Tanzania - Financial Institutions Development Project

Document of The World Bank FOR OFCIAL USE ONLY Report No. P-6479-TA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO SDR 7.5 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR A FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT MAY 23, 1995 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: Tanzanian Shilling (Tsh.) Official Rate: US$1.00 = Tsh. 530 ACRONYMS AND ABBREVIATIONS BOT Bank of Tanzania BSD Bank Supervision Directorate CMSA Capital Markets Securities Authority CRDB Cooperative and Rural Development Bank DANIDA Danish International Development Agency FMD Financial Markets Directorate FSAC Financial Sector Adjustment Credit GOT Government of Tanzania LART Loans and Advances Realization Trust MOF Ministry of Finance NBC National Bank of Commerce NIC National Insurance Corporation NPF National Provident Fund PBZ People's Bank of Zanzibar PPRP Parastatal and Public Sector Reform Project PSRC Parastatal Sector Reform Commission PTF Privatization Trust Fund SAC Structural Adjustment Credit GOVERNMENT FISCAL YEAR July I to June 30  FOR OFFICIAL USE ONLY REPUBLIC OF TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of Tanzania Implementing Agency: Bank of Tanzania Beneficiaries: Bank of Tanzania, National Bank of Commerce (NBC), People's Bank of Zanzibar (PBZ), Capital Markets and Securities Authority, Private Financial Institutions. Poverty: Not applicable Amount: SDR 7.5 million (US$10.9 million equivalent) Terms: Standard, with 40 years maturity Commitment Fee: 0.50% on undisbursed balances beginning 60 days after signing, less any waiver. Financing Plan: See Schedule A Net Present Value: Not applicable Staff Appraisal Report: 13713-TA Project Identification No.: TZ PA 35620 This document has a restricted distribution and may be used by recipients only in the perfomnance of their | official duties. Its contents may not otherwise be disclosed without World Bank authorization.   Memorandum and Recommendation of the President of the International Development Association to the Executive Directors on a Proposed Credit to the United Republic of Tanzania for a Financial Institutions Development Project 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the United Republic of Tanzania for SDR 7.5 million (US$10.9 million equivalent) on standard IDA terms with a maturity of 40 years to help finance a project for financial institutions development. 2. Country and Sector Background. In 1991, the Government of Tanzania initiated its financial sector reform program with support from an IDA credit for financial sector adjustment (FSAC). The program's major aim was to deregulate and liberalize the banking system. Consequently, in addition to three Government owned banks, six private commercial banks have been licensed. The remainder of the sector consists of three developmental financial institutions -- of which two are state owned and the other owned by foreign developmental financial institutions -- and five other nonbank financial institutions of which only one is private. As part of the reform program, the three Government owned financial institutions were recapitalized and portions of their non- performing assets were transferred to the specially created Loans and Advances Realization Trust (LART). 3. Despite the recapitalizations, the state owned banks remain insolvent partly due to delays with the Government's program to reform parastatals, cooperatives and marketing boards which are all major clients of the state-owned banks. Although the financial sector has been opened to private participants, the National Bank of Commerce (NBC) still dominates, in that it accounts for roughly 82% of the deposit base. The new banks have been very cautious and have been limiting their activities in terms of deposit mobilization and lending. Hence, the overall financial sector is still very weak and the reform agenda is large. The payments system remains very rudimentary and inefficient, there are no financial instruments and markets to satisfy the demand for term financing, and there is no capital market. On the regulatory side, although there have been improvements in Bank Supervision, this function remains weak and incapable of overseeing the complex bank restructuring programs as well as the expansion of the sector. 