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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: PAD1350

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR71.7 MILLION (US$100 MILLION EQUIVALENT)

TO THE

REPUBLIC OF THE UNION OF MYANMAR

FOR A

FINANCIAL SECTOR DEVELOPMENT PROJECT

NOVEMBER 29, 2016

Finance & Markets Global Practice East Asia and Pacific 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.

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CURRENCY EQUIVALENTS (Exchange Rate Effective as of September 30, 2016)

Currency Unit = Myanmar kyat MMK 1,219 = US$1

US$ 1.39581 = SDR 1

FISCAL YEAR January 1 – December 31

ABBREVIATION AND ACRONYMS

ACH Automated Clearing House ASEAN Association of Southeast Asian Nations ATM Automated Teller Machine BETF Bank-executed Trust Fund CBM Central Bank of Myanmar CCT Conditional Cash Transfer CEDAW Convention on the Elimination of All Forms of Discrimination against Women COFTAM Committee on Financial Sector Technical Assistance for Myanmar CPF Country Partnership Framework CSD Centralized Securities Depository DA Designated Account DFID U.K. Department for International Development DLI Disbursement-linked Indicator EEP Eligible Expenditure Program FI Financial Institutions FINDEX Financial Inclusion Index FM Financial Management FRD Financial Regulatory Department FSDS Financial Sector Development Strategy GDP Gross Domestic Product GOM Government of Myanmar GRS Grievance Redress Service IAIS International Association of Insurance Supervisors ICB International Competitive Bidding ICP Insurance Core Principle IFC International Finance Corporation IFR Interim Financial Report IMF International Monetary Fund JICA Japan International Cooperation Agency LIFT Livelihood and Food Security Trust Fund MADB Myanmar Agricultural Development Bank M&E Monitoring and Evaluation MEB Myanmar Economic Bank MFI Microfinance Institution MOPF Ministry of Planning and Finance

MSMEs Micro, Small, and Medium Enterprises NBFI Nonbank Financial Institution NCB National Competitive Bidding NLD National League of Democracy OAG Office of the Auditor General PCU Project Coordination Unit PDO Project Development Objective RTGS Real-time Gross Settlement SMEs Small and Medium Enterprises SSS Securities Settlement System TA Technical Assistance TOR Terms of Reference UNCDF United Nations Capital Development Fund

Regional Vice President: Victoria Kwakwa Country Director: Ulrich Zachau

Senior Global Practice Director: Gloria M. Grandolini Practice Manager: Irina Astrakhan

Task Team Leaders: Alexandra Drees-Gross/Nagavalli Annamalai

MYANMAR Myanmar Financial Sector Development Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................1

A. Country Context ............................................................................................................ 1

B. Sectoral and Institutional Context ................................................................................. 1

C. Higher-level Objectives to which the Project Contributes ........................................... 8

II. PROJECT DEVELOPMENT OBJECTIVES ................................................................9

A. PDO............................................................................................................................... 9

B. Project Beneficiaries ..................................................................................................... 9

C. PDO Level Results Indicators ....................................................................................... 9

III. PROJECT DESCRIPTION ............................................................................................10

A. Project Components .................................................................................................... 10

B. Project Costs and Financing........................................................................................ 11

C. Lessons Learned and Reflected in the Project Design ................................................ 15

IV. IMPLEMENTATION .....................................................................................................16

A. Institutional and Implementation Arrangements ........................................................ 16

B. Results Monitoring and Evaluation ............................................................................ 16

C. Sustainability............................................................................................................... 17

V. KEY RISKS ......................................................................................................................18

A. Overall Risk Rating and Explanation of Key Risks .................................................... 18

VI. APPRAISAL SUMMARY ..............................................................................................19

A. Economic Analysis ..................................................................................................... 19

B. Technical ..................................................................................................................... 20

C. Financial Management ................................................................................................ 23

D. Procurement ................................................................................................................ 23

E. Social (including Safeguards) ..................................................................................... 24

F. Environment (including Safeguards) .......................................................................... 27

G. World Bank Grievance Redress .................................................................................. 28

Annex 1: Results Framework and Monitoring .........................................................................29

Annex 2: Detailed Project Description .......................................................................................35

Annex 3: Implementation Arrangements ..................................................................................50

Annex 4: Implementation Support Plan ....................................................................................64

List of Tables Table 1. Selected Financial Inclusion Indicators - Country Comparisons ...................................... 2 Table 2. Project Cost Summary .................................................................................................... 12 Table 3. Summary of Disbursement-linked Indicators ................................................................. 13 Table 4. Summary of Investments and TA* ................................................................................. 13 Table 5. Project Costs and Financing ........................................................................................... 15 Table 6. Financial Inclusion Indicators in Myanmar by Gender (% ages 15+), 2014 .................. 26 Table 1.1. Link of DLIs and Investments to PDO ........................................................................ 34 Table 2.1. Project Cost Summary ................................................................................................. 37 Table 2.2. DLIs with Annual Targets ........................................................................................... 38 Table 2.3. Planned Investments in Goods and Services ............................................................... 39 Table 2.4. Project Costs and Financing ........................................................................................ 49 Table 3.1. Summary of Implementation Responsibilities ............................................................. 52 Table 3.2. IDA Credit Expenditure Categories and Amounts ...................................................... 56 Table 3.3. FM and Disbursement Action Plan .............................................................................. 57 Table 3.4. Risks and Mitigation Measures.................................................................................... 60 Table 3.5. Prior Review Thresholds ............................................................................................. 61 Table 3.6. Summary of Procurement of Goods ............................................................................ 61 Table 3.7. Consultant Assignments Summary .............................................................................. 62 Table 3.8. Development Partner Financial Sector Activities in Myanmar ................................... 63 Table 4.1. Implementation Support Plan ...................................................................................... 64 Table 4.2. Skills Mix Required ..................................................................................................... 65 List of Figures Figure 1. Credit to the Economy (% of GDP) ................................................................................ 3 Figure 2. Financial Sector Assets (US$, millions) .......................................................................... 3 Figure 3. Share of Firms in Myanmar Identifying the Main Obstacle to Doing Business (%) ...... 4 Figure 3.1. Implementation Arrangements ................................................................................... 51 Figure 3.2. Flow of Funds ............................................................................................................. 56 List of Boxes Box 1. Key Interventions of the Myanmar Financial Inclusion Roadmap (2015–2020) ................ 8 Box 2. Myanmar Poverty Profile .................................................................................................. 27

i

PAD DATA SHEET

Myanmar

Myanmar Financial Sector Development Project (P154389)

PROJECT APPRAISAL DOCUMENT.

EAST ASIA AND PACIFIC

Finance and Markets Global Practice

Report No.: PAD1350.

Basic Information

Project ID EA Category Team Leader(s)

P154389 C - Not Required Alexandra Drees-Gross; Nagavalli Annamalai

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

20-Dec-2016 31-Dec-2020

Expected Effectiveness Date Expected Closing Date

21-Mar-2017 30-Jun-2021

Joint IFC

No

Practice Manager/Manager

Senior Global Practice Director

Country Director Regional Vice President

Irina Astrakhan Gloria M. Grandolini Ulrich Zachau Victoria Kwakwa

.

Borrower: Republic of the Union of Myanmar

Responsible Agency: Ministry of Planning and Finance & Central Bank of Myanmar (CBM)

Contact: Maung Maung Win Title: Deputy Minister

Telephone No.: (95-67) 410-450 Email: [email protected]

Contact: U Kyaw Kyaw Maung Title: Governor of CBM

Telephone No.: 95-67-418227 Email: [email protected] .

Project Financing Data (in US$, Millions)

[ ] Loan [ ] IDA Grant [ ] Guarantee

[ X ] Credit [ ] Grant [ ] Other

Total Project Cost: 100.00 Total Bank Financing: 100.00

Financing Gap: 0.00

ii

.

Financing Source Amount

BORROWER/RECIPIENT 0.00

International Development Association (IDA) 100.00

Total 100.00

.

Expected Disbursements (in US$, Millions)

Fiscal Year 2017 2018 2019 2020 2021

Annual 10.00 20.00 25.00 25.00 20.00

Cumulative 10.00 30.00 55.00 80.00 100.00 .

Institutional Data

Practice Area (Lead)

Finance & Markets

Contributing Practice Areas

Macroeconomics & Fiscal Management

Cross Cutting Topics

[ ] Climate Change

[ ] Fragile, Conflict & Violence

[ ] Gender

[ ] Jobs

[ ] Public Private Partnership

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Finance Microfinance 40

Finance Banking 40

Finance General finance sector 20

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable

to this project. .

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Financial and private sector development Other Financial Sector Development 100

iii

Total 100

.

Proposed Development Objective(s)

To expand access to finance in Myanmar and, in the event of an Eligible Crisis or Emergency, to provide immediate and effective response to such Eligible Crisis or Emergency.

.

Components

Component Name Cost (US$, Millions)

Reform of state-owned banks 37.00

Upgrading of the financial sector legal, regulatory, and supervisory framework

37.00

Modernization of the CBM and financial infrastructure 24.00

Project coordination and monitoring 2.00

Continent emergency response 0.00

.

Systematic Operations Risk-Rating Tool (SORT)

Risk Category Rating

1. Political and Governance High

2. Macroeconomic Moderate

3. Sector Strategies and Policies Low

4. Technical Design of Project or Program Moderate

5. Institutional Capacity for Implementation and Sustainability High

6. Fiduciary High

7. Environment and Social Low

8. Stakeholders Low

9. Conflict and Violence Moderate

OVERALL High .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

.

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]

iv

.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

.

Legal Covenants

Name Recurrent Due Date Frequency

Institutional Arrangements (Section I.A, Schedule 2 of Financing Agreement, and Section I.A, Schedule to Project Agreement)

X Continuous

Description of Covenant Obligations of the Recipient and CBM to maintain, throughout the implementation of the Project, Project Coordination Units with functions and resources satisfactory to the Association and with staff in numbers and with terms of reference, qualifications and resources satisfactory to the Association.

Legal Covenants


Project Operations Manual (Section I.C, Schedule 2 of Financing Agreement, and Section I.B, Schedule to Project Agreement)

X Continuous

Description of Covenant Obligations of the Recipient and CBM to carry out their respective parts of the Project in accordance with the Project Operations Manual, and not amend, waive or abrogate any provisions of the manual unless the Association agrees otherwise in writing.

