The World Bank Morocco Microfinance Development Project (P144500) REPORT NO.: RES38173 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE MICROFINANCE DEVELOPMENT PROJECT (GRANT NO. TF015084) {APPROVED ON JUNE 27, 2013} TO THE KINGDOM OF MOROCCO July 31, 2019 FINANCE, COMPETITIVENESS AND INNOVATION GLOBAL PRACTICE MIDDLE EAST AND NORTH AFRICA Regional Vice President: Ferid Belhaj Country Director: Marie Francoise Marie-Nelly Regional Practice Director: Najy Benhassine Practice Manager/Manager: Jean Pesme Task Team Leader: Peter McConaghy The World Bank Morocco Microfinance Development Project (P144500) ABBREVIATIONS AND ACRONYMS BAM Bank Al-Maghrib MENA Middle East and North Africa MoEF Ministry of Economy and Finance NFIS National Financial Inclusion Strategy PDO Project Development Objective PMU Project Management Unit UFA Universal Financial Access WBG World Bank Group The World Bank Morocco Microfinance Development Project (P144500) BASIC DATA Product Information Project ID Financing Instrument P144500 Investment Project Financing Original EA Category Current EA Category Approval Date Current Closing Date 27-Jun-2013 31-Jul-2019 Organizations Borrower Responsible Agency Kingdom of Morocco Ministry of Economy and Finance Financing (in USD Million) FIN_SUMM_PUB_TBL SUMMARY Total Project Cost 0 Total Financing 0 Financing Gap 0 DETAILS -NewFin3 Project Development Objective (PDO) Original PDO The project objective is to promote access to finance to low income households and micro and small enterprises through the promotion of a sustainable and inclusive microfinance sector. OPS_TABLE_PDO_CURRENTPDO The World Bank Morocco Microfinance Development Project (P144500) Summary Status of Financing Net TF Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-15084 25-Jul-2013 25-Jul-2013 25-Jul-2013 31-Jul-2019 4.90 2.59 2.31 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The purpose of this restructuring is to seek the Regional Vice President (RVP) approval to extend the closing date of the Morocco Microfinance Development Project (Grant no. TF015084) from July 31, 2019 to June 30, 2020. This will be the third extension of closing date for this project and the extension was approved by the Middle East and North Africa (MENA) Transition Fund Steering Committee on a no-objection basis on Friday June 28, 2019. The previous extension approved by the RVP on June 28, 2019 was for one month to allow for further discussion surrounding remaining activities of the grant. This has been completed. This restructuring responds to request letters received from the Director of Treasury at the Ministry of Economy and Finance (MoEF) dated June 4, 2019. 2. Project Context/Description. The Project Development Objective (PDO) is to promote access to finance for low income households and micro and small enterprises through the promotion of a sustainable and inclusive microfinance sector. The project in the amount of US$4.9 million became effective on July 25, 2013 and is implemented by the MoEF. It consists of three components:  Component I: Strengthening the institutional, legal, regulatory, tax and governance framework for microfinance (US$1.9 million). This component aims to: (a) prepare an action plan to assess and reinforce the capacity of the National Federation of Microcredit Associations of Morocco; and (b) support activities contributing to the strengthening of the legal, regulatory, tax and governance framework of the microfinance sector.  Component II: Strengthening the market infrastructure, product innovation and funding sources for microfinance (US$1.5 million). This component focuses on activities aimed at: (a) building common platforms improving the efficiency and effectiveness of microcredit associations; (b) building market infrastructure in support of microenterprises; and (c) promoting the strengthening and diversification of funding.  Component III: Integrating Microfinance into a national financial inclusion strategy1 (NFIS) (US$1.5 million). This component aims to: (a) conduct a cross-cutting stocktaking exercise of activities aimed at promoting 1 Activities are implemented across project partners including the Bank Al-Maghrib (Central Bank), the national microfinance association (fédération nationale des associations de microcrédit), the national training center for microcredit associations (centre mohammed VI de soutien à The World Bank Morocco Microfinance Development Project (P144500) financial inclusion; (b) finances the design and roll out of financial literacy programs for low income households and microenterprises; (c) finances studies and impact evaluations assessing the effectiveness of public policies aimed at promoting financial inclusion; and (d) develop a comprehensive national financial inclusion strategy, in consultation with all key public and private sector stakeholders, and develop an action plan to achieve the objectives of the strategy. 3. Implementation Progress. The Project has made credible progress on advancing financial inclusion in Morocco.  Component I activities have focused on concrete steps towards modernizing the legal, regulatory, and supervisory framework for microfinance.2 Currently, Morocco boasts some of the largest microfinance institutions registered as non-profit associations in the world. This legal status is sub-optimal from the perspective of funding sustainability, product diversification, and governance arrangements. In November 2018, the Government amended law No. 18-97 on microcredit authorizing an increase in the maximum lending size from MAD 50,000 to MAD 150,000. The application decrees were approved by the Council of Government on July 25, 2019. Closely linked, the Caisse Central de Garantie, Morocco’s national credit guarantee agency, extended its guarantee products to the microfinance sector. MoEF and the Central Bank (Bank Al-Maghrib, BAM) have set up a working group to approach second generation microfinance sector reforms including the creation of a microfinance bank licensing regime.  