Document of The World Bank Report No: ICR00004783 IMPLEMENTATION COMPLETION AND RESULTS REPORT LOAN NUMBER 8363-MA AND LOAN NUMBER 8756-MA ON A SERIES OF PROGRAMMATIC LOANS IN THE AMOUNT OF US$650 MILLION (€217.6 MILLION/US$300 EQUIVALENT AND US$350 MILLION) TO THE KINGDOM OF MOROCCO FOR THE FIRST AND SECOND CAPITAL MARKET DEVELOPMENT AND SME FINANCE DEVELOPMENT POLICY LOANS June 26, 2019 Finance, Competitiveness, and Innovation Global Practice Middle East and North Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective June 17, 2019) Currency Unit = Moroccan Dirham (MAD) MAD 1.00 = US$0.10 US$1.00 = MAD 9.67 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ACAPS Independent Insurance and Pension Fund Supervisory Authority (Autorité de Contrôle des Assurances et de la Prévoyance Sociale) AMMC Independent Capital Markets Authority (Autorité Marocaine du Marche des Capitaux) ASA Advisory Services and Analytics BAM Central Bank (Bank Al-Maghrib) CCG Government Credit Guarantee Agency (Caisse Centrale de Garantie) CG Council of Government (Conseil du Gouvernement) CMSME Capital Market Development and SME Finance DPL CMSME 1 First Capital Market Development and SME Finance DPL CMSME 2 Second Capital Market Development and SME Finance DPL CMR Mandatory Pension Fund for Civil and Military Services (Caisse Marocaine des Retraites) CPS Country Partnership Strategy DPF Development Policy Financing DPL Development Policy Loan ELA Emergency Liquidity Assistance FIRST Financial Sector Reform and Strengthening FSAP Financial Sector Assessment Program GDP Gross Domestic Product GOM Government of the Kingdom of Morocco ICR Implementation Completion and Results Report IEG Independent Evaluation Group IFC International Finance Corporation IMF International Monetary Fund IOSCO International Organization of Securities Commissions ISR Implementation Status and Results Report J-CAP Joint Capital Markets Program M&E Monitoring and Evaluation MEF Ministry of Economy and Finance (Ministère de l’Economie et des Finances) MSMEs Micro, Small, and Medium Enterprises NFIS National Financial Inclusion Strategy OPCI Real Estate Collective Investment Organization (Organismes de placement collectif immobilier) PDO Project Development Objectives PLL Precautionary and Liquidity Line PLR Performance and Learning Review REIT Real Estate Investment Trust SMEs Small and Medium Enterprises TA Technical Assistance UFA Universal Financial Access VAT Value Added Tax Regional Director: Najy Benhassine Practice Manager: Jean Pesme Project Team Leader: Gabriel Sensenbrenner ICR Team Leader: Roya Vakil The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Kingdom of Morocco First and Second Capital Market Development and SME Finance Development Policy Loans TABLE OF CONTENTS Data Sheet 1. Program Context, Development Objectives and Design 10 2. Key Factors Affecting Implementation and Outcomes 22 3. Assessment of Outcomes 28 4. Assessment of Risk to Development Outcome 37 5. Assessment of Bank and Borrower Performance 37 6. Lessons Learned 39 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 40 Annex 1: Bank Lending and Implementation Support/Supervision Processes 41 Annex 2: Borrower's Comments on ICR 42 Annex 3: Main Recommendations of the 2015 FSAP 48 Annex 4: ASA's Supporting the Implementation of Reforms 49 Annex 5: List of Supporting Documents 51 Page 1 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR A. BASIC INFORMATION Program 1 MA Capital Market Country Morocco Program Name: Development&SME Finance DPL Program ID: P147257 L/C/TF Number(s) IBRD-83630 ICR Date: 05/13/2019 ICR Type: Core ICR Financing Instrument: DPL Borrower KINGDOM OF MOROCCO Original Total USD 300.00M Disbursed Amount USD 291.07M Commitment Implementing Agencies: Cofinanciers and Other External Partners: Program 2 MA-Second Capital Market Country Morocco Program Name: Development and SME Finance DPL Program ID: P153603 L/C/TF Number(s) IBRD-83630,IBRD-87560 ICR Date: 05/13/2019 ICR Type: Core ICR Financing Instrument: DPL Borrower KINGDOM OF MOROCCO Original Total USD 350.00M Disbursed Amount USD 350.00M Commitment Implementing Agencies: Cofinanciers and Other External Partners: B. KEY DATES MA Capital Market Development &S ME Finance DPL P147257 Original Revised / Actual Process Date Process Date Date(s) Concept Review: 10/01/2013 Effectiveness: 07/30/2014 Appraisal: 03/03/2014 Restructuring(s): Approval: 04/29/2014 Mid-term Review: Closing: 12/31/2014 12/31/2014 MA-Second Capital Market Development and SME Finance DPL P153603 Page 2 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Original Revised / Process Date Process Date Actual Date(s) Concept Review: 12/18/2015 Effectiveness: 04/30/2018 Appraisal: 09/26/2016 Restructuring(s): Approval: 05/16/2017 Mid-term Review: Closing: 04/30/2018 04/30/2018 C. RATINGS SUMMARY C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Moderate Bank Performance Moderately Satisfactory Borrower Performance Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Not Applicable Implementing Quality of Supervision: Moderately Satisfactory Not Applicable Agency/Agencies: Overall Bank Overall Borrower Moderately Moderately Satisfactory Performance Performance Satisfactory D. SECTOR AND THEME CODES MA Capital Market Development & SME Finance DPL P147257 Original Actual Major Sector Public Administration Central Government (Central Agencies) 11 11 Financial Sector Other Non-bank Financial Institutions 38 38 Capital Markets 23 23 Banking Institutions 17 17 Industry, Trade and Services Services 11 11 Major Theme/Theme/Sub Theme Finance 28 28 Financial Infrastructure and Access 17 17 Page 3 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR MSME Finance 17 17 Financial Stability 11 11 Financial Sector oversight and policy/banking 11 11 regulation&restructuring Private Sector Development 117 117 Enterprise Development 17 17 MSME Development 17 17 Jobs 100 100 Public Sector Management 56 56 Public Administration 11 11 Administrative and Civil Service Reform 11 11 Rule of Law 45 45 Legal Institutions for a Market Economy 45 45 MA-Second Capital Market Development and SME Finance DPL P153603 Original Actual Major Sector Financial Sector Public Administration - Financial Sector 10 10 Other Non-bank Financial Institutions 20 20 Capital Markets 40 40 Insurance and Pension 20 20 Banking Institutions 10 10 Major Theme/Theme/Sub Theme Finance 28 28 Finance for Development 33 33 Infrastructure Finance 33 33 Financial Infrastructure and Access 17 17 Credit Infrastructure 11 11 Financial inclusion 11 11 MSME Finance 17 17 Financial Stability 11 11 Financial Sector oversight and policy/banking 11 11 regulation&restructuring E. BANK STAFF MA Capital Market Development & SME Finance DPL P147257 Positions At ICR At Approval Vice President: Ferid Belhaj Inger Andersen Country Director: Marie Francoise Marie-Nelly Neil Simon M. Gray Practice Manager/Manager: Jean Pesme Simon C. Bell Task Team Leader: Gabriel J D Sensenbrenner Gabriel J D Sensenbrenner Page 4 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ICR Team Leader: Roya Vakil ICR Primary Author: Roya Vakil MA-Second Capital Market Development and SME Finance DPL P153603 Positions At ICR At Approval Vice President: Ferid Belhaj Hafez M. H. Ghanem Marie Francoise Marie- Country Director: Marie Francoise Marie-Nelly Nelly Practice Manager/Manager: Jean Pesme Jean Pesme Task Team Leader: Gabriel J D Sensenbrenner Gabriel J D Sensenbrenner ICR Team Leader: Roya Vakil ICR Primary Author: Roya Vakil F. RESULTS FRAMEWORK ANALYSIS Program Development Objectives (from Program Document) The CMSME I program supports the Government’s policies to adapt the financial system to the evolving needs of the real economy, develop market-based finance, and provide financing solutions and services to Moroccan enterprises and projects. Its development objectives are: (a) deepening capital markets by broadening the range of instruments and investors; (b) reforming the pension system to ensure continued institutional demand for capital market securities; (c) fostering solutions for the financing of small and young enterprises; and (d) consolidating oversight to balance greater access with continued financial stability. The CMSME 2 program supports an extension and deepening of the reform program undertaken at the start of the series to develop a more inclusive and diversified financial sector. Its development objectives are (a) improving access to finance for small and young enterprises; (b) strengthening capital markets by improving the institutional framework and broadening the range of instruments; (c) improving the financial sustainability of the Caisse Marocaine des Retraites; and (d) strengthening oversight of the banking sector. The four development objectives (Pillars) of CMSME 1 and CMESME 2 are essentially consistent. For this report, the development objectives articulated in the CMSME 2 program document are considered to be the PDO for the programmatic series Revised Program Development Objectives (as approved by original approving authority) The PDOs were not revised. PDO Indicator(s) for DPL series─ from Program Document Page 5 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Original Target Formally Actual Value Achieved at Baseline Values (from Indicator Revised Completion or Target Value approval Target Values Years documents) Pillar A Total financing of eligible MSMEs Indicator 1: Value 0 MAD 6 billion MAD 6 billion quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 12/01/2017 Comments Target achieved. (incl. % achievement) Pillar A MSME loans with CCG guarantees Indicator 2: Value MAD 4.6 MAD 18 billion MAD 20.5 billion quantitative or billion Qualitative Date achieved 06/01/2013 06/01/2018 12/31/2018 Comments Target is exceeded. Achievement dates are within the post-project (incl. % achievement) timeframe for completion. Pillar A Total MSME loans with CCG guarantees to majority female owned MSMEs Indicator 3: Value MAD 420 MAD 1.8 billion MAD 2.3 billion quantitative or Qualitative million Date achieved 06/01/2013 06/01/2018 12/31/2018 Comments Target is exceeded. Achievement dates are within the post-project (incl. % achievement) timeframe for completion Pillar A MSME loans with CCG guarantees in Marrakesh and Oriental region Indicator 4: Value MAD 555 MAD 1.5 billion MAD 2.2 billion quantitative or million Qualitative Date achieved 06/01/2013 06/01/2018 12/31/2018 Comments Target is exceeded. Achievement dates are within the post-project (incl. % achievement) timeframe for completion Pillar A Total MSME VAT credits paid Indicator 5: Value 0 MAD 250 MAD 623.7 million quantitative or Qualitative million Date achieved 06/01/2013 06/01/2018 12/01/2017 Comments Target is exceeded. Further VAT credits of MAD 42.8 million were paid in (incl. % achievement) 2018 (as of March 21, 2018) Page 6 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Pillar A Total number of MSMEs with credit scores Indicator 6: Value 0 40,000 0 quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 06/01/2018 Comments This report is not able to assess this indicator. The credit bureau (incl. % achievement) information systems only distinguish between a legal entity and an individual. There is no distinction made by bureaus between large companies and SMEs. Scores are also offered only upon request by enterprise. It is likely that this target was achieved due to the fact that 90 percent of total firms in Morocco are SMEs and the addition of a second licensed credit bureau increased the coverage of enterprises. As of July 2017, 449,395 registered individuals and 8,180 legal entities received a credit score. Pillar A Total number of non-bank providers licensed Indicator 7: Value 0 4 5 quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 02/01/2018 Comments Target is exceeded (incl. % achievement) Pillar B AMMC has certified 50% of finance professionals required to register Indicator 8: under Law 42-13 in trading, compliance, asset management, and financial analysis Value 0 50% 0 quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 06/01/2018 Comments Target not achieved – in progress. The result is close to being achieved, (incl. % achievement) however, and is expected to be realized before end of CY 2019. The AMMC officially launched the accreditation process for market professionals and, as of June 2019, is in the process of reviewing applications for certifications. A first mapping of eligible professionals has been completed, with 400 people identified as certification-eligible across the specialties. The clearance rounds have been decided and scheduled for June, September, October, and December 2019. The professionals concerned by the accreditation are in the process of preparing a training plan, via their associations, based on the AMMC syllabus. Pillar B Continuous prices posted on Bloomberg for the following securities: less Indicator 9: than 1-year residual maturity, less than 2-year residual maturity, more than 10-year residual maturity, 5-year benchmark, 10-year benchmark , more than 10 years residual maturity Value No Yes Yes quantitative or Morocco Qualitative page on Bloomberg Page 7 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Date achieved 06/01/2013 06/01/2018 06/01/2018 Comments Target is achieved. Firm and continuous quotes are posted daily by banks (incl. % achievement) on Bloomberg's Ebond Morocco platform. The latest end-of-day quotes are available on the MEF website. The first agreement was signed in March 2013 with CDG Capital and subsequently with the other banks in January 2015 Pillar B Number of REITs managers licensed Indicator 10: Value 0 2 0 quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 06/01/2018 Comments Target not achieved – in progress. The result is close to being achieved as (incl. % achievement) the AMMC has launched the process for licensing REITs managers and is evaluating applications. The result is expected by end of CY 2019. Pillar C Actuarial calculation projects 2028 as year in which CMR depletes its Indicator 11: reserves, compared to 2022 without reform Value Year 2022 Year 2028 Year 2027 quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 12/31/2017 Comments Target achieved. (incl. % achievement) Pillar D The three banks that have been designated as systemic as of 2016 file Indicator 12: recovery plans by 2018 Value 0 3 recovery plans 3 recovery plans quantitative or Qualitative Date achieved 06/01/2013 06/01/2018 06/01/2018 Comments Target achieved. (incl. % achievement) G. RATINGS OF PROJECT PERFORMANCE IN ISRs MA Capital Market Development & SME Finance DPL P147257 Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 07/01/2014 Satisfactory Satisfactory 0.00 2 01/02/2015 Satisfactory Satisfactory 290.34 Page 8 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR H. RESTRUCTURING (IF ANY) Page 9 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR 1. PROJECT CONTEXT, DEVELOPMENT OBJECTIVES, AND DESIGN 1.1 Context at Appraisal Country Context 1. In 2014, Morocco was enjoying a period of political stability. The country was governed by a parliamentary constitutional monarchy, whereby executive power was exercised by a multi-party government led by a Head of Government and by the King who is the Head of State. Legislative power was vested in both the Chamber of Representatives and the Chamber of Councilors, while the judiciary was independent from the Government. A new constitution, adopted in July 2011, revised the governance framework and strengthened the powers of the Head of Government and Parliament and the independence of the judiciary. After years in opposition, the Justice and Development Party won legislative elections, and Mr. Abdelilah Benkirane became Head of Government in January 2012. The Benkirane I Government faced a large legislative agenda against a background of social demands exacerbated by an adverse external economic environment. Following a rebalancing of the coalition in 2013, the Benkirane II Government reiterated its engagement to pursue the reform program and legislative agenda. 