Legal Covenants


Annual Work Plans and Budgets (Section I.D, Schedule 2 of Financing Agreement, and Section I.C, Schedule to Project Agreement)

X Two months before each government fiscal year

Annual

v

Description of Covenant Obligations of the Recipient and CBM to furnish to the Association an annual work plan and budget for the Project, in form and substance satisfactory to the Association, covering the activities and expenditures proposed for each government fiscal year, and implement the activities under the Project in accordance with such plan and budget.

Legal Covenants


DLI Monitoring and Reporting (Section I.G, Schedule 2 of Financing Agreement, and Section I.F, Schedule of Project Agreement)

X Annual

Description of Covenant Obligations of the Recipient and CBM to furnish reports to the Association, not later than December 31 of each year during the implementation of the Project, on the status of achievement of the relevant DLI Targets in accordance with the verification protocol set out in the Project Operations Manual.

Legal Covenants


Contingent Emergency Response (Section I.G, Schedule 2 of Financing Agreement)

X Continuous

Description of Covenant

Obligation of the Recipient to ensure that, in the event of an eligible crisis or emergency, the activities under Component 5 are carried out in accordance with the Immediate Response Mechanism Operations Manualand all relevant emergency response implementation plan(s) and safeguard requirements.

.

Conditions

Source Of Fund Name Type

IDA Subsidiary Agreement (Section 5.01 and 5.02, Financing Agreement)

Effectiveness

Description of Condition A Subsidiary Agreement has been executed on behalf of the Recipient and CBM, on terms and conditions acceptable to the Association, and the Association has received a legal opinion confirming its valid execution, authorization and binding force on the Recipient and CBM.

Conditions


IDA Withdrawal Conditions (Section IV.B, Schedule 2 of Financing Agreement)

Disbursement

vi

Disbursement condition specifying that the Recipient may not withdraw the proceeds of the Financing allocated to the DLI sub-components unless and until it has furnished evidence that it has achieved the respective DLI targets and incurred the relevant Eligible Expenditure Programs.


IDA Withdrawal Conditions (Section IV.B, Schedule 2 of Financing Agreement)

Disbursement

Description of Condition

Disbursement condition specifying that the Recipient may not withdraw the proceeds of the Financing as may be allocated to Component 5 unless an Eligible Crisis or Emergency has occurred, all related safeguards instruments and requirements and the emergency response implementation plan have been completed, the emergency response implementing entities have adequate staff and resources, and the provisions of the Immediate Response Mechanism Operations Manual remain - or have been updated so as to be - appropriate for the activation and implementation of Component 5.

Team Composition

Bank Staff

Name Role Title Specialization Unit

Alexandra Drees-Gross Team Leader (ADM Responsible)

Practice Manager Financial Inclusion GFMDR

Nagavalli Annamalai Team Leader Lead Counsel Banking GFM02

Christopher Fabling Team Member Sr Financial Management Specialist

Financial management

GGODR

Sirirat Sirijaratwong Team Member Procurement Specialist

Procurement GGODR

Kiyotaka Tanaka Team Member Financial Sector Specialist

Financial analyst GFM02

Kyemon Soe Team Member Financial Management Analyst

Financial management

GGODR

Manush Hristov Counsel Senior Counsel Legal LEGES

Nang Htay Htay Team Member Financial Sector Specialist

Banking GFMD02

Nataliya Mylenko Team Member Senior Financial Sector Specialist

Microfinance GFM02

Balakrishnan Mahadevan Team Member Senior Payments Specialist

Financial Infrastructure

GFM2B

Satoshi Ishihara Safeguards Specialist

Senior Social Development Specialist

Social safeguards GSURR

Sau Ngan Wong Team Member Senior Counsel Legal and regulatory

GFMDR

vii

Serap Gonulal Team Member Lead Insurance Specialist

Insurance GFM3A

Jinchang Lai Team Member Principal Operations Officer

Financial infrastructure

GFM02

Ivan Daniel Mortimer-Schutts

Team Member Senior Operations Officer

Financial infrastructure

GFM02

Viet Quoc Trieu Team Member Senior Financial Sector Specialist

Banking GFMD02

Pamornrat Tansanguanwong

Team Member Senior Social Development Specialist

Social safeguards GSU02

Extended Team

Name Title Office Phone Location

.

Locations

Country First Administrative Division Location Planned Actual Comments

Myanmar Yangon Yangon X

Myanmar Nay Pyi Taw Union Territory Nay Pyi Taw X

.

1

I. STRATEGIC CONTEXT

A. Country Context

1. While resource-rich, Myanmar remains one of the poorest countries in Southeast Asia.1 Although significant reforms have been introduced in recent years, the economy remains centered on extractive industries and agriculture.2 With a population of 51.4 million, the country has a per capita gross domestic product (GDP) of US$1,233 (2014).3 In 2010, the rate of poverty was estimated to be between 25.6 percent and 37.5 percent, concentrated particularly in rural and conflict-affected areas.4 At least 70 percent of Myanmar’s poor live in rural areas, and agriculture plays a critical role for both inclusive growth and poverty reduction,5 contributing close to 29 percent of output in 2015–2016. After two years of strong growth and macroeconomic stability, Myanmar faced a more difficult economic environment in 2015–2016 when economic growth eased to 7 percent from 8.5 percent in the previous year. Short-term vulnerabilities increased, including growing fiscal and current account deficits (5.2 and 7 percent of GDP, respectively), rising inflation (11.7 percent annual average), and exchange rate pressure (30 percent depreciation).

2. Beginning in 2011, Myanmar launched major political and economic reforms aimed at increasing openness, empowerment, and inclusion. Economic reforms have included the unification of exchange rates, removal of a host of import and export restrictions, new legislation that provides greater autonomy for the central bank, and increased transparency, including publishing the government budget. The past years have seen a dramatic increase in political and civil liberties. These reforms included the 2015 parliamentary elections which were recognized as the country’s first free and fair national election in 25 years. At the same time, new tensions and challenges have emerged, including outbreaks of violence primarily focused on the country’s Muslim minorities. Despite such setbacks, the coming years offer opportunities to further deepen the reforms.

3. Myanmar has also begun removing constraints on commerce, trade, and private enterprise that long held back the economy. However, major obstacles remain, including an underdeveloped financial sector, infrastructure gaps, and limited capacities to manage economic shocks. All of these areas will need to be addressed in order for Myanmar to meet its economic, social, and poverty reduction goals.

B. Sectoral and Institutional Context

i. Financial Sector Overview

4. Myanmar has a small and underdeveloped financial system that does not effectively meet the demands of the country’s growing economy. Although financial institutions in 1 World Bank. 2014. Myanmar—Ending Poverty and Boosting Shared Prosperity in a Time of Transition: A Systematic Country Diagnostic. Washington, DC: World Bank. 2 World Bank. 2015. Myanmar: Empowering People for Inclusive Growth. Country Partnership Framework for the Period 2015-2017. 3 World Bank. 2016. East Asia Pacific Economic Update. Growing Challenges. 4 Estimate depends on methodology used. See: World Bank. 2014. A Systematic Country Diagnostic. 5 World Bank Development Indicators 2015.

2

Myanmar have grown rapidly over the past four years due to the large demand for credit and increasing confidence in the banking system, the financial system as a whole still contributes only in a modest manner to economic growth and prosperity. Large segments of the population in both urban and rural areas as well as private sector firms remain underserved.

5. Myanmar has some of the lowest levels of penetration of financial services in the world with a ratio of credit to GDP of approximately 12 percent. The formal financial system consists of 23 small-scale, closely held private banks; four fully state-owned banks; and a small number of microfinance institutions (MFIs). There are 43 foreign bank representative offices, and nine foreign banks received licenses in 2015 to open as commercial banks. There is only one state-owned insurance company in Myanmar. Private insurance companies have been given conditional approval by the Myanmar Insurance Business Supervisory Board to begin operations. The banking sector dominates the finance sector and accounts for most of the financial sector assets held outside the central bank. State-owned banks are dominant in the banking sector and the sector operations with limited competition.

6. The banking sector is growing rapidly but starts from a low base. In recent years, there has been accelerated growth in the number of branches of private commercial banks, points of sale, automated teller machines (ATMs), and expansion of mobile financial services. As of February 2016, more than 1.4 million debit cards had been issued and 1,674 ATMs and 4,072 points of sale terminals have been set up, mainly in Yangon, Mandalay, and Nay Pyi Taw. However, the overall penetration of debit cards is still low, access points are mainly concentrated in urban areas, and the reliability is still poor. Rural areas remain largely unserved/underserved.

7. The supervisory structure for the financial sector is under development and has changed significantly in recent years. Currently, the Ministry of Planning and Finance (MOPF) is mandated to regulate capital markets (until the Securities and Exchange Commission Act comes into effect, whereupon regulation would be undertaken by the Securities and Exchange Commission), insurance, and MFIs. The Central Bank of Myanmar (CBM) is responsible for supervising the overall banking system and ensuring financial stability. These supervisory bodies lack capacity with regard to qualified staff, analytical tools for on- and off-site supervision, enforcement powers, and access to technology to supervise effectively.

8. Access to basic financial services in Myanmar is extremely low. Currently, according to the recent Financial Inclusion Index (FINDEX) survey, only 23 percent of adults have access to an account in financial institutions, compared to nearly 80 percent in Thailand and 90 percent in Malaysia. Further, Myanmar has less than 2.6 bank branches per 100,000 adults—among the lowest levels in the world (Table 1).

Table 1. Selected Financial Inclusion Indicators - Country Comparisons

Myanmar Bangladesh China Lao PDR Thailand

Domestic bank deposits/GDP (%) 22.5 68.9 156.6 n.a. 84.1

Commercial bank credit/GDP (%) 8.9 49.8 101.4 33 82.1

Bank branches per 100,000 adults 2.6 8.2 7.9 2.7 12.2

Bank accounts per 1,000 adults 159 611 40 400 1,509 Source: International Monetary Fund (IMF) FAS, 2014.

3

Figure 1. Credit to the Economy (% of GDP)

Source: World Development Indicators, private credit/GDP.

Figure 2. Financial Sector Assets (US$, millions)

Source: Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ) 2015, 2014 data (K 1,000/US$).

