Sudan Multi Donor Trust Fund Final Project Proposal

Transcription

1 Sudan Multi Donor Trust Fund Final Project Proposal Sudan Microfinance Project Applicant: Brief Description: Central Bank of Sudan The project supports the establishment of the Sudan Microfinance Development Facility. The Facility is designed to support the establishment of new and existing microfinance institutions and providers through dissemination of best practices, technical assistance and training, financing and managing donor resources. It will support creation of new MFIs as well as downscaling banks and other providers to serve the sector. Project Objective: Sector: Location: Development The development objective is to increase the availability of affordable financial services to 200,0000 households by supporting the emergence of commercially sustainable microfinance service providers. Financial Sector Government of National Unity. The project will serve locations throughout Sudan including the three areas, marginalized parts of western, eastern and northern Sudan, as well as focusing on urban working poor. The project is aligned with a component of a project for MDTF-S. Total Project Cost: MTDF Total: $ 10.0 million Government Contribution Total : $ 10.0 million Total Cost: $20.0 Million, of which 50% GNU and 50% MTDF Implementing Period: Phase 1 January 2007-January 2009 Phase 2 January 2009-January 2012 Expected Outcomes: Policy and regulatory environment for microfinance established At least eight microfinance institutions operational in Sudan At least two commercially sustainable by end of project period Tens of thousand of small entrepreneurs financed Service providers to microfinance institutions established and strengthened Contact for further information Mr. Abdel Alim El-Amin Director of Banking Supervision Central Bank of Sudan Ishrag Dirar Director of Microfinacne Unit Central Bank of Sudan 1

2 A B C D E F TABLE OF CONTENTS Government Endorsement Key Issues and Rationale for MDTF Involvement Project Development Objective(s) Project Description and Costs Institutional Arrangements Potential Risks and Issues Annex 1: Country and Sector Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: SMDF Board of Directors Terms of Reference Annex 11: SMDF Management Firm Terms of Reference Annex 12: Project Preparation and Supervision Annex 13: Documents in the Project File Annex 14: Country at a Glance A. Government Endorsement The Government of National Unity and the Government of South Sudan have endorsed microfinance as a central component of its poverty reduction strategies as described particularly in the Joint Assessment Missions, recent budget speeches, and policy documents. The Central Bank of Sudan has, through its own resources, invested in defining a vision and action plan for the development of microfinance and has established a microfinance unit at the central bank. Bank of Sudan Microfinance Initiative: The Central Bank of Sudan recently commissioned a study of the microfinance sector with the objective of preparing a long term development strategy for the sector. The two key recommendations of the action plan were the need to strengthen the Bank of Sudan s microfinance regulatory capacity, and the establishment of an autonomous apex institution. This institution will provide financial and capacity-building support to new and existing microfinance providers serving diverse market segments across rural and urban parts of Sudan. Central Bank of Sudan In order to support the establishment of the microfinance sector, the Central Bank of Sudan has established a microfinance division within the Central Bank s Financial Institutions and Systems Wing (FISW). The purpose of this division will be to promote sustainable microfinance (both Islamic and conventional) in Sudan. Microfinance is seen by the central bank as a viable financial sector instrument for enhancing access to financial services for the poor, alleviating poverty, 2

3 promoting economic development, and empowering women. Its strategy is to promote microfinance through both banks and non-bank financial institutions, and to facilitate the use of both government and non-government financial and technical resources. Ministry of Finance: Private Sector Development Program: The Ministry of Finance is developing a private sector development strategy through an effort institutionally led by the Director of Policy, and a cross-agency steering committee. The objective is to create an enabling environment that is more conducive to the development of broad-based, pro-poor, private sector growth. This effort will support elimination of obstacles to small and microenterprises growth. Sudan Microfinance Development Facility Further, the Central Bank of Sudan has decided to establish the Sudan Microfinance Development Facility (SMDF) to spearhead the development of the microfinance sector. While the nongovernmental and private sector has commenced a number of nascent microfinance activities, a recent study called for public sector support to accelerate the development of the sector. Although the demand for microfinance services is substantial, the industry currently only covers an estimated 1%-3% of the potential market. There are several factors that point to huge potential demand in the market. For example, small-scale industries account for 93% of the manufacturing industry in Sudan, small entrepreneurs provide two-thirds of household needs for the majority of Sudanese households, and the agricultural sector employs 67% of the population mainly through small scale subsistence farmers. On the other hand the formal financial sector only serves a tiny proportion of these, thus pointing to the existence of a huge untapped market. The proposed size of the SMDF is small relative to other microfinance development facilities, and demand for its services is likely to be strong. As noted above, the Sudanese economy is comprised largely of small and very small firms and agricultural enterprises, and recent economic growth has been strong. While still relatively small, the microfinance sector has a few goodpractice providers that are growing rapidly. International microfinance providers and networks with solid track records in starting and operating MFIs including BRAC of Bangladesh and several East African players as well as Northern networks have expressed interest in Sudan. It is also worth noting that Sudan has a more developed banking system than Afghanistan had when its much larger microfinance development facility -- MISFA -- was created, which would generate additional demand for SMDF resources, if viable bank downscaling models can be identified. Several of MISFA s partners have experienced strong growth, requiring replenishment of the apex funds. All of these factors suggest that the facility should be able to place its resources, and indeed, might require additional funding to respond to the demand for its services. While microfinance is not a panacea for poverty reduction, it could play an important role in the financial sector development of Sudan. Providing access to appropriate microfinance (credit, savings, and other services) could support a range of outcomes, including: Increased incomes, a growing enterprise sector, and increased employment Increased assets and wealth Reduced vulnerability of households to economic shocks and to risk, and increased household ability to invest in their own health, education, etc. 3

4 Economic empowerment of women The international community, together with the Sudanese government, has put together a microenterpise development project focused on poverty reduction through the improvement of livelihoods for both the urban and rural poor. The estimated funding is US$20 million over five years, to be invested in microfinance, in line with the following principles: Take an institutional approach to supporting microfinance act like an investor in retail providers of financial services and microfinance support organizations rather than a financier of a project. Establish business-like partnerships with partner organizations, with funding linked to clearly defined and mutually agreed performance targets. Invest in diverse retail providers capable of delivering well-tailored services to diverse market segments (by gender, geographic location, socioeconomic base, etc.). Take a long-term approach to investing in microfinance the development of viable microfinance capacity takes time. Ideally provide three to five years of financing and capacity-building support on a progressively more commercial basis, to the point at which the microfinance providers are financially viable and able to operate without external support. Make sure that the retail providers and support organizations have sufficient support to build institutional capacity, through technical assistance and training tailored to the needs of the organizations. Build expertise within Sudan on good-practice microfinance strategies, operations, policies, and regulations at all levels retail microfinance providers, service providers to the microfinance industry such as consultants, trainers and auditors, and regulators and policy makers to ensure the health of the sector as a whole. Create an enabling environment for the sector, supporting the government in applying a mix of laws, policies, and regulations to stimulate innovation and diversity in achieving the goal of broad-based access to finance. Adjust the program s interventions as the sector develops, to ensure that funding and capacity-building is tailored, more focused, and implemented in such a way as to avoid distorting the market as the microfinance market becomes more competitive and commercial. Work on the development of an appropriate exit strategy and thresholds from the inception of the initiative. In an environment with many existing or planned microfinance programs, and a range of approaches, donors, and priorities there is a need for coordination and rationalization of donor support for microfinance within a sector development framework, provision of a mechanism for introducing good microfinance practices and standards, and support of the development of institutional microfinance provider capacity. A microfinance development facility a wholesale mechanism that provides financing and technical support to retail MFIs, microfinance networks, and other intermediaries and service providers can help achieve this. It can also provide donors with an efficient funding mechanism that meets national market needs. It was with these goals in mind that the establishment of a support facility is being proposed for Sudan. 4

5 B. Key Issues and Rationale for Multi-Donor Trust Fund (MDTF) Involvement Sudan has experienced a substantial economic recovery since the mid-1990s, including rapid growth of manufacturing, construction, services, irrigated and rain fed agriculture, light manufacturing, and more recently, energy exports. However, this growth has not been broadbased, and in fact has been accompanied by rising inequality and a growing urban informal sector. About 60-75% of the population in the North and 90% of the South is estimated to be living below $1 a day in income. A key development strategy for Sudan s emerging poverty reduction strategy is to address: (a) rising income inequality as well as the inequitable distribution of investment; and (b) to address the needs of small-scale, domestic, and women-owned firms that have not participated in growth. Development of small- and micro- enterprises and livelihoods of low-income people is seen throughout the JAM as a core poverty reduction strategy. There is a huge potential for the development of microfinance programs in the country, particularly in light of current social and economic conditions, and the Government's declarations for prioritizing poverty alleviation in its policies. However, there are many challenging constraints facing this nascent microfinance sector which unless addressed will limit its effectiveness in fulfilling its role in poverty alleviation and economic development. The MTDF resources will support the governments aspirations for a microfinance industry that supports the activities of small and medium scale enterprises crucial to job creation, and reaping the peace dividends of the CPA. C. Proposed Development Objective(s) The projects development objective is to increase the availability of affordable financial services by supporting the emergence of commercially sustainable microfinance service providers. To achieve this objective, this project will finance legal and regulatory reforms for microfinance activities and the establishment of a dedicated microfinance development facility a facility that will provide financial and technical assistance to microfinance service providers. The project aims to develop sustainable provision of financial services for low-income clients. In order to achieve this goal, the project takes an institutional approach, focusing on building sustainable microfinance institutions that have the capacity to provide affordable financial products and services on a profitable basis to a specific target group - low-income people (with attention to female entrepreneurs). During the next five years, there are likely to be new pressures on the microfinance sector in Sudan to which SMDF will need to respond to remain sustainable. These new pressures include increasing competition and a changing economic environment. SMDF will need to review its strategy and program frequently to remain relevant and even-handed in its assistance as the sector matures and becomes more competitive. D. Project Description & Costs Specifically, the project will finance the following activities: CBOS and MFNE Capacity Building (US$0.25 million) 5

6 The objective of this component is to support initial development of the legal and regulatory framework for microfinance, so as to enable diverse microfinance providers (including at least commercial banks, local and international NGOs and financial co-operatives) to start up operations, diversify their product offerings, and expand their sources of capital. This component will primarily help strengthen the human and institutional capacity of the Bank of Sudan (CBOS) and the Ministry of Finance and National Economy (MOFNE) so that they can discharge effectively their key functions of regulating and supervising the microfinance industry, undertaking microfinance research, and formulating and implementing microfinance policy. This component will provide financial and technical assistance (including training and exposure programs) to build-up institutional capacity in the following main areas: o Regulation and Supervision Functions (US$70,000): This activity will focus, inter alia, on: (a) strengthening prudential licensing, regulation and market conduct rules for the microfinance industry, and their monitoring and enforcement by supervision staff; (b) facilitating a risk-based supervision model, and strengthening the skills of supervisors to undertake risk-based supervision including through better on-site inspection and offsite surveillance, for deposit taking microfinance institutions. o Research, Policy Formulation and Implementation function, (US$80,000)This activity will focus, inter alia, on: (a) microfinance policy including legal and regulatory issues; (b) performance monitoring including increase in access to microfinance and microenterprises by low-income people and communities, and (c) the impact of government financial sector policies on the industry. o Training (US$100,000): This activity will provide financing for study tours, to assess good policy and regulatory and supervisory policies and practices in countries with comparable contexts to Sudan. This activity can cover the costs of technical assistance and capacity-building for the Central Bank and public sector 'line' agencies so as to ensure relevant public sector agencies have the knowledge and capacity to carry out their regulatory responsibilities. Sudan Microfinance Development Facility (US$2.7 million) This component will finance the establishment of the Sudan Microfinance Facility and support its ongoing operational costs. Specifically, it will provide financial and technical assistance in the following activities: o Policies, Procedures and Institutional Framework: ($100,000): This activity will finance the Central Bank s establishment of the Facility as a for-profit organization and its appointment of the autonomus Board of Directors. Using an international tender process, the central bank will select the firm/organization to manage the Facility during its start-up and initial implementation. The management will prepare annual work plans for review and approval by the Board. The Board will oversee all aspects of the Facility s strategy development, implementation, monitoring and evaluation, and reporting to relevant stakeholders. Among other priority tasks for start- 6

7 up of the Facility to be financed by this activity, will be development of the full set of policies and procedures required for the Facility s operations. o o Research (US$50,000): In partnership with the proposed microfinance unit in the Central Bank, the Facility should further investigate (on the basis of previous work commissioned by CBOS) an in-depth assessment of the sector, including attention to policy, legal and regulatory issues. The findings and recommendations of the assessment will form the basis for a thorough consultative process with stakeholders in the government, finance and civil society sectors, to formulate priorities for work to improve the enabling environment for pro-poor financial services and a more inclusive financial system. Policy Advocacy (US$50,000): In the Facility s early years, it should focus on advocating policy changes that remove the most pressing barriers to a diverse microfinance sector operating across Sudan. This component will support that work, as well as capacity-building for the Central Bank s new microfinance unit and other government entities with significant involvement in the microfinance initiative. o o Training (US$100,000): This component will also finance training, study tours, and other capacity-building of the staff of the microfinance Facility (to develop their technical capacity and experience in monitoring and appraising microfinance institutions and other skills related to project implementation), as well as Board members (to equip them with the knowledge and skills necessary to provide strong leadership to and oversight of the initiative). No later than the end of this program, the Facility will be able to operate without substantial external support. Management and Operating Costs (US$2,300,000): This activity will cover the costs of the Facility, including staff salaries, staff travel, equipment, vehicle maintenance, utilities, office supplies, rental of premises and external audits. Microfinance Sector Development (US$17.0 million) This component will assist in developing the microfinance industry. It will provide financial and technical assistance in the following activities: o Technical Assistance to New Microfinance Providers (US$5,000,000): This activity will provide funds for capacity-building of MFIs and the overall sector. Facility staff will provide some training and technical assistance directly; however, the facility will also have the ability to contract out delivery of training, consulting, etc. to international and local firms and individuals with the requisite expertise. This will include providing support to microfinance networks and other intermediaries for them to provide long-term technical assistance to greenfield and young microfinance providers. The Facility s technical services will be planned and managed so as to build the 7

8 capacity of the MFIs to plan and manage their own technical assistance in the future. Beyond working with retail microfinance providers, the Facility will directly provide and contract out for training and technical assistance to Sudanese service providers to the sector, such as trainers, consultants, and auditors. A critical requirement for the long-run financial and development performance of the sector is the availability of capable service providers, to reduce the dependence on foreign expertise. The Facility will also explore how it will strengthen one or more national provider networks, such as the Microfinance Organizations Network (MON). o Equity, Loan and Grant Financing (US$12,000,000): Qualifying MF providers selected for assistance will be eligible to receive grants for loan capital, technical assistance, short-term operating costs, MIS and systems development, market research and new product development, staff training and capacity development, and other purposes that contribute to extending financial services to targeted client segments and building sustainable institutions. If its legal status and charter permit it, the Facility will also provide other kinds of financing such as loans, loan guarantees or equity. The facility may also make grants to organizations that help develop effective demand for microfinance, for example, by helping low-income people develop viable livelihoods and supporting enterprise start-up and growth. Activities to be financed under this activity include: (i) training (local and international); (ii) consulting services (local and international); (iii) the cost of seminars and translation services; (iv) travel for participation in regional and international training courses, meetings and conferences; and (v) grants and other financing forms. Monitoring and Evaluation (US$0.05 million) This component will finance the projects monitoring and evaluation activities including a longitudinal impact assessment, the objectives of which are: (i) to document the impacts of a sustainable microfinance sector in Sudan; (ii) to provide client-level information to MF providers for use in documenting program impacts, improving program management, and developing new products and services, and (iii) to build local research capacity for collecting and analyzing clientlevel information on microenterprises and microfinance. The impact assessment will use a mixed method approach, including both quantitative and qualitative data. If feasible, it will employ a quasi-experimental design involving both clients and non-clients. E. Institutional Arrangements Administrative Arrangements The following administrative arrangements are proposed: The Central Bank of Sudan (CBOS) will facilitate the establishment of SMDF as a microfinance wholesale institution. However, the SMDF will be autonomous of government with a separate legal status as a for-profit organization, separate 8

