parastatals, a resolution of the problems facing the National Bank of Commerce (NBC), and measures to remove distortions in the pricing and marketing of petroleum. 5. Rural and Micro- To develop a sustainable rural and micro-finance 1999 Approved by the Board in financial Services Project system with a wide outreach to small scale rural and August 1999. To become urban clients throughout Tanzania. effective soon 6. Second Financial * To create a competitive financial sector that, using Institutions Development commercial principles, will channel domestic savings Approved by the Board in Project (FID Pll) into increased private investment. This would include: August 1999. To become I (i) facilitating the privatization of state owned banks; 1999 effective soon (ii) strengthening the supporting financial infrastructure including bank supervision by the central bank, an improved payments system and the establishment of a private credit infonration bureau; and (iii) implementing a strategy for the development of capital markets. I 14  Table 3: Project Timetable Steps in Project Cycle Date Planned Actual Date Identification February 1994 Preparation March 1994 March-June 1994 Appraisal June 1994 June-Sept. 1994 Negotiations October 25, 1994 December 20-21, 1994 Letter of Development Policy February 23, 1995 Board Presentation November 1994 August 3, 1995 Signing I October 27, 1995 Effectiveness August 1995 February 23, 1996 Mid-term Review April 1998 Was Not Necessary Project Completion December 31, 1998 February 28, 1999 Loan Closing June 30, 1999 June 30, 1999 Table 4: Credit Disbursements: Cumulative Estimated and Actual Disbursements (US S million" FY96 FY97 | FY98 FY99 FY2000 Appraisal Estimate 1.80 5.40 9.0 10.28 10.90 Actual 1.37 3.33 10.05 10.33 10.33 Actual as a % of Estimate 76.1 6 1.7 111.7 1 100.5 ioo.o0 Date of Final Disbursement: June 28, 1999 Effect of the fluctuations of SDR/IJS$ exchange rate 15  Table 5: Key Indicators for Project Implementation Programmed Actual 1. Completion of the Diagnostic evaluation of NBC and a tine bound Completed in March 1995 action plan for the downsizing and restructuring of NBC 2. NBC has appointed consultants to carry out the divestiture strategy Management consultants were appointed in mid 1995 but did not carry out their mandate. The contract was termrinated due to non-performance.. 3. The Borrower has contracted the banking advisory services to Advisor appointed in December 1995 Ministry of finance Cril2 .B B. .;0g -. - E . ..g... . 1. The Borrower shall maintain records and accounts adequate to reflect * Complied with continuously the resources and expenditure in respect of the project 2. The Borrower shall submit to the Association not later than six months * Complied with continuously after the end of each fiscal year a certified copy of the audit report of the financial statements of the project 16  Table 6: Status of Legal Covenants Development Credit Agreement 2.03 3 Closing date C June 30, 1999 Credit was fully disbursed and it closed as planned. Funds for some of the components were re-allocated to the critical component of NBC privatization. Uncompleted components were transferred to FTDP II 3.03 4 Exchange of views with IDA on C Continuous progress of the Program 3.04 1,4 Preparation of audited financial CD Not later than six The NBC audited accounts (with the required months after the accounts were always adjustments and loan write-offs) end of each FY provided late and those for NBC and PBZ and furnishing of PBZ were not them to IDA provided until July 1999 3.05 5 Offer for sale, by October 31, CD October 31, 1995 February The strategy was 1995, at least one branch 1999 changed and NBC was network of NBC and identify a split into two banks, joint venture partner for the NBC (1997) and NMB. corporate subsidiary of NBC NBC (1997) was offered for sale in February __________ 1999. 3.06 5 Appoint a General Manager and CP October 31, 1995 BOT seconded 2 senior Financial Controller to assist officer to manage PBZ PBZ and ensure the bank has and prepare restructuring commenced the implementation plan. of a restructuring plan 4.01 (a) 1, 2 Borrower to maintain records C Continuous and accounts to reflect the operations, resources and expenditures in respect of the Project 4.01 (b) 1, 4 Borrower to have the records C Not later than six and accounts audited for each months after the FY and to submit to IDA a end of each FY certified copy of the audit report 17  .. 7. . ........ Sch. 4 (1) 2 BOT shall be responsible for C Continuous As a result of personnel supervising the implementation changes in BOT, of the Project and monitoring its responsibility for the progress Project was moved from the Financial Markets Directorate to the Directorate of Bank Supervision Sch. 4 (2) 2 Borrower to appoint and C The advisor's contract maintain until completion of the expired six months project banking advisors to assist before the end of the Ministry of Finance with bank project and was not restruicturing renewed. A new advisor was recruited to assist with the evaluation of NBC proposals. Sch. 4 (3) 5 Borrower to furnish IDA with CP October 31, 1995 Government enforced the NBC's business plan and cause MOU with NBC. NBC to carry out operations in However, there were accordance with the some lapses in performance targets contained enforcement during the therein bidding and negotiation .I_________ process. Sch. 4 (4) 5 Borrower to ensure NBC C Every month promptly furnishes BOT with monthly reports on outstanding loans to large borrowers (loans TShs 100 million and above) I Sch. 4 (5) 5 BOT to provide IDA with the C March 31 of annual work plan of the DBS preceding year each financial year Sch. 4 (6) 5 BOT to furnish to IDA annual C September 30 of reports on the financial status of each year all banks with action plans for identified problem institutions. Sch. 4 (7) 5 Borrower to fumnish to IDA the CD Dec. 31, 1995 The Commission was work plan for the establishment established in March of the Insurance Commission 1999. Sch. 4 (8a) 5 Borrower to maintain, until C Continuous completion of the Project, a Chief executive Officer of the CMSA Sch. 4 (8b, c) 5 Borrower to furnish to IDA an C October 31, 1995 annual work plan and budget for for 1996; CMSA for each year September 31 of each preceding year for subsequent years. I Sch. 4 (9) 5 Borrower to ensure that NC October 31, 1995 This component was management team for the PTF deferred until FIDP II has been selected and a draft becomes effective management contract has been furnished to IDA 18  Sch. 4. (10) 5 Borrower to carry out, through NC March 31, 1997 April 2, Given the substantial BOT, a mid-term review of the 1998 percentage of funds progress m carrying out the disbursed by March 1997 Project and the Program and the intense review of restructuring options for NBC, the Government and the Bank agreed to no mid term review. Covenant types: Present status: 1: Accounts/Audits C: covenantcompliedwith 2: Flow and utilization of project funds CD: complied with after delay 3: Management aspects of the project/executing agency CP: compliedwithpartially 4: Monitoring, review and reporting NC: not complied with 5: Project implementation not covered by categories 1-4 19  Table 7: Bank Resources; Staff Inputs2 Stage of Project Cycle Weeks USS '000 Preparation to appraisal 15.5 59.2 Appraisal 31.4 90.6 Negotiations through Board approval 35.2 121.7 Supervision 122.9 601.7 Completion 6.0 6.0 TOTAL 211.0 879.2 Table 8: Bank Resources; Missions Month/Year No. of No. of Staff skills Performance rating Types of . Persons Weeks represented problems Implementation Development Status Objectives Identification Pre-Appraisal Appraisal July 1994 11 3 EC, FS, BS, PS Post Appraisal September 1994 3 1.5 EC, FS, BS Agreement on the broad elements of a strategy for the PostNegotiation Jan/Feb 1995 3 1.5 EC, FS, BS Completion of conditions for Supervision I November 1996 Supervision II February 1997 2 1.8 EC, PYS S S Supervision III September 1997 3 2 EC, FS, AC S S Supervision IV February 1998 3 1 EC, FS S S Supervision V June 1998 2 1.8 FS, EC S S Supervision VI February 1999 2 2 EC S S Completion November 1999 2 1 FS, EC S S Staff Skills: EC - Economist ; BS - Banking Specialist; FS - Financial Sector Specialist ; AC - Accounting Specialist; PYS - Payments System Specialist; PS - Private Sector Specialist 2 Excludes Trust Fund Resources 20  Perfonnance Rating: S - Satisfactory; U - Unsatisfactory; 1 - Minor Problems; 2 - Moderate Problems; 3 - Major problems, actions taken; 21  22  TANZANIA FINANCIAL INSTITUTIONS DENVELOPMEN' PROJECT (CR. 2771-TA) PART HI: APPENDIXES  2  TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT (CR. 2771-TA) APPENDIX I: BORROWER'S CONTRIBUTION TO THE IMPLEMENTATION COMPLETION REPORT 3  .4  FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT IMPLEMENTATION COMPLETION REPORT I. INTRODUCTION 1. In 1991, the Government of Tanzania initiated its financial sector reform program with the support of IDA credit for financial sector adjustment (FSAC). The aim of the program was to create a financial system that operates on the basis of market-oriented principles, is efficient in mobilizing and allocating resources, and effective in fostering long-term economic growth. The program was intended to: i) Support a stable, market-oriented macro-economic framework; ii) Strengthen the financial infrastructure, including banking and associated legislation; iii) Create a competitive environment and introduce private participation in the banking sector; and iv) Strengthening the existing banks. 2. Due to the precarious situation of the financial institutions then, it was leamt that these objectives could not be speedily implemented. Hence, in the short to medium term, the Government intended the program to include: i) Passage of new banking laws and prudential regulations; ii) Restructuring of the three Government-owned commercial banks; iii) Legislation to promote private sector participation in the insurance industry; and iv) Initial steps to promote the emergence of a capital market in Tanzania through the enactment of the Capital Markets and Securities Act. 3. In August 1993, the Government released its Master Plan forParastatal Privatization and Reform. The plan entailed the privatization, closure and liquidation ofparastatals and restructuring of remaining parastatals to enhance their financial and operational performance. The technical assistance was to be financed by an IDA credit forParastatal and Public Sector Reform (PPRP) and the policy reforms were to be supported by a Structural Adjustment Credit, which was also to support the continuation of policy reforms in the financial sector. 