9. Access to finance is the most frequently identified obstacle to business in Myanmar. According to the 2014 Myanmar Investment Climate Assessment, lack of access to finance is a more significant constraint than access to land, electricity, and a skilled workforce. In addition, access to finance is one of the most frequently identified main obstacles in all three broad industry subsectors, namely manufacturing (23 percent), retail trade (36 percent), and services (14 percent).

10. Myanmar has a large share of firms that finance investments in fixed assets and working capital through their own resources. About 46 percent of the firms reported acquiring fixed assets in 2014—a relatively high share reflecting rapid economic growth in Myanmar and driven by a new climate of economic openness and liberalization (Figure 3). On average though, a mere 1 percent of fixed asset investment costs was financed by bank borrowing while a staggering 92 percent was financed by firms using their own funds—a higher level than in any comparator country. Working capital needs are also largely financed by using own funds, with 87 percent of the firms using internal sources—also a significantly higher share than in any of the comparator countries.

0%

20%

40%

60%

80%

100%

120%

140%

2000 2010 2013

N

30,148

2,804536 30 7

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

4

Figure 3. Share of Firms in Myanmar Identifying the Main Obstacle to Doing Business (%)

Source: 2014 Myanmar Investment Climate Assessment.

11. Gender disparities exist in access to finance in Myanmar. Both women and men are underserved with regard to access to basic financial services in Myanmar, reflecting the overall underdevelopment of the financial system and the informality of the economy as a whole. However, notable gender disparities exist in certain aspects of finance, including access to accounts at formal financial institutions and access to credit. Myanmar’s experience is in line with the World Bank FINDEX’s general findings that “in developing economies women are 20 percent less likely than men to have an account at a formal financial institution and 17 percent less likely to have borrowed formally in the past year. Even if they can gain access to a loan, women often lack access to other financial services such as savings, digital payment methods, and insurance.”

12. According to the World Bank’s global FINDEX database, in 2014, an estimated 29 percent of men in Myanmar had access to a bank account compared to 17 percent of women. Women also lag behind men with regard to access to savings accounts, with only 10.4 percent of women reporting savings within the last year compared to 15.4 percent of men. Financial inclusion analyses from around the world have shown that women often face different barriers than men and tailored interventions are often required at the financial institutions level to address these constraints. Section IV provides additional analysis of social safeguards and the gender aspects of finance in Myanmar.

ii. Main Barriers to Financial Inclusion

13. Despite recent and important reform efforts, a number of challenges remain and present constraints to sound and stable financial sector development or increasing access to services for firms and individuals. The main constraints are outlined below.

14. Small and underdeveloped financial institutions. Reflecting decades of isolation, Myanmar’s financial institutions are still small and unsophisticated. The 23 private commercial

0.410.651.021.441.631.712.182.35

2.984.454.93

9.4616.85

21.3622.73

0 5 10 15 20 25

Crime, theft and disorderCorruption

Competition from informal sectorCourts

Customs and trade regulationsBusiness licensing and permits

TransportTax administration

Tax ratesPolitical instability

Labor regulationsAccess to skilled workers

Access to electricityAccess to land

Access to finance

5

banks have on average only US$25 million in capital. Their average assets amount to only US$150 million versus US$5 billion for the average local bank in Thailand.

15. The microfinance industry of Myanmar is also small and fragile. More than 200 new licenses for MFIs have been granted in the past two years. Together, the MFIs provide microloans to around one million clients in both urban and rural areas. Five MFIs account for around 80 percent of the market. As in the case of banks, the MFIs lack capital and access to funding. Many of them are not allowed to take deposits from their members. Moreover, they lack proper risk management systems, thereby undermining their financial soundness.

16. Limited range of financial products. Commercial banks offer only a limited range of products. Other than basic savings and deposit accounts and short-term loans, the supply of financial products remains restricted. Electronic payment products and services (debit cards, internet banking, mobile banking, and electronic funds transfers) and consumer credit (for example, credit cards, automobile loans, salary advances, personal loans, and mortgages) are still incipient. Trade finance, factoring, leasing, investment loans, export credit, life insurance products, private pension schemes, agriculture insurance, and other such products are not yet available.

17. Large presence of state-owned banks. Myanmar’s four main state-owned banks jointly account for more than 37 percent of total bank assets and 50 percent of all bank branches and serve more than five million customers through their different lending and savings products. State-owned banks were created several decades ago to mobilize savings and provide credit to select sectors of the economy. However, their financial performance is weak. They are forced by the Government to provide credit at subsidized interest rates. Their corporate governance arrangements make them vulnerable to political interference. Moreover, some of them crowd out private sector financial institutions from some of their niche markets (for example, agriculture finance). The Government has indicated that it intends to restructure these banks as a top priority.

18. Outdated legal and regulatory framework. Myanmar’s legal and regulatory framework for the financial system, especially the banking system, is dated and deficient. The legal framework was designed for a closed economy, not for a market-based economy. As a result, the financial system remains restricted for foreign-owned institutions, which are only allowed to do a limited range of operations with foreign corporate clients, and imposes severe restrictions for domestic banks.

19. The regulatory framework for financial consumer protection is incomplete and requires substantial improvements. In particular, the consumer protection framework needs to be developed for banks (both private and state-owned); nonbank financial institutions (NBFIs) (such as MFIs, cooperatives, finance companies, and pawnshops); credit reporting agencies; and insurers. The existence of a sound financial consumer protection framework is fundamental to building trust in the formal financial sector and thus, in helping Myanmar meet financial inclusion targets.

20. Weak regulatory and supervisory capacity. The capability of financial sector supervisors to identify, monitor, and control risks in regulated institutions is extremely limited. Moreover, enforcement of existing laws and prudential regulations is not satisfactory. Accounting and auditing standards are far from international standards. All these conditions make the financial

6

system fragile and prone to bank failures in the future, unless they are properly addressed. Recent international experience has shown that the rapid expansion of the financial sector can result in a severe financial crises unless financial authorities are able to identify, monitor, and put in place measures to limit excessive risk taking by financial institutions.

21. Lack of a clear legal and regulatory framework, for mobile financial services in particular. The regulatory framework for mobile financial services also needs to be developed to help take advantage of the unique potential of such services to accelerate and scale up financial services to households and firms in Myanmar. The country has one of the lowest ratios of mobile phone penetration in the world. However, as a result of recent liberalization measures, two international telecom companies (Ooredoo and Telenor) have recently started to operate. In addition, the CBM issued a mobile financial services regulation in 2016 that significantly strengthens the legal framework for the provision of mobile financial services by nonbanks. As a result, telecom operators are now negotiating business partnerships with local banks to offer mobile financial services to their customers (consumers and retail businesses). However, challenges remain in ensuring adequate implementation of the regulation.

22. Absence of modern financial infrastructure. Myanmar’s financial infrastructure lacked several critical components: a Real-time Gross Settlement (RTGS) system, Centralized Securities Depository (CSD), a robust card payments network, an Automated Clearing House (ACH) for retail payments, and a Securities Settlement System (SSS). As a result, the processing of payments relies heavily on manual, paper-based processes—resulting in inefficiencies and risks to the financial system. With the support of the Japan International Cooperation Agency (JICA), the CBM has developed and implemented the CBM-Net system covering large-value funds transfers and a CSD during January 2016. While the CBM-Net indeed serves as a large-value funds transfer system and CSD, a gap analysis of those systems against standard features of an RTGS has identified several gaps that have to be addressed to bring it in line with global standards for an RTGS system. CBM will need to address it going forward. Notwithstanding the foregoing, the next phase of development of a modern payment system will require further enhancements to the existing systems and implementation of new systems like ACH would allow banks to process large volumes of financial transactions on a rapid, cost-effective, and secure basis. The strengthening of internal systems of the CBM such as accounting system and currency management and enhancing them, providing the necessary interfaces between systems for better automation, and providing additional tools to the CBM for better monitoring of the systems and processes would go a long way in supporting these activities.

23. The modernization of the payment system in Myanmar is urgent to enable greater efficiency of the economy and mitigate risks for the financial system. A modern payment system will provide the much-needed platform for introducing electronic payment services, including innovative payment instruments (for example, mobile money) and migrating large-volume payment programs (for example, government payments) and remittances from cash-in or cash-out to fully electronic transactions from one account to another.6

6 Myanmar also lacks a liquid and efficient interbank market. Only a few banks participate in the incipient interbank market, with banks adjusting their liquidity with the CBM through the deposit and credit auction window. In the absence of a liquid interbank market, there are no market benchmarks, which makes risk pricing and the execution of monetary policy difficult.

7

iii. The Government’s Financial Sector Reform Program

24. As part of its overall reform efforts, the Government has prepared two key guiding documents for the modernization of the financial system:

The Financial Sector Development Strategy (FSDS) 2015–2020 The Myanmar Financial Inclusion Roadmap 2015–2020

25. This project supports the Government in implementing the reforms outlined in these two strategies. Both were prepared through extensive consultation with government agencies, the private sector, and development partners. Overall, the FSDS aims to provide a comprehensive set of sequenced actions to build a larger, more efficient, and more competitive financial system. The Roadmap, by contrast, focuses on financial inclusion aspects, provides a baseline diagnostic and analysis of the key barriers to financial inclusion, and outlines a phased strategy for addressing the challenges.

26. The Myanmar FSDS. In the long term, the Government’s vision is to focus on the development of a sound, market-oriented financial sector that will mobilize and allocate resources to support sustainable economic growth. Specifically, the vision of the medium-term (five-year) strategy for the financial sector of Myanmar is as outlined:

Effectively support economic stability through active monetary and foreign exchange policies, financial institutions, markets, and products.

Provide access to finance for the Government, investors, and the public to conduct, borrow, save, and plan for the future, as well as to mitigate various kinds of risks. In particular, easy access to financial services is critical at a reasonable cost for all stakeholders, especially small and medium enterprises (SMEs), and to long-term resources and housing finance through appropriate instruments.

Increase the depth of the financial sector to support the sustainable growth of the economy. Deepening the system requires efforts to promote the dynamism and interaction of the various categories of financial institutions so as to improve the penetration of financial services, develop existing institutions, open the sector to new institutions, and foster the introduction of new instruments.

Create a level-playing field for all participants in the market to maximize the efficiency of finance.

