Draft Operations Manual - Home | Mena Transition Fund



Date of Submission to Coordination Unit:

A. GENERAL INFORMATION

1. Activity Name

|Inclusive Regulations for Microfinance Project |

2. Requestor Information

|Name: Eng. Mohamed Hammam |Title: Assistant to the Minister of Planning and International Cooperation |

|Organization and Address: Ministry of Planning and International Cooperation |

|Cairo, Arab Republic of Egypt |

|Telephone: +20223916214 |Email: mehammam@ |

3. Recipient Entity

|Name: Dr. Sherif Samy |Title: Chairman |

|Organization and Address: The Egyptian Financial Supervisory Authority (Implementing Agency) |

|Telephone: (+202) 353-45352 |Email: Sherif.Samy@.eg |

4. ISA SC Representative

The World Bank SC Representative

|Name: Junaid Ahmad |Title: Sector Director MNSSD |

|Organization and Address: World Bank, 1818 H street, NW, Washington DC 20433, USA |

|Telephone:+1 202 458 8470 |Email: jahmad@ |

5. Type of Execution (check the applicable box)

|√ |Type |Endorsements |Justification |

|x |Country-Execution |Attach written endorsement from designated | |

| | |ISA | |

| |Joint Country/ISA-Execution |Attach written endorsement from designated |(Provide justification for ISA-Execution) |

| | |ISA | |

| |ISA-Execution for Country |Attach written endorsement from designated |(Provide justification for ISA-Execution) |

| | |ISA | |

| |ISA-Execution for Parliaments |Attach written endorsements from designated| |

| | |Ministry and ISA | |

6. Geographic Focus

|X |Individual country (name of country): The Arab Republic of Egypt |

| |Regional or multiple countries (list countries): |

7. Amount Requested (USD)

|Amount Requested for direct Project Activities: |USD 4,000,000 |

|(of which Amount Requested for direct ISA-Executed Project Activities): | |

|Amount Requested for ISA Indirect Costs: |USD 505,000 |

|Total Amount Requested: |USD 4,505,000 |

8. Expected Project Start, Closing and Final Disbursement Dates

|Start Date: |1-July -2014 |Closing Date: |31- December -2018 |End Disbursement Date: |30-June -2018 |

9. Pillar(s) to which Activity Responds

|Pillar |Primary |Secondary |Pillar |Primary |Secondary |

| |(One only) |(All that apply)| |(One only) |(All that apply)|

|Investing in Sustainable Growth. This could| |x |Enhancing Economic Governance. This could |X | |

|include such topics as innovation and | | |include areas such as transparency, | | |

|technology policy, enhancing the business | | |anti-corruption and accountability policies,| | |

|environment (including for small and | | |asset recovery, public financial management | | |

|medium-sized enterprises as well as for | | |and oversight, public sector audit and | | |

|local and foreign investment promotion), | | |evaluation, integrity, procurement reform, | | |

|competition policy, private sector | | |regulatory quality and administrative | | |

|development strategies, access to finance, | | |simplification, investor and consumer | | |

|addressing urban congestion and energy | | |protection, access to economic data and | | |

|intensity. | | |information, management of environmental and| | |

| | | |social impacts, capacity building for local | | |

| | | |government and decentralization, support for| | |

| | | |the Open Government Partnership, creation of| | |

| | | |new and innovative government agencies | | |

| | | |related to new transitional reforms, reform | | |

| | | |of public service delivery in the social and| | |

| | | |infrastructure sectors, and sound banking | | |

| | | |systems. | | |

|Inclusive Development and Job Creation. | |X |Competitiveness and Integration. This | | |

|This could include support of policies for | | |could include such topics as logistics, | | |

|integrating lagging regions, skills and | | |behind-the-border regulatory convergence, | | |

|labor market policies, increasing youth | | |trade strategy and negotiations, planning | | |

|employability, enhancing female labor force | | |and facilitation of cross-border | | |

|participation, integrating people with | | |infrastructure, and promoting and | | |

|disabilities, vocational training, pension | | |facilitating infrastructure projects, | | |

|reform, improving job conditions and | | |particularly in the areas of urban | | |

|regulations, financial inclusion, promoting | | |infrastructure, transport, trade | | |

|equitable fiscal policies and social safety | | |facilitation and private sector development.| | |

|net reform. | | | | | |

B. STRATEGIC CONTEXT

10. Country and Sector Issues

|With the third anniversary of the January 25th revolution, Egypt continues to undergo major political, economic and social transformations. A grassroots|

|campaign led by the Tamarrod youth movement started to collect citizens' signatures in May 2013 to force President Mohamed Morsi to call for early |

|elections. The campaign culminated in massive demonstrations on June 30, 2013, with calls for the President to step down. In the wake of these |

|demonstrations, President Morsi was ousted and a new transition period was ushered in. |

|A new Cabinet was appointed in July 9, 2013, yet after several labor strikes that took place early in 2014, the government unexpectedly announced its |

|resignation in February 2014. A new interim Cabinet was sworn in on March 1, 2014, headed by Ibrahim Mehleb, who was perceived as the “most active” |

|minister in the previous government. The security situation since June 30, 2013 has been volatile, due to sporadic confrontations between security |

|forces and supporters of the banned Muslim Brotherhood and its allies. A new Constitution has been put in place, as per a referendum conducted in |

|mid-January 2014 with almost 39 percent turnout. Other transition milestones are expected soon with the Presidential elections scheduled in April 2014 |

|to be followed by parliamentary elections towards the summer. |

|The Egyptian economy has been in a deteriorating tailspin since the January 25th revolution. Real GDP growth reached 2.1 percent in June 2013, which is |

|a slight decline from the previous year’s growth of 2.2 percent. The first quarter of 2014 has also seen modest growth of one percent, due to the |

|heightened political unrest. Real growth is expected to average around 2.7 percent to 2.9 percent for the whole fiscal year, provided that the |

|government swiftly implements its two fiscal stimulus packages which amount jointly to a US$ 8.5 billion. The fiscal deficit has surged to 13.7 percent |