2. With an average economic growth rate of nearly 5 percent from 2001 to 2011, Morocco reduced poverty and boosted shared prosperity. Extreme poverty had practically been eradicated, dropping from 2 percent to 0.28 percent over the same period.1 Relative poverty also declined, from 15.3 percent to 6.2 percent, and population vulnerability (those living just above the poverty line) decreased from 22.8 percent to 13.3 percent. Still, by 2014, nearly 20 percent of the country, or 6.3 million Moroccans, lived in poverty or under the constant threat of falling back into poverty. During the same period, the well-being of the bottom 40 percent of the population grew both in absolute terms (the well-being of the poor improved) and relative terms (the well-being of the poor improved relative to that of the non-poor), suggesting an increase in shared prosperity. 3. Yet this growth rate was insufficient to reduce unemployment, which held at 9–10 percent in the years before the Development Policy Loan (DPL) series. A simultaneously declining participation rate indicated a disturbing trend of increased exclusion. It was estimated that Morocco needed to reach annual growth rates of 6–7 percent to absorb new entrants into the labor market and generate greater wealth for all. 4. Structurally, the Moroccan economy was oriented toward non-tradable activities (that is, construction, public works, and low value-added services) and volatile, poorly productive agriculture. Given this orientation, Morocco had made little productivity gains over the past two decades despite high levels of investment.2 Investment efforts—dominated by publicly funded large infrastructure projects— boosted the productivity of labor but had not triggered a growth take-off through higher total factor 1 Extreme poverty refers to the population living on less than US$1 Purchasing Power Parity per day. The drop is based on the national poverty threshold, corresponding to the equivalent of US$2.15 Purchasing Power Parity in 2007. 2 Morocco has consistently invested 5–10 percentage points of gross domestic product (GDP) more than its peer countries and its total investment as a share of GDP has increased from 25 percent of GDP in the 1990s to 35 percent in 2014. Page 10 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR productivity. Morocco had yet to guarantee the productivity gains needed to support the emergence of a larger middle class. 5. Morocco was having difficulty benefitting from globalization, due in part to the weaknesses in competitiveness of its enterprises. Morocco’s share of global exports hovered around 0.15 percent since the mid-1970s, while most of their competitors saw substantial increases in their shares. High and rising export prices were symptomatic of persistent weaknesses in the competitiveness of Moroccan enterprises on the global market. The renewal of the exporter base with entry and exit of firms was limited, and existing firms exhibited little product and market innovation. 6. At the time of the design of the DPL series, authorities at the Ministry of Economy and Finance (Ministère de l’Economie et des Finances, MEF) and Central Bank (Bank Al-Maghrib, BAM) were providing long-term support to advance financial inclusion and were pursuing sequenced, systematic, and complex reforms of its financial system for over 10 years. A first wave of reforms phased the public sector out of banking; a second wave focused on securing system stability; followed by efforts toward liberalizing financial risk taking, enabling large borrowers to diversify financing beyond banks, reforming the pension system as the cornerstone of capital markets, and developing new financing solutions to meet the needs of micro, small, and medium enterprises (MSMEs). Macroeconomic and Sector Context 7. Shortly before the DPL series was designed, Morocco’s economy suffered a series of adverse external shocks. While the 2008 financial crisis had limited direct effects on Morocco’s economy, the subsequent food and fuel price crises and Eurozone crisis had more serious repercussions. Morocco suffered a major deterioration of its terms of trade, combined with a significant increase in its food import bill (18 percent per year on average). With a strong trade exposure to the European Union, Morocco was adversely affected by the sovereign debt crises in neighboring Southern European countries and the subsequent slowdown of economic growth in Europe. As a result, economic growth beyond the agricultural sector decelerated to an average of 3.5 percent since 2009, compared to 4.7 percent during 2000–2008. Growth was being driven mostly by debt-creating domestic demand, most notably by growing public expenditures. On the upside, however, the emergence of new growth drivers in higher value-added industries (such as car manufacturing and aeronautics) and the expansion of Moroccan companies in Western Africa were creating the conditions for Morocco to become a regional hub for investments between Europe and Sub-Saharan Africa. 8. In response to this deterioration, the Government of the Kingdom of Morocco (GOM) took measures to consolidate public finances and engage in structural reform . Subsidy reform in 2013 was a key component of macroeconomic stabilization, along with delayed public investment programs. Morocco reduced its budget deficit from 6.8 percent of GDP in 2012 to 4.3 percent in 2015. The debt-to-GDP ratio stabilized at around 64 percent of GDP in 2015 (45 percent in 2008). At the time of approval of the Second Capital Market Development and SME Finance DPL (CMSME 2) in 2017, Morocco had achieved further consolidation of its macroeconomic framework. The fiscal position had significantly improved owing to substantial cuts in subsidies. The external position benefited from low oil prices, resilient tourism, remittances, and foreign direct investments . The authorities had announced plans to move to a less tightly managed exchange rate and thus allow greater financial risk taking, while safeguarding the stability of the system. Unemployment—at 9.6 percent in Q3 2016—remained an important challenge, particularly in cities (14 percent compared to 4 percent in rural areas) and among the youth (18 percent). The adoption Page 11 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR of the Organic Budget Law, and its implementation decree in July 2015, aimed to strengthen Morocco's fiscal framework over the medium term and enhance central and local governments' budget design and implementation for better public service delivery and efficiency. The 2016 and 2017 Budget Laws enshrined the Government's commitment to solidify the tax base, rein in expenditures, and implement a pension reform that would improve sustainability and reduce contingent liabilities. 9. The financing of fiscal deficits tightened banking system liquidity. In 2012, BAM partly compensated for this by relaxing its stance in the context of low inflation: cutting its policy rate from 3.25 percent to 3 percent, lowering the commercial banks’ reserve requirement from 6 percent to 4 percent, and increasing liquidity injections. In 2013, the monetary stance was less accommodating and money supply grew by only 2.8 percent, compared to 4.5 percent in 2012. Nonperforming loans continued to increase in 2013, reaching 5.9 percent of bank credit to the private sector. With the loan-to-deposit ratio exceeding 100 percent in domestic banks, the scope for extending credits to the private sector was increasingly constrained. The implementation of Basel III3 in 2014, which aimed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage, put further pressure on credit extension, especially longer terms and larger borrowers. 10. Against this backdrop, Morocco continued to diversify and grow its financial system so that it was well positioned to address the country’s development challenges . Financial system assets as a percentage of GDP had reached levels comparable to some high-income countries.4 Morocco’s financial system had therefore performed well in mobilizing savings for the formation of capital. However, finance functions pertaining to allocating and monitoring capital were still inhibiting growth. At that stage of Morocco’s development, a better mix between banking and capital markets was needed to increase diversity among investors, improve transparency in capital decisions, and foster good corporate governance. Raising the proportion of equity capital in the financial structure of particular small and medium enterprises (SMEs), by facilitating access to external finance, was also needed to enhance creditworthiness. Finally, implementing G20 financial system reforms was expected to give capital markets a greater role in providing long-term financing to the economy. 11. To achieve private sector-led growth and create jobs, however, Morocco needed to undertake reforms along several key themes: improve the functioning of credit and capital markets to channel Morocco’s large savings (including pension funds) to firms and private projects; ensure the stability of the financial system; develop financing solutions to enable qualifying MSMEs to access, renew, or increase bank loans, including on more favorable terms; and reform capital markets instruments and practices to enable large borrowers to replace bank financing with market financing thereby freeing up bank capital to lend to MSMEs. 12. To address these challenges, the Government of Morocco developed a program to diversify finance from banks toward capital markets to improve the transparency of investment decisions, increase the diversity of investors, and foster corporate governance. Underpinning this strategy was the recognition that finance needs to play a central role in the economy’s competitiveness and resilience, and that capital markets can bring discipline to the selection and monitoring of investments, and supplement 3 Basel III is a set of international banking regulations developed by the Bank for International Settlements to promote stability in the international financial system. The Basel III regulations are designed to reduce damage to the economy by banks that take on excess risk. 4 Over 200 percent of GDP. Page 12 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR banks in developing solutions for financing small and young enterprises. The GOM program intended to create (a) an enabling investment climate and (b) a regulatory and institutional environment that supports a competitive and stable financial sector. Undertaking pension reform was viewed as an integral part of capital market reform because of the large size of these funds in Morocco. The theory was that, without reform, pension funds would sell assets, leaving only insurance companies as significant buyers of securities, which would consequently make securities costly to issue, and large borrowers would continue to rely on bank financing and banks would not free up lending space for MSMEs. IMF Relations 13. The World Bank Group and International Monetary Fund (IMF) collaborate closely in Morocco. Over the years, the World Bank and IMF staff have had frequent exchanges on macro-financial issues, a common understanding of the division of labor, and Morocco’s economic challenges. Analytical work being carried out by the IMF has focused on (a) inclusive growth, (b) the functioning of the credit market, (c) the functioning of the labor market, and (d) competitiveness and diversification. 14. In 2015, the World Bank and IMF conducted a Financial Sector Assessment Program (FSAP). The FSAP assessed that risks to financial stability were limited, although rising nonperforming loans’ levels and concentration risks needed to be monitored. In addition, World Bank supervision was deemed effective and improving, but requiring of more resources going forward. The FSAP also noted that a lack of financial access was still a constraint for (M)SMEs, which represented 90 percent of total firms.5 Among other things, the FSAP recommended that the supervision of capital markets and financial market infrastructures needed upgrading (see annex 3 for list of key FSAP recommendations).6 15. Overlapping with the DPL series, in July 2014 and July 2016, the IMF approved two 2-year arrangements for Morocco under the precautionary and liquidity line (PLL) for US$5 billion and US$3.5 billion, respectively.7 The PLL provides insurance against external shocks as the authorities pursue their reform agenda aimed at further strengthening the economy’s resilience and fostering higher and more inclusive economic growth. In December 2018, the IMF approved another PLL for US$2.97 billion. In April 2019, the IMF concluded the Article IV Consultation with Morocco. The Board welcomed improved fiscal management and diversification of the economy and commended the authorities for the progress made in implementing the 2015 FSAP recommendations. 5 IMF. 2015. Article IV Consultation Staff Report (Report No. 16/35). 6 For more information, see: Morocco Financial System Stability Assessment (2016) (https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Morocco-Financial-System-Stability-Assessment- 43676); Morocco FSAP Technical Note – Banking Supervision (https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Morocco-Financial-Sector-Assessment-Program- Technical-Note-Banking-Supervision-44347); Morocco FSAP Technical Note – Crisis Management, Bank Resolution, and Financial Sector Safety Net https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Morocco-Financial-Sector-Assessment-Program- Technical-Note-Crisis-Management-Bank-Resolution-44348 7 Morocco’s first PLL arrangement for US$6.2 billion was approved on August 3, 2012. The second PLL arrangement for US$5 billion was approved on July 28, 2014. Page 13 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Rationale for World Bank Assistance 16. The Capital Markets and SME Finance loan series was requested by the Government to support its policy reforms aimed at developing a more inclusive and diversified financial sector, while ensuring continued financial stability. The Government’s program recognized the central role of finance for the economy's competitiveness and resilience. The DPL program, consisting of two single tranche operations of €217.6 million (equivalent to US$300 million) for the first loan in the series and €350 million (US$350 million equivalent) for the second loan in the series, was developed to support the Government’s reform program. It was the first DPL operation focused on capital markets in Morocco. The First Capital Market Development and SME Finance DPL (CMSME 1) intended to support this program through a focus on the legal and regulatory framework for capital markets, pension reform, SME finance, and oversight of the financial system. 