4. The Financial Institutions Development Project (FIDP) was to build upon the achievements of FSAC and complemented the Structural Adjustment Credit (SAC). Specifically, FIDP financed the technical assistance required to assist the implementation of reforms in the financial sector. 5. The objectives of FIDP were to support: i) Encouraging competition in the commercial banking sector; ii) Strengthening banking regulation and supervision; iii) Improving the payments mechanism in the country; iv) Implementing comprehensive parastatal reforms, including privatization of state owned enterprises; v) Developing a market for Govemnment securities; vi) Establishing a regulatory structure for securities and insurance markets, and vii) Developing a corporate securities market. 5  6. The primary objectives of the project are to develop a market-oriented financial system and to ensure the orderly and gradual evolution of capital markets in Tanzania while supporting the privatization process. II. FIDP DESIGN AND COMPONENTS TO ACHIEVE THE OBJECTIVES 7. The scope of the project, which was to be supported by a $10.9million credit, included the following components: (i) The Banks restructuring Component: This aimed at supporting a strategy for downsizing NBC and restructuring PBZ. The support was for: (a) implementing the divestiture of at least one of NBC's urban branch networks and establishing a joint venture subsidiary to focus on corporate and international finance; (b) a management team for the remaining NBC; (c) Restructuring of PBZ under a professional management team into a viable commercial bank, including preparation of business plan, formulation of appropriate policies and operating procedures, installation of effective internal control, the design of a market strategy and the introduction of new financial services; (d) non-resident banking advisors to the Ministries of Finance (as the sole shareholders of NBC, THB, TIB and PBZ) (ii) Financial Infrastructure Strengthening Component which was to support: (a) an intensive program aimed at rapidly developing Banking Supervision in BOT; (b) establishment of an Insurance Commission, including drafting and implementation of prudential regulations for licensing, regulating and supervising insurance companies; and (c) a technical assistance fund to finance a series of studies on improvement of the payments system and the possible creation of a Credit Information Bureau. (iii) The Capital Market Development Component that was to support (a) Strengthening of Capital Markets and securities Authority in the regulation and development of the capital market, including the establishment of a viable capital market in Tanzania and the preparation of such regulations as shall be necessary for the purpose; (b) Training of dealers and potential stockbrokers; (c) Carrying out a basic publicity and educational program for the general public, including nationwide distribution of information; (d) Completion of the first public issue, including design distribution procedures, determination of offer prices and allotment procedures; (e) Preparation of a stock exchange blueprint and action plan. 6  III. ADEQUACY OF PROJECT DESIGN AND RESPONSIVENESS OF THE PROJECT OBJECTIVES 8. FIDP which aimed at addressing the above pertinent issues was a great input, not only in transforming the financial sector into a market based scenario but also to assist in the general development of the economy of the country. The components of FIDP as outlined above, addressed key and pre- requisite issues to the emergence of a financial sector, which would allow efficient mobilization, and allocation of resources, meet credit and investment needs of a broad range of customers and foster long- term economic growth. 9. The financial sector of Tanzania was dominatedby Government-owned banks in which there was pervasive interference by the Government. Credit was directed on the basis of Govermment priorities without regard to the creditworthiness of the customers, and banks were convenient agents of fiscal policy. The lack of separation between fiscal and financial activities, combined with an unfavorable economic environment and an inadequate regulatory framework led to significant misallocation of credit to banking system clientele who were bankrupt and mostly in arrears and an ineffective monetary policy and unstable macro-economic framework characterized by the unchecked growth in monetary supply and lack of competition. Weak banking supervision further contributed to the crisis in the sector. 10. With the enactment of Banking and Financial Institutions Act, 1991, it was necessary for the Govemment-owned banks to be restructured and privatized to enable them comply with the banking laws and most importantly, to let-go of the Government'shold so as to allow them operate competitively in an economy controlled by the market forces. 