27. Myanmar Financial Inclusion Roadmap. The roadmap lays out a vision for the enhancement of financial inclusion in Myanmar. The roadmap is based on data provided by the 2013 Myanmar FinScope Survey. It was funded with the support of the United Nations Capital Development Fund (UNCDF). The Roadmap has been adopted by the Interministerial Committee on Financial Inclusion chaired by the MOPF. Priority outputs have also been identified and supported by a set of 20 interventions to be implemented by various public and private stakeholders (Box 1). A time horizon of up to five years has been envisaged for the full impact to be realized.

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Box 1. Key Interventions of the Myanmar Financial Inclusion Roadmap (2015–2020)

The Myanmar Financial Inclusion Roadmap lays out a vision for the enhancement of financial inclusion in Myanmar. The Roadmap is based on the diagnostic contained in the Making Access Possible: Myanmar Country Diagnostic Report, 2014, which including an analysis based on in-country research and quantitative data provided by the Myanmar FinScope Survey 2013.

Under the Roadmap, 20 interventions have been identified as critical to scale up financial inclusion:

1. Have a supportive regulatory and structural environment 2. Increase credit supply 3. Mobilize savings 4. Enable multiple providers in agriculture 5. Support expansion of asset finance 6. Broaden support for the low-income 7. Strengthen and enable commercial bank sector 8. Enable MFIs and cooperatives 9. Reform and strengthen Myanmar Economic Bank (MEB) and Myanmar Foreign Trade Bank 10. Catalyze insurance sector development 11. Improve product design 12. Improve Myanmar Agricultural Development Bank (MADB) service reach, quality, and diversity 13. Agricultural value chain interventions 14. Support Ministry of Industry initiative 15. Enable wider range of providers for micro, small, and medium enterprises (MSMEs) 16. Better enable actions in the low-income segment 17. Promote financial education and responsible finance 18. Establish consumer credit bureau 19. Introduce e-payments 20. Extend distribution footprint

Following are the main expected outcomes from the Roadmap.

Outcome 1: Strengthened financial sector support to financial institutions o Output: Critical institutions created or strengthened o Output: Market barriers addressed across products

Outcome 2: Better financial inclusion in priority segments o Output: Improved access to agriculture, livestock, and fisheries o Output: Increased access for micro and SMEs o Output: Better access to low-income households

C. Higher-level Objectives to which the Project Contributes

28. Links to the Country Partnership Framework (CPF). The operation is fully aligned with the World Bank Group’s CPF for Myanmar for the period FY15–17 (Report No. 95183-MM), discussed by the Executive Directors on April 23, 2015. The report was developed following extensive consultations with a wide range of stakeholders. It is the first World Bank Group strategy for Myanmar since 1984 and comes at a time of great opportunity for Myanmar. The CPF focuses on three routes for achieving the World Bank Group’s twin goals of reducing extreme poverty and promoting shared prosperity: reducing rural poverty, investing in people and effective institutions for people, and supporting a dynamic private sector to create jobs.

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29. The project contributes to outcomes in all three of the CPF focus areas. First, the project is expected to benefit the rural poor, in particular, through its focus on upgrading financial sector infrastructure and by establishing the regulatory framework for mobile financial services. These reforms are expected to extend basic financial services, including payments, to underserved areas and improved payments are expected to reduce costs for banks to operate in underserved areas. Second, the project’s focus on institutional development for Myanmar’s financial regulators and policy makers (at the CBM and MOPF) is also expected to significantly enhance the quality of financial sector supervision and regulation and foster financial system development, deepening, and stability. Third, the upgrade of the legal and regulatory framework is expected to promote economic growth and job creation by promoting stable and sound development of the financial system and a sound basis to attract foreign capital to the financial sector.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

30. The project development objective (PDO) is to expand access to finance in Myanmar and, in the event of an Eligible Crisis or Emergency, to provide immediate and effective response to such Eligible Crisis or Emergency.

B. Project Beneficiaries

31. The project beneficiaries will be households and micro, small and medium-sized enterprises in Myanmar. The indirect beneficiaries will include the following institutions: the MOPF, the CBM, and Myanmar’s main state-owned banks.

C. PDO Level Results Indicators

32. The PDO indicators include the following:

Percentage of adults (ages 15+ years) who report having an account (by themselves or together with someone else) at a financial institution, or personally using a transactional account (which includes mobile money services), in the past 12 months, as defined by FINDEX, and gender disaggregated

The percentage of adults (ages 15+) in the poorest 40 percent by income, who report having an account (by themselves or together with someone else) at a bank or another type of financial institution

Gross loans outstanding from commercial banks as a percentage of GDP

33. In addition, the project will track an extensive set of intermediate indicators as outlined in Annex 1.

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III. PROJECT DESCRIPTION

A. Project Components

34. The project focuses on expanding access to financial services in Myanmar. The project will accomplish this by helping to build and strengthen the country’s financial system in a sound, stable, and inclusive manner.

35. The project focuses on assisting the Government in implementing a set of the highest priority reforms identified both in the Myanmar Financial Inclusion Roadmap 2015–2020 and the Myanmar FSDS. Specifically, the project will provide financing for critical investments and technical assistance (TA) to the MOPF and the CBM, the two key public sector institutions responsible for the financial inclusion agenda. It will also emphasize improving the enabling environment for financial sector development by eliminating some of the key barriers that prevent investment and limit sound and stable development.

36. Project Components. The project has five components overall.

Component 1: Reform of State-owned Banks. The expected result is to build a more competitive financial sector by reforming and reducing distortions created by state-owned banks.

Component 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework. The expected result is to enhance legal certainty that improves soundness and stability of the financial sector and upgraded supervisory capacity.

Component 3: Modernization of the CBM and Financial Infrastructure. The expected result is to support the restructuring and modernization of the central bank and the modernization of the financial infrastructure, with a focus on payment systems and the framework for secured transactions.

Component 4: Project Coordination and Monitoring. The expected result is to support the institutional capacity of the MOPF and CBM to coordinate program implementation and monitoring of key outcomes and results.

Component 5: Contingent Emergency Response. This component has a provisional allocation of US$0 and is designed to allow for rapid reallocation of credit proceeds in the event of an eligible crisis or emergency under streamlined procurement and disbursement procedures.

37. These areas have been selected based on the strategic relevance of the reform areas and specific Government requests for assistance from the World Bank Group. Annex 2 presents the detailed project description.

38. Complementary TA and development partner coordination. The selection of reform areas also takes into account gaps in assistance and areas already being supported by other development partners. The World Bank Group also participates in a number of coordination fora

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to streamline and improve the effectiveness of development assistance, including the Committee on Financial Sector Technical Assistance for Myanmar (COFTAM) chaired by the CBM and the IMF. Annex 3 provides a list of development partners and their areas of focus.

39. Complementary TA to support the Government to achieve the goals set forth in the program will be provided by the World Bank Group to Myanmar with trust fund assistance. Specifically, the project is currently complemented by resources from the World Bank-executed Korean Trust Fund in the amount of US$3.3 million. It is also anticipated to be supported by complementary TA from the U.K. Department for International Development (DFID) financed through the Myanmar Multi-donor Trust Fund as a Bank-executed trust fund (BETF). The DFID support is estimated to be US$7.0 million equivalent.

40. Sequencing. Sequencing financial sector reforms so that they address the critically binding constraints to financial sector development is crucial to the successful implementation of Myanmar’s financial sector reform program. Given this, special attention in the project has been devoted to sequencing. Three broad phases are envisaged, as detailed below.

During the first phase (2016–2017), the emphasis is on building the necessary financial infrastructure underpinning the banking system, including finalizing the legal and regulatory framework for the banking system and nonbank financial sector, introducing clearance and settlement systems, strengthening and modernizing the CBM (especially its supervision capacity) and other agencies’ capacity (including supervisors for the nonbank financial sector), and preparing the ground for deeper structural changes in the banking system.

The second phase (2018–2019) focuses on broader structural changes in the financial sector. This includes restructuring the state-owned banks; implementing a revamped microfinance strategy; developing an operational framework to deal with systemic risks; establishing a money market and government bond market and its prerequisites which include the legal, regulatory, and institutional infrastructure; and enhancing the efficiency of the financial sector and continuing with capacity building.

The third phase (2020–2021) aims to deepen the financial sector by enabling a wider range of markets, financial instruments, and services and strategic liberalization and integration of the financial sector.

B. Project Costs and Financing

41. The project will finance the achievement of results through the use of two types of financing mechanisms: (a) results-based financing in the form of disbursement-linked indicators (DLIs), which are defined as results that trigger payments against Eligible Expenditure Programs (EEPs), and (b) traditional input-based financing in the form of goods and services. These are summarized in the following paragraphs.

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Table 2. Project Cost Summary

Lead

Institution

Amount (US$,

millions) Component 1: Reform of State-owned Banks 37.0 Subcomponent 1.1: (DLI 1) Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates

MOPF 30.0

Subcomponent 1.2: Consultancy services to restructure state-owned banks

MOPF 7.0

Component 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework

37.0

Subcomponent 2.1: (DLI 2) Upgrading of the banking sector legal and regulatory framework

CBM 20.0

Subcomponent 2.2: (DLI 3) Upgrading of the microfinance sector regulatory and supervisory framework

MOPF 5.0

Subcomponent 2.3: (DLI 4) Upgrading of the insurance sector regulatory and supervisory framework

MOPF 5.0

Subcomponent 2.4: Microfinance and Insurance—Consultancy services and IT investments to improve quality of regulation

MOPF 7.0

Component 3: Modernization of the CBM and Financial Infrastructure 24.0 Subcomponent 3.1: Consultancy services to restructure/modernize the CBM CBM 2.0 Subcomponent 3.2: CBM Financial Sector Training Center and legal CBM capacity building

CBM 6.0

Sub-component 3.3: Investments to enhance the payment system CBM 16.0 Component 4: Project Coordination and Monitoring 2.0 Sub-component 4.1: Staffing of the MOPF Project Coordination Unit (PCU) (with experts in procurement, monitoring and evaluation [M&E], and financial management [FM])

MOPF 1.0

Subcomponent 4.2: Staffing of the CBM PCU (with experts in procurement, M&E, and FM)

CBM 1.0

Component 5: Contingent Emergency Response 0.0 Emergency response recovery expenditures, as determined MOPF 0.0

i. Disbursement-linked Indicators (US$60 million)

42. Through the use of DLIs, the project will finance the operational costs of the MOPF in select areas to improve operational capacity and support the implementation of institutional and financial sector reforms needed to meet the PDO. The project focuses on a set of priority DLIs that represent key milestones in the achievement of program outcomes. The selection of DLIs is driven by attention to the specific binding constraints to financial sector development. All DLIs support the key outcomes of the Government financial sector reform program.

