TEMPLATES for PROJECT DOCUMENT PROCESSING
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 48101 – IQ
EMERGENCY PROJECT PAPER FOR A PROPOSED FINANCING GRANT
IN THE AMOUNT OF US$ 10 MILLION
TO THE central Bank OF IRAQ
FOR
THE EMERGENCY
BANKING SECTOR REFORM PROJECT
April 13, 2009
Finance and Private Sector Development
Social and Economic Development Department
Middle East and North Africa Region
|This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its |
|contents may not otherwise be disclosed without World Bank authorization. |
Currency Equivalents
(Exchange Rate Effective as of May 5, 2008)
|Currency Unit= |Iraqi Dinar (IQD) |
| US$1.00= |IQD 1,200 |
Government Fiscal Year
January 1–December 31
Abbreviation And Acronyms
|ALM |Asset and Liability Management |
|CAS |Country Assistance Strategy |
|CBI |Central Bank of Iraq |
|CFP |Country Financing Parameters |
|CQ |Consultants Qualifications |
|FMA |Fiduciary Monitoring Agent |
|FM |Financial Management |
|FSVC |Financial Services Volunteer Corps |
|FX |Foreign Exchange |
|FY |Fiscal Year |
|GDP |Gross Domestic Product |
|IMF |International Monetary Fund |
|IQD |Iraqi Dinar |
|IRFFI |International Reconstruction Fund Facility for Iraq |
|IRSB |Iraqi Strategic Review Board |
|ISN |Interim Strategy Note |
|IT |Information Technology |
|ITF |Iraq Trust Fund (administered by the World Bank) |
|JMAP |Joint Management Action Plan |
|MIM |Master Implementation Manual |
|MIS |Management of Information Systems |
|MOU |Memorandum of Understanding |
|NPLs |Non-performing Loans |
|OP |Operational Policies |
|PIM |Project Implementation Manual |
|PMT |Project Management Team |
|PMU |Project Management Unit |
|QBS |Quality Based Selection |
|QCBS |Quality and Cost-Based Selection |
|RFP |Request for Proposal |
|ROC |Restructuring Oversight Committee |
|RTGS |real time gross settlement |
|SBA |Stand-by Agreement |
|SOEs |State-owned Enterprises |
|SOE |Statement of Expenditure |
|US$ |United States Dollar |
|USAID |United States Agency for Development |
|Vice President: |Daniela Gressani |
|Country Director: |Hedi Larbi |
|Sector Director: |Ritva S. Reinikka |
|Sector Manager: |Zoubida Allaoua |
|Task Team Leader: |Sahar Nasr |
Emergency Banking Sector Reform Project
Table of Contents
Emergency Project Paper (EPP) Data Sheet
I. Introduction 1
II. Emergency Challenge 1
A. Country Context 1
B. Financial Sector Overview 2
C. Progress Made in Banking Sector Reform 4
D. Recovery Strategy 6
E. Rationale for Proposed Emergency Project 7
III. World Bank Response and Strategy 7
A. Collaboration with IMF and other Donors 7
B. Brief Description of Bank’s Strategy of Emergency Support 9
C. Eligibility for Processing under OP/BP 8.0 9
D. Consistency with Country Strategy 9
E. Project Development Objectives 10
F. Summary of Project Components 10
G. Expected Outcomes 13
IV. Appraisal of Project Activities 14
V. Implementation Arrangements and Financing Plan 16
A. Institutional Arrangements 16
B. Financial Management and Disbursement Arrangements 18
C. Procurement Arrangements 19
D. Supervision, Monitoring and Evaluation 20
VI. Project Risks and Mitigating Measures 21
A. Operational Risks 22
B. Governance Risks—State-owned Bank Restructuring and Recapitalization without Privatization 22
C. Political and Security Risks 23
D. Implementation Risks 23
VII. Terms and Conditions for Project Financing 24
A. Terms and Conditions for Project Financing 24
B. Conditions for Approval 24
Annexes
Annex 1: Detailed Description of Project Components 25
Annex 2: Results Framework and Monitoring 30
Annex 3: Summary of Estimated Project Cost 32
Annex 4: Financial Management and Disbursement Arrangements 33
Annex 5: Procurement Arrangements 39
Annex 6: Implementation and Monitoring Arrangements 44
Annex 7: Project Preparation and Appraisal Team Members 46
Annex 8: Statement of Loans, Credits and Grants 47
Annex 9: Framework for Institutional and Operational Restructuring of State-Owned Banks 48
Annex 10: Banking Regulation and Supervision Program 55
Annex 11: Donors’ Contribution 58
Annex 12: Iraq Banking Reform Strategy—Action Plan 64
Annex 13: Detailed Terms of Reference (TORs) for Project Activities 74
Annex 14: Country at Glance 93
MAP
|This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its |
|contents may not otherwise be disclosed without World Bank authorization. |
| |
|Acknowledgments |
| |
|The Iraq Emergency Banking Sector Reform Project was prepared by a core World Bank team comprising: Sahar Nasr, Task Team Leader |
|and Lead Financial Economist; Didier Debals, Senior Financial Sector Specialist; John Nasir, Senior Economist; Jorge Thompson |
|Araujo, Lead Economist; Mona El-Chami, Senior Financial Management Specialist; Abduljabbar Hasan Al Qathab, Senior Procurement |
|Specialist; Nikolai Soubbotin, Senior Counsel; Douglas Pearce, Senior Private Sector Development Specialist; Yahia Said, Senior |
|Public Sector Specialist; Knut Opsal, Senior Social Scientist; Nazaneen I. Ali, Procurement Specialist; Steve Wan, Operations |
|Analyst; Amira Zaky, Program Assistant; James Hanson, Dr. Salwa El-Antary, Laila Abdel Kader, and Noha Medhat, all consultants. |
| |
|The World Bank Group greatly appreciates the close collaboration with the Government of Iraq in the preparation of this operation.|
|Special gratitude goes to Dr. Azez Jafaar, Senior Advisor to the Minister of Finance; Dr. Ahmad Al Juboori, Deputy Governor of the|
|Central Bank of Iraq (CBI). The team also wishes to thank Dr. Waleed Aidi Abdulnabi, Assistant Deputy Governor of CBI; Dr. Huda |
|Hadi Salman, Assistant to the Iraqi Minister of Finance; Eng. Huda A. Malik, Director General, International Cooperation |
|Directorate, Iraqi Strategic Review Board (ISRB), Ministry of Planning and Development Cooperation; Dr. Majid Mohammed Hasan Al |
|Soori, Banking Restructuring Expert, CBI; Mr. Mohsen Abd Hasan, Assistant General Manager, El Rafeidein Bank; Mr. Kazem Mohamed |
|Nashour, Expert, Rasheed Bank; Mr. Abdel Hadi Hamid Farhan, General Manager, Board of Supreme Audit; Mr. Abdul Abbas Khalaf |
|Sultan, Head of Iraqi Board of Supreme Audit; Ms. Heiam Khalil, Deputy Head of Iraqi Board of Supreme Audit; and Ms. Rana Jabbar |
|Ali, Secretary, CBI, in addition to countless other individuals from the public and private sector who have contributed to the |
|preparation process. |
EMERGENCY OPERATION PROJECT PAPER DATA SHEET
Republic of Iraq
Emergency Banking Sector Reform
Middle East and North Africa
|Date: April 13, 2009 |Team Leader: Sahar Nasr |
|Country Director: Hedi Larbi |Sectors: Finance (100%) |
|Sector Director: Ritva S. Reinikka |Themes: Other financial and private sector development, Regulation and |
|Sector Manager: Zoubida Allaoua |Competition Policy, State Enterprise/Bank Restructuring and |
|Lending instrument: Emergency operation |Privatization |
|Type of Operation: |
|New Operation [X] Additional Financing [ ] Existing Financing (restructuring) [ ] |
|Financing type: Loan [ ] Credit [ ] IDA Grant [ ] Other [X] |
|Project ID(s): P113337 |Total Amount: US$ 10 million |
|Proposed terms: Trust Fund Grant |Expected implementation period: 20 months |
|Expected effectiveness date: April 2009 |Expected closing date: October 31, 2010[1] |
|Recipient: Central Bank of Iraq |Responsible agency: Central Bank of Iraq |
|Development Objective: |
|The Project Development Objective is to strengthen the supervisory framework for financial intermediation and to build capacity of financial |
|institutions to support implementation of Phase I of the Iraq Banking Reform Strategy. |
|Short Description: |
|The proposed project would support the Iraqi authorities in the implementation of Phase I of the “Iraq Banking Reform Strategy” (2008-2012) and its|
|Action Plan, focusing on four main components: (i) institutional and operational restructuring of the two state-owned commercial banks; |
|(ii) financial restructuring of the two state-owned commercial banks; (iii) strengthening the regulatory and supervisory functions of the Central |
|Bank of Iraq; and (iv) project management, monitoring and evaluation. |
|Financing Plan (US$m.) |
|Source |Local |Foreign |Total |
|Recipient | |US$ 10 million | |
|Total IBRD/IDA | | | |
|Trust Funds | | |US$ 10 million |
|Others | | | |
|Total | | |US$ 10 million |
|Estimated disbursements (Bank FY/US$m.) |
| |2009 |2010 |
|Total IBRD/IDA | | |
|Trust Funds |4.0 |6.0 |
|Does the emergency operation require any exceptions from Bank policies? |Yes [ ] No [X] |
|Have these been approved by Bank management? |Yes [ ] No [X] |
|Are there any critical risks rated “substantial” or “high”? |Yes [X] No [ ] |
|What safeguard policies are triggered, if any? |None |
|Significant, non-standard conditions, if any: None |
Introduction
This Project Paper seeks the approval of the Vice President of the Middle East and North Africa Region to provide a grant in an amount of US$ 10 million to the Central Bank of Iraq (CBI) for an Emergency Banking Sector Reform Project. The objective of the Project is to strengthen the supervisory framework for financial intermediation and to build capacity of financial institutions to support implementation of Phase I of the Iraq Banking Reform Strategy.[2]
Specifically, the proposed operation will focus on four main components: (i) institutional and operational restructuring of the two main state-owned commercial banks (Rasheed Bank and Rafidain Bank); (ii) financial restructuring of the two main state-owned commercial banks; (iii) strengthening of the regulatory and supervisory functions of CBI; and (iv) project management, monitoring and evaluation. Overall, this operation would assist Iraq in implementing Phase I of their program, covering the period from 2009 to 2010. It will thereby foster more efficient financial intermediation, resource mobilization and risk management, and, in the medium-term, it will permit an increase in private participation in the provision of financial services.
The project is financed through the Iraq Trust Fund (ITF), which is administered by the World Bank. The grant will be for CBI—the recipient and implementing agency. The Bank is also working closely with the Ministry of Finance, the Board of Supreme Audit (BSA), the two state-owned commercial banks, the Executive Restructuring Committee, and the Restructuring Oversight Committee (ROC). There has been strong collaboration with development partners, namely, the International Monetary Fund (IMF), the European Union (EU), the US Department of Treasury, and the Financial Services Volunteer Corps (FSVC) funded by the US Department of State-Near Eastern Affairs. In addition to the regular coordination, monthly donors meetings are being held to ensure synergy and delivery of quality services to the Iraqi counterparts. Donors have been instrumental in moving the restructuring process forward.
Emergency Challenge
1 Country Context
The Republic of Iraq—with an area of about 437,000 square kilometers with an estimated population of 27 million in 2006—has been adversely impacted by internal and external shocks. A series of wars, international sanctions and misdirected economic policies have left the country’s economy and especially its financial sector weak and underdeveloped. The last two decades have also witnessed a worsening in a number of human development indicators. Iraq’s economy remains dominated by the oil sector, which provides about 95 percent of foreign exchange (FX) earnings. From 2003 to 2007, violence in Iraq has impeded economic recovery and reconstruction. Although significant risks remain, recent political and security developments have improved Iraq’s economic outlook for the medium term. According to recent reports total security incidents have fallen to their lowest level in over four years. Nonetheless, the security situation remains fragile in certain areas. A poll conducted in March 2008 shows that 62 percent of those polled say security in their own area is good—up from 43 percent in 2007—but half of all Iraqis still rate security as the biggest problem for the country overall.
Macroeconomic performance has improved considerably since 2007. Monetary policies have been tight and sound fiscal policy and under-spending of the capital budget have kept the fiscal balance in check. As a result, inflation was brought down to 5 percent by end 2007, from 65 percent at end-2006. The overall consumer price level in 2008 is projected at 12 percent, reflecting inflationary pressures stemming from increasing food and fuel prices in the earlier part of the year.
Real gross domestic product (GDP) growth is projected to increase to almost 10 percent in 2008, up from only about 1.5 percent in 2007, driven largely by the ongoing expansion of oil output. Provided the recent reduction in violence takes hold, crude oil production is expected to reach on average at least 2.3 mbpd and exports 1.8 mbpd, both higher than initially targeted. Although agricultural output in 2008 is likely to be affected by drought, other non-oil economic activities are expected to recover significantly. CBI has maintained a prudent monetary stance in order to stave off inflationary pressures.
Iraq has been hit hard by the recent decline in oil prices. After reaching a substantial fiscal surplus in 2008, the Iraqi government had to readjust downward the 2009 budget in order to reflect falling oil prices. The 2009 budget was built on a budget oil price of US$ 50 per barrel, with total revenues of about US$ 42.5 billion in 2009, down from US$ 70.1 billion in 2008. Aggregate fiscal expenditures for 2009 are projected at US$ 59.5 billion, of which US$ 12.2 billion (or about 20.5 percent of total expenditures) represent total investment spending. The preliminary projected deficit is in the order of US$ 17 billion. Overall growth is still forecast to be about 8 percent and inflation should be contained at 10 percent in 2009. The deterioration in Iraq’s fiscal situation has increased the interest by the Iraqi authorities in finding alternative sources of financing, including non-concessional funding. Under the new ISN, an IBRD envelope of US$ 500 million can be committed for investment projects over the next two and a half years.
2 Financial Sector Overview
The Iraqi financial sector is dominated by the banking system. As of June 2008, the banking system comprised 29 banks, of which two are state-owned commercial banks, 23 are private banks, and 4 small state-owned specialized banks. Capital markets, besides government debt instruments, are almost nonexistent. Iraq had a nascent stock exchange but it was closed after the privatization program ended, following the imposition of sanctions, and it has recently resumed operations. However, trading on the Iraq Stock Exchange has remained thin. State-owned insurance companies, which had been largely inactive during the previous regime, are small compared to the size of the economy. Nevertheless, the financial system in Iraq has considerable potential for further development and growth.
The banking system in Iraq is dominated by state-owned banks that account for more than 90 percent of the banking system’s total assets. [3] Their consolidated assets total about US$ 26 billion (equivalent to 51 percent of GDP). The system has a total network of 550 branches, of which 450 are for state-owned banks. The state-owned Rafidain Bank and Rasheed Bank are the largest commercial state-owned banks in Iraq (accounting for 70 percent of the system’s assets), and the only ones with a national network of branches (147 and 142 branches respectively). In addition to these two large state-owned banks, there are four small state-owned specialized banks, namely Agriculture Co-operative Bank, Industrial Bank of Iraq, Real Estate Bank of Iraq, and the Ishtiraqi (Socialist) Bank—the latter was recently renamed Iraq Bank and will soon be folded into Rafidain Bank. The state-owned specialized banks have 69 branches in total, and have about 2,000 employees in aggregate.
Most of the private banks are small and their activities are limited to provision of transactions services to a select clientele. Their operation began in 1993, when private banks with nationwide branches were established in Iraq. Despite the proliferation of private banks, their contribution to the banking sector remains minor. There are also several foreign banks in Iraq, and some have invested in Iraqi private banks that—once the security situation settles down—will bring new expertise and competition into the system.[4]
Financial intermediation in Iraq is weak. Although the banking sector is the main component of the Iraqi financial system, it offers few credit facilities, despite the fact that many of the branches have resumed operations after the 2003 turmoil. The credit culture is poor with very little extension of credit to the private sector. Total bank lending to the private sector is equivalent to only 3.6 percent of GDP in December 2008 (Table 1). Bank lending is heavily skewed towards government securities. Very few banks offer loans with more than one year maturity and most banks lack the expertise to offer appropriate credit facilities or assess risks. Compared to some other countries in the region the deposit base and loan portfolio of Iraqi banks is small relative to GDP.
Table 1: Rafidain and Rasheed Banks: Selected Indicators (in billion Iraqi Dinar)
| |Rafidain Bank |Rasheed Bank |
|Year founded |1,941 |1,988 |
|Number of branches |147 |142 |
| Of which in Baghdad | |69 |
|Loans and Advances |402 |219 |
| Of which non-performing |209 |139 |
|Assets on balance sheet |21,295 |6,019 |
|Liabilities on balance sheet |20,934 |5,222 |
|Equity |361 |797 |
|Estimated capital shortfall after risk and valuation adjustments |15,370 |359 |
Source: E&Y Financial and Operational Audits (2008).
Correspondingly, the asset structure of state-owned commercial banks is heavily tilted toward government securities and involves little credit to the corporate sector, be it public or private.[5] Government in turn financed itself in issuing debt in the form of Treasury Bills subscribed by the banking sector—mostly Rafidain and Rasheed, but also the central bank, using the high reserve requirement. As a result, government securities directly account for a sizeable share of the two state-owned commercial bank’s assets, and indirectly, through their reserves in the central bank. This process means that the government effectively acts as intermediary between banks and state-owned enterprises (SOEs). At the same time, SOEs placed their deposits with state-owned commercial banks. Given the limited financing extended by banks to the SOEs sector, the latter appears to be, in aggregate, a net creditor of the state-owned banks, though some enterprises are, of course, net borrowers.
Despite the political situation, the state-owned commercial banks are trusted names and continue to increase deposits in terms of volume and number of depositors. They are also the backbone of the payments system and are the only instrument the government has to make social security and other nationwide payments. While, the state-owned banks have wide name recognition, a reasonable level of public trust and are fairly liquid, they need a clear strategy and an effective governance and managerial structure for their activities to make a contribution to development. This would require the adoption of a comprehensive reform strategy for the banking sector.
The Government of Iraq must move quickly to reform the financial sector, particularly the state-owned commercial banks, which are the largest component. These two banks require assistance to strengthen corporate governance, establish a strong management structure, develop a clear business strategy, and improve skills in the critical areas of payments, risk management, and controls. They also require an overhaul of policies and practices to address portfolio, and operational problems, so as to put the banks on the road towards satisfactory and sustainable performance. They are encumbered with long overdue non-performing loans (NPLs) and have weak operational capacity, outdated systems and ineffective controls. The state-owned banks must be reformed to enable them to better serve the market; operate in a more competitive market as new entrants expand, and enhance their franchise and market value should their ownership structure be opened up to private interests. Only then can these banks operate and grow in what, once peace is restored, is likely to be an increasingly open and competitive environment.
3 Progress Made in Banking Sector Reform
Banking sector reform is a key item on the Iraqi government’s reform agenda and a key component of the Stand-By Arrangement (SBA) with the IMF. The Deputy Prime Minister in February 27, 2008, announced that 2008 is the “Banking Reform Year”. Over the past years, the Government of Iraq has been focusing on reforming the banking sector with a special emphasis on the state-owned banks and CBI. These efforts have been supported by various donors. In February 2009, the Government of Iraq endorsed a comprehensive two-phase Banking Reform Strategy—Action Plan for the period 2008-2012 with the World Bank support.[6]
The Iraqi authorities have made considerable progress over the past years in starting the reform process of the banking sector. Various steps were taken to establish a conducive institutional environment. On December 2006, a Memorandum of Understanding (MOU) for Rafidain Bank and Rasheed Bank was signed between CBI and the Ministry of Finance regarding the steps for and sequencing of operational and financial restructuring.[7] A Restructuring Oversight Committee consisting of the Minister of Finance, the Governor of CBI, and the Chairman of the Board of Supreme Audit has been established to ensure that restructuring is executed in accordance with the MOU. The Restructuring Oversight Committee oversees the work of the Executive Steering Committee, which is in charge of the implementation of the restructuring program.[8] The latter committee is chaired by the Deputy Governor of CBI.
To ensure effective implementation, more than ten Restructuring Working Committees have been established within the two state-owned banks. Each of these working committees is dedicated to effective implementation of different components of the reform program. They include committees focusing on developing business plans; improving policies and procedures; drafting job descriptions; institutional reorganization; human resources; accounting and financial management (FM); IT; and; branch administration. In addition, CBI has set up a task force to develop a comprehensive set of prudential regulations for commercial banks.
Independent financial and operational audits of the two state-owned commercial banks were conducted in early 2008 and completed in July 2008 by an international audit firm—Ernst and Young (E&Y) according to terms of reference (TOR) which the World Bank contributed to.[9] Although the audits were affected by the loss of information on branch loans and credit files during the war, and by limited access to documentation from branches outside Baghdad; they still provide adequate basis for developing restructuring action plans for both banks.
There were several key operational shortcomings the financial and operational audits revealed, including: (i) operational rules and regulations are not clear for all employees, and reporting requirements and responsibilities are not clearly allocated; (ii) information technology and other financial infrastructure is inadequate and outdated and so are risk management models; (iii) product offering is limited; and (iv) the internal audit function’s methodology follows a compliance-based and not a risk-based approach.
The World Bank has provided technical support and guidance to the Iraqi authorities for the development of a comprehensive, action-specific Banking Reform Strategy (2008-2012), which was endorsed by the Iraqi Authorities in February 2009.[10] The strategy includes a detailed Action Plan, and is divided into two phases, identifying key starting points for various activities with clear timeline and benchmarks. The following are the seven key priorities of this plan: (i) organization structure; (ii) capacity building; (iii) finance and accounting systems; (iv) IT infrastructure; (v) risk management; (vi) internal audit and compliance with laws and regulations; and (vii) strengthening the banking supervisory and regulatory authority. The Action Plan outlining the strategy to implement reforms in these seven key areas (contained in detail in Annex 12) was drafted and will be implemented by the Government of Iraq, ensuring ownership of the reform program.
There have also been some developments in the implementation of the banking reform program. Considerable progress has been witnessed in the institutional, operational and financial restructuring of the two state-owned banks—Rasheed Bank and Rafidain Bank, through capacity building and training of staff. Moreover, a significant number of the prudential regulations required for banks have been prepared by CBI—including key regulations on licensing, capital adequacy, credit risk, large exposures, and liquidity—while the remaining regulations are expected to be completed soon. The introduction of several reforms and updated technology at CBI has allowed banks to conduct business on a more efficient and transparent basis.
A Financial Restructuring Committee has been formed to address the problem of NPLs. Decisions have been made with regard to the resolution of many NPLs, especially those of SOEs. It is worth noting that recapitalization needs arising from NPLs are relatively modest despite the high share of NPLs (56 percent in value terms), because both banks’ loan portfolios are very small. The government, represented by the Ministry of Finance is committed to address these issues.
The government has insisted that the banks sort out and reconcile assets and liability accounts, before providing any new capital. The state-owned banks have already begun the verification of their obligations toward foreign creditors under the Paris Club and discussion of other, related issues with the Ministry of Finance, and are making appropriate accounting adjustments to their books. Such adjustments will be verified for accuracy by qualified, independent, external auditors. The necessary recapitalization will then go hand-in-hand with the progress on the operational restructuring.
Modernization of the IT infrastructure of the state-owned banks is a crucial component of the financial sector reform action plan. The Ministry of Finance selected the contractors to modernize the IT architecture in 2008. A contract was signed between Rafidain Bank and the B-Plan Company to implement “Core Banking System” that would automate bank operations. Rasheed Bank is in the process of finalizing the selection of a vendor. The mandate of the selected firms is to undertake gap analysis of the IT environment of the two banks with the objective of developing a comprehensive technology modernization strategy, prioritized development plan, an optimizing/standardizing application systems plan, and implementation of data warehousing capability plan.
The legal and regulatory framework is also being modified to spur the development of an open and competitive financial sector. This work includes the review and overhaul of Iraqi banking laws—with the goal of adjusting the central bank and the commercial bank laws to the new market led conditions. One expected outcome is to put the private and public sector banks on a level playing field. The new unified Iraq Commercial Banking Law of 2004 sought to provide a framework conducive to an open, market-based and well-regulated domestic banking system. It addresses the provisions for bank licensing while defining the rules on entry and exit (eliminating for instance existing requirements for majority Iraqi control of bank assets). It also suggested prudential guidelines related to capital adequacy and exposure limits to borrowers as a share of equity.
