Document of The World Bank FOR OFFICIAL USE ONLY Report No: 75522-MA PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF US$4.9 MILLION FROM THE MIDDLE EAST AND NORTH AFRICA TRANSITION FUND TO THE KINGDOM OF MOROCCO FOR A MICROFINANCE DEVELOPMENT PROJECT June 27, 2013 Finance and Private Sector Development Group Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective June 5, 2013) Currency Unit = Moroccan Dirham (MAD) US$1 = MAD 8.52 MAD 1 = US$0.12 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AMC Associations de Micro-Crédit (Micro-Credit Associations) BAM Bank Al Maghrib (Central Bank of Morocco) CCG Caisse Centrale de Garantie (Central Guarantee Fund) CDG Caisse de Dépot et de Gestion CGAP Consultative Group to Assist the Poor CM6 Centre Mohammed VI pour la Microfinance Solidaire CMU County Management Unit CPS Country Partnership Strategy CQS Selection Based on Consultant's Qualifications DAAG Direction des Affaires Administratives et Générales (Directorate of Administrative and General Affairs) DECDG Development Economics, Development Data Group DPL Development Policy Loan DPTF Deauville Partnership Transition Fund DPTF OM Deauville Partnership Transition Fund Operations Manual FM Financial Management FNAM National Federation of Micro-Credit Associations GDP Gross Domestic Product GID Gestion Intégrée des Dépenses (Integrated Expense Management) GNI Gross National Income IBRD International Bank for Reconstruction and Development IC Individual Consultants IDA International Development Association IFC International Finance Corporation IFI International Financial Institution IFMIS Integrated Financial Management Information System IGF General Inspectorate of Finance IMF International Monetary Fund INTOSAI International Standards on Auditing ISA International Standards on Auditing IT Information Technology IUFR Interim Unaudited Financial Report J-PAL Jameel Latif Poverty Action Lab M&E Monitoring and Evaluation MAD Moroccan Dirham MCA Millennium Challenge Account MENA Middle East and North Africa MFI Microfinance Institutions MIS Management Information Systems MoEF Ministry of Economy and Finance MSME Micro Small and Medium Sized Enterprises NCB National Competitive Bidding OP Operations Policy PAD Project Appraisal Document PDO Program Development Objective PEFA Project Economic and Financial Assessment PFM Public Financial Management PFS Project Financial Statements PJD Parti de la Justice et de Développement (Justice and Development Party) PMU Project Management Unit PPP Purchasing Power Parity QCBS Quality and Cost Based Selection SBD Standard Bidding Documents SME Small and Medium Enterprise TA Technical Assistance TF Trust Fund UN United Nations USAID United States Agency for International Development USD United States Dollar VAT Value-Added Tax Regional Vice President: Inger Andersen Country Director: Simon Gray Sector Director: Loic Chiquier Sector Manager: Simon C. Bell Task Team Leader: Teymour Abdel Aziz KINGDOM OF MOROCCO Morocco Microfinance Development Project TABLE OF CONTENTS Page I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ............................................................................................................ 1 B. Sectoral and Institutional Context ................................................................................. 3 C. Higher Level Objectives to which the Project Contributes .......................................... 8 II. PROJECT DEVELOPMENT OBJECTIVES ................................................................8 A. Project Development Objective (PDO) ........................................................................ 8 B. Project Beneficiaries ..................................................................................................... 8 C. PDO Level Results Indicators ..................................................................................... 11 III. PROJECT DESCRIPTION ............................................................................................11 A. Project Components .................................................................................................... 11 B. Project Financing ........................................................................................................ 13 C. Lessons Learned and Reflected in the Project Design ................................................ 14 IV. IMPLEMENTATION .....................................................................................................16 A. Institutional and Implementation Arrangements ........................................................ 16 B. Results Monitoring and Evaluation ............................................................................ 17 C. Sustainability............................................................................................................... 17 V. KEY RISKS AND MITIGATION MEASURES ..........................................................18 A. Risk Ratings Summary Table ..................................................................................... 18 B. Overall Risk Rating Explanation ................................................................................ 18 VI. APPRAISAL SUMMARY ..............................................................................................19 A. Economic and Financial Analyses .............................................................................. 19 B. Technical ..................................................................................................................... 19 C. Financial Management ................................................................................................ 19 D. Procurement ................................................................................................................ 20 E. Social (including Safeguards) ..................................................................................... 21 F. Environment (including Safeguards) .......................................................................... 21 Annexes Annex 1: Results Framework and Monitoring...............................................................................22 Annex 2: Detailed Project Description ..........................................................................................25 Annex 3: Implementation Arrangements .......................................................................................28 Annex 4: Operational Risk Assessment Framework (ORAF) .......................................................40 Annex 5: Implementation Support Plan.........................................................................................43 PAD DATA SHEET Kingdom of Morocco Morocco Microfinance Development Project PROJECT APPRAISAL DOCUMENT Middle East & North Africa Financial and Private Sector Development . Basic Information Date: June 27, 2013 Sectors: Private Sector Development (100 percent) Country Director: Simon Gray Themes: Private Sector Development, Micro and small Finance Sector Manager/Director: Simon C. Bell/ Loic Chiquier EA C Category: Project ID: P144500 Lending Instrument: Investment Project Financing Team Leader(s): Teymour Abdel Aziz Joint IFC: . Recipient: Kingdom of Morocco Responsible Agency: Ministry of Economy and Finance Contact: Nouaman Al Aissami Title: Chief of Credit Division Telephone No.: Email: n.alaissami@tresor.finances.gov.ma . Project Implementation Period: Start Date: July 31, 2013 End Date: July 31, 2017 Expected Effectiveness Date: July 31, 2013 Expected Closing Date: January 31, 2018 . Project Financing Data(US$M) [ ] Loan [ ] Grant [ X ] Other (Trust Fund Grant) [ ] Credit [ ] Guarantee For Loans/Credits/Others Total Project Cost (US$M) : 5.9 Total Bank Financing : Total Transition Fund 4.9 Financing Gap : Financing (US$M) : i . Financing Source Amount(US$M) BORROWER/RECIPIENT 1.0 IBRD IDA: New IDA: Recommitted Other 4.9 Financing Gap Total 5.9 . Expected Disbursements (in USD Million) Fiscal Year 2014 2015 2016 2017 2018 Annual 0.1 1.5 1.6 1.6 0.1 Cumulative 0.1 1.6 3.2 4.8 4.9 . Project Development Objective(s) The project objective is to promote access to finance to low income households and micro and small enterprises through the promotion of a sustainable and inclusive microfinance sector. . Components Component Name Cost (USD Millions) Component 1: Strengthening the institutional, legal, regulatory, tax and 1.9 governance framework for microfinance Component 2: Strengthening the market infrastructure, product innovation 1.5 and funding sources for microfinance Component 3: Integrating Microfinance into a national financial inclusion 1.5 strategy . Compliance Policy Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [X] . Does the project require any waivers of Bank policies? Yes [ ] [X] Have these been approved by Bank management? Yes [ ] [ ] Is approval for any policy waiver sought from the Board? Yes [ ] [X] Does the project meet the Regional criteria for readiness for implementation? Yes [X] [ ] ii . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency Recruitment of additional procurement specialist and No four (4) months Once additional financial management specialist after the Effective Date Description of Covenant The Project Management Unit (PMU) shall recruit, by not later than four (4) months after the Effective Date, an additional procurement specialist and an additional financial management specialist each of whose qualifications, experience and terms of reference shall be acceptable to the World Bank. . Team Composition Bank Staff Name Title Specialization Teymour Abdel Aziz (TTL) Economist, TTL Financial Sector Development Gabriel Sensenbrenner Lead Financial Economist Financial Sector Development Peter McConaghy Junior Professional Associate Financial Sector Development Philippe de Meneval Senior PSD Specialist Private Sector Development Steve Wan Operations Analyst Operations Abdoulaye Keita Senior Procurement Specialist Procurement Khadija Faridi Consultant Procurement Lamyae Hanafi Benzakour Financial Management Specialist Financial Management Laila Moudden Operations Assistant Financial Management iii Hassine Hedda Finance Officer Disbursements Suzanne Parris Program Assistant Operations Jean-Charles de Daruvar Senior Counsel Legal Maya Abi Karam Counsel Legal Alexandra Sperling Legal Analyst Legal Non Bank Staff Name Title Office Phone City . Locations: The regions of Tanger-Tetouan, Taza-Al-Hoceima-Tatounate, Fez-Boulmane, Meknes-Tafilalt, Tadla-Azilal, Doukkala-Abda, Rabat-Sale-Zemmour-Zaër, Casablanca, Oriental, Marrakech-Tensift-El Haouz, Chaouia-Ourdigha, Gharb-Chrarda-Beni Hsen, and Souss-Massa-Draâ; and the provinces of Guelmin, Assa- Zag, Tantan and Tata. Country: Kingdom of First Administrative Location Planned Actual Comments Morocco Division . iv I. STRATEGIC CONTEXT A. Country Context 1. The wave of democratization that the Middle East and North Africa (MENA) region has experienced since the start of the Arab Spring has also reached Morocco, although its experience has been reasonably peaceful. In March 2011, King Mohammed VI proposed a broad and comprehensive package of political reforms that garnered the support of the electorate in a constitutional referendum held on July 1, 2011. The new Constitution sets the basis for a more open and democratic society, provides mechanisms for the construction of a modern state of law and institutions, and lays the foundation for extended regionalization. Transparent parliamentary elections, held on November 25, 2011, were won by the Parti de la Justice et du Développement (PJD), a party that had traditionally been in active opposition. The PJD formed, in early January 2012, a four-party coalition government, with Mr. Benkirane, the head of the PJD, becoming the Head of Government. 2. In this context, Morocco’s unique experience reflects its political distinctiveness in the region, even though many of the same grievances among the population exist (lack of economic opportunities, corruption, widespread poverty, social inequality, unemployment). This experience has shown that Moroccans seem more inclined to seek evolution within the system – gradual change continuous with the country’s history and religious values. 3. The movements associated with the political transition and constitutional changes represent real pressure on the Moroccan State for meaningful and quick change. While the people seem to be willing to support the Government and its mandate, they are expecting and indeed demanding that it breaks with the past and ushers in more credible and faster reforms, notably in the areas of job creation and improvement of the quality of public services delivered. If the Government can assume more ownership of the political process and genuinely deliver, then this will go a long way to transforming the social and political landscape of Morocco. 4. Morocco made significant economic headway during the decade preceding the Arab Spring. Growth averaged 4.8 percent over 2001-12, compared to 2.8 percent in the 1990s. Inflation was less than 2 percent over the period. Gross domestic product (GDP) per capita doubled to reach US$2,951 in 2012; unemployment declined from 13.6 percent in 2000 to 9 percent in 2012; absolute poverty decreased from 15.3 percent to roughly 8.8 percent between 2001 and 2008. 5. Morocco weathered the first round of the global financial crisis relatively well, maintaining an investment grade rating since 2007. This reflected sustained efforts to implement sound macroeconomic policies and ambitious structural reforms. Morocco liberalized a number of sectors, including transport, energy, and telecommunications, and signed many Free Trade Agreements, including with Europe. The financial sector was strengthened to support the new dynamism of the nonagricultural sector and (although much still remains to be done) the microfinance segment is among the most developed in the MENA region. 6. However, Morocco has confronted growing economic challenges in the second round of the global financial crisis. Developments in the Euro area and continued high fuel and food 1 import prices are expected to put sustained pressure on fiscal and external balances. The current account deficit is estimated to have reached 9.6 percent of GDP in 2012 from further losses in terms of trade, and lower tourism receipts and remittances. The fiscal deficit deteriorated to 7.6 percent of GDP in 2012 and central government debt jumped to 58.8 percent of GDP. This fiscal deterioration stems mainly from higher-than-expected expenditures, especially on food and fuel subsidies, wages and salaries, and transfers to public agencies and state-owned enterprises. Financing the deficit through classical external borrowing from multilateral and bilateral creditors, along capital grants proved insufficient, which led the Government to raise US$1.5 billion bonds on international financial markets in December 2012. As a result, the central government debt increased by 5.1 percentage points of GDP in 2012 to reach 58.8 percent of GDP. 7. The recent shocks have left the Government with much smaller policy margins at a time when the population has higher expectations for job creation and poverty alleviation. Unemployment remains high (9 percent), especially among the urban youth, despite one of the lowest participation rates (49 percent) among comparator countries. Four out of 5 unemployed are urban, 2 out of 3 are youth aged 15-29, 1 in 4 jobless holds a university diploma. About a quarter of the population–around 8 million people–is either in absolute poverty or under constant threat of falling back into poverty. Seventy percent of poverty is still rural and in 2007 the urban poverty rate was 4.8 percent compared to 14.5 percent in rural areas. Income of the poor has been growing at a slower rate than the average income. 8. In the current political and economic environment, inclusive growth and job creation by the private sector dominate the policy debates. With government increasingly financially constrained, there are high expectations that SMEs and micro-enterprises can increasingly contribute to private sector job creation in Morocco. The World Bank’s 2011 financial sector flagship report showed that access to finance is a key constraint in areas underserved by conventional banks, such as the informal sector. 