9 premises, and an autonomous Board composed of representatives from civil society, donors, government, and private sector. 1 CBOS will lead by facilitating the program, i.e., taking the necessary steps to create the facility, organize selection of the founding Board. The Board will select through a competitive process the organization that will manage and operate the Facility. CBOS will advertise an international request for proposals seeking firms or organizations to implement the five-year program, based on the program documents and specifications. Efforts will be made to ensure dissemination of the international tender to southern MFI institutions and networks with relevant experience. CBOS will lead a competitive selection process for the facility s program implementer, which will be responsible for the pilot and follow-up phases, under direction of the SMDF Board. SMDF will be led by a Project Director with international microfinance/financial experience and a team of national and international staff and short-term advisors. The implementing organization will prepare annual work plans for approval by the Board. This will be done through broad consultations with stakeholders in the sector providers, policy makers, donors and investors, enterprise associations, development organizations and other civil society groups, etc. in order to build consensus on key priorities for the sector and sector development strategy and activities. A two-phased approach is implemented with a start-up' phase for two years to establish the institutional framework, mechanisms, systems and procedures and to provide financial and technical assistance to 2-4 qualified microfinance providers. The start up phase will be followed by an expansion phase, with significantly stepped-up funding and technical assistance to microfinance providers and broader support to the sector and ensuring an enabling environment for broad-based access to finance. Figure 1 Illustrative Management Structure SMDF Board Central Bank x1 Ministry of Finance x1 International Microfinance Experts x2 Sudanese Civil Society & Private Sector* x3 Project Director Facility Ops Manager Facility Ops Manager 1 Financial Officer 1 Training Coordinator 1 Monitoring Agent 1 Procurement Specialist 1ITPerson 1 Financial Officer 1 Training Coordinator 1 Monitoring Agent 1 Procurement Specialist 1ITPerson SMDF Implementing Organization 1 The independence of the facility helps ensure that its activities are guided by the requirements of the sector, rather than political considerations. Its independence also provides some protection against disbursement pressure from government and donors, a common challenge of apexes and one that is particularly important to manage in a very young sector such as that found in Sudan. 9

10 *The Sudanese private sector includes groups representing small-scale entrepreneurs Governance Structure SMDF will be governed by a Board of seven people. The Board will autonomously manage the SMDF on behalf of the central bank. They will be responsible for providing the SMDF with policy direction in accordance with the objectives of the facility as agreed with the central bank at the time of its establishment. The Board Members will autonomously approve the strategy, work plan, contracts, and agreements, etc. and they are also the only ones who can amend the articles. If the organization winds up, dissolution of the assets will be carried out in a way that benefits the microfinance sector, with none going to the directors, government, or donors. The proposed Board members will include: Central Bank nominee (1) Ministry of Finance and National Economy nominee (1) Two directors chosen by the donors to the facility - these will be international microfinance experts and not donor staff. There will be three directors chosen from Sudanese civil society or the private commercial sector, for example organizations representing small scale entrepreneurs. These three names will be put forward after the above nominations have been finalized. They can be proposed by any of the other directors, but a majority of the other four directors must approve them (3). There are two reasons for donors choosing two directors: (a) donor coordination and support will be critical to the success of SMDF; (b) the microfinance sector in Sudan has very little local microfinance expertise, so they asked that microfinance experts be included on the board (2). The articles for the SMDF will be drafted to allow for future expansion of the number of directors to be drawn from Sudanese civil society and the private sector. While there are very good reasons to begin with a board where the majority of directors are representatives of Government (since government support is crucial) and international experts (who do most of the work on the board and have the trust of the donors), the vision is that a transition should be made towards an privately managed organization. Management SMDF will be responsible for the day-to-day administration and implementation of the project. Provisionally, it is recommended that SMDF implementation will be headed by a Project Director and staffed by two Facility Operations Managers (one in the North and one in the South), and below them for each office: one financial officer 2, one training coordinator, one procurement specialist, one staff member responsible for monitoring and identifying indicators and one IT person (Terms of reference for each to be prepared). Additional support staff to be added on an as-needed basis. However, the organization selected by the competitive process to implement SMDF will propose the final staffing plan, for approval by the Board. Specifically, under the direction of the Board, the SMDF implementing organization will: 2 With an option to hire a financial accountant depending on identified needs 10

11 Carry out all activities related to the project necessary for the successful implementation of the project; utilize the Project documents as its mandate for the design, preparation, and implementation of work plans; collaborate with the IDA team to ensure performance & completion; Be responsible for the procurement, accounting, and disbursement processes and administrative services related to planning, organizing, coordinating, implementing, and monitoring; establish an accounting system to meet the reporting requirements of the IDA and other donors; Utilize project management tools to document and maintain the status of the project and monitor progress in project implementation, including the impact of activities in each; monitor the activities of all participating NGOs/MFIs as well as technical experts employed under the project; Liaise with the Government and donors to review progress on project implementation; commission external evaluation as required; prepare quarterly project updates for consideration by the Government and World Bank, coordinate the implementation activities and liaise between the concerned NGOs, MFIs, MDTF, government bodies and other interested parties. Overall Coordination and Implementation While each awardee will implement its own program, SMDF will take the lead in ensuring overall achievement of the program s objectives and negotiating performance-based agreements with each awardee. SMDF will be responsible for coordination among stakeholders and interest groups, including ensuring that the relevant ministries and other stakeholders are informed of the progress of the sector and participation of specific interest groups. F. Potential Risks and Issues Country issues Microfinance has a limited history in Sudan. The recent study of the sector revealed that current supply meets only about 1-3% of estimated demand. A microfinance sector, based on internationally-accespted good practices and offering financial services such as micro and small enterprise loans, agricultural loans, consumer and household loans, deposits, remittances and money transfers, and insurance, does not really exist in Sudan. Most of the experiments in micro lending launched to extend 'small' loans to small producers and low-income groups, including women demonstrate little consistency and adherence to good rpactices. This is in part a result of dissimilar objectives (e.g., poverty alleviation, humanitarian relief, job creation, etc.), the lack of microfinance knowledge and capacity among most implementing organizations, to some extent, the fact that Islamic banking regulations discourage cost-covering interest rates and other conventional practices traditional microfinance providers consider necessary to be sustainable., and the absence of a clear strategy for microfinance. Main challenges in Sudan are: (1) Sudan has just emerged from almost 25 years of civil war. As with most conflict-affected countries there will be continuing concerns for security, political and economic leadership capacity and possible corruption. Also, with the economy, governance, and peace agreement fragile, the newly established Multi Donor Trust Fund, administered by the World Bank, has been facing considerable pressure to facilitate a faster disbursement of funds while Government experience with World Bank operations is limited; (2) the absence of a legal framework for microfinance, and (3) the presence of both Islamic and conventional banking 11

12 systems in the country. In preparing this project, the Team has taken the above concern into account by establishing a facility whose leadership and staff would be well-versed in goodpractice microfinance design and implementation (and trained in World Bank financial management and procurement standards), and providing it the requisite flexibility to tailor its financial and technical services to the needs of the emerging sector, while holding awardees accountable through performance-based assistance. In addition, the project will provide modest capacity-building assistance to the Central Bank to enable it to take steps to improve the enabling environment for microfinance and oversee the sector s development in appropriate ways. As a result, the risks are estimated high at country level. Sector Level There is weak government, and sector institutional capacity to implement Microfinance programs. The project has substantial resources allocated to building capacity in both government and sector institutions. The risks are estimated as substantial. Entity level The project implementation establishing the SMDF Board, and procuring the management firm to establish the SMDF will be handled by the Central Bank of Sudan. Thereafter the SMDF will be responsible for implementing the components providing support to the sector. The institutional and organizational procurement arrangements of CBS are strong enough to carry out the establishment of the SMDF. The CBOS has confirmed its strong commitment to implement this project establishing a microfinance unit at the central bank and has drafted regulations for the sector for comment. The terms of reference for the management firm have been drafted taking into account good practices in design of such programs identified by CGAP. Despite all this, there remains a risk that well-qualified firms may be reluctant to operate in Sudan at the moment for political reasons, and that if a firm is so hired, it may take a while to identify a strong interim team including international experts and to develop appropriate local staff to manage the facility over time. Technical and administrative staff may be hard to keep as new firms enter the sector and offer more attractive salaries this may affect the sustainability in the SMDF s implementation capacity including associated financial management and procurement risks. With the microfinance sector in its infancy and many competing claims on Sudan s human capital, building solid, sustainable institutional capacity for providers and sector support organizations - will be a challenge in itself, especially given the goal of a sector that comprises diverse provider types and products. Consequently, the risks at entity level are considered high Project level Microfinance service providers will not find it easy to recruit, train, and retain staff with this level and diversity of skills. Building sustainable, diverse microfinance providers and products in an environment that includes conflict-affected regions, and large swaths of sparsely-settled territory, and areas with limited economic dynamism and diversification, will be all the more challenging. Finally, SMDF will have to overcome the common challenges of apexes of this type - disbursement pressure and politicization of assistance. Consequently, the risks at entity level are considered high However, in mitigation, Some microfinance institutions have already been established in Sudan, particularly in Southern Sudan recently. Discussions with these institutions and in networks of institutions confirm a very high demand for financial resources, and technical assistance to 12

13 expand their activities. The proposed size of the SMDF is small relative to other microfinance development facilities, and demand for its services is likely to be strong. Below are the detailed risk assessment ratings and mitigation measures. Risk Country level Sector Level Entity level Project level Rik rating H S H S Risk Mitigating Measures Incorporated into Project Design Legal and regulatory framework: The project will support the strengthening of regulatory capacity at the central bank. Political risk: Continuing concerns for security, political and economic leadership capacity and possible corruption Institutional Capacity: There is weak government, and sector institutional capacity to implement Microfinance programs Managerial and administrative capacity: Attracting capable management and administrative staff will be a challenge. In mitigation, a professional management will be hired with demonstrated experience in delivering microfinance through a well-advertised international search. The World Bank will provide further oversight Project complexity: The project has been simplified to focus on the establishment and support of microfinance institutions. Technological risk: The technologies employed, primarily methodologies concerning lending to low-income microentrepreneurs and households, while new to Sudan, have been demonstrated elsewhere. Disbursement Conditions (Y/N) N N N N Remarks Legal and regulatory framework: The CBOS has drafted regulations for the sector. Note that there is also a risk of overly active government involvement and premature regulation of the sector w e need to stress a light touch and focusing on just the most essential laws, and regulations. Political risk: There is high-level and widespread support for microfinance And the SMDF will operate branches in Northern and Southern Sudan allowing sponsors to focus resources to specific regions in response to political risk factors thus providing incentives for good governance. Instituional Capacity: The project has substantial resources allocated to building capacity in both government and sector institutions Implementation Capacity: Bank of Sudan staff are relatively capable, as the institution has been considerably strengthened in recent years. A new microfinance unit has been established in the Central Bank of Sudan, and an external consultant is being recruited to manage it. The Apex Institution will be professionally managed by a firm with international experience. Demand Analysis: Preliminary demand analysis of the proposed services for the facility have been positive. Demand for appropriate financial services clearly exceeds supply by many factors. Overall risks S This is a much needed project in a desperate but complex political and economic environment. H-High, S-Substantial, M-Moderate, L-Low The overall risk is Substantial 13

14 As noted above, the Sudanese economy is comprised largely of small and very small firms and agricultural enterprises, and recent economic growth has been strong. While still relatively small, the microfinance sector has a few good-practice providers that are growing rapidly. International microfinance providers and networks with solid track records in starting and operating MFIs including BRAC of Bangladesh and several East African players as well as Northern networks have expressed interest in Sudan. As a result, the project inherent risks are estimated moderate. The overall risk for this project is considered High given the nascent nature of the industry in Sudan. The residual risk would be substantial only if the regulatory and supervision framework is strengthened and the SMF is established as an autonomous agency with an autonomous Board relatively early in the implementation process. Commitment, Disbursement, and Flow of Funds To facilitate project implementation and disbursement, the Central Bank of Sudan (CBoS) will establish an account at the central bank on terms and conditions satisfactory to IDA and donors to cover expenditures incurred under the grant. The grant allocation would be deposited in the account for eligible expenditures as identified in the project. The SMDF will maintain a separate identifiable account to be used exclusively for project-related expenditures and retain all supporting documentation for ex-post review by the MTDF, IDA, donors, and other stakeholders. The SMDF will develop an accounting and management information system (MIS) for managing and monitoring the financial and operational aspects of the project. The MIS should capture comprehensive information regarding its day to day operations. This information need to be as detailed as possible to enable the SMDF to measure, monitor, and evaluate its operations. Reporting, Accounting and Auditing For the financial control of project operations, the SMDF is responsible for keeping the above mentioned data properly up-to-date. The SMDF will keep records of the accounts (all statement of expenditures, flow of funds from CBOS, to NGOs, and to clients) in such manner that meet the requirements of the donors, and IDA. The accounts should be prepared according to the acceptable accounting principles and must be audited annually, by an autonomous auditor. Supporting documentation will be maintained by the SMDF and made available to IDA missions and autonomous auditors as required. SMDF will prepare monthly reports on the overall project implementation progress and performance for review by the Government, IDA, donors, and other stakeholders. These reports should be accompanied and supported by the details on the components of the project. At the end of the pilot phase, the SMDF will prepare a comprehensive project completion report (supported by data) which would include project implementation experience, impacts on the client, impacts on the NGOs/MFIs, and potential project expansion and replication in several areas. Procurement Arrangements Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006 and the provisions stipulated in the legal agreement. The various items under different expenditure categories are described in general below under Annex -8. For each contract to be financed by the project, the different procurement 14

15 methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the recipient and the Bank in the procurement plan. The procurement plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. G. Proposed Preparation Schedule The Facility s objectives will be achieved through four components: (i) Bank of Sudan microfinance regulatory capacity-building; (ii) Development of the policies, procedures, and institutional framework; (iii) Management and operation of the Facility; (iv) Technical assistance and funding to microfinance providers (Table 8.1). 3 Item Government US$ Millions MTDF US$ Millions Total US$ Millions CBOS and MoFNE Capacity Building SMDF Microfinance Sector Development Monitoring And Evaluation TOTAL Phase 1: START-UP (estimated at two years) During the start-up phase, an autonomous, for-profit organization -- SMDF -- would be established to wholesale funds and provide capacity-building support. The Central Bank will facilitate establishment of the facility, including selecting an organization to implement the program. Based on a detailed work plan, eligibility criteria, and selection process prepared by the management firm, and approved by the SMDF Board, the implementing organization will conduct initial outreach and competitively select 2-4high potential microfinance providers for funding and capacity-building, and 2-4other promising providers for capacity building. The startup phase will provide an opportunity to begin supporting different models of microfinance in Sudan. After assessing weaknesses in the sector as well as potential growth areas the implementing organization will be responsible for prioritizing viable models from the potential models that currently exist. These include specialized microcredit organizations, community-based savings and credit associations (including Self-Help Groups) or financial cooperatives, specialized microfinance banks or other specialized providers. The facility will also investigate supporting commercial banks or other conventional financial institutions in downscaling their products and delivery channels to serve clients currently beyond their reach. If viable they will support institutions that are not financial institutions such 3 The term microfinance providers is used in its broadest sense to refer to a variety of institutions, including but not limited to, NGOs, credit unions, savings and loans cooperatives, leasing companies, microfinance banks. 15

16 as retailers or telecommunications companies to extend financial services as appropriate and permitted under law, alone or in partnership with others. During this phase the facility will also be responsible for identifying performance indicators (with the awardees) as well as other key indicators to success. They will set up monitoring systems based on these indicators. Criteria would stem from the key principles identified in section D. Phase 2: Scale Up (Preliminary time scale: 4 years) Under the expansion phase, SMDF would extend financial and technical assistance (directly and through contracted services) to at least ten additional microfinance providers and other support institutions throughout the country on a more systematic and widespread basis. The fund will look into the sustainability of the initial awardees based on the previously identified indicators and advise accordingly as to whether these microfinance institutions should still be funded. The fund would provide follow-on financing to initial awardees that have demonstrated a positive impact on clients lives based on agreed upon performance indicators and will aid those that have the potential to build large-scale, sustainable operations. A feasible timeline and work plan would be set up for stepping back from the financing of these operations based on agreed upon criteria of self sustainability. SMDF would conduct ongoing outreach throughout the provinces and advertise periodic calls for further applications, to ensure that smaller and regionally based organizations are aware of the fund and have the opportunity to apply for financing. SMDF could also provide or arrange for capacity-building of other microfinance sector support organizations (e.g., service providers to MFIs). Ongoing coordination with government, donors and other key stakeholders would also be a critical ongoing activity during the expansion phase. H. Appraisal Summary Economic and financial analyses Significant net economic benefit is expected to be derived from the Project. The Project will help build the foundation for improved microfinance sector soundness and effectiveness, thereby supporting better access to finance for the small and medium scale private sector, including lowincome households and other segments o f the economy that are currently underserved by the formal financial sector, or entirely excluded. Over the medium-term, the project is expected to generate substantial benefits for low income households seeking microfinance for basic entrepreneurial activities. Technical The project design draws on the results of relevant economic and sector work, and incorporates the lessons from other Bank Group microfinance projects. One common problem with microfinance projects has been the absence of framework within which to coordinante development assistance; the project addresses this through the establishment of an autonomous microfinance development facility. 16

