Document of The World Bank Report No: ICR00003851 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-78500) ON A LOAN IN THE AMOUNT OF US$300 MILLION EQUIVALENT TO THE ARAB REPUBLIC OF EGYPT FOR A ENHANCING ACCESS TO FINANCE FOR MICRO AND SMALL ENTERPRISES PROJECT June 30, 2016 Finance and Markets Global Practice Middle East and North Africa CURRENCY EQUIVALENTS (Exchange Rate Effective June 29, 2016) Currency Unit = Egyptian Pound (LE) LE 1.00 = US $8.87 US$1.00 = LE 8.87 FISCAL YEAR 2016 ABBREVIATIONS AND ACRONYMS ABA Alexandria Businessman’s Association CAS Country Assistance Strategy CBE Central Bank of Egypt CIB Commercial International Bank DPL Development Policy Loan EBI Egyptian Banking Institute EFSA Egyptian Financial Supervisory Authority EMP Environmental Management Plan FPD Finance and Private Sector Development FM Financial Management GAFI General Authority for Investment and Free Zones GDP Gross Domestic Product ICA Investment Climate Assessment IEG Independent Evaluation Group IFC International Finance Corporation IFR Interim Financial Report ISR Implementation Status and Results Report M&E Monitoring and Evaluation MENA Middle East and North Africa MFA Microfinance Association MFI Microfinance Institution MSE Micro and Small Enterprise MSME Micro, Small, and Medium Enterprise NBE National Bank of Egypt NBFI Nonbank Financial Institution NGO Nongovernmental Organization NPL Nonperforming Loan PAD Project Appraisal Document PDO Project Development Objective PFI Participating Financial Institution PMC Project Management Committee SEDO Small Enterprise Development Organization SFD Social Fund for Development SME Small and Medium Enterprise Senior Global Practice Director: Gloria M. Grandolini Practice Manager: Jean Pesme Project Team Leader: Laila Ashraf AbdelKader Ahmed ICR Team Leader: Peter McConaghy ARAB REPUBLIC OF EGYPT Enhancing Access to Finance for Micro and Small Enterprises CONTENTS Data Sheet A. Basic Information…………………………………………………………………….i B. Key Dates .................................................................................................................... i C. Ratings Summary ........................................................................................................ i D. Sector and Theme Codes ........................................................................................... ii E. Bank Staff .................................................................................................................. ii F. Results Framework Analysis ...................................................................................... ii G. Ratings of Project Performance in ISRs ................................................................... vi H. Restructuring (if any) .............................................................................................. vii 1. Project Context, Development Objectives and Design ............................................................... 1 2. Key Factors Affecting Implementation and Outcomes .............................................................. 9 3. Assessment of Outcomes .......................................................................................................... 29 4. Assessment of Risk to Development Outcome ......................................................................... 37 5. Assessment of Bank and Borrower Performance ..................................................................... 38 6. Lessons Learned........................................................................................................................ 43 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........................... 45 Annex 1. Project Costs and Financing .......................................................................................... 46 Annex 2. Outputs by Component.................................................................................................. 47 Annex 3. Economic and Financial Analysis ................................................................................ 55 Annex 4. Bank Lending and Implementation Support/Supervision Processes............................. 56 Annex 5. Beneficiary Survey Results ........................................................................................... 58 Annex 6. Stakeholder Workshop Report and Results ................................................................... 59 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................................... 60 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................................... 63 Annex 9. List of Supporting Documents ...................................................................................... 64 MAP .............................................................................................................................................. 66 DATASHEET A. Basic Information Egypt Enhancing Access Country: Arab Republic of Egypt Project Name: to Finance for Micro and Small Enterprises Project ID: P116011 L/C/TF Number(s): IBRD-78500 ICR Date: 05/12/2016 ICR Type: Core ICR Financial Intermediary Lending Instrument: Borrower: Arab Republic of Egypt Loan Original Total US$300.00 million Disbursed Amount: US$300.00 million Commitment: Revised Amount: US$300.00 million Environmental Category: F Implementing Agencies: The Social Fund for Development Cofinanciers and Other External Partners: B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 07/02/2009 Effectiveness: 08/18/2010 Appraisal: 01/13/2010 Restructuring(s): 07/09/2012 Approval: 03/09/2010 Mid-term Review: 03/03/2013 10/14/2012 Closing: 12/31/2015 12/31/2015 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Satisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project at Quality at Entry No None any time (Yes/No): (QEA): Problem Project at any time Quality of Supervision No None (Yes/No): (QSA): DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Microfinance 50 50 SME Finance 50 50 Theme Code (as % of total Bank financing) Micro, Small, and Medium Enterprise support 60 60 Other Financial Sector Development 40 40 E. Bank Staff Positions At ICR At Approval Vice President: Hafez M.H. Ghanem Shamshad Akhtar Country Director: Asad Alam A. David Craig Practice Manager/Manager: Jean Pesme Simon C. Bell Project Team Leader: Laila Ashraf AbdelKader Ahmed Sahar Nasr ICR Team Leader: Peter McConaghy ICR Primary Author: Peter McConaghy F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The objective of the project was to contribute to a sustainable improvement in inclusive access to finance for MSEs on a commercial basis. Revised Project Development Objectives (as approved by original approving authority) n.a. ii (a) PDO Indicator(s) Actual Value Original Target Formally Achieved at Indicator Baseline Value Values (from Revised Completion or approval documents) Target Values Target Years Indicator 1 % increase in the total number of MSE loans in participating financial institutions Value n.a. (indicator added (quantitative or 0 20% 26% during restructuring) qualitative) Date achieved 08/18/2010 07/12/2012 09/23/2015 Comments (including % Target exceeded. Target 130% achieved. achieved) Indicator 2 % increase in number of female MSEs with access to finance Value (quantitative or 28 32% 30% 30% qualitative) Date achieved 08/18/2010 — 07/12/2012 09/23/2015 Comments (including % Target 100% achieved. achieved) % increase in total volume of outstanding MSE portfolio of participating financial Indicator 3 institutions Value n.a. (indicator added (quantitative or 0 27% 18% during restructuring) qualitative) Date achieved 08/18/2010 07/12/2012 09/23/2015 Comments (including % Target not achieved. Target 66% achieved. achieved) (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Component 1: Line of Credit for Microfinance Indicator 1 Overall microfinance portfolio of participating lenders (volume in LE thousand) Value 7,500 (LE (quantitative or 1,800 (LE million) 1,671 (LE million) 7,529 (LE thousands) thousands) qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target achieved. achieved) Indicator 2 Number of banks engaged in microfinance lending iii Value (quantitative or 0 3 — 4 qualitative) Date achieved 08/18/2010 12/15/2015 12/15/2015 Comments (including % Target exceeded. Target 130% achieved. achieved) Indicator 3 Number of alternative microfinance products developed and piloted Value (quantitative or 0 1 — 2 qualitative) Date achieved 08/18/2010 12/31/2015 05/05/2015 Comments (including % Target 200% exceeded. achieved) Indicator 4 Number of microenterprise clients Value (quantitative or 0 839,698 91,000 81,848 qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target not achieved. Target 89% achieved. achieved) Indicator 5 Portfolio at risk for participating MFIs and banks Value (quantitative or 0 < 5% — < 5% qualitative) Date achieved 08/18/2010 12/31/2015 12/15/2015 Comments (including % Target fully (100%) achieved. achieved) Indicator 6 Total SFD microfinance portfolio (in LE million) Value n.a. (indicator added (quantitative or 1,623 4,500 5,600 during restructuring) qualitative) Date achieved 08/18/2010 12/31/2015 05/05/2015 Comments (including % Target 124% achieved. achieved) Indicator 7 Number of female-owned microenterprises served under the line of credit Value n.a. (indicator added (quantitative or 0 27,000 26,790 during restructuring) qualitative) Date achieved 08/18/2010 12/31/2015 12/15/2015 Comments (including % Target 99% achieved. achieved) iv Volume of microfinancing from the line of credit to participating financial institutions Indicator 8 (LE million) Value (quantitative or 0 1,671 450.78 455 qualitative) Date achieved 08/18/2010 12/31/2015 12/31/2015 12/15/2015 Comments (including % Target fully achieved. Target 101% achieved. achieved) Component 2: Line of Credit for Small Enterprise Finance Indicator 1 Number of small enterprise clients Value (quantitative or 1,000 16,500 25,000 6,126 qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target 24% achieved achieved) Indicator 2 Portfolio at risk for participating banks Value (quantitative or 0 <5% <5% qualitative) Date achieved 08/18/2010 12/31/2015 12/15/2015 Comments (including % Target fully achieved. achieved) Indicator 3 Number of banks engaged in small enterprise lending Value (quantitative or 7 8 10 7 qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target 70% achieved. achieved) Volume of small financing from the line of credit to participating financial institutions Indicator 4 (LE million) Value (quantitative or 0 825 1,350 1,466 qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target 108% achieved. achieved) Indicator 5 Number of new initiatives developed to foster small enterprise lending Value (quantitative or 0 1 2 2 qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 v Comments (including % Target fully achieved. achieved) Indicator 6 Number of female-owned small enterprises served under the line of credit Value n.a. (indicator added (quantitative or 0 5,400 1,285 during restructuring) qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target not achieved. 23% of overall target was achieved. achieved) Indicator 7 Overall small enterprise portfolio of participating lenders (LE million) Value (quantitative or 1,706 825 8,429 8,573 qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target exceeded. Target 102% achieved. achieved) Indicator 8 SFD small enterprise portfolio (LE million) Value n.a. (indicator added (quantitative or 1,900 4,400 8,000 during restructuring qualitative) Date achieved 08/18/2010 12/31/2015 07/12/2012 12/15/2015 Comments (including % Target 181% achieved. achieved) G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (US$, millions) 1 09/25/2010 Moderately Satisfactory Moderately Satisfactory 0.00 2 07/16/2011 Satisfactory Satisfactory 41.55 3 10/12/2011 Satisfactory Satisfactory 90.04 4 06/05/2012 Satisfactory Satisfactory 163.04 5 11/21/2012 Satisfactory Satisfactory 163.04 6 06/08/2013 Satisfactory Satisfactory 206.02 7 12/30/2013 Satisfactory Satisfactory 236.94 8 06/22/2014 Satisfactory Satisfactory 258.50 9 12/12/2014 Satisfactory Satisfactory 299.25 10 05/10/2015 Satisfactory Satisfactory 299.25 11 09/27/2015 Satisfactory Satisfactory 299.25 vi H. Restructuring (if any) Board ISR Ratings at Amount disbursed Restructuring Approved Restructuring Reason for Restructuring at restructuring in Dates PDO and Key Changes Made DO IP US$, millions Change 07/09/2012 N S S 139 (i) to accommodate for delays in passing of the 2014 Microfinance Law; (ii) to account for innovative approaches required under microfinance components which require capacity building; (iii) to account for changes in leadership of project implementing agency and partners (for example, Egypt post) in post-revolution context; (iv) to account for an increased demand in other products, such as Islamic finance and over draft facilities under the small enterprise component; (v) mainstream gender into project results framework; (vi) to account for increase in average loan size in MSE market due to inflation and increase of SME investment cost throughout project implementation. Outcome and intermediate indicators were revised significantly, with over two-thirds of all indicators either being revised or dropped (see section 2.3 for further analysis) vii I. Disbursement Profile viii 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Country Background and Sectoral Context 1. At the time of project preparation, the Arab Republic of Egypt faced significant challenges in maintaining sustainable economic growth and addressing economic, social, and regional inequalities. The global economic slowdown that began in 2008 had adversely affected growth and employment in the country, particularly given the strong positive correlation between Egyptian and the Organisation for Economic Co-operation and Development growth patterns.1 In FY2009, growth decreased to 4.7 percent while in FY2010, it increased only slightly to 5.1 percent. In FY2009, employment growth fell to 2.3 percent while in 2010, the unemployment rate hovered at 9 percent. Unemployment was significantly higher among women (22 percent) and among the vulnerable (23 percent).2 Between 2005 and 2010, poverty increased by 5 percentage points, with significant regional disparities being an enduring feature.3 2. Micro and small enterprises (MSEs) were negatively affected by the slowdown in economic growth during 2008–09. A rapid assessment of 200 Egyptian firms conducted by the World Bank in February 20094 showed that the median firms’ sales decreased by 29 percent, while employment fell by 5.6 percent. The most severely affected sectors were plastic, tourism services, nonmetal industries, metal industries, and hotels. Capacity utilization fell by 21 percent on average, from 70 percent utilization level to 55 percent. While output (measured by sales) fell quickly, employment was slow to adjust, and the capital stock remained fixed, implying lower productivity per unit produced. 3. Such an adverse impact was particularly worrisome as, at the time of project appraisal, MSEs accounted for over 99 percent of Egyptian enterprises, 85 percent of nonagricultural private sector employment, and almost 40 percent of total employment. Over 80 percent of the MSEs were informal enterprises, characterized by low value-added, low production quality, and poor export performance. 4. Despite a large banking sector, credit to the private sector in Egypt remained very concentrated on large and well-established enterprises. According to the 2009 data from the Central Bank of Egypt (CBE), over half of all credit went to one-fifth of 1 percent of their clients. It was estimated that only 1 percent of total bank credit went to MSEs. According to an assessment completed by the International Finance Corporation (IFC) in 2009, 2.1 million registered MSEs lacked access to formal finance.5 This assessment excluded informal micro-level enterprises. A 2009 World Bank Investment Climate Assessment (ICA) revealed that firm size was the single most influential factor associated with whether or not a firm had a loan or overdraft facility. Less 1 World Bank Macro Policy Notes 2009. 2 Vulnerable is defined by the International Labour Organization as unpaid family workers and own-account workers as a percentage of total employment. 3 Data cited in Egypt: Promoting Poverty Reduction and Shared Prosperity: Systematic Country Diagnosis. World Bank, September 2015. 4 The World Bank Rapid Assessment Survey was conducted in February 2009. 5 IFC (International Finance Corporation). 2009. Egypt: Market Assessment of the Need of Micro and Small Enterprises, September. 1 than 4 percent of small manufacturing firms and 3 percent of small firms reported having loans, as opposed to 12 percent of medium-size firms and 25 percent of large firms (see figure 1). Figure 1. Percent of Egyptian Firms with Loans of Overdraft by Size Source: 2009 ICA Enterprise Survey 5. The output and productivity losses associated with the financial crisis of 2008 had a negative impact on access to finance for MSEs in Egypt. Private credit to gross domestic product (GDP) provision declined from 65 percent in June 2003 to 40 percent in June 2009. The loan-to-deposit ratio decreased from 70 percent to 50 percent in the same period. In 2004, a restructuring was undertaken in the financial sector which saw many weak-performing loans to both state-owned enterprises and private firms being written off and more stringent regulation and supervision of both state-owned and private banks being introduced. This led to more cautious lending policies. The financial crisis also caused a retrenchment of foreign capital to the Egyptian markets and a slowdown in deposit growth, which caused further risk aversion among Egyptian banks. 6. Authorities adopted a stimulus package6 in May 2009 to stabilize output growth by about 5.5 percent, which placed further stress on the sovereign debt ratio, which was approximately 60 percent of GDP in 2009. During this period, there was an increase in bank investment in treasury bills and government bonds. Banks held about 91 percent of outstanding treasury bills as of December 2008; state-owned banks alone held 70 percent, reflecting inefficiencies in identifying profitable projects and cautious investment policies (see Figure 2). 6 Spending of LE 13 billion on infrastructure (mainly sewage and drinking water) and supporting manufacturing. Another LE 15 billion Investment Plan under the modality of public-private partnerships was directed toward infrastructure projects in education, health, wastewater treatment, and transport. In addition to the fiscal stimulus package, the CBE cut its lending interest rate by 250 basis points in May 2009. 2 Figure 2. Credit to Government and Private Sector to Total Credit 70% Government Private Sector 60% 50% 40% 30% 20% Feb‐06 Jun‐06 Oct‐06 Feb‐07 Jun‐07 Oct‐07 Feb‐08 Jun‐08 Oct‐08 Feb‐09 Jun‐09 Oct‐09 Feb‐10 Jun‐10 Oct‐10 Feb‐11 Jun‐11 Oct‐11 Feb‐12 Jun‐12 Oct‐12 Feb‐13 Jun‐13 Source: Central Bank of Egypt 2013. 7. Microenterprise lending was provisioned through a fragmented set of hundreds of nongovernmental organizations (NGOs) distinct from the financial sector and regulated by the Ministry of Social Solidarity. The Social Fund for Development (SFD)7 financed approximately 390 NGOs that were on-lending to microenterprises, many of whom were small in scale and suffering from operational weaknesses and poor repayment histories. Four banks 8 that had microfinance units received technical assistance from the Egyptian Banking Institute (EBI). These banks operated largely through conventional products using traditional collateral policies, which were incongruent with the financing needs of small entrepreneurs. 8. The development of a robust microfinance sector was also stymied by the lack of a regulatory framework for nonbank financial service provision. NGO microfinance institutions (MFIs) were not allowed to collect deposits (under Law 84 of 2002) and lacked the capital requirements and internal controls to establish themselves as banks. The NGO MFIs also had no legal avenue to own finance companies which would have provided them access to commercial funding to assist with product diversification—both of which would promote sustainable growth for the sector. Further, the NGO MFIs experienced delays when seeking obligatory approvals from authorities for the use of grant funds and loans from donor agencies and international organizations. Rationale for Bank Assistance 9. The operation contributed to the achievement of the strategic objectives of the 2006– 09 Country Assistance Strategy (CAS) and the 2008 CAS Progress Report. This project addressed two key strategic objectives of the CAS, specifically facilitating private sector development through improving financial sector competitiveness and efficiency and promoting inclusive growth and equity. The proposed operation also supported mainstream gender in access 7 The SFD was established in 1991 by a Presidential Decree #189 and with the support of the United Nations Development Programme. The SFD was created with a capital of LE 1.1 billion to alleviate the hardship created by the returning Egyptian workers from the Gulf region as a result of the First Gulf War. 8 The Piraeus Bank, Suez Canal Bank, National Bank for Development, and the Bank of Alexandria-San Paolo IMI. 3 to finance, a cross-cutting theme outlined in the CAS. A focus on gender was made more explicit during the project restructuring (see section 1.7). 