4. Banks Restructuring. NBC. Overall macroeconomic performance suffered a severe setback in FY93 and the first half of FY94. This was due, in part, to leakages through the financial system as an illiquid NBC extended credit to agricultural cooperatives and increased its overdraft with the Bank of Tanzania (BOT). A short term action plan to curtail losses and to begin preparations for a more radical restructuring of NBC was adopted in February, 1994. A ceiling on outstanding loans was imposed at the level of January 31, 1994. NBC also was directed to cease lending to non-performing  2 borrowers. Available data indicate that NBC is complying with the ceiling, which will continue until a new and professional management team in key areas in NBC has prepared and begun implementation of a new business plan. The Board of Directors was reconstituted at the end of March, 1994, and 800 staff were retrenched in April. The NBC Act was amended in August, 1994 to provide for private shareholding. Three detailed portfolio reviews were completed during 1994 and the early part of 1995 of which two comprised part of a diagnostic evaluation of the bank. The evaluation will firm up the details of the Government's privatization strategy for NBC. 5. The portfolio review confirmed that roughly 77% of NBC's portfolio is non- performing, i.e. classified sub-standard or worse. NBC's management and staff are making substantial efforts to deal with the significant non-performing portfolio. Measurement of loan collection results has been introduced across the bank, from the board to the smallest branch. Staff are fully aware of the new priority and their success in collection is being strictly monitored and will impact the personnel appraisal system. A new loan recovery unit has been established to deal with the largest and toughest credits. A detailed loan recovery plan for the largest 50 credits is under implementation and this coupled with evidence of tangible collection results is a precondition for appraisal of the proposed Structural Adjustment Credit (SAC). However, despite these diligent efforts to restructure and strengthen its operations, the bank again is insolvent and is imposing an increasing burden on Tanzania's real sectors. It is urgent and essential that NBC is far more fundamentally restructured than what has been envisaged to date. As an initial step, the Board of NBC has agreed to make sizable adjustments to the bank's financial statements to improve the credibility of the bank's accounts. 6. Cooperative and Rural Development Bank (CRDBJ. From July, 1992 through June, 1993 the net worth of CRDB, the other major previously state-owned commercial bank, deteriorated substantially. Since July, 1993 the management has moved aggressively to implement a restructuring plan. A new organizational structure for headquarters, zonal and branch offices was prepared and, as a result, a total of 600 staff members were retrenched; loan recovery and deposit mobilization efforts were strengthened; and a privatization program was completed in January, 1995 with the sale of 41% of shares to the public, 29% to a Trust capitalized by DANIDA, and 30% to cooperatives and corporations. However, the capital adequacy of the bank remains in question until an external audit is completed, the level of recovery, provisioning and write-off of impaired assets is finalized, and the statements are approved by BOT. A freeze on lending imposed by BOT will be removed and CRDB will be fully licensed only when these issues have been resolved and all prudential requirements have been met. 7. People's Bank of Zanzibar (PBZ). PBZ is the principal commercial banking institution in Zanzibar but accounts for less than 1% of all deposits in Tanzania. It has traditionally included in its activities quasi-central banking operations for the Government of Zanzibar. The last examination of PBZ in 1994 revealed that the bank was insolvent and that roughly 70% of its portfolio was rated substandard, doubtful or loss. The main reasons for its poor financial status are non-commercial credit practices, a failure to  3 recognize non-performing assets (including continued interest accrual on such assets), and failure to establish sufficient provisions for uncollectible loans. The Government's strategy for PBZ is to restructure the bank so that it operates on strictly commercial principles under the management of professional bankers. A detailed restructuring plan for the People's Bank of Zanzibar, the remaining state-owned bank, will be finalized following the recruitment of a private management team. 8. Bank Supervision. The Banking and Financial Institutions Act of 1991 strengthened BOT's bank supervision authority and, in November 1992, banking supervision was elevated to the status of a Directorate and staffing levels were increased. Since then, the Directorate has begun to develop most of the basic skills necessary to conduct banking examinations and has conducted a series of on-site examinations. The role of the Directorate is all the more critical and complex given the severe problems within Tanzania's financial institutions. Gross errors in basic loan approval systems and accounting techniques continue. Over the next few months the Directorate will have to devote more attention to the problem banks, even as new banks enter the market. This will severely strain the Directorate's capacity, test the skills of its staff, and curtail its ability to conduct new on-site examinations. 