17 Social This project is expected to contribute social benefits to the economy. As economic life resumes through basic entrepreneurial activities financed by microfinance loans the social well-being of citizens, especially in southern Sudan is expected to improve. No specific social safeguard issues have been identified at present. Environment The project is designated in Category C for environmental screening as there is no expectation of works resulting from the micro loans provided by microfinance service providers supported by the SMDF. 17

18 ANNEX 1: COUNTRY AND SECTOR BACKGROUND SUDAN: Microfinance Development Project Country Context Sudan has experienced a substantial economic recovery since the mid-1990s, including rapid growth of manufacturing, construction, services, irrigated and rain fed agriculture, light manufacturing Sudan and more recently, energy exports. A combination of factors, including the Comprehensive Peace Agreement, hard-earned macroeconomic stability, rising urban consumption, policy reforms to encourage investment favorable energy and crop prices have contributed to levels of foreign direct investment that are among Africa s highest. However, this growth has not been broad-based, and in fact has been accompanied by rising inequality and an increasing urban informal sector. According to the Joint Assessment Mission, about percent of the population in the North and 90 percent of the South is estimated to be living below $1 a day in income. Despite the sustained growth since 1997, most experts believe that poverty has actually increased, due in part to rural-urban migration. According to the Joint Assessment Mission (JAM), Rising urban poverty is associated with high inequality alongside low productivity due to increasing informalization during the 1990s, especially in the capital, which now accounts for more than one quarter of the entire population of the country. (JAM pp 78-82). Sector Background The Bank of Sudan recently commissioned a study of the microfinance sector with the objective of preparing a long term development strategy for the sector. The resulting strategy includes a five year action plan that aims at enhancing the sectors contribution to economic and financial sector development as well as reducing poverty in the country. The strategy also aims to take proactive steps to support women entrepreneurs who lack support when compared to their male counterparts. In 2006, study concluded that microfinance, as it is known and practiced worldwide, is at an infancy stage in Sudan with supply being extremely small compared to demand for these services. Rough estimates have put the demand covered at only about 1-3%. A microfinance sector, offering financial services such as micro loans, repeated and larger loans, consumption loans, savings, deposits, money transfers, insurance and adopting acknowledged performance measurement indicators, does not really exist in Sudan. Despite the several experiments in micro lending launched to extend 'small' loans to small producers and low-income groups, including women, yet there is no conformity in approach among the institutions/agencies undertaking these endeavors. This is probably a result of dissimilar objectives in terms of poverty alleviation and the absence of a clear strategy for microfinance. A growing focus on poverty alleviation has developed during the last few years, as reflected by the establishment of several social funds; specialized institutions such as the Savings and Social Development Bank (SSDB) and the Social Development Fund (SDF); and the launching of several, albeit, scattered poverty alleviation initiatives. Nevertheless, the government's efforts in developing microfinance policies that tackle poverty in a most efficient manner remain limited and uncoordinated. NGOs and rural development projects have continued to be the main providers of microfinance to the poor, but these initiatives have remained limited in coverage and impact when compared to the size of the problem of poverty in the country. 18

19 There is a huge potential for the development of microfinance programs in the country, particularly in light of current social and economic conditions, and the Government's declarations for prioritizing poverty alleviation in its policies. However, there are many challenging constraints facing this nascent microfinance sector which unless addressed will limit its effectiveness in fulfilling its role in poverty alleviation and economic development. Some of these challenges are addressed here. Outreach to the poor is still limited among many microfinance institutions. In particular, banks, having little experience in fieldwork and few links with grassroots or community based organizations (CBOs), are limited in their outreach to potential clients. Generally speaking, the procedures and requirements for loan provision in the banking system (licenses, clearance from Zakat and taxes, land lease, banking accounts, requirements of cheques and collateral) are structured to serve those in the formal sector. The dilemma of weak outreach extends to embrace the ineffectiveness of banks in increasing their network of branches. The current coverage of bank branch networks in the country is such that a large part of the poor do not have easy access, as more than half of bank branches are concentrated in the regions of Khartoum State and Central States. It can be concluded that the formal banking system, as it is structured at present, is not designed to serve the financing needs of the poorer segments of the Sudanese society. Among non-bank MFIs, donor dependency has limited their outreach. Among NGOs, the decision to work in one location over another is not based on the normal market targeting and penetration but rather on external donors dictating areas of operation - a direct result of MFI dependence on external funding. This is especially true for the rural development projects in which donors choose the target communities to initiate integrated rural programs based on needs in the rural community, such as road construction, irrigation, health care needs, and environmental deterioration. Another reflection of donor dependency is the risk of sudden phase-out (even for NGOs or rural development projects that achieve good results), which adversely affects the sustainability of MFI programs and, more importantly, deprives local communities from access to financial resources that they had become accustomed to, ultimately causing business disruption, and in some cases complete dissolution of micro enterprises. One of the major factors negatively affecting the expansion of microfinance services is the lack of needs assessments for targeted clients that would allow MFIs to design methods of outreach and follow-up that are tailored to the needs of the designated target group (unemployed graduates, IDPs, productive families, women etc.). Microfinance programs, having not been derived from market surveys, offer only a limited array of products so that product diversification remains to be a problematic issue. In particular, banks have placed little emphasis on the development of microfinance products that are appropriate to the needs of the poor. Currently, banks do not provide consumption or emergency loans and do not include a savings component in their microfinance activities. MFIs also neglect the particular needs of women that should be integrated into the development of any new microfinance product. Rural financial intermediation, in general, does not 19

20 meet the specific demands of a broad spectrum of clients, including farmers, and agribusiness entrepreneurs among others. Experimentation, promotion of innovative and appropriate financial technologies and products for rural clients is lacking. Absence of institutional credit guarantee systems operating now in Sudan except for one that is offered by an individual borrower. The individual borrower guarantee that is prevalent lifts the burden of loss of the business due to natural hazards, death, or disability of the borrower. Nevertheless, the portfolio guarantee approach, whereby the guarantor covers whole or part of the default of the MFI according to a specific agreement, is non existent. Lack of exposure to worldwide microfinance good practices coupled with lack of training in microfinance facilitation and management constrain service providers ability to manage and operate programs that effectively and efficiently provide microfinance services to the poor. This is a direct result of the poor existing efforts at capacity building in this sector in Sudan. Despite the prevalence of a number of capacity building programs, yet they are insufficient and poorly funded to utilize available resources, cater to client needs more appropriately, and adopt microfinance good practices in business planning. The training and experience of the personnel in commercial banks is unsuitable for servicing poor clients. Despite the fact that demand for microfinance has been steadily growing in Sudan during the last decade, most bankers are still reluctant to do business with the poor as a large-scale profitable activity. They still perceive microfinance as a charitable activity that is better dealt with by other more socially oriented organizations. In addition to the lack of exposure to and training in microfinance facilitation and management among bankers, the lending procedures followed by banks are conventional and are not tailored to the conditions of the microfinance clients. With regards to non-bank micro-credit providers, shortage of qualified credit and micro enterprise specialists to handle small business and microfinance operations is constraining their ability to expand their services and better cater to clients needs. Success has varied considerably between institutions, according to the variation in approach and the level of financial discipline adopted by each. Lack of exposure to and training in microfinance facilitation and management and have limited experience in management information systems that provide timely and accurate information for monitoring and evaluation of the progress and financial soundness of the microfinance program. Performance as microfinance providers is limited by the widespread perception that the loan is a gift and by the associated resistance to the shift from grants to a market oriented approach. Moreover, no emphasis has been made on savings mobilization or inclusion of consumption loans in their packages. With the exception of the experiences of a few international NGOs and the SDF, there is limited exposure and ongoing sharing of ideas and experiences among microfinance providers. Banks, for example, do not know about the successful experiences of a local microfinance organization operating in the same geographical location (e.g. banks and PASED in Port-Sudan). Statistics, surveys, 20

21 baselines, and research that provide estimates of the volume of the microfinance market and its characteristics in the different geographic areas and sectors of the economy and that is central to the development of this sector in Sudan are very limited or unavailable. Coordination between organizations with different mandates (banks, NGOs, social funds, and rural development projects) is extremely limited. A few NGOs have established links with the formal banking system and created platforms for coordination in the geographical areas where they operate. For example, there are some NGOs, UN agencies, some development projects, and social funds that have established links with the SSDB and ABS. However, this coordination, in most cases, is a result of designing microfinance initiatives as a response to an emerging need or as disaster relief, rather than as a guided and planned effort to avail access to finance to the poor by deploying formal financial resources. At the macro level, supportive government policies and initiatives have recently been launched to encourage the development of the small and micro business sector, in general, and its financing, in particular. However, these remain scattered and are not undertaken within a more comprehensive poverty strategy. More importantly, policies are uncoordinated and are NOT seen to be filtering down to the smallest administrative unit. For instance, micro and small entrepreneurs are continuously being harassed by the local municipal authorities for licenses, taxes, fees, etc. Most serious is the continuous raids on these groups by local authorities who in many cases confiscate their hard won assets procured through credit from the microfinance institutions. As a result of government policies, NGOs and CBOs experienced a number of problems that negatively impacted on both their effectiveness and their efficiency. For example, the demolition or re-planning of squatter areas caused business instability and hence negatively affected the repayment of loans to MFIs Rationale for the Project The two key recommendations of the action plan, which was the result of intensive and extensive consultations in workshops, roundtable meetings as well as small group meetings, was the need to strengthen the Bank of Sudan s microfinance regulatory capacity, and the establishment of an apex institution that would provide financial and capacity-building support to new and existing microfinance providers serving diverse market segments across rural and urban parts of Sudan. Additionally, the Ministry of Finance is developing a private sector development strategy that would create an enabling environment that is more conducive to the development of broad-based, pro-poor private sector growth. This effort will support elimination of obstacles to small and microenterprises, including obstacles to microenterprise formalization. 21

22 ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES SUDAN: Microfinance Development Project Project Name Year Economic and Sector Work 2002 Sudan Gezira Implementation Project 2002 Sudan Watching Briefs 2007 Sudan Public Expenditure Review 2005 Sudan Dafur Joint Assessment Mission 2006 Sudan Diagnostic Trade Integration 2006 Kordofan Growth & Institutions Study 2007 Sudan Investment Climate Assessment 2007 Poverty and Social Impact Assessment 2006 FIAS Administrative Barriers Study Technical Assistance (Non-Lending) 2007 Sudan PSD Policy Dialogue 2007 LICUS Trust Fund 2007 Health Policy Dialogue and Support 2007 Sudan Policy Reform Initiative 2007 Sudan Telecom Strategy 2007 Sudan Gezira Integrated Agriculture Reforms

23 ANNEX 3: RESULTS FRAMEWORK AND MONITORING SUDAN: Microfinance Development Facility Project Development Objective Growth of an institutionally diverse and commercially sustainable microfinance sector offering a range of financial services in both urban and rural clients. Outcome Indicators 1. Institutional Diversity Number of microfinance providers from 0 to Commercial Sustainability 4 Number of microfinance providers with positive balance sheet from 0 to Product Diversity Number of financial products offered by providers receiving SMDF assistance (deposits, range of loans, payments/transfers). Use of Outcome Information Yr 1-5 Outcome information will inform continued dialogue with Sudanese authorities to facilitate further sector development. Yr 2 Mid-term review of progress will use outcome information to determine need for changes in project implementation (if required). Intermediate Results Results Indicators for Each Component Use of Results Monitoring Component One: Strengthen the human and institutional Capacity of the Bank of Sudan (BOS) and the Ministry of Finance and National Economy (MOFNE) to regulate and supervise the microfinance industry (US$0.25m) Suitably enabling environment for microfinance to develop. Component Two: Establish the Sudan 1. Issuance of policy guidelines on microfinance practice on Sudan relevant issues including, Permissible types of Islamic and conventional microfinance products Y/N Agency partnerships between banks and microfinance institutions Y/N Mandatory and voluntary client savings Y/N Foreign investment in the sector Y/N 2. A microfinance unit at the Central Bank staffed by staff with a firm understanding of international good practice in microfinance regulation and supervision. Y/N 1. Autonomous and wellfunctioning board of directors. Yr 2 5 Yr 2 Review legal and regulatory framework and policy promulgation activities. Yr2-5 Assess enforcement of prudential and market conduct rules and norms 4 i.e., operating at better than break even profitable might be a more widely-understood term (but does not apply to non-profits) or one could also use operating at break-even or better 23

24 Microfinance Facility and support its ongoing operational costs (US$2.7m). Capable, transparent, autonomous, efficient Facility delivering appropriate tailored services. Component Three: Develop the microfinance industry (US$17m) Improvements in institutional capacity of a diverse number of actors providing services to a broad geographic range of market segments through technical assistance and training. Investments in diverse retail providers Y/N 2. Clear policies and procedures for allocation of financial and technical assistance, etc. issued Y/N 3. Evidence of financial/ technical services being tailored to changing conditions of the market, e.g. proportion of loans out of total disbursements. 4. Sudanization of leadership and key technical staff within 3-4 years in line with a clear exit decision and timetable by end of project. Proportion of Sudanese nationals in SMDF from probably 0% to % by project end 1. Institutional Diversity Number of MF providers operating including NGOs, specialized MFIs, banks and others already at DO level Sudanese service providers to the microfinance sector e.g. trainers, consultants, industry associations, auditors, etc. 2. Commercial Sustainability Indicators of increased microfinance knowledge among key players demonstrated by adherence to good practice non measurable e.g., charging costcovering interest rates (Y/N), portfolio at risk below 10% (Y/N), etc. 3. Product Diversity MFI performance indicators demonstrating institutional capacity to manage increasing outreach to low income clients in a viable Determine facility effectiveness and realign delivery policies and procedures as needed Yr 2 5 Facilitate consultations with concerned parties including the central bank, the commercial banking sector, microfinance industry and service providers on the Facilities performance, especially if there is slow progress. 5 The MISFA project in Afghanistan is now in its third year and has reached 200,000 clients. Sudan s population is larger than Afghanistan s by 10 million thus we expect the increase in MF clients to also be higher.] 24

25 Component Four: Finance the project s monitoring and evaluation activities including a longitudinal impact assessment (US$0.05m) manner, microfinance providers reducing dependence on grants and donor support. Offerings in the market of multiple loan products (both Sharia and non), insurance, agricultural loans, home improvement, etc; deposits (especially in the South which is much less banked ) and remittances and payments. 4. Outreach with geographic diversity and gender balance Increase in the number of clients served by microfinance providers (outreach) to at least 200,000 5 active clients appropriately balanced geographic coverage (e.g. rural and urban, north and south) and gender. 1. Continuously updated results framework for the project that links project interventions to project results; high-quality, relevant, timely project progress reports. 2. longitudinal impact assessment that (i) documents the impacts of a sustainable microfinance sector in Sudan; and (ii) provides client-level information to MF providers for use in documenting program impacts, improving program management, and developing new products and services. 3. Increased local research capacity for collecting and analyzing client-level information on microfinance activities. Yr 1-5 Provide key stakeholders a useful tool for detecting obstacles with implementation and for improving the project design. 25