The foundations of banking supervision, which involve both on-site and off-site supervision, have been improved over the past two years. Technical assistance (TA) provided by IMF has encouraged CBI to move from a rule-based to a risk-based system. The framework for and legislation on banking supervision are being modernized with a view to building a strong supervisory system; this is critical to ensure that the public has confidence in the financial system, and that banking activities are conducted with proper oversight from financial authorities. To this end, the approach to the development of the banking supervisory function has been based on an institutional development plan, identifying the critical areas for improvement, along with the expertise, resources, and training programs needed to build the required skills.
4 Recovery Strategy
One of Iraq’s main challenges is to build political legitimacy and credible, inclusive institutions needed for stability and sustainable economic prosperity. In this context, restoring and improving basic services are essential for improving the quality of life, increasing government credibility, and restoring stability. This would be achieved through development of institutions to regulate the market and business environment to encourage private investment, and broaden access to financial intermediation. International experience with reconstruction in conflict-affected countries has shown that a sound and efficient financial sector is essential for economic growth and development.
The United Nations/World Bank Joint Needs Assessment of October 2003 identified support for Iraq’s transition from a centralized, state-dominated economic system to an open, market-based economy as one of the key development objectives for donor support. Iraq enjoys two strong advantages as it attempts this transition: its natural endowment of oil resources, and its human capital, which reflects a long tradition of education, scientific and commercial skills, and entrepreneurial spirit. As the security situation improves, the development of sound macroeconomic policies and a business environment conducive to private investment is key to spur growth and create jobs. A well functioning financial sector is critical to supporting this growth.
The International Reconstruction Fund Facility for Iraq (IRFFI) was endorsed at the 2003 Madrid Conference, to help donors channel their resources and coordinate their support for reconstruction and development activities in Iraq, and to ensure that activities financed by IRFFI are aligned with Iraq’s priority program. IRFFI encompasses two trust funds: the World Bank Iraq Trust Fund (ITF), administered by the World Bank, and the United Nations Development Group Iraq Trust Fund, administered by the United Nations Development Program (UNDP). As of end 2008, 25 donors have committed about US$ 1.85 billion to IRFFI, and deposited US$ 494.4 million to the ITF. The ITF finances 15 active grants, valued at US$ 420.3 million. The Banking Sector Reform Project, amounting to US$ 10 million, will be the nineteenth grant financed by the ITF.
5 Rationale for Proposed Emergency Project
Enhancing the performance of the banking system, and improving its capacity to provide sound and efficient financial services will make a critical contribution to Iraq’s economic growth and prosperity as well as poverty reduction. A sound banking system is of great importance to economic growth and macroeconomic stability, as numerous studies and empirical evidence have shown. Moreover, there is a large body of research findings within and outside the World Bank showing that financial sector reforms are demonstrably linked to growth and poverty reduction. For these reasons, building sound, efficient and inclusive financial systems that work for all members of society is central to the growth and poverty reduction agenda.
The proposed operation aims at supporting the Iraqi government in building such a sound and efficient banking system, able in the medium-term to provide efficient financial service competitively.[11] This in turn would ensure efficient mobilization of funds and allocating them to the most productive investments—promoting private sector development. Of primary importance is to build the capacity of the two largest state-owned commercial banks—Rafidain Bank and Rasheed Bank—with their huge branch network, accounting for more than 70 percent of the banking system,[12] play an effective role in financial intermediation, able to provide the resources needed for Iraq’s growth and offer good deposit and payment systems for the business and household sector. This would in a later stage allow private banks to also contribute to the financing of Iraq’s development. Underpinning the modernization of the state-owned banks would be the strengthening of the regulatory and supervisory capacity of the central bank.
World Bank Response and Strategy
Bank restructuring is a politically difficult and long term task, which needs sustained Bank support. Through this project, the World Bank has been playing a key role in the reform dialogue. The World Bank has worked closely with the Iraqi counterparts; CBI, Ministry of Finance, Board of Supreme Audit, and the two state-owned commercial banks in developing the comprehensive “Iraq Banking Reform Strategy,” endorsed by the Iraqi authorities in February 2009. The Bank is also engaged in ongoing discussions with the Executive Steering Committee, and the Restructuring Oversight Committee (ROC) regarding the implementation of the strategy.
Collaboration with IMF and other Donors
The Bank has been coordinating all efforts in partnership with all development partners actively involved in the banking reform in Iraq, namely, IMF, EU, US Treasury, and Financial Services Volunteer Corps. Over the past five years, donors have been participating in seminars and workshops on banking restructuring, with the objective of supporting CBI, the Ministry of Finance, and the state-owned banks. This Banking Sector Reform Project will provide technical and financial assistance to support the restructuring process. This project will build on the previous efforts undertaken and at the same time complement work being undertaken by other development partners. The World Bank project will be focused on the two state-owned commercial banks to help them develop into healthy financial institutions following modern banking practices, and on upgrading CBI’s regulatory and supervisory capacity. In that regard, there are various activities that are cross cutting among donors, such as the institutional, operational and financial restructuring where joint activities (capacity building workshops and training-of trainers) would be organized jointly.
The donor community has been playing a vital and active role over the past few years in restructuring the banking sector. There has been good collaboration between the World Bank and the IMF and other donors in Iraq in banking sector reform, namely, EU, US Treasury, and Financial Services Volunteer Corps (FSVC). The donor community has been playing a vital and active role over the past few years in restructuring the banking sector. The World Bank has been coordinating donors’ initiatives to avoid overlap, ensure complementarity, and address key issues on a timely and priority basis. To this end, an ‘Iraq Banking Reform Donors Group’, chaired by the World Bank has been formed to coordinate efforts related to both technical and financial support provided to the Government of Iraq in the area of banking reform (see Annex 11). Periodic meetings are being held to ensure synergy in the implementation of the reform program.
The IMF has taken the lead in monetary activities, through the provision of TA with the objective of rebuilding the capacity of CBI, and other government bodies with a view to supporting financial and monetary stability. IMF provided considerable assistance in: (i) the drafting of the central bank, payment and banking laws; (ii) supporting the introduction of a new currency and the implementation of the real time gross settlement (RTGS) system; (iii) improving accounting and financial reporting; and (iv) developing a banking regulatory and supervisory system, in line with best international standards and practices. The medium-term objectives for TA in the monetary and financial sector will be to support the implementation of the program under the SBA, particularly the restructuring of the state-owned banks, and to bolster CBI’s capacities with regard to core central bank functions. However, it is unlikely that the IMF will be able to provide as much assistance over the coming two years as it had during the past two years.
Among the bilateral donors working closely with the Bank is the US. The work undertaken by the U.S. Department of Treasury mainly focused on the financial restructure and completion of the financial and operational audits of two state-owned commercial banks—Rafidain Bank and Rasheed Bank; in addition to the development of a draft strategic and operational restructuring plan in accordance with the audit recommendations. The U.S. Treasury had two resident advisors in Iraq since 2007 and expects to have four full time resident advisors before mid 2009. The U.S. Treasury also provided assistance in the following areas: (i) organization structure; (ii) IT; (iii) human resources, assisting in developing new salary and pay for performance program; and (iv) reforming the existing policy and procedures. The future plan—over the coming two years—will focus on providing assistance in the following areas: (i) strategic planning, formulation of business plans and budgets; (ii) job descriptions, policy and procedures of HR, human resources activities, and refining a new table of organizational structure; (iii) accounting systems, and information technology; (iv) operations and branch administration; and (v) credit and collection.
In addition, the Financial Services Volunteer Corps will be providing technical assistance to CBI during 2009 and the most of 2010. Financial Services Volunteer Corps’ work plan includes advice to: (i) strengthen the internal operations of the central bank, including work to strengthen the banking supervision department; (ii) strengthen the management of state reserves; (iii) enable the CBI to broaden its network of counterparty financial relationships and; (iv) assist the CBI formulate a plan for addressing outstanding financial claims and judgments against it. FSVC has offered to assist in the restructuring of Rashid Bank and Rafidain Bank, but recognizes that other donors are either already working on that, or may be working on that at some time in the future. Similarly, FSVC has been asked by the Governor for assistance on monetary policy issues, and is willing to provide such advice provided that it does not lead to duplication.
Brief Description of Bank’s Strategy of Emergency Support
The Bank has prepared a third ISN for Iraq, which was presented to the Board of Executive Directors in March 2009. The ISN acknowledges Iraq’s unique circumstances and emphasizes the importance of providing an appropriate blend of financial assistance and knowledge support through analytical and advisory services.[13] Activities under this ISN would fall under at least one of three thematic areas of engagement: (i) continuing to support ongoing reconstruction and socio-economic recovery; (ii) improving governance and the management of public resources, including human, natural and financial; and (iii) supporting policies and institutions that promote broad-based, private-sector-led growth, with the goal of revitalizing the private sector and facilitating job creation.
While this proposed project will support the financial and operational restructuring of the two state-owned banks, its ultimate goal is to support private-sector-led growth through broader access to finance and financial services, in view of the importance of these two banks in Iraq’s financial sector. Therefore, the project is expected to directly contribute to the third thematic area, although its support to improving the payments system and strengthening the financial system will also contribute to ongoing socio-economic recovery efforts (as per the first thematic area) as well as public resource management improvements (as per the second thematic area).
Eligibility for Processing under OP/BP 8.0
The Government of Iraq has requested that the proposed project be financed from the ITF. The Second ISN for Iraq stipulates the use of OP/BP 8.50 for all ITF-funded projects. OP/BP 8.00 (Rapid Response to Crisis and Emergencies), issued March 2007, now replaces OP/BP 8.50. The proposed Banking Sector Reform Project is fully consistent with OP 8.00 criteria.
Thus, the proposed project will clearly address the following priorities (as defined in Paragraph 4 of OP 8.00): (i) restoring the means of production and economic activities; (ii) preserving or restoring essential services; (iii) establishing and/or preserving human, institutional, and/or social capital, including economic reintegration of vulnerable groups; and (iv) assisting with the crucial initial stages of capacity building for longer-term reconstruction, disaster management, and risk reduction. The design of the project is benefiting from the flexibility allowed under OP/BP 8.00 to support more effective and rapid implementation, particularly with regards to procurement methods to be used.
Consistency with Country Strategy
The proposed project is fully consistent with the Bank’s engagement strategy in Iraq, which includes state-owned bank restructuring as a priority area. The Iraqi National Development Strategy and the International Compact with Iraq also give priority to bank restructuring. The Joint Management Action Plan (JMAP) for Iraq also indicates that while the Bank and IMF will cooperate closely on the financial sector, the Bank will take the lead in supporting the process of restructuring state-owned banks upon completion of the SBA. The World Bank is making efforts to support policies and institutions that promote longer-term broad-based, private-sector-led growth. This operation intends to contribute to the outcomes under this area of the Bank’s strategy moving forward. The operation would help alleviate one of the impediments to a more efficient functioning of the financial system, and its ability, in the medium-term, to improve financial intermediation in support of real sector growth.
Project Development Objectives
The Project Development Objective is to strengthen the supervisory framework for financial intermediation and to build capacity of financial institutions to support implementation of Phase I of the Iraq Banking Reform Strategy.[14]
Summary of Project Components
In agreement with the Iraqi authorities, the proposed project would support the Iraqi authorities in implementing Phase I of their Banking Reform Strategy (2008-2012) and its Action Plan. Table 2 outlines the various phases of the reform program, indicating what would be accomplished every year throughout the coming four years. This project comprises four main components: (i) assist in the institutional and operational restructuring of the two state-owned commercial banks (US$ 5 million); (ii) provide TA for the financial restructuring of the two state-owned commercial banks (US$ 1.0 million); (iii) build capacity at CBI to strengthen the regulatory and supervisory functions of CBI (US$ 2.75 million); and (iv) project management, monitoring and evaluation (US$ 0.75 million).[15] A detailed description of the project components is outlined in Annex 1, cost allocations in Annex 3, and TORs for the specific activities in Annex 13.
i. Institutional and Operational Restructuring of the two State-owned Commercial Banks
Under institutional and operational restructuring, this project would provide capacity building and training to the two state-owned banks staff, covering the following components of Phase I of the Banking Reform Strategy: (i) reorganizing the organizational structure and implementing the changes; (ii) improving HR processes;[16] (iii) conducting risk management, both credit and non-credit risk management; and (iv) IT infrastructure, covering all operational aspects, security system of information and management of information systems. A detailed framework on institutional and operational restructuring of state-owned banks is provided in Annex 9.
As far as institutional and operational restructuring is concerned, the World Bank project will coordinate training with all stakeholders (IMF, US Treasury, Financial Services Volunteer Corps, and other private companies involved in banking sector reform). Various workshops will be held in coordination with other donors for the capacity building of the management and staff of the two-state-owned banks, along with staff from the Ministry of Finance (owner), CBI (regulator), and the Board of Supreme Audit. These workshops will provide the participants the best practice in terms of organizational structure of commercial banks, helping them in establishing new units, such as Risk Management Units, and in identifying the required caliber. This would also entail sharing with them means for improving HR processes.
Training on risk management will include support for establishment of a well-functioning, adequately managed and completely staffed risk management organization in line with international and regional best practices; changes in the organizational structure, especially the set up of a risk control department; and development of manuals for risk management. This will also entail amendments to existing credit approval procedures on the basis of accepted best practices; improved measuring and monitoring capabilities that will enable the banks to produce comprehensive and accurate reports on a bank-wide basis, including the ability to identify “single obligors” and aggregate such exposures; and training in human resource management.
In addition, capacity building will also involve actual training of the banks’ branch staff in handling basic deposit-taking transactions, using computers, and loan officers’ capacity to assess credit risks. Unless training can be held in Iraq, the training will focus initially on a cadre of selected bank staff outside Iraq to act as trainers of the staff (“training of the trainers”) in Iraq. Following the training of these cadres, training programs will be set up in Iraq, if possible linked by video conference to the original trainers of the trainers so they can continue to provide just in time support. This is likely to entail travel to a centralized training center in Iraq. Indicators of performance for the grant will be the numbers of staff trained and growth of loans and deposits.
Table 2: Phasing of the Iraq Banking Sector Reform Project*
|Phase I** |Phase II |
|First Year |Second Year |Third Year |Fourth Year |
|2009 |2010 |2011 |2012 |
|Organizational Structure |Capacity Building |Organizational Structure |Capacity Building |
| | | | |
|Business unit organization |Training of staff based on a |Governance, control and support |Improve HR process |
| |detailed training plan |units | |
|Finance and Accounting |Finance and Accounting |Finance and Accounting |Finance and Accounting |
| | | | |
|Restructuring the balance sheets |Put in place an accounting system |Capital adequacy |Cost recovery pricing of financial|
| | |Comprehensive reporting system of |products |
| | |financial results |Budgeting, planning and |
| | | |performance management |
|IT Infrastructure |IT Infrastructure |Internal Audit and Compliance |Internal Audit and Compliance |
| | | | |
|Connectivity to branches and CBI |IT platform covering all |Process, audit framework, |Internal audit and compliance |
| |operational aspects |methodology, and effectiveness of | |
| |Security system of information |internal audit | |
| |Management of information systems | | |
|Risk Management |Risk Management |Risk Management |Risk Management |
| | | | |
|Credit risk management |Credit risk management |Non credit risk management |Non credit risk management |
|Strengthening the Banking |Strengthening the Banking |Strengthening the Banking |Strengthening the Banking |
|Supervision and Regulatory |Supervision and Regulatory |Supervision and Regulatory |Supervision and Regulatory |
|Authority |Authority |Authority |Authority |
| | | | |
|Review of banking supervision |Update and enforce a set of |Make new recruitments and develop |Make new recruitments and develop |
|process |regulations in line with |training |training |
| |international standards | | |
* Based on the Iraq Banking Reform Strategy—Action Plan (2008-2012).
**This World Bank Banking Sector Reform project supports the first phase of the Government of Iraq Banking Reform Strategy, covering the period of 2009-2010. Additional funding, such as local government funding and donors’ financial support, will be considered to support the second phase, covering the period of 2011-2012.
This training is critical to ensure that the basic staff can handle deposits and start making sound loans, thereby attracting depositors and beginning to finance private sector growth. Specifically, the grant will help the banks' staff take deposits and make loans efficiently, and, eventually allow transactions across bank branches using an interconnection of branches. The interconnection of the branches will make possible for bank managers in the banks' headquarters to monitor and limit risks, using the training provided by the IMF as well as the training under the grant. At the moment, training has focused on improving the functions of Rafidain Bank’s head and foreign offices but will need to be extended to staff in the rest of Rafidain Bank and in Rasheed Bank.
The project will fund TA to help develop the operational capacity of the two state-owned commercial banks based on the findings of the audits, the Action Plan, and the optimum use of the on-going automation. The next steps will be to help the two institutions adopt modern banking practices and systems. Adherence to the restructuring and business plan would remain under close supervision of CBI throughout. The plan will entail defining, in light of country circumstances, the mandate of the state-owned commercial banks with an initial focus on mobilization of savings and payments. Thus, the banks’ activities are likely to be narrowly limited on deposit taking and payment transactions. As their capacity increases, they will move into other core banking operations including the extension of credit to the corporate and household sectors.
ii. Financial Restructuring of the two State-owned Commercial Banks
This component would focus on capacity building and training in the following areas: (i) finance and accounting—restructuring the balance sheets of these two banks and developing the accounting systems; and (ii) internal audit and compliance, focusing on the process, audit framework, methodology, and effectiveness of internal audit. The project will support in organizing workshops and provide technical assistance on the best means of addressing the problem of NPLs by sharing the experience of other developing and developed countries in cleaning up the balance sheets of their state-owned banks, and will also guide the Iraq authorities in choosing the most suitable approach to the Iraqi circumstances. In addition, the project will also ensure that the new accounting systems lead to balance sheets that reflect net asset values and the banks' financial position, through capacity building in the area of finance, accounting, internal audit and compliance. For details see Annex 12, Section VI
Following the recommendations of the audits of Rasheed Bank and Rafidain Bank, the Bank will assist, and advise the government in financial restructuring, and in choosing the best way to reduce NPLs and foreign debt. Financial restructuring would help state-owned banks to restore their ability to comply with minimum capital adequacy and other prudential requirements of CBI, and to restore their full credibility with their business counterparts, but will depend on the government’s activity to a large degree. Audit recommendations inter-alia regarding build-up in provision levels at state-owned commercial banks need to be implemented. The Bank will monitor the process of recapitalization with the evolution of the capital adequacy ratio.
The financial restructuring process would entail two steps: First, the government’s cleaning up of the institutions’ foreign liabilities (taking over the borrowings made at the behests of the former government) and SOE’s NPLs and second, meeting the needed regulatory capital requirements. This process would involve the government’s resolution of the public enterprise NPLs; and possibly government funding to replace part of the non-recoverable loans of the small private sector NPLs (taking account of provisioning needs, recoverability and market value of collateral, as well as the potential for rescheduling selected problem loans). It is worth mentioning that the settlement process of outstanding private claims as part of the liquidation of the London branch of Rafidain Bank is well under way and the process to liquidate fixed assets has begun and expected to conclude by end of 2009.
iii. Strengthening the Regulatory and Supervisory Functions of the CBI
The project would provide capacity building to CBI to enhance its supervisory and regulatory authorities. Under this component, support would provide in reviewing the existing banking supervision process, assessing the effectiveness of its supervisory apparatus to the adherence to international codes and standards, and preparing a detailed action plan to address any deficient, gaps and needs in coordination with the IMF.
Capacity building and training of the staff of the supervision department at CBI would include setting up the underpinnings of a strengthened regulatory and supervisory framework, focusing on on-site and off-site processes. CBI needs to implement the corrective actions required to close the gap between existing practices at CBI and international accepted best practices. Also, it could be focusing on developing and implementing appropriate supervisory tools and methodologies in addition to a comprehensive training program to enable staff members to cope with the new supervisory approach. Given that the Board of Supreme Audit will continue to play a key role in auditing and fiduciary oversight of the two state-owned commercial banks, the project would also provide support to the Board of Supreme Audit on its auditing role over banks.[17] CBI should embark on a comprehensive program of capacity building covering extended areas of the regulatory and supervisory functions, as it should be seeking to move from compliance to risk-based supervision. An assessment of banking supervision at CBI needs to be carried out. A detailed plan for banking regulation and supervision is in Annex 10.
iv. Project Management, Monitoring and Evaluation
This component of the project covers all costs related to the management, monitoring and evaluation of the project. It will include the costs associated with the establishment of PMU, along with salaries of PMU staff, that would include: (i) maintenance of office equipment; (ii) office supplies, utilities, and office administration costs, including translation, printing and advertising; (iii) communication costs; (iv) costs associated with the production of bidding documents; and (v) commercial bank charges. Costs will also include: (i) transportation and travel including per diem allowance for PMU staff in travel status to attend supervision missions; any other project implementation related expenses as agreed by CBI and the Bank.[18] This operation aims at establishing a competent PMU capable of managing, monitoring and evaluating project implementation, acting as a technical secretariat for the authorities restructuring committees. The PMU will also be responsible for preparing Project Reports on the basis of the indicators agreed upon. Each Project Report shall cover the period of one calendar quarter, and shall be furnished to the World Bank not later than one month after the end of the period covered by such report.
Expected Outcomes
Overall, the World Bank proposed project is expected to lead the two state-owned commercial banks (Rafidain Bank and Rasheed Bank) to adopting a comprehensive restructuring plan as spelled out in the Banking Reform Strategy, mainly implementing the first phase of the action plan. Since the project would be for less than two years, where the closing date is October 31, 2010, the expected outcomes would be limited to what would be achieved within this timeframe (Annex 2). Expected outcomes under each project component is as follows:
▪ Institutional and operational restructuring of the two state-owned commercial banks. Expected outcomes under the first component include: (i) in depth improvement of the functioning of the two state-owned commercial banks, as evident in the capacity building of staff (number of staff trained in banks operations—making new loans and deposits); and (ii) the two state-owned commercial banks resuming lending and taking deposits (as evident in the loan-to-GDP ratio).
▪ Financial restructuring of the two state-owned commercial banks. Expected outcomes include: (i) implementation of audit recommendations inter-alia regarding build-up in provision levels at state-owned commercial banks and reducing NPLs. In that respect, it is hoped that the government will recapitalize the two state-owned commercial banks by the government to the extent feasible under fiscal constraints; (ii) balance sheets reflect bank net asset values and financial position; and (iii) recapitalization of the two state-owned commercial banks by the government to the extent the government agrees and given fiscal constraints.
▪ Strengthening the regulatory and supervisory functions of CBI. This component is expected to lead to: (i) capacity building granted to the supervisory and regulatory bodies of the CBI; and (ii) CBI strengthened the effectiveness of its supervisory apparatus.
▪ Project management, monitoring and evaluation. Expected outcomes under the fourth component are: (i) recruitment of qualified staff capable of effectively managing the project; (ii) capacity building granted to the Executive Steering Committee, supporting the reform program; and (iii) efficient and smooth execution of the project.
In support of Phase I of the Government’s Banking Reform Strategy and its Action Plan, the project components, and expected outcomes for the operation are summarized in Annex 2.
Appraisal of Project Activities
Bank restructuring is a long term and politically challenging task. If there is not strong support from all parties involved, the operation will not be successful. In this case, the Government of Iraq and all of the relevant agencies, as well as, individual banks are supportive of the restructuring process. The financial sector dialogue conducted over the past year has allowed for a common view to emerge on a number of sector policy issues, embodied in the Banking Reform Strategy. An appraisal mission was conducted in November 22–25, 2008 (Annex 7 provides project preparation and appraisal team members). With the available data and information, the following, which is quite limited, is a summary of the economic, financial, institutional, fiduciary, environmental and social aspects of the proposed project:
Economic and Financial Aspects. Iraq has been hit hard by the recent decline in oil prices, although macroeconomic performance has been considerably improved since 2007. After reaching a substantial fiscal surplus in 2008, the Iraqi government had to readjust downward the 2009 budget in order to reflect falling oil prices. Overall growth is still forecast to be about 8 percent and inflation should be contained at 10 percent in 2009. The deterioration in Iraq’s fiscal situation has increased the interest by the Iraqi authorities in finding alternative sources of financing, including non-concessional funding. Successful implementation of the Banking Reform Strategy would ensure that the overall financial system and the banking system specifically, would contribute better to economic development and growth.