9. Project Objectives. The Government has implemented a short term program to stem the losses in the financial sector and now wishes to regain the momentum for financial sector reform by implementing a strategy which would address the fundamental weaknesses in the sector while building the foundation for the diversification of financial instruments. The main elements of the strategy are: i) encouraging competition in the commercial banking sector; ii) strengthening banking regulation and supervision; iii) improving the payments mechanism; iv) promoting and supporting comprehensive parastatal reforms, including privatization, of state owned enterprises; v) developing a market for Government securities; vi) establishing a regulatory structure for insurance and securities markets; and vii) developing a corporate securities market. In this context, the primary objectives of the project, which are articulated in the Government's Letter of Financial Policy, 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. 10. Project Description. The project would provide technical support for three components: the downsizing and restructuring of the Government owned banks including the National Bank of Commerce and the People's Bank of Zanzibar (DANIDA is providing technical assistance for CRDB's restructuring); the strengthening of Bank Supervision and, more generally, the supporting financial infrastructure; and implementation of a strategy to promote the gradual evolution of a capital market. 11. Banks Restructuring. ($5.6 million) NBC. In normal circumstances, the appropriate prudential response to NBC's current financial position would be to stop it from lending or taking new deposits, pending rapid action to recapitalize the bank or liquidate it. In light of recent experience, new injections of capital into NBC by the  4 Government would be inappropriate. Given the dominance of NBC in the financial sector, and the consequent macro-economic effects of its demise (NBC, with its extensive rural presence, is in effect the country's payments system), liquidation is not practical at this time. The strategy therefore is to aggressively downsize NBC while greatly constraining its activities until such time as it can meet prudential requirements and be fully privatized. 12. Details of the strategy would be defined by an ongoing diagnostic evaluation of NBC. However, its broad elements entail: (a) the divestiture of at least one profitable urban branch network (consisting of 8 to 10 NBC branches) while retaining within a partially privatized NBC a national presence in urban areas and a rural branch network; (b) the potential establishment of a joint venture subsidiary of NBC (in partnership with a strong private bank with an international network) to focus on corporate and international transactions; and (c) the restructuring of the retained NBC with new line managers in key areas. 13. The Government has provided a schedule of activities which constitutes the broad elements of the strategy. First, the diagnostic evaluation, including an updated portfolio review, would define the strategy for restructuring NBC including recommendations for divestiture and the disposition of the impaired assets. The Government also has recruited three senior, experienced commercial bankers as Deputy Managing Director/Chief Operating Officer, Director of Finance and Credit Manager in NBC. Second, a review of the features of the strategy would occur during the early phases of the diagnostic evaluation so that the remainder of the diagnostic evaluation could concentrate on: (a) analyses of the implementation implications for NBC; (b) rapidly outlining a strategy that will maxirnize the value of the branch network(s) sale and maximize the benefit of NBC's downsizing on the financial sector overall; and (c) getting the joint venture underway. Third, the pro formas for the entities and/or facilities to be offered for sale would be finalized and agreed by the Government and NBC. This would likely include the removal of some portion of the non-performing loans to a recovery unit that would be moved to a subsidiary for collection. The residual NBC, after charging off the loans, would be a smaller organization and would add some urgency to the tasks of reducing head office administrative costs and rationalizing the rural branch network. Fourth, terms and conditions for the sale of urban branch network(s) and the joint venture international/corporate subsidiary would be prepared. Sales memoranda, authority to disclose terms and contact particular buyers would be agreed. The schedule calls for the opening of the urban network(s) under new ownership and for the joint venture to begin operations by October, 1995. 