INTEGRATED SAFEGUARDS DATA SHEET CONCEPT STAGE Public Disclosure Copy Report No.: ISDSC2308 Date ISDS Prepared/Updated: 14-Mar-2013 Date ISDS Approved/Disclosed: 25-Mar-2013 I. BASIC INFORMATION A. Basic Project Data Country: Afghanistan Project ID: P128048 Project Name: Afghanistan Access to Finance (P128048) Task Team Guillemette Sidonie Jaffr Leader: Estimated 06-Jun-2013 Estimated 27-Aug-2013 Appraisal Date: Board Date: Managing Unit: SASFP Lending Specific Investment Loan Instrument: Sector(s): Microfinance (45%), SME Finance (45%), General finance sector (10%) Theme(s): Other Financial Sector Development (10%), Micro, Small and Medium Enterprise support (90%) Financing (In USD Million) Total Project Cost: 50.00 Total Bank Financing: 50.00 Public Disclosure Copy Total Cofinancing: Financing Gap: 0.00 Financing Source Amount BORROWER/RECIPIENT 0.00 International Development Association (IDA) 50.00 Total 50.00 Environmental F - Financial Intermediary Assessment Category: Is this a No Repeater project? B. Project Objectives 17. The proposed Development Objective of the project is to increase micro, small and medium enterprises’ access to financial services, notably credit. C. Project Description Component 1: Improving access to financial services for micro and small enterprises This component aims to provide continuing support to the microfinance sector through Microfinance Investment Support Facility for Afghanistan (MISFA), as well as, supporting MISFA to take on a broader role as a catalyst for innovations to increase access to financial services to the lower end of Public Disclosure Copy the market (notably micro and small enterprises) as per its new strategic plan under preparation. Despite the recent difficulties of the microfinance sector, it is important to continue providing support to the sector, which is playing a key role in providing access to financial services to low- income households and micro-enterprises. The number of microfinance clients is estimated at over 400,000 by the Afghanistan Microfinance Association as of December 2012, of which 38 percent are women. MISFA microfinance partners count 136,717 clients (with 19 percent of women). MISFA is recognized as a strong institution which has – in recent years – taken the difficult role of leading the consolidation of the microfinance sector. Under its proposed new strategic plan, MISFA intends to pursue its role of wholesale lender to the microfinance sector (having learnt the lessons from the past microfinance crisis) and further expand financial sector development initiatives, with a focus on developing new financial products for a diversity of institutions (including community-based institutions). MISFA also intends to develop specific initiatives targeted at underserved groups, most notably women and youth. The microfinance sector crisis (and ensuing consolidation) has shown that in spite of ten years of capacity building efforts, the microfinance sector still remains fragile and significant efforts at capacity building are still required. It should be noted that MISFA currently has sufficient available resources for on-lending and, as such, does not require additional funds for on-lending. This component will include the following activities: • Innovation fund: this fund will allow MISFA to support innovations to improve access to financial services proposed by MFIs and other institutions which have a focus on access to finance. As such, this fund would cover the testing and piloting of new financial products (small enterprise finance, agricultural credit, savings, sharia-compliant products, insurance, etc.) as well as the use of Public Disclosure Copy technology to improve access to financial services. This sub-component will not include on-lending funds as MISFA has currently enough resources for on-lending (which could be mobilized in parallel by the applying institutions, if needed). • Systems strengthening fund for MFIs: this fund will support efforts from MFIs to strengthen their systems and their human resources (MIS, internal control, risk management, etc.) based on a detailed capacity strengthening plan. This fund will also support systems strengthening of MFIs aiming to become Deposit taking MFI (DMFI), once the regulation is approved. This sub-component will not include on-lending funds. • Research and development at MISFA: this sub-component will help MISFA develop innovative programs, as incubator, to better serve under-served groups, notably women and youth. Under its proposed new strategic plan, MISFA intends to develop a Women Empowerment Program as well as a Youth Entrepreneurship Program (combining financial and non-financial services). This component will also support the establishment of a Knowledge Management Department at MISFA to document best practices, lessons learned, and provide timely and relevant information to stakeholders by commissioning research and studies. This Department would also be tasked to develop a Progress out of Poverty Index (based on international