Component II of the Project has supported investments in common infrastructure and tools necessary to advance microfinance and broader digital economy outcomes in Morocco. The program supported the development of digital financial education tools targeted to vulnerable households and microentrepreneurs.3 To date these tools have been used to train 15,655 households and 4,141 microentrepreneurs working with partners across the microfinance sector including the National Foundation for Financial Education housed at BAM.4 Other activities include analytical work related to supply chain finance for rural entrepreneurs and support to make operational Morocco’s Observatory for Small and Medium-Sized Enterprises.  Component III of the grant has supported cross-cutting exercises and studies related to financial inclusion in the Kingdom of Morocco. This includes completing the 2017 Findex survey exercise. This survey assesses financial access and usage and boasts a sample size five times as large as the 2017 Findex update completed in other economies. It was the first time the Moroccan Authorities had agreed to participate in the exercise since the product’s inception in 2011 and to make the data public (available on the Findex website).5 The findings showed significantly larger financial inclusion gaps than originally anticipated and significant opportunities to bridge financial inclusion through digitizing payments and enhancing outreach to women. Component III also financed capacity building workshop and technical notes to support the development of Morocco’s NFIS. 4. Results Indicators: Two out of four PDO-level indicators have already been achieved ('total outstanding microcredit portfolio' and 'portfolio at risk'). A third indicator (number of final beneficiaries of microfinance institutions) is nearly met at 925,000 clients against an end-target of 1,100,000 beneficiaries, and the fourth indicator (percentage of adults la microfinance solidaire) and the national foundation for financial education (fondation nationale pour l’éducation financière). 2 Activities include, inter alia: regulatory review benchmarking against microfinance guidance as set by the Basel Committee on Banking Supervision; Sectoral studies on market potential, credit risk, and financial integrity risks; and technical workshops providing knowledge exchange with peer Central Banks. 3 Available here: http://www.cm6-microfinance.ma/fr/e-learning 4 Data draws from the World Bank Group Financial Capability Survey in Morocco. Link to report available here: http://www.worldbank.org/en/topic/financialinclusion/publication/2014-morocco-financial-inclusion-and-capability-survey 5 https://globalfindex.worldbank.org/ The World Bank Morocco Microfinance Development Project (P144500) with an account at a formal institution) is at 56%. At the intermediate indicator level, six of the seven indicators are met, a 50% increase in the number of intermediate indicators achieved since September 2017. Indicators related to financial literacy trainings have significantly exceeded expectations. 5. Justification for extension of closing date. The Government of Morocco (GoM) through its National Financial Inclusion Council presided by the Minister of Finance and the Governor of the Central Bank has: (i) approved a National Financial Sector Strategy (NFIS) on April 1, 2019; and (ii) put in place a steering committee for its implementation. The NFIS runs until April 2024 with ambitious targets towards formal and responsible financial access and usage of financial services for low-income Moroccans.6 It is the result of four years of consultation across public and private sector entities relevant to key financial inclusion in the Kingdom. The project activities are aligned with reforms related to microfinance, women’s access to finance, and digital payments supported by the Financial Inclusion and Digital Economy Development Policy Financing (IBRD US$700 million) (Report No. PGD66) that was approved by the World Bank Group’s Board of Executive Directors on February 19, 2019. 6. The authorities have requested an extension of the grant’s closing date to complete analytical and technical support on priority topics to achieve targets set out in the NFIS. Successful implementation of the NFIS will support achieving the PDO indicators measuring the percentage of adults having access to the formal financial system and the total number of borrowers in the microfinance sector.7 The extended closing date will also allow to complete Component I and II activities supporting core reforms. These include second generation microfinance sector reform, in addition to finalizing activities aimed at improving market infrastructure for the microfinance sector, including supporting the Kingdom’s Observatory for Small and Medium-Sized Enterprises. 7. Extending the closing date will also allow the authorities to make progress on their ambitious broader financial sector reform agenda. In addition to reforms related to financial inclusion supported by this grant, the authorities are advancing an ambitious reform agenda related to capital markets (new product introduction), financial infrastructure, and financial stability (resolution of troubled loans and new banking law). Since 2013, the World Bank has been supporting this reform agenda through development policy loans and investment project financings related to MSME development.8 Because of the comprehensive nature of this reform program, the human resources within the MoEF are often stretched, which translates into needing more time and technical support to complete activities. 