11. The incoming of private banks and general restructuring of the financial sector meant that the supervisory body had to have both adequate and qualified staff. Given the fact that the Directorate of Banking Supervision was still new and understaffed, it was very important that some funds be set aside to provide training for its staff. 12. The development of the private sector that was catalyzed by parastatal sector reforms and financial sector reforms called for development of capital markets to provide for financing needs. As such, the non-consideration of capital market development would have been a stumbling block towards successful achievement of economic reforms. 13. The objectives of FIDP were therefore commensurate to the needs and conditions of the country at the time of its institution. IV. IMPLEMENTATION EXPERIENCE AND RESULTS Bank restructuring 14. NBC Divestiture. The divestiture of National Bank of Commerce took place at a slower speed than expected. The main reason being a long but unavoidable decision making process that necessitated several presentations to Parliament. Finally a consensus was reached to split NBC into two banks and one Holding Company. The three entities namnely, NBC (1997) Ltd., NationalMicrofinance Bank (NMB) Ltd. and the NBC Holding Company became operational on 1St October 1997. 7  15. NBC (1997) Ltd. is a full-fledged commercial bank focusing on corporate and large customers, has 35 branches situated in urban areas while NMB Ltd. (with 95 branches) is meant to provide both commercial and microfinance services to the urban and rural areas. NMB will seek to encourage savings and develop loan products suitable for small urban and rural businesses as well as agricultural customers. 16. Even though the banks commenced operations in October 1997, they were undercapitalized and had serious operational deficiencies hence the Government signed Memoranda of Understanding with the Boards of Directors of both banks in October 1997 to monitor their performance and cultivate responsibility to their management. The Bank of Tanzania was vested with powers to monitor compliance with the MOUs. 17. Various technical supports (Accounting, legal, property valuation and training) financed- under FIDP have been given to these entities to improve their performance, better their conditions and to prepare them for privatization. 18. The privatization of NBC (1997) Ltd. is inits final stages. The investor, Amalgamated Bank of South Africa (ABSA), is currently managing the bank under interim agreement while going on with due diligence to enable finalization of the deal. 19. NMB has not been able to attract any investors so far. However, the government has hired a management contractor, Development Alternatives (DAI), to steer the bank for a period of two-and-half years to improve its performance and condition and make it attractive for privatization. 20. The whole process of restructuring and privatization of both NBC (1997) Ltd. and NMB Ltd. fell behind schedule because of: (i) Inability of both banks to produce financial statements that were consistent with the banks' September 30, 1997 audited balance sheet; (ii) The complexity of the divestiture process and preparation of relevant documents that took both the shareholder and the consultants a longer time than originally expected. 21. Restructuring of PBZ. The restructuring of PBZ has not been very successful. The Bank of Tanzania seconded its two senior staff to PBZ to assist in its management. Accountants were also contracted to assist in finalization of PBZ accounts for the period ending 31St December 1995 ready for restructuring purposes. Preliminary stages for preparation of Business plan for PBZ were started but due to increased costs in restructuring NBC, no funds were available for PBZ. Thus, shortage of funds, coupled with the Revolutionary Government of Zanzibar's detailed commitment to restructure and privatize PBZ, stagnated the restructuring process of PBZ. The Government of Zanzibar is now committed and has requested for a study of possible restructuring options to be made to enable selection of the most feasible option that can be implemented under FIDP II. Financial Infrastructure strengthening 22. Strengthening Banking Supervision in the BOT. The Project aimed at strengthening the Directorate of Banking Supervision by training its staff in the supervision of problem institutions, on-site examination and methodology development. 8  23. Staff attended both in-country and overseas courses sponsored under FIDP relating to financial analysis, Credit management, money laundering, supervisory techniques, andmicrofinance. However, since new examiners are being recruited and other staff transferred to this Directorate as the banking sector grows, further and additional training under FIDP II will be necessary. 24. The project provided for engagement of methodology specialist(s) who were to work together with IMF Advisor to assist the review of regulations and guidelines; amendment of regulatory reporting requirement; and development of a data from the required regulatory reporting, to display and compute necessary financial data and ratios for use by examiners and analysts in their examination and surveillance roles. 