43. Table 3 provides a list of the DLIs for the project and the institutions responsible for each. This is only a summary. In addition, annual targets have been identified and agreed upon for each DLI.

44. Annex 3 includes the DLI verification protocol and the list of eligible operational expenditures (EEPs) associated with the DLIs. The list has been included in the Project Operations Manual and may be updated, as necessary, with the prior no-objection of the World Bank.

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45. Eligible expenditures will be tracked and monitored on an annual basis by the designated staff of the MOPF and CBM serving in the PCUs. Disbursements of the amounts allocated to each DLI will be made annually to the implementing agencies to reimburse these eligible expenditures, conditional on their achievement of the relevant DLI targets.

Table 3. Summary of Disbursement-linked Indicators

Disbursement-linked Indicators Lead

Institution

Amount (US$,

millions)

Sub-component 1.1 (DLI 1): Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates

MOPF 30.0

Sub-component 2.1 (DLI 2): Upgrading of the banking sector legal and regulatory framework

CBM 20.0

Sub-component 2.2 (DLI 3): Upgrading of the microfinance sector regulatory and supervisory framework

MOPF 5.0

Sub-component 2.3 (DLI 4): Upgrading of the insurance sector regulatory and supervisory framework

MOPF 5.0

ii. Input-based Financing (US$40 million)

46. The project will also finance selected investments (IT and other goods, minor works, and non-consulting services) and consultancy services through a traditional input-based financing mechanism.

47. The goods and services procured under the various components have been selected to be financed under this modality (rather than through the DLIs mechanism) because they (a) are considered significant and critical investments required for meeting the PDO and (b) require specialized TA for the procurement process and/or international tenders. As a result, procurement capacity-building support will be provided to assist the Government in implementing these activities and also build the medium-term capacity to procure such goods and consultancy services.

Table 4. Summary of Investments and TA*

Institution US$, millions

Component 1: Reform of State-owned Banks Sub-component 1.2: Consultancy services to restructure state-owned banks

Due diligence, international financial diagnostics, technical and operational assessments, and so on

IT upgrade assessments and plans Preparations of restructuring plans Corporate governance reviews and formulations of improvement plans

MOPF 7.0


Sub-component 2.4: Microfinance and Insurance—Consultancy services and IT investments to improve quality of regulation

Capacity building to (a) improve the capacity and quality of supervision for insurance and microfinance sectors; (b) review the overall structure, responsibilities, and functions of the Financial Regulatory Department

MOPF 7.0

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(FRD) in line with international practices; (c) develop operational policies and procedures for the FRD operations; (d) draft supervisory manuals; and (e) develop a consumer protection framework

IT equipment and purchase of software to improve the quality of supervision and transparency of the microfinance and insurance sectors

Component 3: Modernization of the CBM and Financial Infrastructure Sub-component 3.1: Consultancy services to restructure/modernize the CBM

Development of an institutional development plan, including governance structure and organizational structure, HR policies, IT systems, human resource development, FM, and a training plan, to prepare the CBM to operate effectively in accordance with the new CBM Law and mandate

CBM 2.0

Sub-component 3.2: CBM Financial Sector Training Center and legal CBM capacity building

Establishment of the CBM Financial Sector Training Center: Refurbishment of physical space, training center equipment, and computers

Consultancy services for developing curriculum (financial sector regulation, supervisory training, central banking basic skills, auditing and accounting, finance, and financial literacy)

Delivery of training and capacity-building programs (as above) Legal and regulatory capacity building: Legal and regulatory

advisory/consultants to support banking supervision capacity building, payment system implementing regulations, consumer protection, and development of capacity to oversee and regulate mobile financial services

CBM 6.0

Sub-component 3.3: Investments to enhance the payment system IT-Investments for upgrading the CBM’s Payment System (for example,

additional CSD functionalities, an ACH [including image-based check clearing] functionality, and an Securities Settlement System, integration of central bank core banking functionalities into the CBM-Net) and respective hardware requirements

Implementation of government payment platform for electronic payments (salaries, conditional cash transfers [CCTs], and so on)

CBM 16.0

Component 4: Project Coordination and Monitoring Sub-component 4.1: Staffing of the MOPF PCU (with experts in procurement, M&E, and FM)

MOPF 1.0

Sub-component 4.2: Staffing of the CBM PCU (with experts in procurement, M&E, and FM)

CBM 1.0

Component 5: Contingent Emergency Response Emergency response recovery expenditures, as determined MOPF 0.0 * The total amount of consultancy is not to exceed 10 percent of the total loan amount and the calculation of consultancy amount excludes cost of PCU and trainings provided under the project to FRD and CBM.

Project Financing Summary

48. The project will be financed by an IDA Credit. The instrument will be Investment Project Financing.

49. The EEPs related to the DLIs will provide flexible, predictable, and transparent funds for operational expenditures and salaries of the MOPF by using the Government of Myanmar (GOM) budget lines under ‘Current Budget and Expenditure’.

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Table 5. Project Costs and Financing

Financing Categories Project Cost

(US$, millions) IDA Financing (US$, millions)

% of Financing

1. DLI-based financing 2. Input-based financing

60 40

60

40

100

100

Total Financing Required 100 100 100

C. Lessons Learned and Reflected in the Project Design

50. The project has incorporated a number of lessons into the project design, drawing on the experience in supporting financial sector development in other low-income and transition countries. The key lessons are outlined below.

(a) Sequencing of financial sector reforms. In transition economies, it is important to put in place primary building blocks for sound and stable financial sector development and sound supervision. In the case of Myanmar, which begins with an extremely outdated financial sector legal framework, the project has emphasized putting in place a modern legal and regulatory framework for the financial sector and providing resources to build human resource skills and supervisory capacity. These are considered priority interventions that will allow a second phase of deepening of the sector and diversification of financial markets.

(b) A comprehensive approach to financial sector reform. Experience in other countries has shown that expanding access to financial services often requires strong interagency coordination. As a result, the project promotes collaboration among the various institutions involved in financial sector development—including the MOPF, FRD, and CBM—around a common reform platform and focuses efforts on a common set of objectives.

(c) Building in resources for capacity building into the procurement process. The project provides significant resources to support the procurement of critical investments in IT and specialized consultancy services. The project will provide training to MOPF and CBM staff to build capacity to procure these goods and services in a transparent and cost-effective manner through support of the PCUs.

(d) Simplifying FM arrangements. Given the limited procurement and FM capacity at the MOPF-FRD and CBM, the project has been designed to simplify FM arrangements by supporting the achievement of specific designated and clear outcomes. The DLIs and eligible expenses have been identified up front through extensive discussion with MOPF budget staff to ensure an understanding of the financing instrument. The FM arrangements also build upon the experience in Myanmar with two other results-based financing projects: the Myanmar Essential Health Services Access Project and Myanmar Decentralizing Funding to Schools Project.

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IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

51. The two main implementing agencies will be the MOPF and the CBM. The MOPF will be responsible for the implementation of Component 1 and Sub-components 2.2, 2.3, 2.4, 4.1, and 5. The CBM will be responsible for the implementation of Component 3 and Sub-components 2.1 and 4.2. At each institution, a PCU will be maintained under Component 4 to provide implementation support to their respective parts of the project. Oversight, implementation guidance, and support will be through existing mechanisms of the GOM.

52. The PCUs will be responsible for the following:

Overall project management Coordination across implementing agencies M&E of outcomes and results Procurement and implementation support Financial management

53. The project will provide resources for PCU staff at the MOPF and CBM. Among the PCU staff, a senior procurement specialist will be hired under the project to provide technical support to both the MOPF-FRD and CBM in developing the Terms of Reference (TORs) for specific investments and consultancy assignments. The PCU will also have resources to hire an IT specialist as needed to advise on certain IT investments. An M&E specialist will also be hired to monitor overall outcomes and results under the project and also ensure the necessary reporting overall.

54. On behalf of the Borrower, the MOPF PCU will have overall project reporting, monitoring, and FM responsibilities. The MOPF will provide a consolidated report on the EEPs.

55. A Project Operations Manual will set forth the overall project protocols and procedures.

56. Flow of funds. The Republic of the Union of Myanmar is the Borrower for the Credit and will sign the Financing Agreement with IDA. The MOPF will onlend US$25 million for the investment and TA to the CBM through a Subsidiary Agreement. A Project Agreement between IDA and the CBM will define the responsibilities of the CBM under its respective components of the project.

57. Annex 3 provides a description of the main roles and responsibilities of the MOPF and CBM for the relevant project activities and the allocation of funds to each institution under the various disbursement categories.

B. Results Monitoring and Evaluation

58. The project will provide substantial resources to support a strong M&E system through the PCUs at the MOPF and CBM. This goal is to (a) ensure effective and timely implementation of the financial inclusion reform program according to plan and apply midcourse corrections; (b) provide a robust basis for the disbursement of IDA funds; and (c) measure

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achievement of results envisaged in its objectives and learn lessons for future operations and TA programs supporting financial sector development.

59. The project system will seek to use the main Government systems that are already in place. It will also provide resources through each activity to build capacity among staff of the implementing agencies to monitor the results with regard to financial sector development and access to finance.

60. The two implementing agencies will conduct overall monitoring and coordination of project activities in accordance with the indicators included in the Results Framework (Annex 1). The PCUs will submit biannual progress reports to the World Bank. Biannual reviews, the first one to take place six months after IDA Credit effectiveness, will provide a detailed analysis of implementation progress toward achievement of the PDO and will include an evaluation of FM and procurement.

61. The implementing agencies will (a) no later than two years after the effectiveness date (or such other date as agreed with the World Bank), carry out a midterm review of the project and prepare and furnish a midterm report to the World Bank documenting progress achieved and implementation challenges and (b) review the midterm review with the World Bank, about one month after its submission, and thereafter take all measures required to ensure the continued efficient implementation of the project and the achievement of its objectives.