14. The project would finance the technical assistance required for the implementation of the strategy including the senior management team in NBC. The team is assisting NBC with the preparation of a business plan acceptable to IDA. The plan would: (i) provide for continued credit restraint as NBC is restructured; (ii) address the significant portfolio of non-performing assets; and (iii) aim to restructure the remaining bank into a self sustaining and viable going concern. The plan would consist of time-bound performance targets including targets for the reductions in the ratio of operating costs to average total assets,  5 increases on the return on average total assets, reductions in the percentage of non- performing loans in the portfolio, establishment of an appropriate loan to deposit ratio, increases on the ratio of loan collections to scheduled collections and the adequate diversification of credit risk. These ratios, among others, would be defined to ensure that aggregate lending could only increase if there is a substantial strengthening of profitability and the quality of the asset portfolio. The plan also would serve as a yardstick for prudential supervision until such time as NBC meets prudential requirements. 15. PBZ. The credit would finance the remuneration of two experts as General Manager and Financial Controller of PBZ for three years. Their main responsibilities would be to oversee the restructuring of the bank. Specifically, this would include the preparation of a business plan, the formulation of appropriate policies and operating procedures, installation of effective internal control, the design of a marketing strategy, and the introduction of new financial services. 16. Ministry of Finance. The credit would also finance periodic services of consultants to provide advice to the Ministries of Finance on the mainland and in Zanzibar, as well as to the Boards of the Government-owned banks, on the progress of the respective restructuring plans. 17. Financial Infrastructure Strengthening ($4.9 million). Bank Supervision. The IMF is providing a Bank Supervision Advisor to BOT. The project would complement the IMF's technical assistance by providing focused technical assistance to the Bank Supervision Directorate for the supervision of problem institutions, on site examinations, methodology development, and training. Technical assistance for the supervision of problem institutions would include consultancies to: (1) monitor the restructuring of the three state-owned banks; (2) advise on the progress of the respective restructuring plans; (3) assist with problem institution supervision of NBFIs and foreign exchange bureaus; and (4) direct the design and delivery of the Problem Institution Management (PIM) training course for all the examination staff of Banking Supervision. Assistance for On- Site Examination would include support for up to two years to bring the skills of the Bank Supervision Directorate up to an adequate level in all high risk areas. The main focus will be on the development of the on-site methodology pertaining to the internal control environment. Emphasis will be placed on the role of the Board, as well as on the treasury and systems areas, including wire payments and the detection of money laundering. Technical assistance for Methodology Development would include the design and documentation of methodology in three crucial areas: off-site examination, on-site examination and ladders of compliance. Finally, the component would finance a series of in-house training courses which, in part, would aim to introduce the examination modules resulting from the development of the new methodology. These courses would be strongly promoted to the financial system at large to encourage widespread participation of financial institution personnel. 18. Insurance Adviser. A new Insurance Act was recently drafted and is scheduled for presentation to Parliament during the first quarter of 1995. The Act provides the  6 framework for the entry of private participants into the Tanzanian insurance market, based on objective, minimal but prudent requirements. In addition, for the first time, the legislation provides for prudent regulation of the industry to promote on-going confidence in the system. The Government intends to establish a supervisory authority (an Insurance Commission). The Commission would develop a supervisory methodology and policy framework, including the drafting of regulatory guidelines and the supporting accounting principles and standards to be adopted by the industry to meet the legislative requirements. This component would finance a technical advisor for a period of up to two years. The advisor would be required to draft prudential regulations for licensing, regulating and supervising insurance companies. The regulations would establish prudential controls and limits, such as exposure limits, capital adequacy guidelines, and controls on related parties and enforce corrective measures with specific guidance on dealing with troubled institutions. 