|of GDP in June 2013, which increased from the previous year’s deficit of 10.6 percent in June 2012. The deficit declined during the first half of FY14 |

|(June 2013–December 2013) to 4.4 percent of GDP in December 2013 compared to 5.2 percent of GDP during the same period last year. After decreasing |

|sharply in 2012, inflation reached 11.7 percent in December 2013. This was mainly due to the weaker currency (which depreciated by around 15 percent |

|during the first half of 2013) and food inflation that rose 12-15 percent during the first half of FY14. |

|Overall economic and political instability has adversely affected investment and the growth of the private sector. Domestic investment fell to |

|14.2 percent of GDP while foreign direct investment (FDI) has dropped to 1.1 percent of GDP in June 2013. The business environment and the security |

|situation have also discouraged the establishment of new enterprises. Smaller enterprises were disproportionally affected by the deteriorating business |

|climate and the security situation. Sluggish growth, the fiscal deficit, and the drop in investment have had a negative effect on the creation and |

|growth of such enterprises. |

|The widening fiscal deficit has also led to the crowding out of private sector credit. Banks have opted for purchasing less risky, high-yield Government|

|bonds and Treasury bills that represent 41 percent of the banking system assets, accounting for 58 percent of GDP, leaving very little loanable funds |

|available. Claims on the government-to-total domestic credit has risen to reach 66 percent, while claims on private business sector credit dropped to |

|25 percent in January 2014, as opposed to 54 percent and 42 percent in June 2012, respectively. |

|All this has contributed to an increase in unemployment and poverty rates. Unemployment is on the rise, reaching 13.4 percent in Q4 2013, up from |

|8.9 percent in Q4 2010. Unemployment is especially striking among women and youth (aged 20-24 years old) where unemployment rates were 25 percent and |

|39 percent, respectively. The poverty rate also increased to 26.3 percent in June 2013 up from 25 percent in June 2011 and 21.6 percent in June 2009. |

|Rural Upper Egypt continues to be the most vulnerable region with a poverty rate of 50 percent in June 2013. Not only has economic growth been well |

|below its potential, it has failed to create sufficient job opportunities. Moreover, growth has not been inclusive, creating grievances and unrest among|

|many segments of society. |

|Besides the anemic macroeconomic environment, governance and transparency remain pressing issues. Egypt is deteriorating in almost all governance |

|indicators. According to the World Bank Worldwide Governance Indicators, government effectiveness, regulatory quality, and rule of law rankings have all|

|declined in the past two years. Weak governance, privileged lending, lack of a level playing field, weak regulatory framework and unequal access to |

|markets have contributed to limited economic opportunities, an underdeveloped private sector, and have ultimately hindered job creation. Strengthening |

|governance will be crucial to support the transition and enhance the credibility of public institutions. Giving equal access to markets, and |

|opportunities is essential for restoring citizens` confidence. It is critical to move towards a fairer and more competitive economy that utilizes market|

|mechanisms to create economic opportunity and productive jobs. |

|In that context, the government announced an ambitious program that primarily targets sustainable growth and social equity, with an emphasis on the |

|development and support of smaller enterprises. Included in a ten-pillar program announced on July 17, 2013 is the development of micro, small and |

|medium enterprises (MSMEs) to create jobs, particularly for women and youth. This focus on MSMEs was made in response to the demand for an inclusive |

|system that promotes shared prosperity. |

|Limited access to finance is one of the main obstacles facing Egyptian entrepreneurs. Egypt’s rank in the 2014 Doing Business Report for ‘Getting |

|Credit’ deteriorated from 82nd in 2013 to 86th in 2014. In Egypt micro and small enterprises (MSEs) account for more than 98 percent of enterprises, |

|generate more than 85 percent of employment in the non-agriculture private sector, and 40 percent of total employment. |

|Microenterprises suffer disproportionately from low financial intermediation and are offered limited financial products. Only 11.1 percent of micro |

|enterprises have bank loans, as opposed to 38.2 percent for large enterprises. On the supply side, banks are reluctant to lend to micro enterprises, |

|especially young and new ones, due to the perceived associated risk. Furthermore, banks continue to lend based on collateral as opposed to cash-flow, |

|narrowing the opportunities for these enterprises that often do not have sufficient collateral. Banks in Egypt effectively serve privileged large well |

|established enterprises. |

|Access to financial services amongst micro businesses and households in Egypt is very low. According to Findex data, only 10 percent of adults have an |

|account at a formal financial institution, and fewer than four percent of Egyptian adults took a loan from a financial institution in the past year. By |

|way of comparison, on average 18 percent of adults in the Middle East and North Africa (MENA) region and 24 percent of adults in lower middle income |

|countries have accounts at formal financial institutions. Only two percent of the working age population is active microcredit borrowers. In Egypt, |

|financial intermediation is very low for micro enterprises. |

|Microenterprises are clustered in low productivity sectors in Egypt. More than half of micro enterprises (56 percent) are small trade businesses |

|(retailers) and workshops. Manufacturing represents only 14 percent of micro enterprises. Low access to finance and the absence of a robust ecosystem |

|to develop small firms is behind the concentration of these enterprises in low productivity sectors. Most of the microenterprises provide their products|

|and services to local markets, and very few expand to national and international markets. |

|Most microenterprises are informal in Egypt, implying they do not often have a business license or tax card. Their employees generally lack health and |

|social insurance. Some microenterprises keep regular books and claim to present them to the tax authority. However, most microenterprises do not comply |

|with the necessary requirements for formal businesses, particularly with respect to business registration and payment of taxes. Costly and cumbersome |

|procedures, as well as a lack of incentive to comply cause microenterprises to operate in a “grey zone” between formality and informality. |

|Gender disparities are also prevalent, with women facing more challenges in accessing finance than men. Traditions, in some cases, give women little |

|control over their own assets, and in many cases they are unable to use them as collateral, being under the guardianship of a male member of the family.|

|Amongst Egyptian women, only 2.7 percent report taking a loan from a formal financial institution, and two percent report taking a loan from a private |

|lender in the past 12 months.[1] In addition, banks request more strict collateral requirements when dealing with women investors, as they are perceived|