10. The operation reflected the high-level priorities of the Egyptian authorities. In 2009, there were a number of political commitments to promote access to finance for MSEs, in part to counteract the decline in credit provision as a result of the global economic downturn in 2008. 11. The project also contributed to the high-level strategic objectives of the SFD. Law 141 passed in 2004 designated the SFD as the agency responsible for MSE development and created the Small Enterprise Development Organization (SEDO), which was mandated to establish, develop, support, and finance small enterprises for job creation purposes. The SFD also led the development of Egypt’s microfinance strategy in 2005. Throughout this period, the Egyptian authorities enacted policy measures supporting the MSE sector, specifically the establishment of the Egyptian Enterprises Center at the General Authority for Investment and Free Zones (GAFI) and the formation of the Small Enterprise Unit at the EBI. The EBI was housed at the Central Bank to build the capacity of MSEs and mainstream financial literacy in Egypt. 12. The proposed project built on the Government’s financial sector reform program of 2004–08. The key elements of this reform program included the establishment of the first Egyptian Financial Supervisory Authority (EFSA) under the Ministry of Investment; issue of CBE Decree #2408 of 2008 which reduced reserve requirements on funds used for loans to small enterprises; issue of a new law on secured lending; and further improvements in the services offered by the Credit Bureau. 13. The project built on past World Bank financial sector operations conducted between 2005 and 2010. These projects focused on improving the soundness and stability of the financial system and included an emerging focus on access to finance. Lending included two financial sector Development Policy Loans (DPLs) in 2006 and 2008 that supported the restructuring of the banking sector and the development of nonbanking financial institutions and markets. A mortgage finance development project was approved in July 2006, as well as an Affordable Mortgage Finance Program DPL in 2009. 9 The latter two focused on developing mortgage finance and improving access to low-income housing, respectively. In addition, there were numerous trust funds, including several Financial Sector Reform and Strengthening 9 DPL I was approved by the Board of Executive Directors in June 2006; DPL II was approved in May 2008; the Mortgage Finance Development Project was approved in July 2006; and the Affordable Mortgage Finance Program DPL was approved in September 2009. 4 initiatives that contributed to improved financial infrastructure, addressing supervision and regulation, information systems, credit registry, and payments system.10 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 14. The objective of the project was to contribute to a sustainable improvement in inclusive access to finance for MSEs on a commercial basis. The operation provided a line of credit through the SFD, the apex body for MSE finance, which would on-lend on commercial terms to eligible NGOs, potential MFIs, and banks. The project intended to increase MSE credit sustainably and broaden the outreach of finance through innovative delivery mechanisms and financial products. 15. The project-specific outcome indicators at the time of project approval were as follows: (a) Lending to MSEs by MFIs, NGOs, and banks (b) Number of MSEs in the poorest 1,000 villages (c) Number of female-headed or owned MSEs with access to credit (d) Number of active MSE clients served by the project (e) Portfolio at risk (30 days for participating MFIs, 90 days for banks) 16. As described in the Project Appraisal Document (PAD), the key indicators for measuring project outcomes were congruent with the core sector indicators of the Finance and Private Sector Development (FPD) Board and included sustainability (for NGOs) and profitability (for banks). Sustainability and profitability outcomes, however, were not captured in the results framework in the project. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 17. The project development objective (PDO) was not revised during project implementation. 10 Financial Sector Reform and Strengthening initiatives sponsored by the World Bank included (a) strengthening banking supervision and building the capacity of the Banking Supervision Department at the CBE, focusing on connected lending, large exposures, and market risk assessments; (b) automation of the CBE’s credit information system with the objective of strengthening the existing Credit Information Department at the CBE and improving data collection and analysis for credit information; (c) modernizing the payments system, which aimed at strengthening the payments system at the CBE done in collaboration with the European Union, where the European Union was providing the equipment in relation to the real-time gross settlement system and the World Bank is providing the technical support; (d) establishing the private Credit Bureau, which entailed legal and regulatory amendments for the establishment of private credit bureaus that would cater both to banks and nonbank financial institutions (NBFI); and (e) modernizing the insurance sector focusing on developing actuary skills. 5 1.4 Main Beneficiaries 18. The main project beneficiaries were (a) microenterprises, defined as enterprises with paid-in capital of less than LE 50,000 and up to 5 workers and (b) small enterprises, defined as enterprises with paid-in capital of between LE 50,001 and LE 1 million and up to 50 workers. The definition was in line with Egyptian legislation (specifically, the Small Enterprise Law 141 of 2004) and was used by key public authorities, most notably, the CBE and the Central Agency for Public Mobilization and Statistics. The project also sought to make financing available to MSEs in underserved regions. 19. The project beneficiaries also included 18 financial institutions who received on-lent loan financing, specifically 12 banks, 5 microfinance associations (MFAs), and 1 tier I MFI. Financial institutions were required to meet specific eligibility criteria as outlined in annex 14 of the PAD. For MFIs, criteria included registration and basic institutional features (historical track record, verifiable financial statements, completed institutional rating using the GIRAFE methodology,11 capital structure, and market and financial risks). For banks, the eligibility criteria focused on compliance with banking regulations and financial covenants; financial criteria (profitability, liquidity assessment, risk and leverage analysis, and exposure limits); and the institutional ratings provided by the CBE. 20. The SFD funding would help the MSEs expand their operations while reducing maturity mismatches on their balance sheet. It was anticipated that the participating banks and MFIs would improve their capacity and institutional tools, specifically credit assessment tools focused more on a firm’s short-term financial position (through cash flow analysis, debt-to-equity, and debt service coverage ratios) rather than focusing on collateral (in the case of banks). The project was expected to lead to changes in MSE financing by encouraging commercial and sustained entry to this segment. 21. The project aimed to improve the underlining market infrastructure and institutional capacity of key financial sector players to promote sustainable access to finance for MSEs. This was to be done primarily through (a) strengthening the link between financing and business performance in achieving sustainable and more inclusive access to finance; (b) supporting new approaches to extend MSE finance on a larger scale; (c) enhancing the SFD’s capacity to evaluate the effectiveness of its MSE support; (d) improving incentives for banks to expand into MSE lending; (e) assisting in the transformation of high-potential microcredit NGOs into regulated non- deposit MFIs that can borrow funds from banks and financial markets; 11 GIRAFE is a ratings methodology for MFIs developed by PlaNet Rating. There are six areas of assessment: Governance and decision-making processes, information and management tools, risks analysis and control, activities and loan portfolio, funding equity and liabilities, efficiency and liability. 6 (f) helping high-performance microenterprises graduate to formal small enterprises; (g) offering Islamic financial products that are in compliance with Shari’a; and (h) ensuring better opportunities for women’s access to finance, especially for small firm owners. 1.5 Original Components (as approved) 22. The project comprised two components: (a) a line of credit for microfinance and (b) a line of credit for small enterprises. The disbursement and allocation of funds among the two components were left flexible, dependent on the performance of the SFD microfinance lending component and relative to the small enterprise finance component. Component 1: Line of Credit for Microfinance (US$150 million) 23. The microenterprise line of credit was to be channeled through banks and NGOs (and potential MFIs) mainly via (a) microfinance NGOs and MFIs; (b) banks as wholesalers to NGOs and MFIs; (c) banks lending directly through their branch network; and (d) a service agent lending through post office branches. As described in the PAD, product and delivery innovations included Islamic microfinance and mobile phone banking (linked to anticipated regulatory changes). 24. Microfinance NGOs and MFIs. Funding was to be focused on high-performing, high- potential MFIs, with up to 20 in the top tier 1 and tier 212 (as assessed by the SFD), projected to receive funding directly from the SFD through this operation. At the time of project preparation, the SFD lent to NGOs on maturities up to five years.13 25. Wholesale microfinance development facility with banks. The SFD was to set up financing facilities with at least one bank (initially the Commercial International Bank (CIB), but this could have been extended to other banks too) to provide wholesale funding to MFIs, including to strong MFIs that were not the SFD partners. Banks were expected to provide matching funds from their own resources. This would stimulate the growth of more market-based funding for the NGOs and the MFIs and link microfinance to bank resources. 26. Bank networks. The SFD would increase its lending to banks for direct microfinance lending. The component sought to intensify the existing work of the SFD with banks and financial institutions on microfinance. This component was to be supported by the EBI through courses for both bank staff (who would be involved in microlending) and for microenterprises and small enterprises (to help them prepare for dealing with banks). 27. Post office branches through a service agent. The SFD was negotiating with Egypt Post for space in selected branch locations that could be used as outlets which would offer microenterprise loans. The SFD would set up a foundation or finance company as a microfinance 12 Generally tier I MFIs refer to MFIs that are financially sustainable, have strong operational capacity, and a high degree of transparency through tested and verified reporting structures. Tier 2 MFIs are smaller institutions approaching profitability. 13 As outlined in the PAD, the SFD requires that women make up at least 30 percent of the NGOs’ loans and enterprise ‘start-ups’ are at least 10 percent. 7 provider that would make use of the post office branch infrastructure. The PAD stressed the wide geographic outreach Egypt Post had, specifically its wide coverage in poor villages in the country—with more than 3,000 outlets. The SFD was to work with Egypt Post to target 20–50 branches accordingly. The terms and conditions of the loans were to be similar to the existing operations of the SFD, including factoring in the cost of the space and utilities in the post offices, which would decrease the cost of the transaction for the microfinance institution/foundation and allow it to get it into poorer and more remote areas where the operational costs tend to be higher. Component 2: Line of Credit for Small Enterprise Finance (US$150 million) 28. The Small Enterprise Finance Component was to be channeled through (a) direct bank lending through their branch networks and (b) bank linkages with NGOs and potential small enterprise finance companies set up under a new microfinance regulation. 1.6 Revised Components 29. Components were not revised during project implementation. 1.7 Other Significant Changes 30. The project underwent a Level II restructuring approved in July 2012 to revise outcome indicators and adjust target values. The outcome and intermediate indicators were revised significantly, with over two-thirds of all indicators either being revised or dropped (see section 2.3 for further analysis). The restructuring led to significantly different outcomes in the results framework. The required amendments reflected project performance, given the economic and political instability associated with the 2011 Egyptian revolution and, more specifically, the transitions among key Government counterparts and within financial institutions (including the SFD, Egypt Post, and heads of authorities). Political instability also delayed the passing of the Microfinance Law, which was seen as an important piece of regulatory infrastructure that would allow for greater acceleration of microlending. Although approved by the cabinet of ministers in March 2010, the Microfinance Law was not ratified by parliament due to the fact that it was dissolved twice from March 2011 to March 2012. The economic and political uncertainty, as well as the security situation in many villages in which microfinance NGOs operate, contributed to a decreased demand for microenterprise lending. However, there was a greater demand for Islamic finance and overdraft facilities under the small enterprise component of the project. Thus, Component 2 disbursed faster than expected. The restructuring also added two intermediate indicators capturing gender effects of the operation (percentage of female-owned micro and small enterprises served under the line of credit). 31. This scenario was discussed and envisioned in the PAD and permissible under the Loan and Project Agreement that did not specify funding amounts per component to allow for flexibility based on market demand and needs. The restructuring also introduced more specific gender targets to the results framework. 8 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Preparation 32. The project was the first of its kind in Egypt and reflected lessons from analytical work on MSEs, ongoing and completed World Bank Group activities, and related donor projects. The analytical underpinnings informing project design included the 2006 Independent Evaluation Group’s (IEG’s) World Bank Lending for lines of Credit: An IEG Evaluation; 2007 Finance for All: Policies and Pitfalls in Expanding Access; 2007 Financial Sector Assessment Program Update; 2007 National Egypt Post Organization Support; 2007 Poverty Assessment; 2008 Access to Finance and Economic Growth in Egypt; 2009 Investment Climate Assessment (ICA); 2009 Egyptian Women Workers and Entrepreneurs; 2009 Market Assessment of the Needs of Micro and Small Enterprises conducted by IFC;14 and the 2009 Egypt Macro Policy Note. 33. The project was designed specifically to take into account the lessons presented in the IEG’s 2006 Lending for Line of Credit Report. These lessons include the following:  Ensuring implementing entity’s accountability and strong management. Particular emphasis was placed on assessing the capacity and internal controls/functions of the SFD to ensure it possessed adequate institutional capacity to implement the project. A full institutional appraisal was conducted, which examined the SFD’s operational and human resource capacity, corporate governance structures, and related elements of accountability. Strategic priorities were assessed to ensure that the SFD had adequate mandate and independence from political interference to successfully implement the project.  Microfinance sustainability. The project’s design reflected international best practices with regard to supporting microfinance apex institutions 15 to avoid dependency or market distortion. This was done through encouraging greater involvement of banks in direct MSE lending and access to NGOs and potential MFIs to bank and market funds as well as through an attempt to create a wholesale funding initiative through the CIB and the NBE. The wholesale funding initiative was designed to promote sustainable and commercial expansion of the microfinance funding landscape in Egypt, creating market structure which would be active after project closing.  Suitable products and delivery mechanisms. The project worked with a variety of financial service providers (bank, NGO MFIs, postal network) and channels (wholesale, direct lending, postal agent network). The project promoted the development of new products, specifically Islamic financing. 14 The IFC study provides a market assessment of the demand for financial services by MSEs and analyzes the outreach gap in Egypt. This document is not public. 15 Wholesale facilities, or apexes, are set up to manage and on-lend funds to financial institutions and to accelerate the growth of sound microfinance retail capacity to expand access to finance. 9  Use of sound eligibility criteria that met World Bank Operational Guidelines and monitoring of NGOs and banks to ensure financial and operational quality (see below under Design for specific criteria and indicators).  Focusing on precisely defined and measurable indicators. The project design focused on a number of key performance indicators related to volume of lending, creation of microenterprises, and female access to finance in line with the core sector indicators for the FPD projects. This was in line with the recent analytical work at the time which suggested that few, but precisely defined, targets are more effective than requiring massive reporting on detailed uses of funds.16  Effective donor coordination. The project set up a donor coordination mechanism led by the World Bank which sought to align policy and resources on access to finance initiatives for MSEs in Egypt. 34. The project team considered and captured, in project documents, alternative technical approaches considered during project preparation. These approaches included wholesale lending through Egypt Post. This was considered an important technical approach given the vast and diverse geographic outreach of Egypt Post, although was not supported because the organization lacked the regulatory status and operational infrastructure to act as a financial service provider. A technical assistance component was considered to promote capacity at various market levels (macro-regulatory and legal; meso-financial infrastructure; micro-providers and clients), although this was not supported due to the existence of complementary advisory programs by the World Bank Group and other donors. The Government considered its own resources and donor funding adequate for these activities. Design 35. The project’s design was based on the following lessons learned from previous line of credit operations. (a) Consistency with the World Bank and Government priorities. The project’s design was aligned with the FY2006–09 CAS. (b) Straightforward and flexible design, with a minimum of statutory requirements:  Currency and pricing. The SFD provided loans in domestic currency to the NGOs, MFIs, and banks. For partner banks the maturity was up to six years, including a grace period of up to one year in domestic currency. For NGOs the maturity was up to five years and included a grace period of up to two years in domestic currency. The NGOs and banks on-lent funds to the MSEs on commercial terms, with a maturity not exceeding six years.  