25. The Directorate of Banking Supervision in collaboration with the Directorate of legal services developed several Guidelines and Circulars that were compiled in a volume called "Prudential Guidelines". These guidelines are available to banks and other financial institutions. In April 1996 the Directorate embarked upon the review of all Guidelines and initiation of some new regulations. Several Guidelines/ Regulations have been reviewed. 26. With the assistance of the Department of Management Information Systems, the Directorate has prepared a Banking Supervision Information System (BSIS), which is capable of producing early warning indicators. 27. The Banking Supervision in the Bank of Tanzania is much stronger now than it were in 1995 when FIDP I was sanctioned. The Directorate has been able to assist the BOT to handle complicated cases of two banks that faced difficulties recently and, it has been very instrumental in the restructuring process of the Government owned institutions working hand in hand with PSRC. 28. National Payment Systems Modernization. The National Payment Systems Modernization was initiated in August 1996. It was fornally introduced to all interested stakeholders at a sensitization workshop in September 1996 attended by the representatives of a range of institutions, including financial institutions (i.e. Central Bank, Commercial Banks etc), Government, Capital Markets & Securities Authorities, infrastructure providers (e.g. Telecommunication, Power Company), Clearing House and the newly formed stock exchange, Business and consumer representatives and Major Users (e.g. Pension Funds, Insurance Companies, etc.). 29. The project has been implemented by a multidisciplinary team from the Central Bank, assisted by specialist committees on legal, operations, automation and standards which draws membership from banks and financial institutions. A council of CEOs from key stakeholder organizations chaired by the Governor has overall responsibility over the project. 30. The primary objectives of the improved payment arrangement are to: * Fulfill BOT requirements on the control of reserves and current account balances; * Reduce float, speed up the circulation of funds, and increase the efficiency of fund transmission; * Improve convenience and service to users; * Achieve a reliable, secure, and integrated payment, clearing and settlement system that meets the needs of a changing and growing economy; 9  * Improve and strengthen the relevant internal accounting and control procedures within banks to support migration to envisage modem environment. * Improve BOT management of monetary policy to supply timely and accurate information on funds and settlement account balances; * Expand flexibility to suit Tanzania conditions by allowing for the integration of future services such as ATM's, debit, credit, smart cards and other card-based transactions, securities settlement transactions and large value time critical payment. 31. The implementation of the project was divided into four phases: (i) Situation stock taking - Detailed investigation and data collection phase. (ii) Conceptual design - Consists of developing a comprehensive vision of users requirements and conceptual description of the payment and support mechanisms necessary for their satisfaction and a time phased implementation plan wvith order of magnitude development and implementation costs (iii) Technical specifications - The preparation of technical specifications to a level of detail efficient to communicate the overall system requirements to prospective vendors or in- house developers in a non-ambiguous way, and permit them to prepare fullycosted and comprehensive implementation proposal. (iv) Development and Implementation - This phase was not included in the FIDP. 32. The implementation process was not to the speed expected, and some of the possible reasons for this include: (i) Delay in hiring local consultants; (ii) Delay in obtaining internal BOT and participating commercial banks resources; (iii) Lack of experience in the payments system and (iv) Inadequacy of senior management attention. 33. The second phase of implementation that was intended to deal with vision, strategy and conceptual did not start as per scheduled time (July 1998 - June 1999) due to unavailability of fufnds. The Terms of Reference, Letter of invitation and draft contracts for consultants who were to undertake this phase were prepared and copies sent to World Bank for no objection. FIDP II will fund this and subsequent phases. 34. Creation of Credit Information Bureau. The process of creation of a credit information Bureau was planned to be done in two phases. The first phase was to deal with extensive research, study and discussion with the key members of the financial system as well as commercial enterprises in Tanzania and major accounting and legal firms to determine whether the market is sufficiently developed to support such a credit information bureau. This phase was to take three months. 35. Phase two, which was to take 6 months was intended to capture a detailed market analysis of the potential market for credit agency services and recommendations of the agency in terms of the breadth and depth of the product and service mix to be offered. 