19. Studies Fund The project would finance studies for the development of a national payments system and a Credit Infornation Bureau. Studies on the national payments system would be undertaken in two phases. The first phase would collect and analyze data about the payment traffic in Tanzania, assess the related institutional, legal and financial infrastructure, estimate the costs of transactions, and generate realistic projections of the transacting environment 5 years hence. The second phase would be the design of improvements to the national payments system including an assessment of the feasibility of the electronic exchange of data. This component also would finance a feasibility study to determine: (i) if there is a potential market for a credit information bureau in Tanzania; and (ii) if so, whether it could become self-sustaining within a three year time frame. Specifically, the study would be undertaken in two phases. The first phase would assess the readiness of private and state-owned companies and financial institutions to participate in such an agency on a structured fee basis, assess whether there is enough capacity in the market to support such an agency, and review the potential ownership/membership structures. The second phase would be contingent upon the outcome of the feasibility study and would entail the preparation of a detailed five year business plan including a recommendation for the ownership structure. 20. Capital Market Development ($2.1 million). The project would provide technical assistance to promote the development of a capital market keeping in mind the Government's preference for a simple and evolutionary approach. Specifically, assistance would be provided for: (a) the drafting and completion of a core set of enabling regulations; (b) an advisor to provide assistance over the course of two years to the Authority on a wide variety of regulatory and market development matters; (c) basic training of would-be stock brokers; (d) basic publicity and educational program for the general public, including nationwide distribution of information; (e) technical assistance to include completion of a 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, and supervision of the allotment processing; (f) the preparation of a stock exchange blueprint and item-by-item action plan together with donor funding requests for start-up  7 costs. This component would also provide funding for the establishment and management of the first three years of a Privatization Trust Fund (PTF). The Government intends to establish the PTF mainly to broaden local participation in privatization while maximizing the financial benefits of the sale of privatized assets. The Government would offer its retained shares of privatized parastatals to the Trust in exchange for a deferred payment upon successful disposition. 21. Project Costs and Financing. The project cost is estimated at US$13.4 million (Tsh7.4 billion) which includes project management costs and contingencies. The foreign exchange component of the program is estimated at 66% of the total cost. The proposed IDA credit of US$10.9 million would finance 90% of project costs net of duties and taxes. The Government's local contribution would be for an estimated US$1.2 million. In addition, the Government would finance the payment of taxes and duties amounting to roughly US$1.4 million. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement, disbursements and the disbursement schedule are shown in Schedule B. The key processing events are shown in Schedule C and the status of Bank Group operations is shown in Schedule D. The Staff Appraisal Report (13713-TA) is being distributed separately. 22. Project Implementation. The project would be implemented by the Bank of Tanzania. The Director of the Financial Markets Directorate in the Bank of Tanzania would be responsible for: (i) administering project funding and procurement processing (including the employment of consultants) and managing the Project Accounts and the Special Account; (ii) overseeing project implementation activities by various institutions and coordinating activities; (iii) following up on the agreed conditionalities and financial provisions and proposing any necessary adjustments and amendments to implementation: (iv) providing periodic project progress reports; and (v) acting as the focal point of contacts between the Government of Tanzania and IDA during the project implementation period. 23. Although BOT would assume day to day responsibility for implementation, the Ministries of Finance for the United Republic and Zanzibar, as the sole shareholders of the Government owned banks, will bear ultimate responsibility for the restructuring of both institutions. Given the complexity of the issues involved, experienced commercial bankers will be recruited to advise the Ministries on the overall progress of the program. Issues raised by the Advisors would then be discussed during meetings of the Boards of Directors. The Advisors would be expected to liaise with the Parastatal Sector Reform Commission. They would not be expected to reside in Tanzania but would be contracted to visit three times per year. This arrangement will be reviewed as the project is supervised and will be amended if necessary. A mid-term review is proposed for March 1997. 