Eligibility criteria. The criteria differed for banks and NGOs and were fully consistent with good practices for MSE finance and with the World Bank’s own 16 Consultative Group to Assist the Poor Occasional Paper No. 6 (2008). 10 guidelines, specifically OP 8.30. 17 The criteria were based on established methodology. The GIRAFE methodology rating methodology was used to assess NGO MFIs. Criteria to assess Egyptian banks was based on operational and financial criteria (analysis of liquidity, profitability, capital adequacy, financial leverage): portfolio quality, management capacity and governance, internal systems and reporting, compliance with CBE regulations and requirements, MSE capacity, and outreach capacity.  Flexibility in allocation amounts between both components. Disbursement of the line of credit between the project’s two components were to depend on the performance of the SFD microfinance lending components relative to the small enterprise finance component, although it was envisioned that both components would be equal (US$150 million each). (c) Emphasis on product and channel diversification. The project included lending through multiple financial service providers (banks, NGO MFIs, post offices through a service agent, and bank networks) and channels (microfinance NGOs and MFIs directly, banks as wholesalers to NGOs and MFIs, banks lending directly through their branch network, and service agents through post offices). There was an emphasis on product diversification, including Islamic finance, graduation from micro to small enterprise lending, and wholesale financing. (d) Impact evaluation. The project design included a robust impact evaluation designed to provide rigorous evidence on the effectiveness of supporting MSEs through on- lending support. (e) Clear identification of risks and associated mitigation measures. The risks were well outlined in project documents and included (a) macroeconomic risks associated with lingering effects from the global economic slowdown; (b) operational risks, specifically, whether the SFD and key financial institutions had adequate capacity to successfully implement the project; (c) sectoral impact, particularly given the fragmented nature of the NGO MFI sector and the guarantee mechanisms already in place; and (d) sectoral risk, specifically, whether nonfinancial constraints to the MSEs’ development were not addressed under this project, including such issues as macroeconomic and regulatory policy uncertainties, access to land, high tax rates, and corruption. Mitigation measures were proposed for each major risk outlines and included in the table below. Table 1. Critical Risks and Risk Mitigations Risk Rating with Risks Risk Mitigation Measures Mitigation No improvement in access to  The SFD will focus on the best NGOs (that have Moderate finance been constrained in resources), banks, and MFIs.  The NGOs will be encouraged to improve 17 OP 8.30 refers to financial intermediary lending. The OP statement was revised in April 2007 consequent to the issuance of OP/BP 12.00 Disbursement. Previously revised in August 2004 to reflect the term "Development Policy Lending" (formerly, Adjustment Lending), in accordance with OP/BP 8.60, issued in August 2004. 11 Risk Rating with Risks Risk Mitigation Measures Mitigation performance and reporting to increase their access to funds.  Better outreach, for example, through use of the post offices and new instruments.  Improvement in the Credit Bureau’s coverage.  Issuance of the microfinance law  Approval of a law on secured lending.  Capacity building by donors, the EBI, GAFI, and the National Council for Women (NCW) to help NGOs and banks deal better with MSEs. Credit guarantees reduce  Banks are able to raise their interest rates to cover Negligible banks’ incentives for risk their risks and already are decreasing or stopped management their use of the guarantees. Slow disbursement  Capacity building of the SFD, NGOs, and banks. Moderate  Allocating a higher percentage of funds to the fastest disbursing lines and intermediaries.  The SFD has substantial unmet demand for funds that has led it to impose funding caps on its high- performance borrowers.  The banks and NGOs already have microfinance capacity and track record for disbursement.  The SFD has disbursed a US$200 million donor credit line faster than projected. Nonfinancial constraints  Further Government reform actions addressing Moderate bottlenecks to access to finance outside the financial sector  Donor coordination to ensure constraints are effectively targeted Declining portfolio quality  Reliable, accurate, and timely information provided Moderate from increased loans to new by the private Credit Bureau that includes more borrowers and new MSEs geographic areas  Close monitoring and adjustment of the SFD disbursements to NGOs, banks, and MFIs based on performance  Increase in number of staff dealing with MSEs in NGOs and banks  Training of NGO and bank staff to deal with MSEs  Improvement in MSEs’ capacity to deal with banks  Improvement in management capacity of MSEs through training provided by donors, the EBI, GAFI, and the NCW  Issuance of the microfinance law to regulate MFIs Inadequate technical  The SFD formed a donor committee that will meet Moderate assistance provided by donors on a monthly basis as well as on ad hoc basis when and Government entities needed.  Effective donor coordination at donor’s level through the MSE donor subgroup. Overall risk rating — Moderate 12 36. The project underwent an official compliance review of OP 8.30 during project preparation. The review was based on a review of the final version of the PAD, participation in the Quality Enhancement Review discussion, and background materials on the microfinance market in Egypt.18 The review notes that a very thorough effort was made by the task team to comply with the requirements of OP 8.30. The project team was congratulated for the seriousness with which it incorporated initial technical concerns into the overall project design. The review stated the following key findings: (a) The flow of funds is commercially priced. (b) Credit risk is assigned to commercially oriented financial institutions (banks and registered NBFIs). (c) The design makes an explicit effort to reach women, remain consistent with Islamic financing requirements, and fit into the Government’s overall strategy for access to finance. (d) The project uses the World Bank’s new reporting framework for lines of credit. (e) The key performance indicators demonstrate a poverty alleviation focus. (f) While the linkage model (banks as tier II institutions lending to MFIs) is attractive, the project should insure that training on MFI risk is available to banks, rather than relying on the Government’s guarantee fund to cover the risks. The use of the GIRAFE rating system promoted by the project is very useful to complement such training. (g) The plan to carry out an impact evaluation and link it to the midterm review is excellent. (h) The supervision and prudential norms that apply to the SFD are not specified. Given the size of the lines of credit supported by the project, this would be important to take into consideration. (i) Coordination with IFC has been strong and could provide the basis for joint supervision missions with the World Bank Group and support to the counterpart and the private sector. 37. The review does note, however, that under normal circumstances a social fund is not the best option for the tier II implementation of a credit line, given potential political interference and lack of clarity on the supervisory structure. The analysis stressed that given the track record presented, the SFD has a commercial orientation, managerial autonomy, credibility in the market (for contract enforcement), and contacts with 390 NGO MFIs and seven 18 The review was completed by Mike Goldberg, who worked as a senior private sector development specialist in the Latin America and Caribbean Region during the time the compliance review was written. 13 commercial banks. This was seen as a key ingredient for a strong tier II institution to disburse a credit line quickly. 38. The results framework, which focused on broad access figures for MSEs and percentage of portfolio dedicated to MSE lending of participating financial institutions (PFIs), appeared robust and in line with the core sector indicators outlined by the FPD sector board (see table 2). The results indicators included relatively easy-to-measure observable indicators of first order outcomes (for example, overall microfinance portfolio of lenders, number of banks engaged in small enterprise lending, portfolio at risk, and so on). Table 2. Results Framework (at time of project approval) PDO Project Outcome Indicators Use of Outcome Information Contribute to a sustainable  Lending to MSEs by MFIs, NGOs,  To gauge whether participating improvement in inclusive access to and banks intermediaries manage to finance for MSEs on a commercial  Number of MSEs with access to expand lending to MSEs while basis. finance in the poorest 1,000 managing nonperforming loans villages (NPLs) and improving the  Number of female-headed (or profitability of their MSE owned) MSEs with access to credit business  Number of active MSE clients  To assess whether activity is served by the project suitable for scaling up  Portfolio at risk (30 days for nationwide participating MFIs; 90 days for  To judge whether MSE lending banks) outreach is at the expense of portfolio quality and to promptly introduce corrective action Use of Intermediate Outcome Intermediate Results* Intermediate Outcome Indicators Monitoring Component 1: Line of Credit for Microfinance  To indicate that the line of credit Increased volume in microfinance  Overall microfinance portfolio of is effectively increasing the lending participating lenders overall microfinance lending portfolio Enhancement of banking sector’s  Number of banks engaged in  To demonstrate that banks are role in providing microfinance microfinance lending becoming more invested in credit providing access to finance to small enterprises Innovation in products and  Number of alternative microfinance  To assess demand for new delivery mechanisms products developed and piloted (for products before scaling up example, Islamic finance, mobile phone banking, and housing) Increased outreach  Number of active microenterprise  To ensure as wide an outreach to clients marginalized communities  Number of active microenterprise across Egypt clients in poorest 1,000 villages Sustainable MSE lending portfolio  Portfolio at risk for participating  To indicate that the line of credit MFIs and banks (30 days) is sustainably increasing the overall microfinance lending portfolio Use of Intermediate Outcome Intermediate Results* Intermediate Outcome Indicators Monitoring 14 Component 2: Line of Credit for Small Enterprise Finance Increased volume of small  Overall small enterprise portfolio  To indicate that the line of credit enterprise finance lending of participating lenders is effectively increasing the overall small enterprise lending portfolio Enhancement of the banking  Number of banks engaged in small  To demonstrate that banks are sector’s role in providing credit to enterprise lending becoming more invested in small enterprises providing access to finance to small enterprises Innovation in products and  Number of new initiatives  To assess demand for new delivery mechanisms developed to foster small enterprise products before scaling up lending Increased outreach  Number of active small enterprise To ensure as wide an outreach to clients marginalized communities across Egypt Sustainable MSE lending portfolio  Portfolio at risk for participating To indicate that the line of credit lenders (90 days) is sustainably increasing the overall microfinance lending portfolio Note: *All intermediate results’ indicators were based solely on MSEs, NGOs, banks, and MFIs participating in the operation. 2.2 Implementation 39. The project was declared effective on August 18, 2010, five and a half months after it was approved by the Board. During the time of the midterm review in October 2012, 54 percent of the total loan amount was disbursed. The project was fully disbursed by September 2015. The project closed on December 31, 2015. 40. Implementation, as assessed through an ICR preparation mission, an extensive review of the project’s Aide Memoires, and Implementation Status and Results (ISR) reports, can be summarized according to the following timeline: Table 3. Implementation and Output Timeline Key Recommendations Period Implementation Status During this Period Recorded in Aide Memoires August  Micro: Preparation phase, including finalizing terms of  The SFD to prepare a letter 2010– references for project management committee (PMC), requesting the Bank’s no October updating general loan contracts to be signed with NGOs, objection for first 2010 gaining internal approvals on contract architecture, and disbursement; a World negotiations with the CIB on wholesale lending facility Bank member to and Egypt Post participate in the PMC  Small: Contract template finalization, negotiations with meetings Credit Agricole, the National Bank of Abu Dhabi, and Al-  Advancement on key Baraka Islamic Bank nonfinancial technical assistance support including Microfinance Law, MFIs reporting to the credit registry January  Egyptian revolution; Mubarak resigns in February 2011; — 2011 beginning of multiple provisional governments 15 October  US$41.5 million (14% of total) disbursed on April 28,  Egyptian authorities need 2010–April 2011 to further accelerate project 2011  Macroeconomic deterioration negatively affects appetite implementation for credit consumption in financial sector; share of  Proceed with the post banking sector net claims rises to 60% of credit; and office initiative and sovereign and private credit risk slashed by all major finalize negotiations with rating agencies MFIs  Micro: Progress on component slow; negotiations with  Proceed with preparatory Egypt Post and the CIB is ongoing; tier I NGO MFIs not work for impact evaluation satisfied with the SFD lending conditions; team  Speed up development of approaches larger bank (for example, the National Bank of issuing microfinance law Egypt [NBE] on bank downscaling contracts); and Egypt  The World Bank to work Post-SFD microfinance provision scheme still under closely with development negotiation (team decides to look for partnerships with tier partners on finalizing the I MFIs) MSME Action Plan  Small: SEDO has a total of seven contracts for clearance  Hiring of external to the bank team; LE 125 million contract to the NBE contractor and submit  The SFD begins restructuring in response to citizenship Interim Financial Report engagement; further engagement on Micro, Small, and (IFR) Medium Enterprise (MSME) Action Plan July 2011  Micro: Component sees progress—one contract signed  The World Bank team (with Alexandria Businessman’s Association, [ABA] explores ways to accelerate while contracts with four others under development); tier disbursement in the wake II NGOs are identified as potential sources of financing; of the revolution the CIB will not move forward with wholesale facility without a risk sharing facility from the SFD  Small: Continues to perform well; four contracts signed  Post office initiative moves to partnership model with the ABA March 2012  Project disburses US$163 million (54% of total loans);  Close monitoring of 148% of total schedule to be disbursed; 69% of it under contracts and small enterprise components disbursements  Micro: One contract signed with tier I microfinance NGO  Negotiation with the NBE (US$24 million); no agreement reached with the CIB on on wholesale financing wholesale facility; negotiations shifted to the NBE; facility Banque Misr signed a US$20 million contract for  Considered allocation of microlending through an Islamic window more funds to the small  Small: Contracts signed with seven banks (amounting to enterprise component US$129 million); substantial progress made on component  Launched South-South corporation with Small Industries Development Bank of India July 2012 Level II restructuring is completed:  The SFD to continue  PDO-level outcome indicators: dropped two,a added two,b monitoring all contracts and revised onec and disbursements  Component 1: Intermediate indicators: dropped two,d  The SFD to follow up with revised three indicators,e and added two indicatorsf Government counterparts  Component 2: Intermediate indicators: dropped one,g on requests for additional revised one upwards,h and introduced twoi financing October  Midterm review—total amount disbursed from the World  Closely monitor contract 2012 Bank to the SFD is US$163 million (54% of total) performance  20% of contracts to date committed to microfinance (8  Bank team to respond to contracts); contracts for small enterprise financing consists additional financing of 71 percent of the total loan request 16  Progress on post office initiative unlikely before loan being fully disbursed  The SFD requests additional financing December  A contract with CIB for wholesale financing valued at LE  Continuous monitoring 2013 15 million signed on April 29 2013. contracts/disbursements  Amount disbursed to the SFD is US$259 million (86% of  The SFD to reduce or the total loan); 74% reaches end beneficiaries cancel size of low-  Beneficiaries—women (30%), youth (40%) (based on the performing contracts SFD periodic reports)  Through the MSME  SFD management continues efforts to restructure the SFD, technical assistance including establishing new monitoring and evaluation facility, the World Bank (M&E), gender, and safeguard units. reaches an agreement to support institutional strengthening and capacity building of newly established environment departments; under Pillar II of the facility, training workshops for MFIs were held at the request of the Egyptian Microfinance Network focusing on governance and financial management (FM) May 2015  Latest IFR and external audit (by KPMG) demonstrates — project disbursements amounted to US$289.5 million (96.5%); disbursements to end beneficiaries of US$278.2 million (92.7%)  The project makes significant progress in meeting the PDO; example indicators include (a) increase in the total number of MSE loans in PFIs reaching 103%; (b) rise in total volume of outstanding MSE portfolio in PFIs from LE 1.59 million to LE 1.85 million in 2015  The SFD successfully channeled funding to financial leasing companies catering to the eligible MSEs December  Project closure — 2015 Note: a. Increase in lending to MSEs by MFIs; increase in number of microenterprises in the poorest 1,000 villages; Increase in number of microenterprises in the poorest 100 villages. b. Increase in total volume of outstanding MSE portfolio of PFIs; Increase in total number of MSE loans in PFIs. c. Changed indicator target: increase in number of female MSEs with access to finance from 32.2 in FY2015 to 50 percent in FY2015. d. Overall microfinance portfolio of participating lenders; Number of active microenterprise clients in poorest 100 villages. e. Number of active microenterprise clients in poorest 1,000 villages; number of banks engaged in microfinance lending; number of alternative microfinance products developed and piloted. f. SFD microfinance portfolio: percentage of female-owned microenterprises served under the line of credit. g. Overall small enterprise portfolio of participating lenders. h. Number of new initiatives developed by the SEDO to foster small enterprise finance (2 in FY2015 from 1 in FY2015). i. The SFD small enterprise portfolio; percentage of female-owned small enterprises served beneficiaries of the line of credit. 17 41. Factors that affected implementation outcomes can be organized into four categories. They are as follows: Political, Social, and Economic Effects of the January 2011 Revolution 42. The Egyptian revolution—which began on January 25, 2011, in response to calls for anticorruption, transparency, and economic and social inclusion and was followed by nearly two years of political instability and interim governments—had a significant impact on project implementation. The revolution created significant instability in Egypt’s economy. In FY2011, GDP growth was less than 2 percent, while the net international foreign reserves slumped to US$14 billion, contributing to a widening budget deficit and increasing internal and external debt. Real GDP growth was subdued at 2.1 percent in FY2013 and 2.2 percent in FY2014 with output drops in the key sectors (construction, trade, and tourism). Foreign direct investment, a core tenet of Egyptian growth, reached nearly zero in the second quarter of 2013. The Egyptian unemployment rate, which traditionally hovered about 9.5 percent in the years preceding the revolution, increased to 13.2 percent in the first quarter of 2013 (shortly after the midterm review for the project). According to Central Agency for Public Mobilization and Statistics, during the last quarter of FY2014, out of the 3.7 million unemployed persons, about 70 percent are between 15 and 29 years, making youth unemployment a critical challenge (see figure 3). 