17. The Capital Market Development and SME Finance DPL (CMSME) series was directly in line with the Country Partnership Strategy (CPS) for Morocco (2014–2017), which included a core focus on the financial sector through the ‘Inclusive and Competitive Growth’ Pillar. The DPL series aligned with the Middle East and North Africa Framework for Engagement by facilitating opportunities for private sector initiative and job creation and strengthening economic governance and regulators. At the time of CMSME 2 preparation, the June 2016 Performance and Learning Review (PLR) of the CPS stressed access to finance for MSMEs as a catalyst of private sector-led growth and entrepreneurship. The PLR confirmed the relevance of the pillar for CMSME 2. The aim was to improve efficiency of the capital market in helping financial intermediaries promote competitiveness through stronger and better overseen allocation of savings, as well as extending access of small and young enterprises to finance. Governance had a strong transversal emphasis throughout the CPS, including governance of financial sector regulators that were assessed in the 2015 FSAP. 18. The loan series was closely linked to three other development policy lending operations that were recently approved: (a) Skills and Employment DPL series (P120566 and P144185),8 (b) the Economic Competitiveness Support Program DPL series (P127038 and P128869),9 and (c) the Accountability and Transparency DPL series (P130903 and P154041).10 All three were instrumental in supporting the GOM in accelerating growth and creating employment and were developed in close coordination with all involved task teams. 8 Independent Evaluation Group (IEG) Outcome Rating = Moderately Satisfactory. 9 IEG Outcome Rating = Moderately Satisfactory. 10 IEG Outcome Rating = Moderately Satisfactory. Page 14 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Figure 1. Morocco CPS FY14–17: Strategic Results Areas and CPS Outcome Areas 19. In addition, the DPL series complemented two other World Bank investment loans in support of financial sector development in Morocco: (a) US$50 million approved on June 28, 2012, as part of an MSME facility for the Middle East and North African countries (MSME Development Project, Report No. 68550-MA) that supported the provision of partial guarantees to banks, facilitating lending to collateral- poor MSMEs) and (b) US$50 million approved on March 10, 2017, for the Financing Innovative Startups and SMEs Project (Report No. PAD 1362). 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 20. The CMSME 1 Program supports the Government’s policies to adapt the financial system to the evolving needs of the real economy, develop market-based finance, and provide financing solutions and services to Moroccan enterprises and projects. Its development objectives are (a) deepening capital markets by broadening the range of instruments and investors, (b) reforming the pension system to ensure continued institutional demand for capital market securities, (c) fostering solutions for the financing of small and young enterprises, and (d) consolidating oversight to balance greater access with continued financial stability. Page 15 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR 21. The CMSME 2 Program supports an extension and deepening of the reform program undertaken at the start of the series to develop a more inclusive and diversified financial sector. Its development objectives are (a) improving access to finance for small and young enterprises, (b) strengthening capital markets by improving the institutional framework and broadening the range of instruments, (c) improving the financial sustainability of the Caisse Marocaine des Retraites, and (d) strengthening oversight of the banking sector. 22. The four development objectives (pillars) of CMSME 1 and CMESME 2 are essentially consistent. For this report, the development objectives articulated in the CMSME 2 program document are considered to be the PDO for the programmatic series. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 23. The PDOs were not revised. Because of progress made in implementing reforms (both through CMSME 1 and Government initiatives not covered through the operation), CMSME 2 proposed nine prior actions, of which four were new compared to the triggers envisaged at the time of CMSME 1 approval: (a) two new mechanisms that enhance financial support to qualifying MSMEs, (b) one measure fostering nonbank payment service providers using mobile wallets, and (c) two measures introducing a new capital market instrument. See table 3 in section 1.6 that summarizes and explains material changes affecting several indicative triggers of CMSME 2 (at the time of CMSME 1 approval) as reflected in the CMSME 2 prior actions. 1.4 Original Policy Areas Supported by the Program (as approved) 24. The policy areas supported by loan series are (a) improving access to finance for small and young enterprises, (b) strengthening capital markets by improving the institutional framework and broadening the range of instruments, (c) improving the financial sustainability of the Caisse Marocaine des Retraites, and (d) strengthening oversight of the banking sector. Table 1. Policy Areas and Key Results Indicators for CMSME Loan Series Key Results Indicators Policy Area CMSME 1 CMSME 2 Improving access to • CCG co-investing increased • Total financing of eligible MSMEs increased finance for small and • 3,000 new small or young • MSME loans with CCG guarantees increased young enterprises enterprises reached • Total MSME loans with CCG guarantees to • Number of new CCG outlets majority female-owned MSMEs increased in the regions increased • MSME loans with CCG guarantees in • Creation of centralized Marrakesh and Oriental region increased collateral registry • Total MSME VAT credits paid increased • Credit scoring offered by • Total number of MSMEs with credit scores credit bureau increased • Total number of nonbank providers licensed increased Page 16 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Key Results Indicators Policy Area CMSME 1 CMSME 2 Strengthening • AMMC has certified 50% of • AMMC has certified 50% of finance capital markets by finance professionals required professionals required to register under Law improving the to register under Law 42-13. 42-13 institutional • Continuous prices posted on • Continuous prices posted on Bloomberg for framework and Bloomberg for panel of panel of treasury securities. broadening the treasury securities. • Two REITs managers have been licensed. range of instruments • Number of separately identified securities reduced. • Securities lending contracts recorded in central depository. • Derivative contracts cleared and settled through central clearing counterparty. Improving the • Actuarial calculation forecasts • Actuarial calculation projects 2028 as year in financial year of first CMR deficit after which CMR depletes its reserves, compared to sustainability of the 2022. 2022 without reform. Caisse Marocaine des Retraites Strengthening • Financial conglomerates • The three banks that have been designated oversight of the report to supervisors their as systemic as of 2016 file recovery plans by banking sector internal arrangements for 2018. the identification and management of risks per the new regulations. • AMMC complies with IOSCO Principles 6 and 7 on the perimeter of regulation and maintaining financial stability. Note: CCG= Government Credit Guarantee Agency (Caisse Centrale de Garantie); VAT = Value Added Tax; AMMC = Independent Capital Markets Authority (Autorité Marocaine du Marche des Capitaux); CMR = Mandatory Pension Fund for Civil and Military Services (Caisse Marocaine des Retraites); REITs = Real Estate Investment Trusts; IOSCO = International Organization of Securities Commissions. 1.5 Revised Policy Areas 25. The policy areas were not formally revised, although the formulation of the policy areas varied across operations, as did their pillar designations. • Capital market development. The change in wording from ‘deepening capital markets by broadening the range of instruments and investors’ to ‘strengthening capital markets by improving the institutional framework and broadening the range of instruments’ considers the recommendation of the 2015 FSAP to not implement the 2012 law on derivatives11 and 11 The 2015 FSAP found that the 2012 law on derivatives did not incorporate recent international standards on central clearing counterparties. Page 17 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR rather support the new law on REITs. This replacement was intended to still meet the objective of broadening the range of instruments. • Access to finance. The change in wording from ‘fostering solutions for the financing of small and young enterprises’ to ‘improving access to finance for small and young enterprises’ represents the addition of measures on universal financial access (UFA) and adoption of financial inclusion as central to the GOM’s broader goal of modernizing the role of finance to promote private sector-led development. • Pension reform. CMSME 2 proposes a more targeted focus on the financial sustainability of the CMR which reflects the work undertaken between the DPL series (because of CMSME 1 prior actions) in which the Government proposed a comprehensive set of reforms for several key CMR parameters (supported by extensive technical assistance (TA) funded through the Financial Sector Reform and Strengthening [FIRST] initiative and designed in tandem with the DPL series) (see annex 4 for list of FIRST activities). Table 2. Pillar Categorizations in CMSME Loan Seriesa Pillar CMSME 1 CMSME 2 A Deepening capital markets by Improve access to finance for small and young broadening the range of enterprises instruments and investors (this pillar A/CMSME 2 refers to small and young enterprises as in pillar C/CMESME1) B Reforming pension system to Strengthen capital markets by improving the ensure continued institutional institutional framework and broadening the range of demand for capital markets instruments securities (this pillar B/CMSME 2 refers to broadening the range of instruments as in pillar A/CMSME 1) C Fostering solutions for the financing Improve the financial sustainability of the Caisse of small and young enterprises Marocaine des Retraites D Consolidating oversight to balance Strengthen oversight of the banking sector greater access with continued financial stability Note: a. Pillars on the same topic have different Pillar-Letter designation. 1.6 Other Significant Changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) 26. As referenced in section 1.3, table 3 summarizes and explains material changes affecting indicative triggers of CMSME 2 (at the time of CMSME 1 approval) as reflected in the CMSME 2 prior actions. Table 3. Material Changes in CMSME 2 Prior Actions Indicative CMSME 2 Revised CMSME 2 Prior Rationale for Change Contribution to CMSME Trigger (from CMSME 1 Action Objectives Program Document) PDO Pillar A: Improve access to finance for small and young enterprises Page 18 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Indicative CMSME 2 Revised CMSME 2 Prior Rationale for Change Contribution to CMSME Trigger (from CMSME 1 Action Objectives Program Document) The CCG launches a The indicative trigger is public-private fund dropped, as a new IBRD- dedicated to start-ups funded investment project (approved in March 2017) finances CCG co-investments in privately managed funds dedicated to start-ups. New Measure The central bank (Bank The new prior action Al-Maghrib), the credit contributes to improving guarantee agency (Caisse access to finance for Centrale de Garantie) and small and young the Moroccan banks enterprises, and its association (Groupement results will be monitored Professionnel des in terms of the number of Banques du Maroc), have eligible MSMEs benefiting established a cofinancing from the co-financing arrangement supporting arrangement and volume the financial restructuring of financing. of MSMEs. Council of Government Dropped This indicative trigger is Regulating investment (Conseil du replaced by a new prior advisors ensures that Gouvernement, CG) action in Pillar B (law on capital markets are fair adopts the draft law on the stock exchange and for unsophisticated secured transactions investment advice). The investors, and thus law includes provisions underpins market that, for the first time, development. regulate investment advice, thereby closing a key gap identified by the 2015 FSAP. New measure 2. The Head of the This new measure The payment of VAT Government has supports initiatives to credits reduces the established the assist MSMEs deal with working capital needs of conditions for paying financial pressure arising MSMEs and improves value added tax (VAT) from external shocks, in their bankability. The tax credits to MSMEs. particular, by setting the code has been revised to conditions for paying VAT prevent future VAT credits to MSMEs. The accumulation. Budget Law, voted in 2013, recognized the VAT credits accumulated between January 2004 and December 2013 (CMSME 2 prior action) as debt. Under this measure, the Government had settled Page 19 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Indicative CMSME 2 Revised CMSME 2 Prior Rationale for Change Contribution to CMSME Trigger (from CMSME 1 Action Objectives Program Document) MAD 235 million as of June 2016. AMMC registers at least Dropped The authorities have three funds under the licensed three new fund new framework for managers operating private equity and under the 2015 Law on venture capital private equity and venture capital. This trigger is replaced with prior action 4. New Measure 4. The two regulations This measure supports The 2014 Banking Law (circulaires) implementing UFA: licensing provides the legal the provisions of law No. requirements for opening framework for a new 103-12 (the Banking Law) and managing transaction category of financial concerning providers of accounts by nonbanks. intermediaries that payment services have • Circulaire relative aux specialize in the issuance been published in the établissements de of electronic money and National Gazette (Bulletin paiement implements in services enabling Officiel) No. 6548, dated Articles 15 and 22 of payments with e-money. March 2, 2017. the above law as Achieving UFA requires regards licensing of independent, non-agent new financial providers of payment intermediaries. services. This measure • Circulaire relative aux will promote financial modalités d’exercice inclusion on a wide scale des services de through expanding paiement implements financial service access Article 16 which points, particularly for the defines the services rural unbanked and rural that the new micro and small intermediaries may enterprises. provide and the payment services that may remain under the banking license. PDO Pillar B – Strengthen capital markets by improving the institutional framework and broadening the range of instruments MEF approves regulations Dropped The 2015 FSAP An indicative trigger on for the trading and recommended not to implementing regulations clearing of derivatives to implement Law No. 42- of the 2012 law is implement Law No. 42-12 12, as it does not replaced by a prior action incorporate advances in (#7) that supports the international standards new law on REITs to meet that occurred after the the objective of law was passed in 2013. broadening the range of instruments. New Measure Law No. 70-14 on real This measure supports This prior action supports estate investment trusts broadening the range of the new law on REITs to Page 20 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Indicative CMSME 2 Revised CMSME 2 Prior Rationale for Change Contribution to CMSME Trigger (from CMSME 1 Action Objectives Program Document) (organisms de placement capital market meet the objective of collectif immobilier), has instruments: REITs allow broadening the range of been published in the companies owning and capital markets National Gazette (Bulletin operating commercial instruments to enable Officiel) No. 6552, dated real estate (plants, large borrowers to March 16, 2017, and warehouses, stores, and replace bank loans with Decree No. 2-16-1011 so on) to replace bank market financing, thereby exempting real estate financing of such assets raising long-term investment trusts from with market financing. In financing more corporate income tax, has anticipation of the new efficiently. been published in the law, a first REIT was National Gazette (Bulletin established in January Officiel) No. 6530 bis, 2016. dated December 31, 2016 MEF approves new Dropped In 2015, this trigger was Dropping this trigger regulations for securities met by a set of decrees allows for room in the lending to implement Law and arrêtés. program for UFA No. 45-12 measures to support new financial inclusion measures/regulations passed since CMSME 1 approval. PDO Pillar D – Strengthen oversight of the banking sector MEF approves the The central bank (Bank Following the 2015 FSAP, Safeguarding financial regulations implementing Al-Magrib) has BAM decided to aim first stability is key to capital the regime for financial transmitted on for the regulation on market reform. As conglomerates September 8, 2016, to recovery planning of regulated financial banks for consultation, financial conglomerates, intermediaries use capital the draft regulations on followed by markets more actively, recovery planning to supplementary regulators must continue systemic banks belonging regulations in 2017. First to deliver effective to financial recovery plans are due consolidated supervision conglomerates in from the systemic banks and develop recovery and application of Article 79 in 2018. resolution plans in an of Law No. 103-12 increasingly complex (Banking Law). Main regulations issued environment. by 2016 to implement the Banking Law are internal control, bank governance, resolution of customer complaints, capital adequacy, conservation buffer, countercyclical buffer, deductions from capital, large exposures, participatory banking, and nonbank providers of payment services. Page 21 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Indicative CMSME 2 Revised CMSME 2 Prior Rationale for Change Contribution to CMSME Trigger (from CMSME 1 Action Objectives Program Document) BAM has issued regulations for consultations to the banks in September 2016 and the consultations took place in October– December 2016. 