C. Sustainability

62. The project promotes sustainability of the reforms through several angles. First, key project interventions have been explicitly designed to support the human resource and capacity-building needs of Myanmar’s financial sector regulators and policy makers. In this manner, the project is intended to help create the skills required to promote the development of a sound and stable financial sector. In particular, the CBM Financial Sector Training Center is designed to help institutionalize capacity building, so that the CBM has a well-designed training program to help build a cadre of regulators as the private banking and financial sector expands and diversifies. Similarly, the FRD training component will help the MOPF build the basic skills to regulate the incipient microfinance and insurance industries in line with its mandate. Efforts will be made to ensure that both training components provide equal opportunities to men and women, including the monitoring of the gender balance of the attendees.

63. Second, the project will promote safety, soundness, and sustainability of reforms by establishing the basic legal framework for the financial sector, including through the implementation of the newly passed Financial Institutions (FI) Law, upgrading the regulatory framework for mobile financial services, payment systems, insurance, and microfinance, among other areas. An updated legal framework is expected to promote the stable development of the financial sector and allow for modern banking and new product development, which was not allowed under the previous law.

64. Third, the project will help reduce distortions in the banking sector through reforms of the dominant state-owned banking sector in a way that is expected to attract private sector investments and create a more level-playing field for financial institutions.

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65. In addition, the improvement to the payment infrastructure in the CBM—RTGS, national switch, and the ACH—for checks will increase the efficiency, speed, and safety of the payment system.

V. KEY RISKS

A. Overall Risk Rating and Explanation of Key Risks

66. The overall risk of the proposed operation is High. The proposed project faces significant risks, including (a) political risks, (b) macroeconomic risks, (c) implementation and coordination risks, and (d) conflict and violence risks. The details are discussed in the following paragraphs.

67. Political risks. Myanmar held parliamentary elections in November 2015, which ushered in a new government for the first time in five decades. The new government is led by the National League of Democracy (NLD). While the subsequent transition in government has also been marked by a smooth transfer of power, a number of political risks remain. It is expected that the pace of implementation of the economic and social reform program could be negatively affected by continued political divisions and entrenched interests. While the NLD has put forward an economic platform that is also broadly consistent with the reforms supported under the project, implementation capacity remains a challenge. To help ensure policy continuity, the World Bank will continue to consult with a wide variety of senior stakeholders, both decision makers in Government and the opposition, to ensure that the proposed financial sector policy actions have wide support.

68. Macroeconomic risks. Movements in the regional price of natural gas present the main exogenous risk to macroeconomic stability as oil and gas revenue is expected to decline from 1.8 percent of GDP in 2014/15 to 1.1 percent in 2015/2016, and that affected fiscal sustainability. The kyat fell by nearly 20 percent in 2015 (despite recent recovery) with the general strengthening of the U.S. dollar and has put pressure on Myanmar’s external accounts. Growing fiscal imbalances led to increased monetization of the budget deficit and pose sizeable risks to the Government. The authorities have endeavored to diversify financing sources, but the process is expected to take a long time. The Government can, at least in the short term, rely more on external debt disbursements. However, for the last two years, this portion has only been around 10 percent of net financing. These risks are mitigated by having close and regular consultations with the authorities and the authorities’ intent to seek higher concessional external financing, building foreign exchange reserves, and engaging in regular monitoring as part of this World Bank Group public FM engagement and the IMF Article IV surveillance missions.

69. Implementation and coordination risks. The project could potentially be delayed or negatively affected by the weak implementation capacity of the key implementing institutions, especially the CBM and FRD who have not dealt with IDA-financed projects before. In addition, a lack of transparency and data in the financial sector also could hinder effective M&E. The establishment of dedicated PCUs with skilled personnel at the MOPF and CBM are expected to mitigate these risks. The project is also expected to help foster policy coordination and information sharing of the MOPF and CBM by bringing the institutions together under a common project

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platform. A clear division of responsibilities and up-front agreement on the deliverables and coordination mechanism is expected to help in managing this risk.

70. Conflict and violence risks. Renewed ethnic and religious violence remains a possibility and could affect the overall Government reform program, although financial sector reforms are not particularly at risk. On the religious side, the underlying tensions between the Buddhist majority and the Muslim minority are yet to be resolved. Both the Government and ethnic armed groups have noted that they do not wish to see a return to conflict. Apart from that, these conflicts are localized to particular regions and are not expected to affect the ability of the implementing agencies to carry out their activities under this project.

VI. APPRAISAL SUMMARY

A. Economic Analysis

71. A detailed technical and economic analysis was conducted during project preparation. The main findings are summarized in the following paragraphs. Additional details on each of the analytical underpinnings and technical aspects are included in Annex 2.

72. The project is expected to contribute significantly to economic development and poverty reduction in Myanmar in several ways. First, through the focus on modernizing the legal framework, the project is expected to enhance the soundness and safety of the financial sector. Financial crises have been shown to be costly in both developed and transition countries alike. Not only do banking crises require large outlays of public funds—typically absorbed by the taxpayer—but they can also have a large negative impact on economic growth. Thus, the measures supported under the project—including supporting the implementation of the 2016 FI Law—are expected to significantly reduce the potential for financial crises by bringing the soundness in line with the Basel Core Principles, increasing the soundness of financial institutions operating in Myanmar, and promoting the transparency of the sector. The issuance of the associated implementing regulations and capacity of the CBM to implement the law are directly supported under this project.

73. Second, through building the capacity of the key financial sector regulators (the FRD in the microfinance and insurance sectors and the CBM for the banking sector) and IT investments to improve operational efficiency, the project will allow early detection of vulnerabilities and risks in the financial sector. This in turn will reduce the likelihood of a financial crisis and minimize the economic and fiscal costs of a crisis, should one occur.

74. Third, by modernizing the CBM and financial infrastructure—the CBM and payment systems in particular—the project is expected to improve the safety and efficiency of the banking system. Currently, the CBM’s systems are severely outdated and not automated. The IT investments under the project are considered critical to bring Myanmar’s payment system in line with modernized central bank practices. The IT investments will also better serve the demands of Myanmar’s growing financial system and economy in the years to come as Myanmar continues its overall political and economic reform program.

75. Fourth, by restructuring state-owned banks, the project is expected to significantly reduce the Government’s fiscal burden. Currently, the four main state-owned banks are loss-making

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institutions. The MEB in particular also has a large percentage of the deposits in the system but offers only a small percentage in loans to individuals or SMEs. The implicit government guarantee of these deposits poses fiscal costs on the Government and also distorts the market by making it more difficult for other financial institutions to mobilize deposits. Deposit mobilization is critical to allow resources to more effectively provide credit to the private sector and, in particular, to Myanmar’s fledgling SME sector.

76. Fifth, the project’s focus on financial inclusion, and specifically promoting digital financial services, is also expected to have important economic benefits and help boost shared prosperity in Myanmar. Myanmar is one of the World Bank Group’s priority countries for promoting Universal Financial Access by 2020. Currently, less than 30 percent of adults have access to the formal financial sector. As a result, the project has designed a set of targeted interventions to bring the unbanked in the formal financial sector, such as through digital financial services. This is significant given that increased financial access has been shown throughout the world to be the first step toward increasing livelihoods.

B. Technical

77. The technical review conducted during appraisal found the overall Myanmar Financial Inclusion Roadmap 2015–2020 to be technically sound and well-aligned with international good practices. The project supports the Government in implementing key elements of this strategy as well as the broader FSDS. Both of these strategies were developed through broad consultative processes with a range of public institutions, the private sector, and development partners. A summary of the main findings of the technical review of the main project components is given in the following paragraphs.

78. Component 1: Reform of State-owned Banks. This component aims to improve the competitiveness of the financial sector through the restructuring of state-owned banks. The component builds on extensive World Bank Group and global experience in reforming and restructuring state-owned banks. Past as well as new research reveals that government ownership of banks is associated with lower financial development, more financial instability, and slower economic growth (Rethinking the Role of the State in Finance, World Bank, September 2012). The report recommends that countries carefully consider the risks posed by state-owned banks and pay attention to how they are governed, which is especially challenging in weak institutional environments. The project provides the necessary resources for the Government to implement comprehensive reform of the sector through reforms at two levels. At a high level, it would involve developing an overall state-owned bank policy framework and also building the capacity of the MOPF to establish effective ownership arrangements. At the institutional level, it would involve developing specific reform or restructuring plans for each individual state-owned bank. Given that the condition of the state-owned banks vary widely, a tailored approach to the reforms would be required, including with a close examination of banks that may have outlived their current policy mandates. The goal is to restructure the sector in a way that the state-owned banks do not crowd out the private sector or distort the market though inefficient, subsidized, or in some cases politically motivated lending.

79. The project has thus included significant resources to carry out such restructuring effectively. International experience has shown that state-owned bank reform typically requires

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significant specialized advisory services and TA. This includes not only resources for international assessments, due diligence, legal, and TA to develop and implement the restructuring process, but also resources for selected information and communication technologies investments to increase operational efficiency and risk management of the banks.

80. Component 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework. The aim of this component is to strengthen the legal, regulatory, and supervisory framework for the financial sector with an emphasis on banking, microfinance, and insurance. The component provides TA and selected goods and services.

81. The reforms and activities proposed to be supported through the project are in line with international good practices in financial sector reform. Myanmar passed the FI Law in January 2016—ushering in the first major reform of the financial sector for more than 40 years and establishing the basis for modern banking. The existing law had been severely outdated, designed for a closed economy, and suffered from serious gaps in both the structure and contents required for it to be implemented consistently, transparently, and effectively.

82. While the new FI Law represents a major achievement, it will take several years to be implemented in full. Thus, the project will support capacity building of the CBM to develop and implement the associated implementing regulations for the law and supervise banks in accordance with the provisions.

83. The FI Law is expected to fundamentally change the operating environment for banking in Myanmar. Most specifically, the new FI Law takes into consideration the aforesaid gaps, current problems in the implementation and enforcement faced by the CBM, and the future direction of the banking system. It also defines the scope of power of the CBM adequately, marks the perimeter of exercise of discretion, sets out clear procedures to guide and ensure consistency. Some salient features of the law are described below.

Clear definitions of the types of institutions which are subject to regulation by the CBM and their scope of activities. Hence, the new FI Law rationalizes the definition of ‘banking business’ (removing the artificial distinction between commercial banks and development banks and using duration of deposit) so as to provide a sound basis for the conduct of banking business. Under the FI Law, the banking business is rationalized in line with accepted banking norms.