experience) to better track microfinance impacts. MISFA will also strengthen its Client Profile database to have more accurate information on clients and avoid multi-lending to clients and over-indebtedness. • Targeting the Ultra Poor Program: This sub-component will support the national scale up of the Targeting the Ultra Poor (TUP) program pilo ted by MISFA in Bamyan and Badakshan. The TUP program aims at “graduating� participants from safety nets programs to income-earning activities, linking them with microfinance programs. Building on the lessons learned from the pilots and from international experience, the program will provide TUP beneficiaries a two-year package of Public Disclosure Copy inputs which includes the transfer of productive assets (such as livestock) as well as training (classroom and hands-on);a subsistence support (monthly stipend, as short term income support); and basic health care through community-based health workers. • Support to Policy, Regulation and Advocacy: this sub-component will provide support to agencies in charge of policy, regulation and advocacy, namely: the Ministry of Finance, which has the responsibility to set the policy direction for financial sector development in Afghanistan; the Central Bank of Afghanistan (DAB) which once the Deposit taking MFIs regulation will be approved will be responsible for regulating these institutions and the Afghanistan Microfinance Association (AMA) which is the representative body for the microfinance sector. • Institutional strengthening: This sub-component will support institutional strengthening at MISFA to ensure it is able to fully implement its new strategic plan. It will also support project implementation at MISFA (with a focus on fiduciary aspects). It will also support coordination efforts between various initiatives with a focus on access to finance supported by development partners (notably USAID, with FAIDA and ABADE) and the World Bank (such as Financial Sector Strengthening Project, New Market Development Project, Rural Enterprise Development Project, Skills Development Project and Justice Service Delivery Project). Component 2: Improving access to financial services for small and medium enterprises The credit guarantee facility implemented by DEG has demonstrated that – with well-designed support, i.e. loan guarantee facility and tailored technical assistance – commercial banks are interested in increasing their lending to the SME market segment. As of October 2012, the Credit Guarantee Facility has mobilized loans of a total value of $89.8m to more than 2,500 businesses, the outstanding guaranteed loan portfolio stood at $20.8m. The Facility is active in 12 provinces. The portfolio quality is excellent, with a Portfolio at Risk over 30 days amounting to 1.1 percent. The average net loss rate has been around 1 percent per annum since 2006. Public Disclosure Copy The aim of the component is to increase commercial bank lending to SMEs, as well as to strengthen commercial banks from within. International experience with such “downscaling� programs has shown that the improvements made in the SME lending departments of commercial banks (better credit risk appraisal, stronger credit monitoring, better delinquency management, stronger credit approval process, etc.) often permeates to other departments (such as corporate or consumer departments). It is therefore expected that the technical assistance provided to commercial banks in the context of the Credit Guarantee Facility will gradually help strengthening the banks “from within�: audits of ten commercial banks financed by the World Bank have revealed significant weaknesses across all banks. In addition, the banking sector sustains high level of liquidity. Such a guarantee facility can therefore support commercial banks make a more productive use of their liquidity, i.e. in investing their liquidity in the Afghan private sector. This component will therefore support the expansion of the DEG credit guarantee facility, along the following activities: • Operational improvements and volume growth with existing partner banks (the Facility currently works with 3 partner banks); • Cooperation with additional partner banks (an increasing number of commercial banks have expressed an interest for support to develop SME lending); • Regional expansion; • New product development, including trade finance, rural/agricultural SME lending, sharia compliant SME lending, start-up lending, as well as adapted products to female entrepreneurs. Public Disclosure Copy This component will provide a contribution to the guarantee fund managed by DEG (the current guarantee fund of US$8.6m is almost fully committed). It will also finance technical assistance for new product development (such as trade finance or agricultural finance, as highlighted in the paragraph above) and support the Guarantee Facility operating costs in Afghanistan (including the opening of offices in Mazar-e-Sharif and Herat). DEG is currently in discussions with the German and Afghan governments