27. The preparation and approval of CMSME 2 was delayed because the borrower requested to enhance the operation with a critical trigger on UFA, after all of the original triggers for CMSME 2 had already been met, which required more time to be adopted. In April 2016, the World Bank team received management approval for a waiver of BP 8.60, footnote 9 “to extend beyond the 24 months the deadline for Board consideration of the second operation in a DPL series and prevent the programmatic series from being considered lapsed.” The World Bank and the borrower used the additional preparation time to strengthen several prior actions, including addressing financial inclusion policies (which also enhanced the DPL series’ contribution to the implementation of the Middle East and North Africa strategy discussed by the Board in 2015). 2. KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES 2.1 Program Performance 28. Both CMSME 1 and CMSME 2 were single tranche operations, which disbursed on their respective effectiveness dates. Table 4. Tranche # Amount Expected Actual Release Release Date Release Date Tranche 1 €217.6 million equivalent of US$300 August 15, July 30, 2014 Regular million (US$291,073,184 actually 2014 disbursed) Tranche 2 US$350 million July 27, 2017 July 29, 2017 Regular 29. Tables 5 and 6 present the prior actions by operation, all of which were completed. Table 5. Key Prior Actions by Operation - Morocco CMSME 1 First Operation in a Programmatic Series Prior Status Action Policy Area - Deepening capital markets by broadening the range of instruments and investors 1 According to the minutes (compte rendu) dated February 5, 2014, the Council of Completed Government (Conseil du Gouvernement, CG) has adopted the draft Organic Law No. 12-14 on the higher civil service, which is a prerequisite for the appointment of the chairman of the Board of the new AMMC. Page 22 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR First Operation in a Programmatic Series Prior Status Action 2 The MEF has launched the reform of the government debt market by (a) transmitting, Completed on March 12, 2014, draft agreements to the six primary dealers (intermédiaires en valeurs du Trésor) that set forth their commitment to quote continuous, tradable prices for a panel of treasury securities and (b) concluding one of said agreements on March 14, 2014. 3 By Order (Arrêté) No. 2840-13 dated December 26, 2013, published in the National Completed Gazette No. 6236 dated March 6, 2014, the Minister of Economy and Finance has issued the master agreement (modèle type de convention cadre) for securities lending, as required by Law No. 45-12 published in the National Gazette No. 6124 dated February 7, 2013. 4 By letters dated March 7, 2014, the MEF has communicated to market institutions the Completed rules and procedures (règlement général) for the central clearing counterparty (chambre de compensation) created by Law No. 42-12 creating an organized derivatives market (marché à terme). Policy Area - Reforming pension system to ensure continued institutional demand for capital market securities 5 The plan to reform the CMR has been made public through the Government’s position Completed paper (note de présentation de la loi de finances) transmitting the draft 2014 Budget Law to Parliament, as published on the website of the MEF. Policy Area - Fostering solutions for the financing of small and young enterprises 6 By Resolution of its board No. 7 dated July 3, 2013, the borrower’s CCG has adopted its Completed 2013–2016 strategic plan, which, among others, expanded bank guarantees and created new solutions for financing small and young enterprises. 7 According to the minutes (compte-rendu) dated March 13, 2014, CG has adopted the Completed draft Law No. 18-14 on capital investment mutual funds (organismes de placement collectif en capital), which will modernize the framework for private equity and venture capital and will invest, among others, in small and young enterprises. 8 By communication (attestation) dated March 13, 2014, BAM has confirmed selection Completed of the commercial entity that will be licensed to operate a second credit bureau. Policy Area - Consolidating oversight to balance greater access with continued financial stability 9 According to the minutes (compte-rendu) dated January 16, 2014, the CG has adopted Completed draft Law No. 103-12 on credit institutions, which will create the oversight regime for financial conglomerates and will give BAM licensing authority over microcredit institutions. 2.2 Major Factors Affecting Implementation Table 6. Key Prior Actions by Operation - Morocco CMSME 2 Finance DPL Second Operation in a Programmatic Series Prior Status Action Policy Area - Improve access to finance for small and young enterprises 1 BAM, CCG, and the Moroccan banks association (Groupement Professionnel des Completed Banques du Maroc), have established a co-financing arrangement supporting the financial restructuring of MSMEs. 2 The Head of the Government has established the conditions for paying VAT credits to Completed MSMEs. Page 23 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR 3 BAM has issued the license for a second credit bureau that sets forth requirements to Completed offer MSME credit scoring. 4 The two regulations (circulaires) implementing the provisions of Law No. 103-12 (the Completed Banking Law) concerning providers of payment services have been published in the National Gazette (Bulletin Officiel) No. 6548, dated March 2, 2017. Policy Area - Strengthen capital markets by improving the institutional framework and broadening the range of instruments 5 The Board of the AMMC has appointed the members of its College of Sanction, and the Completed Minister of Finance has adopted the rulebook (Règlement Général) of the AMMC. 6 Law No. 19-14 on the stock exchange and investment advice has been published in the Completed National Gazette (Bulletin Officiel) No. 6552, dated March 16, 2017. 7 Law No. 70-14 on REITs (organisms de placement collectif immobilier) has been Completed published in the National Gazette (Bulletin Officiel) No. 6552, dated March 16, 2017, and Decree No. 2-16-1011 exempting REITs from corporate income tax has been published in the National Gazette (Bulletin Officiel) No. 6530 bis, dated December 31, 2016. Policy Area - Improve the financial sustainability of the Caisse Marocaine des Retraites 8 The laws setting forth the new parameters of the CMR —Law No. 71-14 amending Law Completed No. 11-71, establishing the civil service pension fund, and Law No. 72-14 amending Law No. 12- 71, setting the mandatory retirement age—have been published in the National Gazette (Bulletin Officiel) No. 6496, dated September 1, 2016. Policy Area – Strengthen oversight of the banking sector 9 BAM has transmitted on September 8, 2016, to banks for consultation, the draft Completed regulations on recovery planning to systemic banks belonging to financial conglomerates in application of Article 79 of Law No. 103-12 (Banking Law). Adequacy of Government Commitment 30. The policy reforms supported by the operation were well aligned with the priorities of the GOM and responsive to the needs of the country. The GOM’s financial sector policies sought to promote dynamism, expansion, and competitiveness of the private sector by modernizing the role of finance; introducing new solutions for the financing of MSMEs; and changing the mix of bank and market financing, while safeguarding stability, and are spelled out in policy documents, notably Budget Laws and presentations by the Minister of Finance, Governor of BAM, and heads of financial regulators. Following fiscal consolidation, the GOM wanted to stimulate private sector-led infrastructure investment through capital market financing, public-private partnerships, and a more market-driven exchange rate. 31. The GOM program focused on a more productive allocation of credit and capital. Pension reforms were planned for over a decade through wide-ranging consultations with stakeholders and the International Labour Organization. The reform of secured transactions12 entailed a comprehensive revamp of the framework involving many stakeholders, which hitherto rested on some laws dating back a century. New banking and central Banking Laws and their numerous implementing regulations were 12 Generally, a secured transaction is created by means of a security agreement in which a lender (the secured party) may take specified collateral owned by the borrower if they should default on the loan. By creating a security interest, the secured party is also assured that if the debtor should go bankrupt they may be able to recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrower’s property after it is divided among all creditors. A law of secured transactions provides lenders with assurance of legal relief in case of default by the borrower. Page 24 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR designed to bring this framework up to norms agreed by the G20 after the global crisis. The reform agenda also included institutional reforms of sector governance to foster transparency and accountability of public bodies regulating and supervising the financial system: establishment of independent capital market authority, bringing into the perimeter of regulation the provision of investment advice; demutualizing the stock exchange, bringing key market infrastructure under the roof of one holding company; making independent the insurance and pension authority; separating from the central bank the deposit insurance function by creating a dedicated corporation; and creating a bank resolution authority and a systemic risk council. 32. Morocco made efforts to make gains in financial inclusion and access through programs targeting small and young firms (guarantees, public-private co-investing and co-lending, and BAM refinancing of MSME loans); low-income housing (guarantees); and lagging regions (postal bank, decentralization of guarantee agency, low-income banking, microfinance, and crop insurance). The Government also revamped BAM’s mandate to now include financial education and consumer protection. Finally, the 2014 Banking Law establishes the legal and regulatory framework for participatory banking. Clarity of Government Regulatory and Implementation Architecture 33. A clear and strong regulatory architecture in Morocco contributed to effective coordination of the reform program and was key to the successful implementation of actions supported by the program. The MEF is staffed with a highly skilled technical staff who are very experienced in the design and implementation of World Bank operations and their knowledge, ownership of the reform program, and leadership were critical to the success of the DPL series. The Constitution tasks the MEF with leading both legislative and regulatory work streams, while supervision is devolved to three dedicated agencies: BAM for credit institutions (banking, leasing, and microfinance); the AMMC; and an authority for insurance and pension—the Independent Insurance and Pension Fund Supervisory Authority (Autorité de Contrôle des Assurances et de la Prévoyance Sociale, ACAPS). The law creating AMMC was promulgated in 2013, and Parliament adopted the law creating ACAPS in February 2014. BAM has been independent since 1996 and often initiates legal and regulatory reforms for credit institutions. However, enactment requires the MEF’s review and approval to ensure coherence of policies across the financial system. Over the years, several committees of the MEF; supervisors; and (depending on topic) market entities (custodians, stock exchanges, and industry groups) have coordinated the operation of the regulatory architecture. 34. The creation of a strategic committee of stakeholders tasked with coordinating capital market policies helped ensure coherence of the reform program. In 2013, the Minister of Finance created this committee to diversify financial intermediation beyond banks, revitalize the Casablanca Stock Exchange, and promote Casablanca Finance City (an economic and financial hub aspiring to become a bridging platform between the north and the south). In the first phase, the committee focused on legal and regulatory aspects. The legal and regulatory pipeline aimed to diversify the range of instruments and increase appeal to investors through greater market completeness. The MEF planned to tackle market development topics in the second phase, including broadening the shareholding structure of the stock exchange, strengthening market infrastructures, and streamlining incentives for long-term saving and investment. A multiyear FIRST project supported this agenda. Page 25 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Soundness of the Background Analysis 35. The design of the DPL series was underpinned by strong analytical work, which contributed to the success of the operations. World Bank assistance under all policy areas, in addition to work undertaken by the Government and other international organizations, contributed to the selection of the policy areas and key reforms therein. The program pillars were heavily informed by the 2008 FSAP update, the 2015 FSAP update, reports undertaken by the GOM, as well as TA funded by the FIRST initiative, and studies by industry groups and lawyers. 