The Government of Iraq is committed to implementing the reform strategy, and has requested Bank’s support in the implementation process. There has been a broad agreement on the substance and design of the operation components, the scope of World Bank assistance, and the need to proceed diligently with the reform program. Actions on these components are, overall, progressing satisfactorily. Bank staff will also continue the policy dialogue with the institutions involved in the implementation of the operation, as well as coordinate effectively with donors. At the same time, the Bank will ensure the deployment of staff and consultants able to advise the government in all of the policy and technical areas pertaining to the reforms.
There is also a shared understanding among development partners actively involved in the financial sector reforms, in particular US Treasury and IMF that are supporting the objectives of the proposed operation and have indicated their intent to continue their financial and technical assistance to the authorities in the financial sector, all of which would ensure effective completion of the reform program. Many other donor agencies and private groups are involved in the financial sector and it is necessary to closely coordinate activities with other major players such as the IMF, US Treasury and UN to ensure all advice and assistance are coordinated. Moreover, the Bank along with the development partners will monitor the overall status of the government’s Banking Reform Strategy to ensure that it is well on track.
Institutional Set-up. Iraqi authorities’ readiness to execute the reform strategy and the project is evident in setting up the adequate legal, regulatory and institutional framework by forming entities, such as ROC, the Executive Steering Committee, and working committees (See Para. 16) to ensure effective implementation of the Banking Sector Reform Strategy. Representatives from those committees have met the Bank team during appraisal and ensured their commitment. This has been reinforced by the establishment of a PMU equipped with qualified expertise (Para. 70). Detailed TORs for the specific activities to be undertaken under this project is provided in Annex 13 in order to help the implementing agency move forward with project implementation.
Progress with the implementation of the reform program has been made by the Iraqi authorities during the appraisal mission, which is evident in: (i) the signing of MOU for Rafidain Bank and Rasheed Bank between CBI and the Ministry of Finance regarding the steps for and sequencing of operational and financial restructuring; (ii) the establishment of restructuring committees (Restructuring Oversight Committee, Executive Steering Committee, and Working Committees) to ensure the effective implementation of the program; and (iii) the completion of the independent financial and operational audits by Ernst &Young for Rafidain Bank and Rasheed Bank (for details refer to Para. 15-26).
Procurement and FM Arrangements. The procurement and FM arrangements proposed for the project are acceptable to the Bank in providing reasonable fiduciary assurance that the proceeds of the ITF grant are used for the purposes for which they were granted with due regard to economy, efficiency and the sustainable achievement of the project’s development. More details are disclosed in Annex 4 and Annex 5. Staff in the PMU will be trained in terms of procurement and selection of consultants and consultancy firms. Moreover, selection of consultants will be subjective to prior review by the World Bank to ensure compliance with regulations and guidelines.
Environmental and Social Aspects. The project is rated as a category “C”. This operation will not have significant effects on the country’s environment, forests and other natural resources. There are no expected adverse social or environmental effects, since the upgrading of the state-owned banks network will be implemented on existing sites and will use existing buildings—as confirmed by the Iraq Telecommunications and Post Company (ITPC).
There are various lessons learned that are reflected in the project design. The World Bank has developed substantial experience with investment projects in Iraq and bank restructuring projects around the world. A number of important lessons can be learned from this experience, including:
▪ Successful project implementation in Iraq requires that there be a PMU, with capable staff dedicated to implement the project. Communications are difficult with Iraq and it is difficult to closely supervise operations in Iraq. Thus, it is important to have a stable PMU dedicated to the project that understands and can effectively carry out the procurement and FM responsibilities as well as moving ahead the implementation of the various components of the financial sector reform strategy. The project will include funding to build this capacity. Moreover, the Bank supervision team will be supported by the Fiduciary Monitoring Agent (FMA) that will help the team in project supervision, monitoring implementation, and ensure compliance with Bank policies.
▪ The security situation in Iraq is still fragile and volatile, so it will be necessary to provide much of the training and TA outside of the country. The poor security also substantially raises costs.
▪ Modern banking is a highly technical field and requires years to develop skills. Thus, the TA must be provided on a long-term sustained basis in various phases.
Implementation Arrangements and Financing Plan
The project will be implemented under OP. 8.0. Rapid Response to Crises and Emergencies, and hence, the operation was processed on a fast track basis. The project closes on October 31, 2010. Implementation and monitoring arrangements are provided in details in Annex 6.
1 Institutional Arrangements
The Bank’s approach has been flexible in terms of design to permit a quick response to a changing security environment. The CBI is the grant recipient, and the entity responsible for project implementation. CBI has previous experience in executing World Bank projects, including the Private Sector Development Project, which included a component to develop an intra communications network.[19]
In terms of implementation arrangements, the operation would rely on: (i) capacity building of the PMU (residing in CBI) which has been staffed with qualified full-time Iraqi staff and consultants located in Baghdad; (ii) periodic World Bank supervision missions and team members located in the field to monitor progress made in project implementation; (iii) a network of videoconference facilities set up in the International Zone, the Ministry of Planning and Development Cooperation, CBI, the Ministry of Finance, the Board of Supreme Audit, and the state-owned commercial banks to make the monthly meetings with counterparts feasible; and (iv) monthly donors meetings through videoconferencing and audio bringing together various development partners (IMF, EU, US Treasury, USAID) to ensure effective coordination.
▪ Capacity building of PMU. In agreement with Iraqi authorities, actual project implementation would be carried out by PMU. The PMU would act as the Technical Secretariat of the Executive Steering Committee, which is chaired by the CBI Deputy Governor. A PMU was selected as the best mechanism to implement such a complex operation that requires on the ground close supervision and high technical skills. The current entities do not have adequate internal capacity to implement restructuring and take over the task; therefore, an autonomous unit with a full-time dedicated team is established for project management and implementation. PMUs are associated with a strong degree of autonomy, special management arrangements, independent staff and reporting, pay and employment outside the civil service, and parallel FM and procurement systems. Detailed TORs for the four main positions (PMU Head, FM Officer, Procurement Officer, and Program Assistant) in the PMU were discussed and agreed on with the World Bank during the appraisal mission.[20] In addition, detailed TORs were provided to PMU to support its implementation of the project main components (See Annex 13).
This complex operation would require hiring a Head of PMU who has international expertise with banking restructuring. In other ITF projects, where there was project management team (PMT), the standard government remuneration has often been cited as insufficient for the type and amount of work done, and has been a disincentive to do more for Bank projects. The PMU will be an autonomous organization and will permit staff under independent employment conditions and salary scales. The Bank will support considerable capacity building to allow it to implement the project according to World Bank procedures.
The PMU will assist with final designs, tender documents, tendering, FM and supervision of works. Consultants would assist in completing the project briefs and in carrying-out initial analysis and due diligence on all the proposed components. The Bank will work closely with the Iraqi authorities in the selection process of the referred consultants to ensure compliance with Bank’s guidelines and procedures. The Bank will also provide TORs for the PMU staff and will support CBI in the selection process. This will involve:
▪ Periodic World Bank supervision mission and day-to-day monitoring by Bank staff located in the field. This operation will entail that the Bank conduct several supervision missions, mainly to provide TA and advisory work to the Iraqi authorities in the banking sector restructuring program. Based on the cross country experience, and international best practices, the World Bank banking sector experts will guide the Iraqi authorities in the areas of operational and financial restructuring, as well as on the capacity building of the central bank supervisory and regulatory authority, ensuring relevance to the Iraqi circumstances.
▪ A network of videoconferencing in the International Zone with high senior officials and donors. The Bank will coordinating closely with the various counterparts through a network of videoconference facilities set up in the International Zone, which would ensure regular communication with the central bank, the Ministry of Finance, the Board of Supreme Audi, and the two state-owned banks. This videoconference facility would also make the monthly meetings with donors possible.
▪ Monthly donors meeting to ensure effective coordination. Videoconference facilities have also allowed the monthly donors meeting possible. These have provided a good platform for development partners to share progress with other colleagues in work programs, and challenges confronting them in implementation. These meeting will continue during the lifetime of the project and beyond to ensure effective coordination, and efficient delivery of quality work to the Iraqis.
Institutional setup. The institutional and regulatory setup is conducive to effective project implementation, and adequate implementation of the Iraq Banking Sector Reform Program. In addition to the PMU mentioned above, there is: (i) the Restructuring Working Committees at individual banks; (ii) the Executive Steering Committee, and (iii) the ROC—all of which have clear mandates and responsibilities, ensuring implementation of the reform program. Institutional setup and distribution of responsibilities is as follows:
▪ Ten Restructuring Working Committees at Individual State-owned Commercial Banks. Restructuring Working Committees have been established for the operational restructuring of the two state-owned commercial banks. More than ten working committees have been formed for each bank to support the operational and institutional restructuring, focusing on developing business plans; improving policies and procedures; drafting job descriptions; institutional reorganization; human resources; accounting and FM; IT; branch administration and operations. In addition to the regular meeting with the Executive Steering Committee, which is coordinated by the PMU, to discuss progress and key challenges in implementation; the committees provide progress reports on achievements in the execution of the Iraq Banking Reform Strategy, namely components related to the operational, institutional and financial restructuring of these state-owned banks.
▪ Executive Steering Committee. This committee is in charge of the implementation of the restructuring program for the banking sector, as outlined in the Iraq Banking Reform Strategy. The committee is chaired by the Deputy Governor of CBI, and comprising of representative from the Ministry of Finance; and Board of Supreme Audit; as well as two CBI experts. The PMU will act as the Technical Secretariat of the Executive Steering Committee to support effective implementation (See Para. 68–71). The Executive Steering Committee comes under the ROC, which is established to guide and monitor the implementation of the restructuring plans of all state-owned banks in Iraq.
▪ ROC. The Restructuring Oversight Committee is the decision making authority with regard to the restructuring and reinforcing of reforms in the banking sector. This is a high level decision making body that consists of the Governor of the CBI (Chairman), the Minister of Finance, and the Chairman of the Board of Supreme Audit. The Restructuring Oversight Committee is responsible for the design of the strategy and for setting the vision for a sound and inclusive financial system in Iraq. Their main priority currently is restructuring the banking sector. Key decisions made by the ROC are transmitted to the state-owned banks through the Executive Steering Committee.
2 Financial Management and Disbursement Arrangements
The PMU will be responsible for planning and coordinating all project activities, FM (payment authorization, disbursement, accounting, reporting and audit), procurement of works, goods and consulting services (and related contract management) from the private sector, and monitoring and evaluation. Training was provided to PMU staff during the preparation and appraisal of the project. Upon the signing of the Grant, a substantive project launch would be held with PMU to provide further training in project-specific management, procurement and FM, and strengthening the fiduciary capacities. Also, a Project Implementation Manual (PIM), in English and Arabic, has been prepared to provide a comprehensive set of standards and procedures for PMU to ensure compliance with the requirements for project management, procurement and FM. The PMU will have a competent financial officer on board to undertake the agreed-upon project FM responsibilities, including maintaining project accounting records, having the interim unaudited financial reports timely generated and submitted, and provide the needed support for the project external auditor to submit an annual audit report and audited financial statements. The project’s implementation, procurement and FM performance and compliance with the required guidelines, will be monitored by the FMA.
Table 3: Tentative Financial Components of Iraq State Owned Bank Restructuring Project
|Components |Net Component Cost in M US$ |
|I |Institutional and Operational Restructuring of the two State-owned Commercial |5.00 |
| |Banks | |
|II |Financial Restructuring of the Two State-owned Commercial Banks |1.00 |
|III |Strengthening the Regulatory and Supervisory Functions of CBI |2.75* |
|IV |The establishment of PMU |0.75 |
| |Unallocated |0.50 |
| |Total Project Cost |10.00 |
* Component III includes $2.4 million for consultants and $0.35 million for Goods
The proceeds of the grant will be disbursed through standard disbursement procedures, as outlined in the Bank’s “Disbursement Guidelines for Projects,” by means of reimbursements, special commitments and direct payments. The supporting documentation will be retained by the PMU, will be made available to the Bank during its supervision missions, and will be reviewed during the annual audit of the financial statements. The project is budgeted for US $10 million, with components as listed below in Table 3.
3 Procurement Arrangements
Procurement subject to Bank tendering requirements will consist principally of consultancy and training services, which shall be carried out in accordance with the World Bank’s “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 and revised in October 2006. A relatively small amount of essential office, IT and communication equipment, and software may also be procured under the project, which shall be subject to the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 and revised in October 2006. Any additional provisions stipulated in the grant agreement will equally guide procurement under the project. Detailed arrangements, including thresholds for procurement methods and prior review by the Bank, are presented in Annex 5.
Consultancy and Training services. The project will finance mainly consultants’ services to the Central Bank of Iraq and other entities and publicly owned banks. It is expected that many of the services will be contracted to individual local and international consultants for whom the selection will follow the procedures stipulated in Section V of Bank’s Consultant’s Guidelines. However, where appropriate, firms will also be expected to be contracted to provide services for a range of activities.
Goods. Any goods essential to the success of the project may also be financed. It is expected that these would be procured through National Competitive Bidding or shopping for off-the-shelf products.
Project management, monitoring and evaluation. To support the PMU, the project will finance project operating costs which would include: (i) maintenance of office equipment; (ii) office supplies, utilities, and office administration costs, including translation, printing and advertising; (iii) communication costs; (iv) costs associated with the production of bidding documents; and (v) commercial bank charges. These include: (i) transportation and travel including per diem allowance for PMU staff in travel status to attend supervision missions; any other project implementation related expenses as agreed by CBI and the Bank. The procurement of these items would follow the Recipient’s administrative procedures, satisfactory to the Bank. The project would not finance the salaries of the Recipient’s civil servants.
Procurement process. The PMU, under the oversight of its project manager, would be responsible for the procurement of goods and services financed by the grant. A procurement officer will be specifically recruited to the PMU to manage the process, including the preparation and updating of the procurement plan, managing expressions of interest and requests for proposals (RfP), evaluation of proposals, and contract award and management. The PMU project manager will send to the Bank all requests for “no objection” on contracts, which are subject to prior review (as defined by the procurement thresholds in Annex 5), before contract signature.
In procurement, the great majority of the activities will constitute Selection of Consultants. Consultants' services procured under this project will include selection of consultants to provide services related to the activities outlined above. Services will include TA to support procurement and FM functions in the PMU, training of staff on procurement, FM, contract management, and other technical fields as needed. The selection methods will mainly be Quality and Cost-Based Selection (QCBS) and Quality Based Selection (QBS) for values above US$200,000. For values less than US$200,000 other methods can be envisaged such as selection based on Consultants Qualifications (CQ), selection based on Fixed Budget, Least Cost selection.
For QCBS and QBS, and any other selection process of international consulting firm, Bank’s standard request for proposals (RFP) and standard evaluation forms will be used. For the selection of local/regional consulting firms, RFP and evaluation forms included in the ITF MIM will be used. The different selection methods will be indicated in the PP with clear indication for activities subject to prior review by the Bank. Shortlist of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provision of paragraph 2.7 of the Consultant Guidelines. The selection of individual consultants will be done in conformity with Section V of the Guidelines: Selection and Employment of Consultants by World Bank Borrowers. Support will also be provided by FMA, specifically in monitoring implementation and compliance with Bank policies.
The CBI, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Recipient and Bank’s Project Team on November 24, 2008 and is available in Annex 5: Procurement Arrangements. It will also be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
The overall procurement risk for the project is High, due to the overall situation in Iraq and the low capacity of the implementing agency to implement procurement.
4 Supervision, Monitoring and Evaluation
Through the proposed operation the World Bank will continuously be engaged with the authorities as the process moves forward. The Bank team will closely monitor the project. Though the team is not located in Iraq and it is difficult to travel there, the team will make full use of video conference facilities to communicate frequently with the PMU. In addition, the team will be able to obtain information from the US Treasury advisors who are resident in Baghdad. The Bank team will continue to attend conferences and other event organized by the IMF to work with the Iraqi counterparts. In addition, the project will earmark funds to pay for travel and meetings to help the Bank team maintain contact with the PMU.
This operation aims at establishing a competent PMU capable of managing project implementation, and monitoring and evaluating progress, in addition to acting as a technical secretariat for the authorities restructuring committees. The PMU will be producing quarterly Project Reports and will be reporting to the Executive Steering Committee, which operates under the ROC. The authorities’ restructuring committees, namely, the ROC, its Executive Steering Committee, and the Working Committees in state-owned banks are already overseeing, supervising, and monitoring the progress of the banking reform program. They currently have the necessary capacity to conduct accurate supervision, monitoring and evaluation. The operation will strengthen this capacity and assist them further in conducting more thorough monitoring and evaluation.
To mitigate any implication arising from the weak public financial management system and to ensure that the project’s funds are spent as intended, efficiently and economically, the following FM arrangements were put in place in the project: competent financial officer as part of the PMU to take FM responsibilities; close support and frequent capacity building initiatives from the Bank; simplified clear procedures documented in a Project Implementation Manual (PIM) prepared based on the Master Implementation Manual; simplified parallel accounting and reporting systems; independent external auditor acceptable to the Bank to provide an independent opinion of the project financial statements; the FMA regular monitoring of projects’ FM performance and physical checks; and simple flow of funds arrangements mainly relying on direct payments.
The project will be carried out in accordance with the provisions of the “Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants”, dated October 15, 2006 (“Anti-Corruption Guidelines”).
Monitorable indicators were identified and agreed on by the Bank and the Iraqi authorities to help in assessing progress made (Annex 2). The performance of the two state-owned banks and the effective implementation of the operational and institutional restructuring program would be closely supervised through progress made in two main indicators: (i) number of staff trained for using new computers for making loans and taking deposits; and (ii) state-owned commercial banks under restructuring show some improvement in human resources, risk management, and IT infrastructure. In terms of assessing financial intermediation and improvement in access to finance, indicators to be monitored include loan-to-GDP ratio.
Indicators to be used to monitor progress made in financial restructuring of the two state-owned banks and assess bank solvency and quality of assets include: (i) the quality of the portfolio through the reserve-to-NPLs on new loans ratio; and (ii) capital through measuring improvements in the capital adequacy ratio as provided by the government. The recapitalization and removal of sovereign debt will be easily monitored by reviewing the bank’s financial statements and with the continuous policy dialogue the Bank will remain well informed. The speed of improvement by the end of 2010 is in the hands of the authorities as many financial issues are related to state-owned entities (NPLs and foreign debt settlement). Achievements in strengthening the regulatory and supervisory functions of CBI would be monitored through reviewing its adherence to international codes and standards as specified in the Basle Core Principles. For each indicator, a baseline was identified as of December 2006, along with expected ratios the project aims to achieve by December 2010 (Table 4).
Table 4: Monitoring Indicators, Baseline, and Expected Outcomes*
|Indicators |Baseline |Expected ratios |Data Collection |Responsibility for Data |
| |December 2006 |December 2010 |Instruments |Collection |
| |(percent) |(percent) | | |
|Loans-to-GDP (banking sector) |4 |6 |CBI reports |CBI |
|Reserves-to-NPLs (both banks)** |10 |20 |CBI reports |CBI |
|Capital adequacy ratio (both banks) |Negative |4 |CBI reports |CBI |
|Banking supervision |Non Compliance*** |Compliance |CBI reports |CBI |
* Due to the emergency nature of the project and the possible extension of the closing date, which is dependent on the finalization of the extension of the ITF closing date, the results framework and the monitoring table will be revised to include more details during supervision.
** New loans
*** Non compliance with international codes and standards (Basel Core principles)
Component four related to project management, monitoring and evaluation would be assessed based on various factors including: (i) timely project disbursement; (ii) compliance with Bank’s rules and guidelines in terms of procurement procedures, and FM requirements; (iii) adequate monitoring of project; and (iv) progress made in the implementation of project components.
Project Risks and Mitigating Measures
This project is subject to substantial risks that could hinder the effective implementation of the Banking Reform Strategy, and in turn the execution of the Banking Sector Reform Project and the timely disbursement of the grant. These risks, including those emanating from security issues in Iraq, the operational, governance, and political and security risks. Also, the overall operating environment does not favor a strong implementation and procurement performance.
1 Operational Risks
Iraq has had a long tradition of strong public and private institutions, a capable cadre of civil servants, and a sound basic legal infrastructure. However, years of conflict, mismanagement, and sanctions have isolated the country from international experiences and practices, both technologically and in most areas of governance. The limited capacity of the staff of state-owned banks may make it difficult to actually undertake the restructuring plan and to comply with the timeline set. Moreover, it could be difficult to attract good caliber staff to these banks because of the politically unstable and insecure situation in Iraq, and the low public sector salary scale. In addition, it would also be difficult to get rid of redundant staff (a huge number of administrative staff, and a limited number of qualified credit officers). Other challenges that are bank-specific include the fact that Rafidain Bank does not currently control the financial and administrative affairs of its Kurdistan Region branch.[21]
This operational risk could hinder achieving one of the project’s main objectives, which is improving and strengthening the operational capacity of the two state-owned banks in order for them to provide adequate quality financial services for their customers and to the economy at large. To reduce these risks, the World Bank, IMF, US Treasury and other interested parties maintain a constant policy dialogue with the members of the ROC to maintain reform momentum. This includes regular meetings to assess progress.
2 Governance Risks—State-owned Bank Restructuring and Recapitalization without Privatization
The challenges associated with restructuring state-owned financial institutions are well documented. Therefore, the risk of suboptimal use of funds to shore up their balance sheet structure should not be underestimated. Experience has shown that contributing fresh funds to a public financial institution before an adequate governance and incentive structure is put in place, and new, reliable and effective managerial, operational and financial policies and practices have taken hold may provide perverse incentives to public bank managers to revert to lax lending habits. In this instance, the case may be made, regulatory orthodoxy notwithstanding, that new capital injections in state-owned banks would have to follow a step-wise approach, in line with the specific institutional and operational reforms being introduced and defined on attainment of quantitative and qualitative indicators and benchmarks. Moreover, the issue of fiscal affordability should be addressed, as the pace at which financial restructuring can be effectively implemented will have to be assessed against the fiscal resources potentially available to support the restructuring program.
To mitigate such risks, it is crucial to ensure that lending transactions between state-owned banks and SOEs (especially defaulting ones) are conducted on a market basis to prevent the reoccurrence of past poor performing assets. This approach is predicated on the Ministry of Finance’s commitment, as owner of the state-owned banks, to resolve foreign obligations of the bank, and to define the bank’s new business strategy and restructure its operations in line with such strategy, as a basis for its longer-term financial viability and competitiveness. Regarding private sector NPLs, setting a national policy for dealing with NPLs, and setting up an NPL data base and monitoring recovery efforts is vital. This component of the project would cater for the inefficiencies that affected the financial system in Iraq due to the change in currency, robbery, fraud, and war damage.
3 Political and Security Risks
Implementation of the reform program is hindered greatly by the current poor security situation in Iraq. This has prevented regular missions from visiting the state-owned banks, interacting with staff, and conducting on-site assessments. Accordingly, most of the training and TA takes place outside of the country. In addition, the poor security also substantially raises costs. Donor coordination and joint field visits will reduce security and administrative costs to donors, in addition to reducing the burden on Iraqi officials.
4 Implementation Risks
The state-owned banks and their restructuring committees will not necessarily have the experience and the knowledge to implement the required reforms and policy measures. A key challenge would be the ability of the project to attract qualified international consultants and consultancy firms with the required technical expertise to work in Iraq due to the security situation. In addition, the decision making process might also take time, as this often requires effective coordination between the key policy makers—the CBI (regulator), the Ministry of Finance (owner), the Board of Supreme Audit (auditors), and the state-owned banks themselves. To address these risks, the project has been phased and the Bank team will monitor closely the progress made in project implementation and execution of the restructuring strategy.
Regular communication needs to be maintained between the various committees in charge of implementing the reform program—the Restructuring Working Committees, the Executive Restructuring Committee, and the ROC. Managing operational risk and ensuring effective implementation of the project would be enhanced through the daily dialogue of the World Bank Office and the team member located in Baghdad with Iraqi authorities and donors. Moreover, an Interim Office in Amman supports Iraqi missions. There will also be coordination through a network of videoconference facilities set up in the International Zone, the Ministry of Planning, the Central Bank, and the Ministry of Finance—to make the monthly meetings with donors possible. Moreover, the Bank supervision missions would also support enhancing the policy dialogue among the various counterparts, as was conducted in the Beirut Roundtable where consensus was reached among all counterparts on a unified Banking Reform Strategy (2008–2012). The Bank will also be working closely with donors operating from the field.