8. Action Plan to Accelerate Implementation. The Project Management Unit (PMU), overseen by the Deputy Director of the Treasury Directorate at the MoEF (Direction du Trésor et des Finances extérieures; DTFE), has taken stock of current implementing arrangements with the objective of ensuring PMU capacities are aligned to the scope and complexity of the operation. Project delays are due to three factors: 1) insufficient human resources from MoEF dedicated to daily project management; 2) complex governance and implementation structures spanning four different institutions9; and 3) complex procurement procedures and heavy administration processes. The PMU has agreed, in consultation with WBG technical support, to adopt the following actions to address these three issues and efficiently implement remaining project activities. Area for Improvement Action 6 The strategy calls for increasing the number of adults with access to an account from 20% in 2018 to 50% in 2023 and 75% in 2030, with the emphasis on improving access points, developing digital platforms, financial resilience (savings, insurance) and SME financing. 7 Currently 29% of adults have access to the formal financial system (PDO indicator one) against an end target of 51%. The total number of microfinance borrowers (PDO indicator two) stands at 925,000 against an end target of 1,100,000. 8 This includes the US$650 million Capital Markets and SME Finance Development Policy Financing series (2013, 2017), the US$700 million Financial Inclusion and Digital Economy DPF (2019), and the US$50 million MSME Development Project (FY2013 – FY2018). 9 See footnote 1 for a full list of project partners. The World Bank Morocco Microfinance Development Project (P144500) Human resources dedicated to daily  Appoint a senior member of the DTFE team to act as project management; co-task manager to the grant  Recruit a junior consultant to support with the finalization of terms of reference and inter- institutional project coordination  WBG to appoint additional team member to support supervision and technical implementation support. This team member will be Rabat-based. Complex governance structure and  Place greater implementation resources on activities implementation arrangements; of strategic importance, namely: (i) second-stage microfinance sector reform; (ii) implementation of Morocco’s NFIS; and (iii) development of activities supporting financial technology.  Increase frequency of project steering committee meetings from bi-annually to once every three months.  Improve coordination with MoEF teams working on related technical topics (early stage innovation finance, credit infrastructure, digital payments) to leverage synergies. Procurement and administration  Organize and participate in August 2019 in a two-day processes; project workshop containing project management, technical, and fiduciary sessions. The objective of this training is to maximize technical impact of the final year of grant activities, update the work plan, and identify and resolve any administrative and procurement-related delays. This workshop will be organized in close coordination with the country management unit.  Work intensively with the World Bank procurement specialist to take advantage of flexibility in procurement policy for small recipient-executed grants.  Agree to weekly “agile/check-in” phone calls with TTL, relaunch of program tracker tool, and monthly progress reports. 9. In addition to the table above, efforts will be made by the PMU to improve coordination with MoEF teams working on related technical topics (early stage innovation finance, credit infrastructure, digital payments) to leverage synergies. An event will be planned in September 2019 highlight project results to date in coordination with a launch event for the NFIS. The World Bank Morocco Microfinance Development Project (P144500) 10. Project Performance. The team confirms that: i) the PDO remains highly relevant and achievable; ii) that the performance of the PMU has improved over the past 18 months and is satisfactory; iii) the ratings for both Progress towards achievement of PDO and Overall Implementation Progress are Moderately Satisfactory and expected to further improve given delivery schedule of currently active project activities; and iv) the Bank and the Recipient have agreed on actions that will be undertaken by the Recipient to complete the project (see paragraph 9). Disbursement as of May 2019 is US$2.6 million (or 53%). An additional US$ 962,000 has been committed for activities that are currently under implementation. 11. There are no outstanding fiduciary (financial management or procurement) issues. Interim financial reporting, audit reports, and procurement plans are up to date. The 2018 audit report was received on July 12, 2019 and found to be satisfactory to the Bank. II. DESCRIPTION OF PROPOSED CHANGES The restructuring seeks to extend the current closing date from July 31, 2019 to June 30, 2020. I. SUMMARY OF CHANGES Changed Not Changed Loan Closing Date(s) ✔ Implementation Schedule ✔ Implementing Agency ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Cancellations Proposed ✔ Additional Financing Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Change in Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ The World Bank Morocco Microfinance Development Project (P144500) Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline TF Status Closing Closing(s) Closing for Withdrawal Applications 30-Jun-2018, 31-Jan- TF-15084 31-Jan-2018 2018, 30-Jun-2019, 30-Jun-2020 30-Oct-2020 31-Jul-2019 Note to Task Teams: End of system generated content, document is editable from here.