|as more risky, particularly due to traditions that place them as the key family members responsible for taking care of the household, leaving them with |

|little time for work. Moreover, cultural barriers and norms limit women’s mobility, constraining their entrepreneurship opportunities. In that context, |

|microfinance is considered an important model for gender-inclusive development. |

|Although Egypt boasts the largest microfinance market in the Arab world in terms of client outreach, with approximately 1,100,000 borrowers, and LE 263 |

|million (equivalent to US$ 36 million) in loans outstanding, the sector is estimated to reach only eight percent of its potential.[2] Some |

|non-government organizations–microfinance institutions (NGOs-MFIs) have in recent years had difficulty weathering the ongoing economic and political |

|transition. This instability has exposed the operational weaknesses of some institutions, and caused a deterioration in portfolio quality. The total |

|number of microfinance borrowers is down 18 percent in 2010 from 2008 (1,100,000 versus 1,300,000). However, there has been some recovery since 2011 |

|when the total number of clients served by the industry reached 991,610. The NGOs-MFIs institutional capacity and managing stagnant growth and |

|investment in the broader economy are impeding the sectors potentiality to expand. |

|At the provider level, a critical challenge for the Egyptian microfinance industry is how to expand product offerings and diversify target markets to |

|promote financial inclusion for a broader section of the population. The country’s largest NGOs-MFIs, including the Alexandria Businessmen Association |

|(ABA), are amongst the most sophisticated in the region. They generally offer a suite of non-financial services to their clients, including financial |

|literacy and business development services (BDS). For example, ABA has expanded from traditional group lending to individual lending, micro insurance, |

|livestock leasing, and is in the process of developing Sharia-compliant products. However, smaller NGOs-MFIs need technical assistance to develop |

|programs that diversify their products, improve operational efficiency and sustainability, and expand their geographic outreach. Frontier product areas,|

|include developing venture capital schemes as clients are increasingly requiring long-term debt and equity for successful business growth, are nascent. |

|New providers are beginning to enter the market for financial services to the poor in Egypt. Egypt Post, under its new leadership, has reinvigorated its|

|commitment to be the “bank for the poor” by providing important savings services, payments and insurance. It is also seeking to expand linkages with |

|NGO MFIs for cash-in and cash-out functions for loan disbursement and collection at its more than 3,000 branches across the country. The two finance |

|companies in Egypt serving the microfinance segment (Reefy and Tanmeyah) have continued to expand operations and have both indicated they are on a more |

|financially sustainable footing than during the period directly after the revolution. Additionally, non-traditional actors have begun providing |

|financial services to low-income segments. For example, Vodafone, after years of working with regulators to fulfill licensing requirements, has begun |

|offering a virtual wallet product which allows for money transfers and payment services. Other mobile network operators are also active in this space, |

|although outreach remains limited as these services are new to the market. |

|The overall legal and regulatory environment of the microfinance sector in Egypt suffers from various deficiencies that prevent further expansion. There|

|is no clear supervisory responsibility or framework for the microfinance industry. Commercial banks, which have traditionally focused on serving large |

|corporations and medium to high-income individuals, are supervised by the Central Bank of Egypt (CBE). Some of these commercial banks have begun to |

|downscale and cater to micro enterprises but these are limited in number. The low-income are mostly served by NGO-MFIs for credit and are monitored by |

|the Ministry of Social Solidarity. The two finance companies in the market (Reefy and Tanmeyah), currently providing microfinance, operate in a legal |

|grey zone. As a result, the current system suffers from a fragmented set of rules, lack of level playing field, and an inadequate regulatory and |

|supervisory framework. Growth of this sector is still constrained by the lack of an enabling microfinance regulatory and legal framework that is |

|essential for strengthening the sector, encouraging its growth and allowing for further outreach. |

|In response to operational challenges faced by NGOs-MFIs, efforts have been made to improve the enabling environment for financial intermediation and to|

|strengthen financial infrastructure. The payments system was modernized, in terms of operations, policies, and regulations, creating a more supportive |

|institutional framework. CBE issued a Code of Corporate Governance, enhancing transparency and governance in the banking sector. The first private |

|credit bureau, I- score, was established, improving significantly the information on clients’ credit worthiness. Significant investments have been made |

|to operationalize I-score which has helped significantly in retrieving credit information and enhancing information sharing within the microfinance |

|sector. All these efforts to strengthen the financial infrastructure aim at promoting financial inclusion. |

|Recently, the cabinet appointed in July, 2013, placed financial inclusion on their priority agenda. The CBE has formed a steering committee led by the |

|Egyptian Banking Institute (EBI) with the participation of all key stakeholders mandated to develop the National Strategy for Financial Inclusion, |

|aiming at identifying the policies and activities needed to help both private (financial service providers) and public (regulators) actors in playing a |

|more active role in enhancing access and usage of formal financial services both internally and across market players. The newly appointed Chairman of |

|the Egyptian Financial Supervisory Authority (EFSA), a key member of the steering committee, flagged that strengthening the regulatory and legal |

|framework for the microfinance sector is on top of his reform agenda. |

|Recognizing the importance of its role as a financial regulator and supervisor, EFSA took the decision to develop the regulations of the microfinance |

|sector. A draft Microfinance Law was prepared by EFSA in consultation with stakeholders to address key regulatory gaps, including allowing commercial |

|companies to engage in microfinance, opening a window for NGO MFIs to establish and own shares in microfinance companies. This will increase the ability|

|of MFIs to operate sustainably through greater leverage and a diversification of their funding base through both debt and equity, as well as, an |

|improved framework for risk management, including corporate governance, internal controls and consumer protection. The World Bank has played a central |

|role in facilitating the development of this law, including providing technical advice to the draft law, as well as closely collaborating, in |

|partnership with EFSA, in stakeholder consultations with NGO MFIs, finance companies, the Egyptian Microfinance Network, microenterprises, CBE, and the |

|Social Fund for Development (SFD). A key development was the Cabinet approval of the draft Microfinance Law on February 20, 2014. It has been |