on options to institutionalize the guarantee fund. A critical aspect of the Credit Guarantee Facility – and a key reason of its success – is the technical assistance provided by the Facility to partner commercial banks to lend to SMEs. Commercial banks are usually wary of SME lending, as SMEs are not able to provide the financial information required by commercial banks (i.e. audited financial statements, business plans). SMEs also often lack sufficient collateral. Commercial banks therefore need to develop new lending approach to deal with SMEs. This requires the establishment of SME Unit within commercial banks, the development of appropriate lending methodology and training of staff. Under this component, the Credit Guarantee Facility will provide technical assistance on SME lending to partner banks, until the Facility considers that the partner banks no longer require the technical assistance, as well as technical assistance on new product development (trade finance, agricultural finance). Under this component, the Credit Guarantee Facility also intends to pilot reverse factoring (also known as supply chain financing). The component triggers OP 8.30: Financial Intermediary Lending. The OP 8.30 compliance annex will be prepared in accordance with the World Bank’s procedure. D. Project location and salient physical characteristics relevant to the safeguard analysis (if known) The proposed activities under the project will be across Afghanistan. Public Disclosure Copy E. Borrowers Institutional Capacity for Safeguard Policies The IDA funds will be channeled from Government of Afghanistan (GoA) to one implementing agency (MISFA) and one implementing partner (DEG). The government’s capacity in safeguard policies is generally weak, and political awareness in environmental issues is limited. MISFA has a long track record of supporting the Afghan microfinance sector and has implemented one ARTF funded project (Microfinance Support for Poverty Reduction Project) and one IDA funded project (Expanding Microfinance Outreach and Improving Sustainability Project). Under the IDA funded project, MISFA prepared an Environment and Social Management Framework (ESMF). The ESMF was prepared in accordance with World Bank EA OP4.01 and pertinent to the Afghan laws and regulations. The purpose of the ESMF is to ensure that all activities that the micro loan supports are environmentally and socially sound and are in compliance with requirements of pertinent Afghan laws and regulations as well as World Bank environmental policies, bearing in mind the characteristics of micro loans that support household level economies. By definition, micro loans require very short turn around time and transaction costs must be kept very low. As such ‘subprojects’ are limited to those that have no or little environmental impacts and therefore need no formal Environment Assessment. The implementation of the ESMF by MISFA has been satisfactory. DEG is a member of the KfW Group and one of the largest European development finance institutions – with a focus on financing and structuring investments of private companies in Public Disclosure Copy developing and transition countries. The Afghanistan Credit Guarantee Facility has been implemented by DEG since 2006. The Facility currently counts three partner commercial banks. As SMEs that will benefit from the Credit Guarantee Facility to be financed under the Project are not identified, the Project will prepare an ESMF to manage any potential adverse environment and social impacts, in compliance with the World Bank environment and social safeguards, and national laws. F. Environmental and Social Safeguards Specialists on the Team Asta Olesen (SASDS) Mohammad Yasin Noori (SASDS) Obaidullah Hidayat (SASDI) II. SAFEGUARD POLICIES THAT MIGHT APPLY Safeguard Policies Triggered? Explanation (Optional) Environmental Assessment OP/ Yes BP 4.01 Natural Habitats OP/BP 4.04 No Forests OP/BP 4.36 No Pest Management OP 4.09 No Physical Cultural Resources OP/ No BP 4.11 Indigenous Peoples OP/BP 4.10 No Public Disclosure Copy Involuntary Resettlement OP/BP No 4.12 Safety of Dams OP/BP 4.37 No Projects on International No Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP No 7.60 III. SAFEGUARD PREPARATION PLAN A. Tentative target date for preparing the PAD Stage ISDS: 11-Apr-2013 B. Time frame for launching and completing the safeguard-related studies that may be needed. The specific studies and their timing1 should be specified in the PAD-stage ISDS: N/A IV. APPROVALS Task Team Leader: Name: Guillemette Sidonie Jaffr Approved By: 1 Reminder: The Bank's Disclosure Policy requires that safeguard-related documents be disclosed before appraisal (i) at the InfoShop and (ii) in country, at publicly accessible locations and in a form and language that are accessible to potentially affected persons. Regional Safeguards Name: Zia Al Jalaly (RSA) Date: 20-Mar-2013 Coordinator: Sector Manager: Name: Henry K Bagazonzya (SM) Date: 25-Mar-2013 Public Disclosure Copy Public Disclosure Copy