26 26

27 Project Outcome Indicators 1. Increase in the number of microfinance institutions 2. Increase in the number of commercially sustainable institutions 3. Greater diversity in the range of microfinance products 4. Number of clients and geographical coverage Component Outcome Indicators Component One (Institutional Capacity Building) 1.Improved licensing, regulatory and market conduct rules (deposit taking MFIs) ARRANGEMENTS FOR RESULTS MONITORING Target Values Data Collection and Reporting Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Data Collection Instruments Annual BOS off-site reports Responsibility for Data Collection SMDF and BOS Annual BOS off-site reports SMDF and BOS 0% of providers with savings and loan facilities Clients North <50 South <5 Total <55 50% of providers with savings and loan facilities Clients North 80 South 15 Total 95 60% of providers with savings and loan facilities Clients North 90 South 20 Total % of providers with savings and loan facilities Clients North 120 South 30 Total % of providers with savings and loan facilities Clients North 130 South 40 Total % of providers with savings and loan facilities Clients North 150 South 50 Total 200 Annual BOS off-site reports Annual BOS off-site reports SMDF and BOS SMDF and BOS Region Urban 80 % Rural 20 % Region Urban 60 % Rural 40 % Region Urban50 % Rural 50 % Region Urban 50 % Rural 50% Region Urban 50% Rural 50% Region Urban 50% Rural 50% None Issuance of Licensing regulations Issuance of Prudential regulations Issuance of 80% compliance to prudential and market conduct rules 80% compliance to prudential and market conduct 80% compliance to prudential and market conduct Annual BOS off-site reports BOS 27

28 Project Outcome Indicators 2. Improved risk based monitoring and enforcement Component Two (Sudan Microfinance Development Facility) Capable, transparent, autonomous, efficient Facility delivering appropriate tailored services Share of Sudan Microfinance Development Facility Staff who are Sudanese. Component Three (Microfinance Sector) Target Values Data Collection and Reporting Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Market conduct rules rules rules Data Responsibility Collection for Data Instruments Collection None 80% off-site analysis 100% off-site analysis 100% offsite analysis 100% offsite analysis 100% offsite analysis Annual BOS off-site reports BOS None 0% onsite inspections 20% onsite inspections 50% onsite inspections 100% onsite inspections 100% onsite inspections 5 (Min) Annual BOS on-site reports BOS No Microfinance development facility No policies for TA Autonomous and wellfunctioning board of directors. Clear policies procedures for allocation of financial and TA Support to at least 5 microfinance providers and at least 5 service providers. Support to at least 5 microfinance providers and at least 10 service providers. Support to at least 10 microfinance providers and at least 10 service providers Support to at least 10 to15 microfinance providers and at least 15 service providers Annual SMDF Reports SMDF 50% 80% 100% 100% 28

29 Project Outcome Indicators 1. Diverse range of MF providers operating including NGOs, specialized MFIs, banks and others 2. Commercial Sustainable microfinance institutions Component Four (Monitoring and Evaluation) Continuously updated results framework for the project Longitudinal impact assessment. Target Values Data Collection and Reporting Baseline YR1 YR2 YR3 YR4 YR5 Frequency and Reports Minimum 4 diverse MF providers Minimum 5 diverse MF providers Minimum 6 diverse MF providers Minimum 6 diverse MF providers Minimum 7 diverse MF providers Minimum 8 diverse MF providers Annual BOS reports SMDF reports Data Responsibility Collection for Data Instruments Collection SMDF No data available 0 40% (5) providers Operational selfsufficiency: 80% 45% (6) providers Operational selfsufficiency: 90% 50% (7) providers Operational selfsufficiency: 95% 53% (8) of providers Operational selfsufficiency: 100% Portfolio-at- Risk:7 % Portfolio-at- Risk: <5% Portfolio-at- Risk: <5% providers Portfolio-at- Risk: <5% : None Update Update Update Update Final Results Framework Annual BOS reports SMDF reports SMDF None Update Update Update Update Final Study 29

30 30

31 ANNEX 4: DETAILED PROJECT DESCRIPTION SUDAN: Microfinance Development Facility Project Objectives The development objective is to increase the availability of affordable financial services by supporting the emergence of commercially sustainable microfinance service providers. To achieve this objective, this project will finance legal and regulatory reforms for microfinance activities and the establishment of a dedicated microfinance development facility Legal and Regulatory Reforms As microfinance activities are nascent in Sudan, legal and regulatory reforms to existing banking laws and regulations as well as the legal/regulatory framework for NGOs and other non-banks need to be considered that might make the policy environment more favorable for microfinance activities. For non-bank credit-only providers, the key aim is to ensure that they can offer basic financial services legally and mobilize start-up funds from the Facility and other sources. Since these institutions do not offer deposit services to the general public, they do not require bank-like licensing or prudential regulation. Nor do they require extensive oversight from financial sector regulators. A secondary priority for this category of providers is to ensure that they are able to enter into partnerships and strategic alliances with commercial banks and others to extend diverse financial services to previously underserved client segments. A longer-term priority, as the non-bank sector grows and demonstrates sustainability, is to provide the strongest non-bank microfinance providers with the possibility over time to mobilize additional sources of financing, such as commercial bank financing, equity investment and savings. Some of these options (particularly offering deposit services to the general public) are likely to require enactment of more substantial legal and regulatory changes. For example, the indepth sector assessment and stakeholder consultations may indicate the need to explore the appropriateness of supporting a license option for a specialized commercial microfinance bank, that might have a lower capital requirement than fully-fledged commercial banks and be subject to slightly modified banking regulations as regards, for example, risk categorization of assets. However, more analysis is required as to whether this is an avenue that merits exploration. For commercial banks seeking to downscale into the low-income market, it may be necessary to modify regulations and/or institute waivers that permit the banks to lower their operating costs and charge interest rates sufficient to cover those costs. For financial cooperatives such as savings and credit associations, a key issue is likely to be whether those that serve a large number of clients are adequately supervised to reasonably protect deposits of low-income savers, and if not, how this situation can be remedied. International best practice suggests, however, that it is not necessary or cost-effective to regulate small member-owned institutions that do not provide deposit services to the broader public. Microfinance Sector Development Given the sector s nascent nature and the level of demand for microfinance, it is not enough to wait for the organic growth of microfinance operations. There is a need to support the start-up and expansion of microfinance providers and services throughout Sudan, which are tailored to the characteristics of different market segments and have potential to operate sustainably on an ongoing basis after initial support. 31

32 The technical and financial support included in the project is designed to strengthen the institutional and financial capacity and performance of diverse MF providers. This project will provide funding for institution-building and delivery of microfinance services, as well as financing for training and technical consulting services and other capacity building activities for MF providers, service providers to the sector, and staff and Board of the microfinance development facility itself. The project will take an institutional approach, supporting MF providers that commit to be institutionally and financially viable over the long-term and that present credible capacitybuilding plans to reach large numbers of low-income clients. Partner MF providers will be selected on a competitive basis. Eligibility for financing will be based on the ability of the MF providers to meet agreed eligibility criteria, including: Clear vision: a clear vision and well-articulated strategic plan that reflects a demonstrated commitment to serving low-income clients sustainably and to drawing from accepted good practice Good governance: a well-functioning Board of Directors Good management: a management team and staff that possess the skills needed to develop the institution successfully. Eligible MF providers will be selected on the basis of a competitive process. MF providers that pass an initial screening process will be subject to a due diligence review by staff and/or consultants contracted by the facility. The due diligence will have three goals: To assess whether the MF provider meets the eligibility criteria for financing under the project; To provide an in-depth appraisal of the MF provider's strengths and weaknesses, and provide recommendations of areas in need of improvement; and To jointly assess with MF provider management and staff their technical services needs and assist the MFI develop an institutional capacity-building plan. Criteria for selection will also likely include portfolio-level considerations, such as ensuring adequate geographic coverage and diversity of provider types and financial services. Applicants will present a business plan indicating their anticipated performance targets and assistance needs. Facility staff will review the business and assistance plan, and negotiate changes as appropriate. The Board will approve all awards and contracts, based on the recommendation of management. The Board may delegate approval of smaller awards to management, if it so chooses, and may also choose to delegate proposal review to an investment or procurement committee. Awardees will sign a Performance Action Plan with the Facility, including the mutually agreed performance targets related to all key institutional areas, consistent with international best practices (e.g. IFRS and CGAP standards). Quantitative targets will be based on business plan projections. Institutional targets will focus on time-bound strategies to address key weaknesses within the institution. Awardees will report on, and Facility staff will monitor performance against these targets on a regular basis (e.g., quarterly). Facility staff will also make regular site visits to awardees. Operating Principles 32

33 When establishing such a facility, it is important that there is strong government and donor support and buy-in. There needs to be firm consensus that the Facility will be the primary conduit for government and donor funds to a range of retail microfinance institutions and support organizations, providing funding, training, and capacity-building support in a way that helps set standards for microfinance. Institutions selected for support will receive flexible funding tailored to their particular business plan. Grant funding to retail institutions could support market research and new product development, loan capital, MIS and other investments in systems to support delivery of financial services, staff training and capacity-building, outreach to prospective clients, operating losses in the start-up phase, etc. The facility may also provide funding to intermediaries such as international microfinance networks that in turn build capacity of retail microfinance institutions. In some cases, the facility may provide funding for activities by microfinance providers and others to strengthen the livelihoods and enterprises of current and prospective clients, so they may make more effective use of finance. As microfinance providers approach and achieve break-even, financing in the form of loans or guarantees will be a more appropriate form of funding. In its institution-building work, the facility will deliver some training and technical assistance directly; it will also contract, as needed, with outside providers to build capacity of retail institutions, service providers to the industry, and its own staff. The facility will need to have sufficient flexibility, and also skilled human resources, to be able to effectively support more than one institutional approach (e.g., NGO microcredit organizations, village savings and credit associations, credit unions, banks downscaling their products and service delivery to reach poorer and more rural clients, etc.), supplementing its own staff with outside assistance as necessary. It would need to be respectful and supportive of a diverse range of approaches ranging from those focused purely on financial service provision to those with broader development goals, and would liaise with key NGOs and development organizations consistent with its mission. It is also important to recognize that the program s overall vision -- of diverse types of providers working in all parts of rural and urban Sudan to extend well-tailored financial services (savings, credit, transaction and payment services, etc.) to unserved enterprises and households is an ambitious one that will be realized only over time. In the early years, while best efforts should be made to achieve diversity of approaches, services and institutional types (and it will be critical for the facility to be even-handed in its support and constantly open to opportunities to increase competition), limitations on the facility s financial and technical resources, the very early state of the sector in Sudan, and the well-recognized challenges in financial access for more remote locations and poorer population segments, should be considered in formulating the strategy and setting pragmatic performance goals. In designing a microfinance development facility for Sudan, it will be important to take into account lessons learnt from apex institutions elsewhere. There are few examples of apex institutions being established to support the start-up and development of MFIs. One apex that has managed to successfully support the development and start-up of a viable microfinance sector is the Local Initiatives Project (LIP) supported by the World Bank in Bosnia and Herzegovina, which provided financing and technical support to NGO MFIs in Bosnia using a total project budget of US$ 48 million. Other successful programs have been established in Afghanistan and Sierra Leone. The MISFA project in Afghanistan is operating on a $62.5 million budget. In two and a half years, MISFA reached 156,000 clients. When the project was founded, the economy of Afghanistan was less developed than that of north Sudan. Therefore it is reasonable to expect that the Sudan Facility will reach more clients within the same time frame. 33

34 The challenge in Sudan is distinctive, involving development of the microfinance sector practically from an extremely low base. This will require a long-term investment approach and a strong focus on building the capacity of microfinance providers and the supportive infrastructure of service providers and support organizations for the sector. Operating Objectives The overall objective of a microfinance development facility is to actively support the development of a strong, sustainable microfinance sector in Sudan that provides widespread access to high quality financial services to economically active low-income people. The facility is designed as transitional intermediary from the outset and its role is to help jumpstart and develop the microfinance sector. As such, it would be useful from the outset to set benchmark performance indicators (pertaining, for example, to client and geographic coverage; number, diversity and performance of retail providers; availability of support services; etc.) to track progress in development of the sector. It would also be advisable to agree up-front on a timetable and the broad principles and modalities for exit, i.e., the conditions by which this transitional facility will be dissolved and/or its activities delimited and redesigned to reflect the growing maturity of the sector. Broadly, the SMDF is designed to undertake the following tasks: Coordinate investment for microfinance by establishing a mechanism to channel donor funds to microfinance providers and support organizations for the microfinance sector within a sector-wide development framework; Provide well-structured funding for the start-up and development of sustainable microfinance providers, including funding for institution-building, loan fund capital, and client outreach and preparation as required; Provide or fund training and advisory services to microfinance providers to build their institutional capacity to deliver high-quality services; Promote good microfinance provider performance and transparent operations, by working with practitioners, donors and government to establish sector-wide performance standards, reporting and monitoring criteria; Provide an interim umbrella monitoring role for the non-deposit taking microfinance sector (with appropriate exclusions for small institutions), and promote the development of a supportive environment for non-deposit taking microfinance providers (encompassing any relevant legal areas such as taxation and NGO registration); Invest in service providers (e.g., trainers, consultants, specialized accounting and auditing expertise, etc.) and other supportive infrastructure (e.g., a national microfinance network)to lay the foundation for a healthy and growing sector; Coordinate with policy, legal and regulatory activities of the Central Bank, to ensure creation of an environment that will promote broad-based access to finance, including provision for diverse types of microfinance providers and products; Encourage other donors with an interest in supporting microfinance in Sudan, to utilize the facility for their programs, and provide a mechanism for coordination of existing and new donors and investors and harmonization of strategies and investments sector-wide. For example, DFID s proposed support to the Capacity Building Trust Fund for Quick Start Finance and Enterprise Development is 34

35 compatible with the MDTF North Proposal and could be coordinated with the national facility. Ensure ongoing exposure to best-practices experience, models and tools from elsewhere, e.g. by creating linkages with international specialized agencies such as CGAP. Specifically, the project will finance the following components: 1.0 COMPONENT ONE: CBOS and MFNE Capacity Building (US$0.25 million) The objective of this component is to support initial development of the legal and regulatory framework for microfinance, so as to enable diverse microfinance providers (including at least commercial banks, local and international NGOs and financial co-operatives) to start up operations, diversify their product offerings, and expand their sources of capital. This component will primarily help strengthen the human and institutional capacity of the Bank of Sudan (CBOS) and the Ministry of Finance and National Economy (MOFNE) so that they can discharge effectively their key functions of regulating and supervising the microfinance industry, undertaking microfinance research, and formulating and implementing microfinance policy. This component will provide financial and technical assistance (including training and exposure programs) to build-up institutional capacity in the following main areas: 1.1 Regulation and Supervision Functions (US$70,000) This activity will focus, inter alia, on: (a) strengthening prudential licensing, regulation and market conduct rules for the microfinance industry, and their monitoring and enforcement by supervision staff; (b) facilitating a risk-based supervision model, and strengthening the skills of supervisors to undertake risk-based supervision including through better on-site inspection and offsite surveillance, for deposit taking microfinance institutions. This component will also provide financing for local and international consultants to work with Government authorities and the Banking Agencies (particularly the microfinance unit of the Central Bank), microfinance providers and other stakeholders on concrete proposals for legal and regulatory reform. 1.2 Research, Policy Formulation and Implementation function, (US$80,000) This activity will focus, inter alia, on: (a) microfinance policy including legal and regulatory issues; (b) performance monitoring including increase in access to microfinance and microenterprises by low-income people and communities, and (c) the impact of government financial sector policies on the industry. For example, government support for social funds and specialized state-owned banks might unintentionally be distorting the market by making it difficult for cost-covering providers to operate and undermining the repayment culture; this issue may deserve close attention as a high priority for the new facility and the MF unit in the Central Bank. Similarly, the government policy requiring banks to direct 10 percent of their lending to microenterprises, productive families, etc. might have unintended negative consequences and merit careful analysis and subsequent policy changes. 1.3 Training (US$100,000) This activity will provide financing for study tours, to assess good policy and regulatory and supervisory policies and practices in countries with comparable contexts to Sudan. This activity can cover the costs of technical assistance and capacity-building for the Central Bank and public sector 'line' agencies so as to ensure relevant public sector agencies have the knowledge and capacity to carry out their regulatory responsibilities. 35