36. The CMSME series’ design was informed by the broad lessons learned from other operations in Morocco. The DPLs build on a stream of engagements of the World Bank Group with the GOM and stakeholders over the many years: Middle East and North Africa finance flagship report titled ‘Financial Access and Stability’ (2011), secured transactions framework (International Finance Corporation [IFC] 2011), credit reporting system (IFC 2012), FIRST project on establishing a benchmark yield curve (2013), Middle East and North Africa Transition Fund Microfinance Development project (Report No. 75522-MA) (2013), IFC ‘N-50’ Initiative (2013), and financial and private sector development/human development network diagnostics on pension reform (2013). Integration of Comprehensive Technical Assistance 37. An integrated set of TA projects was designed and funded from the FIRST trust fund to help deliver results under the DPL series. Advisory Services and Analytics (ASAs) involved public consultations with stakeholders in the financial industry to ensure that reform items were inclusive and transparent. ASAs also supported initiatives pertaining to low-income households’ access to mortgage finance, consumer protection, participatory banking, and the demutualization of the stock exchange. Both the range and depth of ASA engagements were important for the DPL series and also for laying the groundwork for future lending. Of particular relevance were ASAs on financial inclusion and access, implementation of the recommendations of the FSAP, pension reform, and financial stability policies (see annex 3 for a comprehensive list of ASAs supporting the implementation of reforms). Plan for Monitoring 38. The DPL series did not have a clear plan for monitoring or measures to collect information that would normally constitute evidence of achievement of outcomes. There were no formal supervision missions focused specifically on the CMSME series (as evidenced by a lack of Aide Memoires or other documentation tracking progress in a formal manner). Program monitoring largely occurred in the context of implementation missions and Aide Memoires for the related FIRST-funded TA projects and, during CMSME 2, with the task team leader being based in Rabat. 2.3 Monitoring and Evaluation (M&E) Design, Implementation, and Utilization 39. M&E design. The objectives of the CMSME loan program were clearly specified, properly aggregated by pillar and outcome area, and backed by strong analytics and a comprehensive suite of TA interventions. The selection of prior actions and indicative triggers was appropriate and was based on extensive consultations with the MEF, BAM, and CCG. The GoM conducted extensive consultations with financial professionals, law firms, industry committees, associations of stakeholders, and foreign partners on the reforms supported by this DPL. Laws and regulations in the financial sector follow a well-laid out Page 26 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR participatory process. Given the reform priorities of the GoM, the selected prior actions for CMSME 1 were appropriate. Several of the indicative triggers selected for CMSME 2 had to be modified and adapted to fit with the timetable and advancement of reforms followed by the Government (see section 1.6 for a review of detailed changes). The indicators for the CMSME were adequately designed—with the exception of the one related to credit bureaus which did not take into account that there were no clear Government intentions to mandate or track size-disaggregated data thereby rending the indicator not assessable—and were intended to be tracked by the World Bank team through the MEF (in coordination with BAM and CCG). 40. M&E implementation and sustainability. M&E implementation lacked regularity and formality due to (a) constraints in the institutional capacity of the MEF to continuously track results under the different policy areas, (b) a lack of an M&E system or processes, and (c) the World Bank project team not formally monitoring implementation. Though not ideal, the impact this lack of formal supervision had on the performance of the program was limited, as the task team leader was engaged and communicated closely and consistently with the MEF to ensure progress of the DPL series and the World Bank team followed progress and gathered and recorded data through the TA missions and related Aide Memoires. Though not following a systematic schedule or format, the Government did adequately coordinate with various stakeholders and sent results of indicators to the World Bank team. 41. M&E utilization. The general progress of the DPL series tracked by the World Bank team was used to assess the advancement of the program overall and to inform the ‘Investing in Market Institutions’ chapter of the 2017 Country Economic Memorandum. 2.4 Expected Next Phase/Follow-up Operation (if any) 42. Despite achievements made under the CMSME DPL series, as well as other World Bank programs and the GoM initiatives, Morocco continues to face development challenges (as stressed in the June 2018 Systematic Country Diagnostic ). Job creation is slowing down; unemployment is high, particularly among youth and women; service delivery is inadequate; and social and territorial disparities remain. 43. The Government is still committed to further reforms to improve the contribution of the financial system to growth over time through the diversification of the supply and greater competition. Morocco’s five-year Government Program (2017–2021) outlines a new vision for economic growth and social inclusion in the Kingdom and is reinforced by sector-level strategies on digital development and financial inclusion. Building on successful elements of its previous reform agenda, the Government Program aims to renew Morocco’s development model and create the enabling conditions to become an emerging economy. 44. The reforms undertaken through the CMSME DPL series (and the TA projects that accompanied it) contributed to the development of several new operations and initiatives in Morocco: • IFC-World Bank Group Joint Capital Markets Program. Morocco was one of seven countries selected for the IFC-World Bank Group Joint Capital Markets Program (J-CAP), a three-year advisory engagement focused on transformational reforms in capital markets. IFC will leverage the policy work that the World Bank delivered under the CMSME DPL series, with a view to seed new transactions to fund the long-term need of the economy. J-CAP aims to create markets for MSME financing through nonbank channels. Page 27 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR • Financial Inclusion and Digital Economy DPF (US$700 million). The Financial Inclusion Digital Economy Development Policy Financing (DPF/Report No. PGD66), approved in February 2019, aims to foster financial inclusion and contribute to digital transformation for individuals, enterprises, and entrepreneurs. The DPF supports improved financial inclusion for individuals and MSMEs through improved connectivity, digital platforms, and diversified and tailored financial services and mechanisms. • Ongoing suite of TA valued at over US$2.5 million covering almost all core financial sector topics – access to finance, financial stability, and financial infrastructure (see annex 3). 3. ASSESSMENT OF OUTCOMES 3.1 Relevance of Objectives, Design, and Implementation (to current country and global priorities, and Bank assistance strategy) Overall Rating: Substantial Relevance of Objectives Rating: High 45. The PDO was highly relevant for Morocco. The design and implementation of the CMSME DPL series were relevant to both the GOM’s development priorities as outlined in their 2012–2016 program and the World Bank’s priorities as expressed in the CPS for FY14–FYFY17 and remain relevant. The Government’s program was structured around five mutually reinforcing pillars: (I) deepening national identity, preserving social cohesion and diversity, and openness; (II) consolidating the rule of law, strengthening good governance, democratic participation and advancement of regionalization and decentralization, in the context of accountability and true citizenship; (III) pursuing strong, competitive, multi-sector, diversified, wealth- and employment-generating, and equitable economic growth; (IV) promoting social programs guaranteeing equitable access to basic services and strengthening solidarity and equal opportunities across citizens, generations, and regions; and (V) consolidation of the country’s regional and international credibility and promotion of public services aimed at Moroccans living abroad. As described in the rationale for World Bank assistance and sector contexts earlier in the document, the DPL series was timely and fit under Pillar III of the Government’s program, given their intention to diversify finance from banks toward capital markets to improve the transparency of investment decisions, increase the diversity of investors, and foster corporate governance. Relevance of Objectives Rating: High 46. In addition, as mentioned previously in the document, the CMSME Program fell squarely under the FY14–FY17 CPS Result Area ‘Promoting Competitive and Inclusive Growth’ which aimed to support policies and interventions that promote investment in competitive sectors as one channel for accelerating Morocco’s growth potential to further reduce poverty and strengthen the business environment and financial sector to encourage and accompany entrepreneurs and emerging businesses; facilitate the participation of all Moroccans, including the rural poor, women, and young people, in the economy; and ensure a greater role for the private sector. The objectives, outcome areas, and design still apply today as Page 28 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR the GOM still places capital market development, financial stability, and the financial inclusion agenda as national priorities. Relevance of Design Rating: Substantial 47. The operation was appropriately structured as a programmatic DPL series, giving the program (a) scope for a medium-term engagement around policy reforms and (b) the flexibility to adjust to changing circumstances. The design of the CMSME series was done in close collaboration with the GOM and involved (and was informed by) extensive stakeholder consultation and based on the recommendations of the 2015 FSAP (see annex 3). The resulting design was responsive to the needs of the GOM and the pace of reforms it was undertaking. The design was appropriately adaptable and responsive to evolving contexts, such as the importance placed on UFA and financial inclusion in the time between CMSME 1 and CMSME 2. 48. The reforms were underpinned by a strong analytical base and complemented by substantial TA. A sustained advisory engagement, since 2014, financed by FIRST focused on the following: (a) Developing new capital market instruments (for example, Sukuk [Islamic bonds] and REITs) (b) Attracting foreign investment to local government debt markets (c) Strengthening the independence and efficiency of key capital market regulators has enabled the CMSME series to be relevant, and critical, throughout implementation. The continued relevance of the objectives is further demonstrated by the current active World Bank Group TA portfolio in the financial sector development space, focusing on (i) Improving the legal and regulatory framework and the oversight capacity over the National Payment Systems to foster safety, inclusiveness, and innovativeness of payment and remittance services; (ii) Establishing an adequate legal and regulatory framework, interagency arrangements, and procedures/tools for the resolution of systemic banks that belong to financial conglomerates, and operationalizing the Deposit Insurance Corporation; and (iii) Broadening and deepening local capital markets through ongoing programmatic assistance in support of the GOM strategy . 49. This TA portfolio is complemented by the recently approved lending operation focused on supporting financial inclusion and the digital economy (see annex 4 for detailed list of TA engagements). Relevance of Implementation Rating: Substantial 50. Following preparation of CMSME 1, the GoM and World Bank and the remained continuously engaged to prepare CMSME 2. Given the changing circumstances and reform progress, the World Bank team flexibly adjusted the program design (prior actions and triggers) to meet the program objectives. Page 29 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR This was especially important and relevant given the delay in implementation caused by the borrower requesting to enhance CMSME 2 with a critical trigger on UFA, after all the original triggers for CMSME 2 had already been met, which required more time to be adopted. In April 2016, the World Bank team received management approval for a waiver of BP 8.60, footnote 9 “to extend beyond the 24 months the deadline for Board consideration of the second operation in a DPL series and prevent the programmatic series from being considered lapsed.” The World Bank and the borrower used the additional preparation time to strengthen several prior actions, including addressing financial inclusion policies (which also enhanced the DPL series’ contribution to the implementation of the Middle East and North Africa strategy discussed by the Board in 2015). 51. The importance of this implementation adaptability was underscored in the World Bank’s latest Country Economic Memorandum for Morocco, published in June 2017, which focused on the importance of considering overarching contexts when trying to ensure that reforms will actually bring about expected outcomes. The modifications in the prior actions and indicative triggers between CMSME 1 and CMSME 2 are indicative of this flexibility and adaptability in implementation to ensure ongoing relevance. 3.2 Achievement of Program Development Objectives Overall Rating: Satisfactory Policy Area 1: Improving access to finance for small and young enterprises Rating: Substantial Financial Restructuring of MSMEs 52. The CMSME program successfully supported the establishment and implementation of a co- financing arrangement supporting the financial restructuring of MSMEs by the CCG, the Kingdom's national guarantee fund, in coordination with BAM and the bankers’ association. According to the fund's operational guidelines, banks now maintain credit lines to qualifying MSMEs in exchange for the fund extending low-interest, long-term subordinated loans to participating banks. The fund assists in safeguarding the jobs of MSMEs and improves the operating context of small enterprises who normally confront limited access to financial services (particularly long-term finance). To date, the fund has outperformed intended targets and as a result of the program, MAD 6 billion in financing has reached eligible MSMEs (by end-2017). The fund also expanded the reach of financing majority female-owned businesses and underserved regions, with loan volumes increasing to MAD 2.2 billion and MAD 2.3 billion, respectively by 2018. Credit Scoring for MSMEs 53. The CMSME series supported the successful establishment by BAM of a second private credit bureau in Morocco to generate competition among bureaus around more advanced services, making it also the first country in the Middle East and North Africa region to do so. Credit reporting systems help SMEs build track records and leverage this reputational collateral to access finance. Lenders use credit bureau data to enter new markets and regulators can monitor systemic risk and calibrate macro- prudential tools. By announcing the operator of the second credit bureau (CMSME 1 prior action), BAM is now in a position to review and approve a license that mandates credit scoring of SMEs. This report is not able to assess this indicator. The credit bureau information systems only distinguish between a legal entity and an individual. There is no distinction made by bureaus between large companies and SMEs. Scores are also offered only upon request by enterprise. It is likely that this target was achieved, however, due Page 30 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR to the fact that 90 percent of total firms in Morocco are SMEs13 and the addition of a second licensed credit bureau increased the coverage of enterprises. As of July 2017, 449,395 registered individuals and 8,180 legal entities received a credit score. The addition of a second licensed credit bureau increased