|transferred in early March 2014 to the Supreme Counsel to be submitted to the President for its issuance. |

|While the development of a sound regulatory framework has been progressing, additional investments are needed to ensure the sector is positioned for |

|sustainable and responsible long-term development. While the Micro Finance Law has been approved by Cabinet, the Executive Regulations, which will |

|address the regulatory and operational requirements required for the purposes of implementing and enforcing the Micro Finance Law (e.g. specific issues |

|related to NGO- MFI transformation, capital adequacy ratios, liquidity management functions, and rules and standards for the conduct of microfinance |

|business and complaints review systems), have yet to be developed. Similarly, supervisory functions within EFSA need to be established which requires |

|recruitment and training of key staff in microfinance supervision. Extensive coordination between existing supervisory entities, including EFSA, CBE and|

|the Ministry of Social Solidarity, is needed. At the provider level, technical assistance is needed to ensure compliance with the regulatory |

|requirements outlined in the new Micro Finance Law, as well as, to assist the transformation process from NGO to finance company. Issues related to |

|responsible growth of microfinance under the new regulatory framework, particularly surrounding consumer protection and sectoral stability, must be |

|addressed. |

|With the objective of attaining a more inclusive financial system, this proposed “Inclusive Regulations for Microfinance Project” comes at a |

|particularly opportune time. The proposed project aims at developing and implementing the legal, regulatory, and institutional framework necessary to |

|promote the growth and expansion of the microfinance sector in Egypt. This proposed Transition Fund that will be supported by the World Bank Group–IFC |

|and the Bank, in collaboration with the Saudi Fund for Development, will complement other efforts in scaling-up the microfinance sector in Egypt, and |

|attaining broader outreach with better risk management. |

11. Alignment with Transition Fund Objective

|The proposed project is aligned with the overarching goals of the Transition Fund of strengthening governance and public institutions, fostering |

|sustainable and inclusive growth by developing, and advancing country-owned programs through supporting transformational reforms. Specifically, it |

|encompasses three of the four themes, namely: (i) investing in sustainable growth, which will be achieved by creating a more enabling and conducive |

|business environment, through improving the legal, regulatory, and institutional, framework for microfinance , with the ultimate goal of enhancing |

|access to finance; and spurring productive investment; (ii) enhancing economic governance, which will be achieved by providing support to EFSA in |

|drafting and finalizing the executive regulations of the law, as well as, operationalizing these regulations and establishing the supervisory unit that |

|will focus on fit and proper requirements, strong governance rules, transparency, disclosure, consumer protection and internal and external controls; |

|and (iii) inclusive development and job creation, by addressing key challenges confronting microenterprises, and expanding the outreach of services to |

|underserved segments (women and youth), as well as integrate lagging regions. |

12. Alignment with Country’s National Strategy

|The proposed project is also closely aligned with the 2012 Interim Strategy Note (ISN) for Egypt (2012−2014), discussed by the World Bank’s Board of |

|Executive Directors on June 28, 2012. The ISN envisions attaining a level playing field and supporting marginalized and underserved enterprises, by |

|strengthening the legal, regulatory and institutional environment for smaller marginalized firms, which the proposed operation aims to achieve. The |

|project addresses the three pillars of the ISN, namely: |

|(i) Improving economic management through strengthening governance, enhancing transparency, and accountability of the financial system by improving |

|EFSA’s governance structure, as well as its information dissemination mechanisms. Moreover, MFIs will be required to disclose and share credit |

|information, which will ameliorate transparency and accountability. |

|(ii) Creating jobs and unleashing entrepreneurial potential by improving the business environment, and enhancing access to finance so that the private |

|sector can function efficiently, fostering economic opportunity, competition, innovation and entrepreneurship with the objective of achieving |

|sustainable private sector-led growth. The importance of microenterprises for low-income households is critical for managing risks during difficult |

|times, responding to shocks. |

|(iii) Fostering inclusion and ensuring broader financial access for disadvantaged segments of the population—women, and youth, as well as, lagging |

|geographical regions. The project will promote economic inclusion through paying special attention to women and youth, and expanding the network of |

|beneficiaries through reaching out to marginalized regions via promoting innovative mechanisms and tools in the microfinance domain. |

|The proposed project’s objective is also aligned with the World Bank and IFC Regional Framework and Strategy for MENA, which evolves in response to the |

|events of the Arab Spring and focuses engagement on financial inclusion, and sustainable private sector-led growth. |

|The operation will contribute to helping Egypt meet the World Bank Group twin goals of ending extreme poverty and boosting shared prosperity. Extending |

|finance to microenterprises is a key tool to combat poverty for poor households, as well as improving the standards of living of their families. |

C. PROJECT DESCRIPTION

13. Project Objective

|The Project Development Objective is to strengthen the regulatory and institutional framework of the microfinance sector in Egypt. |

14. Project Components

|The proposed project comprises of three main components: (i) developing the legal and regulatory framework for microfinance; (ii) establishing and |

|operationalizing the microfinance unit at EFSA; and (iii) promoting accountability, governance and consumer protection. The total cost of the project is|

|US$ 4 million. |

|Component I: Developing the regulatory framework for microfinance (US$ 1.5 million). This component will support the establishment of a regulatory |

|framework that is conducive to growth and stability of the non-bank financial institutions (NBFIs) in Egypt. Critical to the success of the draft |

|Microfinance Law are the executive regulations that should be robust and comprehensive and provide clear guidelines for NGO MFIs, finance companies, and|

|other market players to easily comply with the new supervisory framework. The new regulations will adopt light prudential requirements, with a focus on |

|fit and proper requirements, strong governance rules, consumer protection (especially transparency, disclosure), and internal and external controls. |

|The NGO Microfinance Oversight Board, which will be established as stipulated by the microfinance Law, will play the role of a “sounding board” |

|responsible for the effective supervision and regulation of NGO-MFIs through coordination and cooperation between EFSA (responsible for regulating and |

|supervising microfinance companies licensed by EFSA) and the Ministry of Social Solidarity (responsible for supervising NGO-MFIs which do not have that|