9. Microfinance institutions (MFIs), by the very nature of their business model and cost structure, are particularly well equipped to provide financial services to the informal sector. Morocco’s MFIs have established a solid track record in expanding access to the inform al sector, despite problems resulting from an initial period of high growth without an adequate institutional and governance framework. The recent consolidation of the sector, as well as other central bank measures that led to improved governance, supervision, and more and better sharing of information on the borrowers of microloans, paved the way for further expansion of access. 10. MFIs contribute significantly to the production of quality credit information on borrowers in the informal sector. When these borrowers are seasoned and reach a critical size, they become more attractive to traditional banks and can transition to the more productive formal sector where they typically benefit from a better safety net. By enabling this transition, MFIs may also contribute to net job creation, though only with long lags and in limited quantity. More importantly, greater MFI penetration lays the foundation for a financial system less geared to the few borrowers with valuable collateral, prominent supporters or implicit guarantees. 2 B. Sectoral and Institutional Context 11. Morocco has a well thought-out strategy for the sustainable development of its financial sector, inspired by a drive to learn from and adapt best practices to the need of Morocco’s modernizing economy. Over the past 20 years, important reforms of the institutional and legal framework helped sustain the development of a capable financial industry. The sector is wide open to international practices, with a view to balance financial sector stability objectives with diversification and innovations that meet the needs of households and enterprises. Advances include the governance of financial institutions and of regulatory authorities, oversight practices and crisis preparedness, finance for small enterprises, capital market development, and financial inclusion. The strategy aims to establish Morocco as a regional hub for the dissemination of best practices in financial sector development, and Moroccan financial institutions have established important beachheads in Africa. The strategy has been supported by Bank-financed development policy loans (DPLs) and several Technical Assistance projects, as well as IFC investments in and advisory services to the larger Microcredit Associations (Associations de Micro-crédit, AMC). 12. Financial inclusion is one of three dimensions of the strategy, with capital market development, and continuous refinements of oversight standards and practices. The Bank has partnered with Morocco on financial inclusion under successive financial sector DPLs, the MENA MSME Technical Assistance Facility, and the Morocco MSME Development Project (to ramp up the provision of guarantees to MSMEs). Several dimensions of a full-fledged financial inclusion strategy have achieved consensus and are being launched. In particular, Bank Al- Maghrib (BAM) has been working since 2007 with the national association of banks and finance companies, and has launched an action plan that includes: a foundation for financial education; a center for financial mediation; the licensing of a second credit bureau; the licensing of intermediary banking agents for wider access to banking and payment services; dedicated bank reporting to monitor inclusion; a financial literacy survey; and other initiatives to enhance consumer protection and choice. However, the lack of a well-funded microfinance lobby (FNAM) and the sector’s heterogeneity delayed a full integration of microfinance initiatives in BAM’s plans. Accordingly, there is a need to take stock, and through a process of consultation, achieve synergies, and mitigate implementation risk across various inclusion initiatives. 13. Despite limited institutional capacity from the industry association lobby, demand from underserved segments of the population has led to the emergence of large microcredit institutions. Indeed, Morocco leads in microcredit in the Arab world. The Moroccan microfinance sector represents 40 percent of all microfinance clients across the region, 80 percent of branches, and 50 percent of MFI employment (Livre Blanc, 2012), for a share of Arab World population of 10 percent. The Moroccan microcredit sector consists of 13 not-for-profit associations (Associations de Micro Credit - AMC) with some 800,000 accounts and outstanding loans of MAD 5 billion (0.4% of GDP; 0.7% of credit to the private sector) (MixMarket, December 2012).1 The four largest AMCs account for 95 percent of the outstanding loans, and the five smallest, 1 percent. With AMCs prohibited from collecting deposits, liabilities are 80 percent bank lines, 15 percent subsidized refinance facility for the ones not fulfilling bank lending conditions (through Jaida – a private fund aimed at refinancing MFIs), plus government and donor funds. In 2010, the sector’s equity/asset ratio was 25 percent and its return on equity 1 Not-for-profit status means that net earnings accrue entirely to equity and all activities are tax-exempt, incl. VAT. 3 was 15 percent. 14. The Microcredit Law of 1999 provided a framework for the nascent industry to take off. The law established Jaida and attracted equity support from international donors. Government sources (e.g., Fonds Hassan II) also contributed equity during take-off. In just four years, from 2003 to 2007, MFI loan portfolios grew 11 times and outreach four times, to 1.2 million accounts (Consultative Group to Assist the Poor – CGAP 2010). Growth was driven by four leading MFIs (Zakoura, Al-Amana, Fondation des Banques Populaires (FBP), Fondep) with 90% client outreach. With the emergence of socially systemic AMCs, oversight responsibilities shifted from the Ministry of Finance to BAM, which started to supervise the sector in 2007, although the Ministry retained licensing power until 2012. 15. Unbridled growth overwhelmed not-for-profit governance arrangements, risk control, and information systems. Starting in 2007, BAM inspections revealed alarming financial conditions, sometimes from outright fraud. BAM’s interventions resulted in the clean-up of loan portfolios, a pause in lending, and consolidation. Portfolio-at-risk greater than 30 days (PAR30) increased from 2% in 2007 to 10% in 2009, and client accounts quickly dropped below 1 million, including through paring back cross-borrowing.2 The sector and regulators had focused on quick gains (building size and outreach) at the expense of qualitative actions to develop the literacy of the client base, implement responsible lending practices, and introduce risk management and commercial standards. In May 2009, Zakoura, Morocco’s leading MFI, reported a PAR30 above 30% and the authorities organized its absorption into FBP, backed by a large commercial bank. 16. The authorities and key financial stakeholders took swift action to stabilize the sector. In addition to the Zakoura operation, local commercial banks have kept their financing lines, and other financial backers have maintained their stakes or waived financial covenants. The confidence of financiers was buttressed importantly by BAM’s close oversight of MFIs’ deleveraging measures, through slower growth and efforts to collect from delinquent or fraudulent borrowers. 17. Stabilization was accompanied by the launch of root-and-branch reforms designed to put the sector on a sustainable commercial and financial footing. BAM mandated a comprehensive review of underwriting and credit appraisal, improvement of risk and internal controls, and governance arrangements more in line with those of financial institutions. Assistance from key donors, such as the Millennium Challenge Account or IFC, focused on introducing modern banking practices, obtaining external ratings, developing human resource strategies, and better meeting client needs. 18. Under BAM’s impulse, particular attention was paid to sector-wide information systems to identify and control concentration risk and weed out risky borrowers. MFIs entered agreements with the private credit bureau providing them access to the database at preferential rates in exchange for information on client profiles. As of 6 June 2011, 50 percent of MFI clients were in the credit bureau database, about a fifth of economy-wide records. With donor support, the more advanced MFIs are in the process of updating their information management systems, for example, in order to consult the database in real time or feed transactions initiated by MFI 2 40 percent of beneficiaries had loans from different institutions, with no integrated view of cross-borrowing. 4 agents on the ground directly into accounting and risk management systems. 19. The crisis and comprehensive reforms that followed have primed the sector for a phase of more mature growth. Key stakeholders engaged in wide-ranging consultations that culminated in the October 2012 First International Symposium on Microfinance in Morocco. The aim of the Symposium was to present and discuss a white paper outlining a national strategy for microfinance in a public forum. Workshops covered the job creation potential of microfinance; integration of global best practices; from microcredit to microfinance; and funding needs. 20. In addressing the event, His Majesty the King endorsed the strategy and emphasized its key principles: help the informal sector create jobs; develop new products and practices to reach the underserved; incorporate best financial management and control practices; achieve synergies by integrating the objectives of government policies across regions, types of income generating activities, age or gender. The King also called on continued support from international entities. 21. As part of the national strategy, Parliament passed in 2012 important amendments to the 1999 microcredit law. One amendment formalizes a framework for the consolidation of micro- credit associations, through acquisitions or mergers. This amendment introduces into law the kind of operation that underpinned the resolution of Zakoura. The authorities have been encouraging the smaller AMCs to consolidate in order to achieve critical mass. A larger AMC can more easily partner with a bank to secure funding in exchange for distribution and outreach services. It is expected that the promulgation of the new law will trigger such moves. A second amendment allows AMCs to create finance companies under Morocco’s corporate law. The aim is to attract new investors into the finance company, which in turn can borrow from banks at more attractive terms than the AMC, given BAM’s tighter prudential rules. So-called “transformation� into finance company would allow AMCs to secure more stable funding of current assets, as well as increase capital to support future growth. 22. The 2012 law calls on the MoEF to regulate the costs that AMCs can pass through to microcredit beneficiaries. This amendment came about during parliamentary review of the draft amendment to the microcredit law and was not envisaged in the reform strategy. The industry has worked closely with MoEF and BAM to devise a solution. The current proposal envisages an all-in cost comprising staff costs, other operational expenses, funding costs, credit risk premia (reflecting recent credit losses), remuneration of capital, plus a margin. 3 The large MFIs have indicated that attracting new investors in the context of “transformation� hinges on maintaining the prior regulatory regime and generally the tax-free regime of not-for-profit entities (VAT exemption). 23. Through “transformation� and other measures, the sector aims in the next ten years to multiply by four the number of accounts (to 3.2 million), and by five the volume of credit (to 2% of GDP). If reached, 40-50 percent of the population would be served, assuming 4-5 beneficiaries per account. Comprehensive financial inclusion would be well within reach given overlap between these targets and parallel financial inclusion initiatives. The postal bank created in 2009 as part of BAM’s inclusion plan already has in excess of 5 million accounts, although it 3 MoEF has regulated the all-in-cost of credit extended by banks and finance companies since 1997, and limits the margin to 200 basis points. 5 does not yet offer lending services, but partners with a large MFI to this end. The commercial banks are also developing inclusion tools (so-called “low income banking�) through partnerships with telecom or remittance operators, with 3.5 million accounts opened in the recent past. BAM’s targets under its financial inclusion plan are for two-thirds of the population formally accessing banks by 2014, either directly or via intermediaries. 24. MFI stakeholders are working on other financial inclusion projects that are at various stages of maturation. However, the design of transformational projects has been hampered by a lack of knowledge management platforms and integrated information systems for analysis and policy formulation. Stakeholders indicated that much data is available, and with suitable granularity. However, the data is dispersed and highly unwieldy for analysis, outreach, and policy. A leading industry advocate that attempts to conduct analysis has been the Centre Mohammed VI pour la Microfinance Solidaire (CM6), which was established in 2007. Its mission is to: train AMCs, including in the development of innovative products; studies and outreach (it hosts the microfinance observatory); market access and basic management advice for microenterprises; and financial education. The Centre aims to develop new products and design common technology and information platforms that could provide industry-wide services, especially to the small AMCs. For example, CM6 and Jaida are conducting background work to assess the regulatory and technical feasibility of a mobile-banking platform that would be common to all AMCs. However, CM6 does not engage in policy formulation or interface with the regulatory authorities on behalf of the industry. 25. FNAM as the microfinance industry association has been absent from inclusion initiatives. The 1999 law provided that all AMCs are members of FNAM to ensure a strong interlocutor for the authorities in what was then a nascent industry. The mission of FNAM is to represent the industry in the public arena and with oversight authorities, and spearhead sector- wide initiatives. However, lack of resources since inception means that FNAM has no permanent staff, nor offices, and is thus unable to fulfill its mandate. A critical factor preventing agreement among FNAM members to develop the institution appears to have been heterogeneous membership, with large and financially savvy MFIs at odds with small charitable MFIs. For the past several years, a large commercial bank with an AMC subsidiary has been filling in for FNAM on its own resources. The bank has also been trying to organize and provide basic financial services to a loose grouping of smaller AMCs. FNAM estimates it would need a budget of US$ 0.5 million per year to begin work. A key aim of the proposed project is strengthening FNAM. 26. Microfinance donors are in various stages of evaluating the impact of their strategies and planning possible follow-on projects. Donor activities are generally coming to a close or have already been discontinued. In particular, MCA/USAID will close a wide-ranging microfinance project (see table below) that began in 2007, with MAD 42 million in technical assistance to finish disbursing by June 2013 and MAD 33 million in IT, management information systems and risk control systems. The size of these projects (compared with the sector’s need for additional capital of MAD 5 billion to support MAD 25 billion lending by 2023) suggests that substantial investments in human capital, processes and systems may come to an end, with no replacement contemplated at this stage. The Bank has conducted a series of consultations with microfinance donors active in Morocco to coordinate efforts and better identify the Bank’s value added. A 6 brief summary of donor activities is provided below: TA provider Beneficiaries Focus Duration Funding Source IFC Al-Amana, Governance, Risk ongoing MENA MSME Fondep Management Facility (50% Cofinance) MCA Ardi, Réseau Marketing 2007-13 80% USAID microfinance Diversification of The rest by solidaire funding sources beneficiaries Geographical coverage strategy MCA All MFIs Strengthening 2007-13 80% USAID internal controls, The rest by improving risk beneficiaries management and organization of MFIs MCA RMS, FONDEP- Change 2007-13 80% USAID MC management The rest by beneficiaries MCA Al AMANA Implementation of 2007-13 80% USAID FONDEP-MC Mobile Banking The rest by Improving beneficiaries customer relationship GiZ CM6 Financial 2011-13 GiZ education of micro- entrepreneurs Banque de CM6 Microfinance 2012 AFD France/AFD observatory Source: World Bank staff interviews with donors and implementing agencies. 