24. Project Sustainability. The project would address a major market imperfection by supporting a strategy for aggressively reducing the market share of the Government owned banks and enhancing competition in the banking sector. The strategy, which is  8 embodied in the Government's Letter of Financial Policy, recognizes that increased competition, in an appropriately regulated environment, would increase efficiency, profitability and sustainability both in the financial and capital markets. Also, the development of a credit information bureau should substantially lower the risk profile of Tanzania's businesses and, accordingly, reduce lending costs. Finally, the development of the capital markets and the insurance sector would provide additional savings to finance Tanzania's investment needs. 25. Lessons from Previous IDA Experience. Although the program supported by FSAC (1992) legally deregulated and liberalized the banking system, it failed to accomplish the intended restructuring of NBC for the following reasons: first, the program assumed that the emergence of competitive private banks would gradually erode NBC's market share. Although there has been some erosion, future expansion by the private banks is constrained by their limited Dar es Salaam branch networks and their strategic targeting of relatively narrow niches. As a result, NBC remains dominant. The proposed project supports a more aggressive strategy to reduce NBC's market share. Second, FSAC financed advisers to NBC's management. However, there was no incentive for NBC's management practices to change and the experts were not held accountable for performance. The proposed project includes professional bankers in line management positions who would be evaluated, in part, on the basis of NBC's financial performance. Third, FSAC did not include timebound performance targets against which NBC's performance could be judged. The proposed project includes dated monitorable targets. IDA's overall experience with financial sector operations has influenced the proposed project in that the design is very selective with a strong emphasis on the restructuring of the Government owned banks and improving the regulatory environment for the financial sector. The project also is front-loaded in that most of the critical actions are required either upfront or very early in the project's implementation. 26. Rationale for IDA Involvement. The Bank's country assistance strategy, which was discussed by the Executive Directors on April 7, 1994, is to assist 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), while ensuring an environmentally sustainable development path. Specific criteria for determining Tanzania's eligibility for substantial IDA support and continued adjustment lending included improvements in the operation of public sector banks through strong measures to stem losses and increase the quality of their portfolios, and the introduction of private management with eventual divestiture as an objective. The proposed Financial Institutions Development project seeks to support this strategy and, more broadly, improve the access of the private sector to the banking system in general and to capital markets. The project would provide technical assistance to implement the policy reforms in the financial sector supported by the proposed SAC which is under preparation. IDA also is assisting the Government with the formulation of a strategy for the development of rural banking. 27. Agreed Actions. The following are the conditions for Credit Effectiveness: (a) completion of the diagnostic evaluation of NBC and a timebound action plan (including an  9 interim business plan and a recovery plan for NBC's top fifty non-performing loans), satisfactory to IDA, for the downsizing and restructuring of NBC; (b) appointment of a consulting firn/investment bank acceptable to IDA to implement the divestiture strategy on the basis of terms of reference acceptable to IDA; and (c) appointment of Banking Advisors under terms of reference acceptable to IDA. 28. The following assurances were received during negotiations: (1) Government would implement the program described in the Letter of Financial Policy; (2) NBC: (a) implementation of agreed actions under NBC's divestiture strategy as a result of the diagnostic review, including the divestiture of an urban branch network(s) and the identification of a joint venture partner for the corporate subsidiary by October 31, 1995; (b) the submission of annual audited accounts within six months of the end of NBC's financial year and that appropriate adjustments will be made and all loans classified as loss will be written-off prior to the finalization of the accounts; (c) the submission to IDA of the finalized business plan by October 31, 1995; thereafter, NBC would take actions to meet the plan's performance targets. NBC's overall lending as well as lending to parastatals and cooperatives would be within agreed ceilings until the plan is implemented; (d) NBC will submit monthly reports to BOT on outstanding loans to large borrowers. (3) PBZ (a) a General Manager and Financial Controller, acceptable to IDA, would be appointed by October 31, 1995; (b) the submission of annual audited accounts within six months of the end of PBZ's financial year and