On fiduciary aspects, it is important to strike a balance between providing timely and quality service to the clients and at the same time ensuring that fiduciary requirements of the Bank and the donors are not compromised. While one can develop minimum standards and procedures, the final structure of an assistance program is a ‘softer’ expert judgment, which takes into account many factors including the overall environment, the capacity to carry out a full assessment, and the ability of Bank staff to visit the country and supervise projects. In addition, close attention will be paid to introducing more flexibility in implementation arrangements and business process. Also, bulk of institution building activities would focus on strengthening core functions of key organizations, which has been based on an institutional assessment.
Terms and Conditions for Project Financing
1 Terms and Conditions for Project Financing
The project is financed on a grant basis from the ITF.
2 Conditions for Grant Approval
The condition for approval is: (i) The PMU, staffed with competent and qualified caliber of staff, and with terms of reference satisfactory to the World Bank, has been established by the CBI; and (ii) the Project Implementation Manual (PIM), satisfactory to the World Bank, has been endorsed by CBI.
Annex 1: Detailed Description of Project Components
In agreement with Iraqi authorities, the proposed project would cover four main components, in supporting the Iraqi authorities in developing the Iraqi Government’s Banking Reform Strategy, and its Action Plan: (i) assist in the institutional and operational restructuring of the two state-owned commercial banks; (ii) provide TA in the financial restructuring of the two state-owned commercial banks; and (iii) capacity building and strengthening the regulatory and supervisory functions of CBI, and (iv) project management, monitoring and evaluation.
The World Bank will provide technical support and guidance to the Iraqi authorities with regard to the government’s comprehensive, action specific banking reform strategy, and its Action Plan, based on the findings of the audits that aims at reestablishing the overall financial system by enhancing the soundness of the banking sector.[22] The Action Plan identifies the key pillars of the reform program set by the Iraqi Government, focusing on operational and institutional restructuring of the state-owned banks, including building an IT infrastructure, developing human resources, risk management, accounting and auditing procedures, policies and compliance with international standards. The Action Plan also covers financial restructuring and addressing problems of NPLs. A timeline with key milestones will also be identified. To ensure ownership, the Action Plan is led by the Government of Iraq.
i. Institutional and Operational Restructuring of the two State-owned Commercial Banks
The operational and institutional restructuring of the two state-owned commercial banks is crucial for ensuring a sound and efficient banking system, which would contribute effectively to economic development. Operational and institutional restructuring of the two state-owned commercial banks will start by defining the mandate of the state-owned commercial banks, including their focus on mobilization of savings and payments especially in light of country circumstances. The project will fund TA to help develop the internal capacity of the two state-owned commercial banks based on the findings of the audits and the optimum use of the on-going automation. The next steps will be to help the two institutions adopt modern banking practices and systems, and training of their staff to operate the new IT hardware that is being installed. This will entail a substantial training program for the staff, beginning with the training of a large number of Iraqi trainers (probably one per branch) who can then train the staff. The training of trainers may take place inside Iraq or abroad, as is feasible. As their capacity increases, they will move into other core banking operations including the extension of credit to the corporate and household sectors.
Full implementation of the plan would call for the involvement of resident banking advisors along-side bank board and management. Grant financing from ITF has been secured to this effect to assist the Rasheed Bank and Rafidain Bank in the restructuring process with focus on the critical components related to human resources, risk management and controls, and IT. Adherence to the restructuring and business plan would remain under close supervision of CBI throughout the restructuring period. Bank recapitalization and financial support as needed would be provided by the owner in line with the satisfactory implementation of the operational restructuring plan. Moreover, the mandate of the restructured state-owned institution is strictly defined under its proposed business plan to preclude lax lending policies and focus on the bank core business. A pre-condition, duly highlighted in the government program, for the implementation of financial reforms and for ensuring a level playing field for all banks, private as well as state-owned, is the existence of a supportive legal environment and a high degree of transparency.
The operational and institutional restructuring—a key component in the operation—would be focusing on developing four critical areas: (i) organizational structure, processes, procedures, and policies; credit and risk management functions, including NPLs management;[23] (ii) human resources functions, and alignment of organization and general management functions;[24] (iii) information technology and management of information systems (IT/MIS); and (iv) accounting, reporting and auditing policies and procedures—without which reforms will have no direct benefit to the public and financial markets that the Government of Iraq is trying to build.
ii. Financial Restructuring of the two State-owned Commercial Banks
Financial restructuring would help state-owned banks to restore their ability to comply with minimum capital adequacy and other prudential requirements of the CBI, and to restore their full credibility with their business counterparts. Audit recommendations inter-alia regarding build-up in provision levels at state-owned commercial banks need to be implemented. The financial restructuring process thus would entail schematically two steps. The first would be to fill the gap (for those institutions that need to restore assets value to that of debt liabilities); the second, to contribute needed regulatory capital in compliance with prudential requirements. Restoring the value of bank net assets would entail the resolution of the public enterprise NPLs; and possibly government funding to replace part of the non-recoverable loans of the private sector portfolio (taking account of provisioning needs, recoverability and market value of collateral, and potential for rescheduling selected problem loans). Initially the banks activities may have to be narrowly limited and focus on deposit taking and payment transactions. The government must put the banks on a sound financial footing by addressing the problem of borrowing undertaken at the behest of the government that appears today as part of their liabilities, and shoring up their capital base as needed to meet regulatory requirements and prudential standards. However, this effort will depend on the government’s willingness to take over the debt and recapitalize the banks and correspondingly, fiscal constraints.
Effective implementation of the formal agreement between owner (Ministry of Finance) and regulator (Central Bank of Iraq) whereby the owner has committed to: assume the large foreign debt liabilities of Rafidain; stand behind the state-owned banks, and honor all their liabilities until such time as their capital structure is in full regulatory compliance; and develop and carry out a credible time-bound medium-term plan (2008-2011) for both operational and financial restructuring of the state-owned commercial banks. It is crucial to ensure that any financial support from the state (owner) proceed only in line with the satisfactory implementation of the operational restructuring program.
The authorities need to tread carefully with the pace of financial restructuring, a potential magnet for two conflicting sets of issues. On the one hand, a quick pace of reform – rather than long, protracted periods during which restructured institutions are exempt from prudential standards, particularly in terms of level of provisioning and capital adequacy – promptly putting back an institution on a sound financial footing would, in itself, be more likely to achieve the bank restructuring objectives in: freeing management from the angst of administering ageing arrears to focus on future growth; and providing management the adequate financial base needed to develop the business in increasingly competitive markets. On the other hand, experience has shown that contributing fresh capital to a public financial institution before an adequate governance and incentive structure are put in place, and new, reliable and effective managerial, operational and financial policies and practices have taken hold may provide perverse incentives to public bank managers to revert to lax lending habits, rather than prompting the discipline needed for their eradication. In this instance, the case may be made, regulatory orthodoxy notwithstanding, that financial support with new capital injection in state-owned banks would have to follow a step-wise approach in line with specific institutional and operational reforms being introduced – defined by quantitative and qualitative indicators and benchmarks.
iii. Strengthening the Regulatory and Supervisory Functions of CBI
The regulatory and supervisory framework is in the process of being strengthened but remains weak, with a pressing need to enhance further the regulatory environment and the supervisory functions and capabilities at CBI. Indeed, building an effective legal and regulatory framework is a necessary condition and a critical pillar for a sound and modern financial sector. This is especially true for the banking system which is the core component of Iraq financial industry. One of the main priorities is to re-establish a functional central bank able to carry its critical functions as regulator, supervisor, provider of liquidity and lender of last resort to the banking sector; another is a normally operating branch system to sustain a reliable payment process in the country.
The strengthening of the regulatory and supervisory framework in the banking industry is a critical part of any financial reform program. A credible, independent regulator is the necessary anchor of an effective and resilient financial system, especially in an environment where state ownership of financial institutions is expected to remain significant in the medium term. The CBI has been working on developing a banking regulatory and supervisory system, in line with best international standards and practices, with the support of the IMF, the US Treasury, and the World Bank, as noted.[25] The work conducted in Iraq over the past few years focused on the sector’s legal and regulatory aspects with a particular focus on rebuilding the banking system through the: (i) preparation and enactment of a new central bank law and commercial bank law; and (ii) creation of an effective operating structure for banking supervision.
Since the end of July 2008, as part of the SBA with the IMF, Iraq has completed a first set of prudential regulations[26] for commercial banks. In line with the new regulation underway, banks, especially public sector banks[27] would have to improve their credit risk policies and develop systems for extending credit, reviewing and classifying loans, and defining realistic provisioning needs. Regarding connected and directed lending, measures should be taken to ensure that banks have in place an independent decision making process that would preclude conflicts of interest and enforce arms length lending policies. Under the second set of the prudential regulations, efforts should be directed to implement a new framework for addressing operational risk and related issues, and market risks.
Capacity building of the supervision department at CBI would include setting up the underpinnings of a strengthened regulatory and supervisory framework, focusing on on-site and off-site processes. CBI needs to implement the corrective actions required to close the gap between existing practices at CBI and international accepted best practices. Also, it could be focusing on developing and implementing appropriate supervisory tools and methodologies in addition to a comprehensive training program to enable staff members to cope with the new supervisory approach. Given that the Board of Supreme Audit will continue to play a key role in auditing and fiduciary oversight of the two state-owned commercial banks, the project would also provide support to the Board of Supreme Audit on its auditing role over banks.[28]
The strengthening of the regulatory and supervisory framework in the banking industry is a critical part of any financial reform program. A credible, independent regulator is the necessary anchor of an effective and resilient financial system, especially in an environment where state ownership of financial institutions is expected to remain significant in the medium term. CBI should embark on a comprehensive program of capacity building covering extended areas of the regulatory and supervisory functions, as it should be seeking to move from compliance to risk-based supervision. An assessment of banking supervision at CBI needs to be carried out. A detailed plan for banking regulation and supervision is in Annex 10.
To be effective the TA should be based on a thorough and comprehensive review of on-site and off-site processes at the CBI. An organizational restructuring of the banking supervision function should be carried out to set up or enhance the core functions in banking supervision such as On-Site Inspection, On-Going Surveillance, Licensing, Macro-prudential Analysis and Regulation and Enforcement. As a result, the banking supervision in Iraq would move from compliance to a more proactive and modern risk-based supervision.
The CBI should start new recruitments to rejuvenate the work force. Notwithstanding their good education background, these newcomers would need training and incentives, while a new culture based on efficiency and achievements needs to be built. To this effect, the entire banking supervision training policy and process would be evaluated to assess if the training programs are congruent with and responsive to the needs of the banking supervision. Training would also be useful for management to enhance leadership capacity.
When security permits, on site inspection should focus on risks. Increased attention should be directed to credit organization and policy, concentration of credit, source of funding, risk management system, IT system and internal controls. The CBI should also develop guidelines to conduct standardized on-site examinations. The CBI should provide the inspectors with new IT tools giving them access to databases from On Going Surveillance. On-site examiners should use those tools to run their credit risk controls and the inspection teams will have to update the database with the data collected on the field. This type of feedback will help strengthen and improve the On-Going Surveillance reports credit institutions along a CAMELS based approach. Inspection teams need more trained personnel, particularly in the fields of IT and on a medium term basis market risks.
A new IT system should help On Going Surveillance focus on critical issues for an enhanced decision making process. A new IT system would need to be implemented on a timely basis to increase efficiency and productivity. More specifically, the CBI would analyze the IT supervisory needs (hardware, software, protocol for data collection and data administration, etc.) including the possibility to store all official banking financial statements. In addition, both on site, and off site supervision must work together to create a continuous, seamless supervisory cycle. The off site supervision must also develop new tools to focus on critical issues for an enhanced decision making process (peer comparison analysis, Camels’ model analysis, Early Warning System, etc.). To this purpose, the CBI has to redesign the framework of the supervisory information flow and build a new MIS. With a new IT system being implemented at the CBI, a risk-oriented report regarding the strategy and the overall performance of a credit institution could be worked out. This CAMELS typed approach report would constitute a comprehensive review of the banks.
A macro-prudential surveillance unit should be set up in a financial stability perspective. The key deliverable for this unit would be an annual Banking Sector Review. This review would deliver a comprehensive analysis of the banking sector in dealing with macroeconomic and financial markets developments, banking sector structure, earnings and profitability, capital adequacy, asset quality, liquidity and other risks, and regulatory and supervisory developments.
Since the end of July 2008, as part of the new Stand-By Arrangement (SBA) with the IMF, Iraq has completed a first set of prudential regulations[29] for commercial banks. In line with the new regulation underway, banks, especially public sector banks[30], would have to improve their credit risk policies and develop systems for extending credit, reviewing and classifying loans, and defining realistic provisioning needs. Regarding connected and directed lending, measures should be taken to ensure that banks have in place an independent decision making process that would preclude conflicts of interest and enforce arms length lending policies. Under the second set of the prudential regulations, efforts should be directed to implement a new framework for addressing operational risk and related issues, and market risks.
iv. The Project Management, Monitoring and Evaluation
The project will finance the operating costs that would include: (i) maintenance of office equipment; (ii) office supplies, utilities, and office administration costs, including translation, printing and advertising; (iii) communication costs; (iv) costs associated with the production of bidding documents; and (v) commercial bank charges. Operating costs will also include: (i) transportation and travel including per diem allowance for PMU staff in travel status to attend supervision missions; any other project implementation related expenses as agreed by CBI and the Bank.[31]
This operation aims at establishing a competent PMU capable of managing, monitoring and evaluating project implementation, acting as a technical secretariat for the authorities restructuring committees. The PMU will also be responsible for preparing Project Reports on the basis of the indicators agreed upon. Each Project Report shall cover the period of one calendar quarter, and shall be furnished to the World Bank not later than one month after the end of the period covered by such report.
Annex 2: Results Framework and Monitoring
|PDO |Outcome Indicator |Use of Outcome Information |
|The Project Development Objective is |New organizational structures for the two state-owned banks are|Monitor progress on overall banking sector reform, with|
|to strengthen the supervisory |adopted. |particular reference to planning next phase, whether |
|framework for financial |Number of staff trained in each bank would reach at least 100 |through Bank, other donor, or internal Government |
|intermediation and build capacity of |staff member. |resources |
|financial institutions to support |Compliance supervisory and regulatory framework (Basle Code |Number of staff trained in each bank would reach at |
|implementation of Phase I of the Iraq|Principles) |least 200 staff member (tellers, managers, credit |
|Banking Reform Strategy. | |officers, etc.) |
|Intermediate Outcome |Intermediate Outcome Indicator |Use of Results Monitoring |
|Component 1: Institutional and |Improvement in functioning of the two state-owned commercial |Strengthened institutional and operational framework |
|Operational Restructuring of the Two |banks, evident in the increase in loan-to-GDP ratios from 4% in|for the two state-owned banks. |
|State-owned Commercial Banks |June 2006 to 6% in October 2010. |Capacity building with staff trained for using new |
| | |computers for making loans and taking deposits. |
| | |Improved financial intermediation evident in the rise |
| | |in loan-to-GDP ratios. |
|Component 2: Financial Restructuring |Build-up in provision levels at the two state-owned commercial |Improved portfolio quality of the two state-owned banks|
|of the Two State-owned Commercial |banks for new loans, reflected in the reserves-to-NPLs ratios, |- Reserve-to-NPLs on new loans |
|Banks |rising from 10% in June 2006 to 20% in October 2010. |Strengthened Capital Adequacy—Capital adequacy ratio |
| | |improves as provided by government. |
|Component 3: Strengthening the |Capital adequacy ratio in line with prudential regulations, |Adherence to international codes and standards |
|Regulatory and Supervisory Functions |reaching up to 4% by October 2010. |regarding capital requirements (Basle Core Principles).|
|of Central Bank of Iraq | | |
|Component 4: Project Management, |Recruitment of qualified staff capable of effectively managing |Compliance with Bank’s rules and guidelines in terms of|
|Monitoring and Evaluation |the project. |procurement procedures, and FM requirements. |
| |Capacity building granted to the Executive Steering Committee, |Adequate monitoring of project. |
| |supporting the reform program. |Progress in implementation of project components. |
| |Efficient and smooth execution of the project. | |
| |Training program fully in place. | |
*Due to the emergency nature of the project and the possible extension of the closing date, which is dependent on the finalization of the extension of the ITF closing date, the results framework and the monitoring table will be revised to include more details during supervision
Table 2.1: Monitoring Indicators, Baseline, and Expected Outcomes
|Results indicators |Baseline (June |YR1 |YR2 |Frequency and |Data Collection |Responsibility for|
| |2006) | | |Reports |Instrument |Data Collection |
| |percent | | | | | |
|PDO | | | | | | |
|Development of new |None |Plans for |New organizational |Annually |CBI Annual Report |CBI |
|organizational structures | |development of new |structures approved and| | | |
|for the two state-owned | |organizational |adopted by October 2010| | | |
|banks | |structures completed| | | | |
|Number of staff trained to |200 |100 |100 |Semi-annually |PMU |PMU |
|do bank operation | | | | | | |
|(both banks) | | | | | | |
|State-own commercial bank’s| | |Reserves-to-NPLs ratios|Annually |Financial |CBI |
|improved their capital | | |reaching 20% | |statements of the | |
|adequacy ratio | | | | |two state-owned | |
|(reserves-to-NPLs ratios) | | | | |banks (Rasheed | |
| | | | | |Bank and Rafidain | |
| | | | | |Bank) | |
|Components | | | | | | |
|Loan-to-GDP ratio (banking |4% |4.9% |6% |Annually |CBI reports |CBI |
|sector) | | | | | | |
|Reserves-to-NPLs ratios |10% |15% |20% |Annually |CBI reports |CBI |
|(both banks) | | | | | | |
|Capital adequacy ratio |0 |2% |4% |Annually |CBI reports |CBI |
|(both banks) | | | | | | |
|Number of qualifies staff |0 |4 |4 |Semi-annually |PMU database |PMU |
|in PMU | | | | | | |
|Timely disbursement of |0 |4 |6 |Semi-annually |PMU database |PMU |
|grant | | | | | | |
Annex 3: Summary of Estimated Project Cost
Table A3.1: Costs of Project Main Components
|Components |Net Component Cost |Percent of Total |
| |(million US$) |Project Cost |
| | |% |
|I |Institutional and Operational Restructuring of the two State-owned |5.00 |50 |
| |Commercial Banks | | |
|II |Financial Restructuring of the Two State-owned Commercial Banks |1.0 |10 |
|III |Strengthening the Regulatory and Supervisory Functions of CBI |2.75 |27.5 |
|IV |Project Management, Monitoring and Evaluation |0.75 |7.5 |
| |Unallocated |0.5 |5 |
| | |10.0 |100 |
| |Total Project Cost | | |
Annex 4: Financial Management and Disbursement Arrangements
Financial Management arrangements
Country Financial Management Context
A Country Financial Accountability Assessment (CFAA) has not yet been undertaken for Iraq; however, the Bank had prepared an internal report[32] that had been designed to inform the Bank’s project teams on the structural weaknesses of the Iraqi public financial management system and to assist them in anticipating problems that could occur during the implementation of the Bank-financed projects. Overall, the public financial management difficulties in Iraq are similar to those in many other countries and had been very well known by the Bank. These include weak budgeting and fragmented accounting, accompanied by incomplete and inaccurate financial reporting. Government employees’ financial management capacities are weak and internal controls are poor. Internal and external audit functions are in a nascent state, and cannot realistically be relied upon to redress the situation. The uniqueness of the Iraq situation is that these are all present at once, complicated by the country’s security conditions and the lack of a functioning financial sector that is capable of providing routine financial services. Each deficiency potentially can adversely affect the implementation of the Bank financed projects. The Government of Iraq has started to take measures, including through a planned Bank’s financed operation, to reform the public financial management system; however this reform is a long term activity that will be finalized over number of years.
Many other assessments and reports[33] had been undertaken by the Bank and the other donors over the last four years that confirmed that assessment and led to defining Iraq as one of the “high risk-weak control environment countries” that requires special attention, from the Bank, at various levels.
Portfolio Context
Overall, the ITF finances 18 grants (US$481.6 million), of which 15 grants are active (US$420.3). Of these 15 active grants, 13 are implemented by Iraqi agencies 2 are implemented by the Bank on behalf of the Ministry of Planning and Development Cooperation. The ITF was originally scheduled to terminate in December 31, 2007 and was extended to December 31, 2010. In February 2009, the IRFFI Donor Committee confirmed its intention to extend the termination date to December 31, 2013 to allow the completion of projects in the pipeline, including the Banking Reform Project. Formalization of such extension is still pending. All projects are implemented within the framework of the Iraqi public sector regulations complemented by the Bank policies and procedures as agreed on in the related legal agreements.
A Master Implementation Manual (MIM) was developed by a consulting firm hired by the Bank to document the general implementation, procurement, and financial management policies and procedures applicable to managing projects in Iraq. As the Bank staff had limitation in being able to functionally be in Iraq to regularly supervise the projects, a FMA was hired to help the Bank in supervising the projects’ (ITF-financed and recently the IDA-financed) implementation, including the monitoring of the procurement and FM performance and compliance with the required procedures.. The FMA is guided by agreed Terms of Reference (as per the ITF donor agreements for ITF-financed projects) and has received training from the Bank on procurement and FM guidelines and procedures. To perform its responsibilities, the FMA visits project sites and project management teams (PMTs) and reports (monthly and quarterly) issues to the Bank’s task teams as they arise, and recommend actions to be taken by the PMTs and the task teams.
Portfolio Financial Management Arrangements
To mitigate any implication of the weak public financial management system and to insure that the projects funds are spent as intended, efficiently and economically, the following FM arrangements were generally put in place in projects: competent financial officer as part of the project management (PMT) to take FM responsibilities; close support and frequent capacity building initiatives; simplified clear procedures documented in a project implementation manual (PIM) prepared based on the MIM; simplified parallel accounting and reporting systems; independent external auditor acceptable to the Bank to provide an independent opinion of the project financial statements; the FMA regular monitoring of projects’ FM performance and physical checks; and simple flow of funds arrangements mainly relying on direct payments
Portfolio FM Performance and Disbursement Status
The main issues that are being monitored very closely by the Bank to improve the portfolio FM performance are: the weak capacity, instability, and turnover of the projects’ staff; the weak audit profession and reliance on one auditor; and the general weak control environment affecting the degree of assurance provided. On the disbursement part, the projects have been experiencing delays in getting payments to Iraq due to the inefficient banking system.
Project Implementation Arrangements
Organization. The project is financed through an ITF grant of US$10,000,000. The Central Bank of Iraq is the Grant recipient and the CBI will have primary responsibility for overseeing project implementation and ensuring compliance with the Bank’s guidelines and procedures on fiduciary aspects, monitoring and evaluation, as well as the reporting to the World Bank and other relevant agencies. To facilitate this day-to-day Project implementation, a dedicated PMU has been established. It would operate under the Executive Steering Committee chaired by the Deputy Governor of CBI.
Staffing. A financial officer (FO) will be hired as a member of the PMU to overtake the project FM responsibilities, as agreed during project preparation. These include maintaining financial records, reviewing, processing and ensuring duly authorization of consultants and vendors’ payments, submitting duly signed withdrawal applications to the Bank to claim disbursements, and preparing periodic reports and financial statements. Adequate training will be provided to the financial officer on World Bank FM and Disbursement guidelines and procedures during the supervision missions.