36 2.0 COMPONENT TWO: Sudan Microfinance Development Facility (US$2.7 million) This component will finance the establishment of the Sudan Microfinance Facility and support its ongoing operational costs. Specifically, it will provide financial and technical assistance in the following activities: 2.1 Policies, Procedures and Institutional Framework: ($100,000) This activity will finance the Central Bank s establishment of the Facility as a for-profit organization and its appointment of the autonomous Board of Directors. Using an international tender process, the central bank will select the firm/organization to manage the Facility during its start-up and initial implementation. The management will prepare annual work plans for review and approval by the Board. The Board will oversee all aspects of the Facility s strategy development, implementation, monitoring and evaluation, and reporting to relevant stakeholders. Among other priority tasks for start-up of the Facility to be financed by this activity, will be development of the full set of policies and procedures required for the Facility s operations. These include but are not limited to: soliciting, screening and competitive selection of recipients of financial and technical assistance; tailoring services to individual awardees, and determining the appropriate mix of technical services and financing to be provided; negotiating performance benchmarks for individual awardees; monitoring, reporting and taking corrective action on performance of awardees and portfolio as a whole; arranging for the external evaluation; contracting for outside services; receiving, accounting for, and managing funds from the Trust Fund and other donors and funders that will support the Facility over time, and hiring, recruitment, internal staff development, capacity-building, and other HR policies and procedures. The management of the Facility will prepare these policies and procedures and undertake other key institutional development activities, with approval as appropriate by the Board. Two priority areas for Board attention are geographic coverage (taking into account unserved clients and challenging client segments such as women residents of conflict-affected and/or more remote rural areas) and diversity (i.e., adopting policies that contribute to the vision of diverse providers offering diverse financial services tailored to multiple market segments). 2.2 Research (US$50,000) In partnership with the proposed microfinance unit in the Central Bank, the Facility should further investigate (on the basis of previous work commissioned by CBOS) an in-depth assessment of the sector, including attention to policy, legal and regulatory issues. The findings and recommendations of the assessment will form the basis for a thorough consultative process with stakeholders in the government, finance and civil society sectors, to formulate priorities for work to improve the enabling environment for pro-poor financial services and a more inclusive financial system. 2.3 Policy Advocacy (US$50,000): In the Facility s early years, it should focus on advocating policy changes that remove the most pressing barriers to a diverse microfinance sector operating across Sudan. This component will support that work, as well as capacity-building for the Central Bank s new microfinance unit and other government entities with significant involvement in the microfinance initiative. 2.4 Training (US$100,000) This component will also finance training, study tours, and other capacity-building of the staff of the microfinance Facility (to develop their technical capacity and experience in monitoring and 36

37 appraising microfinance institutions and other skills related to project implementation), as well as Board members (to equip them with the knowledge and skills necessary to provide strong leadership to and oversight of the initiative). No later than the end of this program, the Facility will be able to operate without substantial external support. This will include having in place: a capable Sudanese Director; a well-functioning, respected, autonomous Board of Directors; staff with increasingly diverse and sophisticated skills to meet the evolving needs of the Sudanese microfinance sector; and the capacity (policies, procedures, staff knowledge) to manage more commercially-oriented financial and technical services such as loans. The Facility s track record will have demonstrated practices and outcomes consistent with international good practice 2.5 Management and Operating Costs (US$2,300,000) This activity will cover the costs of the Facility, including staff salaries, staff travel, equipment, vehicle maintenance, utilities, office supplies, rental of premises and external audits. 3.0 COMPONENT THREE: Microfinance Sector Development (US$17.0 million) This component will assist in developing the microfinance industry. It will provide financial and technical assistance in the following activities: 3.1 Technical Assistance to New Microfinance Providers (US$5,000,000) This activity will provide funds for capacity-building of MFIs and the overall sector. Facility staff will provide some training and technical assistance directly; however, the facility will also have the ability to contract out delivery of training, consulting, etc. to international and local firms and individuals with the requisite expertise. This will include providing support to microfinance networks and other intermediaries for them to provide long-term technical assistance to greenfield and young microfinance providers. The Facility s technical services will be planned and managed so as to build the capacity of the MFIs to plan and manage their own technical assistance in the future. Initial analysis of the sector and experience from similar initiatives in other countries suggest that the following areas are likely to be top priorities for technical assistance to providers and capacity-building efforts in the near-term: Market Analysis; New Product Development and Design of Appropriate Delivery Channels, both for Islamic finance and traditional finance; Staff Training and Development; Governance/Board Development; Legal and Accounting Issues and compliance issues (e.g., AML/CFT); and MIS Development. Beyond working with retail microfinance providers, the Facility will directly provide and contract out for training and technical assistance to Sudanese service providers to the sector, such as trainers, consultants, and auditors. A critical requirement for the long-run financial and development performance of the sector is the availability of capable service providers, to reduce the dependence on foreign expertise. The Facility will also explore how it will strengthen one or more national provider networks, such as the Microfinance Organizations Network (MON). 3.2 Equity, Loan and Grant Financing (US$12,000,000) Qualifying MF providers selected for assistance will be eligible to receive grants for loan capital, technical assistance, short-term operating costs, MIS and systems development, market research and new product development, staff training and capacity development, and other purposes that contribute to extending financial services to targeted client segments and building sustainable institutions. If its legal status and charter permit it, the Facility will also provide other kinds of financing such as loans, loan guarantees or equity. Since funding will be tranched, with disbursement of new funds dependent on an awardee s satisfactory performance in meeting targets, forgiveable loans will offer additional incentives for strong performance (by permitting loans to be converted to equity for high-performing institutions). The use of recoverable grants 37

38 may also be an appropriate form of financing for encouraging profit-making institutions to enter the microfinance market. Start-up organizations and specialized microfinance providers (i.e., organizations focused exclusively on serving this market) are expected to receive more comprehensive support from the Facility than applicants with existing financial operations and infrastructure that are downscaling into the low-income market. As a general rule, for example, support for commercial banks will be lighter, since they will need assistance to develop microfinance products and delivery channels to serve this market but not to build their core institutional capacity. For commercial and for-profit applicants, it may also be more appropriate to provide technical services than grants. For deposit-taking institutions, it will be critical to provide any financial assistance in a way that does not create disincentives to deposit mobilization. The Board should consider whether and when cost-share requirements will be appropriate. Funds will be disbursed in tranches, with subsequent tranches dependent on performance in meeting negotiated performance benchmarks. While institutions may receive multiple awards, the Facility will be expected to adjust the size and composition of assistance (type of financing, mix between technical and financial assistance) over time, to better fit the stage of development of the awardee and the overall microfinance market. The facility may also make grants to organizations that help develop effective demand for microfinance, for example, by helping low-income people develop viable livelihoods and supporting enterprise start-up and growth. Activities to be financed under this activity include: (i) training (local and international); (ii) consulting services (local and international); (iii) the cost of seminars and translation services; (iv) travel for participation in regional and international training courses, meetings and conferences; and (v) grants and other financing forms. 4.0 COMPONENT FOUR: Monitoring and Evaluation (US$0.05 million) This component will finance the projects monitoring and evaluation activities including a longitudinal impact assessment, the objectives of which are: (i) to document the impacts of a sustainable microfinance sector in Sudan; (ii) to provide client-level information to MF providers for use in documenting program impacts, improving program management, and developing new products and services, and (iii) to build local research capacity for collecting and analyzing clientlevel information on microenterprises and microfinance. The impact assessment will use a mixed method approach, including both quantitative and qualitative data. If feasible, it will employ a quasi-experimental design involving both clients and non-clients. 38

39 ANNEX 5: PROJECT COSTS SUDAN: Microfinance Development Facility TABLE 1 Component Costs Project Component Phase 1 US$ Millions Phase 2 US$ Millions Total US$ Millions CBOS and MFNE Capacity Building Sudan Microfinance Development Facility Microfinance Sector Development Monitoring And Evaluation TOTAL Project Costs TABLE 2 Expenditure Categories Project Activity Phase 1 US$ Millions Consultant Services Training and Workshops Goods Operational Costs Total Phase 2 US$ Millions Total US$ Millions TABLE 3 Source of Financing Project Component Government US$ Millions MTDF US$ Millions Total US$ Millions CBOS and MFNE Capacity Building Sudan Microfinance Development Facility Microfinance Sector Development Monitoring And Evaluation TOTAL

40 ANNEX 6: IMPLEMENTATION ARRANGEMENTS SUDAN: Microfinance Development Facility CBOS Microfinance Unit Until the SMDF Board is established and the management contract is signed the CBOS Microfinance Unit will be responsible for all implementation arrangements including the procurement of the management firm on behalf of the Board of Directors. SMDF Management Firm Thereafter the SMDF Management Firm will be responsible for the project s implementation. The overriding principle guiding the SMDF s approach to implementation responsibilities for the Facility is the capacity building and mainstreaming of operational responsibility to SMDF staff, which is the project implementing agency. SMDF Specialist Staff To bolster its capacity for project implementation, the firm will hire the staff, as per their proposal, including a Project Managing Director, as appropriate. Board of Directors The SMC will report to the SMDF Board, which will be established for the purpose of guiding the smooth operation of the project and the policy direction of the SMDF. The Board will approve the SMDF strategy, work plan, contracts and agreements, etc. (there is no reference to any higher authority) and they are also the only ones who can amend the articles. The Board will meet at least once every quarter or whenever at least four of its members request for a Board meeting. Guiding Principles for Funding The Board will be responsible for ensuring that the guiding principles for funding investments will be observed. These include: Decisions by the Board to provide funding will be made on merit, and will not be subject to political or disbursement pressures; Decisions by the Board will be made by consensus to the greatest extent possible. Should consensus be unreachable on a specific issue, the majority members will take the final decision; If Proposals are deemed to be in violation of the Government s policy as advised by the CBOS legal and regulatory framework, applicants will be requested to provide amended proposals; Proposals may be approved on a multi-year basis if the SMC determines that the business plan is adequate. For multi-year approvals, the performance agreements will note annual targets and the tranche of funding to be released. If the targets are met, the microfinance provider need not reapply in future years. SMDF Management will utilize uniform performance based agreements. Possible key indicators of minimum performance standards include: o Outreach: number of active borrowers and savers; portfolio size o Portfolio quality: Portfolio at Risk days; 40

41 o Profitability/Sustainability: Adjusted Return on Assets (AROA) and Financial Self-Sufficiency The SMC will apply reporting requirements, using standard terms and definitions as developed by the Consultative Group to Assist the Poor (CGAP). The SMC will monitor performance of microfinance providers against the agreed indicators and targets. The SMC will have the right to cease support to a provider, programme component or the programme if deemed necessary (non-fulfilment of performance criteria, misappropriation of funds). The decision should be discussed by the SMC. Outline of Fund Operations The Fund will have two windows through which funds can be channeled to recipients as grants or loans: Support to individual microfinance providers (NGO-MFIs, Commercial Banks, Non-Bank Financial Institutions, Credit Unions, Credit Cooperatives, etc.) Support to networks and business service providers for non-bank financial institutions, training/ta providers, auditors, raters, credit reference bureau, ICT, etc.) General Criteria for Applications from microfinance Providers (non-bank financial institutionss: Commercial Banks, NBFIs, Credit Unions, NGO-MFIs, Credit Cooperatives) Proposals may be made from start-ups, institutions currently operating in the country, or those which are based outside of the country but wishing to start operations. In order to assess the scope of potential investments, the SMC will apply a set of progressively strict eligibility criteria for the loan and grant products made available, and disseminate information on these to the sector at large via the FIF Secretariat. The criteria will be based on good practices, and include: Firm and demonstrated commitment to full financial sustainability, flexible product development, cost effectiveness and transparency; Disciplined management; Transparency, with the SMDF, government, clients and the public having the right to know status; Reporting and accountability, with regular operational, financial and audit reports; Gender considerations, enabling the participation of women; Governance, sound structures suitable to the institutional type, and largely free from government and political interference; Contribution to the expansion of the low-income client base. Appraisal and Approval of Investments to Microfinance Providers Proposals received will be scored according to the following criteria: Outreach: Number of active clients (borrowers/savers), both male and female; Profitability: Return on Assets, Financial Self-Sufficiency; Portfolio quality: PaR (30 days); Track record of similar applicants in producing stated results for requested funds; Management, including staffing and institutional form; 41

42 Financial frontiers: rural sub-districts served and/or new products/services. To facilitate funding to microfinance providers focused on rural areas, applicants should clearly indicate in their proposals both the amount of funding requested and the proposed outreach that is focused in rural areas. The intended gender composition, regional and sectoral focus of the applicants should also be indicated. Applicants should indicate in their proposals if they have a technical partner supporting the proposal, and the funds dedicated to cover the costs of this technical assistance. Technical partners are encouraged to jointly sign proposals with their partner providers to indicate mutual commitment to meeting proposed targets. The SMC may hire short-term technical consultants to provide the institutional scoring and appraisals, should the SMC not have the capacity to evaluate the proposal. Criteria for Applications from Business Support Service Providers Proposals may be made from providers of technical assistance, training, and other business services to microfinance providers (e.g. audit, ratings, credit reference bureaux, Cash-In-Transit service providers, Internet Communications Technology (ICT), etc.), including private companies, private, public and professional institutes, universities, consultants and professional associations of microfinance providers currently operating in the country, or those which are outside of the country but wishing to start-up operations. In order to assess the scope of potential investments, the SMC will apply a set of eligibility criteria for the grants made available, and disseminate information on these to the sector at large via the SMDF. The criteria are based on good practices, and include: Financial Transparency: contribute to the transparency of financial information to facilitate commercial investment; Sustainability: encourage the long-term sustainability of the services market to gradually remove the dependence on subsidies. The FIF will therefore usually require coinvestment by the provider, often as matching grants; Competitiveness: Encourage the entrance of a range of providers to ensure that services offered are competitively priced, and customer responsive; Specialization, Diversity and Innovation: Encouraging innovations that reduce transaction costs, provide specialization, and promote product diversity; Business transactions: Promoting business transactions between the provider and recipient of services, thus grants will often be placed on the demand-side of the equation, enabling recipients of services to pay providers directly. Project Duration and Implementation Plans The project will have an implementation period of five years. A detailed Project Operational Manual (OM) including the Project Implementation Plan (PIP), Financial Management Plan, and Procurement Plan, will prepared by the SMC and approved by the Board within three months of the signing of the Firm Management Contract. The OM will include all periodic reporting, monitoring and evaluation arrangements throughout the life o f the project. Project Mid-Term Review A mid-term review date of February 28, 2009 has been agreed upon with the objective of assessing progress and, if necessary, to re-direct the project by integrating additional lessons learned and ground realities. 42

43 ANNEX 7: FINANCIAL MANAGEMENT & DISBURSEMENT ASSESSMENT REPORT SUDAN: Microfinance Development Project Scope and Objective of the Assessment The financial management (FM) assessment was carried out in accordance with the Financial Management Practices Manual issued by the Financial Management Board on November 3, The objective of the assessment is to ensure that the project has acceptable financial management arrangements, which will ensure: (i) the funds are used only for the intended purposes in an efficient and economical way, (ii) the preparation of accurate, reliable and timely periodical financial reports, (iii) and safeguard the entity s assets. Implementing Entity During the start-up phase, an autonomous, for-profit organization - SMDF - would be established to wholesale funds and provide capacity-building support. The Central Bank of Sudan (CBOS) will facilitate establishment of the Facility, including selection of the organization to implement the program. SMDF will be responsible for the day-to-day administration and implementation of the project. Meanwhile, a project preparation unit is set up within the Central Bank of Sudan. Staffing Provisionally, it is envisioned that SMDF implementation will be headed by a Project Director and staffed by two Facility Operations Managers (one in the North and one in the South), and below them for each office: one financial management officer, one training coordinator and one IT person with support staff to be added on an as-needed basis. The Finance Officer will be assisted by an accounting assistant and should be capable of directing and guiding the financial management operations of the Project according to the terms of reference in Attachment 1. Inherent Risk Analysis Country level: So far there is no country fiduciary assessment in Sudan. A Country Integrated Fiduciary Assessment (CIFA) is underway following recent the Public Expenditures Review (PER 2006) which revealed that in general the Public financial management (PFM) system is reasonably well functioning in the North but needs to be substantially revamped and modernized. Main challenges faced by the federal government PFM systems are: (i) the entire accounting and financial system is manual (ii) the budget classification needs to be in line with the international standards, (iii) improvements needed in commitment controls, debt management, cash and revenue management, reconciliation of accounts, and limited capacity of staffs (accountants, financials, auditors etc). Besides, the economy, governance and the peace agreement are fragile and the newly established Multi Donor Trust Fund, administered by the World Bank, has been facing considerable pressure to disburse funds more quickly, while Government experience with World Bank operations is limited. As a result, the risks are estimated high at country level. Project level: the project implementation will be handled by an autonomous entity called SMDF firm to be selected through competitive process. Consequently the risks described at country level are expected to be drastically reduced at project level. Still the newly established SMDF will be exposed to the same challenge in terms of pressure for quick delivery while it s lacking experience with World Bank/MDTF procedures. As a result, the overall project risks are estimated substantial. 43

