The World Bank Financial Sector Support Project (P151816) REPORT NO.: RES44780 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF FINANCIAL SECTOR SUPPORT PROJECT APPROVED ON APRIL 30, 2015 TO REPUBLIC OF KENYA FINANCE, COMPETITIVENESS AND INNOVATION AFRICA EAST Regional Vice President: Hafez M. H. Ghanem Country Director: Keith E. Hansen Regional Director: Asad Alam Practice Manager/Manager: Niraj Verma Task Team Leader(s): Thilasoni Benjamin Musuku The World Bank Financial Sector Support Project (P151816) I. BASIC DATA Product Information Project ID Financing Instrument P151816 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 30-Apr-2015 30-Apr-2021 Organizations Borrower Responsible Agency Republic of KENYA Directorate of Budget & Fiscal & Economic Affairs Project Development Objective (PDO) Original PDO The project's development objective is to strengthen the legal, regulatory and institutional environment for improved financial stability, access to and provision of, affordable and long term financing. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-56270 30-Apr-2015 04-Jun-2015 10-Jul-2015 30-Apr-2021 37.00 22.23 14.70 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Financial Sector Support Project (P151816) II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES Background 1. The Financial Sector Support Project (FSSP) (P151816), a credit facility of US$37 million, became effective on July 10, 2015. The current closing date is April 30, 2021. FSSP was built on previous financial sector reforms and gains realized throughthe Financial and Legal Sector Technical Assistance Project (FLSTAP) (P083250). The project development objective is to strengthen the legal, regulatory and institutional environment for improved financial stability, access to and provision of, affordable and long-term financing. The FSSP project is expected to support Kenyan financial sector authorities in further developing regulatory and supervisory frameworks that continue to be effective in mitigating the new risks associated with the financial sector’s rapid development, deepening expansion across sectors, and across borders. It supports the upgrade of the supervisory, regulatory, and institutional framework to keep pace with more complex markets and products with the overall objective of enhancing stability. 2. FSSP has three Components as follows: Component 1 - Strengthening Financial Institutions: this component focuses on the overarching reform, modernization, and capacity support to the financial sector institutional framework by delivering technical assistance to the various financial sector regulatory agencies; Component 2 - Enabling Efficient Financial Intermediation: this component accelerates the financial inclusion agenda by focusing on strengthening financial infrastructure and making more transparent the pricing of financial intermediation so that more businesses and individuals have access to affordable financial products; and Component 3 - Increasing Availability of Long-term Finance: this component focuses on strengthening the demand for and supply of long-term funds so that Kenya’s growing development finance needs for long-term projects in infrastructure, housing and other areas can be met. Project Status 3. At the last Implementation Status & Results (ISR) Report of January 2021, both project progress towards achievement of PDO and Implementation Progress (IP) were rated Satisfactory (S). This is because PDO is on track and implementation progress has been substantive despite disruptions caused by the COVID-19 pandemic. Component 1 of the project has assisted financial sector regulators in strengthening their supervision and surveillance systems, through both IT upgradation and advisors and technical assistance on the implementation of risk-based supervision; and helped develop frameworks for deposit guarantees and deposit insurance for the non-bank sectors. Component 2 has supported the implementation of a collateral registry system, and provide technical assistance in shoring up the legal and regulatory framework for movable property. Component 3 has supported the development of a range of products for long term finance, including around informal pensions, new capital market products, and new insurance products. 4. Key project actions included the kick-off of implementation activities for the Central Securities Depository (CSD) System initiative by the Central Bank of Kenya (CBK), Shared Digital Services Platform (SDSP) initiative by the SACCOS regulatory authority (SASRA), development of a macroprudential policy and crisis management framework for the National Treasury (NT), and endorsement by National Treasury (NT) to setup Kenya National Entrepreneurs Savings Trust (KNEST), an innovative low cost/secure micro-pensions program by leveraging financial technology (fintech) so that the Government of Kenya (GoK) can blend financial assistance to informal sector workers while promoting greater savings. NT was also supported to create the regulatory and institutional framework for KNEST enabled by fintech to lower costs of administration and regulatory oversight. GoK