that appropriate adjustments will be made and all loans classified as loss will be written-off prior to the finalization of the accounts; (c) a restructuring plan, acceptable to the Borrower and IDA, would be adopted for PBZ. (4) Bank Supervision (a) the annual work program for 1995/1996 for the Bank Supervision Directorate, including terms of reference and work program for the consultants required for this component, would be submitted for IDA's approval by October 31, 1995; (b) the annual work programs for the following years (beginning with 1996) will be submitted for IDA's approval by September 30 of the preceding year; (c) the submission by October 31, 1995, for IDA's review and comments, of a report on the status of all financial institutions with action plans for the problem institutions; and an annual report on the status of all financial institutions by September 30 in each year commencing 1996 with action plans for problem institutions. The action plans would include a timetable, acceptable to IDA, for reaching regulatory targets. (5) Insurance the submission for IDA's approval, by December 31, 1995 of the work plan for the establishment of the Commission, including details of the resource requirements (e.g, size, scope, staffing, technology, etc.) (6) CaDital Markets (a) agreement on the 1996 annual work program and budget for the Authority by October 31, 1995. The annual work programs beginning with 1996 will be submitted for IDA's approval three months prior to the end of the preceding year; and (b) maintenance of a CEO under TOR acceptable to IDA during the term of the project. (7) PTI Draft management contract and the selection of a management team acceptable to IDA by December 31, 1995. 29. Environmental Impact. The project's environmental category is C. There would be no adverse environmental impact.  lo 30. Program Objective Categories. The primary emphasis is private sector development through improvements in financial intermediation and the divestiture of CRDB and parts of NBC to private investors. The secondary emphasis is on economic management. 31. Participatory Approach. The project was prepared by BOT's Financial Markets and Banking Supervision Directorates with IDA's support. The project stemmed from a request by the Government for IDA's assistance with the development of Tanzania's insurance and capital markets. However, during project preparation the Government changed the emphasis to the restructuring of the banking system as NBC's poor financial status became more apparent and critical. 32. Project Benefits. Increased competition in the financial sector would improve the quality of banking services and lower the costs of financial intermediation. The elimination of losses by NBC and PBZ would contribute to fiscal and monetary stabilization and improve overall macroeconomic performance. Also, strengthened bank supervision will help build public confidence and mobilize savings. The capital market component would help to address the Government's concern about the need for broad based participation in the privatization effort. 33. Project Risks. The project is designed to mitigate the major risk to NBC's successful restructuring: a possible reversal of Government's stated commitment to the bank's commercialization and privatization. Consequently, the actions required for the significant downsizing of NBC are all either upfront or very early in the project's implementation. Conversely, the aggressive downsizing of NBC could result in the rapid entry of new banks to fill the void and could stretch the limited capacity of Bank Supervision. The extensive amount of technical assistance provided under the credit to Bank Supervision is meant to reduce this risk. Another risk stems from 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 34. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Richard H. Frank President ad interim Attachments Washington, D.C. May 23, 1995  SCHEDULE A TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT Estimated Project Costs Millions of TSh Millions of US$ Foreign as Local |Foreign Total Local Foreign Total % of Total Bank Restructuring 876.0 21 19.6 I 3095.6 1.6 4.0 5.6 72% NBC 612.7 1,350.2 1,962.9 1.1 2.4 3.6 69% PBZ 218.6 556.4 775.0 0.4 1.0 1.4 72% MOF 44.7 313.0 357.7 0.1 0.6 0.6 88% Financial Infrastructure Strengtheninc 1,037.3 1,693.1 2,730.4 1.9 3.1 4.9 62% Bank Supervision 386.4 1,130.6 1,517.1 0.7 2.0 2.7 75% Insurance 71.2 203.7 274.9 0.1 0.4 0.5 74% Studies Fund 579.6 358.8 938.4 1.1 0.7 1.7 38% Capital Markets 284.8 874.3 1J159.1 0.5 1.6 2.1 75% Capital Markets Securities Authority 174.4 432.7 ] 607.1 X 0.3 0.8 1.1 71% PTF 110.4 441.6 552.0 0.2 0.8 1.0 80% Proiect Management 245.6 0.0 _ 245.6 0.4 0.0 0.4 0% Base Cost 2,443.8 4,787.0 7,230.8 4.4 8.7 13.1 66% Contingencies 58.0 110.8 168.8 0.1 0.2 0.3 66% Total 2,501.7 1 4,897.8 7,399.5 4.5 8.9 13.4 66% Note: Totals may not add due to rounding. Project Financing Plan (US$ million equivalent) Local Foreign Total % of Cost IDA 1.9 8.9 10.9 81% Government 2.6 0.0 2.6 19% Total 4.5 8.9 13.4 100% Note: Includes contingencies. Also, totals may not add due to rounding.  