43. Macroeconomic conditions were also precarious. Before the January 2011 revolution, Egypt’s total investments were 16.4 percent of GDP in FY2010/11. The figure dropped, however, by nearly 2 percent to 14.2 percent of GDP in FY2012/13. As a result of lower investment and growth, the public sector debt ballooned to -80 percent of GDP two years after the revolution. 18 Figure 3. Economic Impact of Egypt’s 2011 Revolution (A challenging policy environment marked by unemployment, slowing growth, and macroeconomic and fiscal imbalances) (a) Real GDP Growth Slowed Down Following a (b) Quarterly Unemployment Rate Rising Rebound in 2011/12Q3 (c) Total and Youth Unemployment Rates by Region Source: International Monetary Fund Data 2010–12. 44. Egypt’s financial sector was placed under additional strain due to instability related to the revolution and subsequent transitions. Early on after the revolution, demand for private sector credit stalled. The share of banking sector net claims on the Government rose to 60 percent of credit in local currency in March 2011. Egyptian banks and sovereign ratings were downgraded by all three major rating agencies in early 2011.19 An ICA rapid assessment survey carried out in 2012 revealed that only 11 percent of microenterprises and 17 percent of small enterprises had bank loans compared to 38 percent of large enterprises. Also, more than 70 percent of surveyed firms raised concerns regarding the surge in the cost of finance after the 2011 revolution. As a result, these firms often resorted to alternative sources of finance, including personal savings or inheritances to raise capital. 45. In this context, the project’s objectives took on heightened importance. While the deteriorating macroeconomic environment and the decline in investment associated with political uncertainty reduced appetite for borrowing in the short run, there was a renewed interest in how the financial sector could be used to create employment, economic opportunity (participation), and 19 The NBE, Banque Misr, Banque du Caire, the CIB, and the Bank of Alexandria were downgraded in early 2011. Sovereign and local currency ratings were also downgraded from stable to negative by Fitch and S&P. 19 inclusion among a broad set of Egyptian stakeholders.20 In 2012, the first set of Global Findex21 data was published and demonstrated that only 10 percent of Egyptian adults had access to a formal transaction account and fewer than 4 percent of Egyptian adults took a loan from a formal institution. In comparison, on average, 24 percent of adults in low-income countries have accounts at a formal financial institution. Although Egypt boasts the largest microfinance market in the Arab world with regard to client outreach, with approximately 1,100,000 borrowers and LE 263 million in loans outstanding by end of 2013, the sector was estimated to be reaching only 8 percent of its potential.22 Figure 4. Financial Exclusion in Egypt is Acute Account at a formal financial institution 70 58 60 50 43 39 39 40 32 33 27 25 25 28 30 23 17 18 20 10 13 7 10 0 Egypt, Arab Morocco Tunisia Turkey Jordan Middle East & Lower middle Middle income Rep. North Africa income (developing only) (% age 15+) female (% age 15+) Source: Global Findex Data 2012. Adjustments Needed to Microfinance Component 46. The microfinance component of the project disbursed slower than anticipated and required adjustments in its technical design, which was envisioned in the PAD during project preparation. In March 2012, only one contract between the SFD and a microfinance NGO had disbursed. The project originally called for the creation of a wholesale financing facility at the CIB to lend directly to MFIs. According to analysis captured in aide memoires, the CIB was reticent to move forward with the facility due to their limited exposure to the microfinance market and uncertainty in demand for microcredit. On March 5 2013 a no objection was given by the Bank to SFD to process a contract with CIB for LE 100 million allocated to wholesale lending to the microfinance sector. A LE 100 million was signed with CIB for microfinance lending on April 29 20 During this period, financial inclusion became a policy priority of key public authorities in Egypt. It is defined by the World Bank as a state in which all individuals and business have access and usage of appropriate financial services (including loans, savings products, credit, insurance, and money transfer systems), responsibly provided by institutions permitted to offer such services. 21 Global Findex provides in-depth data on how individuals save, borrow, make payments, and manage risks. Collected in partnership with the Gallup World Poll and funded by the Bill & Melinda Gates Foundation, Global Findex is based on approximately 150,000 adults in over 104 countries. 22 Data from Microfinance Information Exchange (MIX): www.themix.org/ and Sanabel—the Middle East and North Africa (MENA) region’s microfinance network. 20 2013. The contract amount was later amended to LE 15 million. An additional contract for wholesale financing was signed with the NBE in June 2014 amounting L.E 44 mn. 47. Tier I NGO MFIs, with the exception of the ABA, did not sign contracts with the SFD, suggesting that liquidity may not have been a binding constraint for these institutions. Certain providers were reticent to take financing from the SFD as they found it less onerous to work with banks directly and were wary of working with a government-linked institution in a post- revolutionary context. Disbursement related to the microfinance component of the loan more than doubled between March and October 2012, when the SFD began working with tier II and tier III MFIs as well as intensified microlending through bank branch networks, specifically Banque Misr, Banque du Caire, and the NBE. This was the first time SFD had financed banks for the purpose of microfinance lending (either directly or through a wholesale financing facility). Higher than Expected Demand for Small Enterprise Financing - Entry Point for Financial Sector Diversification 48. Demand for small enterprise financing under the project was consistently higher than expected, as evidenced by faster than anticipated disbursement and demand for the financing of new products under the component. There was a 187 percent increase in the disbursement of the small enterprise component between August 2011 and October 2012 (LE 270 million to LE 776 million), with an average repayment rate of 99 percent. In late 2012, a contract was signed with the NBE for an Islamic musharaka financing window of LE 46 million. NBE also expressed interest in expanding products to include supply chain financing and financial leasing. By project closing, 19 contracts had been signed by SEDO valued at LE 1.587 billion. 49. While demand for financing under the small enterprise finance component was higher than anticipated, the line of credit served 6,126 small enterprises, only 24% of the target value outlined in the July 2012 restructuring memo. According to SFD analysis, inflation following the revolution raised the investment cost for small enterprises thus increasing demand for larger average loan sizes. In addition, both the Islamic Finance and overdraft financing contracts introduced under the project had a higher average loan size than initially anticipated. The average loan size of the Islamic Musharaka contracts was LE 400,000. The total amount of the overdraft contracts was LE 387.5 mn and the average loan size is LE 520,000. Overdraft financing was seen as critical for MSEs to help mitigate negative economic shocks during the post-revolutionary period. These factors contributed to the low overall number of small enterprises served under component two of the project. Postal Network Initiative - Service Agent Lending through Post Office Branches 50. The original project design called for the SFD to create a finance company that would provide financial services using the branch infrastructure of Egypt Post. Despite ongoing technical support to both the SFD and Egypt Post, the initiative in its original form failed to materialize and became unrealistic near the halfway point of project implementation. As an alternative, a pilot was conducted whereby Egypt Post offered the ABA the use of their teller services to both disburse and collect loan payments. This pilot did not expand significantly due in part to pricing issues of cash-in cash-out services and loan disbursement and collection. 21 Lending in Underserved Regions and Promoting Access to Finance for Youth and Women 51. While the technical design of the project focused on lending to MSEs regardless of geographic location, the project was successful in lending to underserved regions and to women (30 percent of beneficiaries) and youth (40 percent of beneficiaries). In light of the regional disparities and policy priorities post-revolution, the project allocated approximately 40 percent of the value of disbursed loans to previously underserved governorates and poor villages, with a focus on Upper Egypt that alone accounted for 35 percent of total value of disbursed loans. The restructuring removed indicators related to the number of MSEs in Egypt’s poorest 1,000 villages, which may have prevented a more granular understanding of project activity in highly underserved villages in Egypt. Figure 5. Geographic Distribution of Small Enterprise Financing 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 0 Menufia Ismailia Gharbia Beni Sweif Giza Alexandria Matrooh Dakahlia New Valley North Sinai Sohag Behera South Sinai Luxor Qualubeyia Suez Sharkia Fayuom Menia Aswan Kafr El Sheikh Assiut Quena Red Sea Cairo Damietta Port Said Source: SFD December 2015 Status Report. Role of Implementing Agency and Nonfinancial Synergies in Postrevolutionary Context 52. Caretaker governments after the revolution tasked the SFD with developing interventions to promote employment and growth. In April 2011, the World Bank led a donor coordination effort to develop an MSME Action plan coordinated by the SFD which sought to address key institutional and regulatory reforms needed to improve access to finance for MSEs. Between 2013–15 technical assistance23 complemented the project to modernize and restructure the SFD, specifically through establishing gender, M&E, and safeguards units. Technical assistance also supported enhanced governance standards within the institution, specifically 23 Technical assistance was provided mainly through the Middle East and North Africa joint World Bank-IFC MSME Technical Assistance Facility. The US$31.5 million dollar facility is a multi-donor technical assistance facility that aims to improve access to finance for MSMEs, promote sustainable job creation, and encourage private sector-led growth during a time of transition for many countries in the region. 22 private sector board representation and assistance in moving toward e-disbursements and electronic submissions of withdrawal applications. On March 20, 2013, a Memorandum of Understanding was signed between the SFD and the Small Industries Development Bank of India in an effort to strengthen South-South cooperation. An evaluation of this technical assistance to assess effectiveness was not conducted. Findings from the ICR preparation mission suggest that these initiatives were launched although not necessarily completed or fully implemented. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 53. An M&E system was set up during project preparation to capture key development outcomes as defined in the results framework. The SFD formed a PMC comprising representatives from the MSE finance teams as well as technical staff from the financial and administrative affairs group. This PMC was responsible for capturing key data from project actors at multiple transaction levels, both the volume/flow of funds from the SFD to PFIs and on to end beneficiaries, as well as the outcome indicators at the level of the PFI (for example, overall portfolio dedicated to MSE finance, number of financial institutions involved in bank downscaling, portfolio at risk) and at the level of the beneficiary (for example, increased MSEs with access to credit). 54. Participating NGOs and banks were required, under the terms of the on-lending financial agreement, to submit monthly operations reports providing disbursement of the SFD’s line of credit to the borrower, borrower outreach (number of loans/accounts), female participation, portfolio quality, and profitability (a sustainability reporting indicator is being added in the case of NGOs). 55. The banks were required to submit the following information: (a) borrower information, including name, amount, loan terms, purpose of loan, disbursed loan amount, any rejected loan applications, jobs created, gender, start-ups and (b) portfolio information, including quarterly reports on NPLs, disbursement, and repayment amounts. The SFD carried the final responsibility for collecting the data from the participating NGOs and banks and producing the regular monitoring reports. 56. The following implementation and supervisory arrangements are described in annex 13 of the PAD: Table 4. Supervision Arrangements and Reforms At the Level of the Intermediary Situation at Time of NGOs Financed through NGOs Financed through SFD Area Appraisal CIB for > LE 5 million Loan size Used to be LE 5 million No cap; decision based on the Maximum of LE 25 million and was increased cash flow needs of the MFI recently to LE 25 million and according to CIB assessment Loan No parallel loans. No Allow parallel loans. For Allow parallel loans. For disbursement other loans till the example, a loan which is example, a loan which is frequency previous loan is fully disbursed on annual basis and disbursed on annual basis and repaid. large enough to cover all or large enough to cover all or part part of the cash deficit for the of the cash deficit for the 23 At the Level of the Intermediary Situation at Time of NGOs Financed through NGOs Financed through SFD Area Appraisal CIB for > LE 5 million specific year. The MFI/NGO specific year. The MFI/NGO can get a loan each year while can get a loan each year while it it is repaying its previous loans is repaying its previous loans on on time without delinquency. time without delinquency. Loan Used to be a balloon  Based on cash flow of the  Based on cash flow of the repayment payment and was MFI/NGO MFI/NGO schedule changed to  Each one of the annual  Each one of the annual loans  3-year loans with a loans will be repaid over a will be repaid over a period grace period of 18 period of 3–5 years of 3–5 years months and 4  Quarterly payments  Quarterly payments semiannual payments  Shorter grace period (3–6  Shorter grace period (3–6  5-year loans with a 2- months) months) year grace period and  Interest to be paid quarterly  Interest to be paid quarterly then paid through during the grace period during the grace period semiannual payments.  Interest is paid semiannually during the grace period. Reporting  Financial statements Using the SEEP FRAMEa to Using the SEEP FRAME to format  Portfolio Performance provide provide Report (including  Income Statement  Income Statement Portfolio at Risk)  Balance Sheet  Balance Sheet  List of clients with  Cash Flow Statement  Cash Flow Statement detailed information  Portfolio Report including  Portfolio Report including the Aging Report the Aging Report  Nonfinancial Data Report  Nonfinancial Data Report  Ratios Report  Ratios Report  Analytical Adjustments  Analytical Adjustments List of clients with only List of clients with only  Their names  their names  ID number  ID number  Business  Business  Loan Amount  Loan Amount Channeling Separate bank accounts No separate bank accounts are A separate account in the the funds and on the branch level from required. A separate account in accounting system is to be bank Accounts which the NGO can the accounting system (or a created so that the NGO can disburse loans and to sub-main account) is to be report about the loans which which the repayments of created so that the MFI/NGO were given from the World those loans are deposited can report about the loans Bank loan. which were given from the World Bank loan. At the Level of the Client NGOs Financed through NGOs Financed through SFD Current Situation CIB for > LE 5 million Interest rate A cap of 18 percent No cap on interest rateb No cap on interest rate cap flat/year on the interest rate charged by the NGOs to the ultimate clients 24 At the Level of the Intermediary Situation at Time of NGOs Financed through NGOs Financed through SFD Area Appraisal CIB for > LE 5 million Loan size LE 10,000 maximum for Maximum LE 25,000 Maximum LE 25,000 lending through NGOs and LE 25,000 maximum for lending through banks Follow-up Follow up on 20 Follow up on clients on a Follow up on clients on a visits to clients percent of clients by sample basis as agreed with sample basis in compliance with the SFD agents/staff the bank the SFD Internal Audit Requirements Note: a. Framework for Reporting, Analysis, Monitoring, and Evaluation which was developed by a group of microfinance international players and published by SEEP Network. b. The SFD will encourage competition among different players which is expected to improve efficiency and to bring down the interest rate as demonstrated in other countries in the region and the world. 57. The results framework was revised in July 2012 to better manage expectations of the project’s outcomes and more accurately capture project impact. The following changes were enacted and approved according to the restructuring paper: Table 5. Changes Enacted and Approved According to Restructuring Paper Indicator Indicators Dropped Indicators Revised Indicators New Indicators Level Unchanged Outcome-level  Increase in  % increase in  % increase in total  None indicators lending to MSEs share of female volume of by MFIs MSEs with outstanding MSE  Increase in access to finance portfolio of PFIs number of (revised  % increase in total microenterprises downwards from number of MSE in the poorest 32.2% final loans in PFIs 1,000 villages indicator to 30%) Component 1:  Overall  Number of  Total SFD  Portfolio at Line of Credit microfinance active microfinance risk for for portfolio of microfinance portfolio participating Microfinance participating clients (decrease  Percentage of MFIs and lenders from 839,698 female-owned banks, 30  Number of active target FY2015 to microenterprises days clients in poorest 91,000 in served under the 1,000 villages FY2015) line of credit  Number of banks engaged in microfinance lending (revised downwards from 3 to 2)  Number of alternative microfinance products developed and 25 Indicator Indicators Dropped Indicators Revised Indicators New Indicators Level Unchanged piloted (revised upwards) Component 2:  Overall small  Number of new  SFD small  Number of Line of Credit enterprise initiatives enterprise portfolio banks for Small portfolio of developed by (1,450 FY2015) engaged in Enterprise participating SEDO to foster  Percentage of small Finance lenders small enterprise female-owned enterprise finance (changed small enterprises lending (10 in from 1 to 2 by served FY2015) project closing) beneficiaries of the  Portfolio at  Number of line of credit (50 in risk for active small FY2015) participating enterprise clients banks, 90 (changed from days 16,500 to 29,000 by project closing) 58. Project progress was meticulously documented through 11 ISRs and eight aide memoires. Results indicators were regularly based on information provided by the SFD and via implementation support missions. Data by the SFD was collected by the PMC based on regular status reports coming from their regional offices which collected data from various PFIs. Detailed reporting at the level of the PFI was outlined in the PAD (see Table 3 above) and focused on institutional financial indicators (Balance Sheet, Income Statement) and client profiling information (loan amount, size of business). The team took data produced by the SFD at face value. 