Risks and Mitigation Measures. The assessment of the financial management (FM) arrangements proposed by CBI was undertaken during meetings held in Amman and Beirut and based on a number of documents provided by the CBI. The purpose of the assessment is to confirm that the FM arrangements for this project are acceptable in providing reasonable fiduciary assurance that the proceeds of the Grant are used for the purposes for which it was granted with due regard to economy, efficiency and the sustainable achievement of the project’s development objectives. In addition, it helps in defining the areas that need additional arrangements or enforcement of controls. The documentation of the assessment is available in the project files. Based on the result of the assessment, the FM risk, as a component of the fiduciary risk, and which is a combination of country, entity and project specific factors is high. The following are the identified FM risks and the relevant mitigating measures. With these measures in place, the project would have acceptable project FM arrangements; however, in Iraq the residual risk will remain high.
|Project Risk |Rating |Mitigating Measure |
|Based on FM arrangement | | |
|Limited knowledge by the CBI of the Bank’s guidelines and |H |Utilizing a dedicated competent PMU that would be |
|procedures. Limited capacity in general to meet the project’s | |recruited to manage the project, including a full-time |
|FM requirements. | |financial officer who would be on board before the project|
| | |effectiveness and would get proper training. |
|Overall weaknesses and shortcomings in various areas of FM |H |Agree on the associated control environment and procedures|
|such as: internal control, internal audit, accounting, | |and document them in a Project Implementation Manual, |
|reporting, accounting software and other identified by CBI | |based on the Iraq MIM that will be adopted by the PMU. |
|external auditor in their management letter for FY07 | | |
|Possibility of the PMU not being delegated the authority to |M |Include the PMU mandate and responsibilities in the PIM. |
|perform duties, including procurement, payment authorization | | |
|and execution. | | |
|Limited accounting and reporting systems in providing timely |H |Using a parallel accounting and reporting system that can |
|and comprehensive information. | |capture the project financial activities and generate the |
| | |Interim Unaudited Financial Reports and Annual project |
| | |Statements. |
|Limited flow of funds process and expected payment delays, |M |CBI to open a project account with a sufficient |
|especially for individual local consultants. | |project-life advance to make payments from and get |
| | |reimbursed from the Bank. |
|Limited physical existence of the Bank staff in Baghdad and |H |The Iraq FMA hired by the Bank to monitor the project |
|limited independent verification function. | |implementation, procurement and FM performance based on |
| | |existing TORs. The Bank will perform frequent SPN missions|
| | |outside Iraq. |
|Limited access to competent external auditors in Iraq and |M |Agree on detailed audit TORs and use the fixed cost method|
|delay in the selection process. | |for the selection of the auditors. The process should |
| | |start right after project effectiveness. |
|Overall FM Risk |H | |
H = High Risk; S = Substantial Risk; M = Modest Risk; N = Low or Negligible Risk
Internal Controls. The project’s financial controls will be documented in the project implementation manual (PIM) that will customize the Iraq Master Implementation Manual to the needs of the project. This PIM will clearly disclose each PMU member responsibilities, the payment verification, authorization and execution processes, authority limits, physical receipt and control of equipment, as well as relationship lines with the different stakeholders, such as the ROC, Secretariat, CBI, SOE-banks, MOF, and the World Bank. The expenditure cycle will follow controls specified in the manual and will include the following steps: (i) technical approval by the spending department of each entity; (ii) administrative approval by the PMU Manager; (iii) issuance of payments will be made upon receipt of supportive documentation and written requests signed by authorized officials; (iv) the accuracy and consistency of the payment requests will be verified by the financial officer. The project will finance mainly consultants’ services. These can be classified either as delivering a set of output, or as supporting the delivery of an output. Payments will be made against the delivery of outputs for the first category, as detailed in their contracts. While for the second category of consultants, payment will be made against the submission of a time sheet and a summary of activities performed during the period invoiced.
|Project FM Risk |Rating |Mitigating Measure |
|Based on project activity | | |
|Difficulty of managing multi-components and maintaining |H |Agree on flow of information with the various stakeholders and |
|proper communication and coordination with the different | |document in the PIM before effectiveness |
|stakeholders. | | |
|Inherent difficulty of assessing the acceptability of |M |PMU Manager will ensure technical review and will share with the |
|consulting and training services (the main core of the | |Steering Committee, with the oversight of the Restructuring |
|project), based on which payments would be made. | |Oversight Committee (ROC), which is in charge of the |
|Possibility of having the same activities covered by | |implementation of the restructuring program. |
|initiatives of other donors. | | |
|Inherent difficulty of ensuring that the right persons had|M |Strengthening the monitoring and evaluation function at the PMU. |
|been chosen to attend project-financed workshops, actually| | |
|attended, and benefited as intended, in addition to the | | |
|inherent risk associated with related expenditures such as| | |
|per diem and travel cost, | | |
|Overall FM risk |H | |
H = High Risk; S = Substantial Risk; M = Modest Risk; N = Low or Negligible Risk
Independent Verification. The Iraq FMA will monitor the performance of the project implementation, procurement and FM periodically and share reports with the Bank and CBI. The external auditor will report as well, in his management letter, on any deficiency in the FM system and controls that is considered pertinent, and will provide recommendations for its improvement.
Budgeting: The PMU will maintain a project budget and detailed disbursement plan per quarter. This plan will be developed based on the initial procurement plan, implementation schedule and estimated payments cycles, and revised upon need. It will be used as a monitoring tool to analyze budget variances and manage cash.
Accounting: Based on the number of the contracts and the frequency of payments, spreadsheet applications will be used to record the project’s financial transactions and generate reports. Procedures for protecting the data and preventing losses will be maintained.
Financial Reporting: The PMU will be responsible for preparing the following:
▪ Quarterly Interim un-audited financial reports (IFRs) as part of the quarterly project progress reports, and submitting them to the Bank within one month from the quarter then ended. The format of the reports will be agreed upon during the negotiations. These reports consist of a statement of sources and uses of funds by component; statement of uses of funds by category of expenditure, both comparing actual and planned expenditures; and a list of cumulative contracts’ commitments.
▪ Annually Project Financial Statements (PFS) and submitting an audited PFS with the independent auditor opinion to the Bank not later than six months after the end of each FY. The PFS include: (i) statement of sources and uses of funds by component; (ii) statement of uses of funds by category of expenditures, both comparing actual and planned expenditures; and (iii) list of contracts’ commitments.
Auditing Arrangements: An external independent auditor, acceptable to the Bank, will be engaged to carry out the annual financial statements audit in accordance with international standards of auditing, issue the required independent opinion, and prepare the management letter. The auditor will be granted access to the project documents at the PMU and CBI. The audit TORs include performing a Statement of Expenditure (SOE) review for the audit period covered. The audit report and management letter will be submitted by the PMU to the Bank not later than six months after the end of each FY. An escrow account will be used to pay the auditor after the project’s closing date.
Funds Flow. The project disbursement methods are disclosed under the Disbursement arrangements and in the Disbursement Letter. In addition to some equipment and small operating cost, the project will finance mainly consultants’ services. A variety of international and local individual consultants and firms will be hired as part of the project activities. Based on the experience so far with flow of funds performance of current Iraq projects, and to achieve the needed efficiency, the Bank will pay directly beneficiaries with bank accounts outside Iraq. For the beneficiaries with bank accounts inside Iraq, CBI will provide a sufficient project-life advance to be deposited in a project account, from which the PMU will make payments and periodically claim reimbursement from the Bank.
Supervision. Where security conditions make travel to Iraq impossible for Bank staff, supervision missions will be undertaken from an alternative location. Close monitoring of FM arrangements will be conducted throughout the project life. Supervision will be conducted about 2-3 times a year, in addition to regular video and audio conferences. The project FM team will continue to get periodical training on FM arrangements.
The FMA will monitor the project implementation, procurement and FM performance and compliance with the required procedures. It will visit the PMU periodically and will offer advice and on-the job training in addition to reporting periodically issues to the Bank task team as they arise, and recommend actions to be taken by the PMU and the task team.. To perform its responsibility, the FMA will be granted regular access to the project documents at the PMU and different relevant entities.
Table: FM Action Plan
|Action |By Whom |Date |
|Recruit Financial Officer |CBI/PMU |By project approval |
|Establish accounting records |CBI/PMU |By project approval |
|Prepare FM chapter of PIM |CBI/PMU |By project approval |
|Start external independent auditor |CBI/PMU |Two months after effectiveness |
Disbursement Arrangements
The Grant of US$10 million is expected to be fully disbursed by closing date, October 31, 2010.[34] The Bank's strategy in Iraq has become more flexible in selecting the entities to implement the Bank-financed or administered projects. For the past four years, the Bank has chosen to have the projects implemented though the Iraqi Ministries (rather than stand alone units outside government structures), ensuring that appropriate and effective financial controls are in place over the use of funds provided by the Bank, while at the same time working together to strengthen the Ministries’ own financial control processes and procedures. While this strategy has worked for some ministries, it had caused considerable project delays for others, due to the limited capacity and the existing inefficient systems. To timely and effectively implement and manage this project, a dedicated PMU will be established, composed of competent full-time consultants. Taking into consideration the high risk environment assessed for the project, including the assessed high FM risk, the disbursement arrangements will compensate by continuing to use appropriate disbursement methods. The disbursement methods used will be:
▪ Direct Payments These payments will be made to accounts at commercial banks capable of receiving funds transferred from the international banking system.
▪ Reimbursement to the CBI for eligible expenditures paid from the CBI resources. The CBI will submit reimbursement applications once per quarter.
▪ Special Commitments to facilitate payments under Letters of Credits for prior review contracts for the importation of goods as agreed in the procurement plan.
Continued training on Bank disbursement arrangements will be provided to the existing CBI PMU and financial counterpart at CBI, if needed. Supporting documents, e.g., copies of invoices and receipts, or SOE are required to be provided with all requests to disburse funds. These documents, including the SOE thresholds are detailed in the Disbursement Letter. The original copies of the supporting documentation will be maintained by the CBI and made available for review by Bank representatives upon request.
Country Financing Parameters (CFP) were approved for Iraq in September 2005. The CFP allow for the financing of 100 percent of eligible project expenditures.
The allocation of the proceeds of the Grant by expenditure category is as follows:
| |Expenditure Category |US$ m |Financing Percentage |
|1 |Goods |0.35 |100% |
|2 |Consultants services and training |8.40 |100% |
|4 |Incremental Operating Expenses |0.75 |100% |
|5 |Unallocated |0.50 | |
| |Total |10.00 | |
Annex 5: Procurement Arrangements
A. General
1. 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 and revised in October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 and revised in October 2006, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category is described below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Recipient and the Bank project team in the Procurement Plan (PP). The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice (GPN) will be published in UNDB on-line and in its printed version as well as in dgMarket online in January 15, 2009. Specific Procurement Notices (SPN) will be published for all ICB procurement and Consulting contracts as per Guidelines as the corresponding bidding documents and RFPs become ready and available.
2. Procurement of Works: no procurement of works is envisaged under this project.
3. Procurement of Goods: Goods procured under this project would include: IT and communication equipment and office furniture. The procurement will be done using Bank’s SBD for all ICB and National SBD agreed with the Bank and included in the ITF MIM. Shopping procedures and will also be carried out following MIM forms for the Request for Quotations. The Project Implementation Manual will extract and group the procurement procedures and methods applicable for the project.
4. Procurement of non-consulting services: no procurement of non consulting services is envisaged under this project.
5. Selection of Consultants: Consultants' services procured under this project will include selection of consultants to provide services related to: (i) Institutional and Operational Restructuring of the two State-owned Commercial Banks, (ii) Financial Restructuring of the Two State-owned Commercial Banks, and (iii) Strengthening the Regulatory and Supervisory Functions of CBI. Services will include TA to support procurement and FM functions in the PMU, training of staff on procurement, FM, contract management, and other technical fields as needed.
6. For consulting firms, the selection methods will mainly be QCBS and QBS for values above US$200,000. For values less than US$200,000 other methods can be envisaged such as selection based on CQ, selection based on Fixed Budget, Least Cost selection. For individual consultants, the selection will follow the procedures explained in Section V of Bank’s Guidelines for the selection and employment of consultants.
7. For QCBS and QBS, and any other selection process of international consulting firm, Bank’s standard RFP and standard evaluation forms will be used. For the selection of local/regional consulting firms, RFP and evaluation forms included in the ITF MIM will be used. The different selection methods will be indicated in the PP with clear indication for activities subject to prior review by the Bank. Shortlist of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provision of paragraph 2.7 of the Consultant Guidelines. The selection of individual consultants will be done in conformity with Section V of the “Guidelines: Selection and Employment of Consultants by World Bank Borrowers”.
8. The establishment of PMU: The project will finance the operating costs which would include: (i) maintenance of office equipment; (ii) office supplies, utilities, and office administration costs, including translation, printing and advertising; (iii) communication costs; (iv) costs associated with the production of bidding documents; and (v) commercial bank charges. These include: (i) transportation and travel including per diem allowance for PMU staff in travel status to attend supervision missions; any other project implementation related expenses as agreed by CBI and the Bank. The procurement of these items would follow the Recipient’s administrative procedures, satisfactory to the Bank. The project would not finance the salaries of the Recipient’s civil servants.
B. Assessment of the agency’s capacity to implement procurement
9. An Operation Procurement Report (OPR)” was prepared June 2005. The main findings and recommendations of the OPR are:
▪ Uncertainty of public procurement laws and regulations after suspension of all procurement regulations enacted under the former regime and replaced by the CPA Order No. 87 on Public Contracts in May 2004. This new law provides for the creation of an Office of Government Public Contract
▪ Lack of implementing regulations and administrative instructions for the new law.
▪ The procuring entities continue to use pre-existing regulations that lack a clear legal basis.
▪ This situation of legal uncertainty and lack of adequate regulations creates opportunities for corruption and substandard practices in public procurement.
Table A5.1: Summary Risk Assessment
|Description of risk |Rating of risk |Mitigation measures |Rating of residual|
| | | |risk |
|CBI lacks experience in Bank procurement |H |Recruitment of seasoned procurement officer with the |M |
|procedures | |appropriate experience to assist the PMU implementing | |
| | |the activities financed by the Project. TORs for these| |
| | |positions have been communicated to the CBI to start | |
| | |selecting key staff. FMA to provide on job trainings | |
| | |when needed | |
|Lack of applicable laws and regulations |H |Follow the ITF MIM which would provide aligned and |M |
| | |explicit methodology consistent Bank’s procurement and | |
| | |selection procedures. | |
|Lack of law enforcement which would increase |H | |H |
|risk of looting and the damaging of facilities| | | |
|Inability of World Bank procurement staff to |H |Prior review of all activities. Review outcomes by |H |
|supervise project in the field because of | |technical experts within Bank task team. The use of | |
|security situation | |the FMA to help the Bank monitor the implementation | |
| | |progress of the project as well as the recipient's | |
| | |compliance with Bank procurement, financial management | |
| | |and also provides on-the-job training, TA, and support | |
| | |to the project management staff. | |
|Corruption in procurement |H |Lowering threshold for prior review. Frequent review of| |
| | |files by the FMA as well physical verification by the |H |
| | |FMA. Close monitoring of corruption indicators in | |
| | |procurement and implementation. | |
|Average |H | |H |
H: High; M: Moderate and L: Low.
▪ Current procurement procedures and practices reflect the regulations issued by the former regime have number of features that are not in line with generally accepted sound public procurement practice. These features include: (i) inadequate requirements for registration of suppliers and contractors that are obsolete and inefficient and may lead to lack of fairness; (ii) insufficiently transparent and fair debarment procedures; (iii) continued use of obsolete methods and procedures for procurement of goods and works and selection of consultants, (iv) undue restrictions on access to bidding documents, (v) insufficiently transparent bid submission, opening and evaluation procedures, and contract award procedures, (vi) use of Kurdish language in the northern regions and Arabic language in the other parts of country; and (vii) lack of effective bid protest mechanisms and publicity on contract awards.
▪ Risks related to poor contract administration practices and security concerns are a major issue.
10. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Procurement Specialist on November 17, 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement Officer and the Ministry’s relevant central unit for administration and finance.
11. The CBI does not have any experience in implementing projects using Bank procurement and selection procedures or any different norms of acceptable international practice. Therefore, procurement will predictably bear a high level of risk. The risk lies essentially in the lack of applicable laws and regulations, modern standard documentation, insufficient training of concerned staff in procurement using World Bank guidelines and international sound procurement practice, the lack of law enforcement which would increase the risk of looting and the damaging of facilities, and the inability of World Bank procurement staff to supervise project in the field. This risk would be mitigated by the recruitment of seasoned procurement officer with the appropriate experience to assist the PMU implementing the activities financed by the Project. To address the ambiguity of regulations, the implementation arrangements as agreed between the Bank and the Government of Iraq will follow the ITF MIM which would provide aligned and explicit methodology consistent Bank’s procurement and selection procedures.
12. The overall project risk for procurement is High.
C. Procurement Plan
13. The Recipient, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Recipient and Bank’s Project Team on November 24, 2008. It will also be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. A General Procurement Notice will be advertised on-line UNDB and dgMarket on March 30. However, Specific Procurement Notices will be advertised according to the timing established in the procurement plan and for each activity soliciting expressions of interest of international consultants.
D. Frequency of Procurement Supervision
14. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended 2 supervision missions annually.
E. Independent Verification
15. The Iraq FMA will monitor the performance of the project implementation, procurement, and FM periodically and share reports with the Bank and CBI.
Table A5.2: Initial Procurement Plan for the whole project period Dated November 25, 2008 - Goods
|Package No. |Description/ Location |
|DC |Direct Contracting (in accordance with section 3.6 of the Guidelines) |
|SH |Shopping (in accordance with section 3.5 of the Guidelines) |
| |For goods contracts valued at or less than 100,000 |
| |Aggregate Shopping amount for the project: 400,000 to be monitored during the project period |
|Prior review | |
| |For Goods contracts: All ICB contracts. All NCB contracts of USD 100,000 equivalent or more and first “two” shopping contracts. |
Table A5.3: Initial Procurement Plan for the whole project period Dated November 25, 2008 - Consultants’ Services
|Package|Description of Assignment and component |
|No. | |
|QBS |Quality Based Selection (in accordance with section 3.5 of the Consultant’s Guidelines) |
|CQ |Consultants Qualifications (in accordance with section 3.7-8 of the Consultant’s Guidelines) |
| LCS |Least-Cost Selection (in accordance with section 3.6 of the Consultant’s Guidelines) |
|Exp |Expenses spent according to Recipient’s rules acceptable to the Bank (SOE) |
|SSS |Single source Selection (in accordance with section 3.9-13 of the Consultant’s Guidelines) |
| IC |Individual Consultant (in accordance with section V of the Consultant’s Guidelines) |
Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.
Annex 6: Implementation and Monitoring Arrangements
The project will be prepared under the OP. 8.0. Rapid Response to Crises and Emergencies, and hence processing the operation will be on the fast track. The proposed schedule for the project preparation and delivery was shared and discussed with Iraqi Delegation. The project is scheduled to be delivered in the first quarter of 2009, with a closing date of October 31, 2010 (20 months). The project was approved by the Iraq Strategic Review Board Meeting (ISRB)[35] on December 4, 2008. Negotiation of the project is planned in early 2009.
The Bank’s approach has been flexible in terms of design to permit a quick response to a changing security environment. In terms of implementation arrangements, the operation would rely on: (i) a PMU with qualified full-time Iraqi staff and consultants located in Baghdad; (ii) capacity building and training of state-owned banks’ staff actively working on banking reform; (iii) regular World Bank supervision missions to monitor progress made in project implementation; (iv) team members located in the field in Baghdad for day-to-day updates; (v) a network of videoconference facilities set up in the International Zone, the Ministry of Planning and Development Cooperation, CBI, the Ministry of Finance, the Board of Supreme Audit, and the state-owned commercial banks to make the monthly meetings with counterparts feasible; and (vi) periodic meetings through videoconferencing and audio with the various development partners (IMF, EU, US Treasury, USAID) to ensure effective coordination.
This operation will entail that the World Bank conduct several supervision missions, mainly to provide TA and advisory work to the Iraqi authorities in implementing the Banking Sector Reform Strategy—Action Plan (2008-2012). Based on the cross country experience, and international best practices, the World Bank banking sector experts will guide the Iraqi authorities in the areas of operational and financial restructuring, as well as on the capacity building of the central bank supervisory and regulatory authority, ensuring relevance to the Iraqi circumstances. In addition to the regular supervision missions, a team member in the field in the Baghdad World Bank Office will provide day-to-day support to PMU to ensure smooth implementation.
The World Bank has supported the Iraqi authorities in developing a comprehensive Banking Sector Reform Strategy--Action Plan. The Bank would help develop the banks capabilities in the areas identified in the operational audits.
To ensure effective implementation, Restructuring Working Committees have been established for the operational restructuring of the two state-owned banks. More than 10 working committees have been formed for each bank to support the operational restructuring, focusing on developing business plans; improving policies and procedures; drafting job descriptions; institutional reorganization; human resources; accounting and FM; IT; branch administration and operations. The ROC will ensure that the bank committees execute the restructuring in accordance with the MOU signed between the Central Bank and the Ministry of Finance.
In agreement with Iraqi authorities, actual project implementation would be carried out by a PMU. In the case of this project, a PMU is the best solution as there is no internal capacity to implement restructuring and take over the task; therefore, an autonomous unit with a full-time dedicated team is established for project management and implementation. PMUs are associated with a strong degree of autonomy, special management arrangements, independent staff and reporting, pay and employment outside the civil service, and parallel FM and procurement systems. The PMU will require considerable capacity building to allow it to implement the project according to World Bank procedures.
PMU is responsible for planning and coordinating all project activities, FM (accounting and disbursements), procurement of works, goods and consulting services (and related contract management) from the private sector, and monitoring and evaluation. Training would be provided to PMU staff during the preparation and appraisal of the project. Upon the signing of the Grant, a substantive project launch would be held with PMU to provide further training in project-specific management, procurement and FM. Also, a MIM, in English and Arabic, will be prepared to provide a comprehensive set of standards and procedures for PMU to ensure compliance with the requirements for project management, procurement and FM.
The PMU will assist with final designs, tender documents, tendering, FM and supervision of works. Consultants would assist in completing the project briefs and in carrying-out initial analysis and due diligence on all the proposed components. Capacity building will be provided to strengthen the fiduciary capacities of PMU, support compliance with the Bank’s environmental and social safeguards, and conduct reviews and inspections as agreed with the Bank.
Establishing a PMU would ensure smooth and effective implementation of the project. PMU’s policies and procedures will be harmonized with standard government practices. It will serve the Executive Steering Committee in charge of banking restructuring, which is headed by the Deputy CBI Governor, comprising of: Ministry of Finance representative; Board of Supreme Audit representative; and two CBI experts. The Executive Steering Committee comes under the ROC, which is established to guide and monitor the implementation of the restructuring plans of all state-owned banks in Iraq. The ROC consists of the Governor of the CBI (Chairman), the Minister of Finance, and the Chairman of the Board of Supreme Audit. The ROC is the decision making authority with regard to restructuring/reinforcing state-owned Banks.
The Bank will work closely with the Iraqi authorities in the selection process of the referred to consultants to ensure compliance with Bank’s guidelines and procedures. The Bank will also provide TORs for the PMU staff and will support CBI in the selection process.
Supervision, monitoring and evaluation. The Bank team will closely monitor the project. Regular Supervision Missions will be visiting Baghdad to meet with the main counterparts and the PMU to supervise and monitor progress made in project implementation and execution of strategy. In addition, a team member is located in the field in the World Bank Baghdad Office to provide day-to-day support. The team will also make full use of video conference facilities to communicate frequently with the PMU, CBI and the two state-owned commercial banks. Moreover, the team will be supported by FMA that will help the team in project supervision, monitoring implementation, and ensure compliance with Bank policies. The team will also coordinate closely with development partners, such as the US Treasury advisors who are resident in Baghdad. The Bank team will continue to attend conferences and other event organized by the IMF to work with the Iraqi counterparts. In addition, the project will earmark funds to pay for travel and meetings to help the Bank team maintain contact with the PMU.