the coverage of enterprises and supported increasing access to finance for SMEs in Morocco.14 54. Building on the momentum of the licensing of the second credit bureau, BAM is now planning to revamp its Public Credit Registry based on international best practices, harnessing the power of data from multiple sources to help monitor systemic risk, while responding to changes in regulations imposed by global standards like the Basel Accords. While the credit bureaus will continue to provide risk management and information services to the lending industry, the Public Credit Registry will be used by BAM regulators to support its internal needs and responsibilities. Reducing the Working Capital Needs of MSMEs 55. The Government has exceeded its targets with the payment of VAT credits to help MSMEs deal with the financial pressures arising from external shocks. In 2017, MAD 623.7 million was paid in tax credits to enterprises with turnover below MAD 50 million. This largely exceeds the target of MAD 250 million. Further, VAT credits of MAD 42.8 million were paid in 2018 (as of March 21, 2018). The Government has now opted to reimburse other VAT credits using a factoring scheme. As requested by companies eligible for the reimbursement, a scheme was put in place on January 24, 2018, between the MEF, the Direction Générale des Impôts, and BAM that enables banks to advance VAT credits to MSMEs with turnover above MAD 50 million. Under the factoring scheme, banks advance VAT credits to MSMEs in exchange for a discount of 3 percent and treasury pays the advance over three years. This initiative, built upon the success achieved because of CMSME, will even further reduce MSME working capital needs. UFA 56. The DPL series extended the scope of electronic payments through nonbank providers by expanding financial access points for the rural unbanked and MSMEs.15 By issuing the regulations for nonbank providers of payment services as part of the CMSME reform program, BAM has enabled more of the unbanked to gain access to basic financial services. The 2014 Banking Law provided the legal framework for a new category of financial intermediaries that specialize in the issuance of electronic money and in services enabling payments with e-money. Previously, banks held the monopoly of issuance and nonbank entities were agents of the banks in the distribution of e-money products. This model limits the competition on banks to innovate around transaction accounts or electronic instruments to store money and send payments. Achieving UFA requires independent, non-agent providers of payment services. In June 2016, BAM issued two regulations that implement the non-agent model: one on minimum licensing requirements and another defining which payment services are now open to competition. The publication of both regulations was completed as prior actions for CMSME 2. By February 2018, BAM had issued licenses for five payment providers, thereby exceeding their targets. 13 IMF. 2015. Article IV Consultation Staff Report. 14 Taking the introduction of credit bureaus in a sample of 70 developing economies as a positive credit shock, (it was found) that improved access to financing increased employment growth by about 3.5 percentage points among micro, small and medium enterprises, compared with only 1.2 percent for larger firms (IMF Report “Financial Inclusion of Small and Medium Sized Enterprises in the Middle East and Central Asia”, 2019). 15 This is in line with the World Bank’s UFA 2020 Initiative. Page 31 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Policy Area 2: Deepening capital markets by improving the institutional framework and broadening the range of instruments Rating: Substantial AMMC 57. The DPL series effectively improved the institutional capacity of the AMMC through support for adoption of the draft law on the higher civil service which allowed for the board of the AMMC to be installed. The board took two key decisions (recommended by the 2015 FSAP), supported by the program, to adopt its internal rules and procedures and install the College of Sanction (an independent body in charge of enforcement on cases that the board refers to it). The rulebook has been adopted and was reviewed by the World Bank Group through parallel TA. The authorization advisory committee ( Comité consultatif d’habilitation) provided in article 69 of the AMMC General Regulation has been created and, in April 2019, the AMMC officially launched the accreditation process for market professionals, marking a new stage in the implementation of their mission, particularly in terms of market oversight and consumer protection. The purpose of this scheme is to ensure that persons occupying specific positions in organizations, subject to the supervision of the AMMC, are qualified to hold that position and can perform their duties, comply with regulations and ethics rules, and possess the necessary technical knowledge. Designed in line with international best practices, this system is established by Law No. 43-12, particularly in Articles 31 to 33, and provides for the delivery of a certification card to those individuals who are subject to the authorization and who have successfully completed the examination. 58. The General Regulations of the AMMC also define the terms of the licensing process, those related to the organization of the examination and the authorization, the granting of the professional card, the renewal of the authorization, as well as the provisions relating to the withdrawal and suspension of this authorization. This process ensures that business is conducted more in line with fiduciary standards in advanced markets. This action is taking longer than planned in the scope of the CMSME, as the AMMC has not yet certified the target 50 percent of professionals. However, the commitment of the Government is clear (as demonstrated by the continued progress of this reform even after the close of the DPL series) and the result is expected to be realized before end of CY 2019 as evidenced by the progress being made to activate this process. The AMMC officially launched the accreditation process for market professionals and is currently in the process of reviewing applications for certifications. A first mapping of eligible professionals has been completed, with 400 people identified as ‘certification eligible’ across the specialties. The clearance rounds have been decided and scheduled for June, September, and October. As noted in the 2016 IEG report on World Bank Group Support to Capital Market Development, “[for] outcomes [related to the regulation and development of capital markets] …allowances must be made for long lags before final results become available in the legal and regulatory area. In many cases draft laws or regulations are completed but not acted upon for years. Better World Bank monitoring of long-term change is also desirable because completion reports are usually done too soon after the interventions.” 59. The World Bank Group program supported the functioning of the Casablanca stock exchange through TA to inform the preparation of the law on the stock exchange and investment advice and the mutual funds law. The DPL series supported the publication and adoption of this dedicated law (No. 19- 14 published March 2017) aiming to modernize the stock exchange through, among others, strengthening governance structures, creating new market segments (principal and alternative listings), creating dedicated listing and oversight requirements for SMEs, and creating a capital market commission presided by the Minister of Finance. Page 32 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Securities Lending Framework 60. The Government successfully took actions to deepen the Moroccan capital markets by signing agreements with primary dealers16 to make continuous prices for selected securities available to market participants subscribing to the data feed from a new trading platform. Securities lending is a core foundational element for completing capital markets and ensuring more informative prices. In line with the recommendations from the 2015 FSAP, the result related to the regulation and recording of securities lending contracts through a central depository was revised so that the contracts run through the AMMC, which was successfully achieved. Securities lending transactions were primarily Treasury bills, which accounted for 94 percent of securities lending volumes. Through these steps, the GoM has broadened the range of investors by allowing them to sell securities that they borrow. Continuous posting of prices facilitates the pricing of new corporate debt and interest rate and foreign exchange swaps. The MEF also issued a master agreement governing securities lending to address the participation of potentially large nonresident investors relative to the size of the market and to set the scope for temporary limits on short- selling of financial firms in case of systemic distress. New Capital Market Instrument 61. The CMSME supported the establishment of REITs in Morocco as a new instrument to finance SME business premises. REITs are investment funds that own industrial and commercial real estate with a view to leasing it to SMEs, and they offer institutional investors assets yielding steady rental income. The Real Estate Collective Investment Organizations (Organismes de placement collectif immobilier, OPCI) Law, supported by the CMSME series, allows asset managers to market the new asset class to institutional investors, which in turn can eventually help MSMEs reduce their dependency on bank loans to finance their fixed assets. The outcome related to the licensing of two REITs managers is expected to be realized by end-2019. FIRST TA supported authorities with the finalization of the executive regulations supporting the introduction of REITs into the market after the publishing of the law in March 2017. In April 2019, the MEF published, in the Official Gazette No. 6771, Decree No. 3149.18 approving the AMMC Circular No. 02/18 on management companies of OPCI. This circular, which comes under the provisions of Law No. 70- 14 on OPCI, was developed based on best practices and international standards. It focuses particularly on the following: • Conditions for approval by the AMMC of OPCI management companies • Means necessary for carrying out OPCI's management activity: organizational resources, internal control system, risk management system, human resources, and technical requirements • Rules related to ethics for the prevention and management of conflicts of interest • Investor information systems 16 Generally, a Primary Dealer is a pre-approved bank, broker-dealer, or other financial institution that is able to make business deals with the Central Bank, such as underwriting new government debt. These dealers must meet certain liquidity and quality requirements as well as provide a valuable flow of information to the Central Bank about the market. Page 33 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR 62. With the publication of this circular, the people wishing to manage OPCI can fill out an application for license approval and file it with the AMMC. Policy Area 3: Improving the financial stability of the Caisse Marocaine des Retraites Rating: Substantial 63. This policy area aimed to support the GOM as it undertook reform of the CMR by making public the outline of the reforms and adopting a legislative package that set forth the parameters of the reform. For over a decade, the Government had made the argument to the public that the pension system parameters, set 45 years ago, cannot be held considering demographic transitions, including by making public several reports analyzing these parameters. Morocco’s current pension system parameters are generous by international standards, reflecting both high accrual and net income replacement rates. Three schemes are unsustainable to varying degrees, burdened by rising dependency ratios of beneficiaries to contributors. Restoring sustainability will require higher contributions, benefit cuts, or some combination of the two (parametric reform). Without reform, the supply of long-term saving will lose its anchor, with implications for the development of local capital markets. 64. As part of CMSME 2 prior actions, the GOM successfully proposed a comprehensive set of reforms for the following CMR parameters in the package of laws that it transmitted to the Parliament in January 2016: • Gradually increase the age at which civil servants retire without penalties from 60 to 63. • Gradually increase the contributions for employees and employer (equal contributions) from 20 percent to 28 percent of salary. • Change the base for computing pensions from the last year of salary to the last eight years. • Decrease the accrual rate (taux d’annuité) from 2.5 percent of salary to 2 percent. • Raise the minimum pension from MAD 1,000 per month to MAD 1,500 to protect the least well-off retirees and employees. • No change to pension rights accrued before the reform coming into effect. 65. In its annual report for the period ending December 31, 2017, the CMR announced that the new actuarial forecast for reserve depletion had been successfully revised to 2027 (from 2022). Policy Area 4: Strengthening oversight of the banking sector Rating: Substantial 66. The actions under this pillar successfully enabled the financial sector authorities to develop resolution plans for systemic banks based on their recovery plans. Morocco’s systemic banks are part of mixed conglomerates, with the risk that losses in other parts of the conglomerates could compromise the financial strength of banks by depleting solvency and liquidity buffers at the holding level. A core recommendation of the FSAP pertains to the framework for resolving systemic banks: appointing of BAM as resolution authority, recovery and resolution planning for banks, rules and procedures for the deposit Page 34 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR insurance corporation, and clarifying its role in resolution. The Parliament adopted the new Banking Law in December 2014 (prior action for CMSME 1). The law introduced a systemic risk council, a deposit insurance corporation, more direct intervention and resolution tools, and a supervisory regime for financial holdings. 67. A FIRST-funded project assisted the authorities to develop resolution plans, the decision tree for when emergency liquidity assistance (ELA) becomes solvency support, the roles of the MEF and BAM when this line is crossed, and coordination with the other regulators. In December 2014, BAM identified the three main banking groups in the country as systemically important credit institutions using a mapping process based on criteria of size, interconnectedness, and complexity (including cross-border operations). A prior action for DPL 2 concerned consultation on the draft regulations directing banks that belong to financial conglomerates to submit recovery plans. BAM successfully issued regulations for consultations to the banks in September 2016 and the consultations took place in October–December 2016. The MEF transmitted Circular Number 4/W/2017 concerning internal crisis recovery plans for publication in the National Gazette on August 23, 2017, and, by June 2018, the three banks that were designated as systemic as of 2016 had filed recovery plans. 3.3 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs) Rating: Satisfactory 68. The CMSME DPL series was successful in setting the stage for a more inclusive, diversified, and stable financial sector. The PDOs were highly relevant and closely linked with the priorities of Morocco’s Government and the overall World Bank strategy for Morocco. The CMSME policy reforms are supported by robust laws which remain in effect and have set solid foundations for implementation which are supported by the Government and stakeholders through follow-up actions. The outcome targets have been achieved or exceeded in almost all policy areas, except select instances concerning capital market development, which are expected to be realized by end-2019, and IEG has advised it can take longer to yield results. Progress is being maintained by the Government. Achievements are deemed to be substantial in all four policy areas. 