NBFIs regulation. The law provides for options to provide oversight and, if needed, regulation of the NBFI businesses such as money remittance, leasing, factoring, e-money, and the credit card business. A light-touch registration system is created for the NBFIs to enable the CBM to collect data and information. However, the CBM can bring these NBFIs within the regulatory purview of the FI Law if they pose systemic risks and threats to financial stability. The FI Law also provides a framework for monitoring and dealing with a third category of exempted institutions such as the MADB, Rural Development Bank, and the MFIs, which fall under the authority of another regulator and law. With the approval of the MOPF, the CBM will have the necessary power to bring these institutions under FI Law if it is in the interest of the public and the stability of the financial system.

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Licensing. The new FI Law provides for an adequate framework for licensing of banks. The new FI Law sets out the minimum conditions for licensing and the procedures and the powers of the CBM to carry out the licensing function effectively. The new FI Law also deals with the licensing of foreign banks either as branches or as a subsidiary. It also includes a clear list of permitted banking business activities necessary in the FI Law to ensure that banks are able to carry on a broad range of activities including securities and insurance, subject to these activities being regulated by the respective laws.

Sound statutory basis for the prudential supervision of banks. In line with the Basel Core Principles standards, the authority of the CBM to develop and use prudential regulations and requirements to control the different types of risks inherent in the banking business is clearly provided in the new FI Law. The CBM has the power to enter into arrangements with foreign supervisory authorities and domestic authorities for cooperation and exchange of information.

Powers of the CBM to take prompt corrective actions. The new law provides a graduated approach to the enforcement of prudential requirements, culminating in bank resolution measures such as bank rehabilitation, liquidation, and cancellation of the banking license. Accordingly, the FI Law prescribes a gradual sequence of enforcement measures, escalating in intrusiveness.

Bank resolution measures and insolvency provisions. The new FI Law introduces a logical sequence of resolution measures. It will begin with an order suspending the business of the bank or alternatively placing the bank under administration and appointing an administrator to take control of the failing bank. It will culminate in the liquidation of the bank and the cancellation of its license. In line with international good practices and given the current state of the insolvency law in Myanmar, the new FI Law provides for a comprehensive framework for bank and NBFIs resolution.

Payment system. To supplement the provisions in the CBM Law, the new FI Law provides a more detailed provision to enable the CBM to, among other things, formulate payment system policy, operate and license the payment system, ensure finality of payment, cooperate with the private sector, and designate payment systems.

84. Similarly, the support to the FRD for the development of the legal and regulatory framework for microfinance, insurance, and supervision of state-owned banks is considered to be in line with international good practices of the NBFI supervision and development. The particular areas of upgrading the microfinance policy and regulatory framework have been informed by the 2012–2014 Financial Inclusion for National Development (FIND) project, funded by the Livelihood and Food Security Trust Fund (LIFT). The project supported capacity building of the newly formed FRD microfinance department.

85. For insurance supervision, the project will support the strengthening of the insurance sector legal framework to be more broadly in line with the core principles of the International Association of Insurance Supervisors (IAIS). The project will also support the FRD Insurance Supervisory Department to develop and put into use a set of standardized reporting formats that are more in

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line with international norms. This is expected to significantly improve the transparency of the sector, in turn allowing for more stable and sound development and promoting private investment.

86. Component 3: Modernization of the CBM and Financial Infrastructure. This supports the restructuring and modernization of the central bank, payment systems modernization, and enabling secured transactions. Most of the CBM’s processes, procedures, and institutional arrangements are carried over from 1990 and do not position the CBM as an effective central bank in a market-based economy. The restructuring and modernization will pave the path for the CBM to meet key international standards of Monetary Policy and Transparency, Basel Core Principles, and the Core Principles for Payment Systems. The establishment of the CBM Financial Sector Training Center will help build the capacity of the CBM and improve the quality of supervision of the banking sector.

87. The payment systems modernization component has been informed by a diagnostic of the national payment system, prepared with the support of the ADB and also reviewed by World Bank Group payments experts. The TA and IT investments that are proposed to be financed under the project are designed to increase consistency with the CPMI-IOSCO Principles for Financial Market Infrastructure.

88. The work on secured transactions has also been informed by global experience and lessons from International Finance Corporation (IFC) advisory services programs on establishing the legal framework for secured transactions. The approach to focus on legal reform through a consultative process, including with the private sector, is consistent with international good practices.

C. Financial Management

89. The overall FM risk is assessed as Substantial. The main risks are associated with (a) inadequate documentation of policies and procedures and lack of clarity on applicable government rules; (b) finance staff that are inexperienced with FM of development partner-financed projects at the FRD and CBM; (c) lack of a sound mechanism for preparation of work plans and budget allocation; and (d) the use of manual processes.

90. FM mitigating measures proposed to address these risks include: (a) having in place an acceptable FM manual which is part of the Project Operations Manual for the project; (b) recruitment of a short-term local FM specialist at the FRD and CBM and where required an international FM specialist for a short period to provide support on project financial matters (the detailed TOR of this position will be developed once capacity of the CBM PCU is assessed fully); (c) training in FM for staff involved in the implementation of the project; and (d) for the input-based operations, set up an Excel system initially, including the establishment of ‘chart of accounts’ to allow the recording of transactions according to government codes as well as by project components and disbursement categories until the Government introduces the computerized accounting system. The FM arrangements have been deemed acceptable given that these appropriate risk mitigation measures will be implemented during the course of the project.

D. Procurement

91. The Procurement Guidelines: “Procurement of Goods, Works and non-Consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2012

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and revised July 2014 and Consultant Guidelines: “Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers”, dated January 2011 and revised in July 2014, will apply to the project. Myanmar is a fragile country with low procurement implementation capacities. The World Bank has streamlined the procurement process for new and ongoing projects in Myanmar, effective February 2016. These streamlined procedures take into account the country situation and capacity and are in line with the World Bank Guidance Note on Projects in Situation of Urgent Need of Assistance or Capacity constraints, dated April 2013. These procedures offer simplified procurement arrangements, higher thresholds for shopping, and use of consultant qualification selection method as well as select use of tender securities. In addition to the above, provisions of the IRM Operations Manual agreed between the World Bank and Government will be applied for Component 5.

92. The two main implementing agencies under the project will be the MOPF and the CBM, which are autonomous from each other. In addition, the MOPF will have the overall coordinating and reporting function for the entire project. The CBM will also implement its specific activities and send all its reports to the MOPF for collation.

93. Procurement activities under the project will include large-value consultancy and advisory services, refurbishment of the CBM Financial Sector Training Center, and supply and installation of IT infrastructure and systems. Both the MOPF and the CBM will carry out their own procurement activities.

94. The project’s overall procurement risk is High. An assessment of procuring entities in July 2016 found no centralized procurement legal framework and regulatory system in the country, apart from a general arrangement to exercise open competitive tendering as a default method. The MOPF and CBM have delegated powers to make their own arrangements. Both agencies lack comprehensive procurement procedures, procurement expertise, and staff with experience in World Bank Procurement Guidelines and Procedures and have limited expertise in procuring such high-value contracts on a competitive basis. Risk mitigation measures agreed with Government include requirements that both the PCUs have staff with knowledge of the Bank or international procurement expertise, the Bank will train the PCU staff, explicit coordination arrangements and responsibilities for technical inputs to be agreed, and Bank Procurement and Consultant Guidelines will apply in all procurement activities.

95. The details are provided in Annex 3.

E. Social (including Safeguards)

96. The project is not expected to have negative social effects. The proposed components aim to improve the enabling environment for the poor to get access to finance by mainly focusing on improving institutions and staff capacity of the MOPF and CBM and legal and regulatory frameworks for the sector. It is unlikely that any particular social group, including ethnic minorities, will be negatively affected. The project will establish the CBM Financial Sector Training Center which may include some minor refurbishments of existing buildings. Land acquisition or access restriction will not occur. OP 4.10 or OP 4.12 will thus not be triggered. The project will collect indicators on gender with regard to analytical work and capacity-building activities.

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97. Studies show that when people participate in the financial system, they are better able to start and expand businesses, invest in education, manage risk, and absorb financial shocks.7 Access to accounts and to savings and payment mechanisms increases savings, empowers women, and boosts productive investment and consumption. Access to credit also has positive effects on consumption as well as on employment status and income and on some aspects of mental health and outlook. The Myanmar Financial Inclusion Roadmap 2015–2020 prioritizes financial inclusion programs that target those segments of the population that would benefit most from improved access to finance, such as farmers/fisherpeople, MSMEs, and low-income households.

i. Gender Analysis

98. With respect to gender, as seen in the FINDEX data presented in Table 6, the overall level of financial inclusion is low and women generally lag behind men, sometimes by a significant margin. For example, men are 67 percent more likely to have an account at a financial institution. This gender gap for account ownership is larger than the gap between those with and without secondary education (27 percent) and similar to the gap between the richest 60 percent and poorest 40 percent (68 percent). Women are, however, ahead on mobile account ownership, which is an activity that this project will support, and are more likely to have received domestic remittances and government transfers in the past year.

99. This project has several components which seek to reduce gender inequality in access to financial services. In particular, microfinance borrowers are mostly women, so the work on improving MFI supervision will help enhance the protection and access to credit afforded to women.

100. All components will endeavor to be gender-informed, with gender-disaggregated indicators where available. Given the low levels of overall financial inclusion and/or the centralized nature of some components (for example, legal frameworks and financial infrastructure), not all components are conducive to being explicitly gender-targeted. However, by benefiting both genders equally, these should reduce the relative gender gap.

101. In general, Myanmar has the worst gender equality scores in the region, as measured by the Organisation for Economic Co-operation and Development (OECD) Social Institutions and Gender Index. The Ministry of Social Welfare and Relief and Resettlement is leading reforms to enhance gender equality and empowerment. Myanmar has committed to the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW) and Myanmar’s National Strategic Plan for the Advancement of Women covers key areas of the Beijing Platform for Action, which is the United Nations agenda for women’s empowerment. This project will coordinate where possible with these wider efforts.