59. The PAD called for an impact evaluation to be conducted on the outcomes of the project on the development of alternative financial products, expansion of access through the postal network, expansion of outreach on potential NGOs, and the impact of small enterprise loans on marginal clients. A July 2013 aide memoire states that an impact evaluation was conducted in April 2013 as part of the Egyptian Women Leadership in an MSE project to evaluate the impact of the Enhancing Access to Finance for Micro and Small Enterprise Project mainly in gender empowerment, generation of employment opportunities, and poverty alleviation through enhancing finance to the MSEs. The ICR authors were unable to locate this impact evaluation and it is not clear whether this evaluation was directly assessing the SFD beneficiaries under the proposed project. 2.4 Safeguard and Fiduciary Compliance 60. Procurement, FM, and environmental safeguard requirements were detailed in the PAD. A procurement capacity assessment of the SFD was completed in October 2009. Due to the impossibility of determining, at the appraisal stage, which MSEs were to undertake procurement under the project, no contracts under the credit line component were subject to prior review but to the World Bank’s post review on a random basis not to exceed 10 percent of the total number of subprojects/sub-loans and limited to no more than 10 subprojects/sub-loans. Procurement assessments were completed regularly during project supervision and were satisfactory and found to be in line with the commercial practices mandated by the World Bank. 26 61. An FM assessment was carried out on the SFD FM system and procedures in October 2009. The FM assessment concluded that the FM arrangements satisfy the Bank’s minimum requirements because the SFD did perform and introduce the following amendments was applied during project implementation. The midterm review mission noted acceptable FM arrangements and compliance with reporting and accounting requirements stated in the loan agreement. The assessment did, however, report adjustments stated in interim financial statements of LE 710,000 due to delays in data reporting from the PFIs to the SFD on disbursements and due to amounts erroneously charged in previous periods. A reconciliation process was undertaken from October to December 2012 to eliminate these discrepancies which was captured in IFR. 62. In February 2016, Ernst and Young (E&Y) performed a limited review of accompanying financial statements (sources and uses of funds, cash withdrawals, cash forecasts, special account reconciliation). The auditors found the financial statements were presented in accordance with the accounting policies of the Loan Agreement. 63. An Environmental Management Plan (EMP) was prepared in October 2009 which included the following measures for incorporation into the SFD’s project and subproject cycle: (a) environmental screening and recording of outcomes; (b) environmental assessment of subprojects; (c) appraisal and approval of subprojects; (d) M&E of subprojects; and (e) training and capacity building on topics including environmental strategic planning. 64. A July 2013 aide memoire notes there was no evidence of the SFD feeding quarterly reports to a software program to establish a database of all subprojects’ safeguards-related issues and to verify their compliance and adherence to the EMP. In March 2013, a decree from the SFD’s secretary general established an Environmental Management Department in an effort to ensure sufficient staffing and necessary capacity-building programs to effectively carry out the EMP. The situation seemed resolved upon subsequent safeguards assessment when the SFD presented a sample report from regional offices showing the status of subprojects. 2.5 Post-completion Operation/Next Phase 65. The project nearly met its objective of contributing to a sustainable improvement in inclusive access to finance on a commercial basis for MSEs and demonstrated that lending to MSEs is a viable business proposition that had outcomes on both the composition of lending portfolios among PFIs and on broader access to finance metrics. As of December 2015, 30 contracts amounting to LE 1.92 billion were signed with PFIs in both MSE components, representing 107 percent of the total project’s value and 87,974 projects were financed as follows:24  Total number of male beneficiaries was 59,899 (68 percent); female beneficiaries was 28,075 (32 percent).  Out of SEDO’s total financed projects, 4,841 (79%) were to male beneficiaries and 1,285 (21%) were to female beneficiaries. 24 All figures based on the SFD December 2015 status update report. 27  Out of SFD’s microfinance central sector (MFCS) total financed project 55,058 (67%) were to male beneficiaries and 26,790 (33%) were to female beneficiaries. 66. SEDO disbursed loans to 6,126 projects, of which 5,679 were small loans (more than LE 25,000) amounting to LE 1,578 billion. SEDO financed 447 loans up to LE 25,000 amounting to LE 8.75 million. The total number of microloans for the project (up to LE 25,000) is 82,295, amounting to LE 464.6 million. The volume of financing to small enterprises under the Islamic Musharaka contracts includes the share amounts financed from the financial intermediaries’ own funds and are reflected within SFD reporting as such. 67. The project was successful at moving PFIs toward serving MSEs: (a) the increase in the total number of MSE loans in PFIs reached 103 percent of the total’s project’s value; (b) the rise in the total volume of outstanding MSE portfolio of PFIs went from LE 1.59 billion in 2014 to LE 1.85 billion in 2015; and (c) the increase in number of female MSEs with access to finance reached 30 percent in as of March 2015. The line of credit financed more than 80,000 MSEs and outreached to underserved governorates and marginalized groups, youth, and women. It also served a diverse range of sectors, commercial, services, industrial, animal production, and agriculture. 68. The project was the first of its kind in Egypt and led to significant scaling-up through a complementary donor project and further World Bank assistance. A second US$300 million project was prepared from mid-2013 onwards and was approved by the World Bank Board on April 1, 2014. The project—promoting innovation for inclusive financial access—expanded on the outcomes of this first project and included more innovative financing mechanisms, including leasing and venture capital financing. During the same period the Agence Française de Développment prepared a €30 million line of credit project directly through the NBE for small and medium enterprise (SME) investments, including in the health and education sectors. 69. The project allowed the SFD to introduce new initiatives in both its MSE components. SEDO developed and introduced overdraft financing and Islamic finance (musharaka) as new initiatives to foster small enterprise lending. The overdraft facility was seen as critical to maintain economic activity of MSEs given economic deterioration during the period of project implementation. Under its microenterprise component, the MFCS encouraged banks to expand microfinance lending. The project provided an opportunity for CIB and NBE to develop wholesale financing products for the microfinance sector, albeit on a relatively limited basis (both institutions signed one contract each with SFD in 2013 (CIB) and 2014 (NBE) respectively. 70. The project provided a credible platform for World Bank financial assistance to be coupled with technical assistance to improve the enabling and regulatory framework for inclusive finance in Egypt (see box 1). Box 1. The Joint IFC-World Bank MENA Regional MSME Facility This is currently actively operating in Egypt, where a child trust fund of US$1,236,387 was set up in August 2012. The main objective of the facility is to improve the business environment for MSME finance, build the capacity of financial institutions for sustainable financing, and support MSME business development services in Egypt. The activities covered by the trust fund contribute to a sustainable improvement in inclusive MSME development in Egypt and ultimately contribute to job creation and growth. This technical assistance facility's closing date is January 2017. 28 The World Bank leads Pillar I of the facility, which focused on improving the business enabling environment for MSME finance. Activities delivered under this pillar include (a) support to the CBE in the development of a credit guarantee facility for MSME financing; (b) capacity building of the SFD and the EFSA in setting up the regulatory framework to support the Microfinance Law; (c) assisting the authorities in the establishment of a secured lending framework to help SMEs pledge their movable assets as collateral and thereby, increasing their access to finance through addressing the chronic problem of availability of suitable collateral; (d) strengthening the leasing industry, aiming at reforming the industry through improving the legal and regulatory environment, capacity building for EFSA and selected financial institutions, and raising awareness of the Government and private sector on the benefits of well-functioning leasing systems; (e) capacity building of the SFD, through supporting the establishment of new units, namely M&E, innovation, and gender units, as well as providing technical assistance in preparing manuals and public awareness publications; and (f) capacity building of Egypt Post in areas of product development, MFI partnership risk management, and Islamic financial services. Pillar II of the facility is led by IFC and focuses on advisory services and capacity building of financial institutions, although not explicitly PFIs under the operation. Key activities delivered under this pillar include (a) training on new product design, strengthening corporate governance, and improving credit information systems to banks to build their MSME portfolio; (b) organizing a regional Islamic Finance Forum in partnership with the Islamic Financial Services Board and the Ministry of Investment; and (c) training workshops for NGO-MFIs jointly with the Egyptian Microfinance Network, focusing on governance and FM. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 71. The project remains highly relevant to Egypt’s development and priorities, specifically its efforts to promote financial inclusion among households and businesses. The project was fully aligned with the Country Partnership Strategy’s priorities at preparation and during implementation. The project was congruent with the Interim Strategy Note for Egypt (FY2013/14) (Report No. 66443-EG), discussed by the Board on June 28, 2012, which focused on economic management, jobs, and inclusion. The strategy was also aligned with the high-level policies of the Egyptian authorities, specifically the 2004 Action Plan for enhancing competitiveness of SMEs in Egypt, published by the Ministry of Finance, as well as policy priorities among successive interim governments between 2011 and 2014. The SFD was requested to update the National Action Plan for MSME development in early 2013 and did so in consultation with all stakeholders (private sector, civil society, NGO MFIs, banks, the EFSA, and so on). 72. The project provided critical financing for the MSEs in a liquidity-constrained and risk adverse financial sector after the 2011 Egyptian revolution, in one of the most volatile periods of Egyptian history. The project provided for a quick disbursement instrument at a reasonable cost and incentivized financial sector downscaling through a variety of channels, products, and providers, from community-based, associated NGOs to large commercial banks weary to enter the MSE market. Demand for credit, with the notable exception of the first two years of the project under the microfinance component due to complications with setting up the wholesale lending facility through the CIB, was high and ahead of schedule. Of the total loan, 79 percent was disbursed by July 2013, with demand for credit reflecting the demand for expansion of real economic activity (see figure 6). This was particularly important after the 2011 revolution when there was a tightening of liquidity in the financial sector and an increase in the number of credit-constrained micro and small businesses (see section 2.1 subsection A for more information). 29 Figure 6. Actual Versus Planned Disbursements 2500 1922 2000 1800 1800 1589 1500 13301275 1000 843 586 500 180 183 0 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Planned Actual Source: SFD December 2015 Status Report. 73. The project was unique in the diversity of providers and channels used to promote financial sector access and inclusion. Under the small enterprise finance component, of the 19 contracts signed with 7 banks, 3 were specifically for Islamic finance provision, 1 was for agricultural finance (cattle raising for dairy production), and 4 provided overdraft facilities for a total of LE 1.46 billion. Under the microfinance component, 3 contracts were signed for bank downscaling (Bank Misr, Banque du Caire), 2 for wholesale financing (CIB, National Bank of Egypt), and 5 with NGO MFI associations (including the ABA, one of the largest and most professional MFIs in the Middle East and North Africa region), totaling LE 455.8 million. 74. The project was successful in alleviating liquidity constraints and moving the PFIs further toward MSE lending. It is unclear, however, as to what level of additionality will result from the line of credit without more granular information on how market creation affects. Additional data is needed at the level of the PFI in the form of new financing programs developed, new clients served, or sustainable business lines produced. There is some evidence that this line of credit was used to develop new financial products, specifically Islamic financing. 75. In supervision and reporting documents, there was inadequate information on the pricing of the SFD financing under each contract to ensure its compliance with commercial terms. Certain tier I MFIs found pricing conditions unattractive while banks reported the SFD pricing to be less expensive than competing financing sources. The OP 8.30 assessment completed during project preparation concluded that the SFD was lending at market rates, with effective interest rates that ranged between 27 percent and 42 percent. The average cost of funds allowed the SFD to finance operations and overheads and accounted for currency risks. Loan terms offered by the SFD-funded NGOs to MSE borrowers vary according to each NGO’s policies and objectives. 76. The project provided strong learning for all participants and promoted new ideas that required reform in the way the SFD conducts its business. The project demonstrated repeated and credible efforts to establish a wholesale financing facility with the CIB, as well as to expand postal financial inclusion through the SFD, setting up a finance company for financial services at Egypt Post. While only one wholesale financing contract valued at LE 15 million was signed with CIB in 2013 and the partnership with the Egypt Post did not materialize, negotiations 30 and progress on these initiatives were well documented and alternatives were quickly identified, specifically working directly with tier I MFIs, pursuing postal financial inclusion through a partnership arrangement between Egypt Post and the ABA and through intensifying efforts to promote bank downscaling through lending to commercial banks. 77. The project provided an important and credible platform to advance advisory services and convening work in complement with financing. Key initiatives moved forward through continuous policy dialogue in conjunction with supervision missions included the following:  Technical assistance complemented the project to modernize and restructure the SFD, specifically through establishing gender, M&E, and safeguards units. The technical assistance also supported governance standards within the institution, specifically private sector board representation and assistance in moving toward e-disbursements and electronic submissions of withdrawal applications.25  Support to the Egyptian authorities on developing and passing the new Microfinance Law (November 2014) which sought to address key regulatory gaps and open a window for the NGO MFIs to own companies.  Support to the Egyptian authorities in developing an MSME Action Plan in the wake of post-revolutionary demands for jobs, economic inclusion, and accountability.  Support to the Egyptian authorities in developing policy measures moving from microfinance to financial inclusion, including digital finance.  Support at improving the financial infrastructure in Egypt, including improvement to I-Score, the Credit Bureau developed for MFIs as well as work on modernizing the secured transactions framework.  Technical assistance to support institutions, including Sanabel, the region’s MFA and the Egyptian microfinance sector association. 78. The M&E arrangements affected the quality of data collected. While data captured reflected mainly the first line indicators, specifically the number of MSEs financed and the percentage of MSEs in the portfolios of PFIs, granular data (investment generated or financial health of borrowers) are unavailable. Pricing terms and conditions of contracts between the World Bank and the SFD and for financing provided from the PFIs to beneficiaries were not well documented in status reports and supervisory documents. Certain data points captured in the ISRs do not match indicators outlined in the project restructuring paper or the PAD. For example, on the PDO-level indicator “percent increase in number of female MSEs with access to finance” the FY2015 target value is 50 percent while the ISR states a 30 percent target value. The original figure has baseline indicators in absolute values while the target value is expressed as an increase 25 Outcome efforts of this technical assistance should be captured in a final evaluation report for the MSME technical assistance facility. During the ICR preparation mission, it was noted that work toward these initiatives had been launched. They had not necessarily been continued or mainstreamed within the SFD. No evaluation has been completed to date on the technical assistance provided. 31 by 32.2 percent. This ICR uses data inputted in the ISRs as the basis of analysis although cross- referenced with data provided by the SFD. The project restructuring memo26 was used for baseline and target values, cross-referenced with the original results framework outlined in annex 10 of the PAD. 3.2 Achievement of Project Development Objectives 79. The project’s main development objective of contributing to a sustainable improvement in inclusive access to finance for MSEs on a commercial basis—which has been stated and measured at the time of the ICR—was partially achieved. The revised PDO indicators were designed to measure the project’s impact more adequately than the original indicators, which in hindsight may have been too ambitious in light of particular implementation delays and changes to the external environment due to the economic and political instability caused by the revolution. By project closing, the achievement of the PDO indicators were as follows:  Indicator 1: 20 percent increase in total number of MSE loans in PFIs. It is estimated that the MSE loan portfolio of PFIs increased by 26 percent as of project closing. The target was exceeded in this indicator.  Indicator 2: 30 percent increase in the number of female MSEs with access to finance. It is estimated that the project resulted in a 30 percent increase in the number of female MSEs with access to finance. The indicator was 100 percent met.  Indicator 3: 27 percent increase in the total volume of outstanding MSE portfolio of PFIs. As of September 2015, there had been an 18 percent increase in the volume of outstanding MSE portfolio of PFIs. The indicator was 66 percent achieved. According to the final ISR submitted in September 2015, the rise in the total volume of outstanding MSE portfolio of PFIs shifted from LE 1.59 billion in 2014 to LE 1.85 billion at the time of project closing. Component 1: Line of Credit for Microfinance  Indicator 1: Overall microfinance portfolio of participating lenders to reach LE 7,500,000. This indicator’s target was exceeded. The overall microfinance portfolio of banks reached LE 7,529,000 by project closing.  Indicator 2: Three banks engaged in microfinance lending. This indicator’s target was exceeded. By project closing, four banks were engaged in microfinance lending.  