27. The MoEF asked the World Bank to be the implementation support agency for the proposed grant under the MENA Transition Fund in light of its long-standing engagement with the Moroccan authorities on financial inclusion issues. In addition, the Bank hosts the secretariat of the G-20 Global Partnership for Financial Inclusion (GPFI) and develops policy documents with the Financial Inclusion Expert Group for the GPFI. The Bank also has close links with and hosts the Consultative Group to Assist the Poor (CGAP), the leading policy group on microfinance. A financial sector DPL planned for end-2013 will include an important financial inclusion pillar and the proposed grant will help inform the design of the DPL. 28. Morocco received considerable assistance from the donor community (see section III B for additional details) and as such, incorporating core lessons and designing a project that complements rather than duplicates other donor activities is of significant importance to the overall success of the project. 7 C. Higher Level Objectives to which the Project Contributes 29. The proposed operation contributes directly to the objectives of the World Bank Group’s Country Partnership Strategy (CPS) for Morocco (FY2010-2013) discussed by the World Bank’s Board of Executive Directors on January 26, 2010. The CPS proposes three thematic pillars aligned with the development priorities of the country. The first pillar states that the structural transformation of the Moroccan economy will require a comprehensive and coordinated set of policies in many areas, underpinned by a financial sector that better serves smaller firms and microenterprises. The proposed operation is targeting precisely the financial inclusion of this underserved segment of the Moroccan economy, as well as women, which have been amongst the key beneficiaries of the Moroccan microcredit sector: of all microloans issued in Morocco, 55.3% have benefitted women and 46.9% have benefitted age groups between 30 and 49 years. These objectives are also central to the MENA Regional Strategy, discussed by the Board in January 2013. 30. The Government’s support for a strong and sustainable microfinance sector has been endorsed in the First International Symposium on Microfinance in Morocco held in October 2012. At this public forum, the country’s microfinance strategy was introduced and discussed. Workshops covered the job creation potential of microfinance; integration of global best practices; product diversification away from credit-led models; and funding needs. In addressing the event, His Majesty the King endorsed the strategy and emphasized its key principles: help the informal sector create jobs; develop new products and practices to reach the underserved; incorporate best financial management and control practices; achieve synergies by integrating the objectives of government policies across regions, types of income generating activities, age or gender. The King also called on continued support from international entities. The proposed operation supports the roll-out of the national microfinance strategy by strengthening the resilience and impact of the microfinance sector, both for lending to enterprises as well as households for investment. Microloans to households are often the initial steps toward consumption smoothing, which helps raise living standards and thereby worker productivity in formal enterprises. MFIs also generate “self-employment� which helps alleviate the incidence of absolute poverty in the informal economy. II. PROJECT DEVELOPMENT OBJECTIVES A. Project Development Objective (PDO) 31. The project objective is to promote access to finance to low income households and micro and small enterprises through the promotion of a sustainable and inclusive microfinance sector. B. Project Beneficiaries 32. The project’s direct and indirect beneficiaries fall into five categories and reflect key actors at different institutional levels within the microfinance sector in Morocco. Beneficiaries are: i) industry regulators and policymakers including BAM and the Ministry of Finance; ii) coordinating agencies/service providers including FNAM and the Centre Mohammed VI; iii) microfinance institutions; iv) low-income individuals, particularly women, and v) 8 microenterprises and small businesses, including women-led firms. 33. Industry Regulators and Policymakers: The project will provide technical assistance through diagnostic studies and policy development support on key legal, regulatory, and governance issues affecting the microfinance sector. Policy support will also be provided to promote innovation and regulate new product development such as mobile banking. The project will also develop a financial inclusion strategy (based on stock-taking and impact evaluation work) and provide assistance in disseminating this strategy accordingly. These activities will benefit industry regulators and policymakers, most notably the BAM and the Ministry of Finance, allowing them to develop an enabling environment that promotes efficiency, stable growth, and access to finance for underserved people in Morocco. 34. Coordinating Agencies/Service Providers: This project seeks to provide FNAM the capacity and strategy needed to become an effective and sustainable industry association. Technical assistance provided through the project will allow FNAM to effectively coordinate information amongst MFIs and engage with policymakers on key sectoral issues. Similarly, the project also seeks to reinforce key service providers within the industry, most notably Center Mohammed VI, which will benefit from project assistance to expand their role in financial education, knowledge management, and research. Together these activities seek to strengthen the market infrastructure surrounding MFIs through enhancing the capacity of coordinating agencies and service providers. 35. Microfinance institutions: Microfinance institutions (MFIs) will benefit directly from technical assistance and policy work designed to build common platforms to enhance the efficiency of the sector. MFIs will benefit from technical assistance designed to mutualize back office and other support functions, diversify and expand funding sources, and provide guidance on transforming to finance companies. MFIs will also benefit from policy guidance on product innovation, particularly mobile banking. More indirectly, MFIs will benefit through a strengthened industry association (FNAM) and an improved regulatory and legal environment through assistance provided to regulators and policymakers. 36. Low-income individuals, particularly women: The project seeks to enhance the ability of low-income individuals, particularly women, to access quality microfinance services. Low- income individuals will benefit from more efficient and strengthened MFIs, which can translate into greater product offerings, expanded geographic reach, and more competitive pricing for clients. They will also benefit from the development of a national financial inclusion strategy that seeks to address gaps in financial access and usage, particularly for rural poor and the poorest segments of society who are not served by banks or microfinance institutions. Low- income individuals will also benefit from financial education training that is prioritized in this project. Finally, low-income individuals will benefit indirectly through more effective legal, regulatory, and governance environment for the microfinance industry developed through the project. 37. Microenterprises and small businesses, including women-led firms: Microenterprises and small firms will benefit from the project through a strengthened and more efficient MFI sector. MFIs will be able to offer microenterprises and small firms more innovative product 9 offerings, more competitive pricing, greater geographical reach, and improved efficiencies when accessing microcredit. Microenterprises and small firms will also benefit indirectly from the policy guidance provided through the project to MFIs transforming into finance companies. Transformation allows MFIs to tap into significantly more diverse funding sources, most notably equity investments through shareholders. This additional funding will help MFIs serve microenterprises that have larger financing needs than average MFI clients but are not yet served by banks or non-bank financial institutions. Additional financing as a result of transforming will also enhance the geographic reach through which MFIs can serve small firms. Box 1: Inclusion of Gender in Project Design and Implementation Microfinance is considered a successful example of gender-inclusive development. Globally 75% of more than 205 million customers served by MFIs are women, including 82% of the 137.5 million poorest clients (Microcredit Campaign Report 2012). In Morocco 27% of women have an account at a formal financial institution (Findex 2012) while 43% of women have taken a loan (formal or informal) in the past year. Approximately 46% (368,000) of total MFI clients are women in Morocco. Women are viewed as key beneficiaries for MFIs because they are often responsible for the well-being of the family, and thus seen as a conduit for conferring income and consumption smoothing benefits to the greatest number of people. Microfinance also supports females ’ economic empowerment because it creates opportunities for business expansion and productive investment at the household level, bypassing many socio-economic barriers that prevent women from participating in the local economy. Qualitative and quantitative studies (e.g. those from Women’s World Banking) have demonstrated that access to microfinance services empowers women through an increased likelihood to own assets (land, houses, etc.), greater control over household assets, and an ability to invest and grow in microbusinesses. An impact evaluation in Morocco (Duflo et al 2011) estimated the effect of Al Amana opening 60 new branches in sparsely populated rural areas on credit allocation, consumption, and business activity, among others. The main effect of improved access to credit was to expand the scale of existing self-employment activities of households, including both keeping livestock and agricultural activities. The evaluation revealed important limitations to female empowerment in rural areas in Morocco. The studies found that only a small proportion of women borrow in rural areas. Out of those women who borrowed there was little change with regards to bargaining power in the household, decision-making, or mobility between villages. Recognizing the gender-specific benefits of microfinance, as well as challenges outlined by the recent impact evaluation (detailed above), this project seeks to mainstream gender into all activities. All diagnostic work to be completed will incorporate gender analysis. For example, an assessment of regulatory burdens on MFI growth will include gender-specific consideration and policy suggestions. Policy guidance on product development will prioritize how to effectively innovate for female client segments. The financial literacy activities will include specific modules on financial literacy of women and girls, recognizing the differences in asset allocation and household bargaining power women are subject to. An impact evaluation will be completed to measure the effect of existing financial literacy efforts (mainly by BAM although also supported by MFIs) on the economic participation of women. In addition, women will be placed at the center of the national financial inclusion strategy, particularly for strategies addressing female microfinance access in rural areas. Specific gender targets have been included and will be tracked by the M&E framework. 10 C. PDO Level Results Indicators 38. The performance of the project will be assessed against the following indicators that will also serve as project milestones:  Percentage of adults (and women) with an account at a formal financial institution, including low-income households  Volume of outstanding microloans (USD mn)  Number of end-beneficiaries of MFIs, including low-income households, microenterprises and small firms  Portfolio at Risk of MFIs III. PROJECT DESCRIPTION 39. The project aims to support access to finance to low income households, micro- and small enterprises through the promotion of a sustainable and inclusive microfinance sector. This objective will be achieved through a comprehensive package of analytical work and technical assistance aimed at supporting the enabling environment for microfinance and financial inclusion. The program is structured around three core components: (i) strengthening the institutional, legal, regulatory, tax and governance framework for microfinance, (ii) strengthening the market infrastructure, product innovation and funding sources for microfinance, and (iii) integrating microfinance into a national financial inclusion strategy. A brief description of the respective components is included below (See Annex 2 for detailed project description). A. Project Components Component 1: Strengthening the institutional, legal, regulatory, tax and governance framework for microfinance (US$ 1.9 million) 40. This component aims to support activities contributing to the strengthening of the institutional, legal, regulatory and governance framework of the microfinance sector. This component aims to a) prepare an action plan to assess and reinforce the capacity of the National Federation of Microcredit Associations of Morocco (FNAM) and b) support activities contributing to the strengthening of the legal, regulatory, tax and governance framework of the microfinance sector. This component will also finance goods, services, travel, and incremental operating costs incurred by the PMU in the implementation and management of the project. a) Prepare an action plan, including a comprehensive assessment to reinforce the capacity of the National Federation of Microcredit Associations of Morocco (FNAM): FNAM is the primary industry association responsible for development of the microfinance sector in Morocco through policy guidance, MFI coordination, and engagement with key actors including funders and regulators. The institutional capacity of FNAM needs to be strengthened to ensure the sector can effectively restructure, expand, and respond to changing regulatory and market conditions. The project will assist the FNAM in fulfilling its core mandate of acting as the industry’s steering body by centralizing information and disseminating studies, acting as an intermediate body between state regulating bodies and 11 microfinance institutions, developing and delivering services that address member’s needs/issues, and providing support across all levels and in all regions and districts in the country. FNAM also plays the role of an intermediary between Microfinance Institutions and key stakeholders of microfinance services of Morocco, including the Government, Central Bank, donors, development partners, financiers, investors and clients of microfinance services. This component will be implemented in two stages: First, an action plan will be prepared, including a comprehensive assessment of the role, funding structure, statutes, governance and capacity of the FNAM, measuring the gap between its current status and desired future role, benchmarking it with other global best practice examples. In a second step, a technical assistance program will be developed building on the recommendations of this diagnostic, with the objective of transforming the FNAM into a proactive industry organization and knowledge hub of the Moroccan microfinance sector. b) Carrying out studies to inform the development of a modern legal, regulatory, tax and governance framework for microfinance: This sub-component aims to support activities contributing to the modernization of the legal, regulatory and fiscal framework for microfinance, as well as the development of governance and risk management standards for the microcredit sector. Activities will include, inter alia, studies that inform the development of a tax policy adapted to the specific needs of the MFIs, review the cap on borrowings for clients of MFIs, the regulation of remuneration of credit, reviews and