44 The residual risks could be moderate provided the mitigating measures described in the financial management arrangements below are properly addressed to ensure that funds are used for the purpose intended, and accurate timely information is produced. Control Risks Overall, the main control risks described below are also substantial but could be moderate provided that the mitigating measures suggested are properly addressed. Risk 1. Funds may not be used in an efficient and economical way and exclusively for purposes intended due to SMDF s inexperience with IDA/MDTF procedures. Risk Rating S Risk Mitigation Measure (a) A team of qualified and experienced staff will be required from the SMDF through supervision of the selection process; (b) Strong internal control and efficient procedures will be required to be set up and maintained by the SMDF; 2. During the start-up phase, the inexperience of SMDF staff in IDA procedures may jeopardize timely and accurate financial reporting and disbursement process. 3. Audit reports may be in arrears and accountability issues that might raised would not be addressed timely. 4. Delays in releasing counterpart funds may jeopardize project implementation. S S S (a) SMDF staff will be required to attend FM/Disbursement training; (b) intense monitoring and support will also be provided from the Monitoring Agent (MA); (c) all financial reports and withdrawal applications will be prescreened by the MA before submission to IDA. Audit arrangements will be agreed with the Auditor-General to provide audit reports within 6 months end of year; (b) audit findings and recommendations followed up closely the Bank supervision team. Ensure that counterpart funds are budgeted annually and released timely by the MoFNE. H = High S = Substantial M = Moderate N = Low/negligible Strengths and Weaknesses Strengths There is a strong commitment from the GoNU for the project particularly at the Central Bank of Sudan. The acceptance of outsourcing project management with SMDF firm is an evidence of this commitment. Despite some deficiencies, there are several aspects of the public financial systems that work well. These include budget preparation, the role of the Internal Audit Department of MoFNE and the National Audit Chamber. These are likely to have a positive impact on the financial management of project funds. Weaknesses 44

45 The Government has agreed to finance a relatively high proportion (50%) of all project costs. The track record of the Government indicates that there will be difficulties in timely budgetary allocation for such contributions and effective release of funds to the Project. Delays in Government contributions could result in disruption of project activities. As a result of the long period of civil strife, Sudan has been cut off from external donor agencies in recent years. Staff recruited for project implementation, including financial staff, are unlikely to be very familiar with the procedures and FM requirements of the Bank. Consequently, intensive staff training and supervision will be required during the initial stages of the project. Information Systems A management information system (MIS) is expected to be set up by SMDF for management and monitoring purposes of the project. As much as possible, financial and accounting function could be integrated in the MIS in the future while in the beginning manual accounting system will prevail. Financial Reporting and Monitoring For the purpose of monitoring project implementation, SMDF will be required to prepare and submit the following reports in a timely regular manner: - Monthly: (i) a bank reconciliation statement, (ii) statement of cash position, (iii) statement of expenditures; - Quarterly: a progress report to be submitted to the World Bank within 45 days of each quarter according to the format adopted for MDTF projects; it should include (i) a financial report, (ii) physical progress report, (iii) and a procurement report; the - Annually: the annual project financial statements to be submitted to the World Bank before end June with audit reports will consist of the following: (i) a statement of sources and uses of funds (grant and counterpart funds separately); (ii) a statement of cash position from all sources; (iii) statements reconciling the balances on the bank accounts; (iv) list of withdrawal applications, by reference number, date and amount; and (v) Notes to the Financial Statements. Accounting and Budgeting Policies and Procedures During the start-up phase, the project accounts will be maintained on cash-basis in manual system supported by account books and Excel sheets until well functioning accounting software is integrated with the MIS. Accounting records will be maintained in Sudanese Pound (SP). A chart of accounts deriving from Sudanese Chart of Accounts will be developed to facilitate the recording and preparation of relevant monthly, quarterly and annual financial statements, including information on the following: total project expenditures, total financial contribution from each financier (MDTF, GoNU), total expenditure on each project component/activity, and analysis of that total expenditure into civil works, various categories of goods, training, consultants. Annual financial statements will be prepared in accordance with International Accounting Standards (IASs). Before each fiscal year a budget will be prepared on the basis of the work program, submitted to the Ministry of Finance and National Economy for approval then cleared by the World Bank before execution. The budget should be in line with the allocation of funds for each annual fraction of the project cost table. The budget execution should be reported in the financial section of the quarterly progress report. All accounting, budgeting and control procedures will be documented in the Manual of procedures, a living document that will be regularly updated. 45

46 Internal Audit Since SMDF is not expected to have a full time internal auditor, the Internal Audit Department (IAD) of the Ministry of Finance and National Economy (MoFNE) will be required to perform internal audit review at least twice a year. IAD will report to the MoFNE, the World Bank and to SMDF which will the responsibility to ensure that audit recommendations are addressed in a timely manner. External Audit The Grant Agreement will require the submission of Audited Project Financial Statements to the World Bank within six (6) months after year-end. The audit will be performed by the Office of the Auditor-General or an autonomous qualified external auditors appointed by him on terms of reference acceptable to the World Bank. A single opinion on the Audited Project Financial Statements in compliance with International Standards on Auditing (ISAs) will be required including the accuracy and the propriety of expenditures made under the SOE procedures and the extent to which these can be relied upon as a basis for credit disbursements. In addition to the audit reports, the auditors will be expected to prepare a Management Letter giving observations and comments, and providing recommendations for improvements in accounting records, systems, controls and compliance with financial covenants in the IDA agreement. Terms of reference of the audit will be agreed upon between the Auditor-General, SMDF and the World Bank within 6 months after effectiveness. Disbursement Arrangements The overall project funding will consist of MDTF Grant and counterpart funds provided by GoNU. These funds will be managed to two (2) bank accounts opened and be maintained at Central Bank of Sudan (CBOS) by SMDF: - One (1) Designated Account in USD dollar to receive MDTF deposits and replenishments then to record payments eligible to MDTF resources; - One (1) Project Account in Sudanese Pound to receive counterpart deposits and replenishments then to record payments eligible to GoNU resources. Interest income received on the designated account will be deposited to the project account. Additionally, it will be maintained an MDTF-N Child Account (Washington) in SDR to keep track of drawdown from the Grant. The account will show (a) deposits made into CBOS (b) direct payments, replenishments, reimbursements or special commitments issued by the World Bank, and (c) opening and closing balances. 46

47 Summary of Funds Flow Diagram Sources of Funds Donors MDTF-N GoNU Budget Project Bank Accounts (at CBOS) Designated Account USD Project Account in SP Advances will be made when the conditions for credit effectiveness are met. All bank accounts will be reconciled with bank statements by the Finance Officer and validated by SMDF Director on a monthly basis. Detailed banking arrangements, including control procedures over all bank transactions (e.g. cheque signatories, transfers, etc.) will be documented in the Manual of Procedures. Disbursement Method During the start-up phase, the transaction-based disbursement method will apply given the lack of experience to use the report-based mechanism. Conversion to the latter could be envisaged in the expansion phase after a conclusive assessment carried out by the Bank financial management specialist. The option of disbursing the funds through direct payments from project s MDTF Child Account on contracts above a pre-determined threshold will also be available. Withdrawal applications for such payments will be accompanied by relevant supporting documents such as copies of the contract, contractors invoices and appropriate certifications. Detailed disbursement procedures will be documented in the Manual of procedures and World Bank Disbursement Guidelines (May 2006). Designated Account To facilitate project implementation and reduce the volume of withdrawal applications, a designated account will be opened at CBOS. A request for initial deposit will then be prepared and submitted by the implementing entity to the World Bank and should cover about four months of eligible expenditures. The Finances Officer will be responsible for submitting monthly withdrawal applications for subsequent replenishments with appropriate supporting documents. To the extent possible, all of MDTF s share of expenditures should be paid through the designated account. Withdrawal applications should be prepared under forms provided by the World Bank and should include the Statement of Expenditures (SOE), reconciled bank statement and other documents such as the Summary of expenditures. The Government may also choose to pre-finance project expenditures and seek reimbursement from MTDF. 47

48 Statements of Expenditures Disbursements made on the basis of SOEs will be as follows: (i) civil works contracts costing less than US$150,000 equivalent; (ii) goods under contracts costing less than US$ 100,000 equivalent; and (iii) services under consultant firm contracts costing less than US$100,000 equivalent and under individual consultant contracts costing less than US$20,000 equivalent The supporting documentation will be maintained by SMDF and made available for review by MDTF/World Bank supervision missions and internal and external auditors. Counterpart Funds and Taxes The Government of National Unity (GoNU) will finance counterpart funds including taxes with respect to the new Country Financing Parameters (CFP) for Sudan. Procurement Arrangements A Bank Procurement Specialist (PS) is carrying out an assessment of the Procurement Capacity of the implementing entity. It s expected that the project will observe procurement procedures outlined in the Guidelines: Procurement under IBRD and IDA Credits and Guidelines for the Use of consultants by World Bank Borrowers and by the World Bank as Executing Agency D. NEXT STEPS Action Plan This action plans is recommended for implementation before grant effectiveness. Before Effectiveness ACTION Responsible 1. Select SMDF firm with qualified Finances Officer Project Preparation Unit/CBOS (PPU) 2. Install acceptable financial management system (manual PPU accounting system and manual of procedures developed) 3. Designated account and Project Account opened with Counterpart initial deposit released. PPU Conditions for Credit Effectiveness The conditions for credit effectiveness are: (a) the SMDF is selected with a qualified Finance Officer; (b) a financial management system acceptable to the Bank is set up; (c) designated account and project account are opened with counterpart initial deposit released. Financial Covenants Adequate financial management system including records and accounts are maintained by the SMDF. Project financial statements and audit reports are prepared and submitted to the World Bank within specified deadlines reflecting project s operations according to sound audit and accounting practices. Supervision Plan During the start-up phase, intense supervision will be required and would cover the following activities: (a) review of financial report included in the quarterly progress report; (b) review of 48

49 internal audit reports and annual audited financial statements and reports including the management letter; (c) timely follow up of accountability issues that might raised; (d) and provide appropriate support including training in Bank FM/Disbursement procedures. Conclusion This is a substantial-risk project to be implemented in a very difficult post-conflict environment. Given the urgency, the project is also being processed very rapidly by the Bank and MDTF. The staff involved in the implementation of the project is likely to have little experience working with international donor agencies, particularly with regard to fiduciary responsibilities and accountability of project funds. In the above context, the project is likely to succeed only if it is intensively supervised and recommendation promptly implemented, especially in its early stages. The overall conclusion of the financial management assessments is that provided the following conditions are met prior to the Grant effectiveness, the Bank s financial management requirements will be satisfied. 49

50 Procurement Environment ANNEX 8: PROCUREMENT SUDAN: Microfinance Development Project 1. The historic Comprehensive Peace Agreement (CPA) was signed between the Government of Sudan and Sudan Peoples Liberation Movement (SPLM) on January 9, 2005, marking the end of a 21-year civil war and auguring a new era of peace, reconstruction and development for Sudan. The CPA opened an unprecedented window of opportunity to turn the devastation of years of war, displacement, and underdevelopment into a new era of peace and prosperity. The Joint Assessment Mission (JAM) which was comprised of the UN, the World Bank, the Government of Sudan and the SPLM included an assessment report on public procurement. The JAM concluded that the current public procurement system of the National Government of Sudan is deficient to meet the country s needs for transparency and achievement of value for money. The JAM recommended procurement reforms which would include capacity building and logistical support. A Country Integrated Fiduciary Assessment (CIFA) is underway following the recent Public Expenditures Review (PER 2006). The CIFA will be a more detailed analysis than the JAM and it is expected to come up with a more focused proposal for modernizing public procurement systems. 2. The main weaknesses of the current system are improper application of the existing regulations and the lack of oversight mechanisms. The public service has deteriorated seriously during the war time and recent reform efforts have not yet taken hold. There is lack of information on how funds are spent at the decentralized levels, so it is difficult to evaluate volume and efficiency of public procurement in Sudan. Procurement capacity has been lost due to the many years of conflict and low budget for non-defense activities. This includes a lack of capacity to manage donor-funded procurement. The private sector has also lost its ability to perform and meet the demands of government procurement, which currently is perceived as reserved for a handful of enterprises. Restoring confidence in the system is a major challenge. 3. To facilitate the financing of reconstruction needs by the international community, donor funds have been contributed into Multi Donor Trust Funds (MDTF), part of which will be used for this project. The World Bank also provided Trust Funds to finance activities in critical areas in capacity building including in the area of Public Sector Management, Public Financial Management and Public Procurement. This capacity building is to support the systems for use of funds under the MDTF as well as for Government own resources. But this capacity building in public procurement has have not yet taken hold. The Donors agreed that all procurement under MDTF programs would follow World Bank Procurement Guidelines. To assist the Bank in monitoring the MDTF Projects, two Monitoring Agents (one for the North and one for the South) have been appointed. The main responsibility of the Monitoring Agent is to monitor implementation of MDTF projects on behalf of the World Bank to ensure compliance with fiduciary procedures and to provide advice to project implementing agencies. Capacity Assessment and mitigation of risk 4. An assessment of the capacity of the CBOS to implement procurement actions for the project has been carried out by the Bank's procurement specialist on February 10, The assessment reviewed the organizational structure, procurement procedures and methods, staffing and the interaction between the procurement section and other units. The overall project risk for procurement was found to be average as it (CBOS) has little experience in World Bank-financed 50

51 procurement. Under this project, CBOS is expected to process one major contract for selection of an SMDF Management Firm and other very minor contracts to support its capacity building. No assessment was done on MOFNE as it has a very small role to play on procurement of minor contracts to support its capacity building. The initial procurement for proposed SMDF and development of its procurement capacity (see Para below) will be handled by the SMDF Management Firm. The average risk of CBOS will be mitigated by its (CBOS) seeking assistance of other MDTF projects like the Technical Assistance Facility Project that has already gone through several contracts under MDTF projects. 5. Once the Sudan Microfinance Development Facility is established, it will be responsible for subsequent procurement activities. The following actions would be carried out to ensure SMDF has the required procurement capacity: (i) The SMDF has a procurement manual that provides detailed information to guide procurement management in the SMDF. The manual provides information on: (a) Roles and duties of tender committee, (b) procurement methods and procedures and (c) Content of tender documents. (ii) One Procurement Officer per SMDF Branch with adequate qualification and experience will be employed at the SMDF on a full time basis with primary responsibility being management of procurement activities under the project. The TORS would be agreed by negotiation and the employment of the specialist would be completed within three months of the signing of the Firm Management Contract. The Procurement Officers should, as a minimum, have a first degree and three years experience in procurement involving selection of consultants and goods 'procurement. The responsibilities of the Procurement Officer would include, preparing and monitoring procurement plans, bidding documents, bid evaluation reports, and contract documents. The procurement staff would report to the Manager, Administration Services Department and would be provided with full time access to a personal computer with printer. (iii) The tender committee of the SMDF has at a minimum the following members: (i) Manager, Administration, (ii) Manager, Finance Department, (iii) Manager, Legal Department, (iv) Procurement Officer, (v) and (vi) technical staff (on an ad-hoc basis, as needed). (iv) If a procurement person with adequate qualification is not found the best qualified person would be selected and made to participate on a comprehensive and intensive Procurement Training Program at one of the regional (ESAMI or GIMPA) or other similar training programs as soon as possible. In addition one or more staff from SMDF would participate in an intensive procurement training program. (v) A comprehensive procurement training program will be organized for staff that would be involved in the procurement decision making process including key staff from the beneficiary institutions and tender committee members. Requirement for a Procurement Plan 6. The CBOS should prepare a procurement plan for the selection of the SMDF Management Firm. All other minor contracts for capacity building by CBOS and MOFNE will be part of their detailed work plan for the capacity building component. Procurement Plan for SMDF will be prepared and implemented by the SMDF Management Firm as and when the SMDF is established. 51