|status) to make sure the same rules and requirements are applied to both microfinance companies and NGO-MFIs, thus creating a level playing field for |

|all service providers in the market. This would also allow microfinance companies to engage in other non-banking financial services in accordance with |

|the EFSA Law No. 10 of 2009 after getting EFSA’s approval. This would not only be encouraging for the microfinance companies who will be able to engage |

|in other financial services besides microcredit, but can also be an incentive to NGO-MFIs to transform to microfinance companies. |

|Specifically, this component will support EFSA through four main sub-components: (i) developing and finalizing the Executive regulations, and |

|supervision manuals, stipulating the instructions needed to enforce and implement the law and developing the needed rules and standards to be enforced |

|on NGO-MFIs in accordance with the Microfinance Law; (ii) drafting and finalizing the Directives of the NGO Microfinance Oversight Board[3], (iii) |

|conducting study tours on legal and regulatory framework for microfinance institutions ; and (iv) providing advisory services to strengthen the |

|regulatory framework for non-bank financial institutions (NBFIs), aiming at enhancing overall financial inclusion in Egypt. This would include |

|addressing in the regulatory challenges faced by EFSA to play an active role in financial inclusion, notably the securities markets, micro insurance, |

|and leasing as well as microfinance. This would promote a more diversified financial system, enhancing competition and better quality services to the |

|clients. |

|Component II: Establishing and operationalizing the Microfinance Unit at EFSA (US$ 1.5 million). The objective of this component is to ensure that the |

|microfinance unit adopts international best practices and develops the capacity necessary to implement the law and associated executive regulations |

|effectively as to support the growth of the overall microfinance sector in Egypt. It will support EFSA through the provision of technical assistance and|

|advisory services in establishing and equipping the Microfinance Unit, which would be responsible for operationalizing the executive regulations and |

|policy, enforcing rules, ensuring compliance, and supervising MFIs. This will help EFSA to establish appropriate on-site and off-site monitoring |

|systems and procedures, advice on enforcement mechanisms and training on the operationalization of the Microfinance Law and its executive regulations. |

|The IT system will also allow the compilation of sectoral data to monitor macro prudential indicators, which would allow adequate and timely monitoring |

|of the performance and soundness of microfinance sector and NBFIs. The system will also help in identifying financial inclusion barriers created by some|

|financial institutions (such as minimum balance amounts for opening a bank account). |

|This component comprises of three sub-components: (i) supporting the establishment of the microfinance unit that is specialized and responsible for |

|licensing, monitoring, oversight, inspection and audit, financial reporting, and consumer protection, and complaints. This support will be provided |

|through the provision of advisory services in relation to issues such as advice on the structure, staffing and reporting lines for the Unit, the |

|development of terms of reference (TORs) for the relevant positions (which TOTs will define staff members’ roles, qualifications, responsibilities, |

|accountabilities and performance criteria) and advice as to coordination and communication arrangements with other departments in EFSA and other |

|government agencies; (ii) providing capacity building and training of relevant staff, to be equipped to undertake key operational procedures and |

|strategic functions within the Unit; (iii) strengthening the institutional infrastructure, with the required equipment and IT, both software and |

|hardware, aiming at enhancing the data collection from the financial entities, information dissemination, allow for better monitoring and supervision |

|and ensuring compliance, with the objective of improving transparency, disclosure and overall governance. Experts will be hired to support this. These |

|three sub-components are aimed at ensuring the sustainability of the Micro Finance Unit through the provision of the required skills and capacity for |

|effective implementation of the Microfinance Law. |

|Component III: Promoting accountability, governance and consumer protection (US$ 1 million). This component will support EFSA in enhancing |

|accountability and governance, as well as developing a robust consumer protection capacity within the microfinance industry, and in developing financial|

|literacy amongst target population groups. A separate division will be solely responsible for consumer protection. |

|This component comprises three sub-components: (i) enhancing consumer protection and financial literacy through (a) advice as to the consumer protection|

|specific supervisory tools that are likely to be required (such as mystery shopping, monitoring of forms of disclosure and advertising materials, |

|consumer forums etc.); (b) advice on content, and review, of manuals for processes and procedures for consumer protection supervision; (c) advisory |

|inputs/services for the development of transparent, fair and accessible procedures for the complaint resolution function of the new Unit; (d) |

|assistance in designing and implementing financial literacy training materials and programs relevant to customers of MFIs (the relevant programs might |

|be provided by EFSA or the MFIs themselves); and (e) the design of a public awareness campaign about rights and responsibilities under the new Micro |

|Finance Law and the supervisory role of EFSA; (ii) conducting study tours and on the job training in countries which have well developed systems for |

|financial consumer protection; and (iii) building the capacity of the Microfinance NGOs Oversight Board through training seminars and workshops. Within |

|this component particular attention will be placed on comprehensive transparency and disclosure requirements and further business conduct rules. |

|Gender mainstreaming. An overarching goal of the project is to promote gender-inclusive development of the Egyptian microfinance sector. Under |

|component I, a gender specialist will form part of the team drafting the Executive regulations to help ensure gender mainstreaming. For example, the |

|published supervisory guidelines would be cognizant of the need to track and promote female microfinance clients. Similarly, NGOs specializing in female|

|economic participation and entrepreneurship will form part of the Microfinance NGOs Oversight Board. This will help ensure the concerns and priorities |

|of women are taken into account during the drafting of the Executive regulations and during the implementation of the Microfinance Law. This is |

|particularly critical given the ongoing political and economic volatility in Egypt and the recent prioritization of citizenship feedback in Egyptian |

|public policy. |

|Under component II, capacity building workshops on gender-inclusive financial inclusion and microfinance development will be delivered to EFSA staff, |

|with particular reference to the role of regulatory agencies in the promotion of gender-inclusive development. This is a frontier area of financial |

|sector development (particularly for the MENA region) and one that Egypt can take a leadership role in. Similarly, study tours to countries that have |

|effectively promoted gender inclusive microfinance sectors will be organized under this component. |

|Under component III, consumer protection initiatives that specifically target women will be developed and implemented. These programs (centering on fair|