Indicator 3: One new alternative microfinance products developed and piloted. This indicator’s target was exceeded. By project closing, two new alternative microfinance products were developed and piloted. 26 The restructuring memo is publically available – see annex 9 for full citation 32  Indicator 4: 91,000 total microenterprise clients. This target was not met. By project closing, the project financed 81,848 microenterprise clients.  Indicator 5: Portfolio at risk for participating MFIs and banks (30 days) not to exceed 5 percent. This target was achieved.  Indicator 6: Total SFD microfinance portfolio to reach LE 4,500 million. This target was exceeded. By project closing, the SFD’s total microfinance portfolio reached LE 5,600 million.  Indicator 7: 27,000 female-owned microenterprises served under the line of credit. This target was 99 percent met. By project closing, 26,790 female-owned microenterprises were served under the line of credit.  Indicator 8: Volume of microfinancing from the line of credit to PFIs to reach LE 450.78 million. This target was achieved. By project closing, the line of credit financed LE 455 million of microcredit. Component 2: Line of Credit for Small Enterprise Finance  Indicator 1: Number of small enterprise clients to be 25,000. The project reached 6,126 clients under the small enterprise financing component. The target was not met.  Indicator 2: Portfolio at risk for participating banks (90 days) not to exceed 5 percent. The indicator was fully met, with the PAR not exceeding 5 percent.  Indicator 3: Ten new banks to be engaged in small enterprise lending. The indicator was nearly met. By project closing, seven new banks were engaged in small enterprise lending.  Indicator 4: Volume of small financing from the line of credit to PFIs to reach LE 1,350 million. The indicator was exceeded, with the volume of financing reaching LE 1,466 million by project closure.  Indicator 5: Two new initiatives developed to foster small enterprise lending. The indicator was fully met. By project closing, two new initiatives were reported to foster small enterprise lending.  Indicator 6: Number of female-owned small enterprises served under the line of credit to reach 5,400. The indicator was not met. By project closing, the number of female-owned small enterprises financed by the project was 1,285.  Indicator 7: Overall small enterprise portfolio of participating lenders to reach LE 8,429 million. The indicator was exceeded. By project closing, the small enterprise portfolio of participating lenders reached LE 8,573 million. 33  Indicator 8: SFD small enterprise portfolio to reach LE 4,400 million. The indicator was exceeded. The SFD small enterprise portfolio reached LE 8,000 million by December 2015. Key Transmission Channels through which PDO Was Achieved 80. Platform for financial intermediation for MSEs. The project provided a vehicle for financing through 7 banks for lending to small enterprises and 4 banks for lending to microenterprises. These financial institutions had no prior exposure to World Bank standards for SME lines of credit and provided important experience in financial intermediation. The project provided important demonstration on the business case for promoting commercial funding to MSEs, as evidenced by the fact that the PFIs had little prior experience with MSE lending and the fact that the portfolio at risk of the PFIs was under 5 percent throughout implementation, suggesting that it was a profitable segment in which credit risk and information asymmetry could be managed. The rise in the total volume of outstanding MSE portfolio of the PFIs reached LE 1.85 billion in 2015, increasing by 26 percent of the total portfolio value. The project amount represents approximately 4.5 percent of total MSE financing among the PFIs. 81. Volumes. The credit line provided LE 1.92 billion in total MSE financing (representing 107 percent of the total project value). The total amounts disbursed to end beneficiaries are LE 2.04 billion, representing 114 percent of the total project value, of which LE 1.587 billion through SEDO and LE 456 million through MFCS. The project financed 81,848 microenterprise clients and 6,126 small enterprise clients. The project financed 26,790 female-owned microenterprise clients and 1,285 female-owned small enterprise clients, representing 32 percent of microenterprise clients and 19 percent of small enterprise clients. 82. According to the data provided by the SFD’s PMC and as reported in aide memoires, youth represent 40 percent of total project beneficiaries. SEDO disbursed loans to 6,126 projects, of which 5,679 small loans (more than LE 25,000) amounting to LE 1.578 billion and 447 loans (up to LE 25,000) amounting to LE 8.75 million. The total number of microloans (up to LE 25,000) was 82,295 projects, amounting to LE 464.6 million. 83. Product, provider, and sectoral diversification. The project promoted MSE lending using a variety of products and providers for a number of key sectors. Under the small enterprise finance component, of the 19 contracts signed with 7 banks, 3 were specifically for Islamic finance provision, 1 was for agricultural finance (cattle raising for dairy production), and 4 provided overdraft facilities for a total of LE 1.46 billion. Under the microfinance component, 3 contracts were signed for bank downscaling (Bank Misr, Banque du Caire), 2 for wholesale financing (CIB, the NBE) and 5 with NGO MFI associations (including the ABA, one of the largest and most professional MFIs in the Middle East and North Africa region) totaling LE 455.8 million. Under small enterprise lending, 55 percent of total lending was for the commercial sector; 15 percent for the services sector; 25 percent in the industrial sector; 3 percent in animal production; and 1 percent noted as free occupations. 84. Lending in underserved regions. The project allocated approximately 40 percent of the value of disbursed loans to previously underserved governorates and poor villages. About 35 percent of this lending focused on Upper Egypt. For small enterprise lending, the top 4 geographic 34 target regions were Cairo (15.2 percent), Giza (54 percent), Qualubeyia (5.5 percent), and Alexandria (8.3 percent). Daqahlia (10.6%), Sharqia (6.9%), and Gharbia (6.6%) also registered high lending rates. With regard to microenterprise lending, the top 3 geographic target regions were Cairo (1.31 percent), Giza (1.61 percent), and Qualubia (2.18 percent). 3.3 Efficiency 85. The project fully disbursed the original loan amount by May 2015, eight months before project closing. The project was efficient in financing productive MSEs, shifting the total volume of outstanding portfolio of PFIs toward MSEs, and in generating significant employment opportunities. During project implementation, a total number of 30 contracts were signed, amounting to LE 1.92 billion across both MSE components representing 107 percent of the total project’s value. The project financed 87,974 enterprises in total. Assuming there are 2.1 million MSEs lacking access to formal finance in Egypt, the project successfully served 4.2% of total MSEs requiring financing in Egypt.27 The project succeeded in increasing the total percentage of outstanding MSE portfolio of PFIs by 33 percent (increasing from LE 1.59 billion in 2014 to LE 1.85 billion at the time of project closing in 2015). This result suggests that US$9,090,909 was required to increase the MSE portfolio by 1 percent. 86. The fact that 40 percent of project funding went to underserved governorates and poor villages boast very well for efficiency measures, particularly given high unemployment rates in and lack of significant economic opportunity in these areas. 87. The project’s impact on more specific economic metrics—including sales, productivity, export, market linkages, long-term jobs, and topology of jobs created—is not possible as it was not included in the results framework and no impact evaluation was completed. Furthermore, causality cannot be established in the absence of a rigorous impact evaluation. 3.4 Justification of Overall Outcome Rating 88. The project was effective in supporting access to credit for MSEs and contributed to promoting MSE lending among PFIs. The operation was highly relevant to the financial sector development challenges facing Egypt, specifically at improving public support mechanisms for increased access to finance for MSEs. The project design incorporated best practice principles for lines of credit support to apex institutions and became an important tool to promote economic opportunity after the 2011 revolution, which was a period characterized by significant economic and political transition. The project faced shortcomings with the overall M&E framework and encountered implementation challenges under component one of the operation, most notably the partnership with Egypt Post and the wholesale financing facility with the CIB. The overall outcome rating for the project is Moderately Satisfactory, reflecting the rating for relevance of objectives, design, and implementation (section 3.1); the Moderately Satisfactory rating for achievement of PDOs (section 3.2); and the Moderate rating for efficiency (section 3.3). 27 Based on figures cited in IFC. 2009. Egypt: Market Assessment of the Need of Miocro and Small Enterprises, September. 35 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 89. The project had positive impacts on poverty, gender, and social development. 90. With regard to gender, of the total beneficiaries, 32 percent (28,075) were female and all beneficiaries were considered low income, as estimated by the target population served by the PFIs, specifically, the NGO MFIs who work with vulnerable communities characterized by low levels of economic participation and financial inclusion. 91. The project had an important, albeit indirect, impact on poverty through beneficiaries targeted. Of total project financing, 40 percent (US$120,000,000) went to underserved governorates and poor villages. The intervention was particularly timely at providing economic opportunity for Egypt’s vulnerable population. The line of credit provided support to micro and small businesses and may have enabled end beneficiaries to reduce poverty through income generation, private sector employment, and an improved ability to make productive investments (in health, education, and housing) within the household.28 (b) Institutional Change/Strengthening 92. The project provided a credible platform to improve institutional capacity of financial service providers, the SFD, and of public authorities. 93. With regard to PFIs, the project helped strengthen credit appraisal procedures and ensure compliance with prudential standards of 12 banks who received project financing. Both the banks and participating NGO MFIs experienced a significant learning phase due to their initial lack of familiarity with World Bank operations. In many instances, the project provided a platform to demonstrate that lending to micro and small businesses is a viable business opportunity, even in periods of economic instability. This is evidenced by the number and size of loans disbursed through the project, the portfolio at risk not exceeding 5 percent, and the rise in total volume of outstanding loans dedicated to MSEs in the PFI’s overall lending portfolio. 94. With regard to the five MFAs receiving financing, the project provided an important channel to increase their access to commercial funding and to improve operational systems to access such financing. A number of these associations had historically relied on grants and subsidized funding to finance credit operations. The project was thus an important vehicle to promote professionalization and sustainability of these institutions as for many of them it was the first time completing a professional due diligence process to access commercial funding. This learning was particularly important given the new Microfinance Law passed in 2014 which required institutional transformation into finance companies. 28 With the absence of a rigorous impact evaluation, causality cannot be established nor can the effect of the loan on the microeconomic conditions on the household. However, related empirical research on MSE finance can lead to increases in investment, productivity, and employment. For more, see Financial Inclusion and Development: Recent Impact Evidence, Consultative Group to Assist the Poor Focus Note no. 92, 2014. 36 95. The project provided a platform to improve the capacity of the SFD to operate as an independent and professional apex institution. The project set up a PMC to manage the line of credit and overhauled the FM, safeguards, and M&E systems to ensure accountable fiduciary arrangements and to better track the performance of financing. Supervision missions identified areas of further technical assistance, for example, strengthening of gender disaggregated data, bolstering M&E capacity within the institution, and improving public outreach initiatives. 96. Banks, MFAs, and NGO MFIs built infrastructure and capacity to work with other International Financial Institutions and have a greater awareness of available sources of funding. During the ICR preparation mission, many financial intermediaries, particularly NGO MFIs, stated that the project had helped them leverage additional financing from other International Financial Institutions or market players. They also insisted the project had assisted them in improving capacity to absorb and monitor external financing. (c) Other Unintended Outcomes and Impacts (positive or negative) 97. The project assisted authorities in engaging with citizens on credible strategies to promote poverty reduction and employment in the years following the 2011 Egyptian revolution. It also helped prioritize financial inclusion among public authorities by demonstrating the business case for MSE financing across a number of different financial institutions. The project provided a platform for policy dialogue on finalizing the new Microfinance Law and enhancing the role and capacity of the EFSA (NBFI regulator). It also provided a platform to advance preliminary work on a national financial inclusion strategy led by the CBE and at updating Egypt’s MSME engagement strategy coordinated by the SFD. The project provided an opportunity to test new strategies and distribution channels required to promote financial inclusion, including provision through Egypt Post, and the development of new products, including Islamic finance. Financial inclusion is a key policy priority of Egyptian authorities. In 2013, the SFD commissioned an assessment of its programs on job creation. The assessment found the project generated 143,038 jobs.29 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/A. 4. Assessment of Risk to Development Outcome Rating: Moderate 98. Risk to development outcomes are related to general country and financial sector risks and macroeconomic environment affecting the overall ability of MSEs to operate and expand. Country risks include the geopolitical context and turbulence in financial markets. Specifically, there has been a substantial decrease in net international reserves in early FY2016 due to large debt repayments and tempered investor sentiment. Acute shortages in foreign currency is stifling domestic production and hampering import abilities. The CBE allowed the exchange rate to devalue 14.4 percent in March 2016 to attract investment and export flows. The devaluation will also exert a mild pressure on the banks’ already low capital buffers, because the appreciation of 29 The ICR preparation team was not given access to the assessment providing estimation of job figures. The SFD shared with the team the methodology for determining these figures, which was based on a ratio of the value of the loan divided by the total number of hours worked by employees. 37 the banks’ U.S. dollar-denominated assets relative to their Egyptian pound-denominated capital will lower their capital ratios. Regardless, the financial sector is considered stable, with NPLs in the Egyptian banking system falling to 6.8 percent of total loans at the end of December 2015, compared to 7.2 percent in September 2015, and bank provisions covering about 99 percent in the system. The microfinance sector continues to undergo restructuring. Registration of associations is ongoing and they are being placed under the authority of the EFSA. Inflation (11 percent) and unemployment (12.8 percent) remain a concern. 99. Project-specific risks are related to the future performance of the SFD as well as PFIs and end beneficiaries. The institutional and financial performance of these actors have been monitored during project supervision, as well as with supervision of the Promoting Financial Innovation for Inclusive Financial Access Project (follow-on project). The financial performance of financial intermediaries that have been monitored complied with project requirements. There is also sustained demand for MSE finance, particularly given that an estimated 703 associations are in the process of complying under the new legal framework for microfinance. The project’s sustainability is reenforced by the fact that a second US$300 million line of credit project was prepared and approved in April 2014, 20 months before the closing of the original project. This second project scaled up operations related to microfinance and introduced more innovative financing mechanisms including leasing and venture capital financing. 5. Assessment of Bank and Borrower Performance Box 2: World Bank’s ICR Ratings Scales According to guidelines published by the Independent Evaluation Group of the World Bank and last updated in July 2014, the rating scale for ICRs are as follows: Highly Satisfactory There were no shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance. Satisfactory There were minor shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance. Moderately Satisfactory There were moderate shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance. Moderately Unsatisfactory There were significant shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance. Unsatisfactory There were major shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance. Highly Unsatisfactory There were severe shortcomings in the operation’s achievement of its objectives, in its efficiency, or in its relevance. In the rare instances where lack of sufficient information or other circumstances make it impossible to assign one of the above ratings, “Not-rated” should be recorded. 38 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 100. The project was extensively prepared. Its design was highly relevant to the strategic priorities and requests of Egyptian authorities, as highlighted in section 1.2 (relevance) and section 2.1 (past operational and analytical work informing project design). The project’s risk assessment was comprehensive and candid, focusing on country-level risks (for example, sectoral weaknesses, regulatory/legal framework deficiencies) and entity-level risks (mainly accounting and internal controls including accounting, internal audit functions). The World Bank worked with the SFD to develop a data capturing and monitoring system specifically for the project, as well as verified and suggested improvements to FM systems critical to the accountability of the project. The World Bank also worked extensively with the SFD to identify interested and capable PFIs (including NBE, Bank Audi, Banque Misr and MFIs including ABA, Lead Foundation, and Dakahlya Businessmen' Association for Community Development [DBACD]) during project preparation across both MSE finance components. It also facilitated extensive discussion with partnering entities, including Egypt Post, the CIB, and the NBE. The relatively high number of PFIs (see section 3.1) across both the banking and microfinance sector provides evidence that preparatory work was effective in preparing the market for this liquidity support program. 101. The PAD was extremely detailed. A full safeguards EMP was developed despite the fact the project was classified as an environmental category ‘FI’ and it was not expected that subprojects would have negative environmental impacts. A full compliance assessment of OP 8.30 was conducted. 