Annex 7: Project Preparation and Appraisal Team Members
|Sequence Timing |
|Preparation and Pre-Appraisal November 22, 2008 |
|Appraisal December 2008 |
|Negotiations April 2009 |
|RVP Approval April 2009 |
|Grant Signing April 2009 |
|Closing Date October 31, 2010 |
Staffs and Consultants Who Worked on the Project
|Name |Title |
|Sahar Nasr |Task Team Leader, MNSED |
|Didier Debals |Senior Financial Sector Specialist, MNSED |
|Jorge Thompson Araujo |Lead Country Economist, MNSED |
|Douglas Pearce |Senior Private Sector Development Specialist, MNSED |
|John Nasir |Senior Economist, MNSED |
|Yahia Said |Senior Public Sector Specialist, MNSED |
|Mona El-Chami |Senior Financial Management Specialist, MNAFM |
|Abduljabbar Al-Qathab |Senior Procurement Specialist, MNAPR |
|Nikolai Soubbotin |Senior Counsel, LEGEM |
|Hyacinth Brown |Senior Disbursement Officer, LOAFC |
|Steve Wan |Operations Analyst, MNSED |
|Amira Zaky |Program Assistant, MNC03 |
| | |
|Consultants | |
|Salwa El Antary |Consultant, Banking Sector Restructuring, MNSED |
|James Hanson |Consultant, Banking Sector Restructuring, MNSED |
|Laila Ashraf AbdelKader |Consultant, Financial Economist, MNSED |
| | |
Annex 8: Statement of Loans, Credits and Grants
Operations Portfolio (IBRD/IDA and Grants)
(as of 02/09/2009)
| |
| | | | | | | |
|Proj ID |
|IFC’s Committed and Disbursed Outstanding Investment Portfolio |
|As of 02/28/2009 |
|(In USD Millions) |
| | | | | |
| | | | | | | | |
|** Quasi Equity includes both loan and | | | | |
|equity types. | | | | |
|Commercial State-owned Banks |Financial & operation restructuring of |Monetary Technical Assistance |Iraq Banking Sector Reform Project |Financial Services Volunteer Corps: |
|Restructuring |the 2 state owned banks (Rafidain & | |$ 10 million |2008-2010 |
| |Rasheed)-by providing technical |- Monetary and financial systems areas.|(2008–2010) |Strengthening banking supervision (in|
| |assistance |- Market policy and operations. |- Institutional and operational |co-ordination with METAC) at CBI |
| |$ 8.275 million |- Accounting and financial reporting. |restructuring of the two state-owned | |
| |(2008-2010) |- Central bank reform. |commercial banks | |
| | |- Banking supervision. |- Financial restructuring of the | |
| |-Strategic planning, policy & |- Banking restructuring. |state-owned commercial banks | |
| |procedures/job descriptions, |- Market policy and operations. |- Strengthening the regulatory and | |
| |-Human resources/Table of |- Payment and settlement systems. |supervisory capacity of the central bank | |
| |Organization, |- Reserves management. | | |
| |-IT & Accounting, |- Central bank prudential regulations. | | |
| |-Branch Administration/Operations, |- Debt restructuring. | | |
| |-Credit and Collection | | | |
| |-Staff Training and Development | | | |
|Capacity Building of the Central Bank of |Strengthening the regulatory and |Covered under the above project |Covered under the above project |FSVC |
|Iraq (CBI) |supervisory capacity of the central | | |- Strengthening internal organization|
| |bank | | |of Central Bank, |
| |(costs included in figure above) | | |- Strengthening reserves management |
| |CBI Strategic Planning Workshop, - | | |function at central bank. |
| |Monetary policy approaches, | | |- Facilitating expansion of CBI’s |
| |Site security arrangements, | | |counterparty relationships. |
| |Banking sector IT issues, including | | | |
| |expansion of the electronic payments | | | |
| |system. | | | |
Annex 12: Iraq Banking Reform Strategy—Action Plan*
(2008-2012)
I. Organization Structure
A. Develop an Overall Organization Structure
▪ Business Units organization** (retail, corporate and investment banking, and other business units)
▪ Risk Management Units
▪ Management Information System
▪ Governance, Control and Support Units (audit, legal & compliance, anti-money laundering, human resources & organization, shared services, financial functions, risk functions)
B. Forming a Dedicated Restructuring Unit Headed by a Restructuring Project Officer in Individual Banks
II. Capacity Building
A. Improve Human Resources Processes (development of a people strategy, clear rules and regulations for employees, assessment of skills and needs, job descriptions and qualifications and career paths, rewards management and performance evaluation)
B. Training of Staff Based on a Detailed Training Plan (skills and talent development, role modeling, increasing understanding and motivation, mindset and behavior transformation)
III. Finance and Accounting
A. Restructuring the Balance Sheets (including inherited debts and losses)
B. Capital Adequacy (classification of assets and provision policy, capital base)
C. Budgeting, Planning and Performance Management
D. Accounting System in Compliance with National Standard and in-line with International Practices
E. Comprehensive Reporting System of Financial Results
F. Cost Recovery and Re-pricing of Financial Products
IV. IT Infrastructure
A. IT Platform Covering all Operational Aspects, including:
▪ Marketing and sales tools
▪ Credit tools
▪ Risk management tools
▪ IT Related Consumer Product
B. Connectivity of Branches and Supervision Authority—Flow of Information
C. Security System of Information
V. Risk Management
A. Credit Risk (origination, underwriting, monitoring, workout)
B. Non-Credit Risk Management (market risk, operational risk, etc.)
VI. Internal Audit and Compliance
A. Internal Audit (processes, audit framework and methodology, effectiveness of internal audit)
B. Compliance with Laws, Regulations and Instructions (scope of improvement, compliance framework and methodology, organization)
VII. Strengthen the Banking Supervisory and Regulatory Authority
A. Make a Thorough and Comprehensive Review of Banking Supervision Processes
B. Update and Enforce a set of Regulations in line with International Standards
C. Make New Recruitments and Develop Training
I. Organization Structure
A. Develop an Overall Organization Structure Start Time: July 2009
▪ Review the “as is” overall organization structure (hierarchical structure, roles and responsibilities, risk management, revenue sources) and detect the main current organizational issues.
▪ Design the bank new target model fulfilling: (i) hierarchical structure simplification in order to speed up decision making processes; (ii) focus on risk, business and accountability; (iii) neat separation between risk generation and risk control/monitoring; and (iv) neat distinction between revenue generating units and supporting/shared services units
▪ Adopt the new organization structure.
▪ Create the Restructuring Units
▪ Identify and hire Heads for key priority functions
▪ Design the migration plan from the “as is” to the new organization
1. Business Units Reorganization
a. Retail Business Unit Start Time: June 2009
▪ Create the position of “head of Retail” who will be responsible for: (i) retail products (deposits and other liability products, credit cards, personal loans, mortgages, etc.; (ii) retail client segments (i.e. affluent, mass market and micro-business; and (iii) branch network
▪ Create separate units for marketing.
▪ Consolidate branch network management under one Head (or a number of regional managers) to report directly to the Head of Retail
b. Corporate Business Unit Start Time: September 2009
▪ Create the position of “Head of Corporate & Investment Banking” who will be responsible for the development and management of the Corporate Business (small, middle and large corporate segments)
▪ Create the “Trade Finance” Unit.
▪ Decide on integrating investment banking with corporate banking or creating an Investment Banking Unit (as is desirable)
c. Other Business Units Organization Start Time: December 2009
Under the Treasurer:
▪ Review Treasury front office activities
▪ Review Treasury back office activities
▪ Create Credit Workout Unit to be responsible of non-performing loan analysis, recovery strategy, debt recovery “execution” and performance assessment (See Section IV and V for more details)
2. Risk Management Units Start Time: July 2009
▪ Create Risk Management Units (See Section V for more details)
▪ Create the position of the Chief Risk Officer who will be reporting to senior management and responsible for: (i) risk policy (credit, market, operational risk, portfolio, etc.), and risk control (credit, market, operational risk, portfolio, etc.); (ii) risk measurement (credit, market, operational risk, portfolio, etc.); and (iii) other risk related functions
3. Management Information System Start Time: December 2008/January 2009
▪ Risk Management Unit will be responsible for: (i) central NPLs database; (ii) simplified and standardized rating/scoring tool; (iii) standard and centralized system and database for customers pre-screening; (iv) control of limits; (v) simulation of capital absorption on new deals; and (vi) simulation of market risks and capital needs
4. Governance, Control and Support Units Start Time: January 2009
a. Audit
▪ Revisit audit organizational structure to ensure that it covers The bank control system (i.e. IT, financial and branch network auditing) and clients’ claims management
b. Legal and Compliance Start Time: January 2009
▪ Revisit compliance organizational structure.
▪ Increase number of compliance staff for understaffed areas
c. Anti-money Laundering Start Time: January 2009
▪ Revisit the established Anti-money Laundering Units in individual banks to ensure compliance with the Anti-Money Laundering Law and CBI regulations
d. Human Resources and Organization Start Time: January 2009
▪ Enhance the position of “Human Resources Head” who will be responsible for: (i) human resources development and management (selection, evaluation, training, incentive system and career paths); (ii) bank organization; and (iii) internal communication
e. Shared Services Start Time: January 2009
▪ Create the position of the Chief Operations Officer who will be responsible for the management of shared services provision to the Bank’s business units, in order to maximize effectiveness and efficiency
▪ IT application, processes, back office services, real estate and facility management, purchases and logistic)
f. Financial Functions Start Time: January 2009
▪ Create the position of the Chief Financial Officer who will be responsible for: (i) planning and control; (ii) funding and asset and liability management; and (iii) accounting, financial reports and tax management
B. Forming a Dedicated Restructuring Unit at each Individual Bank
1. Establish a Dedicated Restructuring Unit Headed by a Restructuring Project officer in Individual Banks: Start Time: January 2009
▪ Create the position of the Head of the Restructuring Unit for each bank
▪ Follow-up and coordinates across different working groups on operational, institutional and financial restructuring of the bank
▪ Reports to the bank management and Executive Restructuring Committee
▪ Produce monthly and quarterly reports on progress made and challenges confronting the implementations of the restructuring process
II. Capacity Building
A. Improve Human Resources Processes
1. Development of a People Strategy Start Time: On-going process
▪ Define clear roles and responsibilities for human resources management processes
▪ Leverage bank’s strategy to develop a comprehensive “People Strategy”, including: (i) an agreement on type and number of employees needed; and (ii) an agreement on strategic people choices (i.e., talent acquisition, work and accountability, performance metric and employee value proposition)
▪ Develop a plan to address redundant staff through redeployment or voluntarily early retirement schemes
▪ Clarify the rules and regulations applicable to employees of state-owned banks
2. Assessment of Skills and Needs Start Time: July 2008
▪ Evaluate current level of skills, especially for pivotal roles (such as workout officers and Credit Marketing Officer) and managerial positions (including network)
▪ Assess commercial (such as product information) interpersonal and analytical/technical skills of sales force
▪ Identify recruitment needs for specific positions
▪ Create new job openings in areas that are not adequately available in banks with the needed skills, (such as chartered accountant, certified FM, IT expert, credit officer, credit risk management, mortgage underwriting, sectoral analyst, etc.)
3. Job Descriptions, Qualifications and Career Paths Start Time: July 2008
▪ Define specific and action-oriented job descriptions starting with pivotal positions in both Head Quarters and network; ensure that the responsibilities/ accountabilities are clear and well-understood
▪ Identify career paths for different positions including changing requirements/expectations at milestones
4. Reward Management and Performance Evaluation Start Time: June 2008
▪ Improve performance evaluation system to ensure objectivity and to include Value Based Management indicators
▪ Leverage on the work of the Ministry of Finance and the banks on “The Incentive Structure for Management and Employees Program”
▪ Revisit level and variability of incentives for specific positions (e.g. Marketing Officer, Workout Officers, etc.)
▪ Agree on style of accountability
▪ Collaborate with Value Based Management leaders to define process for setting goals and monitoring results
▪ Evaluate performance based on defined process
▪ Agree on compensation and rewards
▪ Find suitable solution for employees with low performance and potentials
B. Training of Staff Based on a Detailed Training Plan
1. Skills and talent development Start Time: January 2008
▪ Launch an extensive training starting from pivotal areas and roles: (i) key training areas would include FM, risk management, credit analysis, compliance, marketing, tellers with IT capabilities, etc.; and (ii) key marketing roles (such as credit marketing officer) would include four dimensions: technical knowledge (including, product knowledge), management capability, leadership and communication skills (including sales attitude)
▪ Set up a training program to increase experience and international competence preferably in partnership with foreign banks and/or institutions (such as exchange programs); provide support for development programs such as masters degree and language courses
2. Role Modeling Start Time: January 2008
▪ Deeply involve the top management in explaining the overall missions and strategy as well as the targets and objectives
▪ Find pivotal people and make them the “champions” of the behavioral change.
▪ Define the characteristics of a high-performing “top team” and the main steps for transformation paths
▪ Define seminar program held by top management for explaining to employees overall mission, strategy, targets and objectives and stage leadership “symbolic acts” as appropriate
▪ Identify the top 100-300 leaders to be indicated in future as role models (e.g. charismatic Branch/ Line managers).
▪ Highlight “change champions” characteristics from all levels in both formal and informal leadership roles.
▪ Training workshops with these pivotal people to make them “champions of change” within their daily work
3. Increasing understanding and motivation Start Time: January 2008
▪ Arrange recurring meetings between head quarter people and branch network to illustrate strategy and commercial initiatives.
▪ Establish a task force to help network in implementing commercial initiatives and new sales behavior
▪ Conduct regular meetings for feedback
4. Mindset and Behavior Transformation Start Time: January 2008
▪ Conduct full diagnostic of the Bank’s culture/needs
▪ Conduct a program targeting mindset & behavior as well as other capability needs, including:
▪ Design program and prepare training modules for key business and control areas and roles
▪ Conduct off-site training modules targeting different profiles (e.g. front line staff, branch managers, etc.)
▪ Conduct intense technical/ commercial workshops for front line staff
▪ Launch a training program designed to select top performers for future programs, by closely monitoring performance of participants
▪ Measure impact of programs and agree on improvement opportunities for future programs
III. Financing and Accounting
A. Restructuring the balance sheets (including inherited debts and losses) On-going process
▪ Define foreign debts of banks in accordance with the aim of reflecting the foreign debt settled in the banks’ financial statements
▪ Transfer to the Ministry of Finance or establish contra-accounts
▪ Ministry of Finance would take responsibility of part of the external debt
▪ Ministry of Finance will negotiate for the remaining portion of the external debt with relevant parties
▪ Define other debt and losses for making related decisions by authorized parties
▪ Identify and agree on discrepancies and ways to eliminate undercapitalization of banks
▪ Monitoring of banks’ foreign assets in foreign banks and foreign correspondents
B. Capital Adequacy On-going process
1. Classification of assets and provision policy
▪ Increase the amount of provisions in the profit and loss (P&L) in compliance with the audit results
▪ Provide additional resources by the Ministry of Finance to the banks to be used for provisioning for NPLs
▪ Account for NPLs that are not recognized in the current accounts
2. Capital base On-going process
▪ Reevaluation of the banks’ assets and take decision regarding non-strategic investments, rationalizing real estate properties of the bank in order to reduce the risk-weighted assets base
C. Budgeting, Planning and Performance Management Start Time: June 2009
▪ Leverage on the findings and recommendations of Ernest & Young audit in order to design a short-term Annual Business Plan and long-term “Strategic Business Plan” for each bank: (i) overview market outlook; (ii) assess bank current position; (iii) define bank’s mission, strategic priorities and aspirations; and (iv) define implementation approach, progress monitoring process and tools
▪ Improve operational planning and budgeting: (i) diagnose current situation and align different stakeholders; (ii) design a new operational plan and budgeting concept; and (iii) testing, piloting and deployment of the process
▪ Design a value-based management approach: (i) define Key Performance Indicators and value drivers; (ii) create a performance planning system and set opportunity based targets; and (iii) create a controlling function
D. Accounting System in compliance with National Standards and in-line with International Standards Start Time: January 2009
▪ Restructure general ledger
▪ Map and redesign accounting processes and policies
▪ Define system to account for provisions
▪ Leverage on the work being done to identify and clarify foreign debt, inherited losses and provisions
E. Comprehensive Reporting System of Financial Results Start Time: June 2009
▪ Define a set of data that is critical to the Ministry of Finance, the CBI, the management of the banks, and investors
▪ Identify financial performance indicators
▪ Take the required steps and measures to make the data available to decision makers and public
F. Cost Recovery and Re-pricing of Financial Products Start Time: March 2009
▪ Inventory of the major financial products and services, including potential new products
▪ Reassessment of the costs of financial products and services including those provided to the public sector to ensure that these costs cover capital costs
▪ Establishing a streamlined mechanism of the procedures and steps required to authorize pricing of financial products and services
IV. IT Infrastructure
A. IT Platform Covering Accounting and all Operational Aspects
1. Establish IT Platform Start Time: October 2008
▪ Implement an IT system that handles basic transactions of the banks.
▪ Expand the capability of the system to provide a timely picture of the banks position.
▪ Design interim templates in key areas, such as: (i) credit tools in the areas of pre-screening, scoring, early warning and NPLs transparency; (ii) tools to target manage and monitor sales (reports on products usage, risk profiling, etc.); and (iii) corporate segmentation based on real business parameters such as turnover, number of employees and asset size
▪ Design IT related consumer products, such as swift, credit cards, automatic teller machines, direct deposits of pay, etc.
B. Connectivity of Branches and Supervision Authority Start Time: October 2008
▪ Set-up connectivity between branches and Headquarters in Baghdad
▪ Set-up connectivity between branches and Headquarters in other Governorates in Iraq
▪ Set-up connectivity with all correspondent banks
▪ Set-up connectivity with head quarters and the CBI
C. Security System for Information Start Time: June 2009
▪ Adopting a security system for information in compliance with international standards
▪ Defining the responsibilities and authorities of those who have access to the system
▪ Identifying the right caliber, ethical, and professional skills for the staff responsible for the security system of information
▪ Establish a disaster recovery system
V. Risk Management
A. Credit Risk
1. Origination Start Time: October 2008
▪ Revise credit policy to make it simple and shared across the organization, setting guidelines on the credit risk appetite of the Bank and on how credit Risk should be distributed (across segments, sectors and geographies)
▪ Define how the overall process (of deciding, announcing, monitoring and revising credit Policy and strategy) works by specifying roles and responsibility of different stakeholders (i.e., Board, sales force as well as Credit Risk control units)
▪ Develop risk management policies and regulations for credit risk
▪ Transform front-line credit sales force from reactive to pro-active, increasing their focus on the client service while at the same time improve their level of accountability
▪ Reduce credit concentration risk
▪ Design standard and system/database for pre-screening (initially even basic parameters such as turnover, number of employees, past transactions, etc.), support organization with industry- specific data and information, such as sector reports
▪ Assess current situation by: (i) collecting credit files of all corporate and small and medium enterprises customers; (ii) assessing credit risk distribution (e.g., risk-adjusted exposure or, in absence of it, nominal exposure) across sectors and geographies; (iii) assessing risk rating and credit strategy of all corporate customers and most significant exposures (for example small and medium enterprises), and (iv) identify the weaknesses
▪ Define a risk-adjusted pricing for lending products
▪ Review credit policy/strategy
▪ Developing a simple credit strategy leveraging on existing material: (i) setting guidelines on Bank credit risk appetite and on how credit risk should be distribute across sectors/geographies
▪ Evaluating the new system
▪ Define a program to improve sales force and effectiveness: (i) create client portfolios to be allocated to sales force; (ii) define basic performance measurements (commercial, revenue and risk indicators); (iii) develop recruiting and training requirements for sales fore and credit officers; and (iv) plan the roll-out of the training program
▪ Develop business requirements to the IT for a centralized pre-screening tool supporting information reports (e.g. sector reports)
▪ Understand whether target IT platform fully satisfies/meets the business requirements
2. Underwriting
Rating and Scoring: Start Time: January 2009
▪ Simplify and standardize rating/scoring mechanism and tools, ensure that all credit-related employees understand and use them
▪ Design the systems to integrate all applications and database across the whole process and locations
▪ Standardize data requirements at the front-line level to minimize back-forth between origination and underwriting
▪ Closely monitor discrimination power of the scoring mechanism for further improvements
▪ Closely monitor customers ability to repay any loans in foreign currency
Delegated Credit Powers: Start Time: January 2009
▪ Revise the overall credit processes designing a workflow and a set of powers (based first on lending exposures and over time on risk) which will allow quick response to clients and optimize the workload of the Board, Credit Committees and other organization levels involved in credit underwriting
▪ Degree of delegation will depend on the size of the exposure
3. Monitoring
Diagnose the “as is” and Draft the Operating Model: Start Time: March 2009
▪ Review Current model and identify gaps versus best practices
▪ Develop a full diagnostic on processes: (i) watch-list selection and prioritization; (ii) preparation and implementation of pre-specified actions towards companies in the watch list; (iii) risk re-rating policy and procedures; and (iv) assessment of predictive power of current early warning model
▪ Develop a full diagnostic on organization: (i) responsibility split between head office and branches; and (ii) role split between credit officers and Credit Marketing Officers
▪ Design the operating model to be implemented (with clear responsibility split between head office and branches as well as between credit officers and Credit Marketing Officer) and review the dedicated units
Capture Quick Wins and Design the Change: Start Time: March 2009
▪ Identify and launch quick wins: (i) create and review the watch list and its prioritization; (ii) prepare an action plan towards companies in the watch list; (iii) select and train a task force (composed of high potential employees with credit e expertise) responsible to manage/update the watch list; and (iv) develop an easy to use and effective tool (i.e. excel format) to monitor the large corporate loans according to certain parameters and pre-set warning criteria
▪ Define a new loan monitoring process (e.g. process description of watch list selection, composition and prioritization, action plan design and implementation
▪ Improve monitoring organization: (i) define official role description of all the parties involved in the monitoring process (credit risk monitoring statistics, RMS, credit officers); and (ii) design a new performance measurement and incentive system
▪ Design required supporting system: (i) develop business requirements for an early warning system; and (ii) develop business requirements for a workflow system and attached standard reports
▪ Ensure that the IT platform to fully satisfies/meets the business requirements
4. Workout
Short-term Initiatives: Start Time: March 2009
▪ Analyze current existing portfolio: (i) establish a central NPLs database to enable portfolio segmentation in order to better identify relevant credit customers; and (ii) analyze historical recovery over last year and total cost of credit (losses, financial and operating costs): closed NPLs files sampling and one year recovery analysis of open NPLs Review current performance by customer segments
▪ Identify and launch “quick wins”: (i) draft a list of prioritized credit files according to net present value of recovery, distinguishing across segments and across secured vs. non secured lending, (iii) select and train a task force (composed of high employees with credit expertise) to workout selected NPLs; (iii) design the task force organization structure and its “ad hoc” incentives system; (iv) define simple and standard reports to make performance transparent and easy to monitor (at both aggregate and officer level); and (v) review the set of authority limits and delegated powers so as to speed up decisions and settlement process
▪ Develop recovery strategy and processes by customer segments (e.g. cases allocation to recovery officers, required level of analysis, key performance indicators)
Long term Initiatives for Sustainable Performance: Start Time: March 2009
▪ Design the long term operating model and define the organization structure specifying: (i) credit categories (i.e. Corporate, small and medium enterprises, Retail) and if necessary, sub-segments (i.e. geography and/or industrial sector); (ii) criteria to allocate credit to workout unit; (ii) criteria to allocate credit portfolio to workout officers; and (iii) processes and systems
▪ Develop a recruiting and redeployment plan, both for internal and external resources, according to the requirements in terms of full time equivalent and skills
▪ Define a training program for the workout officers
▪ Define an incentive system based on the recovery performance
▪ Estimate economic and financial impact of the long term business model
▪ Develop business requirements for a decision support system, with the following characteristics: (i) centralized and electronic access to the required data; (ii) support to the recovery agents in identifying recovery strategies; and (iii) decision making support based on quantitative indicators (i.e. recovery rate, average time of recovery, cost per transaction, etc.)
B. Non-credit Risk Management Start Time: March 2009
▪ Implement basic risk management in terms of measurement, strategy, processes and systems: (i) introduce simple risk adjusted profitability measurement; (ii) define basic capital allocation and expected return on capital; (iii) define risk management strategy and processes (e.g. operating limits and risk control processes); and (iv) introduce simple systems- or prototypes in short term- to support risk measurement of portfolio positions, control of limits and simulation of capital absorption on new deals
▪ Develop a full diagnostic to assess in an objective and consistent way each area of risk management.
▪ Design corporate risk management function with clear description of roles and responsibilities: (i) provide high level job description and key performance indicators for all functions related to risk and its processes
▪ Define guidelines on risk by the business unit and by risk type
▪ Define metrics for risk-adjusted performance measurement for the different levels of the organization
▪ Define a capital allocation process, coherent with the business and growth aspirations; set targets for expected returns taking risk into account; and allocate capital
▪ Define control processes to monitor operating limits and specify proper actions for managing exceptions
▪ Define business requirements of new systems/prototypes to support: (i) risk measurement of portfolio positions; (ii) control of limits; (iii) simulation of capital absorption on new deals
1. Market Risk Start Time: March 2009
▪ Create Market Risk Management organization
▪ Review of treasury processes
▪ Liquidity risk measurement and management.