adapt the solvency and liquidity ratios of the MFIs, and strengthen the financial reporting and regulatory oversight of BAM over MFIs. Improving the use of judicial and non- judicial (arbitration, mediation) means for recovering unpaid loans will also be a key activity of the project under this component. Component 2: Strengthening the market infrastructure, product innovation and funding sources for microfinance (US$ 1.5 million) 41. This component focuses on activities aimed at a) building common platforms improving the efficiency and effectiveness of microcredit associations, b) building market infrastructure in support of microenterprises, and c) promoting the strengthening and diversification of funding. a) Promoting innovative common platforms and new products for MFIs. This sub- component will support the development of common platforms, systems and products aimed at improving the efficiency and effectiveness of MFIs. Activities will include studies on the development of new products for the microfinance sector, the development of a mobile banking platform for MFIs, which is expected to have a transformational impact on the sector through the significant reduction of transaction costs for cash transfers for low income households and microenterprises. Other proposed activities include the development of a training and certification program for officers of Microfinance Institutions. b) Building market infrastructure for micro entrepreneurs: This sub-component will support the development of market infrastructure aimed at facilitating microenterprises’ 12 access to markets. Activities supported will include studies on how microenterprises can improve the commercialization of their products, and the development of an electronic platform allowing microenterprises to market their goods, or the development of a e-project platform through which micro entrepreneurs can get information on innovative business models, and supporting the development of a micro-credit mediation function within the framework of BAM’s mediation center. c) Strengthen and diversify funding sources: This sub-component aims to support activities which would inform policymakers, regulators, supervisors and MFIs on how the microfinance sector can diversify and strengthen its funding sources to ensure its financial sustainability over the medium and longer term. Proposed activities include, inter alia, studies aimed at assessing refinancing possibilities to MFIs and amend existing regulations to allow MFIs tapping into new financial resources, and structuring and designing a guarantee mechanism including all stakeholders. In a second phase, this sub-component would, building on the findings of the aforementioned studies, finance the design and structuring of mechanisms (e.g. stabilization fund, guarantees, etc.) aimed to strengthen the financial sustainability and stability of the sector. Component 3: Integrating Microfinance into a national financial inclusion strategy (US$ 1.5 million) 42. This component aims to integrate the national microfinance roadmap into a wider, comprehensive national financial inclusion strategy. In a first step, this component aims to conduct a cross-cutting stocktaking exercise of all previous and ongoing activities aimed at promoting financial inclusion, putting the microfinance sector in a larger financial sector development context. This component will also finance the design and roll out of financial literacy programs for low income households and microenterprises, the key beneficiaries of microfinance, within the framework of the proposed ‘foundation for financial education’, which is in the process of being rolled out under the leadership of BAM. This component will also finance studies and impact evaluations assessing the effectiveness of public policies and private initiatives aimed at promoting financial inclusion, as well as the impact of financial inclusion, including microfinance, on employment creation, poverty reduction and growth. 43. In a second phase, this component aims to build on the findings of the aforementioned activities to develop a comprehensive national financial inclusion strategy, to be developed in a structured consultative process with all key public and private sector stakeholders, and develop an action plan with specific objectives and targets to achieve the aims of the strategy, as well as a clearly defined M&E framework to measure progress. B. Project Financing Project Cost and Financing 44. The proposed Investment Project Financing will be financed through a trust fund grant in the amount of US$4.9 million from the MENA Transition Fund. The MoEF will provide an estimated in-kind contribution of US$1 million. The project costs and financing are detailed in the table below. 13 Trust Fund Project cost Project Components Financing % Financing (US$M) (US$M) Component 1: Strengthening the 2.9 1.9 65.5 institutional, legal, regulatory, tax and governance framework for microfinance Component 2: Strengthening the 1.5 1.5 100.0 market infrastructure, product innovation and funding sources for microfinance Component 3: Integrating 1.5 1.5 100.0 Microfinance into a national financial inclusion strategy Total Project Costs 5.9 4.9 Interest During Implementation Front-End Fees Total Financing Required 5.9 4.9 83 C. Lessons Learned and Reflected in the Project Design 45. The project design is reflective of key lessons from existing projects providing support to the Moroccan microfinance both inside and outside of the World Bank Group. The project is also reflective of recent analytical and research work on the microfinance sector. 46. Existing Development Projects to the Sector: The Millennium Challenge Corporation, as part of a broader US$700 million global compact signed with the Government of Morocco, is in its final year of implementing a US$42.6 million financial services project. Project activities consisted mainly of providing technical assistance to MFIs to increase institutional capacity. Assistance was provided to nearly every MFI in the sector and focused on strengthening institutional capacity on topics including internal management (human resources, employee skills training), systems development (MIS, internal audit, risk management, credit scoring), and market development (new product development, expanding funding sources). Equally, the International Finance Corporation (IFC) has a robust TA program with leading MFIs Fondep and Al Amana that has recently focused on streamlining credit operations. 47. Lessons leant from these projects are three-fold. First, large MFIs have been relatively successful at completing TA projects and have relatively robust internal and external procedures. Thus, a project seeking to provide TA to these MFIs risks duplicating efforts. Any direct TA provided to MFIs should focus on smaller MFIs that lack capacity and resources to grow and sustain themselves. Second, there is a need to address the institutional, regulatory, and governance framework that surrounds the sector for a number of these TA initiatives to prove successful. For example, scoping and diagnostic work on mobile banking was completed with a leading MFI (Fondation Banque Populaire) although currently there lacks a legal and regulatory framework to support this. Finally, there is a significant need to deepen sectoral reforms through increased coordination between MFIs and regulators through common platforms that promote communication and policy dialogue. This can help reduce duplication, help market actors learn from each other, and promote innovation and growth in the sector. 14 48. Analytical and Research Work in the Sector: This project is informed by recent research work on the microfinance sector utilizing a variety of approaches, including randomized control trials, financial diary research, qualitative focus groups and analytical studies.4 This research has pointed out limitations in both impact and outreach of microfinance institutions. Impact evaluations have pointed out that while microcredit access is crucial for low-income households to smooth consumption, manage risks, invest productively, and respond to financial shocks, it often has little impact on poverty alleviation.5 Similarly, improved data, for example global Findex data and Finmark Trust Finscope’s surveys, have pointed out that despite exponential growth in the microfinance sector, a significant majority of the world’s poor are not served by formal financial services. For example, recent survey work completed by the Jameel Latif Poverty Action Lab (J-PAL) pointed to the fact that only 2.5% of those in Morocco living on less than US$2/day borrow from formal credit sources. 49. These research findings have led to a shift in industry thinking away from enhancing MFIs alone towards an interest in developing the broader financial ecosystem. In addition to a renewed focus on consumers (demand), this approach acknowledges the need for effective and appropriate supporting functions such as credit bureaus or payment systems and rules that govern the system. Ensuring adequate infrastructure and developing a policy and regulatory environment that enables increased outreach in a way that meets the needs of poorer consumers, has become a priority for governments and other stakeholders. The result has been a much more holistic view of the sector and a more coordinated effort by government and industry to focus on increasing financial inclusion and ultimately, making microfinance work better for the poor. 50. This project incorporates this recent research and subsequent shift in industry thinking by focusing on the institutional change required at both the MFI level as well as the broader market eco-system. Significant project resources are dedicated to diagnostic work, stock-taking, and impact evaluation, recognizing the importance of understanding in scientifically rigorous way current impediments to growth in the microfinance sector. Similarly, the project focuses on changes to the legal, regulatory, and governance framework surrounding MFIs. These activities provide strategic investments in an enabling environment that will allow MFIs and other providers to overcome current market bottlenecks (for example, transformation or lending limits). The project also focuses on building a national financial inclusion strategy, seeking to coordinate diverse market actors towards promoting financial inclusion of all Moroccans. This extends significantly beyond the purview of MFIs alone. Finally, the financial literacy components in the project help ensure the project supports the direct financial needs of low- income Moroccans themselves, embodying the recent research shift towards understanding client needs. This project complements a related World Bank regional project “Enhancing Microfinance Access amongst Women and Youth in MENA�, under preparation, focusing on completing demand-side research and implementing financial literacy modules across Egypt, Morocco, and Tunisia. 4 For example, national level FinMark Trust’s FinScope surveys www.finmark.org.za and Global Findex databases www.data.worldbank.org/data-catalog/financial_inclusion; Also see, see Financial Access Initiative (FAI) http://financialaccess.org/; Abdul Latif Jameel Poverty Action Lab (J-Pal) http://www.povertyactionlab.org/about-j-pal; Innovations for Poverty Action (IPA) http://poverty-action.org/ 5 See: Bauchet, Jonathan et al. Latest Findings from Randomized Evaluations of Microfinance. Report. Washington: CGAP, December 2011. 15 IV. IMPLEMENTATION A. Institutional and Implementation Arrangements Institutions 51. The project will be implemented by the Ministry of Economy and Finance (MoEF). The Ministry is in charge of the regulation of the microcredit sector: Its competencies include the regulation of the maximum amount of microcredit (currently capped at 50,000 MAD); the sector’s accounting framework; the maximum interest rate; asset/liability ratios, etc., in consultation with the Micro-Credit Advisory Board (see Box 2). This overarching regulatory role qualifies the MoEF as a well suited implementing agency for this cross-cutting project. Box 2: Micro-Credit Advisory Board The micro-credit advisory board is consulted on all matters related to the licensing and the development of micro-credit associations. It is composed of the following members:  Representatives of the administration;  Representatives of professional associations;  Representatives of the National Federation of Micro-credit Associations (FNAM);  a representative of Bank Al-Maghrib;  a representative of the Moroccan Banking Association;  a representative of the Moroccan Association of Finance Companies. The number, operating procedures and terms of appointment of members of the Advisory Board are set by decree. Implementation of Activities 52. The MoEF will be responsible for the implementation of all project components, in close collaboration with FNAM, BAM and Centre Mohamed VI. The MoEF has ultimate responsibility for the implementation of the project and exercises oversight functions including approval of the Project Implementation Manual (PIM), work plan, and budgets, and oversight of fiduciary implementation and progress towards implementation and results. Detailed implementation arrangements are available in Annex 3. 53. The MoEF prepares an annual work plan describing activities, timeline, and budgets for activity implementation. The MoEF has developed the PIM which describes the policies to be followed for all project components. Any modification of the PIM requires the Bank’s no objection. 54. Project Team: The Project will be implemented by Project Management Unit within the MoEF, supported by a team of consultants. The MoEF will contribute an estimated in-kind contribution of US$ 1,000,000 to support the implementation of this project (US$ 400,000 in 16 staff time and US$ 100,000 in other expenses [travel, material, etc.], US$ 500,000 in contributions to project components). 55. Ad-hoc Advisory Committee: An ad-hoc advisory committee comprising representatives from BAM, FNAM and Centre Mohamed VI has been formed to advise the project based on ad-hoc briefings provided by the MoEF throughout the lifetime of the project. The advisory committee provides strategic input and guidance throughout project implementation. The committee provides technical expertise to project implementation and help ensure the project is effectively addressing key regulatory, legal, governance, and market development issues in order to successfully help the industry overcome market bottlenecks. The committee also serves coordination and communication functions, ensuring all partners involved are aware of progress and key lessons learned across project sub-components. 56. Coordination Activities: The project will be implemented in coordination with complementary projects to take advantage of synergies between different donor-funded activities. The team has undertaken consultations with a number of donors active in private and financial sector development in Morocco, and this project has strong potential complementarities with many planned and ongoing activities, including, among others, the Financial Sector Strengthening Project of the USAID/Millennium Challenge Account (MCA). The MCA/USAID project began in 2007 and provided MAD 42 million in technical assistance to MFIs and MAD 33 million in IT, management information systems and risk control systems. The MCA/USAID project will finish disbursing in June 2013. This project has been designed to build on the USAID/MCA project while minimizing duplication (see paragraph 46 for additional information). The project has also been designed and will be implemented in close coordination with the IFC. 57. This project also fits within a broader, long term engagement with the Moroccan authorities aimed at expanding access to finance for households and MSMEs. The World Bank has supported crucial institutional and legal reforms through a series of DPLs focusing on financial inclusion and stability, and promoting enhanced access to financing to MSMEs though the support of the national partial guarantee mechanism [MSME Development Project (Report No. 68550-MA)], technical assistance in support of the MSME sector [MENA MSME Facility (P124341)], as well as the regional project on “Enhancing Microfinance Access amongst Women and Youth in MENA�. B. Results Monitoring and Evaluation 58. The results framework for the project is centered around the PDO and specifies PDO level and intermediate indicators which will be monitored to evaluate project performance towards the objectives (see Annex 1). Primary responsibility for results monitoring will fall on MoEF, which will present an M&E report to the World Bank on a quarterly basis. C. Sustainability 59. The sustainability of the project results will be achieved through adoption of policies and programs informed by the diagnostic and capacity building work completed during the project. A core focus of the project is to provide industry actors - regulators, government, MFIs, service 17 providers, and micro entrepreneurs – knowledge and capacity building to overcome sectoral bottlenecks and impediments to growth. These bottlenecks include the institutional capacity of FNAM, regulatory and legal impediments to MFI transformation and growth, information asymmetries preventing access to finance amongst micro entrepreneurs, or the lack of a coordinated strategy on financial inclusion. This project equips industry actors with the capacity and resources needed to overcome such bottlenecks to promote growth and diversification in the microfinance sector, to bridge microfinance with larger financial inclusion efforts, and to promote an enabling regulatory and legal environment. These changes lay the foundation for long-term future growth in the sector, particularly as the sector continues to mature and diversify in terms of products offered, geographic reach, institutional capacity of MFIs, and the prioritization of financial inclusion. 