69. In 2016, the creation of the AMMC has led to more active supervision and enforcement of capital market rules. Reflective of the momentum of the DPL series, current policy work now concentrates on the framework for exchange traded funds, sukuk, REITs or start-up finance, and revamping investment rules for insurance companies and pension funds to allow alternative asset classes. Pension and insurance hold financial assets equivalent to a third of GDP. Long-range pension reforms, launched in 2016, aim to safeguard the soundness of key institutional buyers of new market instruments and were a prerequisite for shifting public investment to more cascade financing. 70. On balance, achievement of the CMSME PDO is considered to be Satisfactory for the period of the CMSME implementation and on the path for full accomplishment post-project. A programmatic DPL series was appropriate to achieve these development objectives, giving the team both (a) the extended engagement period necessary for the preparation of complex reforms and (b) flexibility to adjust the DPL program over time. The program tackled relevant reforms across all four pillars and the momentum of reform has extended beyond the life of the program series. The DPL team coordinated implementation of most reforms closely through other investment and TA projects which contributes to the rating. Page 35 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR 3.4 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development 71. The CMSME loan series did not support reforms that were expected to have significant negative distributional impacts. Reforms were expected to generate benefits for lower-income households mainly through the 50 percent increase in minimum pensions, as well as job opportunities through economic growth and the development of financing solutions for SMEs. Reforms related to UFA, specifically extending the scope of electronic payments through accounts in nonbanks, are expected to facilitate access to basic financial services among low-income households, thus improving welfare. The Government conducted consultations with stakeholders (financial institutions, donors, government authorities, industry associations, and so on) on Morocco’s reform program supported by the World Bank throughout the preparation of the DPL series. 72. The design of the parametric pension reform benefited from the poverty and social impact analysis undertaken by several government agencies and international organizations and was informed by a wide range of consultations with concerned stakeholders which the World Bank concurs with. The reform is expected to improve social outcomes at the bottom of the income distribution. Specifically, an increase in minimum pension would immediately improve the retirement income of 54,000 out of the current 302,000 retirees and survivors. The replacement ratio (retirement income/salary) of higher- earning employees who retire after 2016 will drop progressively from 87.5 percent of last salary to 81 percent, reflecting less generous accrual rates after 2016. It is estimated that, post-reform, some 54,000 retirees and survivors at the bottom of the civil service wage distribution will have a replacement rate higher than the 87.5 percent of salary they enjoyed before reform. Some 33,000 will have a replacement rate between 81 percent (the new normal rate) and 87.5 percent. Any drop in the replacement rate will be progressive because the reform safeguards pension rights until 2016, with less generous parameters being phased in until 2022. 73. The civil service pension reform is expected to also have positive spillovers for the wider population by supporting the income of urban families. Civil servants, both employees and retirees, overwhelmingly live in urban centers. Civil service employees represent 16 percent of contributors to pension funds in Morocco. The reform contributes to social stability in lagging pockets of urban centers by avoiding a large drop in the take-home pay of civil servants living in urban centers. 74. Women are intended to be specific beneficiaries of reforms supported by the operation. Financial sector development is particularly relevant for female economic empowerment because it creates opportunities for business expansion and productive investment at the household level, bypassing many socioeconomic barriers that prevent women from participating in the economy. The operation’s gender- impact consists of (a) financing for women-led MSMEs, including through the opening of CCG branches in lagging regions; (b) expanding electronic payments, (c) improving credit information systems including a secured transactions framework that empirically has shown to benefit women entrepreneurs who may not own land to provide as collateral, and (d) continuing pension reform. The pension reform will be gender positive by (a) replacing final salary with an average which will benefit women as men tend to have steeper career paths and (b) supporting the reform safeguards survivorship pensions, as women represent 99 percent of survivorship beneficiaries and survivorship pensions represent 40 percent of pensions by number. Page 36 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) 75. The CMSME program, and its related suite of TA activities, helped strengthen capacity within the MEF, BAM, and AMMC. Through workshops, strategic guidance, and assistance drafting laws and regulations, the program strengthened the quality of the supervisory and regulatory framework and built the capacity of financial sector agencies in the use of new financial products. The program has strengthened the capacity of the MEF and BAM to respond to market developments. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) 76. No other significant unintended outcomes or impacts were reported during preparation of this Implementation Completion and Results Report (ICR). 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) Not applicable. 4. ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME Rating: Moderate 77. The risk that the development outcomes achieved within the framework of the CMSME loan series is rated Moderate for the reasons explained in the following paragraphs. Overall, it is unlikely that any single risk will hamper the sustainability of those outcomes already achieved or will block the attainment of those development outcomes that remain to be achieved. Further, the Government remains fully committed to the program, justifying an overall risk of Moderate. 78. Government commitment to reform. Over the past several decades, Morocco has resolutely embarked on the modernization of its financial sector, to accompany and support the economic and social development of the country. This process has been successful in improving financial inclusion and access to finance MSMEs, enhancing the role of capital markets in financing the economy, and consolidating the financial sector’s supervisory framework to ensure its soundness, sustainability, and stability. Significant progress has also been made in transparency and integrity of the financial sector through the consolidation of the payment system and strengthening the role of the sector’s supervisory authorities. The Government has repeatedly reiterated its commitment to continue efforts to modernize and develop the financial sector and build on previous achievements to take new steps, and this commitment has already manifested itself in continued engagement in aspects of the CMSME agenda through FIRST projects, the J-CAP, and the recently approved Financial Inclusion Digital Economy DPL. 79. Institutional capacity for implementation and sustainability. While the Government’s commitment to reform is high, sustainability of M&E of the outcomes achieved in the program is fragile because of constraints on the institutional capacity of the MEF to continuously track results under the different policy areas and the lack of an M&E system or processes. 5. ASSESSMENT OF BANK AND BORROWER PERFORMANCE (relating to design, implementation and outcome issues) Page 37 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory 80. The World Bank’s performance during preparation for both phases of the loan series was satisfactory. The design of the operation was underpinned by a strong analytical base and TA to support the achievement of key prior actions. The World Bank team closely ensured that the key policy areas were in line with the Government’s program and with the CPS. The World Bank team also ensured complementarity with other World Bank operations that were under preparation at the time, such as the MSME Development Project and the Financing Innovative Startups and SMEs Project. The design choice of a series of single tranche DPLs governed by triggers for the second operation allowed for flexibility in achieving programmatic objectives. The World Bank team clearly identified and appropriately rated the risks to achieving the PDO, which are still relevant today. Finally, the CMSME series design was informed by lessons learned from other operations in Morocco that were encapsulated in the FY10–FY13 CPS. (b) Quality of Supervision Rating: Moderately Satisfactory 81. There was a lack of formal supervision that would have focused exclusively on the CMSME program. The two Implementation Status and Results Reports (ISRs) produced under CMSME 1 contained minimal information regarding actions, or progress on outcomes and results, or any issues discussed for management attention. According to World Bank Procedure, an ISR is required for programmatic operations with over 12 months between their Board approvals. Given the period between approvals was 36 months, an ISR was drafted under CMSME 2. However, it was never validated or formally submitted to management as it was drafted after the CMSME 2 closing date of April 30, 2018. Instead, the project team was advised to file this draft ISR in the project files. The limited resources dedicated to M&E for this program resulted in World Bank-driven data collection efforts for the preparation of the ICR. 82. The program was effectively monitored, however, through regular supervision missions for the related TA activities and the field presence of the task tam leader,17 who was based in Rabat for implementation of CMSME 2. Through continuous contact and coordination with the GOM daily, the World Bank team was able to further progress in meeting the overall program objectives. Taken together, these actions and circumstances helped minimize the potential negative impact of a lack of formal reporting on the program directly and effectively compensate for moderate shortcomings in the formal supervision system. The program effectively achieved its objectives. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 83. With a Satisfactory rating for quality at entry and a Moderately Satisfactory rating for quality of supervision, the overall World Bank performance is rated Moderately Satisfactory in accordance with the IEG’s harmonized rating criteria. 5.2 Borrower Performance (a) Government Performance 17 A change in circumstances which was not known during the preparation of the DPL series. Page 38 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Rating: Moderately Satisfactory 84. The Government’s commitment and ownership to the policy areas under the CMSME loan series was strong during the design of the loan series, and momentum for reform was maintained throughout implementation of the program. The Government placed a strong focus on implementing the reforms called for in the abovementioned 2012–2016 government strategy that included strong dimensions of economic development and job creation. During the design of the program, and especially during CMSME 1, multiple public and private stakeholders were consulted with respect to the quality of the proposed reforms and regulations. 85. During implementation, the Government stakeholders involved in the operation were highly supportive during supervision missions. The Government’s fiduciary performance was Satisfactory, as financial management, governance, and compliance with the covenants experienced no shortcomings and the loan tranches were disbursed as foreseen. 86. Shortcomings in the Government’s performance relate to human resources capacity within the MEF, and the lack of a formal project management and M&E system in place at the MEF for the collection of data and for the proactive identification of program implementation issues and delays. In this case, the implementing agencies are relatively indistinguishable from the Government for the CMSME loan series, so there is only one Government performance rating in this section. Policy actions were implemented by several agencies, but overall responsibility and coordination was with the MEF. 6. LESSONS LEARNED (both project-specific and of wide general application) 87. The following lessons have been learned from the implementation of the CMSME DPL loan series and should be taken into consideration when designing future lending operations with a capital markets development and SME finance dimension: 88. The DPL series should be directly tied to, and complement, the strategic objectives laid out in the CPS, as well as other IPF and DPF programs in the country . The CMSME series was directly in line with the CPS for Morocco (2014–2017) and the Middle East and North Africa Framework for Engagement. The program was also strengthened by the findings of the 2015 FSAP. The loan series was closely linked to three other development policy lending operations that had been recently approved (a) Skills and Employment DPL series (P120566 and P144185),18 (b) the Economic Competitiveness Support Program DPL series (P127038 and P128869),19 and (c) the Accountability and Transparency DPL series (P130903 and P154041).20 All three were instrumental in supporting the GOM in accelerating growth and employment creation and were developed in close coordination. 89. The DPL series should be accompanied by downstream TA to increase development impact. The downstream phase of the CMSME series consisted of strong World Bank TA for key prior actions along all pillars. Downstream support in achieving the program indicators is still ongoing and should also be envisioned in the future to help maximize the impact of the program. For future operations in the capital 18 IEG Outcome Rating = Moderately Satisfactory. 19 IEG Outcome Rating = Moderately Satisfactory. 20 IEG Outcome Rating = Moderately Satisfactory. Page 39 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR markets development area, the Government could consider reinforcing the impact potential of policy lending with requests for downstream TA, as implementing successful reforms is contingent upon reinforcing the capacity of implementing ministries and agencies, who are not the recipient of funds in development policy operations. 