|treatment, timely information, and effective recourse) will be structured and delivered in a manner in which women can successfully access and benefit |

|from services provided. These programs will take into account socio-economic and cultural barriers (for example women ownership of assets) that cause |

|women to be treated differently than men by financial institutions and regulators. Program modules will include topics on transparency (key terms, |

|relevant charges), fees and charges, debt collection, consumer awareness, and sales and marketing practices. They will focus on using delivery channels |

|tailored the needs of female clients. |

|Overall, enhancing financial consumer protection mechanism will ensure that female clients’ rights are protected and that discriminatory practices are |

|eliminated. Furthermore, through promoting a supportive regulatory and institutional framework the project will facilitate women’s access to finance and|

|encourage them to access the formal financial sector. Gender disaggregated data will be prioritized and tracked throughout project implementation, |

|specifically the percentage of women beneficiaries, and the number of consumer protection initiatives targeted specifically to women. |

15. Key Indicators Linked to Objectives

|Progress towards achieving the project’s objectives will be measured by a series of quantitative and qualitative indicators at the Project Development |

|Objective (PDO), and at the intermediate level. |

|Key results and indicators at the PDO level, are: (i) new regulatory framework effective for MFIs, including NGOs-MFI; (ii) number of MFIs licensed by |

|EFSA under the law; (iii) number of NGOs engaged in microfinance activities (reported by the Microfinance NGOs Oversight Board); (iv) number of |

|microfinance beneficiaries under the Microfinance Law; and (v) percentage of female MFI beneficiaries. |

|Intermediate indicators would also be tracked, including: (i)the Microfinance Executive Regulations by EFSA; (ii) Frequency of meetings of the |

|Microfinance NGOs Oversight Board; (iii) Microfinance Unit established and operational at EFSA Number of staff of MFIs trained for study tours; (iv) |

|Microfinance sector reports disclosed by EFSA;(v) Number of training programs for Microfinance unit Staff; (vi)Number of staff and clients |

|trained—workshops, study tours, and capacity building events; (vii)Number of awareness and consumer protection initiatives launched and implemented by |

|EFSA. |

D. IMPLEMENTATION

16. Partnership Arrangements (if applicable)

|This project is done in partnership between the World Bank Group—World Bank, International Financial Cooperation (IFC), and the Saudi Fund for |

|Development to support the Egyptian authorities in developing the microfinance sector. |

| |

|The World Bank will be responsible for the provision of implementation support to the project and the Saudi Fund for Development will participate in |

|missions for coordination of this activity with other related activities. Team members and experts from each institution will contribute and provide |

|support wherever necessary based on required knowledge and expertise. To ensure effective coordination and implementation on the ground, periodic joint |

|supervision missions will be led by the Bank and the Saudi Fund for Development , with the active participation of IFC, these would take place at least |

|once every six months. Core team members from the World Bank and IFC will be located in the field. |

|The technical assistance and advisory services that would be offered under this project is critical for the effective and successful implementation of |

|the lines of credit provided by both the World Bank, and the Saudi Fund for Development. In addition to ensuring effective execution of the lines of |

|credit, the partnership will ensure synergies and consistency in terms of pushing the right policies and regulatory reforms by two major players in the |

|microfinance sector in Egypt. The Saudi Fund for Development is solely targeting microenterprises, using the design, the eligibility criteria and the |

|implementation arrangements of the Bank’s operation. |

|The Saudi Fund for Development will bring in their extensive knowledge of the region. The Saudi Fund for Development with its competent and experienced |

|leadership has great credibility in Egypt, and is entrusted by the authorities to develop the microfinance sector. The World Bank will play a |

|coordinator role, to ensure the most effective use of resources, prudent allocation of funds that are not distortive to the market, tapping on the |

|comparative advantage and expertise of the different institutions and international best practices. |

17. Coordination with Country-led Mechanism/Donor Implemented Activities

|The proposed project complements on-going World Bank Group activities, ranging from IBRD investment, to advisory services and technical assistance under|

|the Regional World Bank-IFC MENA MSME Facility; IFC advisory services; and the Consultative Group to Assist the Poor (CGAP) technical assistance, as |

|well as, the Gender Development Unit Programs, gender mainstreaming efforts. The Bank is ensuring complementarity between these diverse activities to |

|ensure synergies and effective results on the ground. |

|Lending. The proposed project will complement the proposed World Bank’s US$ 300 million Promoting Innovation for Inclusive Financial Access Project for |

|Egypt (P146244), which aims at expanding access to finance for MSE in Egypt, using innovative financing mechanisms, with a special focus on youth and |

|women, as well as underserved regions. A key objective of this project is to expand the microfinance sector. This has been scaled up by a parallel line |

|of credit from the Saudi Fund for Development (US$ 200 million) which is fully dedicated to supporting the microfinance sector. Both these investment |

|loans provide lines of credit to financial intermediaries, including NGOS-MFIs. The proposed project will ensure effective implementation of the lines |

|of credit through developing the legal, regulatory and institutional financial infrastructure to promote the expansion of the microfinance sector. It |

|provides critical non-financial support to ensure the line of credit can be effectively used by MFIs in the sector. |

|World Bank-IFC MENA Regional MSME Technical Assistance Facility.[4] The proposed operation will complement the joint World Bank-IFC MSME Facility, a |

|multi-donor trust fund, which provides technical assistance and advisory services under three pillars, namely: (i) developing the enabling environment |

|for MSMEs; (ii) providing advisory services to financial institutions that serve MSMEs; and (iii) building the capacity of MSMEs through entrepreneur |

|networks, mentoring, and business incubator-type services. This will ensure that adequate capacity and resources are in place through adopting global |

|best practices in microfinance and entrepreneurial skills development. |

|It is also worth noting that the remaining funds under the Egypt MSME Facility, Pillar I—developing the enabling environment, are not sufficient to |

|finance the extent of legal and regulatory reforms called for under this operation. In addition, being a client-executed operation, this Transition Fund|

|will further complement the Bank and IFC-executed MSME Facility. The Transition Fund will support the drafting of the Executive regulations, and the |