▪ Interest rate risk measurement and management
▪ Funds Transfer Pricing
2. Operational Risk Start Time: March 2009
▪ Define operational Risk organization and methodology
▪ Set up Operational Risk reporting and control
▪ Define key performance indicators and standards of control
▪ Outline Operational Risk Management manual
▪ Set up Risk and Control self assessment
▪ Design new product approval process
VI. Audit and Compliance
A. Internal Audit
1. Processes, Audit Framework and Methodology, and Effectiveness of Internal Audit
Start Time: March 2009
▪ Evaluate the audit process, including role of Audit Committee, and recommend necessary improvements
▪ Create an integrated audit assessment frame work and methodology
▪ Assess effectiveness of internal audit, including the technical expertise, qualifications and experience in the internal audit function in order to provide assistance in all areas of the business
▪ Evaluate and assess effectiveness of the audit process and recommend necessary improvements of: (i) mission; (ii) roles and responsibilities; (iii) staffing (number of employees); (iv) skills (technical expertise, qualifications and experience); (v) supporting tools; and (vi) Key Performance Indicators
▪ Create an integrated audit framework and methodology
▪ Review and define Audit roles and processes (e.g. mission, roles and responsibilities, staffing, skills)
▪ Define a migration plan towards the “optimal” Audit structure, (e.g. supporting tools, key performance indicators)
B. Compliance with Rules, Laws, Regulations and Instructions Start Time: March 2009
▪ Assess current areas of improvement (e.g. understand role of the current Compliance Unit, benchmark with international players
▪ Strengthen compliance function: (i) revisit compliance framework and methodology (activities, regulation, policies) and the boundaries with audit and other functions; (ii) revisit organizational structure (e.g. define head role and responsibilities, review reporting lines, increase number of compliance staff in understaffed areas, define skill level requirements); and (iii) increase compliance-related IT investments (management information system, transaction monitoring, etc.)
▪ Run a compliance mindset and behavior program for both frontline and compliance officers, e.g. training programs, communication programs, and incentives and rewarding scheme.
VII. Strengthen the Banking Supervisory and Regulatory Authority
A. Make a Thorough and Comprehensive Review of Banking Supervision Processes
Start Time: January 2009
▪ On site supervision should focus on risks: (i) credit organization and policy; (ii) concentration of credit; (iii) source of funding; (iv) risk management systems; (v) IT system; and (vi) internal controls.
▪ Off site supervision should focus on: (i) new Management Information System; (ii) comprehensive review of banks (CAMELS approach); (iii) qualitative and quantitative analysis; and (iv) Peer comparison analysis
▪ Macro prudential surveillance should focus on resilience: (i) key developments, risks and vulnerabilities of the banking sector; (ii) seamless supervisory cycle with micro prudential surveillance; and (iii) main delivery: annual banking sector review
B. Update and Enforce a Set of Regulations in line with International Standards
Start Time: January 2009
▪ Priorities of the first set of regulations: (i) implementation of a lending policy; (ii) accuracy of loan evaluation and improvement of loan loss provisioning; (iii) monitoring of large exposures; (iv) addressing connected and directed lending; and (v) enhancement of internal controls and audit
▪ Priorities of the second set of regulations: (i) operational risk and related issues; and (ii) market risks
C. Make New Recruitments and Develop Training Start Time: January 2009
▪ Staff and training issues: (i) start new recruitments to rejuvenate the work force; (ii) assess the training policy and process; (iii) enhance leadership capacity and rewards; and (iii) incentives and rewarding scheme.
Annex 13: Detailed Terms of Reference (TORs) for Project Activities
I. TORs for Project Activities under Component One: Institutional and Operational Restructuring of the Two State-owned Commercial Banks
A. Organization Structure
1. Overview
Project Understanding. To establish an Organization and Job Profiling Platform where it came to identify the following project objectives: (i) supporting the bank’s business reform strategies; (ii) paving the way for the implementation of the bank's job profiles including families and levels; and (iii) facilitating working relationships between various divisions.
Execution Overview. A High Level Organization Structure exercise will be carried out to achieve the required Organization and Job profiling Platform. The project is recommended to pass through the following phases:
▪ Organization Baseline Study through the following: (i) study available documentation covering history, plans, and reports; and (ii) meetings with Bank officials to understand the reform requirements, the current bank’s structure, the bank’s nature of core functions, defining key business drivers, norms of operations (what is working & what is not, etc…).
▪ Meeting with the selected bank officials to confirm the organization concepts and each of the banks’ fundamental areas.
▪ High Level Organization Charts will be developed for level 1 and level 2 in the bank based on EBI’s experience guided by the business strategy, reform requirements and driven by the best practice in the banking sector. The Organization Structure would reflect: (i) reporting relations within the bank; (ii) bank’s headcount; (iii) the different organization levels; and (iv) key results areas and key performance indicators.
▪ Upon confirmation on the outcome of the High Level Organization Structure, a draft of the Job Profiles will be developed through the following job analysis of the different functional areas followed by approval of the draft and final job profiles outcome; and transfer of knowledge to the bank’s officials on writing and managing the job profiles. A typical job profile reflects: (i) job purpose; (ii) key results and corresponding duties; (iii) key performance indicators; (iv) required core competencies and level-specific competencies; (v) communication; (vi) financial responsibility; and (vii) job specifications. The same methodology will be applied on the rest of the organization levels in the banks (level 3 and level 4). Further details on the methodology and execution will be provided upon agreement on the project concept.
Overall Project Duration. The service duration will primarily depend on the set plan where the overall duration is estimated to be around 100-130 days for all project phases per each bank.
2. Branch Managers Certificate
Training Purpose. This course will develop an understanding of the nature of strategy and management and their relevance to organizations in the business, corporate and international management context. Candidates will learn the principles of management and the tools and techniques used to ensure success.
Certificate Objectives: (i) contribute positively to the strategic debate in the bank; (ii) apply their own and the team’s knowledge and experience in order to contribute to the achievement of the bank’s strategic objectives; (iii) define what is meant by effective leadership and how it differs from management; (iv) describe the performance management process; (v) determine through analysis the clear and realistic objectives for a project and evaluate its management through the project stages; (vi) use presentations effectively to deliver messages; (vii) prepare employees for organizational change by providing simple ideas they can use to succeed in the new environment; (viii) explain the differences between money laundering and the financing of terrorism; and (ix) describe the main concepts of forgery and falsification of documents.
Who Should Attend. This course is targeted at all functional branch managers, deputies and assistants.
3. Course Outline
Module 1: Managerial and leadership skills for Managers
▪ Describe the major issues facing management
▪ Identify the factors and behaviors that hinder effective communication
▪ Analyze a situation and determine which leadership style to use, given the development level.
▪ Identify the motivational factors that increase productivity in the workplace
▪ Demonstrate how to coach a staff member
▪ Analyze a situation to determine whether to delegate responsibility
▪ Analyze a situation where change and the accompanying transition process must take place.
Module 2: Marketing for Non-marketers
▪ Describe different marketing principles and approaches.
▪ Discuss the importance of segmenting markets.
▪ Describe the development of new products.
▪ Explain the different marketing communication tools.
▪ Identify different advertising strategies.
Module 3: CELEMI Livon Lite™
▪ Describe a marketing strategy and tactical initiatives
▪ Explain how to optimize limited resources through strategic allocation
▪ Discuss ways to improve responsiveness to customer needs and preferences
▪ Explain the overall business impact of a decision
▪ Develop local (local within global) performance
Module 4: Managing Performance and Appraisals
▪ Link the performance criteria for individuals to company performance criteria
▪ Describe the performance management process
▪ List and discuss the pros and cons of different appraisal methods
▪ Explain SMART goals
▪ Explain the role of competencies in the appraisal process
▪ Practice conducting an effective performance appraisal discussion
Module 5: Effective Presentation Skills
▪ Apply the steps in preparing a presentation
▪ Use presentation visual aids to emphasize ideas
▪ Learn and apply platform skills
▪ List presentation Do's and Don’ts
Module 6: Time and Stress Management
▪ Define time management
▪ Describe typical time wasters
▪ Describe the time management system
Module 7: Managing Change “Who Moved My Cheese”
▪ Discuss ways to accept change
▪ Discuss how to anticipate change
▪ Explain how to recognize change
▪ Define change
▪ Discuss methods to achieve change
▪ Demonstrate how to lead and manage change
Module 8: Problem Solving and Decision Making
▪ Discuss the barriers and motives to creative problem solving
▪ Create alternative solutions
▪ Think outside the box – in non-traditional ways (be creative)
Module 9: Working in Teams
▪ The importance of working in teams
▪ Team strengths
▪ More effective relations with team members
▪ Developing teamwork strategies
Module 10: Implementing Strategies through Effective Projects
Overview. This highly practical introductory module provides delegates with all the essential skills, tools and techniques that they will need to support them in their project management role. The programme concentrates on the practical techniques that can be applied directly back to the workplace. Participants formulate a detailed strategy and implementation plan initiative.
Objectives. Participants formulate a detailed strategy and implementation plan initiative. To introduce the principles of Management and the tools and techniques used to ensure success. Candidates will have an opportunity to analyse their own problems and concerns about projects they currently manage or will be managing.
Benefits. By the end of the course participants will be able to:
▪ Define what is meant by a project and how it differs from normal management tasks.
▪ Identify the role, skills and qualities of an effective manager.
▪ Set clear and realistic objectives for a project and understand the stages of the project life cycle.
▪ Confidently plan, organize and document a project in a logical manner.
▪ Gain and maintain the support and commitment of others and clearly identify the role of all team members.
▪ Monitor, control and adjust a project effectively and keep all relevant parties informed of progress.
▪ Predict risks and make appropriate contingency plans.
▪ Review and learn from strengths and weaknesses identified on completion of a project.
Content
▪ What is strategy?
▪ Diagnostic tools and techniques
▪ People management issues in relation to strategy
▪ Mission statements, vision and values
▪ Appreciation to strategic planning
▪ Introduction to Project Management
▪ The Project Life Cycle
▪ Project Planning, Risk and Change Management
▪ Implementing and Controlling Projects
▪ Effective Project Communication and People Management
Program Applications
▪ Teach the power of effective planning and generate the conviction to do it
▪ Demonstrate the impact of goals on teamwork and results
▪ Teach the power of vision and proper goal setting
▪ Create a vision for individual and team productivity and results
Course Length
Total Time 3 weeks
Assessment Strategy. Participants will be graded on an end of program group project presentation and there will also be informal assessment based on class participation, exercises, small group activities, and role play.
4. Supervisors Level
Purpose of Training. This program is designed to provide supervisors with the skills required to be effective. As supervisors and first-line managers become more and more overloaded with responsibilities and tasks, effective supervision is an absolute must. It is very resourceful to comprehend the basic supervision and management concepts and its fundamental skills to become a successful supervisor and meet the company’s objectives. The course will cover such topics as leadership versus management, communication skills, performance management, teamwork, motivating people, and creative problem solving and decision making, performance management.
Who Should Attend. This course is intended for new, prospective or existing lower and mid-level supervisors.
Language of Instruction. This program is delivered in Arabic and English.
Course Objectives
▪ Describe the characteristics of a supervisor.
▪ List the factors and behaviors that hinder effective communication.
▪ Describe the six-step performance interview model.
▪ Build effective, creative teams.
▪ Develop an action plan to maintain employee motivation, address dissatisfaction and bring out the best in your direct reports.
▪ Delegate authorities
5. Course Outline
Supervising / Managing fundamentals
▪ Definition of management
▪ Definition of a manager
▪ Characteristics of the ideal supervisor
▪ Primary supervisory duties
▪ Leader vs. manager
▪ Manager/supervisor roles
▪ Time management
▪ Leadership and the art of coaching
Communication Skills
▪ Communication styles and methods
▪ Barriers to communication
▪ Listening skills
▪ How supervisors can ensure that subordinates fully understand their instructions
▪ The importance of adapting the communication style to different personalities and situations
Motivating People (getting things done through others)
▪ Motivation theory
▪ Creating motives
▪ Developing the skills to motivate others
▪ Increase efficiency of staff
▪ How to achieve objectives with efficiency and effectiveness
▪ Motivation methods
Delegating without losing control
▪ Reasons for delegation
▪ When to delegate and when not to delegate
▪ Delegating authorities
Working in Teams
▪ The importance of working in teams
▪ Team strengths
▪ More effective relations with team members
▪ Developing teamwork strategies
Managing Performance
▪ Definition
▪ Elements of managing performance
▪ Different methods of performance appraisal
▪ Development and training
6. Human Resources Certificate
Certificate Description. This professional certificate focuses on the issue of planning, directing and developing human resources in an organization, using the right tools based on the job-related competencies, knowledge and skills. The ability to select, interview and assess candidates is a key factor in ensuring that the right person is hired for the job.
Who Should Attend. This certificate is intended for human resource (HR) managers, specialists and personnel, as well as line managers.
Certificate Objectives
▪ Explain the strategic role of HR management
▪ Recruit and place employees
▪ Train and develop employees
▪ Pay employees for performance
▪ Develop a management information system for HR
▪ Develop stress and time management and presentation skills
Module 1: Introduction to Human Resources
▪ The strategic role of human resource management
▪ Equal employment opportunity
▪ Know your employment law
▪ Basics of leadership skills
Module 2: Recruitment and Placement
▪ Job analysis
▪ Planning and forecasting
▪ Employee testing and selection
▪ Interviewing candidates
Module 3: Employee Training and Development
▪ Training and developing employees
▪ Performance management and appraisal
▪ Managing careers
Module 4: Compensation
▪ Establishing strategic pay plans
▪ Pay for performance and financial incentives
▪ Employee benefits and services
Module 5: Management Information Systems for HR
▪ Using the internet for writing job descriptions
▪ Succession planning systems
▪ Automated applicant tracking systems
▪ The new performance management systems
▪ Integrating career planning into the employer's Human Resources Information System (HRIS)
▪ Automating the compensation planning process
▪ Employee incentive management systems
▪ Benefits management systems
Module 6: Soft Skills: Stress and time management
▪ The sources of stress and strategies to overcome stress
▪ Time wasters and means of overcoming them
▪ Successful time management steps
Presentation skills
▪ Body language techniques
▪ Different audience styles
▪ Methods of presentation preparation, taking into consideration audience analysis
▪ Preparing for a presentation
Problem solving and decision making
▪ Problems, basic categories and their relation to management problems
▪ Applying the creative approach in problem analysis and solving
▪ The factors that affect the decision making process
Certificate Length
Total Time 2 weeks
Assessment Strategy
Participants will be assessed based on their mid-term test.
B. HR Consultancy TOR
A. Background/objective
A key initiative is to assist in undertaking the Iraq Banking Reform Strategy.
Assistance will include providing support as requested by the management of the Central Bank in the following areas:
▪ Develop an Overall Organization Structure including the following units:
- Business Units organization (retail, corporate and investment banking, and other business units)
- Risk Management Units
- Management Information System
- Governance, Control and Support Units (audit, legal & compliance, anti-money laundering, human resources & organization, shared services, financial functions, risk functions)
▪ Forming a Dedicated Restructuring Unit Headed by a Restructuring Project Officer in Individual Banks
B. Tasks
Off Site
▪ Review the Bank's mission, vision and objectives
▪ Develop recommendations for organizational structure and skills required for business units and
▪ Prepare training matrix for capacity building for each staff
On Site
Work with the Central Bank of Iraq to develop an organizational structure for all business unites, taking into consideration the following:
▪ Review the “as is” overall organization structure (hierarchical structure, roles and responsibilities, risk management, revenue sources) and detect the main current organizational issues.
▪ Design the bank new target model fulfilling:
- Hierarchical structure simplification in order to speed up decision making processes
- Focus on risk, business and accountability
- Neat separation between risk generation and risk control/monitoring
- Neat distinction between revenue generating units and supporting/shared services units
▪ Adopt the new organization structure.
▪ Create the Restructuring Units
▪ Identify and hire Heads for key priority functions
▪ Design the migration plan from the “as is” to the new organization
▪ Provide input into skills required to staff positions
▪ Meet with management to determine reporting lines
▪ Review banking laws and other relevant policies to identify needed units and hierarchy
C. Outputs and Deliverables
▪ Define the roles and responsibilities of all the personnel within the organization.
▪ Establishing a hierarchical structure of authority, power and hence decision making
▪ Establish communication channels and information flows, incorporating a chain of command with specific rules and regulations relating to reporting procedures and accountability methods
▪ Establish control mechanism such as the degree of centralization and the span of control.
▪ Establish strategies for coordination of work practices
▪ Establish Decision making processes
▪ Establish specific operational functions and tasks
C. Credit and Risk Management Program
Target Audience. This course is intended for junior and senior officers with minimum two years of experience working in the following areas: credit, credit administration, credit analysis, credit risk management, credit monitoring. In addition, employees in other bank credit-related departments could attend as a secondary target audience.
Program Duration: 276 hrs – 34.5 full days
Program Description. During this program, participants will be trained in a comprehensive approach on all credit and risk management related topics over four courses. These courses will provide participants with the knowledge and skills to analyze financial statements, evaluate borrower creditworthiness, explain the asset conversion cycle, discuss the various types of risk encountered in lending, and evaluate the structure of the loan which enables them to make sound financial, lending and leasing decisions.
First Part (64 hrs – 8 full days)
Courses Objectives
Course (1): Financial Statement Analysis (16 hrs)
At the end of this program, the participants will be able to:
▪ List the financial statements and explain their structure.
▪ Describe how to analyze the liquidity, profitability and performance of a company and identify the valuation methods.
▪ Perform financial analysis in order to lay the groundwork for credit and investment decisions.
Course (2): Credit – Introduction (24 hrs)
At the end of this program, the participants will be able to:
▪ Explain the importance of bank credit.
▪ Define working capital and the asset conversion cycle.
▪ Describe best practices in financing methods.
Course (3): Industry Analysis for Lending Purposes – Workshop (8 hrs)
At the end of this program, the participants will be able to:
▪ Characterize industries by type and maturity.
▪ Determine the industry risk through analysis of the cost / asset structure, profitability and market sensitivity.
▪ Perform risk analysis in order to create a database used for credit and investment decision-making.
Course (4): Banking Information (4 hrs)
At the end of this program, the participants will be able to:
▪ Define banking Information.
▪ Describe the banking information department.
▪ Explain the duties and responsibilities of the banking information department
Course (5): Credit Administration Functions (12 hrs)
At the end of this program, the participants will be able to:
▪ Identify the role and function of credit administration.
▪ Describe the various types of credit facilities.
▪ Explain fully secured credit facilities.
▪ Identify types of collateral.
Course Outline
Course (1): Financial Statement Analysis (16 hrs)
Module 1: Financial Statements
Module 2: Structure and Elements of Financial Statements
Module 3: Special Case Studies
Course (2): Credit – Introduction (24 hrs)
Module 1: The Concept of Bank Lending
Module 2: Working Capital and the Asset Conversion Cycle
Module 3: Types of Bank Loans
Module 4: Types of Credit Facilities, Lending Limits and Associated Risks
Module 5: The Credit Process in Banks
Module 6: Financial Analysis for Credit Purposes
Course (3): Industry Analysis for Lending Purposes – Workshop (8 hrs)
Module 1: The Classification of an Industry
Module 2: Introduction to Industry Risk Characteristics
Module 3: Industry Risk Analysis as a Lending Tool
Course (4): Banking Information (4 hrs)
Module 1: Introduction to Banking Information
Module 2: The Banking Information Department
Module 3: Duties and Responsibilities of the Banking Information Department
Course (5): Credit Administration Functions (12 hrs)
Module 1: The Role and Function of Credit Administration
Module 2: Types of Credit Facilities
Module 3: Fully Secured Credit Facilities
Module 4: Types of Collateral
Assessment Strategy
The participants will be directly assessed after each part according to the class discussions and exercises conducted.
Second Part (80 hrs – 10 full days)
Course Objectives
Course (1): Tools of Credit Analysis (40 hrs)
At the end of this program, the participants will be able to:
▪ Identify the different financial statements.
▪ Explain the asset conversion cycle.
▪ Describe asset-based lending.
▪ Determine historical and future cash flows.
▪ Describe the terms, conditions and collateral requirements in the loan agreement.
Course (2): Financing Investment Projects – Cash Flow Analysis (40 hrs)
At the end of this program, the participants will be able to:
▪ Explain the mechanics of cash flow.
▪ Describe the time value of money and cost of capital.
▪ Explain capital budgeting and cash flow analysis.
Course Outline
Course (1): Tools of Credit Analysis (40 hrs)
Module 1: Financial Statements
Module 2: The Asset Conversion Cycle
Module 3: Asset-based Lending
Module 4: Cash Flow
Module 5: The Loan Agreement
Course (2): Financing Investment Projects – Cash Flow Analysis (40 hrs)
Module 1: Cash Flow Analysis
Module 2: The Time Value of Money and Cost of Capital
Module 3: Capital Budgeting and Cash Flow Projection
Assessment Strategy
The participants will be directly assessed after each part by a formal test in addition to the class discussions and exercises conducted.
Third Part (80 hrs - 10 days)
Course Objectives
Course (1): Credit Risk Ratings and Loan Provisioning (24 hrs)
At the end of this program, the participants will be able to:
▪ Describe the main conceptual framework for credit risk ratings and loan provisioning.
▪ Explain the credit risk rating and loan provisioning process.
▪ Explain the credit risk management process.
Course (2): Credit Risk Analysis (40 hrs)
At the end of this program, the participants will be able to:
▪ List the various types of financial statements.
▪ Explain the asset conversion cycle.
▪ Describe the various types of risk encountered in lending.
▪ Evaluate the loan structure.
Course (3): Bank Risk Management (16 hrs)
At the end of this program, the participants will be able to:
▪ Explain the concept and function of risk management.
▪ Explain and measure credit risk.
▪ Define operations risk and methodologies for measuring it.
▪ Define market risk and methodologies for measuring it.
▪ Define liquidity and the core principles for managing it.
▪ Describe the Basel core principles of risk management
Course Outline
Course (1): Credit Risk Ratings and Loan Provisioning (24 hrs)
Module 1: Conceptual Framework
Module 3: Credit Risk Management
Module 2: Credit Risk Ratings and Loan Provisioning
Course (2): Credit Risk Analysis (40 hrs)
Module 1: Financial Statements
Module 2: The Asset Conversion Cycle
Module 3: Various Types of Risk
• Determining and measuring the acceptable level of risk
• Types of risk:
o Inventory risk
o Collection risk
o Legal structure risk
o Exchange rate risk
o Business risk
o Political risk
• Asset-based financing risk
• Practical exercises and case studies
Module 4: Evaluating the Loan Structure
Course (3): Bank Risk Management (16 hrs)
Module 1: Introduction to Risk Management
Module 2: Credit Risk
Module 3: Operational Risk
Module 4: Market Risk
Module 5: Liquidity and Other Risks
Module 6: The Basel Core Principles of Risk Management
Assessment Strategy
The participants will be directly assessed after each part according to the class discussions and exercises conducted. In addition, a formal test will be conducted for “Credit Risk Analysis” course.
Fourth Part (52 hrs – 6.5 full days)
Course Objectives
Course (1): Detecting Falsified and Fraudulent Financial Statements (16 hrs)
At the end of this program, the participants will be able to:
▪ Differentiate among falsified and fraudulent statements, and errors.
▪ Detect falsification and fraud in the valuation of assets on the balance sheet.
▪ Detect falsification and fraud in provisions, revenues and expenses in the income statement.
▪ Identify emergency conditions and subsequent events.
▪ Define the roles of different parties in detecting falsification and fraud.
Course (2): Non-performing Loans and methods of Problem Loan Resolution (36 hrs)
At the end of this program, the participants will be able to:
▪ Define non-performing loans and the causes.
▪ Identify the indicators of non-performing loans.
▪ Explain the banking treatment of non-performing loans.
▪ Explain the banking treatment of non-performing investment projects.
▪ Monitor rescheduled non-performing loans.
▪ Manage non-performing loans.
▪ Explain the principles of borrower credit ratings and provisioning.
▪ Describe the legal aspects of working with non-performing loans.
▪ Identify the lessons learned from classified/non-performing loans.
Course Outline
Course (1): Detecting Falsified and Fraudulent Financial Statements (16 hrs)
Module 1: The Difference between Falsified and Fraudulent Documents
Module 2: Detecting Falsification and Fraud in Asset Valuation on the Balance Sheet
Module 3: Detecting Falsification and Fraud in Provisions, Revenues and Expenses in the Income Statement
Module 4: Emergency Conditions and Subsequent Events to the Balance Sheet
Module 5: Parties Responsible for Detecting Falsification and Fraud in Financial Statements
Course (3): Non-performing Loans and Methods of Problem Loan Resolution (36 hrs)
Module 1: Introduction to Non-performing loans
Module 2: The Indicators of the Non-performing Loan
Module 3: The Banking Treatment of Non-performing Loans
Module 4: The Banking Treatment of Non-Performing Investment Projects
Module 5: Monitoring Rescheduled Non-performing Loans
Module 6: Managing Non-Performing Loans
Module 7: The Principles of Borrower Credit Ratings and Provisioning
Module 8: Legal Aspects of Working with Non-performing Loans
Module 9: Lessons Learned from Classified Loans
Assessment Strategy
The participants will be directly assessed after each part according to the class discussions and exercises conducted. In addition, a formal test will be conducted for “Non-performing Loans and Methods of Problem Loan Resolution” course.