10  36. Preliminary stages of contracting consultants for phase one took considerable time, however, the consultant was finally engaged and work started in April 1998. By June 1998 the inception report was submitted to the Bank of Tanzania and a draft report on feasibility study was submitted in July 1998. Comments were then sought from various organizations and sent to the consultant who completed the final report in December 1998. In the report, it has been noted that Tanzania has a potential for Credit Information Bureau and that this be considered as part of the ongoing reforms in the financial sector. 37. The major drawback faced in the course of implementation was inadequacy of funds. The budget made for feasibility study on credit information bureau was insufficient to meet actual costs. Some of the costs were met by BOT on behalf of FIDP and are to be reimbursed under FIDP II. 38. Establishment of Insurance Commission. The Government has established a supervisory authority (the Insurance Supervisory Department) for the insurance industry without significant support of FIDP I. 39. Under FIDP II however, the department will develop a supervisory methodology and policy framework, which will include the drafting of regulatory guidelines and the supporting accounting principles and standards to be adopted by the industry to meet the legislative requirements. Capital Markets Development 40. Public education programs. The authority prepared information leaflets and published these in main print media. Popular and widely read newspapers were used to reproduce public information materials contained in the information leaflets. CMSA also aired televised programs to inform the public on capital market concepts and institutions. Seminars for top executives in the Government and private sector, journalists, members of parliament, middle cadre managers, lawyers and members of the Chamber of Commerce Industry and Agriculture were held. 41. Training and Licensing of Market Professionals. The first training programme for potential market participants was held in 1996 by GMA Capital Markets Limited in collaboration with CMSA. Licensed dealing members also attended an internship at New York Stock Exchange (NSSE) in 1997. After the training and fulfillment of other licensing requirements CMSA licensed five companies as licensed dealing members, five individuals as Dealers Representatives and eleven companies as Investment advisors. 42. Training and Professional Development of the Board and Staff of CMSA. Board of Directors of the CMSA visited Mauritius Securities Industry Institutions in 1995 and learned about its securities business, matters on policy, tax incentives, trading system and market structures. Four members of management attended International Capital Markets Institute organized by the US securities and Exchange Commission, on capital markets development and followed by Internships with stock exchange, Mercantile Exchange, Law firms and Accounting firms, in New York, Chicago and Ghana. In addition, two members attended an international capital market development seminar organized by Conceptor International in collaboration with SIDA and Stockholm Stock Exchange. Another two members also attended the securities training course organized and conducted by GMA Capital Markets Limited and passed the course examination. 11  43. Research Programme. Ernest and Young undertook the fiscal study and CMSA submitted to the Government recommendations on fiscal incentives for Capital Markets development. Coopers and Lybrand concluded the legal study and submitted their recommendations. 44. Studies on clearing and settlement systems and share ownership transfer were done. Modalities for effecting public issues were worked out. Studies on foreign ownership of shares in domestic companies, foreign investments by Tanzanians and on business combinations (mergers and acquisitions) have also been carried out. 45. Development of security products. The CMSA has successfully established the Dar es Salaam Stock Exchange (DSE) to the point where two Initial Public Offerings (IPOs) took place during the first half of 1998. DSE now has a small pipeline of further IPOs which, based on listing fees, will allow it to become financially viable within the next two years. 46. The CMSA has not completed the study to attract foreign institutions into the domestic market. Furthermore, under the Public education programme some target groups have not been reached. The investment clubs have not been established and resource library for professional development of market participants is not in place. Finally the research studies on accounting and disclosure standards and in business combinations have not commenced. V. OVERALL PERFORMANCE OF THE BORROWER AND THE BANK Government Ownership 47. The government of Tanzania participated fully in the implementation of the project. The Bank of Tanzania managed the project through its Banking Supervision Directorate. The Government of Tanzania' s ownership of the project can be clearly revealed in the following areas: (a) It has been participating almost in all stages of the project from initiation up to implementation stage. (b) A Transitional Management Committee which was entrusted with the responsibility of supervising restructuring and privatization process of NBC comprised of members from the Government and Private sector appointed by the Government. (c) The Government also participated in the task of selecting various consultants who performed different assignments for completion of the project. All contracts were prepared and signed by the Govermment. (d) Also whenever problems arose during the course of implementation, they were solved by the Government through its Transitional Management Committee, Bank of Tanzania management and other beneficiaries of the project. 