102. The project design was flexible and focused on broad participation of PFIs, which were either active or looking to downscale to the MSE market. Allocation of financing between both components were left flexible based on market demand. Criteria for NGO MFIs focused on registration and basic institutional features (historical track record, verifiable financial statements, completed institutional rating using the GIRAFE methodology, capital structure and market, and financial risks) while for banks, eligibility criteria focused on compliance with banking regulation and financial covenants, financial criteria (profitability, liquidity assessment, risk and leverage analysis, and exposure limits), and institutional ratings provided by the CBE. 103. There was a certain level of flexibility with regard to the transmission mechanisms through which financing was directed. For example, the microfinance component envisioned funding through (a) microfinance NGOs and MFIs; (b) banks as wholesalers to NGOs and MFIs; (c) banks lending directly through their branch network; and (d) service agents lending through post office branches. This allowed the project opportunities to test different delivery models while supporting the broader of objective of promoting MSE financing on a commercial basis. This flexibility may have led to delays in project implementation. Contractual and implementation arrangements were not finalized with Egypt Post or the CIB at the time of project approval. Similarly, the sheer number of transmission channels may have been, in hindsight, overly ambitious to supervise with robust detail. 39 104. There were shortcomings in the M&E framework for the project. Both outcome and component-level indicators required extensive updating through Level II project restructuring just before the midterm evaluation for the project. Of the three original PDO-level indicators, two indicators were dropped and one was revised. Certain indicators were revised significantly. For example, the number of active microfinance clients was revised by 9.3 times, from 839,698 to 90,156. Greater attention was required when developing the results framework. This, however, should be balanced with the fact that this was the first project of its kind in Egypt and thus a certain level of learning by doing is expected. 105. Similarly, the results framework lacked second-order magnitude indicators, including MSE sales, productivity, export, market linkages, long-term jobs, and topology of jobs. An impact evaluation was planned and described in the PAD which sought to capture some of these results. 106. The World Bank’s quality at entry is thus rated Moderately Satisfactory. (b) Quality of Supervision Rating: Moderately Satisfactory 107. Project supervision was intensive. World Bank implementation support missions were provided routinely and included day-to-day support provided by both World Bank headquarters and the Cairo-based task teams, including a senior adviser and FM and procurement specialists based in Cairo. Through the project, implementation support missions included a mix of skill sets: (a) implementation support provided by the operations analyst; (b) FM training and support provided by two FM specialists over the course of the project; (c) procurement training and support provided by one procurement specialist; (d) a senior operational task team leader with over 20 years of experience in financial sector development in Egypt; and (e) a variety of senior technical staff providing advice, particularly with regard to quality control. 108. World Bank guidelines for supervision require an ISR every six months and an initial ISR due within three months of project approval. The number of supervision missions averaged four per year during project implementation, twice that of general practice. Aide Memoires were extensive and captured opportunities and challenges in a candid and comprehensive manner. Eleven ISRs were produced and an implementation support mission completed approximately every four to five months throughout project implementation. All ISRs, with the exception of the first ISR submitted, provided a Satisfactory rating for the project, despite the aforementioned implementation challenges and project restructuring. This suggests that more candid assessments of project performance may have been necessary throughout project supervision. 109. The project team showed strong technical and managerial ability, particularly through finding solutions to the slow disbursement of the microfinance component (through working more intensively with banks to downscale and working directly with tier I NGO MFIs). The team documented an extensive policy dialogue on activities, which were slower to advance or did not fully materialize, specifically the wholesale financing facility with the CIB and financial service provision through a dedicated financing company to be set up by the SFD through Egypt Post. The team showed persistence in bringing up issues related to stalling project progress, whether it be reporting delays from SFD regional offices or PFIs, slow project progress related to the microfinance component of the project, or identifying capacity-building needs of the SFD and key 40 market players in the wake of post-revolutionary demands for further economic opportunity and access to finance. 110. There were shortcomings with regard to indicator tracking. Indicators were not always consistent among different data tracking platforms. For example, ISRs had different outcome targets than the project restructuring paper and what was reported by the SFD. For this ICR, unless otherwise stated, data from ISRs and from SFD’s December 2015 status update report were used. For example, the PDO level indicator “increase in the total volume of outstanding MSE portfolio of PFIs” has an outcome target of 40 percent in the project restructuring paper, a target of 27 percent in the latest ISR, and is not included in the results framework provided by the SFD in its December 2015 status update report. According to SFD, it was agreed during project restructuring that the World Bank would be responsible for PDO-level indicator tracking while SFD would focus attention on intermediate level tracking. This was not captured in official documentation. Greater attention and precision was required while tracking results indicators. 111. The impact evaluation as described in the PAD failed to materialize. A July 2013 Aide Memoire states that an impact evaluation was conducted in April 2013 as part of the Egyptian Women Leadership in Micro and Small Enterprises Project to evaluate the impact of the project mainly in gender empowerment, generation of employment opportunities, and poverty alleviation. The ICR authors were unable to locate this or another impact evaluation as outlined in the PAD. 112. The Moderately Satisfactory supervision rating is justified by the successful completion of a large-scale project with seven banks, five MFAs, and one microfinance institution and for effectively developing solutions to challenges arising during project implementation. This is particularly impressive given the very high level of political and economic volatility throughout 2011–2015 in Egypt. In future projects, the stated results framework should be tracked with a greater level of rigor. Second-level project impacts should be assessed through impact evaluation work. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory. 113. Based on the above, the overall rating for World Bank performance is Moderately Satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 114. The Government’s performance is rated as Satisfactory. The Government demonstrated strong ownership of the project and commitment to its objectives. In addition, the Government’s advanced policy measure to promote the sustainable growth and development of the microfinance sector, most notably through passing the Microfinance Law in November 2014 and providing capacity-building resources to the EFSA through a complementary technical assistance project prepared in 2014 and financed by the Middle East and North Africa Transition Fund. During 2011– 2015, Government authorities showed high-level leadership on promoting the MSME policy as a tool to generate growth and employment. This was evidenced by a number of high-level workshops 41 (for example, World Bank-German Agency for International Cooperation October 2013 Roundtable on Financial Inclusion); the Government request in April 2011 for assistance in developing an MSME Action Plan in conjunction with the SFD; and support for emerging policy areas, including digital finance. During project implementation, the CBE took a leadership position in organizing a national financial inclusion strategy (currently under development through the EBI housed at the CBE). (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 115. The performance of the SFD was Moderately Satisfactory, reflecting strong project management, proactive resolution of implementation bottlenecks, and delivery of project outcomes, as outlined in the results framework at the time of ICR preparation. More attention was required on accurate tracking of key results indicators throughout project implementation. SFD shared a general agency wide operations manual published in January 2010. The manual was reviewed and cleared by the World Bank team project appraisal. It provides general policies for all SFD programming related to micro and small enterprise lending and is not specific to this operation. The SFD complied with all fiduciary and operational requirements and proactively monitored developments related to initial target sectors. Despite slight implementation delays, particularly with regard to the microfinance component, the project fully disbursed eight months ahead of schedule. The SFD took strong ownership and leadership throughout project implementation, particularly as their relevance heightened to accommodate demands for employment generation and economic inclusion after the 2011 revolution. 116. The SFD rapidly adjusted to changing market conditions and operational bottlenecks, specifically by allocating more funding to direct lending to MFAs, and through banks for downscaling to microfinance due after delays with establishing the wholesale commercial facility with CIB. The SFD showed an ability to adjust and develop solutions to bottlenecks while maintaining the overall PDO. For example, the SFD moved to a partnership model between Egypt Post and select MFIs after the finance company postal financial service initiative failed to move ahead (in large part due to management changes at the head of Egypt Post associated with interim government arrangements after the revolution). 117. The SFD also showed a willingness to improve operational processes and reporting procedures throughout project implementation. Work was launched with regard to internal reorganization (to promote ‘fit-for-purpose’ and transparency) and on launching M&E, gender, and environmental safeguards departments. This is particularly important in light of the November 2011 United Nations Development Programme-commissioned evaluation report of the SFD, 30 which encouraged the institution to reassert its independence from political pressures, improve its M&E functions, and where possible operate through the private sector or public-private partnerships without promoting entitlement programs or market distortions. Meetings held with donors during the ICR preparation mission confirmed that they continue to work with the SFD while being cognizant of the findings of this review and the need for the SFD to facilitate the 30 Pillay, R., Elmagad, and El Oraby. 2011. The Social Fund for Development: An Independent Forward-Looking Review. 42 development of Egypt’s financial sector as it relates to MSMEs while not distorting or engaging in direct lending. 118. The SFD could have been more proactive with regard to implementing the project’s impact assessment. While evidence of preliminary work was completed, a final output was not made available to the ICR preparation team. Similarly, the SFD completed a jobs assessment study on its entire portfolio. The document was classified according to SFD’s information policy and thus not disclosed to the World Bank. The study’s summary and methodology was, however, shared. 119. The SFD should be commended for building implementation capacity quickly, particularly given that this was the first project of its kind with the World Bank and the high level of volatility in the Egyptian financial sector at the time of project implementation. The SFD should be commended for showing proactivity in resolving operational bottlenecks and for playing a coordination role in national SME policy from 2011 to 2014. The SFD also showed proactivity in requesting additional financing in 2013, which translated into a new project focused on MSE lending and on financial sector innovation including leasing and venture capital financing. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 120. The overall rating for Government performance and of the implementing agencies is Moderately Satisfactory, reflecting the above analysis. 6. Lessons Learned 121. The project provided a platform to promote inclusive finance in Egypt by introducing MSE lending to a variety of financial service providers and NGO MFIs and by testing more innovative products, most notably Islamic finance. Key lessons for ongoing and future operations are detailed in the following paragraphs. 122. Responsiveness to changing market conditions reduces implementation delays. The revolution coupled with economic deterioration due to the global economic recession had a profound impact on this project. The project’s achievement of the PDO is a testament to the World Bank team’s and implementing agency’s responsiveness to changing market conditions and the ability to effectively change gears when needed. 123. Project design requires strong implementation arrangements ahead of project effectiveness. While the project was ultimately able to promote microfinance lending (through MFAs, one NGO MFI, and bank downscaling), implementation delays occurred due to the lack of progress on the wholesale financing facility that was to be set up by the CIB. A contractual arrangement in place at the time of project approval would have avoided delays on the wholesale financing facility. This suggests that implementation arrangements and operational procedures must be fully finalized before a World Bank project being declared effective. 124. Possible trade-off between diversification of provider types and implementation efficiency. The microfinance component was significantly more complex than the small finance component and aimed to provide financing through (a) microfinance NGOs and MFIs; (b) banks as wholesalers to NGOs and MFIs; (c) banks directly through their bank network; and (d) agent 43 lending through post office branches. While four different financing channels allowed for testing of commercial models, it may have splintered the attention and resources of the implementing agency, resulting in less effective outcomes. 125. Liquidity is not always the binding constraint for financial service providers to engage in MSE lending in Egypt. The fact that demand for the line of credit was low among tier I NGO MFIs suggests that liquidity is not always the binding constraint causing low financial access of SMEs. Many MFIs and financial service providers in Egypt have existing lines of credit from banks and in light of the decline in overall demand in the market due to the revolution and ongoing instability, the MFIs were generally fairly liquid and did not have an immediate need for capital. Certain providers were reticent to take financing from the SFD as they find it is less onerous to work with banks directly. This suggests—for project design—that a package of services combining financial and nonfinancial support may be more effective at addressing market deficiencies related to financial exclusion. Similarly, segmentation of financial service providers based on target client’s type, development relevance, geographic and sectoral concentration, and liquidity position of the financial institution may assist to ensure that a line of credit has additionality. Part of this TA work was completed during project preparation through the MSME TA facility (see Box 1). 126. Investments needed to promote postal financial inclusion. The service agent lending through post office branches under Component 1 of the project failed to materialize, in part due to internal reorganization of Egypt Post after the 2011 revolution and challenges related to limited investments in operational capacity and infrastructure (reconciliation, network connectivity, fiduciary systems, and so on) and limited staff capacity. While the project piloted a partnership model whereby Egypt Post was linked to MFIs for cash-in and cash-out functions for loan disbursement and collection, progress in this partnership was relatively limited. This implies that promoting postal financial inclusion requires substantial investment within operational and infrastructure capacity within Egypt Post and more nuanced technical arrangements, which would allow for partnership models to develop on a more intensive and sustainable basis. 127. Strong M&E design and effective arrangements are necessary for rigorous assessment of outcomes. The modification of key results indicators pursued under Level II restructuring suggests that indicators could have been more extensively identified and prepared during project preparation. Similarly, the impact of the project extends beyond the loan amount, number of clients, and the percentage of MSE portfolio of PFIs. It is important to analyze the loan purposes, nature of investments, productivity, market linkages, exports, and the indirect effects on income and poverty, particularly for small microfirms operating at the household level. An evaluation is essential to better understand the development impact of funding rather than just disbursement as well as market incentives for PFIs to lend to MSEs on a sustainable basis. 128. Results framework should investigate explicitly linkages to real economic outcomes (e.g. employment and sector development). It is advisable to seek strong, long-term commitment to monitor project beneficiaries. Project documents and the operations manual should avoid lengthy generalities when discussing M&E but rather pinpoint key indicators and justify accordingly. 129. Alignment with business practices increases the project’s attractiveness. Throughout implementation stakeholders (including financial service provider, donor partners, related authorities, and internal World Bank technical teams) requested additional information on the 44 pricing terms and conditions through which the SFD provided financing to PFIs. While the project financing was provided under commercial terms using cost markup methodology, explicit pricing transparency in regular monitoring and supervisory documents can assist significantly in making the test case for commercial provision of MSE financing. Both the World Bank and the implementing agency should make explicit pricing arrangements of individual contracts to avoid market distortion or the perception of it among market actors. 130. Linkages between the World Bank Group financing, advisory, and analytical work. The project provides an important example of the World Bank Group combining financing, advisory, and analytical work to produce improved outcomes for inclusive finance. This was due to the strong policy dialogue between the World Bank team and key Egyptian counterparts, the availability of consistent technical assistance funding through the joint World Bank-IFC regional MSME technical assistance facility, and financing support through this project, which demonstrated that commercial provision of MSE financing is possible. 131. Implementation support missions and midterm reviews provide opportunities for strengthening the project. The results of the project can be largely attributed to intensive project supervision since 2011, including field visits and intensive training and capacity building on fiduciary and environmental safeguards procedures. Implementation delays and solutions sought were well addressed in Project Aide Memoires. They can be taken as good practice for other bank teams. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners 132. The project was the first of its kind for the World Bank with SFD where the spirit of learning by doing prevailed. Both teams did their best to design the project’s monitoring framework and performance indicators and extracted lessons learnt to improve the quality of performance indicators for the second line of credit project negotiation with the World Bank (Promoting Innovation for Inclusive Financial Access). 133. Both the World Bank and SFD teams agreed during restructuring that monitoring of PDO- level indicators would be the responsibility of the World Bank team in Cairo, while SFD would report the intermediate indicators. 