60. The project’s sustainability is further strengthened through the project’s focus on expanding national financial literacy efforts. Financial literacy equips low-income beneficiaries and micro entrepreneurs with the knowledge, skills, and motivation to make effective financial decisions across a variety of contexts. This behavior is sustainable in that once financial literacy skills are taught and adopted, they can be used over and over again across a variety of contexts. Furthermore, there are many secondary benefits to financial education. More efficient financial behavior can increase productive activity, which can promote private-sector development, job creation, and innovation. Financial education also allows for more effective management of household financial assets, which can help women specifically as they often play dual roles of income generators and household financial managers. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Stakeholder Risk Moderate Implementing Agency Risk - Capacity High - Governance Moderate Project Risk - Design Moderate - Social and Environmental Low - Program and Donor Low - Delivery Monitoring and Sustainability Moderate Overall Implementation Risk Moderate B. Overall Risk Rating Explanation 61. The overall risk for this operation is moderate. There is a key risk associated with ensuring the implementing agency’s capacity to implement the project, in part due to the lack of full time dedicated staff working on the project and the PIU’s limited experience with the Bank's 18 procurement guidelines. The key risk with regards to project design is a possible conflict of interest between implementing agents and industry actors, but is considered to be mitigated through a well-designed and balanced institutional structure, promoting the effective participation of key actors in various project components. VI. APPRAISAL SUMMARY A. Economic and Financial Analyses 62. The Microfinance Development project is a comprehensive, demand-driven approach aimed at increasing employment and incomes of poor segments of the Moroccan population which are currently underserved by the Moroccan financial system. Economic benefits and outcomes include:  Enhancing income generating activities and job creation though the improved access to financing for microenterprises and small firms.  Positive spillover effects to the overall private sector by enhancing the competitiveness of microenterprises and small firms.  Substantial growth in revenue and employment for microenterprises and small firms though an improved market infrastructure.  Fiscal return for the government from taxation on incremental revenues, income and employment. 63. The outcomes of capacity changes, incremental revenues, and employment effects generated by this project would, as seen in other similar projects, be only visible atcompletion. The project incorporates an M&E framework that aims to measure the impact of this project, as well as the impact of other public policies on employment generation, poverty reduction and growth. B. Technical 64. The project is appropriate to Morocco’s needs and technically viable. It focuses on key economic development priorities in the Government of Morocco’s economic and social development strategy: The promotion of very small enterprises and the microfinance sector has been endorsed by the highest levels of Government, most recently during the international microfinance symposium held in October 2012 (see paragraph 30 for more information). The design is informed by lessons learned from previous World Bank-financed projects and other studies on the impact of the microfinance sector on poverty reduction, employment generation and growth. C. Financial Management 65. The implementing entity of the project is the MoEF. The financial management system within the MoEF was appraised to determine if it complies with the requirements of the Bank in respect to OP/BP10.00. The financial management assessment of the MoEF covered the areas of accounting and financial management, as well as the reporting and auditing processes of the 19 project. The financial management system, including necessary arrangements to respond to the needs of the financial monitoring of the project, satisfies the minimum requirements of the Bank. 66. The assessment concluded that the MoEF, strengthened by the hiring of an additional financial management specialist by the Project Management Unit (PMU), will have sufficient capacity to manage project financial matters and administer grant funds. The hiring of the additional financial management specialist is a dated covenant and shall be completed by not later than four (4) months after the Effective Date. The main responsibilities will include Project budgeting, treasury, general accounting and reporting. The FM inherent risk for the country, the entity, and the project is considered moderate. 67. Disbursement will be handled through the PMU at the MoEF following established procedures. 68. The PMU within the MoEF ensures that interim unaudited financial reports for the Project are prepared and furnished to the World Bank not later than forty five (45) days after the end of each calendar semester, covering the semester, in form and substance satisfactory to the World Bank. Financial flow of funds will come from the grant funds of the Transition Fund. Flow of funds between the World Bank the MoEF will be organized according to the Disbursement procedures of the Bank. 69. The MoEF shall have its Financial Statements for the Project audited in accordance with the provisions of Section 2.07 (b) of the Standard Conditions. Each such audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the World Bank not later than six months after the end of such period. D. Procurement 70. Procurement for the Project will be carried out in accordance with the World Bank’s Guidelines: Procurement of Goods, Works and non-consulting services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011 and Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011 and the provisions stipulated in the Grant Agreement. 71. Procurement under the project is mostly for the selection of consultants for study or local market assessments, support for post-creation business development, development of training product/curricula and tools for capacity building, technical assistance and strategic advice to all microcredit stakeholders, capacity building to the FNAM and project management and monitoring. It concerns also goods and services related to project management, organization of training and other capacity building events under the 3 components. The project is proposed to be implemented by a Project Management Unit (PMU) within the MoEF, comprising members of the division in charge of credit institutions (“Division des établissements de credit�, DEC) of the Directorate of treasury and external finance (“Direction du Trésor et des finances extérieurs�), the Directorate of Administrative and General Affairs (“Direction des affaires 20 administratives et générales�) as well as additional specialists. 72. A capacity assessment of the DEC and the Directorate of Administrative and General Affairs (DAAG) were conducted on January 14 and 23, 2013. Overall, it shows that the DAAG through its division of Administrative and General Affairs and the procurement unit is well staffed (in number: 16 public buyers) to carry out procurement activities. For procurement execution and monitoring, the DAAG has adopted simplified Excel based electronic tools which enormously facilitates both procurement process and contracts management. In addition, the DAAG’s procurement unit staff has good experience of using the GID system for project follow up and statistics data generation. However, the DAAG has very limited exposure to Bank procurement procedures and its staff has not been trained in Bank procurement procedures in the past. On the other hand, the DEC has experience in Bank funded operation in very recent years but with no procurement involved. 73. The overall risk for procurement is considered substantial. This is because of: (i) the lack or limited experience in Bank procurement procedures of the DEC and DAAG and their staff working directly on project implementation; (ii) the absence of training in Bank procurement procedures for those staff; and (iii) the availability of staff to work for the project will be partial and therefore possibly cause delays in the project implementation. 74. To help mitigate the risk and facilitate project implementation, the following measures have been implemented: (i) launch of the recruitment of an additional procurement specialist to help carry out procurement and build capacities within the MoEF; (ii) organization of workshop for procurement training for all staff involved in the project implementation; (iii) preparation of Standard bidding documents (SBD) for National Competitive Bidding (NCB) complying with procedures for NCB acceptable to the Bank; and (iv) preparation of an implementation manual for the project. The hiring of the additional procurement specialist and shall be completed by not later than four (4) months after the Effective Date. More details are provided in Annex 3. E. Social (including Safeguards) 75. Social safeguard policies are not triggered, and the social impacts of this project are expected to be positive. F. Environment (including Safeguards) 76. Environmental safeguards policies are not triggered. The nature of most of the activities will be procurement of services and other intangibles, with possible small scale goods or equipment which are not anticipated to have any major or irreversible environmental impacts. 21 Annex 1: Results Framework and Monitoring MOROCCO: Microfinance Development Project Results Framework Project Development Objective (PDO): The project objective is to promote access to finance to low income households and micro and small enterprises through the promotion of a sustainable and inclusive microfinance sector. Responsibility Description Data Source/ Cumulative Target Values** Frequency for Data (indicator Unit of Baseline Methodology Core PDO Level Results Indicators* Collection definition etc.) Measure (Dec 2012) YR 1 YR 2 YR3 YR4 Indicator One: % of adults (and Percent 0 (0) 2% (2%) 5% (5%) 10% (11%) 12% (15%) Bi-annually BAM PMU (MoEF) Access to formal increase financial inclusion women) with an account at a (percent is a core indicators formal financial institution, female in of relative including low income brackets) financial inclusion households levels in a given country Indicator Two: Outstanding USD mn 550 560 570 580 590 Semi- BAM PMU (MoEF) Volume of Microfinance Loan Portfolio (4’589’185 annually outstanding MAD) microloans Indicator Three: Number of Number 804,000 830,000 900,000 1,000,000 1,100,000 Semi- BAM PMU (MoEF) This indicator active loan accounts - annually includes loan Microfinance accounts held by low-income households, microenterprises and small firms. Indicator Four: Portfolio at Risk Percent 6.7% -- 6.6% 6.5% 6.4% Semi- BAM PMU (MoEF) - Microfinance annually 22 INTERMEDIATE RESULTS Intermediate Results (Component One): Strengthening the institutional, legal, regulatory, tax and governance framework for microfinance Intermediate Result indicator Number 0 0 1 2 3 Annually PMU (MoEF) PMU (MoEF) One: Regulatory studies completed Intermediate Result indicator Number 0 0 0 1 3 Annually PMU (MoEF) PMU (MoEF) Two: Number of operational and regulatory initiatives implemented by BAM and other key stakeholders Intermediate Results (Component two): Strengthening the market infrastructure, product innovation and funding sources for microfinance Intermediate Result indicator Number 0 0 1 2 3 Quarterly PMU (MoEF) PMU (MoEF) One: Number of alternative microfinance products developed and piloted (e.g. Islamic finance, mobile phone banking, housing) Intermediate Result indicator Number 0 500 700 900 1100 Semi- CM6 Centre Two: Number of trainings to Annually Mohammed 6; PMU (MoEF) micro entrepreneurs delivered Intermediate Results (Component three): Integrating Microfinance into a national financial inclusion strategy Intermediate Result indicator Binary No Yes Once BAM PMU (MoEF) One: Financial inclusion stock- (Yes/No) taking completed Intermediate Result indicator Binary No Yes - - Once BAM PMU (MoEF) Two: Evaluation completed of (Yes/No) existing financial inclusion measures 23 Intermediate Result indicator Number 6,000 8,000 10,000 12,000 14,000 Semi- CM6; BAM PMU (MoEF) Modules (class Three: Number of beneficiaries (4,099 from Annually room or receiving financial literacy CM6; 2,000 interactive) that enhance training estimates knowledge and from BAM) understanding of financial concepts, and the skills, motivation and instill the confidence to apply such knowledge and understanding in order to make effective decisions across a range of financial contexts 24 Annex 2: Detailed Project Description Morocco: Microfinance Development Project 1. The project aims to support access to finance to low income households, micro- and small enterprises through the promotion of a sustainable and inclusive microfinance sector. This objective will be achieved through a comprehensive package of analytical work and technical assistance aimed at supporting the enabling environment for microfinance and financial inclusion. The program is structured around three core components: (1) Strengthening the institutional, legal, regulatory, tax and governance framework for microfinance, (2) Strengthening the market infrastructure, product innovation and funding sources for microfinance, and (3) Integrating Microfinance into a national financial inclusion strategy. A description of the respective components is included below. Project Components Component 1: Strengthening the institutional, legal, regulatory, tax and governance framework for microfinance (USD 1.9 million) 2. This component aims to support activities contributing to the strengthening of the institutional, legal, regulatory and governance framework of the microfinance sector. This component aims to a) prepare an action plan to assess and reinforce the capacity of the National Federation of Microcredit Associations of Morocco (FNAM) and b) support activities contributing to the strengthening of the legal, regulatory, tax and governance framework of the microfinance sector. This component will also finance goods, services, travel, and incremental operating costs incurred by the PMU in the implementation and management of the project. a) Prepare an action plan, including a comprehensive assessment to reinforce the capacity of the National Federation of Microcredit Associations of Morocco (FNAM): FNAM is the primary industry association responsible for development of the microfinance sector in Morocco through policy guidance, MFI coordination, and engagement with key actors including funders and regulators. The institutional capacity of FNAM needs to be strengthened to ensure the sector can effectively restructure, expand, and respond to changing regulatory and market conditions. The project