90. The DPL series design should incorporate a certain degree of flexibility to be responsive to changing governmental contexts without sacrificing focus and pace of reforms . The CMSME loan series adapted to the evolving needs of the borrower’s financial sector agenda by adjusting the triggers for CMSME 2 to incorporate financial inclusion and the findings of the 2015 FSAP (with regard to implementation of the law on derivatives). This adaptability ensured that the CMSME series achieved its overarching objectives and that the relevance of the program remained high. 91. Strong government ownership and empowered implementing agencies are critical ingredients for a successful program. In the case of the CMSME loan series, the Government was strongly committed to reform, but implementation agencies were not contractually responsible for driving the key reforms of the program. This led to implementation delays and dispersed drivers for the overall program. Programs should consider having clear roles and responsibilities for implementing agencies (including monitoring and reporting requirements) outlined and agreed to during the design phase to increase capacity of these entities, ensure coherence in the overall program, and strengthen reform ownership. 92. The implementation of an M&E system strengthens the ability to determine the efficacy of reforms beyond the ICR and contribute to knowledge sharing internally and in relation to clients. A clear and systematic process for M&E helps track program results on time, proactively identify issues with program performance, and build capacity within implementing agencies to enable continued monitoring beyond the life of the program. 93. The program design should try to forge stronger links between the DPL objectives and the larger strategic objectives of the country. The CMSME series was very successful in achieving its objectives and was characterized by strong government ownership, sound design, significant TA support, and consistency with the World Bank’s engagement framework (both at a country level and regionally). That said, Morocco has realized limited progress during this period on its own stated strategic development objectives (that is, job creation, dynamic growth, reduced regional disparities, and so on). This issue goes beyond the CMSME series in particular but should inform the World Bank’s engagement with Morocco, as well as the design of future operations. 7. COMMENTS ON ISSUES RAISED BY BORROWER/IMPEMENTING AGENCIES/PARTNERS (a) Borrower/Implementing agencies No comments (b) Cofinanciers Not applicable(c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) Not applicable Page 40 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ANNEX 1: BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES (a) Task Team Members Names Title Unit Lending & Supervision Gabriel Sensenbrenner Program Leader/ Task Team Leader MNC01 Tanya Konidaris Senior Financial Sector Specialist GFCLT Peter McConaghy Financial Sector Specialist GFCMW Abdoulaye Keita Senior Procurement Specialist GGE Laila Moudden Financial Management Analyst GGOMN Steve W. Wan Yan Lun Operations Officer GFCMW ICR Roya Vakil TTL / Financial Sector Specialist GFCMW Steve W. Wan Yan Lun Operations Officer GFCMW (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) US$, Thousands Stage of Project Cycle No. of Staff Weeks (Including Travel and Consultant Costs) Lending FY14 14.87 171,729 FY15 0.00 21,377 FY16 6.15 112,872 FY17 20.53 140,338 Total: 41.55 446,316 Supervision/ICR FY16 5.50 43,200 FY17 0.29 2,307 FY18 13.04 120,830 FY1921 10.00 56,700 Total: 28.83 223,037 21 For FY19, to date staff weeks is 7.41. The numbers include a forecast of additional 2.5 staff weeks. Page 41 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ANNEX 2: BORROWER'S COMMENTS ON DRAFT ICR Page 42 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Page 43 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Page 44 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Unofficial Translation Subject: Policy loan to support the development of the capital market and the financing of small and medium-sized enterprises (Loan 8363-MA and 8756-MA) Reference: Your letter of March 21, 2019 Madam Director, Following your correspondence as referred to, I have the honor to inform you below of our assessment of the reform program supported by the above loan. 1. Project Context, Development Objectives and Design: As you know, the Kingdom of Morocco has resolutely embarked on a process of modernization of its financial sector in order to support and support the country's development strategies, stimulate economic growth and strengthen the capacity of our economy to resist external shocks. In seeking the support of the World Bank, particularly through the loan referred to above, the public authorities have expressed their firm determination to continue and especially to accelerate these efforts to modernize and develop the financial sector and thus make it converge towards the best standards. This program, built jointly with the Bank's teams, has focused on the following key areas: (i) Strengthening the governance structure and the stability of the financial sector through, inter alia, strengthening the framework of macro-prudential supervision and systemic crisis management as well as credit sector infrastructure. (ii) The deepening of the capital market by launching a new generation of reforms whose objective is the diversification of financial instruments; (iii) Improving access to finance for micro-enterprises, whose flagship project is the launch of the National Financial Inclusion Strategy to coordinate and support the initiatives of public and private sector stakeholders in financial inclusion; (iv) The launch of pension reform through the extension of social security coverage, the implementation of the parametric reform of the Moroccan Pension Fund and the launch of the second phase of the reform of the pension schemes. retirement. 2. Overall evaluation of the program: results, performance and lessons learned Overall, the design, development and implementation of the program to support the development of the financial sector took place in good conditions. All the missions carried out by the Bank were well prepared and achieved the expected objectives. This result has been achieved thanks to close collaboration between the Moroccan authorities and the Bank services responsible for the program. Page 45 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR Also, the objective of this program, consisting of the creation of the necessary conditions for inclusive economic growth and generating jobs through the development of the financial sector, has been achieved. Without going back to the details of the program results presented and commented in the completion report, we can say that the program has made a significant contribution to strengthening the governance of the financial sector and deepening its role in financing the economy. In the end, it should be remembered that each program is a field of learning and sharing of experience. This experience should be capitalized and used for better preparation and execution of future programs. In this respect, in our opinion, the following main points should be taken into account in the preparation of future programs: • This program, in view of the areas it addresses, has a special feature, namely a common base of reforms as part of an integrated and comprehensive vision of the Ministry of Economy and Finance. It should, in our view, serve as a basis for defining a new generation of reform programs; • Any reform agenda ultimately aims to strengthen and sustain the dynamics of growth and job creation. This program, even if the milestones selected are all realized, deserves to be supported for the effective operationalization of the developed instruments and the approval of the concepts. In this respect, it seems to us essential that any reform program should integrate this component as early as the design phase. Possible actions could include (i) greater coordination within the World Bank Group and alignment with the objectives and priorities of the other institutions of the Group, including the IFC, and (ii) strengthening of the Technical Assistance (TA) component which could directly benefit the projects built in this framework; • On another aspect, and in view of the multitude of programs managed by the MEF, better coordination between the different donors is becoming more and more necessary. The objective should no longer be limited to a simple exchange of information and / or consultation between donors, but rather to establish a framework, effective and flexible, coordinated intervention between donors, able to increase the performance not only of the borrower but also the donors. This framework should cover both the reform agenda, private sector financing and technical assistance components. With regard to this last point, we inform you of the ongoing project initiated by the MEF aimed at setting up a national platform for coordinating entrepreneurship, for which we are seeking the support of the Bank. The establishment of this coordination framework is a key element to promote a more structured and strategic approach to the TA actions of donors in the Kingdom of Morocco. • Regarding the TA component, which as you know is an important element for the success of the reform projects, we believe that particular attention should be paid to the way in which this TA is designed and implemented. Following feedback from various programs, it appears that, although the results achieved are generally satisfactory, there is a lack of a vision in terms of planning Page 46 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR activities and also in terms of execution. At the time of program preparation, the TA component should be systematically discussed and prepared in a concomitant manner to validate the reform agenda. Similarly, and taking into account the burden and the multitude of projects carried out by the MEF, the opportunity of allocating resources dedicated to the coordination of TA programs is acute. Indeed, the availability of these resources, allowing the partial management of TA actions (preparation of ToRs, recruitment of experts, editing of events, support, ..), will allow the MEF services to focus on their core business, and thus achieve better performance. In this sense, we propose to set up a permanent focal point housed at the level of the project or to recruit a PMU dedicated to the preparation, implementation and monitoring of TA programs. This focal point will allow a better efficiency and effectiveness in the realization of the reform, an interactivity and a constructive exchange with the structure. Please accept, Madam Director, the expression of my highest consideration Madame Marie Françoise Marie-Nelly Directrice des opérations Département Maghreb Bureau de la Banque Mondiale au Maroc 7, Rue Larbi Ben Abdellah Souissi – Rabat – Maroc Page 47 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ANNEX 3: MAIN RECOMMENDATIONS OF 2015 FSAP - Page 48 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ANNEX 4: ASAs SUPPORTING THE IMPLEMENTATION OF REFORMS ASA Project Code Status MSME FINANCE AND INCLUSION Design a coherent set of incentives for the P151565 Ongoing. Landscaping report on supply of risk capital to MSMEs VC/PE sector finalized September 2018. Revamp framework of government guarantees P146779 Ongoing. The project has delivered in support of low-income housing loans (risk- a study that aims to evaluate public based premia, capital of guarantee fund, support to the housing sector and governance, and supervision) make recommendations to improve its effectiveness. Review of additionality of guarantees on MSME P132884 Project closed. loans, new products National financial inclusion strategy (NFIS) P144500 Ongoing. The National Financial Inclusion Strategy (NFIS) launched by national council April 2019. Implementation ongoing. Survey of financial access and usage to establish P144500 Completed baseline for NFIS Review regulatory framework for microfinance, P144500 Ongoing. Working group formed including ceiling on loan rates (TA)/P168587 (DPL) under TA program. Retail payment strategy P148344 Completed. CAPITAL MARKET DEVELOPMENT Regulations to implement the law on securities P149407 Completed lending and short selling Real Estate Investment Trusts (REITs) law P149407 Completed Stock exchange law P149407 Completed Assess core capital market infrastructure to P144500 Completed ascertain their readiness for managing new instruments and practices Internal rules and procedures of AMMC P144500 Completed Internal rules and procedures of ACAPS P144500 Completed Reform private equity/venture capital P144500 Ongoing regulatory framework Develop regulatory framework for sukuk Policy P144500 Completed paper Regulations to implement the law on P149407 — securitization Regulations on Exchange Traded Funds Policy P144500 Completed paper Amend law on undertakings for collective P144500 Ongoing. Policy note completed investment in transferable securities February 2019 and market workshop May 2019. Investment rules for insurance companies in P144500 and J-CAP Ongoing codes des assurances (IFC 603522) Promote the issuance of nongovernment fixed- P144500 Ongoing income instruments FINANCIAL INFRASTRUCTURE AND CREDIT INFORMATION SYSTEMS Page 49 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ASA Project Code Status Secured transactions legal and regulatory P601388 Ongoing framework and establishment of collateral registry for moveable assets National mobile payment solutions P165010 Ongoing. Support with oversight and risk-based supervision approaches. Ongoing. Supervisory framework for payment service providers published April 2019. FINANCIAL STABILITY Recovery planning for banks that belong to conglomerates Legal, regulatory, and operational framework P160187 Ongoing for resolution planning of banks that belong to conglomerates Regulatory and operational framework for new deposit insurance corporation Page 50 of 51 The World Bank Morocco Capital Markets Development and SME Finance DPL series - ICR ANNEX 5: LIST OF SUPPORTING DOCUMENTS • Royaume du Maroc, Caisse Centrale de Garantie, Rapport d’Activité, 2016. • Royaume du Maroc, Caisse Centrale de Garantie, Rapport d’Activité, 2017. • IMF, Financial Inclusion of Small and Medium-sized Enterprises in the Middle East and Central Asia, 2019. • World Bank, Morocco First Capital Market Development and Small and Medium-Sized Enterprise Finance Development Policy Loan, Program Document, April 2014 (Report No. 86203-MA). • World Bank, Morocco First Capital Market Development and Small and Medium-Sized Enterprise Finance Development Policy Loan, Financing Agreement, May 2014 (Loan Number 8363-MA) • World Bank, Morocco First Capital Market Development and Small and Medium-Sized Enterprise Finance Development Policy Loan, ROC Decision Note, February 2014. • World Bank, Morocco Second Capital Market Development and Small and Medium-Sized Enterprise Finance Development Policy Loan, Program Document, April 2017 (Report No. 114404-MA). • World Bank, Morocco Second Capital Market Development and Small and Medium-Sized Enterprise Finance Development Policy Loan, Financing Agreement, June 2017 (Loan Number 8756-MA). • World Bank, Morocco Second Capital Market Development and Small and Medium-Sized Enterprise Finance Development Policy Loan, ROC Decision Note, September 2016. • World Bank, Morocco Country Partnership Strategy FY2014-17 (Report No. 86518-MA). • World Bank, Morocco Financial Sector Assessment, February 2016. • World Bank, Morocco Financial Sector Assessment Technical Note – Banking Supervision, October 2016 (IMF Country Report No. 16/331). • World Bank, Morocco Country Economic Memorandum, 2018. • World Bank, Morocco Systematic Country Diagnostic “Governing Towards Efficiency, Equity, Education, and Endurance”, June 2018. • World Bank, IEG Report “The World Bank Group’s Support to Capital Market Development”, 2016. • World Bank, Morocco Capital Markets Development and Small and Medium-Sized Enterprise Development DPL, Implementation Status and Results Report, July 2014, January 2015, June 2018 (unpublished). 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