Cabinet endorsement of KNEST was received in March 2021. NT will act as KNEST incubator for the first five years and the micro-pension unit at NT established in August The World Bank Financial Sector Support Project (P151816) 2019 will comprise the interim core management team. As of April 2021, project expenditures, commitments, and activities at various stages of procurement amounted to US$25.8 million or 70 percent of total funding available under FSSP. Efforts by the project team, anchored through CMU leadership and working alongside NT, has supported the unlocking of remaining systemic weaknesses that have dragged back the IP which was captured in the ISR. There are no outstanding IFRs or audit reports for the project. Rationale for Restructuring 5. This is the third restructuring of the Project. It covers extension of the closing date of the Project to December 31, 2021 from April 30, 2021, following a request from GoK dated April, 12, 2021. This is to facilitate completion of the initiation phase of the CSD initiative, a strategic initiative for CBK, that will drive capital market development by supporting trading, capital formation, and liquidity in the market. The extension will enable a smooth transition of FSSP support on the CSD initiative to the new operation still under preparation, Supporting Access to Finance and Enterprise Recovery (SAFER) (P175017) project. Due to COVID-19 related disruptions, the kickoff-inception activities for the CSD began in September 2020, although the contract was initially signed in May 2020, with a goal of closing by April 2020. The extension covers eight months, compared to fifteen months requested by the NT, as the SAFER project is envisaged to have commenced implementation before then and will absorb the remaining FSSP activities. 6. Implementation of the NT request is proposed in two stages. The third restructuring will cover the extension of the closing date of the project to December 31, 2021, from April 30, 2021. A subsequent restructuring is proposed to reallocate unspent project funds to strategic activities mentioned in the request letter and cannot be executed at this time. Through a letter dated November 20,2020, NT requested an allocation of US$4.4 million out of the proceeds of the FSSP credit to refinance the Project Preparation Advance (PPA) under the proposed Kenya Aviation Systems Improvement Project (KASIP) (P167734). The World Bank procedures and guidance allows the borrower to refinance a preparation advance from a credit under an active operation - entailing a restructuring of such operation. As part of the next stage of restructuring, the FSSP legal agreement will be amended to introduce a new category of expenditure. A second expenditure category will also be introduced to collapse all remaining categories to facilitate financing of identified the strategic activities using uncommitted project funds. DETAILED CHANGES 7. The team seeks to extend the project closing date by eight months from April 2021 to December 2021 to facilitate completion of initiation phase of the CSD and other strategic initiatives underway. This will enable a smooth transition of FSSP support for these initiatives to the new operation, Supporting Access to Finance and Enterprise Recovery (SAFER) (P175017) project, which is under preparation. The SAFER project is currently at negotiation stage and will not have received the appropriate approvals before the intended closing date for FSSP set at April 30, 2021. The extension will allow for a smooth switchover of support on the CSD, SDSP and KNEST from FSSP to SAFER project, once effective. This is because the SAFER project is further expected to pick up from where FSSP stops and will continue to support CSD and these other key strategic initiatives, by migrating support from the FSSP project. 8. CBK greatly values the WB engagement on the CSD initiative – the central bank sees the WB offering safeguards to underpin quality delivery on the engagement. In addition the central bank recognizes the WB as a knowledge bank on global financial market infrastructure initiatives and has relative high regard of WB procurement processes. Implementation activities for the CSD initiative are at the early stages even though the contract with the vendor was signed in May 2020 with a kickoff in September 2020 due to Covid disruptions. Activities in progress now include finalization of the draft project charter, solution specification document and defining various system integrations The World Bank Financial Sector Support Project (P151816) including data migration. Once these milestones are reached, work on drafting of the definitiv e project plan and implementation timelines can begin. SAFER is available to continue TA support on the CSD initiative, but closing date for FSSP needs to be extended to ensure a smooth transition between the two projects: CBK will need to sign-off the solution specification document to unlock critical downstream work needed to inform added support under SAFER. III. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-56270 Effective 31-Jul-2020 30-Apr-2021 31-Dec-2021 30-Apr-2022