will assist the FNAM in fulfilling its core mandate of acting as the industry’s steering body by centralizing information and disseminating studies, acting as an intermediate body between state regulating bodies and microfinance institutions, developing and delivering services that address member’s needs/issues, and providing support across all levels and in all regions and districts in the country. FNAM also plays the role of an intermediary between Microfinance Institutions and key stakeholders of microfinance services of Morocco, including the Government, Central Bank, donors, development partners, financiers, investors and clients of microfinance services. This component will be implemented in two stages: First, an action plan will be prepared, including a comprehensive assessment of the role, funding structure, statutes, governance and capacity of the FNAM, measuring the gap between its current status and desired future role, benchmarking it with other global best practice examples. In a second step, a 25 technical assistance program will be developed building on the recommendations of this diagnostic, with the objective of transforming the FNAM into a proactive industry organization and knowledge hub of the Moroccan microfinance sector. b) Carrying out studies to inform the development of a modern legal, regulatory, tax and governance framework for microfinance: This sub-component aims to support activities contributing to the modernization of the legal, regulatory and fiscal framework for microfinance, as well as the development of governance and risk management standards for the microcredit sector. Activities will include, inter alia, studies that inform the development of a tax policy adapted to the specific needs of the MFIs, review the cap on borrowings for clients of MFIs, the regulation of remuneration of credit, reviews and adapt the solvency and liquidity ratios of the MFIs, and strengthen the financial reporting and regulatory oversight of BAM over MFIs. Improving the use of judicial and non- judicial (arbitration, mediation) means for recovering unpaid loans will also be a key activity of the project under this component. Component 2: Strengthening the market infrastructure, product innovation and funding sources for microfinance (USD 1.5 million) 3. This component focuses on activities aimed at a) building common platforms improving the efficiency and effectiveness of microcredit associations, b) building market infrastructure in support of microenterprises, and c) promoting the strengthening and diversification of funding. a) Promoting innovative common platforms and new products for MFIs. This sub- component will support the development of common platforms, systems and products aimed at improving the efficiency and effectiveness of MFIs. Activities will include studies on the development of new products for the microfinance sector, the development of a mobile banking platform for MFIs, which is expected to have a transformational impact on the sector through the significant reduction of transaction costs for cash transfers for low income households and microenterprises. Other proposed activities include the development of a training and certification program for MCA officers. b) Building market infrastructure for micro entrepreneurs: This sub-component will support the development of market infrastructure aimed at facilitating microenterprises’ access to markets. Activities supported will include studies on how microenterprises can improve the commercialization of their products, and the development of an electronic platform allowing microenterprises to market their goods, or the development of a e-project platform through which micro entrepreneurs can get information on innovative business models, and supporting the development of a micro-credit mediation function within the framework of BAM’s mediation center. c) Strengthen and diversify funding sources: This sub-component aims to support activities which would inform policymakers, regulators, supervisors and MFIs on how the microfinance sector can diversify and strengthen its funding sources to ensure its financial sustainability over the medium and longer term. Proposed activities include, 26 inter alia, studies aimed at assessing refinancing possibilities to MFIs and amend existing regulations to allow MFIs tapping into new financial resources, and structuring and designing a guarantee mechanism including all stakeholders. In a second phase, this sub-component would, building on the findings of the aforementioned studies, finance the design and structuring of mechanisms (e.g. stabilization fund, guarantees, etc.) aimed at strengthen the financial sustainability and stability of the sector. Component 3: Integrating Microfinance into a national financial inclusion strategy (USD 1.5 million) 4. This component aims to integrate the national microfinance roadmap into a wider, comprehensive national financial inclusion strategy. In a first step, this component aims to conduct a cross-cutting stocktaking exercise of all previous and ongoing activities aimed at promoting financial inclusion, putting the microfinance sector in a larger financial sector development context. This component will also finance the design and roll out of financial literacy programs for low income households and microenterprises, the key beneficiaries of microfinance, within the framework of the proposed ‘foundation for financial education’, which is in the process of being rolled out under the leadership of BAM. This component will also finance studies and impact evaluations assessing the effectiveness of public policies and private initiatives aimed at promoting financial inclusion, as well as the impact of financial inclusion, including microfinance, on employment creation, poverty reduction and growth. 5. In a second phase, this component aims to build on the findings of the aforementioned activities to develop a comprehensive national financial inclusion strategy, to be developed in a structured consultative process with all key public and private sector stakeholders, and develop an action plan with specific objectives and targets to achieve the aims of the strategy, as well as a clearly defined M&E framework to measure progress. 27 Annex 3: Implementation Arrangements MOROCCO: Microfinance Development Project Institutions 1. The project is proposed to be implemented by the Ministry of Economy and Finance (MoEF). The project will be implemented by the MoEF. The MoEF will be responsible for management direction and oversight, financial management, and procurement. Implementing Agency Assessment 2. The MoEF has been identified as the most qualified implementing agency to host the Project Management Unit of the Morocco Microfinance Development project. The Ministry is in charge of the regulation of the microcredit sector: Its competencies include the elaboration of the legal and regulatory framework for the sector, the regulation of the maximum amount of microcredit; the sector’s accounting framework; the maximum interest rate; asset/liability ratios, etc., in consultation with the Micro-Credit Advisory Board and BAM. This overarching regulatory role qualifies the MoEF as a well suited implementing agency for this cross-cutting project. 3. The role of the MoEF as an implementing agency for this project has been fully appraised by the World Bank during the appraisal mission in January 2013. A Project Management Unit (PMU) has been established within the MoEF, and has been tasked to manage the day-to-day implementation of the project. It is composed of the Project Director - an official staff from the Ministry, assisted by the recruitment of a FM and procurement specialists who will reinforce the officials supporting the PMU. 4. The Bank has assessed the staffing of the PMU during appraisal and provided recommendations on how the PMU could be further strengthened. While official staff assigned to the project is highly qualified, they will not be able to fully dedicate their time to this project in light of their existing tasks in the Ministry. Hence, the team has suggested reinforcing the capacity of the PMU through the recruitment of an additional FM and Procurement specialists to strengthen the team and to provide support to the project. The Project Director will control and supervise the work of the consultant to ensure ownership of the project by the Ministry. The Administrative affairs (DAAG) within the MoEF will ensure support to projects. The detailed functions, task and responsibilities of the PMU and its team members is outlined in the Project Implementation Manual (PIM). Implementation of Activities 5. The MoEF will be responsible for the implementation of all project components, in close collaboration with FNAM, BAM and Centre Mohamed VI. The MoEF has ultimate responsibility for the implementation of the project and exercises oversight functions including approval of the PIM, work plan, and budgets, and oversight of fiduciary implementation and progress towards implementation and results. 28 6. The MoEF prepares an annual work plan describing activities, timeline, and budgets for activity implementation. The MoEF has developed a PIM, which can be modified subject to the World Bank’s approval. The PIM describes the policies to be followed for all project components. 7. Project Team: The Project will be implemented by leveraging the MoEF’s in-house team with a team of local consultants. The MoEF will contribute an estimated in-kind contribution of US$ 1,000,000 to support the implementation of this project (US$ 400,000 in staff time and US$ 100,000 in other expenses [travel, material, etc.], US$ 500,000 in contributions to project components). 8. Ad-hoc Advisory Committee: An ad-hoc advisory committee comprising representatives from BAM, FNAM and Centre Mohamed VI will be formed to advise the project based on ad-hoc briefings provided by the MoEF throughout the lifetime of the project. The advisory committee will provide strategic input and guidance throughout project implementation. The committee will provide technical expertise to project implementation and help ensure the project is effectively addressing key regulatory, legal, governance, and market development issues in order to successfully help the industry overcome market bottlenecks. The committee also serves coordination and communication functions, ensuring all partners involved are aware of progress and key lessons learned across project sub-components. 9. Coordination Activities: The project will be implemented in coordination with complementary projects to take advantage of synergies between different donor-funded activities. The team has undertaken consultations with a number of donors active in private and financial sector development in Morocco, and this project has strong potential complementarities with many planned and ongoing activities, including, among others, the Financial Sector Strengthening Project of the USAID/Millennium Challenge Corporation (MCC). The MCA/USAID project began in 2007 and provided MAD 42 million in technical assistance to MFIs and MAD 33 million in IT, management information systems and risk control systems. The MCA/USAID project will finish disbursing in June 2013. This project has been designed to build off of the USAID/MCA project while minimizing duplication (see paragraph 46 for additional information). Trust Fund Arrangements 10. The Deauville Partnership Transition Fund (DPTF) has entered into a Financial Procedures Agreement with the World Bank as the Implementation Support Agency. The Bank, acting as Implementation Support Agency (ISA), will enter into a Grant Agreement with the MoEF which according to the provisions of the DPTF Operations Manual and the TF Grant Application is a Recipient Entity for the purposes of this grant. Financial Management, Disbursements and Procurement 11. Public Financial Management: The Bank’s experience in Morocco and the main conclusions of the 2009 PEFA indicate that the Moroccan public finance system is governed by an elaborate legal and regulatory framework. The financial management risk of the Moroccan 29 public finance system is considered low. 12. Assessment of the Financial Management System: The Financial Management System within the Ministry of Finance was appraised to determine if it complies with the requirements of the Bank in respect to OP/BP10.00. The Financial Management System of the MoEF covered the areas of accounting and financial management, as well as the reporting and auditing processes of the project. The financial management system, including necessary arrangements to respond to the needs of the financial monitoring of the project, satisfies the minimum requirements of the Bank. 13. General framework: The project is financed by the Transition Fund for US$ 4.9 million and by the Moroccan Government for US$ 1 million in kind contribution. The total estimated project cost is US$ 5.9 million. The project will be executed in a period of four years. Risk Analysis: Inherent risk Risk Rating Mitigation of risk Risk rating after mitigation Country level Low The Moroccan public finance system is governed by a complex legal and regulatory framework that offers guarantees of high reliability and transparency. Morocco’s compliance with rules and regulations and existing accountability arrangements provide an adequate framework for the use of public funds and public financial management (PFM) is considered broadly transparent. Project level Moderate  A Project Management Low The Ministry of Economy and Finance has Unit will have a consultant long experience with the World Bank at the for Financial Management county and project levels. The PIU is based at and Procurement that will the Ministry. Its Staff are fully qualified but work closely with the will not be assigned full-time to the Project as Director of the PMU. they have other tasks within the Ministry.  Capacity building of financial management staff of the project.  Close monitoring by the World Bank financial management team  A Project implementation manual acceptable to the World Bank to ensure that project activities are covered in their entirety and that the risk level is mitigated. Inherent risk before mitigation Substantial Inherent risk after mitigation Moderate 30 Control Risks Rating after Risks Rating Mitigation of risk mitigation of risk Budget Low Accounting Low The accounting system is based on accounting regulations applicable to public institutions (Royal Decree n° 330-66, April 21, 1967) BO. n° 2840, April 26, 1967, p. 452) ; relating to the maintenance of public accounting in accordance with General Code of accounting Standards. Financial Reporting Moderate The FM consultant will Low The Implementing agency is using GID to extract the report from GID administer its accounting. and will ensure that The financial reporting for the project can be complementary information extracted from GID. requested in the financial While presenting the funds to the MoEF to be report, if not able to extract it budgeted, the split of the grant into from GID, are completed in components will be clearly presented to allow an excel spreadsheet and the bank funds to be reported in GID by reviewed and submit it to the components. Director for approval and submission to the Bank. Funds Flow Low Financial flows come from the World Bank and in kind contribution from the counterpart The flow of funds from the World Bank are organized according to the Bank's disbursement procedures Internal control Substantial An implementation Manual No formalization of the internal control details the control Moderate functions within the Ministry. environment to be applied for this project. The external auditor of the project will submit a report on internal control Auditing Moderate The Bank team will ensure the Low Delay in submitting audit report. auditor, its term of reference are acceptable to the Bank and that the audit work is started timely to deliver the required report within the deadlines. Inherent risk before mitigation Substantial Inherent risk after Moderate mitigation 14. The assessment concluded that the MoEF, strengthened by the hiring of an additional financial management specialist by the Project Management Unit (PMU), will have sufficient capacity to manage project financial matters and administer grant funds. The hiring of the additional financial management specialist shall be completed by not later than four (4) months after the Effective Date. The main responsibilities will include Project budgeting, treasury, 31 general accounting and reporting. The FM inherent risk for the country, the entity, and the project is considered moderate. 