The World Bank Financial Sector Support Project (P150938) REPORT NO.: RES40423 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF FINANCIAL SECTOR SUPPORT PROJECT APPROVED ON JUNE 5, 2015 TO THE PEOPLE'S REPUBLIC OF BANGLADESH FINANCE, COMPETITIVENESS AND INNOVATION SOUTH ASIA Regional Vice President: Hartwig Schafer Country Director: Mercy Miyang Tembon Regional Director: Zoubida Kherous Allaoua Practice Manager/Manager: Esperanza Lasagabaster Task Team Leader(s): Ali Zafar, Ilias Skamnelos The World Bank Financial Sector Support Project (P150938) I. BASIC DATA Product Information Project ID Financing Instrument P150938 Investment Project Financing Original EA Category Current EA Category Financial Intermediary Assessment (F) Financial Intermediary Assessment (F) Approval Date Current Closing Date 05-Jun-2015 30-Sep-2020 Organizations Borrower Responsible Agency The People's Republic of Bangladesh Bangladesh Bank Project Development Objective (PDO) Original PDO The project development objective is to improve financial market infrastructure, regulatory and oversight capacity of Bangladesh Bank and access to long term financing for private firms in Bangladesh. Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-56640 05-Jun-2015 30-Jun-2015 20-Sep-2015 30-Sep-2020 300.00 273.27 23.58 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The World Bank Financial Sector Support Project (P150938) Project performance and overall status 1. The Project’s performance has been rated Moderately Satisfactory (MS) for both ‘Implementation Progress’ and ‘Progress towards the Project Development Objective’ (PDO) since the Mid-Term Review in March 2018. The latest Implementation Support Review (ISR) on January 17, 2020 has maintained these ratings. The PDO remains a key priority in the Government of Bangladesh’s (GoB) economic policy agenda and has become increasingly important (given the growing demand for long-term finance in the manufacturing sector and overall stability concerns in the financial sector). The project was approved on June 5, 2015 and became effective on September 20, 2015. As of November 15, 2019, the project has disbursed US$273.26 million, which is 91 percent of the total loan amount of US$300 million. It has been mainly driven by Component 3’s long-term finance sub-loans (a total IDA disbursement of US$253 million for sub-loans to 51 projects). Actual disbursement of both IDA and GoB funds from BB to participating financial institutions (PFIs) stood at US$223 million, and from IDA funds alone at US$193.8 million. Recent notable project breakthroughs across all three components include the continued unlocking of Category A sub-loans following the training of PFI’s in environmental and social safeguards, the progress in implementation of Information Technology (IT) packages, and the continuation of work of the international firm advising BB on risk-based supervision. The closing date of the project is September 30, 2020. 2. Overall, the project has been successful in providing long-term foreign exchange finance to private manufacturing companies. The project has filled in an important gap in the market, which is practically non-existent for such tenors in foreign exchange (or local currency). A recent market study conducted by the World Bank (WB) showed that less than three percent of foreign currency denominated loans to exporters was greater than three years in tenor, and none of the banks and financial institutions surveyed extended any loans of five years or more. All project sub-loans have been ‘long-term’ (exceeding three years), with over 50 percent having maturity above five years and over a quarter above seven years. This has allowed participating firms to undertake capital investment and expand their production in a highly competitive global manufacturing market. Notably, a survey of the 42 sub- borrower firms in March 2019 revealed that all the firms believe that their business benefitted from using FSSP finance, and all firms and PFIs have raised their awareness of Environmental and Social issues (a key achievement in the context of Bangladesh). Overall, the demand for long-term finance towards capital machinery has been driven by exporters and manufacturers aiming to expand capacity and upgrade technology to remain competitive under increased global competition in the manufacturing markets. 3. In addition, the project is working on supporting financial market infrastructure development. First, the project has focused on multiple aspects of the payment systems – the critical financial market infrastructure of the country’s economy. The systems ultimately promote economic and financial development not only by contributing to stability (through reliability and robustness) but also by enabling financial access (by enabling the uptake of electronic payments, including government transactions with persons and businesses that is a catalyst for inclusion). In addition, despite delays due to the BB IT cyber heist in 2016, the project is helping BB finance core IT infrastructure, particularly with regard to data centers and associated software packages that house and deploy mission-critical applications (payments systems, banks’ information reporting and BB’s supervisory analytics, disaster recovery etc.). However, the IT packages are taking time to be finalized given procurement and technical reviews. 4. A Level 2 Restructuring was approved in October 2019 to adjust resource allocation and indicators to ensure continued impact on and relevance to the PDO, as well as appropriate results attribution to project outputs. This reallocation was necessary to resolve the issue of overestimation of some of the IT related costs at the time of the project’s design, BB’s decision to finance some of the IT work with its own resources over a longer period, and its The World Bank Financial Sector Support Project (P150938) decision to not complete some packages that are no longer relevant. During the restructuring, a fourth indicator (total core systems’ uptime) was introduced which was easier to interpret and reflective of the ultimate development objective. A fifth indicator which was significantly behind target (compliance with Basel Core Principles -BCP- for banking supervision), was revised downward to reflect delays in implementation and its adjustment to a more realistic goal. Rational for Restructuring 5. The government has requested through a letter dated June 11, 2019, a two-year extension of the closing date to allow more time for sub-loans disbursements. After discussions with the Bangladesh Bank project team, the teams have both agreed to a six-month project extension to March 31, 2021. The request for extension to allow more time for sub-loans and to allow time for critical packages to be installed, though included in the government’s request of June 2019 was not captured in the October 2019 restructuring because the technical review and procurement process of several complex packages took longer than anticipated. These packages will help build the IT system security and will help develop e-commerce in Bangladesh (such as e-payment gateway). In addition, all sub-loans will be disbursed by project completion subject to environmental and social assessments and the necessary due diligence. II. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-56640 Effective 30-Sep-2020 31-Mar-2021 31-Jul-2021