|Directives of the Microfinance NGO Oversight committee, which the Bank and the IFC cannot contribute in drafting through the MSME Facility to avoid any |

|issues of conflict of interest. The proposed Transition Fund will also support EFSA in getting resident advisors and experts to support the |

|establishment of the Microfinance Unit, and the Consumer Protection Department—activities that cannot be financed under the MSME Facility. In addition |

|this project will finance software and hardware that cannot be finance by the World Bank Group-executed trust funds. Moreover, a recipient-executed |

|project supports the fostering of home-grown country-led reforms, which will ensure sustainability, ownership, as well as capacity building. |

|Overall, this operation should be seen as part of a package of parallel assistance that helps in strengthening the legal and regulatory framework and |

|complements the lines of credit provided by the World Bank and the Saudi Fund for Development and other development partners. Such a design is in line |

|with what has been done in other countries and is considered to be a technically-sound all-inclusive package of assistance to address microfinance |

|sector development. The technical assistance provided will complement and not duplicate the activities supported by other donors. |

| |

|Collaboration with Development Partners |

|This project is prepared in collaboration with the Arab and Islamic funds both in terms of financial and technical support, where Egypt is a priority |

|country. The operation is also done in collaboration with other international financial institutions and bilateral donors active in the domain of the |

|MSME sector development. |

|The World Bank’s line of credit has also been scaled up by several other Arab and Islamic funds. This includes the line of credit from the Saudi Fund |

|for Development (US$ 200 million) targeted to the microfinance sector. The Arab Fund for Economic and Social Development (AFESD) is also providing a |

|line of credit, amounting to US$ 50 million as part of the MSME Special Account, that was launched at the Arab Economic and Social Summit held in Kuwait|

|in January 2009.[5] In addition, in December 2013 the Khalifa Fund for Enterprise Development of the United Arab of Emirates (UAE) provided parallel |

|financing, amounting to US$ 200 million for MSMEs. The Islamic Bank for Development is also providing a line of credit amounting to US$ 50 million, as |

|well as technical assistance to financial intermediaries with a focus on Sharia’s compliance finance. The proposed Transition Fund would complement |

|these lines of credit by creating an enabling environment for financial inclusion. |

|This project is prepared in collaboration with the Arab and Islamic funds both in terms of financial and technical support, where Egypt is a priority |

|country. The operation is also done in collaboration with other international financial institutions and bilateral donors active in the domain of the |

|Microfinance sector development. |

|The project team has been coordinating and undertaking consultations with other donors and development partners active in microfinance sector in Egypt, |

|including Agence Francaise de Development, European Investment Bank (EIB), African Development Bank (AfDB), and the European Bank for Reconstruction and|

|Development (EBRD). The Bank has also been working closely with the USAID that is leading the drafting of the National MSME Strategy in Egypt. All this |

|has been done in synergy with the Regional MSME Facility which is supported by DFID, SECO, JICA, DANIDA, and DFATD, which supports financial inclusion. |

|Other activities supported by IFC, in partnership with the Egyptian Microfinance Network, are focused on governance, financial and risk management, as |

|well as better serving women and youth via product and delivery channel development. |

|In response to the political transformations underway in MENA countries, the Deauville Partnership was launched at the G8 Summit in May 2011. The aim is|

|to provide a coordination framework that would help transition countries implement reforms, where MSE development is a key component within the context |

|of the governance pillars. In that context, an SME Policy, Entrepreneurship and Human Capital Development Committee was formed, dedicated to enhancing |

|the role of MSEs in creating jobs, and preparing country-specific action plans, where Egypt was one of the key countries benefiting from such support. |

|Consultations were undertaken with stakeholders, comprising the relevant government agencies, including the Ministry of Social Solidarity, Ministry of |

|Trade and Industry and Investment, SFD, Ministry of Finance, CBE, NGO-MFI, microenterprises and other donors that are actively involved in the |

|development of the microfinance sector. Throughout the project preparation phase, EFSA discussed with all relevant stakeholders, the design and details |

|of the proposed project. The consultations with numerous stakeholders will continue throughout project implementation to ensure continued stakeholders |

|buy-in and ownership. |

18. Institutional and Implementation Arrangements

|The methodology to be adopted by this project will seek to integrate established evidence-based diagnostic work conducted by the World Bank Group—WB and|

|IFC, with a robust stakeholder engagement, and effective coordination with development partners. The project would follow the World Bank guidelines |

|related to procurement, financial management, and social and environmental safeguards. |

|EFSA is the implementing agency for the project and will be responsible for coordinating and managing the overall project. EFSA was selected as the |

|implementing agency because it is by law the entity responsible for regulating and supervising the non-banking financial institutions (NBFIs) in Egypt. |

|The proposed project will help accelerate its reform program. The project comes at an opportune time where the leadership of EFSA is pushing for |

|transformational and regulatory reforms. |

|The Project Management Unit (PMU) at EFSA will oversee and manage this project. The PMU mandate will be to implement policies and procedures outlined in|

|this document and will report directly to the Chairman. The PMU will be responsible for all steps regarding procurements procedures. EFSA has previous |

|experience in World Bank rules and guidelines, having implemented a previous trust fund, an Institutional Development Fund (IDF). |

|EFSA has prepared an Operational Manual with guidance from the World Bank, which included financial management and procurement arrangements and |

|described the roles and responsibilities for project implementation, the institutional and implementation arrangements, financial management, and |

|safeguards, as well as disbursement and procurement procedures. |

|The World Bank will be responsible for the provision of implementation support to the project, in partnership with the Saudi Fund for Development, where|

|joint missions will take place to ensure coordination and effective implementation of these activities with the objective of ensuring that the services |

|provided are addressing all institutional and regulatory reforms needed to complement the line of credit to have an impact on the ground. Distribution |

|of responsibilities is done based on expertise, comparative advantage, and previous engagement. However, team members and experts from each institution|

|will contribute and provide support wherever necessary based on required knowledge and expertise. To ensure effective coordination and implementation on|