15. Support to PMU: The Project Director will be assisted by a specialist in procurement and a specialist in financial management. The Directorate of General and Administrative affairs (DAAG) within the MoEF will ensure support to the project while the FM consultant will strengthen the DAAG capacity, and will assist in ensuring good management of funds, and timely production of the required financial reporting. 16. Procedures and policies: The MoEF has a manual of procedures for the DAAG unit but doesn’t have a manual of accounting and organizational procedures. Hence, to allow a good implementation of the project, a PIM outlines the procedures to be applied for the funds and the level of controls to be applied. 17. Budgeting: In Morocco, each Ministry prepares its own budget and submits it to the MoEF for approval through the “Loi de Finance�. In the case of grants, they can also use an alternate way “le fond de concours� when it needs to be budgeted during the year. The MoEF will ensure that the Budget is well presented and that the separation of the funds in the different budget lines will allow identifying the grant component. This will allow the funds budget presentation for this grant to be presented in Gestion Intégrée des dépenses (GID) accordingly, and hence, extract the financial reporting directly from the system. 18. Accounting: An acceptable cash based accounting system with the outline of budget components is operational according to the regulations described in the public accounting law. The transactions in terms of commitments and disbursements are reflected in the well- functioning Integrated Financial Management Information System (IFMIS) named GID. 19. The overall principles for project accounting are outlined below: (a) Books of accounts for the project will be maintained on cash basis principles. Maintaining the reporting financial to reflect all the transaction flow of funds and issuing of the interim unaudited financial report (IUFR) each semester; and (b) Project accounting will cover all sources and utilization of project funds. This will include payments made and expenditures incurred. Financial Management Reporting of the Project: 20. The PMU within the MoEF ensures that interim unaudited financial reports for the Project are prepared and furnished to the World Bank not later than forty five (45) days after the end of each calendar semester, covering the semester, in form and substance satisfactory to the World Bank. 21. Interim Unaudited financial report (IUFR) will be extracted from GID and complementary information requested will be maintained on an excel spreadsheet. GID allows to extract the commitments and disbursements of the project, but not to present the commitment by categories. GID will allow the extraction of the commitment and disbursements by component only. Hence, this complementary information will be prepared by the FM specialist who will compare the information prepared with the total of the component extracted from GID to ensure accuracy. The head of the Administrative and Financial Management Unit will review and approve and 32 submit it to the PMU Director for approval and submission to the Bank. The FMR’s include, in addition to a summary of project progress the following: - Summary of funding sources and uses of funds - Uses of funds by project component and by project category - Cash withdrawal - Cash forecast 22. The Bank guidelines on financial monitoring will be communicated to the project. A sample of FMR to use for the project has been agreed on and annexed to the manual of implementation of the project. Interim Unaudited Financial Reports and Annual Financial Statements will be used as a financial reporting mechanism and not for disbursement purposes. 23. Controls: In Morocco, the rules governing funds commitment and payment authorization are clear, well known, and enforced. The control framework is based on the segregation of duties between the Commitment (ordonnateur) and payment (comptable). 24. The MoEF does not have the internal control procedures formalized. Hence, a Project Implementation Manual (PIM) has been prepared in order to document the control environment. The PIM describes, among others: controls mechanisms, transfer and accountability mechanisms for beneficiaries. 25. Fiduciary responsibility for control of budget execution and monitoring is assigned to the General Inspectorate of Finance (IGF). The Budget Directorate within the MoEF plays an important role in controlling transactions financed by external donors. 26. External Audit: Audit Arrangements. Annual Project financial statements audited by auditors acceptable to the Bank will be submitted to the Bank within 6 months after the end of each Fiscal Year. The audit will be comprehensive and cover all aspects of the Project (i.e., all sources and utilization of funds, and expenditures incurred). The audit will be carried out in accordance with International Standards on Auditing. The Project team will provide the auditor with access to project related documents and records, and information required for the purposes of the audit. The implementing agency will retain an auditor acceptable to the bank to perform an annual audit in accordance with International Standards on Auditing (ISA or INTOSAI), as issued by the international Federation of Accountants and with terms of reference acceptable to the Bank. The audit terms of reference should be acceptable to the Bank. 27. Audited Project Financial Statements (PFS) will be submitted to the Bank on an annual basis. PFS will include: (i) a statement of sources and utilization of funds or Balance sheet, indicating funds received from various sources, project expenditures, and assets and liabilities of the project; (ii) schedules classifying project expenditures by components, expenditure categories; and (iii) a statement of reimbursement made on the basis of statements of Expenditure (SOEs). 28. The MoEF shall have its Financial Statements for the Project audited in accordance with the provisions of Section 2.07 (b) of the Standard Conditions. Each such audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial 33 Statements for each such period shall be furnished to the World Bank not later than six months after the end of such period. 29. Staffing: In addition to the PMU staff, the recruitment of an additional FM and an additional Procurement specialist is important to strengthen the team and to provide support to the project. The Project Director will control and supervise the work of the consultant to ensure ownership of the project by the Ministry. Funds flow and disbursement 30. Financial flow of funds will come from the grant funds of the Transition Fund. Flow of funds between the World Bank and the MoEF will be organized according to the Disbursement procedures of the Bank. The funds after their budgeting in the “Loi de Finance� will be transferred to MoEF according to Bank disbursement guidelines and according to the method agreed on the Disbursement Letter. Disbursement will be handled through the PMU at the MoEF following established procedures. 31. The payment justifications supporting documents will be sent to the Directorate of Budget (MoEF) for verification, approval and then electronically submitted to the Bank. The MoEF have the below options: a) Pre-finance the expenses, and grant disbursement will be made based on documentary evidence or on presentation of statement of expenditures (SOEs) prepared in compliance with the World Bank disbursement procedures. The Head of the PMU will provide documentary evidence and SOE, which will be submitted to the Budget Directorate/MoEF, External financing department, which will review eligibility and electronically submit them to the World Bank for reimbursement. b) Direct payment: The Head of the PMU will prepare documentary evidence in compliance with the World Bank disbursement procedures and will submit them to the Budget Directorate/MoEF. The Budget Directorate/MoEF, External financing department, which will review eligibility and electronically submit the Direct payment request to the World Bank for processing. c) Advance: The Head of the PMU will open a designated account and can request an advance on the project. Once documentary evidence and statement of expenditures (SOEs) in compliance with the World Bank disbursement procedures are submitted them to the Budget Directorate/MoEF to justify the advance usage, it will be reviewed by the Budget Directorate/MoEF for accuracy and will submit the justification to the World Bank. A replenishment request of the designated account will be then submitted electronically. The head of the PMU will be responsible for submitting monthly replenishment applications with appropriate supporting documentation. Authorized signatories, names, and corresponding specimens of their signatures will be submitted to the Bank prior to the receipt of the first Withdrawal Application. The disbursement procedures are outlined in the PIM. 32. The minimum application size for direct payment and reimbursement will be the equivalent of 20% of the Advance ceiling amount. The Bank will honor eligible expenditures 34 completed, services rendered and delivered by the Project closing date. A four months' grace period will be granted to allow for the payment of any eligible expenditure incurred before the Grant Closing Date. 33. Statement of expenditures (SOE): During implementation, necessary supporting documents will be sent to the Bank in connection with contract that are above the prior review threshold, except for expenditures under Contracts with an estimated value of: (a) US$ 300,000 or less for goods and non-consulting services; (b) US$ 100,000 or less for Consulting Firms; (c) US$ 50,000 or less for Individual Consultants, operating costs and training, which will be claimed on the basis of SOEs. The documentation supporting expenditures will be retained at Project Management Unit and will be readily accessible for review by the external auditors and periods Bank implementation support missions. 34. In summary, the proceeds of the grant would be disbursed in accordance with the disbursement procedures of the Bank and will be used to finance project activities through the disbursement procedures currently used, that is Direct Payment, Reimbursement and Advance, accompanied by appropriate supporting documentation (Summary Sheets with records and/or SOEs) in accordance with the procedures described in the Disbursement Letter and the Bank's “Disbursement Guidelines�. 35. e-Disbursement. The Bank has introduced e-Disbursement for all projects in Morocco. Under e-Disbursement, all transactions will be conducted and associated supporting documents and SOEs scanned and transmitted online through the World Bank’s Client Connection system. The use of e-Disbursement functionality will streamline online payment processing to (i) avoid common mistakes in filling out WAs; (ii) reduce the time and cost of sending WAs to the Bank; and (iii) expedite the Bank processing of disbursement requests. 36. Planning of Implementation Support: Implementation support missions will be conducted every six months based on the risk assessment of the project. The missions’ objectives will include: (i) ensuring that strong financial management systems are maintained for the project throughout its life; and (ii) semi-annual review of IUFRs, review of annual audited financial statements and management letters. Procurement General 37. Procurement for the proposed project would be carried out in accordance with (i) the World Bank’s Guidelines On Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, known as the ‘Anti-Corruption Guidelines’ dated October 15, 2006 and revised in January, 2011; (ii) the ‘Guidelines: Procurement of Goods, Works, and non-consulting services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers’ (known as Procurement Guidelines) dated January 2011; (iii) the ‘Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,’ (known as Consultant Guidelines) dated January 2011; and (iv) all the accompanying standard bidding documents for any new procurement and the provisions stipulated in the Grant Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the grant, the 35 different procurement methods or consultant selection methods, the estimated costs, prior review requirements, and agreed time frame are set out in the Procurement Plan. The procurement procedures and Standard Bidding Documents (SBD) that will be used by the recipient has been included in the PIM, which includes specific and detailed sections regarding Procurement. 77. Procurement under the Project is mostly for the selection of consultants for study or local market assessments, entrepreneurship training for Microcredit beneficiaries, support for post- creation business development, development of training product/curricula and tools for capacity building, technical assistance and strategic advice to all microcredit stakeholders, capacity building to the FNAM and project Management and Monitoring along with drafting a national financial inclusion strategy. It concerns also goods and services related to project management, organization of training and other capacity building events under the 3 components. The project is proposed to be implemented by a Project Management Unit (PMU) within the MoEF, comprising members of the division in charge of credit institutions (“Division des établissements de credit�, DEC) of the Directorate of treasury and external finance (“Direction du Trésor et des finances extérieurs�), the Directorate of Administrative and General Affairs (“Direction des affaires administratives et générales�) as well as additional specialists. Category Amount of the Percentage of Expenditures to be Financed Grant Allocated (inclusive of Taxes) (expressed in USD) Goods, non-consulting services, and consultants’ services, Training and 4,900,000 100% Operating Costs under the Project TOTAL AMOUNT 4,900,000 38. National Competitive Bidding (NCB) procedures adjusted as indicated below will be used for all Goods and Non-Consulting Services contracts estimated to cost less than the equivalent of US$ 3,000,000. To ensure broad consistency with the Procurement Guidelines, the following provisions will apply when using NCB under this project. Said procedures shall ensure that, inter alia: a) The bidding documents include explicitly the bid evaluation method, award criteria and bidder qualification criteria; b) Technical, administrative and financial envelopes are opened immediately after the bid opening session has started and prices are read aloud; c) The bids are evaluated on the basis of the price and any other criteria expressed either in pass/fail terms or in monetary terms; d) Contracts are awarded to the qualified bidder who has submitted the least-cost evaluated and substantially responsive bid as stipulated in the bidding document; and e) Standard bidding documents and bid evaluation reports found acceptable by the Bank are used. 36 39. Moreover, it has been agreed with the beneficiary that each contract financed from the proceeds of this grant shall provide that suppliers, contractors and subcontractors shall permit the Bank, at its request, to inspect their accounts and records relating to the bid submission and performance of the contract and to have said accounts and records audited by auditors appointed by the Bank. The deliberate and material violation by the supplier, contractor or subcontractor of such provision may amount to “obstructive practice�. 40. The procedures and standard bidding documents (SBD) of the beneficiary adjusted to be acceptable by the Bank will be used under National Competitive Bidding (NCB). Thus prior to issuing the first call for bids, a draft SBD to be used under NCB procurement must be submitted to the Bank for approval. 41. Procurement Plan: A Project Procurement Plan dated June 13, 2013 in a format acceptable to the Bank has been prepared and will be updated at least once a year. The procurement plan for the first eighteen (18) month period has been agreed upon. The procurement plan shall indicate which contracts shall be subject to the Bank’s prior review. All other contracts shall be subject to Post Review. No Works contracts are contemplated under the project. 