SCHEDULE B TANZANIA FINANCIAL INSTITUTIONS DEVELOPMENT Summary of Procurement Arrangements (US$ million equivalent) Total ICB LCB Other Cost Goods Vehicles 0.1 0.1 (0.1) (0.1) Computers & Office Equip. 0.2 0.2 0.4 (0.2) (0.2) (0.4) Consultancies Technical Assistance 10.1 10.1 (8.3) (8.3) Studies 1.7 1.7 (1.5) (1.5) Trainin 0.7 0.7 (0.7) (0.7) Incremental Operating Costs 0.5 0.5 (0.0 ) (0. 0) Total Costs 0.2 0.1 13.2 13.4 IDA Financed (0.2) (0.1) (10.7) (10.9) Note: Totals do not add due to rounding. IDA Credit Disbursement Summary Allocation US$ Million Proposed Disbursement Equipment, vehicles and 0.5 100% foreign and 75% local computers. Training 0.7 100% Technical Assistance 7.0 80% Studies 1.5 80% Refund of PPF 0.8 Unallocated 0.4 TOTAL 10.9 PROJECTED DISBURSEMENTS (US$ million equivalent) IDA FY: FY96 FY97 FY98 FY99 1st Half 2nd Half 1st Half 2nd Half 1st Half 2nd Half Total 2.6 2.1 2.0 1.6 1.2 0.9 0.5 Cumulative 2.6 4.7 6.7 8.3 9.5 10.4 10.9  SCHEDULE C TIMETABLE OF KEY PROJECT PROCESSING EVENTS a. Time taken to prepare: 4 months b. Prepared by: IDA in collaboration with Government of Tanzania. The IDA members consisted of Mr. Gerard Byam (Task Manager), Redha Behbehani, Dong He, Nancy Mclnerney- Lacombe and Paul Murgatroyd. The mission also included consultants Wendy Abt, Ray Astin, Robin Marriott, Eric Postel, Qamar Siddiqi and Paul Vonckx. The Government team consisted of Dr. I. Rashidi (Governor, BOT), Mr. G. Mgonja and Mr. A. Mwinyimvua (BOT), and Mr. G. Mbowe (Chairman, PSRC). The mission was assisted in preparation of this document by Ellen Martin and Mariel Fiat. The Lead Advisor is Mr. R. Pardy and Peer Reviewers are Luigi Passamonti (IFC) and Charles Enoch (IMF). The Sector Division Chief and the Acting Country Director are R.E. Hindle and Michael Carter, respectively. C. First IDA mission: February 1994 d. Appraisal: June 1994 e. Negotiations: December 1994 f. Date of Effectiveness: August 1995 g. List of Relevant PCRs: Financial Sector Adjustment Credit (Report No.2308-TA)  SCHEDULE D Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN TANZANIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1995) ~~~~~. ....... .. ...... .. .. .. ....... ;.7 ...... .... ... . .. . . T. . . ... -. . . :: T i-h . E- Nineteen (19) Loans and seventy five (75) Credits fully disbursed, 313.06 1,637.91 of which SECALS, SALs and Program Loans/Credits: (795.42) Cr. 18910 1988 Tanzania Agr. Exports Reh. I 30.00 12.79 Cr. 19700 1989 Tanzania Nat'l. Ag. & Liv. Res. 8.30 4.91 Cr. 19940 1989 Tanzania Agric. Ext. 18.40 5.38 Cr. 20500 1989 Tanzania Tree Crops 25.10 11.89 Cr. 20950 1990 Tanzania Ports Modernization 37.00 20.92 C'r. 20980 1990 Tanzania Health & Nutrition 47.60 39.83 Cr. 21370 1990 Tanzania Educ. Planning & Rehab. 38.30 31.39 C.r. 21490 1990 Tanzania Roads I 180.40 100.56 Cr. 22020 1991 Tanzania Petrol Rehab 44.00 50.41 Cr. 22670 1991 Tanzania Railways Restructuring 76.00 73.89 Cr. 22910 1992 Tanzania Urban Sector Eng. 11.20 5.15 Cr. 23300 1992 Tanzania Engineering Credit 10.00 2.58 Cr. 23350 1992 Tanzania Forest Resources Man 18.30 14.93 Cr. 24130 1993 Tanzania Financial & Legal Ma 20.00 15.98 Cr. 24860 1993 Tanzania Telecom III 74.45 78.03 Cr. 24890 1993 Tanzania Power VI 200.00 211.09 C'r. 25070 1993 Tanzania Priv. Pub. Sect. Mgt. 34.90 32.64 Cr. 25370 1994 Tanzania ASMP 24.50 20.73 Cr. 25980 1994 Tanzania Roads II 170.20 179.49 Cr. 26480 1995 Tanzania Mineral Sector Dev. 12.50 12.52 Total 313.06 2719.06 925.11 of which repaid 242.61 76.36 Total held by Bank & IDA 70.45 2642.70 Amount sold 0.09 of which repaid 0.09 Total Undisbursed 925.11  SCHEDULE D Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS IN TANZANIA (As of March 31, 1995) ObIt0Ajr L<aa EqukyleAeg$ my oh 1994 AEF-NOMAD SAFARI Tourism Services 0.15 0.00 0.15 1995 AEF-RAFFIA BAGS Mfg. of Plastic Products NEC 0.50 0.00 0.50 1995 AEF-TANBREED Agric. & Livestock Products 1.00 0.00 1.00 1994 AEF-Tanganvika Transport and Storage 0.25 0.00 0.25 1985 Amboni Agricultural and Livestock Prod. 5.36 0.00 5.36 1994 Eurafrican Bank Commercial Banks 0.00 0.75 0.75 1978 Highland Soap Mfg. of Soap & Cleaning Prep 1.38 0.37 1.75 1960 Kilombero. Mfg. of Food Beverages & Tobacco 3.50 0.00 3.50 1964 Kilombero Mfg. of Food Beverages & Tobacco 4.37 0.70 5.07 1979 Metal Products Mfg. of Fabric Metal Products 1.33 0.18 1.51 1991 Mufmdi Tea Beverage Industries 2.80 0.00 2.80 1995 Tanzania Brewery Malt Liquors and Malts 18.40 6.00 24.40 1990 Tasco Spinning Weaving & Finishing 2.00 0.00 2.00 1993, 1994 TPS Tanzania Tourism Services 8.04 1.06 9.10 1994 TPS Zanzibar Restaurants & Hotels 0.00 0.16 0.16 1995 TPS Zanzibar Restaurants & Hotels 1.25 0.00 1.25 Total Gross Commitments 50.33 9.22 59.55 Less: repayments, cancellations, exchange adjustments, writeoffs, terminations and sales 25.73 1.25 26.98 Total Commitments now held by IFC 24.59 7.97 32.56 Total Undisbursed 19.36 6.55 25.91 Total Outstanding IFC 5.23 1.42 6.65