52 Bank Guidelines and Standard Bidding Documents and Standards to be followed 7. Since the MDTF is administered by the World Bank, Procurement of goods, civil works and employment of consultants will follow World Bank Procurement Guidelines for Goods and works and Guidelines for the selection and employment of Consultants (May 2004, revised October 2006), subject to any exceptions that may be granted under the Project. Bank s Standard Bidding Documents (SBD) and Standard Request for Proposals (RFP) will be used for all ICB and QCBS contracts (respectively) and for NCB with appropriate modifications. The World Bank Guidelines require that except for ICB contracts and selection of consultants, all other contracts would follow national procedures acceptable to the World Bank. National procedures include national competitive bidding, direct contracting, shopping, and selective bidding procedures. The World Bank has reviewed the national procurement procedures and found them requiring some modifications to be fully acceptable to the World Bank. For purposes of use of the national procedures by the SMDF, the SMDF Management Firm will within three months of the signing of the management Contract prepare for clearance with SMC and the World Bank a Procurement Manual which will be based on national procedures but which must include the following provisions (which provisions must be followed by any other agency procuring under this project): (i) Only the bidding documents for NCB agreed with IDA shall be used for bidding. (ii) Invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 30 days prior to the deadline for the submission of bids. (iii) Foreign bidders shall not be precluded from bidding and no special preference will be accorded to any bidder either for price or for other terms and conditions when competing with foreign bidders, state owned enterprises or small-scale enterprises or enterprises from any given state. (iv) Except with the prior concurrence of the Bank, there shall be no negotiation of price with the bidders, even with the lowest evaluated bidder. (v) Re-bidding shall not be carried out without the prior concurrence of the Bank. The system of rejecting bids outside a predetermined margin or bracket of prices shall not be used. (vi) Extension of bid validity shall not be allowed without the prior concurrence of the Bank: (i) for the first request for extension if it is longer than four weeks; and (ii) for all subsequent requests for the extension irrespective of the period {such concurrence will be considered by the Bank only in cases of Force Majeure and circumstances beyond the control of the Purchaser/ Employer}. (vii) Rate contracts entered into by the state shall not be acceptable as a substitute for NCB procedures. Such contracts will be, however, acceptable for any procurement under National Shopping Procedures. (viii) Two or three envelope system shall not be used. (ix) Contracts to be awarded ONLY to the lowest evaluated bidder provided the bidder is qualified bidder to perform. (x) Rejection of all bids and re-bidding will not be for reasons of wishing to get a preferred bidder. (xi) Bidding shall not be restricted to pre-registered firms, if a registration process is required, a foreign firm declared as the lowest evaluated bidder shall be given a reasonable opportunity of registering, without let or hindrance. 8. Advertising: Immediately after negotiations, a General Procurement Notice (GPN) will be published online in dgmarket and UN-Development Business and in at least two national news papers of wide circulation. The GPN will provide a description of the Project and an indication of the contracts for that will be procured under ICB, and for consultants services estimated at more than US$200,000. EOI will be advertised for consulting services above US$100,000, in 52

53 addition be advertised online in dgmarket. Specific Procurement Notices (SPNs) for bidding opportunities will be published in national news papers of wide circulation. 9. No Procurement of works is envisaged under this project, except there is a possibility of rehabilitation of an existing building to cater for the SMDF offices, which would follow shopping procedures. Procurement of goods: Goods procured under this project would include procurement of office equipment, books, journals, computers (hardware), software, and office supplies and would follow the procedures described below. International Competitive Bidding (ICB) will be used for contracts above US$250,000 for works and US$ 150,000 for goods and whenever foreign suppliers will be required. National Competitive bidding (NCB) will be used for all contracts below ICB thresholds following national procedures acceptable to the Bank. Shopping may be used as alternative to ICB and NCB for goods urgently needed, specialized goods and for all contracts estimated to cost less than US$20,000 equivalent per contract. The request for quotations shall be in writing and addressed to at least three suppliers. The quotations would be opened same time. The request for quotations will contain technical specifications, delivery time, payment conditions and any other information that may be help the suppliers prepare competitive offers. Direct Contracting will be used in cases consistent with section 3.6 of the Bank Procurement Guidelines under IBRD Loans and IDA Credits whenever other procurement. 10. Consultant Services will include the services of an SMDF Management Firm, auditors and other technical assistance for specific studies, training, monitoring and evaluation, which will be procured following the following procedures: Quality- and Cost-Based Selection (QCBS) in accordance to section II of the Consultants Guidelines will be used for all major contracts under the project and for all contracts estimated to cost more than US$ 100,000 equivalent. Shortlists for contracts estimated to cost less than US$ 200,000 may consist of national firms only. Least Cost Selection (LCS) may be used for assignments of a standard and routine nature for auditing and other services of no complex nature. Consultants Qualifications (CQ) may be used for assignments estimated to cost less than US$100,000 and for which the need for proposing and evaluating competitive proposals would not be justified. Single-Source Selection may be used for contracts only for emergency situations in accordance with paragraphs 3.8 to 3.11 of the Guidelines for the Selection and Employment of Consultants in the case of firms; and with section (V) Selection of Individual Consultants in accordance with paragraphs 5.1 to 5.3 of the Guidelines. This may include recruitment of NGOs and UN agencies which possess specific experience relevant for project purposes, as for sections 3.15 and 3.16 of the Consultants guidelines. 53

54 Individual Consultants. Services for assignments that meet the requirements set forth in the first sentence of paragraph 5.1 of the Consultant Guidelines may be procured under contracts awarded to individual consultants in accordance with the provisions of paragraphs 5.2 through 5.3 of the Consultant Guidelines. Under the circumstances described in paragraph 5.4 of the Consultant Guidelines, such contracts may be awarded to individual consultants on a sole-source basis. 12. Prior Review Thresholds: the following contracts will be subject to Bank s prior review: (i) Each contract for works or goods estimated to cost the equivalent of $150,000 or more, all contracts under Direct Contracting; (ii) All terms of reference for consultants services and training. (iii) Each contract with a consulting firm estimated to cost the equivalent of $1000,000 or more, each contract with individual consultants estimated to cost the equivalent of $50,000; all TOR and shortlists for individual contracts below US$ 50,000; and (iv) All contracts awarded under the Single Source Selection method. All other contracts will be subject to post-review and procurement audit by the Bank. 13. Frequency of Procurement Supervision: Bank supervision missions will be carried out every 6 months. Two ex-post review audits will be done during the year. Procurement Records 14. The project staff will maintain accurate records of all procurement activities and documents related to the Project. The procurement files will be maintained for review by the Bank's supervision missions and independent auditing. The project staff will also consolidate procurement activities into Quarterly and Annual Progress Reports. Procurement documents and records shall be in English (to enable World Bank staff and other relevant personnel follow them adequately) with translations into Arabic be for internal use, if needed. 54

55 TABLE A: THRESHOLDS FOR PROCUREMENT METHODS AND PRIOR REVIEW Expenditure Category Contract Value Threshold Procurement Method Contracts Subject to Prior Review 1. Works Above 250,000 ICB / LIB All Contracts, Below 50,000 Shopping None All values Direct contracting All contracts 2. Goods Above 150,000 ICB / LIB All contracts 20, ,000 NCB None 3. Consultant Services and Training Below 20,000 All values Shopping Direct contracting None All Firms Above 200,000 QCBS All contracts (inter nal shortlist) 100, ,000 Below 100,000 All values Individual Consultants Above 50,000 Below 50,000 All values QCBS CQ Direct contract Individual consultants Individual consultants Sole source All contracts (Local shortlist) None All contracts All contracts TOR, shortlist, draft contract All Contracts 55

56 TABLE B: PROCUREMENT PLAN FOR SELECTION OF AN SMDF MANAGEMENT FIRM ACTIVITY PLANNED ACTUAL REMARKS 1 Estimated Cost US$ 2,300,000 2 Procurement QCBS Method 3 Responsible Agency CBOS COMPLETION DATE COMPLETION DATE 4 Finalize TOR 23/03/ World Clearance 28/03/2007 of TOR 6 Prepare EOI and 23/03/2007 GPN 7 Publish (Advertise) EOI and a General Procurement Notice in the Dg Market 8 Receive EOIs 11/04/ Prepare Request for Proposal and clear with Bank 15/04/ Evaluation of EOIs (prepare shortlist) 11 World Bank clearance of Shortlist 12 Finalize RFP and invite for Proposals from shortlisted firms 28/03/2007 EOI in both local and Dg Market, GPN in the Dg market only 20/04/ /04/ /05/ Receive Proposals 15/06/2007 Allow 6 weeks 14 Evaluation of Technical Proposals 30/06/2007 Allow 2 weeks 15 World Bank clearance of Tech evaluation Report 16 Open price proposals 17 Finalize combined technical and price evaluation and 15/06/ /06/2007 Allow two weeks and invite qualified firms to attend. 07/07/

57 determine the winning firm 18 World Bank 15/07/2007 clearance of combined evaluation Report 19 Contract 30/07/2007 negotiations 20 Sign Contract 15/08/ Start contract 15/09/ Complete contract 15/10/2009 A two year contract extendable for one more year or less. 57

58 Economic Analysis ANNEX 9: ECONOMIC AND FINANCIAL ANALYSIS SUDAN: Microfinance Development Facility Traditional economic analysis methods are difficult to apply to this type of project which supports microcredit delivery to tens of thousands of individuals, groups of individuals and microenterprises. However, high repayment rates in average microfinance projects (over 98 percent) suggest that the economic rates of return at an individual client business level are positive. The project aims to achieve a diversified portfolio of clients with nearly 50 percent of activities financed being trade and services which tend to have higher rates of return, compared to farming and production, which have higher investment costs and longer business cycles, and lower returns. The project design includes an impact assessment that will provide an analysis of the economic impact of microcredit provision over a five year period. The impact assessment will include measurement of impacts on household income, assets and employment. The survey design will be longitudinal, allowing an analysis of economic impacts over time (see Annex 4 for the detailed project description. Financial Analysis MFI financial performance will be a key determinant of access to financing under the project. In order to remain eligible for financing, MFIs will be required to maintain a high quality loan portfolio with no more than 5 percent Portfolio-at-Risk (past 30 due) by year three, and move towards full financial sustainability (profitability) within a 3-4 year timeframe. Once the new legal framework is in place, all MFIs above a certain size will be expected to carry out annual external audits, according to International Auditing Standards. Financial analysis of the MFIs applying for financing will be a key part of the appraisal and selection process. The eligibility criteria for financing include criteria related to financial management capacity, accounting and internal controls, portfolio quality, loan loss provisioning, profitability, liquidity management and capital adequacy as described in Annex 6. An autonomous due diligence of all applicant MFIs will be carried out by SMDF staff, with the help of consultants if necessary, as part of the MFI selection process. This will include financial analysis to verify the financial soundness of the MFIs and their creditworthiness. During project implementation, the MFIs will submit quarterly financial statements as well as annual external audits. These will form the basis for ongoing financial analysis and supervision throughout the project. Fiscal Impact The fiscal impact of the project is expected to be positive. The total MTDF grant is US$20 million equivalent. After the initial grants, this will be on-lent from the SMDF to eligible MFIs with a spread sufficient to cover the cost of capital, operational costs, inflation, expected loan losses and exchange rate risk. On the revenue side, it is expected that microlending activities will help increase business activity and employment, which in turn will help generate increased government tax revenue. It is hoped that during the course of project implementation, efforts to improve the business environment will lead to real improvements for businesses which will encourage them to register, in turn increasing government revenues. 58

59 ANNEX 10: SAFEGUARD POLICY ISSUES SUDAN: Microfinance Development Facility Introduction Every project being considered for support will have to meet the World Bank s Environmental Guidelines and Board-approved environmental and social Safeguard Policies. The objective of the World Bank's environmental and social safeguard policies is to prevent and mitigate undue harm to people and their environment in the development process. They are a cornerstone of its support to sustainable poverty reduction. Responsible Agency The SMDF is the implementing agency for the project that will be funded in part by the MTDF grant. Therefore, the SMDF will be responsible for not only the marketing of the Facility, and selection and financing projects, but also for implementation of the environmental guidelines and Board-approved Safeguard Policies for the Facility. Training of staff for the facility will include strengthening the institutional capacity to ensure that any projects that trigger environment/social development safeguards are adequately and appropriately reviewed. Safeguard Policies that might apply Applicable? Safeguard Policy [no] Environmental Assessment (OP/BP 4.01) [no] Natural Habitats (OP/BP 4.04) [no] Pest Management (OP 4.09) [no] Involuntary Resettlement (OP/BP 4.12) [no] Indigenous Peoples (OD 4.20) [no] Forests (OP/BP 4.36) [no] Safety of Dams (OP/BP 4.37) [no] Cultural Property (draft OP OPN 11.03) [no] Projects in Disputed Areas (OP/BP/GP 7.60) * [no] Projects on International Waterways (OP/BP/GP 7.50) Environmental Assessment Category: [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 59

60 ANNEX 11 TERMS OF REFERENCE FOR SMDF BOARD OF DIRECTORS Background Sudan Microfinance Development Facility (SMDF) is a multi-donor facility founded by the Sudan Government of National Unity to develop a strong and sustainable microfinance sector in the country. SMDF s overall aim is to provide poor and low-income Afghans with access to financial services, in particular access to credit that can be used for investment in business activities as well as to meet emergency needs and reduce vulnerability. SMDF s approach is to provide funding and technical assistance to qualified retail microfinance institutions 6 (MFIs) for on-lending as well as capacity building, as they move towards operational and financial self sufficiency. Through various on-lending methodologies the MFIs provide financial services to the poor and low income across the country. Funds for SMDF s grants, loans, and operational expenses currently come from donor grants; however, in the future, SMDF anticipates being able to access IDA and commercial debt, as well as returns from loans to MFIs. SMDF will be governed by a Board of seven people. The Board will autonomously manage the SMDF on behalf of the central bank. They will be responsible for providing the SMDF with policy direction in accordance with the objectives of the facility as agreed with the central bank at the time of its establishment. The Board Members will autonomously approve the strategy, work plan, contracts, and agreements, etc. and they are also the only ones who can amend the articles. If the organization winds up, dissolution of the assets will be carried out in a way that benefits the microfinance sector, with none going to the directors, government, or donors. The proposed Board members will include: Central Bank nominee (1) Ministry of Finance and National Economy nominee (1) Two directors chosen by the donors to the facility - these will be international microfinance experts and not donor staff. There will be three directors chosen from Sudanese civil society or the private commercial sector, for example organizations representing small scale entrepreneurs. These three names will be put forward after the above nominations have been finalized. They can be proposed by any of the other directors, but a majority of the other four directors must approve them (3). There are two reasons for donors choosing two directors: (a) donor coordination and support will be critical to the success of SMDF; (b) the microfinance sector in Sudan has very little local microfinance expertise, so they asked that microfinance experts be included on the board (2). The articles for the SMDF will be drafted to allow for future expansion of the number of directors to be drawn from Sudanese civil society and the private sector. While there are very good reasons to begin with a board where the majority of directors are representatives of Government (since government support is crucial) and international experts (who do most of the work on the board and have the trust of the donors), the vision is that a transition should be made towards an privately managed organization. 6 Microfinance Institutions is used in the broadest sense and includes variety of institutions including NGOs, credit unions, cooperatives and commercial banks involved in microfinance. 60

61 Task Description As SMDF is in the very early stages of its existence as an independent entity, it will need strong support and guidance from individuals who can ensure that best practices are upheld in both SMDF s internal and external activities. Members of the Board will therefore be called upon to provide both strategic direction and technical input on the full range of SMDF s activities, which include funding, TA, training, advocacy, networking, and general industry support. Specific duties include, but are not limited to: - Monitoring SMDF performance against strategic plan - Reviewing, refining and reorienting strategy as needed - Approve funding proposals from MFIs - Providing technical reviews of various aspects of SMDF s operations, including investments, training operations, industry support work - Supervising SMDF s Managing Director - Liaising with donors to ensure funding Members of the Board will be expected to attend official Board meetings at least three times per year, two of which will take place in Khartoum or Juba. Board members will also be required to be present in person or by telephone at ad hoc meetings, which take place no less than once per month. In addition, since SMDF is still establishing many policies and procedures as an independent institution, Board members will be called upon to provide frequent guidance and support to SMDF s Managing Director and other staff members on particular questions via or telephone. Essential Skills, Experience and Qualifications The ideal individual will have at least 10 years of experience in the field of microfinance and/or economic development, extensive familiarity with donor policies, and good knowledge of Sudan. Members of the Board must also possess the diplomacy and persuasiveness to be able to effectively balance to government representation on the Board while forging strong working relationships with other Board members, government personnel, donor representatives, SMDF and MFI staff, and others. A proven record of consensus building among groups of diverse stakeholders is highly valued. 61