42. Procurement of Goods and non-consulting Services: Procurement of Goods and Non consulting services comprising the acquisition of equipment, material and office supplies for the PMU, logistics for workshops, capacity building events among others, will be carried out using the following methods: a) National Competitive Bidding (NCB): Each package estimated to cost less than the equivalent of US$ 3,000,000 may be procured on the basis of NCB procedures as found acceptable by the Bank. Bidding documents acceptable to the Bank will be used. b) Shopping: Goods and non-consulting services estimated to cost US$ 500,000 or less may be procured using Shopping procedures. c) Direct Contracting: Under circumstances which meet the requirements of paragraph 3.7 of the Procurement Guidelines, goods, non-consulting Services and works may be procured in accordance with the paragraph 3.7 of the Procurement Guidelines using the Direct Contracting procurement method. 43. Selection of Consultants: Consultants services comprise mostly the selection of consultants for study or local market assessments, entrepreneurship training for Microcredit beneficiaries, support for post-creation business development, development of training product/curricula and tools for capacity building, technical assistance and strategic advice to all microcredit stakeholders, capacity building to the FNAM and project management and monitoring along with drafting a national financial inclusion strategy. It concerns also goods and services related to project management, organization of training and other capacity building events under the 3 components. The following Bank methods and corresponding standard documents will be used: 37 a) Quality & Cost Based Selection (QCBS) for all types of consultant services. b) Least-cost Selection. Services for assignments which meet the requirements of paragraph 3.6 of the Consultant Guidelines may be procured using the Least-cost Selection method in accordance with the provision of paragraphs 3.1 and 3.6 of the Consultant Guidelines. c) Selection Based on Consultant’s Qualifications (CQS). Services estimated to cost less than US$100,000 equivalent per contract may be procured in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. d) Single Source Selection. Under circumstances which meet the requirements of paragraph 3.8 of the Consultant Guidelines for Single Source Selection, consultant services may be procured in accordance with the provisions of paragraph 3.8 through 3.11 of the Consultant Guidelines, with the Bank’s prior agreement. e) Individual Consultants (IC). Services for assignments that meet the requirements set forth in the paragraph 5.1 of the Consultant Guidelines may be procured under contracts awarded to individual consultants in accordance with the provision of paragraph 5.2 and 5.3 of the Consultant Guidelines. Under the circumstances described in paragraph 5.6 of the Consultant Guidelines, such contracts may be awarded to individual consultants on a sole-source basis. 44. Short lists may be composed entirely of national consultants for contracts of less than US$ 200,000 equivalent per contract, complying with the remarks mentioned above. Publication of Results and Debriefing 45. Online (UN Development Business, and /or Client Connection) publication of contract awards would be required for all Direct Contracting, and the Selection of Consultants for contracts exceeding a value of US$ 200,000. All consultants competing for an assignment involving the submission of separate technical and financial proposals, irrespective of its estimated contract value, should be informed of the result of the technical evaluation (number of points that each firm received) before the opening of the financial proposals. The beneficiary would be required to offer debriefings to unsuccessful bidders and consultants should the individual firms request such a debriefing. Fraud, Coercion, and Corruption 46. All procuring entities, as well as bidders, suppliers, and contractors shall observe the highest standard of ethics during the procurement and execution of contracts financed under the project in accordance with paragraphs 1.16 and 1.17 of the Procurement Guidelines and paragraphs 1.23 and 1.24 of the Consultants Guidelines. Frequency of Procurement Supervision 47. Supervision of Procurement by the World Bank is an integral part of Project 38 implementation support and monitoring. In addition to the prior review supervision to be carried out from the Bank’s Rabat office, it is recommended that two implementation support missions take place during a year to visit the project and to carry out post review of procurement actions. 48. Based on the risk associated with procurement (substantial), as mitigation measures, the following actions have been implemented: a. Initiation of recruitment of an additional procurement specialist to help carry out procurement and build capacities within the MoEF. The hiring of the additional procurement specialist shall be completed by not later than four (4) months after the Effective Date; b. Organization of workshop for procurement training for all staff involved in the project implementation (MoEF); c. Preparation of Standard Bidding Documents for NCB in accordance with the Procurement Guidelines and found acceptable by the World Bank for Goods and Non-consulting Services. d. Adoption of a Project Implementation Manual. The manual describes procurement procedures, responsibility sharing and document flow among the parties involved in Project implementation. The annex of the PIM also comprises all standard bidding documents that will be used under the project. e. Preparation of the procurement plan for the first eighteen (18) months. 39 Annex 4: Operational Risk Assessment Framework (ORAF) MOROCCO: Microfinance Development Project Stage: Approval Project Stakeholder Risks Rating Moderate Description: Risk Management: The project will only extend technical assistance to entities which are considered to be sufficiently prepared of integrating the changes. In a number of components, TA is preceded by a (i) Agencies receiving technical assistance may not have the diagnostic effort to measure the status quo and highlight structural aspects/ weaknesses which need to be institutional capacity to effectively absorb project resources. addressed before any assistance can be provided. This may prevent effective translation of capacity building to Stage: Due Date : 31-Jan- changes to institutional policies and procedures and may Resp: Bank Status: In progress Preparation/Implementation 2018 prevent project outputs from being attained. Risk Management: The Bank has conducted extensive consultations with key donors engaged in Morocco’s microfinance sector during project preparation, and will continue to do so throughout the (ii) A number of donors supporting the microfinance sector in implementation period to ensure that this projects contribution is harmonized and complementary with Morocco are engaged in capacity building work, leaving a existing initiatives and activities. potential risk of duplication/ lack of coordination Resp: Bank and Stage: Due Date : 31-Jan- Status: In progress Client Preparation/Implementation 2018 Risk Management: Project outreach during both preparation and implementation phases will focus on clearly communicating project activities and proposed benefits to participating MFIs and other financial (iii) There is a risk that the MFIs might not be supportive of the institutions serving low-income communities in Morocco. The project has been developed in close proposed capacity building of the FNAM, other MFIs or consultations with MFIs, which have provided useful inputs to the project’s design. microenterprises. Resp: Bank and Stage: Due Date : 31-Jan- Status: In progress Client Preparation/Implementation 2018 Implementing Agency Risks (including fiduciary) Capacity Rating: High 40 Description: The MoEF may not have the necessary dedicated Risk Management: The WB team has assessed the institutional capacity of the MoEF and identified resources to act as primary implementing agency, and its certain areas on which the PMU could need support (financial management, procurement). The MoEF has capacity to implement the project might be hampered due to the agreed to reinforce the capacity of the PMU, and the WB will monitor the adequate staffing of the PMU lack of experience of managing World Bank grants throughout project implementation. (procurement and financial management) and technical Resp: Stage: Due Date : 31-Jan- Status: In progress expertise in microfinance. Bank Preparation/Implementation 2018 Governance Rating: Moderate Description : There is the potential for conflict of interest of a Risk Management: The Bank is aware of this risk, but believes that their inclusion into a broader based member of the steering committee (FNAM) as a representative steering committee comprised of the MoEF, BAM and potentially more members significantly mitigates of MFIs, with a risk of prioritizing interests of financial service this risk. The team will continue to monitor this risk throughout project implementation. providers over other industry actors (government, clients, etc). Resp: Bank Stage: Preparation and Due Date : 31-Jan- Status: In progress and Client Implementation 2018 Project Risks Design Rating: Moderate Description : Technical assistance provided is not truly Risk Management: The Bank has held extensive consultations with industry regulators, government, and responsive to the needs of the industry and as a result, policies key players to identify market gaps and determine what is needed in the way of technical assistance to and procedures are not modified over the long-term expand access and usage of microfinance services. Similarly, preparatory missions have included meetings with key market players to determine how to best deliver technical assistance and implement each project component. These sessions will allow a project design that provides TA in a manner that is responsive to institutional concerns, thereby promoting long-term sustainability. Resp: Bank and Stage: Preparation and Due Date : 31-Jan- Status: In progress Client Implementation 2018 Social & Environmental Rating: Low Description: Gender Inclusivity: Project components may not Risk Management: Dedicated resources will be placed into each project components to focus specifically adequately support microfinance access and usage amongst on ensuring they are gender-inclusive. For example, under component three dedicated TA will be provided women; activities may not fully account for specific access and to MFIs to enhance their ability to serve women clients. Under component 3, data and diagnostics will be usage challenges facing female microfinance clients. accumulated specifically to provide a snapshot of women’s access to microfinance. The financial inclusion strategy will prioritize extension of financial services amongst women and develop action plans from this prioritization accordingly. Resp: Bank and Stage: Preparation and Due Date : 31-Jan- Status: In progress Client Implementation 2018 Program & Donor Rating: Low Description : Donor Coordination, Commitment, and Risk Management: Microfinance remains an important donor priority in Morocco. Donor activities over Integrating into Existing Work: A number of donors supporting the past ten years have yielded significant dividends. The microfinance industry in Morocco is the largest in the microfinance sector in Morocco are engaged in similar the region and boasts a strong regulatory system and robust market infrastructure. As such, the risk of lack capacity building work; risk of duplication of donor interest is considered low. There is, however, risk of duplication. Consultations with donors have been undertaken (and will continue throughout project implementation) to ensure activities are not being duplicated and that there is a strong synergy between existing work and proposed activities. 41 Stage: Preparation and Due Date : 31-Jan- Resp: Bank Status: In progress Implementation 2018 Delivery Monitoring & Sustainability Rating: Moderate Description: Institutions receiving technical assistance Risk Management: TA activities will be delivered with sustainability in mind, implying a significant focus (FNAM, MFIs, etc.) may find it difficult to sustain changes on integrating skills and knowledge into ongoing institutional processes and procedures. Attention will be beyond the duration of immediate assistance. placed on training local staff to provide ongoing training to other staff members. Strong oversight and project management can help identify potential sustainability issues throughout the life of the project and move forward solutions accordingly. Similarly, all institutions the project will be provided capacity building and TA to have extensive experience in microfinance (e.g. MFIs and FNAM). Thus, the capacity and mandate to continue with newly adopted practices exists. Resp: Bank Stage: Preparation and Due Date : 31-Jan- Status: In progress and Client Implementation 2018 Overall Risk Following Review Implementation Risk Rating: Moderate Comments: The overall risk for this operation is moderate. There is a key risk associated with ensuring the implementing agency’s capac ity to implement the project, in part due to the lack of full time dedicated staff working on the project and the PMU’s limited experience with the Bank's procurement guidelines. The key risk with regards to project design is a possible conflict of interest between implementing agents and industry actors, but is considered to be mitigated through a well-designed and balanced institutional structure, promoting the effective participation of key actors in various project components. 42 Annex 5: Implementation Support Plan MOROCCO: Microfinance Development Project Strategy and Approach for Implementation Support 1. The World Bank will support the implementation of this project through a combination of fiduciary and technical support, technical assistance, and coordination. These activities will be implemented through a combination of Bank staff and consultants. 2. Fiduciary and technical support. World Bank fiduciary staff in the Bank’s Rabat office will provide routine supervision of FM and procurement activities. Review and clearance of the Implementation Manual, interim financial reports, withdrawal applications, and procurement actions will provide the basic necessary controls during implementation. In addition, technical assistance and guidance will be provided when necessary on fiduciary issues, which are anticipated to most likely be on procurement issues. Technical support will be provided by Bank staff and local consultants at key design and implementation decision points, including adjustment of design features during the course of the project. 3. Technical assistance - policy. Providing ongoing, just-in-time technical assistance to the Government of Morocco on policies and programs concerning the development of the Microfinance sector is an integral part of this project. The Bank will employ staff and consultants, including staff from the anchor Financial and Private Sector Development Global Practices and CGAP, to support technical assistance needs. 4. Coordination: The Bank will maintain coordination with other national entities and international agencies concerned with financial sector development, particularly in the areas of the development of the Microfinance sector and financial inclusion, to ensure continued synergy and complementarity with other interventions. Implementation Support Plan 5. Technical inputs needed: The PMU might require technical inputs during project implementation. In addition, technical inputs on the design of the M&E system, as well as training to PMU staff on M&E principles and implementation might be required. The World Bank will provide implementation support in these areas if needed, in close collaboration with key partners, including the IFC and CGAP. 6. Fiduciary requirements and inputs: the PMU will hire a FM and procurement specialists. World Bank fiduciary staff will provide implementation support including capacity building where needed. What would be the main focus in terms of support to implementation during: Time Focus Skills Needed Resource Partner Role Estimate Throughout Operational Aspects Project project (TBS) Management, Procurement, 43 Selecting consulting Financial firms/ WB staff Management Measure project Microfinance outcomes Measurement and Evaluation Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments M&E Specialist 1-2 weeks of time for each 1-2 Fiduciary Specialists 44