|the ground, periodic joint supervision missions will be led by the Bank and the Saudi Fund for Development, with the active participation of IFC these |

|would take place at least once every six months. |

|A robust system to monitor and evaluate (M&E) progress is crucial to the project success, and will be implemented based on the agreed results framework,|

|monitoring arrangements and indicators. A strong M&E framework to track inputs, outputs, and outcomes in a systematic and timely fashion has been |

|discussed, and agreed on with EFSA during the preparation phase. M&E will be based on clearly identified benchmarks and output indicators that feed into|

|the project indicators. |

19. Monitoring and Evaluation of Results

|M&E organizational arrangements. A robust system to monitor and evaluate progress is crucial to the project success, and will be implemented based on |

|the agreed results framework, monitoring arrangements and indicators. A strong M&E framework to track inputs, outputs, and outcomes in a systematic and |

|timely fashion has been discussed, and agreed on with EFSA during the preparation phase. M&E will be based on clearly identified benchmarks and output |

|indicators that feed into the project indicators. |

E. PROJECT BUDGETING AND FINANCING

20. Project Financing (including ISA Direct Costs[6])

|Cost by Component |Transition Fund |Country Co-Financing |Other Co-Financing |Total |

| |(USD) |(USD) |(USD) |(USD) |

|Component 1: Developing the legal and regulatory Framework for financial|1,500,000 | | |1,500,000 |

|inclusion | | | | |

|Sub-component 1.1: Technical assistance to EFSA in finalizing the |250,000 | | |250,000 |

|Microfinance Executive regulations and supervision manuals. | | | | |

|Sub-component 1.2: Technical assistance in forming the NGO Oversight | | | | |

|Board and drafting and finalizing its Directives | | | | |

|Sub-component 1.3: Conducting study tours on legal and regulatory | | | | |

|framework for Microfinance Institutions |250,000 | | |250,000 |

|Sub-component 1.4: Advisory services to strengthen the regulatory | | | | |

|framework for NBFIs, aiming at enhancing financial inclusion | | | | |

| | | | | |

| |250,000 | | |250,000 |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| |750,000 | | |750,000 |

| | | | | |

|Component 2: Establishing and operationalizing the Microfinance Unit at|1,500,000 | | |1,500,000 |

|EFSA | | | | |

|Sub-component 2.1: Establishing the Microfinance Unit, and capacity |900,000 | | |900,000 |

|building and training of key staff | | | | |

|Sub-component 2.2: Strengthening the institutional infrastructure, with | | | | |

|the required equipment and IT, both software and hardware. | | | | |

| |600,000 | | |600,000 |

|Component 3: Promoting accountability, governance and consumer protection|1,000,000 | | |1,000,000 |

|Sub-component 3.1: Enhancing Consumer protection, financial literacy, | | | | |

|and public awareness campaigns |400,000 | | |400,000 |

|Sub-component 3.2: Conducting study tours | | | | |

|Sub-component 3.3: Training and capacity building of the Microfinance | | | | |

|Oversight Board | | | | |

| |100,000 | | |100,000 |

| | | | | |

| | | | | |

| |500,000 | | |500,000 |

|Total Project Cost |4,000,000 | | |4,000,000 |

21. Budget Breakdown of Indirect Costs Requested (USD)

Indirect Costs

|Descriptionenditure Cative)atives and activities.C step and RVP instead of Board approval. g. nes: |Amount (USD) |

|these conditions have been m | |

|For grant preparation, administration and implementation support: |456,000 |

|Staff time |290,000 |

|Staff travel |166,000 |

|Fund Management costs |49,000 |

|Total Indirect Costs |505,000 |

F. Results Framework and Monitoring

|Project Development Objective: The project development objective (PDO) is to strengthen the regulatory and institutional framework of the microfinance sector in Egypt |

|PDO Level Results Indicators |

|Component I: Developing the Legal and Regulatory Framework for Microfinance |

|Issuance of the Microfinance Executive Regulations by EFSA |

|Microfinance Unit established and operational at EFSA |

Number of staff and clients trained—workshops, study tours, and capacity building events | |Number |0 |1 |2 |3 |5 |Annual |EFSA |EFSA | |Number of awareness and consumer protection initiatives launched and implemented by EFSA | |Number |0 |1 |2 |4 |5 |Annual |EFSA |EFSA | |

-----------------------

[1] Data from: Global Financial Inclusion Database (Global Findex):

[2] Data from: Microfinance Information Exchange (MIX): and Sanabel – the MENA regionmicrofinance network.

[3] The Oversight Board comprises representatives from the Ministry of Social Solidarity, CBE, EFSA, SFD, General Federation of NGOs, Egyptian Union for Microfinance (to be established), and financial experts especially in the field of microfinance.

[4] MENA MSME TA Facility is supported by UKAID (DFID), the Swiss State Secretariat for Economic Affairs (SECO), Foreign Affairs, Trade, and Development, Canada (DFATD), the Japanese International Cooperation Agency (JICA), the Danish International Development Agency (DANIDA).

[5] This is an initiative led by H.E. Amir of Kuwait to provide US$ 2 billion to support MSMEs development in the Arab countries. The number of participating countries reached 17 by July 2013, where total contribution reached US$ 1.3 billion (with Saudi Arabia and Kuwait b[pic][6]/0EFST‚ƒ…›œ¢µ¼ÍÎ [pic] [7] O T V l m n x íäØäÈؼد¡ä¼˜?…??v?l?c]c]?lThzûh“!^JhZ8Î^JhâI3hâI3^Jh‚e{h“!^JhâI3hˆŒ^JhRG^JhâI3h“!^Jh“!5?\?^JhZ8Îh2*æ:?OJPJQJhZ8ÎhZ8ÎB*[pic]^Jpheing the largest contributors, each US$ 500 million), of which US$ 940 million has been paid out of the total of pledged amount. Loans approved as of July 2013, amount to US$ 333 million through 13 financial intermediaries and apex institutions, known for their active operations in the MSME sector.

[8] ISA direct costs are those costs related to the ISA’s direct provision of technical assistance within the project.

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April 6, 2014

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