II. TORs for Project Activities under Component Two: Financial Restructuring of the Two State-owned Commercial Banks
A. Accounting and Finance Program
Target Audience. This program is intended for staff of bank working in the accounting and finance departments.
Program Description. During this course, participants will learn the latest accounting standards used in preparing financial statements to acquire the skills needed to work with the various components of financial statements and understand the underlying accounting treatment and confirm their credibility.
Program Duration: 64 hrs - 8 full days
Program Objectives:
First Course: Basics of Accounting (24 hrs)
At the end of this program, the participants will be able to:
▪ Discuss accounting standards and their importance.
▪ Explain the concepts and various components of company financial statements.
▪ Discuss asset evaluation and its related issues.
▪ Explain cash flow statement.
▪ Describe special accounting treatment items.
Second Course: Bank Cost Accounting (16 hrs)
At the end of this program, the participants will be able to:
▪ Differentiate between financial and cost accounting.
▪ Design a cost accounting system.
▪ Identify the various cost elements and the related accounting treatment.
▪ Measure bank costs and revenues.
Third Course: Financial Statement Analysis (16 hrs)
At the end of this program, the participants will be able to:
▪ List the financial statements and explain their structure.
▪ Describe how to analyze the liquidity, profitability and performance of a company and identify the valuation methods.
▪ Perform financial analysis in order to lay the groundwork for credit and investment decisions.
Fourth Course: Detecting Falsified and Fraudulent Financial Statements – Workshop “Practical Cases” (8 hrs)
At the end of this program, the participants will be able to:
▪ Differentiate among falsified and fraudulent statements, and errors.
▪ Detect falsification and fraud in the valuation of assets on the balance sheet.
▪ Detect falsification and fraud in provisions, revenues and expenses in the income statement.
▪ Identify emergency conditions and subsequent events.
▪ Define the roles of different parties in detecting falsification and fraud.
Course Outline:
First Course: Basics of Accounting (24 hrs)
Module 1: Introduction to Company Accounting Standards
Module 2: Cash Flow
Module 3: Inventory
Module 4: Fixed Asset Depreciation
Module 5: Special Accounting Treatment
Second Course: Bank Cost Accounting (16 hrs)
Module 1: Introduction to Cost Accounting in Banks
Module 2: Classification and Calculation of Cost Elements in Banks
Module 3: Accounting for the Cost Elements in Bank
Module 4: Cost Statements
Third Course: Financial Statement Analysis (16 hrs)
Module 1: Financial Statements.
Module 2: Structure and Elements of Financial Statements.
Module 3: Special Case Studies.
Fourth Course: Detecting Falsified and Fraudulent Financial Statements – Workshop “Practical Cases” (8 hrs)
Module 1: The Difference between Falsified and Fraudulent Documents.
Module 2: Detecting Falsification and Fraud in Asset Valuation on the Balance Sheet.
Module 3: Detecting Falsification and Fraud in Provisions, Revenues and Expenses in the Income Statement.
Module 4: Emergency Conditions and Subsequent Events to the Balance Sheet
Module 5: Parties Responsible for Detecting Falsification and Fraud in Financial Statements.
Assessment Strategy
The participants will be directly assessed after each part according to the class discussions and exercises conducted.
B. Internal Audit and Compliance Program
Target Audience. This course is primarily targeting mid-level and senior internal auditors in addition to all control staff in banks.
Program Description. During this course, participants will learn about different but related areas that constitute a base for any internal auditor in the banking sector. In the first part they will be able to learn the crucial role of internal audit in the banking system and how to prepare risk-based audit reports. Also, they will learn about the different techniques for verifying whether or not financial statements and documents are genuine and they will learn the basics of cost accounting in bank (e.g. how to categorize costs, how to measure bank costs and revenues, and how to design a cost accounting system). In addition, participants will learn the basics of Basel II and its three pillars, which cover minimum capital requirements, the supervisory review process and market discipline. Moreover, in the second part, they are intended to gain a comprehensive approach on all credit and risk management related topics especially the various types of risk encountered in lending.
Program Duration: 160 hrs – 20 full days
First Part (80 hrs – 10 full days)
Course (1): Bank Cost Accounting (12 hrs)
At the end of this program, the participants will be able to:
▪ Differentiate between financial and cost accounting.
▪ Design a cost accounting system.
▪ Identify the various cost elements and the related accounting treatment.
▪ Measure bank costs and revenues.
Course (2): Internal Audit - Introduction (12 hrs)
At the end of this program, the participants will be able to:
▪ Describe the value of internal audit.
▪ Explain the concept of internal audit.
▪ Discuss internal audit standards.
▪ Discuss how to plan and execute an internal audit.
Course (3): Risk-based Audit (24 hrs)
▪ Explain modern trends in internal audit and control.
▪ Describe the role of internal audit in the bank.
▪ Discuss internal audit standards in banks.
▪ Define the different types of banking risk.
▪ Prepare risk-based audit reports.
Course (4): Detecting Falsified and Fraudulent Financial Statements (16 hrs)
At the end of this program, the participants will be able to:
▪ Differentiate among falsified and fraudulent statements, and errors.
▪ Detect falsification and fraud in the valuation of assets on the balance sheet.
▪ Detect falsification and fraud in provisions, revenues and expenses in the income statement.
▪ Identify emergency conditions and subsequent events.
▪ Define the roles of different parties in detecting falsification and fraud.
Course (5): Basel II (The International Framework of Bank Capital Adequacy) (16 hrs)
At the end of this program, the participants will be able to:
▪ Describe Basel II (credit, operations and market risk).
▪ Explain the First Pillar – Minimum Capital Requirements.
▪ Discuss the Second Pillar – Supervisory Review.
▪ Explain the Third Pillar – Market Discipline.
▪ Describe the advantages and limitations of the application of Basel II.
Courses Outline:
Course (1): - Bank cost Accounting (12 hrs)
Module 1: Introduction to Cost Accounting in Banks
Module 2: Classification and Calculation of Cost Elements in Banks
Module 3: Accounting for the Cost Elements in Bank
Module 4: Cost Statements
Course (2): – Internal Audit - Introduction (12 hrs)
Module 1: The Importance of Internal Audit
Module 2: The Concept of Internal Audit
Module 3: Internal Audit Standards
Module 4: Planning the Internal Audit
Course (3): - Risk-based Audit (24 hrs)
Module 1: Introduction
Module 2: Internal Audit and Control
Module 3: Internal Audit Standards
Module 4: Banking Risks
Module 5: New Concepts in Internal Audit
Course (4): Detecting Falsified and Fraudulent Financial Statements (16 hrs)
Module 1: The Difference between Falsified and Fraudulent Documents
Module 2: Detecting Falsification and Fraud in Asset Valuation on the Balance Sheet
Module 3: Detecting Falsification and Fraud in Provisions, Revenues and Expenses in the Income Statement
Module 4: Emergency Conditions and Subsequent Events to the Balance Sheet
Module 5: Parties Responsible for Detecting Falsification and Fraud in Financial Statements
Course (5): Basel II (The International Framework of Bank Capital Adequacy) (16 hrs)
Module 1: Introduction to Basel II
Module 2: The First Pillar – Minimum Capital Requirements
Module 3: The Second Pillar – Supervisory Review Process
Module 4: The Third Pillar – Market Discipline
Module 5: The Advantages and Limitations of the Implementation of Basel II
Program Assessment. The participants will be directly assessed after each part according to the class discussions and exercises conducted.
III. TORs for Project Activities under Component Three: Strengthening the Regulatory and Supervisory Functions of the Central Bank of Iraq (CBI)
A. Banking Supervision Program
Target Audience. This course is intended for all staff in banking supervision department in the central bank (both On-site and Off-site units).
Program Duration: 200 hrs – 25 full days
Program Description. This program is designed as an intensive and comprehensive training for the Supervision Dept. Staff which will provide the participants with the required knowledge in all related areas in order to develop the supervisory skills needed for monitoring and inspection activities. The program will be conducted over three parts:
First Part (64 hrs – 8 full days)
Course Objectives
Course (1): Financial Statement Analysis (16 hrs)
At the end of this course, the participants will be able to:
▪ List the financial statements and explain their structure.
▪ Describe how to analyze the liquidity, profitability and performance of a company and identify the valuation methods.
▪ Perform financial analysis in order to lay the groundwork for credit and investment decisions.
Course (2): Credit – Introduction (24 hrs)
At the end of this course, the participants will be able to:
▪ Explain the importance of bank credit.
▪ Define working capital and the asset conversion cycle.
▪ Describe best practices in financing methods.
▪ List the types of credit facilities, their lending restrictions and associated risks.
▪ Collect information as part of the credit process.
▪ Use credit analysis as part of the lending process
Course (3): Basel II (The International Framework of Bank Capital Adequacy) – Introduction (24 hrs)
At the end of this course, the participants will be able to:
▪ Describe Basel II (credit, operations and market risk).
▪ Explain the First Pillar – Minimum Capital Requirements.
▪ Discuss the Second Pillar – Supervisory Review.
▪ Explain the Third Pillar – Market Discipline.
▪ Describe the advantages and limitations of the application of Basel II.
Course Outline
Course (1): Financial Statement Analysis (16hrs)
Module 1: Financial Statements
Module 2: Structure and Elements of Financial Statements
Module 3: Special Case Studies
Course (2): Credit – Introduction (24 hrs)
Module 1: The Concept of Bank Lending
Module 2: Working Capital and the Asset Conversion Cycle
Module 3: Types of Bank Loans
Module 4: Types of Credit Facilities, Lending Limits and Associated Risks
Module 5: The Credit Process in Banks
Module 6: Financial Analysis for Credit Purposes
Course (3): Basel II (The International Framework of Bank Capital Adequacy) – Introduction (24 hrs)
Module 1: Introduction to Basel II
Module 2: The First Pillar – Minimum Capital Requirements
Module 3: The Second Pillar – Supervisory Review Process
Module 4: The Third Pillar – Market Discipline
Module 5: The Advantages and Limitations of the Implementation of Basel II
Assessment Strategy
The participants will be directly assessed after each part by according to the class discussions and exercises conducted.
Second Part (80 hrs – 10 full days)
Course Objectives
Course (1): Credit risk Rating and Loan Provisioning (24 hrs)
At the end of this course, the participants will be able to:
▪ Describe the main conceptual framework for credit risk ratings and loan provisioning.
▪ Explain the credit risk rating and loan provisioning process.
▪ Explain the credit risk management process.
Course (2): Credit Risk Analysis (32 hrs)
At the end of this course, the participants will be able to:
▪ List the various types of financial statements.
▪ Explain the asset conversion cycle.
▪ Describe the various types of risk encountered in lending.
▪ Evaluate the loan structure.
Course (3): Non-performing Loans and Methods of Problem Loan Resolution (24 hrs)
At the end of this course, the participants will be able to:
▪ Define non-performing loans and the causes.
▪ Identify the indicators of non-performing loans.
▪ Explain the banking treatment of non-performing loans.
▪ Explain the banking treatment of non-performing investment projects.
▪ Monitor rescheduled non-performing loans.
▪ Manage non-performing loans.
▪ Explain the principles of borrower credit ratings and provisioning.
▪ Describe the legal aspects of working with non-performing loans.
▪ Identify the lessons learned from classified/non-performing loans.
Course Outline
Course (1): Credit risk Rating and Loan Provisioning (24 hrs)
Module 1: Conceptual Framework
Module 3: Credit Risk Management
Module 2: Credit Risk Ratings and Loan Provisioning
Course (2): Credit Risk Analysis (32 hrs)
Module 1: Financial Statements
Module 2: The Asset Conversion Cycle
Module 3: Various Types of Risk
Module 4: Evaluating the Loan Structure
Course (3): Non-performing Loans and Methods of Problem Loan Resolution (24 hrs)
Module 1: Introduction to Non-performing loans
Module 2: The Indicators of the Non-performing Loan
Module 3: The Banking Treatment of Non-performing Loans
Module 4: The Banking Treatment of Non-Performing Investment Projects
Module 5: Monitoring Rescheduled Non-performing Loans
Module 6: Managing Non-Performing Loans
Module 7: The Principles of Borrower Credit Ratings and Provisioning
Module 8: Legal Aspects of Working with Non-performing Loans
Module 9: Lessons Learned from Classified Loans
Assessment Strategy
The participants will be directly assessed after each part by according to the class discussions and exercises conducted. In addition, a formal exam will be conducted after the “Credit Risk Analysis” Course
Third Part (56 hrs – 7 full days)
Course Objectives
Course (1): Internal Audit – Introduction (16 hrs)
At the end of this course, the participants will be able to:
▪ Describe the value of internal audit.
▪ Explain the concept of internal audit.
▪ Discuss internal audit standards.
▪ Discuss how to plan and execute an internal audit.
Course (2): Risk-based Audit (24 hrs)
At the end of this course, the participants will be able to:
▪ Explain modern trends in internal audit and control.
▪ Describe the role of internal audit in the bank.
▪ Discuss internal audit standards in banks.
▪ Define the different types of banking risk.
▪ Prepare risk-based audit reports.
Course (3): Detecting Falsified and Fraudulent Financial Statements (16 hrs)
At the end of this course, the participants will be able to:
▪ Differentiate among falsified and fraudulent statements, and errors.
▪ Detect falsification and fraud in the valuation of assets on the balance sheet.
▪ Detect falsification and fraud in provisions, revenues and expenses in the income statement.
▪ Identify emergency conditions and subsequent events.
▪ Define the roles of different parties in detecting falsification and fraud.
Course Outline
Course (1): Internal Audit – Introduction (16 hrs)
Module 1: The Importance of Internal Audit
Module 2: The Concept of Internal Audit
Module 3: Internal Audit Standards
Module 4: Planning the Internal Audit
Course (2): Risk-based Audit (24 hrs)
Module 1: Introduction
Module 2: Internal Audit and Control
Module 3: Internal Audit Standards
Module 4: Banking Risks
Module 5: New Concepts in Internal Audit
Course (3): Detecting Falsified and Fraudulent Financial Statements (16 hrs)
Module 1: The Difference between Falsified and Fraudulent Documents
Module 2: Detecting Falsification and Fraud in Asset Valuation on the Balance Sheet
Module 3: Detecting Falsification and Fraud in Provisions, Revenues and Expenses in the Income Statement
Module 4: Emergency Conditions and Subsequent Events to the Balance Sheet
Module 5: Parties Responsible for Detecting Falsification and Fraud in Financial Statements
Assessment Strategy
The participants will be directly assessed after each part according to the class discussions and exercises conducted.
Annex 14: Country at Glance
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[1] The project closing date would be extended if the ITF termination date (currently set at December 31, 2010), is extended.
[2] Phase I of the Government of Iraq Banking Reform Strategy covers the period 2009-2010. Additional funding, such as local government funding and donors’ financial support, will be considered to support the second phase, covering the period of 2011-2012.
[3] Iraq nationalized its commercial banks in 1964. In 1974, four commercial banks were merged into one—Rafidain, which had a commercial banking monopoly in Iraq until Rasheed Bank was established. Along with its normal commercial banking operations, Rafidain Bank also conducted some transactions for the Government of Iraq that are part of central bank activities in most countries. Rasheed Bank has a large domestic branch network but no foreign branches. Before the first Gulf war, Rafidain was the Arab world’s largest commercial bank with total assets of US$47 billion and a branch network outside of Iraq, notably in Beirut, Cairo, Amman, Bahrain, and Sanaá.
[4] This includes HSBC, National Westminster, and National Bank of Kuwait.
[5] State-owned enterprises (SOEs) were financed from the budget, in the form of grants, and by hidden subsidies.
[6] This World Bank Banking Sector Reform project supports the first phase of the Government of Iraq Banking Reform Strategy, covering the period of 2009-2010. Additional funding, such as local government funding and donors’ financial support, will be considered to support the second phase, covering the period of 2011-2012.
[7] The MOU sets the stage for the financial and operational restructuring of Rafidain and Rasheed as it provides for the owner to: (i) assume the large foreign debt liabilities of Rafidain; (ii) stand behind the state-owned banks, and honor all their liabilities until such time as their capital structure is in full regulatory compliance; and (iii) develop and carry out a credible time-bound medium-term plan for both operational and financial restructuring of the banks.
[8] This institutional set up has been supported by the US Treasury and the IMF.
[9] Based on the 2006 financial accounts.
[10] A benchmark of the IMF stand-by program with the Government of Iraq is the adoption of operational and financial restructuring program for Rasheed Bank and operational restructuring program Rafidain Bank based on the findings of the audits by end of 2008.
[11] This World Bank Banking Sector Reform project supports the first phase of the Government of Iraq Banking Reform Strategy, covering the period of 2009-2010. Additional funding, such as local government funding and donors’ financial support, will be considered to support the second phase, covering the period of 2011-2012.
[12] Although the non-bank segment of Iraq’s financial Industry—capital markets and insurance—eventually needs to be addressed, a precondition for this development is the resumption of effective banking operations.
[13] Annex 8 provides a detailed statement of loans and credit in Iraq.
[14] This World Bank Banking Sector Reform project supports the first phase of the Government of Iraq Banking Reform Strategy, covering the period of 2009-2010. Additional funding, such as local government funding and donors’ financial support, will be considered to support the second phase, covering the period of 2011-2012.
[15] There are US$ 0.5 million unallocated.
[16] This includes support for: (i) establishment of a well-functioning, adequately managed and completely staffed risk management organization in line with international and regional best practices; (ii) changes in the organizational structure, especially the set up of a risk control department; (iii) development of manuals for risk management; (iv) amendments to existing credit approval procedures on the basis of accepted best practices; (v) improved measuring and monitoring capabilities that will enable the banks to produce comprehensive and accurate reports on a bank-wide basis, including the ability to identify “single obligors” and aggregate such exposures; and (vi) training in human resource management.
[17] The State Audit’s responsibilities include state-owned banks, their subsidiaries, and public enterprises in which Rafidain Bank and Rasheed Bank have stakes and shareholdings.
[18] The procurement of these items would follow the Recipient’s administrative procedures, satisfactory to the Bank. The project would not finance the salaries of the Recipient’s civil servants.
[19] The IIBN, which is expected to be operational by June 2009, would allow the CBI to set up an electronic payment and settlement system to interconnect with 26 private and state-owned banks, including Rafidain Bank, in Baghdad and other areas. The IIBN would enable availability of important applications such as government security registration system, real-time gross settlement system, automatic clearing house, and check-enabled system. It would also allow tracking of financial capital flow and hence provisioning of anti-money laundering applications.
[20] Detailed TORs were attached to the Appraisal Mission Aide Memoire of November 22-25, 2008, which was transmitted to the Iraqi authorities.
[21] This has also affected the audits of the Rafidain Bank as the audit firm did not receive the financial statements of its branches in Kurdistan Region and does not have access to their accounting records.
[22] A benchmark of the IMF stand-by program with the Government of Iraq is the adoption of operational and financial restructuring program for Rasheed Bank and operational restructuring program Rafidain Bank based on the findings of the audits by end of 2008.
[23] This includes: (i) advise on establishment of a well-functioning, adequately managed and completely staffed risk management organization in line with international and regional best practices; (ii) propose changes in the organizational structure, functions and responsibilities of the risk control department; (iii) assist in developing manuals for risk management; (iv) amend existing credit approval procedures on the basis of accepted best practices; and (v) recommend measuring and monitoring capabilities that enables the banks to produce comprehensive and accurate reports on a bank-wide basis with the ability to identify “single obligors” and aggregate such exposures.
[24] This includes: (i) develop a business driven HR strategy based on effective performance management indicators; (ii) recommend and implement selected policies and procedures for recruitment, re-deployment and promotion that will identify abilities in key competencies; (iii) design and implement a performance appraisal procedures that will identify individual strengths and weaknesses; (iv) draft a management development scheme; and (v) review existing job evaluation methods and identify appropriate systems.
[25] Training workshops were conducted to promote the emergence of a core group of professional banking supervisors among the existing CBI staff since June 2004.
[26] This included: (i) licensing requirement processes; (ii) minimum capital requirements; (iii) loan classification and provisioning; (iv) large exposures; (v) connected lending (transactions with related parties); (vi) investment in securities and real estates; (vii) lending policy; (viii) internal control; (ix) compliance function; and (x) risk management.
[27] A banking restructuring action plan would support Rafidain and Rasheed banks in redesigning and implementing a new risk management process.
[28] Responsibility include state-owned banks, their subsidiaries, and public enterprises in which Rafidain and Rasheed have stakes and shareholdings.
[29] This included: (i) licensing requirement processes; (ii) minimum capital requirements; (iii) loan classification and provisioning; (iv) large exposures; (v) connected lending (transactions with related parties); (vi) investment in securities and real estates; (vii) lending policy; (viii) internal control; (ix) compliance function; and (x) risk management.
[30] A banking restructuring action plan would support Rafidain and Rasheed banks in redesigning and implementing a new risk management process.
[31] The procurement of these items would follow the Recipient’s administrative procedures, satisfactory to the Bank. The project would not finance the salaries of the Recipient’s civil servants.
[32] “Financial Management Accountability Assessment”
[33] IMF-World Bank “Enhancing Sound PFM-Short- to Medium-Term Reforms report, “Public Expenditure and Institutional Assessment”, and the “Sub-national Public Financial Management”, and the Corruption Perception Index
[34] This World Bank Banking Sector Reform project supports the first phase of the Government of Iraq Banking Reform Strategy, covering the period of 2009-2010. Additional funding, such as local government funding and donors’ financial support, will be considered to support the second phase, covering the period of 2011-2012.
[35] A committee consisting of the minister of planning and development cooperation, the minister of finance, a representative of the CPA, and two ISRB secretariat members, acts as a focal point for coordinating donor activities, including loans, grants, guarantees, and TA.
[36] Page 22 of the Rafidain Bank and Rasheed Bank reports.
[37] Page 24 of the Rafidain Bank and Rasheed Bank reports.
[38] Page 31 of the Rafidain Bank and Rasheed Bank reports.
[39] Page 32 to 37 of the reports.
[40] Page 43 to 85 of the Operational diagnostic review reports.
[41] Operational diagnostic review reports (page 91).
[42] Amounting to US$ 204 million and US$ 117 million (IQD 1,000 = US$ 0.8521)
[43] Amounting to IQD 306 million and US$ 13.1 billion (18.4 % of GDP—the 2008 GDP would reach IQD 83.6 trillions, ie. US$ 71.2 billion). The capital shortfall of US$ 13.1 billion (Rafidain Bank) is based on a number of adjustments which are likely to be required. Chief among these is a difference arising from the reevaluation of assets and liabilities denominated in foreign currencies. IQD 8.33 trillion (US$ 7.1 billion) are currently recognized as an asset due from the Ministry of Finance and are included within “other assets” of the Rafidain Bank. This amount relates to 2006 and may be recognized as an expense in the income statement.
[44] Page 101 of the operational diagnostic review reports.
[45] Page 12 of the asset quality reports.
[46] Page 113 of the Operational diagnostic review reports.
[47] Page 120 of the operational diagnostic review reports.
[48] Page 125 of the operational diagnostic review reports.
[49] Page 127 of the operational diagnostic review reports.
[50] This included: (i) licensing requirement processes; (ii) minimum capital requirements; (iii) loan classification and provisioning; (iv) large exposures; (v) connected lending (transactions with related parties); (vi) investment in securities and real estates; (vii) lending policy; (viii) internal control; (ix) compliance function; and (x) risk management.
[51] A banking restructuring action plan would support Rafidain and Rasheed banks in redesigning and implementing a new risk management process.
[52] IMF Technical Assistance Subaccount for Iraq Medium-Term Strategy and Work Plan: FY 2009 – 2010. March 20, 2008.
[53] IMF Technical Assistance for Iraq, Third Progress Report: June 22, 2007.
[54] Reconciliation of local banks' current account has improved after the CBI tightened its reporting requirements from the banks. No progress has been made with respect to the reconciliation of suspense accounts (mainly with the Ministry of Finance), and of CBI intra-branch accounts.
[55] Nine key regulations have been finalized.
[56] As of January 25, 2009.
* Banks in this Annex refers to state-owned banks.
** Units in this document refer to any organizational form.
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Flow of Funds
Flow of documents and Information
Direct Payment
Suppliers and Consultants
Payment from DA
CBI PMU Project
Reimbursements
ITF Grant Account
Request Payment
CBI PMU
MOF
MOPDC
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