62 ANNEX 12: SMDF MANAGEMENT FIRM TERMS OF REFERENCE SMDF MANAGEMENT FIRM TERMS OF REFERENCE Consultancy for a reputable firm to establish The Sudan Microfinance Development Facility (SMDF) 1. Background The Bank of Sudan recently commissioned a study of the microfinance sector with the objective of preparing a long term development strategy for the sector. The resulting strategy includes a five year action plan that aims at enhancing the sectors contribution to economic and financial sector development as well as reducing poverty in the country. The strategy also aims to take proactive steps to support women entrepreneurs who lack support when compared to their male counterparts. In 2006, the study concluded that microfinance, as it is known and practiced worldwide, is at an infancy stage in Sudan with supply being extremely small compared to demand for these services. Rough estimates have put the demand covered at only about 1-3%. A microfinance sector, offering financial services such as micro loans, repeated and larger loans, consumption loans, savings, deposits, and money transfers, insurance and adopting acknowledged performance measurement indicators, does not really exist in Sudan. Despite the several experiments in micro lending launched to extend 'small' loans to small producers and low-income groups, including women, yet there is no conformity in approach among the institutions/agencies undertaking these endeavors. This is probably a result of dissimilar objectives in terms of poverty alleviation and the absence of a clear strategy for microfinance. A growing focus on poverty alleviation has developed during the last few years, as reflected by the establishment of several social funds; specialized institutions such as the Savings and Social Development Bank (SSDB) and the Social Development Fund (SDF); and the launching of several, albeit, scattered poverty alleviation initiatives. Nevertheless, the government's efforts in developing microfinance policies that tackle poverty in a most efficient manner remain limited and uncoordinated. NGOs and rural development projects have continued to be the main providers of microfinance to the poor, but these initiatives have remained limited in coverage and impact when compared to the size of the problem of poverty in the country. There is a huge potential for the development of microfinance programs in the country, particularly in light of current social and economic conditions, and the Government's declarations for prioritizing poverty alleviation in its policies. However, there are many challenging constraints facing this nascent microfinance sector which unless addressed will limit its effectiveness in fulfilling its role in poverty alleviation and economic development. 62

63 2. Reform Objectives To develop the sector, the Government of National Unity is proposing to establish a Microfinance Development Facility to champion the emergence of a strong and sustainable microfinance sector in the country. The proposed facility will aim to support microfinance service provider s efforts to assist the poor and low income households with access to financial services and in particular access to credit that can be used for investment in business activities as well as to meet emergency needs and reduce vulnerability. The facility will establish a national multi-donor mechanism which will provide funding to qualified retail microfinance institutions 7 (MFIs) for on-lending as well as capacity building, while moving towards operational and financial self sufficiency. Through various on-lending methodologies the MFIs would provide financial services to the poor and low income across the country. 3. Task Description The Central Bank of Sudan wishes to hire a reputable firm to establish the Sudan Microfinance Development Facility (SMDF), and to implement the proposed objectives of the facility. In the initial phase, the SMDF will be expected to provide flexible and carefullydesigned financing to qualified, high- potential microfinance institutions for institutionbuilding, systems development, and on-lending. Both existing microfinance operations as well as start-ups will be considered for funding. The number of providers financed during this pilot phase will depend on how many meet the qualification criteria. Providers will be selected through a competitive process and would include a desk review followed by an in-depth field appraisal. The duration of the initial phase is 2 years and includes grant funds for following activities: Institution Building: (1) Grant funds to develop institutional capacity of MFIs for future scaling up, through investment in systems, advisory services, training and study tours; (2) Grant funds to develop appropriate MIS, loan tracking, accounting and internal control systems, and (3) Support strengthening of the nascent microfinance network e.g. through translation and dissemination of best practice manuals and tools. Capital for MFIs: (1) On lending, (2) Operational costs, and (3) For experimenting with diverse providers of financial services to the poor and low income 7 Microfinance Institutions is used in the broadest sense and includes variety of institutions including NGOs, credit unions, cooperatives and commercial banks involved in microfinance. 63

64 4. Responsibilities of the Firm The selected firm will be responsible for setting-up SMDF with qualified staff to carry out implementation of the Project effectively and in accordance with Bank guidelines or any other procedures set forth by the Bank. The SMDF will be branded with its own identity from the start, and the firm will primarily be responsible for building its capacity to operate as an independent facility. In accordance with the Project documents (Project Agreement etc.) detailing the design, development and implementation of work plans; the firm will: The Management Firm will be expected to recruit a Project Director who will be responsible for overall administration, and overseeing the functioning of SMDF. Director will report directly to the SMDF Board The Management Firm will be expected to recruit a Project Director who will be responsible for overall administration, and overseeing the functioning of SMDF. Director will report directly to the SMDF Board Ensure that the staff of the SMDF has the capacity to conduct the following activities: manage the branches of the facilities in Northern and Southern Sudan, monitor the SMDF programs, provide training and capacity building and coordinate financial management and reporting tasks. Preference will be given to local staff for these activities. Implement a training and on-the-job mentoring program for local Sudanese Facility staff, in order to ensure that all staff positions, including management, are replaced by suitable candidates before the end of the firm s initial contract period. ; ( Prepare an operational manual and establish procedures and criteria for monitoring and evaluation of the project and of the participating MFIs, Be responsible for the procurement, accounting and disbursement processes and administrative services related to the establishment of the SMDF Set-up an accounting and financial management system acceptable to the Bank and prepare quarterly progress reports, as required, by the World Bank, and other donors according to the formats adopted at national level; Utilize project management tools to document and maintain the status of the SMDF and monitor progress in Project implementation, including the impact of activities in each component (in particular the on lending fund); Facilitate any external evaluation, impact assessment required of the Project, including financial audits to be submitted to the World Bank by end of June annually. Liaise with key stakeholders (MFIs, Networks, Bank, other Government Ministries, and donors), with the objective of ensuring multi donor support to the Facility. 64

65 To promote and advocate for the SMDF s activities and the microfinacne philosophy. Prepare operations policies and principles for SMDF future operations Carry out all activities related to the project necessary for the successful implementation of the Project Project Activities Specifically, the selected firm will be expected to assist the SMDF manage the following financial and technical assistance tasks: A. Technical Assistance to New Microfinance Providers (US$5,000,000): This activity will provide funds for capacity-building of MFIs and the overall sector. Facility staff will provide some training and technical assistance directly; however, the facility will also have the ability : To contract out delivery of training, consulting, etc. to international and local firms and individuals with the requisite expertise. To provid support to microfinance networks and other intermediaries for them to provide long-term technical assistance to greenfield and young microfinance providers. The Facility s technical services will be planned and managed so as to build the capacity of the MFIs to plan and manage their own technical assistance in the future. Initial analysis of the sector and experience from similar initiatives in other countries suggest that the following areas are likely to be top priorities for technical assistance to providers and capacity-building efforts in the near-term: Market Analysis; New Product Development and Design of Appropriate Delivery Channels, both for Islamic finance and traditional finance; Staff Training and Development; Governance/Board Development; Legal and Accounting Issues and compliance issues (e.g., AML/CFT); and MIS Development. Beyond working with retail microfinance providers, the Facility will directly provide and contract out for training and technical assistance to Sudanese service providers to the sector, such as trainers, consultants, and auditors. A critical requirement for the long-run financial and development performance of the sector is the availability of capable service providers, to reduce the dependence on foreign expertise. The Facility will also explore how it will strengthen one or more national provider networks, such as the Microfinance Organizations Network (MON). Equity, Loan and Grant Financing (US$12,000,000): Qualifying MF providers selected for assistance will be eligible to receive grants for loan capital, technical assistance, short-term operating costs, MIS and systems development, market research and new product development, staff training and capacity development, and other purposes that contribute to extending financial services to targeted client 65

66 segments and building sustainable institutions. If its legal status and charter permit it, the Facility will also provide other kinds of financing such as loans, loan guarantees or equity. Since funding will be tranched, with disbursement of new funds dependent on an awardee s satisfactory performance in meeting targets, forgivable loans will offer additional incentives for strong performance (by permitting loans to be converted to equity for high-performing institutions). The use of recoverable grants may also be an appropriate form of financing for encouraging profit-making institutions to enter the microfinance market. Start-up organizations and specialized microfinance providers (i.e., organizations focused exclusively on serving this market) are expected to receive more comprehensive support from the Facility than applicants with existing financial operations and infrastructure that are downscaling into the low-income market. As a general rule, for example, support for commercial banks will be lighter, since they will need assistance to develop microfinance products and delivery channels to serve this market but not to build their core institutional capacity. For commercial and for-profit applicants, it may also be more appropriate to provide technical services than grants. For deposit-taking institutions, it will be critical to provide any financial assistance in a way that does not create disincentives to deposit mobilization. The Board should consider whether and when costshare requirements will be appropriate. Funds will be disbursed in tranches, with subsequent tranches dependent on performance in meeting negotiated performance benchmarks. While institutions may receive multiple awards, the Facility will be expected to adjust the size and composition of assistance (type of financing, mix between technical and financial assistance) over time, to better fit the stage of development of the awardee and the overall microfinance market. The facility may also make grants to organizations that help develop effective demand for microfinance, for example, by helping low-income people develop viable livelihoods and supporting enterprise start-up and growth. Activities to be financed under this activity include: (i) training (local and international); (ii) consulting services (local and international); (iii) the cost of seminars and translation services; (iv) travel for participation in regional and international training courses, meetings and conferences; and (v) grants and other financing forms. 5. Overall Coordination and Implementation MFIs will be responsible for implementation of their own programs (including onlending and capacity building programs), the Firm, under the direction of the Project Director, would ensure overall coordination and implementation of the Project in accordance with agreed performance targets. The firm would also be responsible for day to day administration, and monitoring and reporting. 6. Disbursement and Flow of Funds 66

67 To facilitate project implementation and disbursement, the Facility will establish a designated account with the Bank of Sudan, on terms and conditions satisfactory to the Bank and other donors. The Grant allocation would be deposited in the account for eligible expenditures as identified under the Project. The Firm would maintain a separate identifiable account to be used exclusively for project-related expenditures and retain all supporting documentation for audit purposes and review by the Bank and other donors. The Firm will develop an accounting and Management Information System (MIS) for managing and monitoring financial and operational aspects of the Project. The information system should be as detailed as possible to allow monitoring and evaluation of all aspects of Firm as well as Project operations. The MIS would cover detailed information including (but not limited to): Administration and operations of each participating MFI. On-lending activities and their impact should include details on financing e.g. terms, outreach, and repayments. Operating costs for expansion of microfinance programs. Institution building activities and their impact should include details of capacity building programs e.g. trainings received, equipment procured. Performance indicators against which the implementation experience is measured. Sector data that would assist in assessing impact Financial and accounting procedures. 7. Reporting, Accounting, and Auditing For the financial control of project operations, the Firm would be responsible for keeping the above mentioned data up to date. The Firm would maintain records of accounts (all statement of expenditures, flow of funds) in such a manner that they meet the requirements of the Bank and other donors. The accounts should be prepared in accordance with acceptable accounting principles and must be audited every 6 months, by an independent auditor. Supporting documentation will be maintained and kept by the Firm and made available to the Bank and independent auditors as required. The Firm will prepare quarterly progress reports on the overall project implementation for review by the Government, Bank and other donors according to the format adopted at country level. At the end of the contract period, the firm will prepare a comprehensive final report (supported by data) which would include project implementation experience, impact on MFIs and clients. The report should contain a table of contents, executive summary, findings, tables, and specific recommendations. 8. Duration of Appointment - 2 years The firm will be expected to complete the assignment within 2 years. During which time, the firm is expected to have established competent local staff to manage the Facility. 67

68 Institutional aspects left behind such as systems, operational procedures.. the database of clients, experiences and best practices,,etc, will be owned by the facility. 9. Profile of the Firm(s) or Consortia The services of a firm or consortium are sought to provide the above services. To be considered qualified to perform the services, the firm must be able to demonstrate the ability to deliver all of the inputs specified in these terms of reference and, specifically, should be able to demonstrate: years of experience in a similar activity, comparative advantage, staff technical capacities in terms of staff and knowledge, Experience in managed similar project funded by UN agencies,world Bank and/or other International donors. Regional/International accreditation Reference of clients Knowledge and experience in the use and application of Sudan s financial sector laws and regulations, especially those affecting the microfinance sector. Extensive international experience in the delivery of microfinance development activities, preferably in developing countries. Capacity to prepare microfinance development activities in the context of Sudan. The ability to work effectively in both Arabic and English languages. Substantial diplomatic and interpersonal skills. Ability for teamwork and to share knowledge. Consultant firm is expected to include, at a minimum, in its proposal the following experts: (i) Team Leader, with relevant experience in microfinance system and previous engagement in similar assignment; (ii) Microfinance specialists, (iii) Financial management specialists (iv) Procurement specialist The Firm s personnel would be expected to have an excellent knowledge of the microfinance sector and able to accomplish the project objectives which include preparing: (a) a strategy and detailed work plan and timetable for SMDF implementation of the activities in these terms of reference, (c) the training plans and schedules. The Team leader, especially must display the following qualifications and skills Knowledge and Senior microfinance experience; At least five years of experience of microfinance reform design and implementation, 68

69 Proven experiences in providing microfinance training in a multicultural context; Excellent writing skills for documentation of manuals and guidelines; Experience of managing assistance programs in developing countries, especially in developing countries. Excellent oral and written communication skills and computer skills. Capacity to work in teams in foreign environments, The firm can employ a number of short term experts in addition to the key experts to implement the project. The Firm will be fully responsible and accountable for hiring the local experts (translators, accounting experts, interpreters and trainers). The prospective firms are required to submit the particulars of their staff proposed for the project including qualifications, proven experience in response to the above needs. Prospective bidders should indicate implementation time of the project from the time of signing the contract to full operation in months. 69

70 ANNEX 13: PROJECT PREPARATION AND SUPERVISION SUDAN: Microfinance Development Facility Table 1 Project Preparation Team Name Title Unit Samuel Munzele Maimbo Sr. Financial Sector Specialist AFTFS Magdi M. Amin Sr. Private Sector Development Specialist AFTPS Martin Holtman Lead Financial Specialist CGP Nestor Coffi Sr. Financial Management Specialist AFTFM Colin Rees Consultant AFTTR Sidi Mohammed Boubacar Lead Counsel LEGAF Evarist Baimu Counsel LEGAF Katharine McKee Senior Advisor CGP Menbere Taye Tesfa Consultant AFTPS Amin Sid Ahmed Hassan Consultant AFTPS Narayan Sharma Consultant SASEI Farai Jena Consultant CGP Frdos Akasha Consultant AFMSD Rowena Won-Wai Chiu Young Professional AFCET Yashareg Dagne Program Assistant AFTPS Sheza El Hussein Team Assistant AFMSD Table 2 Project Preparation Timetable Activity Planned Actual IPP Approval August 2006 December 2006 FPP Approval November 2006 January 2007 Key Institutions Responsible for Preparing the Project: World Bank, Bank of Sudan, CGAP 70

71 ANNEX 14: DOCUMENTS IN THE PROJECT FILE SUDAN: Microfinance Development Facility Document Author Date 1. A Vision for the development and expansion of microfinance in Sudan UNICONS Aid Effectiveness And Microfinance: Lessons From IDSS 2005 Afghanistan 3. Bosnia and Herzegovina - Local Initiatives World Bank 2001 (Microfinance) Project II 4. Building a strong microfinance sector in Afghanistan World Bank CGAP Focus Note Series CGAP Guiding Principles on Regulation and Supervision of CGAP 2003 MFIs 7. Donor Guidelines on Good Practice Microfinance CGAP Sector Study UNICONS SMDF - Initial Project Proposal World Bank

72 ANNEX 15: COUNTRY AT A GLANCE SUDAN: Microfinance Development Facility 72