134. The introduction of Islamic Finance and overdraft as new initiatives under component two (small enterprises) in addition to the inflation rate and increase of the investment cost of small enterprises caused the increase of average loan size (LE 400,000 for Islamic finance and L.E 520,000 for overdraft contracts). Such increase caused discrepancies in the actual number of small enterprises versus planned number. (a) Borrower/implementing agencies (b) Cofinanciers (c) Other partners and stakeholders 45 Annex 1. Project Costs and Financing (a) Project Cost by Component (in US$, millions equivalent) Appraisal Estimate Actual/Latest Estimate Percentage of Components (US$, millions) (US$, millions) Appraisal Total Baseline Cost 300.00 300.00 100 Physical Contingencies 0.00 0.00 0 Price Contingencies 0.00 0.00 0 Total Project Costs 300.00 0.00 — Front-end fee Project Preparation Fund 0.00 0.00 0 Front-end fee IBRD 1.50 0.75 0.25 Total Financing Required 300.00 300.00 — (b) Financing Appraisal Actual/Latest Type of Percentage of Source of Funds Estimate Estimate Cofinancing Appraisal (US$, millions) (US$, millions) Borrower — 0.00 0.00 0 International Bank for Reconstruction and — 300.00 300.00 100 Development 46 Annex 2. Outputs by Component All figures based on SFD’s December 2015 status update report. Overall Project Planned versus Actual Portfolio to PFIs: As of End of December 2015 (LE million) Fiscal Year Plan Actual % FY 2011 180 183 102% FY 2012 585.9 843 144% FY 2013 1330 1275 96% FY 2014 1800 1589 88% FY 2015 1800 1922 107% Planned versus Actual Portfolio to PFIs (LE million) 2500 1922 2000 1800 1800 1589 1500 13301275 1000 843 586 500 180 183 0 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 Plan Actual Component 1: Line of Credit for Microfinance Signed Contracts: Ser. Intermediary Name Contract Details Disbursement Position Contract Date Contract To Bank To Client Amount (LE million) 1 A step forward for development 28 June 2011 25 25 25 in Alexandria 2 Step forward for the 01 November 120 120 120 development of microfinance 2011 bank with Bank Misr 3 A Step Forward for Dev in 05 August 2012 1.48 1.48 1.48 Menia 1 4 A step for development in 12 August 2012 3 3 3 Sharqiya (1) 5 A step forward for development 02 July 2012 200 200 200 micro enterprises – Banque du Caire 47 6 A step forward for development 05 September 3 3 3 in Fayoum 2012 7 A step forward for development of 29 April 2013 15 15 15 microfinance - CIB 8 A step forward for microfinance 29 October 2013 40 40 40 development with Bank Misr 9 A step forward for development in 23 September 2.5 2.5 2.5 Beni Sweif (2) 2013 10 A step forward for development in 23 September 2.5 2.5 2.5 Beni Sweif 2013 11 A step forward for microfinance 25 June 2014 44 44 44 projects - NBE Total 455.88 455.88 455.88 Disbursement to End Intermediaries (as of December 2015) Intermediary Banks % NGOs % Total Amount 419 92 36.9 8 455.8 Distribution of Microfinance Lending by Sector Sector Amount (LE) % # of Projects % Commercial 325,933,090 72 57,031 70 Service 73,360,172 16 13,367 16 Industrial 26,160,272 6 4,773 6 Animal 15,637,650 3 4,031 5 Production/Agricultural Free Occupation 14,789,138 3 2,646 3 Total 455,880,322 100% 81,848 100% Distribution of Microfinance Lending by Gender Gender Amount (LE) % # of Projects % Male 323,480,195 71 55,058 67 Female 132,400,127 29 26,790 33 Total 455,880,322 100 81,848 100 Distribution of Microfinance Lending by Project Type Type of Project Amount (LE) % # of Projects % New 5,116,070 1 804 1% Existing 450,764,252 99 81,044 99% Total 455,880,322 100 81,848 100% 48 Geographic Distribution of Microfinance Lending under Line of Credit (LE) Governorate Amount % # of projects % 5,966,000 1.31% 964 1.18% Cairo 7,342,500 1.61% 1,247 1.52% Giza 9,921,970 2.18% 1,918 2.34% Qualubeyia 22,538,050 4.94% 4,655 5.69% Alexandria 39,417,202 8.65% 6,448 7.88% Behera 889,500 0.20% 152 0.19% Matrooh 18,147,850 3.98% 3,391 4.14% Menufia 24,801,011 5.44% 4,172 6.9% Gharbia 20,041,327 1.70% 4,052 2.7% Kafr El Sheikh 7, 736,061 8.87% 1,381 2.1% Damietta 40,414,200 0.02% 8,048 9.2% Dakahlia 71,500 0.38% 11 0.7% North Sinai 1,720,600 0.75% 289 0.5% South Sinai 3,403,920 0.42% 496 1.3% Port Said 1,896,570 9.51% 271 1.4% Ismailia 1,896,570 9.32% 7,805 0.7% Suez 43,358,778 4.93% 7,658 7.3% Sharkia 42,482,804 9.68% 4,024 3.4% Beni Sweif 22,463,034 3.87% 7,925 3.9% Fayuom 44,137,014 6.39% 2,796 3.0% Menia 17,635,690 5.82% 6,206 5.2% Assiut 29,140,407 2.60% 3,770 4.2% Sohag 26,531,550 0.17% 2,013 5.0% Quena 11,835,034 0.27% 97 3.2% Aswan 783,000 2.63% 145 0.1% New Valley 1,210,000 1.4% 1,914 3.7% Red Sea 11,994,750 0.8% 84 1.4% Luxor 455,880,322 100% 81,848 100% Total 49 50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 Component 2: Line of Credit for Small Enterprise Finance Signed Contracts Intermediary Name Contract Type Contract To Bank To Client Amount (LE million 1 Overdraft 100 100 100 2 Islamic Finance 46.166 46.166 92.3 3 Promotion of 200 200 200 SMEs 4 Overdraft 200 200 200 5 Promotion of 200 200 200 SMEs 6 National Bank of Egypt Promotion of 146.7 146.7 146.7 (NBE) SMEs 7 Promotion of 135 135 135 SMEs 8 Promotion of 72.75 72.75 72.75 SMEs 9 16.225 16.225 16.225 10 Société Arab Promotion of 59.97 59.97 59.97 Internationale de Banque SMEs (SAIB) 11 Bank Audi Promotion of 24.9 24.9 24.9 SMEs 12 Promotion of 24.97 24.97 24.97 SMEs 13 Industrial Development & Doctors & 50 50 50 Workers Banks Pharmacists 14 Overdraft 49.99 49.99 49.99 15 Overdraft 37.49 37.49 37.49 16 United Bank Promotion of 25 25 25 SMEs 50 17 Islamic Finance 25 25 50 18 El Baraka Bank Islamic Finance 49.92 49.92 99.8 19 Promotion of Small Cattle Raisin for 2.29 2.29 2.29 Enterprises PBDAC Dairy Production Total 1,466.4 1466.4 1,587.4 Amounts Disbursed to End Beneficiaries by Loan Size Loan Size (LE Disbursed % # of Projects % thousand) Amount 10 to 25 8,759,931 0.6 447 7.3 25 to 50 53,502,342 3.4 1,210 19.8 50 to 150 201,372,168 12.7 2,001 32.7 150 to 300 306,911,155 19.3 1,316 21.5 300 to 500 224,3156,569 14.1 495 8.1 500 to 1000 325,605,933 20.5 389 6.3 1000 to 2000 441,223,191 27.8 259 4.2 Above 2000 25,876,962 1.6 9 0.1 Total 1,587,568,251 100% 6,126 100% 1.6 % of Disbursed Loans by Loan Size 100% 0.6 3.4 12.7 27.8 19.3 20.5 14.1 10 to 25 25 to 50 50 to 150 150 to 300 300 to 500 500 to 1000 1000 to 2000 Above 2000 Total % of projects by loan size 6.3 4.2 0.1 7.3 8.1 19.8 21.5 32.7 10 to 25 25 to 50 50 to 150 150 to 300 300 to 500 500 to 1000 1000 to 2000 Above 2000 51 Distribution of Small Enterprise Finance by Sector Sector Amount (L.E) % # of Projects % Commercial 877,215,283 55% 3,629 59% Service 238,750,583 15% 1,211 20% Industrial 399,765,172 25% 778 13% Animal Production 49,211,800 3% 444 7% Free Occupations 22,625,413 1% 64 1% Total 1,587,568,251 100% 6,126 100% % of Disbursed Loans by Sector 3% 1% 25% 55% 15% Commercial Service Industrial Animal Production Free Occupations % of Projects by Sector 1% 7% 13% 20% 59% Commercial Service Industrial Animal Production Free Occupations 52 Distribution of Small Enterprise Finance Loans by Gender Gender Amount (L.E) % # of Projects % Male 1,334,431,713 84% 4,841 79 Female 253,136,538 16% 1,285 21 Total 1,587,568,251 100% 6,126 100 Distribution of Small Enterprise Finance by Project Type Project Type Amount (LE) % # of Projects % New 402,820,513 25 2,290 37 Existing 1,184,747,738 75 3,836 63 Total 1,587,568,251 100 6,126 100 Geographical Distribution of Small Enterprise Finance Governorate Amount % # of projects % 241,285,018 15.2% 571 9.3% Cairo 86,502,600 5.4% 361 5.9% Giza 87,199,455 5.5% 302 4.9% Qualubeyia 131,729,404 8.3% 382 6.2% Alexandria 24,072,350 1.5% 109 1.8% Behera 1,162,400 0.1% 6 0.1% Matrooh 83,956,029 5.3% 362 5.9% Menufia 104,342,414 6.6% 424 6.9% Gharbia 47,467,000 3.0% 167 2.7% Kafr El Sheikh 31,591,500 2.0% 126 2.1% Damietta 168,130,526 10.6% 561 9.2% Dakahlia 5,821,900 0.4% 43 0.7% North Sinai 12,828,500 0.8% 31 0.5% South Sinai 15,485,945 1.0% 82 1.3% Port Said 26,930,850 1.7% 84 1.4% Ismailia 12,727,000 0.8% 40 0.7% Suez 109,468,719 6.9% 447 7.3% Sharkia 37,916,375 2.4% 210 3.4% Beni Sweif 36,879,900 2.3% 241 3.9% Fayuom 40,868,100 2.6% 185 3.0% Menia 72,398,000 4.6% 318 5.2% Assiut 53 72,864,165 4.6% 259 4.2% Sohag 67,717,500 4.3% 305 5.0% Quena 31,195,300 2.0% 197 3.2% Aswan 1,030,000 0.1% 5 0.1% New Valley 22,803,101 1.4% 224 3.7% Red Sea 13,194,200 0.8% 84 1.4% Luxor 1,587,568,251 100% 6,126 100% Total Geographic Distribution of Small Enterprise Finance Loan (LE) 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 0 Giza Alexandria Matrooh Menufia Dakahlia Qualubeyia Ismailia Gharbia Sharkia Beni Sweif Menia Assiut Quena Cairo North Sinai Sohag New Valley Behera South Sinai Suez Fayuom Aswan Luxor Kafr El Sheikh Port Said Red Sea Damietta 54 Annex 3. Economic and Financial Analysis A traditional economic/financial analysis cannot be undertaken for this project, given that project costs at the level of PFIs cannot be determined and the project lacks data on performance on MSE beneficiaries (employment, sales, growth rates, entry/exit patterns, market linkages). Project outcomes for the beneficiaries have been measured and discussed in other sections of the ICR. 55 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending TTL/financial sector development, Sahar Nasr Program Leader MNC03 financial inclusion, microfinance, SME finance Adviser/financial sector Roberto De Rezende Rocha Senior Advisor GFMDR development issues Team member/macroeconomics, Santiago Herrera Lead Economist GMF01 monetary policy, fiscal consolidation Team member/adviser on David J. McKenzie Lead Economist DECFP evaluation Team member/micro and small Douglas Pearce Practice Manager GFM2B enterprise finance Adviser/financial and private Andrew H. W. Stone Head IEGFP sector development issues Team member/operations Steve W. Wan Yan Lun Operations Analyst GFM05 management Faisal Abdulrahaem Al-Hothali Safeguards Specialist — Safeguards Alaa Ahmed Sarhan Safeguards Specialist — Safeguards Mariana T. Felicia Safeguards Specialist — Safeguards Team member/Access to finance, Xavier Reille Manager CFGA3 microfinance Mohammed Khaled Senior Operations Officer CFGA3 Team member/microfinance Nahla El-Okdah Operations Officer CFGA3 Team member/microfinance Private Sector Development Team member/investment climate Sara al Rowais — Specialist issues Supervision/ICR ICR lead author/Financial Peter McConaghy Financial Sector Specialist GFM05 Inclusion, SME finance Team member/banking regulation Laurent Gonnet Lead Financial Sector Specialist GFM05 and supervision, bank restructuring Laila AbdelKader Financial Sector Specialist GFM05 Team member/SME finance Wael Elshabrawy FM Analyst MNC02 FM Nermin Mour Program Assistant MNC02 Administration (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle US$, thousands (including travel No. of Staff Weeks and consultant costs) Lending FY2010 32.0 96.25 Supervision/ICR FY2011 21.7 130.20 56 FY2012 32.0 192.50 FY2013 32.0 192.50 FY2014 26.4 158.52 FY2015 13.6 81.63 FY2016 1.82 10.91 Total — 862.51 57 Annex 5. Beneficiary Survey Results (if any) 58 Annex 6. Stakeholder Workshop Report and Results (if any) 59 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR (i) Assessment of the operation's objectives, design, implementation, and operational experience The operation’s objectives, design, implementation, and operational experience were in line with the SFD’s objectives and policies, which include the contribution to a sustainable improvement in inclusive access to finance for MSEs. The project design was flexible and allowed the SFD to reallocate between the two project components to respond to MSE needs in the Egyptian market. Whereas the project design allocated the US$300 million equally between the two project components (small enterprises and microfinance), 70 percent of the project value was used by the small enterprises and 30 percent by the microfinance firms. The implementation and operational experience was very positive because of the design flexibility. The PDO was to contribute to a sustainable improvement in inclusive (region and gender) access to finance for MSEs. The expected outcomes to achieve the PDO after restructuring the project were the percentage increase in lending to MSEs by MFIs, NGOs, and banks and increase in the number of female-headed (or owned) MSEs with access to credit. The operation’s outcomes have successfully achieved the agreed objectives, substantially increased the percentage of lending to MSEs, and increased the number of female-headed (or owned) MSEs with access to credit. The most important outcome that contributed to the achievement of the operation’s objectives were clearly reflected in the development of new financing products for small enterprises, such as the overdraft and the Islamic finance to foster small enterprises. In the microfinance, the project supported the SFD’s initiative of lending to tier 1 NGOs (business men associations) with up to LE 25 million that have reputable and sustainable previous experience in microfinance. In addition, these NGOs have a wide geographical spread that can help disseminate microfinance lending as much as possible because they possess a large market share from the total microfinance portfolio in Egypt. Moreover, the project helped the SFD to encourage the banks to engage in microfinance lending through supporting them with the technical assistance needed or through co-financing to enhance and drive the microlending process. Accordingly, the SFD worked on the following:  Developing untraditional microfinance products according to the market needs  Developing market research on client demand for microfinance products  Designing and implementing a credit system to microlending clients dealing with the banks  Designing future plans for developing joint investments portfolio between the SFD and the banks  Studying and designing a technical and procedural framework for the management of various risks related to microcredit products 60  Studying and developing the institutional and administrative measures necessary for the management and follow-up of microlending products through supporting the technical resources and developing institutional capacity for microlending units of the banks Therefore, the MFCS has contracted a new downscaling initiative with Bank Misr and a wholesale finance initiative with the CIB. (ii) Evaluation of the borrower's own performance during the preparation and implementation of the operation, with special emphasis on lessons learned that may be helpful in the future The SFD’s own performance during the preparation and implementation of the operation is satisfactory as the SFD was fully engaged in the preparation stage and positively contributed to the operation’s design and immediate results. The SFD’s own performance during implementation is very positive and satisfactory. To ensure transparent and efficient project management, programmatic quality and effectiveness, technical coordination, internal and external communication, accountability, and sound administration, the SFD has formed a PMC comprising representatives from its key departments, including Technical Bureau, Nonfinancial Services, Planning and International Cooperation Sector, representatives from Small Enterprise Development Sector and Micro Finance Central Sector, and the Financial and Administrative Affairs Sector. The PMC held biweekly meetings, which were attended by a representative from the World Bank Office in Cairo, to undertake the following tasks:  Review the log frame developed under the project, including the relevant key performance indicators for an efficient M&E scheme, and elaborate component strategies, work plans, and budgets guiding implementation at the individual component level.  Supervise the implementation of project components, activities, and tasks in line with the corresponding work plans and budgets.  Develop and implement, through the M&E Department of the SFD, an M&E mechanism for the project’s financial, administrative, and operational activities and ensure timely submission of progress and financial reports.  Build relations and effective networks with relevant program partners, policy makers, business, and donors to further the interests of the program.  Liaise with the actors involved in the implementation of project support and provide technical support to implementing partners, as appropriate. The main project outcomes were the following:  87,974 small and micro-finance projects (6,126 small projects and 81,848 microprojects) 61  32 percent female-headed MSEs  23 percent of the loans disbursed were microloans up to LE 25,000 while 77 percent of the loans disbursed were more than LE 25,000  The sector distribution was as follows (portfolio based): o Commercial sector represented 59 percent o Service sector 15 percent o Industrial sector 21 percent o Agribusiness and animal production 3 percent o Free occupations 2 percent  The project offered 143,038 jobs The successful project implementation resulted in signing the Promoting Innovation for Inclusive Financial Access Project with an amount of US$300 million. (iii) Evaluation of the performance of the World Bank, any co-financiers, or other partners during the preparation and implementation of the operation, including the effectiveness of their relationships, with special emphasis on lessons learned The performance of the World Bank was excellent and it was supportive to the SFD during the stages of the project. The World Bank’s staff in Cairo were engaged in a day-to-day operation of the project through the PMC and offered full support to the SFD in overcoming any implementation obstacles, including the restructuring of the project’s results framework indicators. The World Bank’s full engagement was the major lesson learned from this operation, which made the implementation very smooth. (iv) Description of the proposed arrangements for future operation of the project 62 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders 63 Annex 9. List of Supporting Documents Preparation and Supervisory Documents (Publicly Disclosed) World Bank. 2010. Project Appraisal Document (PAD). Enhancing Access to Finance for Micro and Small Enterprises Project. Project Number P144655. ______. 2012. Restructuring Paper for a Proposed Project Restructuring for the Enhancing Access to Finance for Micro and Small Enterprises Loan. Report No: 72278-EG. ———. 2010. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 1. (Archived September 13, 2010). ———. 2011. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 2. (Archived July 14, 2011). ———. 2011. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 3. (Archived October 12, 2011). ———. 2012. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 4. (Archived June 5, 2012). ———. 2012. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 5. (Archived November 21, 2012). ———. 2013. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 6. (Archived June 8, 2013). ———. 2013. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 7. (Archived December 30, 2013). ———. 2013. Project Appraisal Document. Promoting Innovation for Inclusive Financial Access Project. ———. 2014. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 8. (Archived June 22, 2014). ———. 2014. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 9. (Archived December 12, 2014). ———. 2015. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 10. (Archived May 10, 2015). ———. 2015. Enhancing Access to Finance for Micro and Small Enterprises Project, Sequence 11. (Archived September 27, 2015). 64 Related Analytical Work Consultative Group to Assist the Poor. 2002. Helping to Improve Donor Effectiveness in Microfinance. Apex Institutions in Microfinance. ———. 2002. CGAP Occasional Paper Number 6: Microcredit Interest Rates. World Bank. 2005. Egypt Country Assistance Strategy, Overview. ———. 2009. Egypt Investment Climate Assessment 2009. Accelerating Private Enterprise-Led Growth - Policy Brief. ———. 2009. Egypt and the Global Economic Crisis: A Preliminary Assessment of Macroeconomic Impact and Response. ———. 2015. Egypt: Promoting Poverty Reduction and Shared Prosperity: Systematic Country Diagnosis. Related Evaluations Pillay, Elmagad, and El Oraby. 2011. The Social Fund for Development: An Independent Forward-Looking Review.. Websites World Bank-IFC Middle East and North Africa Technical Assistance Facility. http://www.ifc.org/wps/wcm/connect/REGION__EXT_Content/Regions/Europe+Middle +East+and+North+Africa/IFC+Middle+East+North+Africa+and+Southern+Europe/MS ME+TAF/. Egypt Findex Data. http://datatopics.worldbank.org/financialinclusion/country/egypt,-arab-rep. Egypt - Microfinance Information Exchange (MIX Market). https://www.themix.org/mixmarket/countries-regions/egypt. 65 MAP 66