Report No. PIC709 Project Name Guinea-Financial Sector Operation Region Africa Sector Financial Sector Project ID GNPA1078 Population Profile 1993 estimates 6 million Urban 27t Rural: 73t Density 24/Km2 Growth Rate 2.9 Infant Mortality 133 per thousand Life expectancy 44 years Literacy Rate 34 W Implementing Agency Central Bank of Guinea (BCRG) Ministry of Plan and Finance Ministry of Justice Date PID Prepared July 1994 Projected Board Date August 1994 1. The Country. Located in West Africa, Guinea spans a territory of 246,000 square kilometers. It shares frontiers with six African countries. In the south, it is bordered by the Gulf of Guinea. Its main economic activities are mining and agriculture; its per capita income is US$537 (1993). About 75t of its 6 million population live in rural areas, while 90t of the remaining 1.5 million live in the capital city of Conakry. 2. The Financial Sector. The financial sector of Guinea comprises: (a) the Banque Centrale de la Rbpublique de Guinbe (BCRG); (b) six commercial banks; (c) four insurance companies; (d) two rural credit projects; (e) a social security institution, Caisse Nationale de Sbcuritb Sociale (CNSS); (f) several funds and credit lines set up by donors; and (g) an informal sector (which is estimated to be larger than the formal financial sector). Total assets of the financial sector (as of September 1992) were approximately GNF 247 billion, of which 92 ; were held by commercial banks. 3. The financial sector faces a number of problems. One of these is due to an inadequate judiciary system that, notably, does not enforce contracts effectively. Banks were earning most of their income from foreign currency operations, rather than traditional banking services. Until the recent introduction of an auction money market, idle funds earned no interest and banks had curtailed their deposit mobilization efforts. Furthermore, banks were suffering from a large non-performing portfolio. There is an emerging money market but no bond market. Insurance companies also had their share of problems. Most of these difficulties result from internal weaknesses, within the institutions including the Ministry of Finance and the Central Bank. Additionally, the lack of an effective monetary, regulatory and legal environment aggravates the situation. However, despite these constraints, rural financial companies have been successful both in mobilizing resources and lending on a small scale. 4. Project Objectives. The proposed credit would support a multi- faceted financial sector reform program to be undertaken in the context of the country's medium-term economic program. The operation's objectives are to: (a) strengthen the monetary, regulatory, supervisory and judicial environment; (b) develop a bridge between the informal and formal sectors to increase the reach of the financial sector; and (c) build upon the human resources base, and improve institutional capacity. 5. Project Description. The project will help Government and BCRG develop indirect instruments of monetary management, such as open market operations, disengage from the capital and management of financial institutions, adopt regulation, and reinforce supervision of all categories of financial institutions. It will also allow to take measures to improve the judicial system. The mutualistic savings and loan institutions will be extended in rural areas, and introduced in Conakry. The project will also include training of Ministry of Finance, Central Bank, commercial bank and insurance company staff, as well as members of the legal profession. 6. Project Financing. The proposed project (US$23 million equivalent) will be financed by IDA. The project has an adjustment component of US$18 million equivalent, and a technical assistance component of US$5 million equivalent. The program has been developed in close collaboration with other donors, including CFD, USAID, and CIDA. They will finance a portion of the technical assistance for a total amount of about US$3.1 million. 7. Project Implementation. The program has been designed to clearly define monitorable actions. Processing of the proposed credit will depend upon satisfactory progress in the implementation of the reform program outlined in the Letter of Financial Sectoral Development Policy and Policy Matrix. A "steering committee" of concerned agencies and donors will coordinate individual efforts and oversee the implementation of the overall program. 8. Environmental Aspects. There are no environmental implications from this proposed project. 9. Project Benefits. The program will lead to a competitive, solvent, and self-sustainable financial sector which will cater to the needs of savers, investors, and borrowers in the formal and informal sectors. An efficient financial sector will contribute to an effective monetary and credit policy, as well as to the stability of the Guinean economy. It will support economic growth and social progress. The financial sector reform program will also facilitate the development of the private sector and the privatization of public enterprises. Through the rural finance schemes, the program will reach owners of small businesses, particularly women, and contribute to poverty alleviation. The reform program emphasizes governance, institution building, human resource development, and rehabilitation of the judicial system. Contact Point: Public Information Center - 2 - The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202)458-5454 Fax No.: (202)522-1500 Note: This is information based on an evolving project. Certain components may not necessarily be included in the final project. - 3 -