48. However, one area in the implementation of the project raised concern on the Government ownership of the project. All utilization of loan proceeds were reviewed and approved by the bank except for small claims less than US $ 50,000. The practice necessitated requesting for no objection from the bank even for small genuine claims. Therefore despite the fact that the Government ownership of the project was evidenced in certain areas as explained, the Government did not have any significant control over the loan proceeds. It is therefore expected that in future more control of the fumd will be given to the 12  borrower e.g. by enhancing levels of advance payment to cover longer project periods. This will also minimize number of withdrawal applications submitted to the bank and hence make Government and Bank of Tanzania's responsibility of supervision of the project more efficient and effective. World Bank's Responsibility 49. The main responsibilities of the Bank were to supervise the project and review its progress regularly to ensure that the funds are spent as agreed. On its supervisory role the Bank was expected to do the following: (i) Review and approve applications for withdrawal of loan proceeds, (ii) Respond to any problems or queries on disbursement issues referred to the bank; (iii) Conduct supervision missions to ascertain progress of the project. 50. The Bank responded to problems as they arose during implementation willingly and promptly. The Bank was also considered to be adaptive and flexible as all problems that arose were dealt with accordingly. Some of the problems included reallocation of funds to different tasks and amendments of different contracts. These problems arose from NBC Project cost overruns due to additional work necessary for restructuring and privatization of process of NBC and NMB start up costs. Institutional arrangements 51. The FIDP was to be financed by a $ 10.9 million credit from IDA. The Government of Tanzania was a borrower to that effect. The Bank of Tanzania was given the responsibility of being the Government's implementing agent; managing the project through Bank of Tanzania's Banking Supervision Directorate. The project was for supporting three components; banks restructuring component, financial infrastructure strengthening and capital market development. Quality/Quantity of supervision 52. The quality and quantity of supervision by Bank management is considered satisfactory. The staff closely followed up FIDP activities and whenever help was needed they were ready to assist promptly. The quality/quantity of supervision can also be looked on the number and frequency of supervision missions to Tanzania. Several missions were made consisting of the Task manager and aide memoire reports were issued which helped a lot in the project management and implementation. VI. SUMMARY Findings 53. In the Implementation of this project, the following findings were identified: * A lot of time was used in deciding which strategy of NBC restructuring was to be adopted. * Slow progress in privatization of NBC led to overruns of project costs. The project fund was fully committed and still there were several activities, which could not be accomplished. * During the period of the project the BOT Banking Supervision capacity has improved significantly. Both on-site and off-site supervision approaches are now being used by the 13  Central bank much more effectively and efficiently. However, because of rapidly expanding financial system and incoming of new products, training on banking supervision needs to be a continuous process. Furthermore, because of the competition and need of competent staff, the BOT needs to highly motivate the examiners to retain them. * During the period of the project the number of Private banks and financial institutions licensed to carry on banking business in the country substantially increased. The banking system has changed from the one dominated by Government owned banks to a more competitive banking system whereby private banks are taking significant share of banking business. + Though most of the components financed under FIDP I have made substantial progress in implementation most are yet to be fully completed and thus, need reliable financial support for the targeted objectives to be achieved. * Financing under IDA has proved to be supportive of the development of the financial system in Tanzania. Lessons Learned * The funds given under FIDP I were fixed at Special Drawing Rights (SDRs) 7,500,000.00 whose exchange rate to the Dollar fluctuates. Since most payments are made in USD, it is advisable to fix the amount of the loan in USD. * Delaying execution of the project as per activity plan can lead to cost overruns and non-achievement of the set targets.