7 World Bank Global FINDEX, 2014.

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Table 6. Financial Inclusion Indicators in Myanmar by Gender (% ages 15+), 2014

Indicator Total Female Male Gap

Account at a financial institution 22.6 17.1 28.6 −11.5

Account (including mobile and so on) 22.8 17.4 28.6 −11.2

Mobile account 0.2 0.3 0.0 0.3

Saved at a financial institution 12.8 10.4 15.4 −5.0

Borrowed from a financial institution 15.5 11.8 19.5 −7.7

Borrowed from a store by buying on credit 5.9 5.4 6.4 −0.9

Borrowed from family or friends 21.8 21.4 22.3 −0.9

Borrowed from a private informal lender 16.3 17.2 15.2 2.0

Borrowed for education or school fees 5.7 5.6 5.9 −0.3

Borrowed for health or medical purposes 12.3 13.7 10.8 2.8

Borrowed to start, operate, or expand a farm or business 22.4 19.8 25.2 −5.4

Borrowed any money in the past year 42.8 40.8 44.9 −4.1

Received domestic remittances in the past year 11.0 13.1 8.8 4.4

Sent domestic remittances in the past year 6.8 6.7 6.9 −0.2

Source: FINDEX 2015.

ii. Poverty Analysis

102. The World Bank Group CPF has identified the following main pathways out of poverty: reducing rural poverty; investing in people and effective institutions for people; and supporting a dynamic private sector to create jobs.

103. The project is fully aligned with this strategy and is expected to contribute to the CPF goals in all three areas. More specifically, the project is expected to have a positive impact on poverty reduction in several ways.

By significantly expanding the reach of financial services to rural areas. At least 70 percent of Myanmar’s poor live in rural areas and depend largely on agriculture. Many of these populations are also the least served by financial services. The project has several interventions that are aimed at reaching these populations through expanded financial services. Most significantly, the establishment of a clear regulatory environment for the banking sector and mobile financial services is expected to allow the rapid expansion of outreach of financial services to rural areas. In recent years, mobile money services have emerged around the world, offering services to facilitate access to insurance, credit, and savings.

By building capacity and improving the operational efficiencies of the two key institutions—the CBM and FRD. The project is anticipated to increase the ability of the regulators to put in place effective policies that promote the soundness and development of the sector.

By establishing the legal and supervisory framework for sound and stable development of the private financial sector. A clear legal framework is a

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prerequisite for development of a dynamic, competitive, and vibrant financial sector that can serve the demand of Myanmar’s growing economy. Once established, the improved enabling and operating environment for banks and financial institutions is expected to lead to financial market deepening. This will mean the increased availability of new products and services to firms and SMEs that need access to credit to start, invest, and expand their businesses, ultimately creating jobs and boosting livelihoods in Myanmar.

Box 2. Myanmar Poverty Profile

Despite its potential, Myanmar is one of the least-developed countries in Southeast Asia, a legacy of conflict, isolation, and ineffective economic policies. In 2013/14, the country’s GDP was US$56.8 billion. With a population of 51.4 million, the country had a per capita GDP of US$1,105 compared to US$5,779 in Thailand and US$1,911 in Vietnam.

Absolute poverty in Myanmar was estimated to be between 25.6 and 37.5 percent in 2010. The lower rate reflected the Government’s methodology—which showed a 20 percent decline since 2005—and the higher rate reflected a more broad-based methodology used by the World Bank. The Government’s estimated poverty headcount rate in 2010 represented a reduction from 32 percent in 2005 (the higher end of the range reflects recalculated 2010 data not available for 2005).

At least 70 percent of Myanmar’s poor live in rural areas.

Poverty rates vary across geographical zones, with poverty highest in many areas affected by conflict and the coastal zone (53.1 percent, including 77 percent in Rakhine State) and hills zone (40.9 percent) where the majority of ethnic minorities reside and lowest in the dry zone (29.5 percent).

Poverty is concentrated in Myanmar’s farming heartland of the delta and in the dry zone due to population density. These two zones are home to 64 percent of the country’s poor. Eighty percent of female-headed farming households are not able to produce enough food to meet household consumption requirements.

Urban poverty at 34.6 percent was relatively higher than expected.

Source: Myanmar Empowering People for Inclusive Growth, CPF for the period 2015–2017, WG, 2014.

F. Environment (including Safeguards)

104. The risk of environmental impact associated with the project is low. No safeguards policy has been triggered and the category is assigned Category C. The project will mostly finance financial sector policy and legal and regulatory reform, and physical IT investments and capacity-building activities which are not expected to have any negative environmental impact. The establishment of the CBM Financial Sector Training Center will include minor refurbishment of existing buildings without structural changes. The refurbishment will take place in existing buildings, owned by the CBM in Yangon and in Nay Pyi Taw. These minor refurbishments activities may generate limited adverse environmental impacts such as dust, noise, vibration, solid waste, and safety issues. These potential impacts are assessed to be minimal, localized at two refurbishment sites, and short term in nature. Good environmental practices will be adopted and are included in the Project Operations Manual for the minor refurbishment.

i. Climate Change Screening

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105. The Climate and Disaster Risk Screening Tool was completed, indicating that this project is at relatively low risk from climate and geophysical hazards. Historically, Myanmar has been moderately exposed to strong winds and floods and that, together with rising sea levels, pose future potential threats to the economy. A natural disaster (for example, a major cyclone) will in general set back the implementation and achievement of development objectives.

106. A more inclusive, more developed, and better supervised financial sector can play a critical role in ameliorating climate change and natural hazard impacts on several fronts, for example, intermediating and mobilizing investment funding for countering or mitigating climate change; providing insurance to protect against various losses; allowing money to reach affected areas to speed up recovery (including by the Government and donors); and securing savings at banks (as opposed to cash under mattress) to provide a safety net for those affected. Digitization of the financial sector (for example, banks and insurance companies are still using paper and cash) with better data management will improve their disaster resilience and ability to help affected areas.

G. World Bank Grievance Redress

107. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

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Annex 1: Results Framework and Monitoring

Myanmar Financial Sector Development Project (P154389)

Project Development Objectives

The PDO is to expand access to finance in Myanmar and, in the event of an Eligible Crisis or Emergency, to provide immediate and effective response to such Eligible Crisis or Emergency.

These results are at Project level

Project Development Objective Indicators

Indicator Name Description (indicator definition etc.) BaselineCumulative Target Indicators (FY)

Frequency Data

Source*/ Method

Responsibility for Data

Collection 2017 2018 2019 2020 Target

Adults with active transaction accounts (%)

The percentage of adults (aged 15+) who report having an account (by themselves or together with someone else) at a financial institution; having their own debit card; or receiving or making payments using an account or card or mobile phone in the past 12 months

Males: 28.6%

Females: 17.4%

Males: 30%

Females: 19%

Males: 33%

Females: 23%

Males: 37%

Females: 27%

32% 32% Every three years

FINDEX (and CBM)

FINDEX (and CBM)

Adults in the poorest 40% with accounts at a financial institution (%)

The percentage of adults (aged 15+) in the poorest 40% by income, who report having an account (by themselves or together with someone else) at a bank or another type of financial institution

16.1% 17% 18% 20% 20% 20% Every three years

FINDEX (and CBM)

FINDEX (and CBM)

Loans from commercial banks (% GDP)

Gross loans outstanding from commercial banks as a percentage of GDP

8.9% (2013)

10% 12% 13% 15% 15% Annual IMF FAS (and CBM)

IMF FAS (and CBM)

Note: *Using latest available figures. Note figures reported by FINDEX every three years, and use survey data from prior year. FAS data has 1–2 year lag.

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Intermediate Results Indicators

Indicator Name Description (indicator definition etc.) Baseline Cumulative Target Indicators Frequency Data

Source/ Method


Collection

Improved transparency and soundness of state-owned banks

The MEB undergoes and publishes the key findings of financial diagnostics.

No No No Yes Yes Yes Annual MOPF MOPF

Upgrading of NBFI supervisory capacity

Development of supervisory manuals or internal guidelines for insurance, microfinance, and state-owned banks

0 0 1 2 3 3 Once each FRD and MOPF

FRD and MOPF

Improved soundness and transparency of financial institutions

Percentage of financial institutions that comply with the requirements on submission of information, capital adequacy, acquisition of substantial interest, and large exposures requirements set by the new FI Law and regulations.

0% 0% 0% 30% 40% 50% Annual CBM CBM

Banks connected to CBM

Percentage of banks in Myanmar by assets with operational core banking system connected to the CBM-Net

0% 0% 0% 80% 80% 80% Annual CBM CBM

Capacity building for citizen engagement activities and empowering citizens

Development of the CBM and FRD capacity to hold consultations with the public and private sector on key regulations and policies related to banks, MFIs, and insurance companies—empowering citizens to engage more effectively with regulators.

No No No Yes Yes Yes Annual CBM and FRD

CBM and FRD

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Intermediate Results Indicators (Cont.)

Indicator Name Description (indicator definition etc.) BaselineCumulative Target Indicators

Frequency Data

Source/ Method


Collection FY17 FY18 FY19 FY20 Target

DLI 1: Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates

Improved transparency and policy framework for state-owned banks

The MOPF has established a high-level steering committee for state-owned bank reform and improved the transparency of the sector through issuance of a state-owned banks policy framework.

No Yes Yes Yes Yes Yes Annual MOPF MOPF

Improved governance and efficiency

The MOPF has developed and approved a comprehensive MEB restructuring plan, based on a detailed financial diagnostic and that includes measures to improve corporate governance, strengthen risk management, and meet supervisory standards.

No No Yes Yes Yes Yes Once MOPF MOPF

Improved governance

The MOPF has amended MEB’s legal structure and corporate governance arrangements in order to strengthen MEB’s managerial autonomy and accountability, in accordance with the approved MEB restructuring plan.

No No No Yes Yes Yes Once MOPF MOPF

Improved risk management at the MEB

The MEB has implemented an improved risk management framework for MEB’s operations, in accordance with the approved MEB restructuring plan.

No No No No Yes Yes Once World Bank

World Bank

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DLI 2: Upgrading of the banking sector legal and regulatory framework

Improved banking sector legal framework

The CBM has issued appropriate regulations that impose new requirements for banks on the submission of information, governance, capital adequacy, acquisition of substantial interest, and large exposures, in accordance with the Financial Institutions Law.

No Yes Yes Yes Yes Yes Once CBM CBM

Improved transparency and soundness

Percentage of financial institutions that have complied with the requirements on submission of information, governance, capital adequacy, acquisition of substantial interest, and large exposures standards set forth in the Financial Institutions Law and implementing regulations for the prior fiscal year.

0% 0% 0% 30% 40% 50% Annual CBM CBM

Secured transactions legal framework

The CBM has issued an appropriate regulation that strengthens the legal and regulatory framework for secured transactions by facilitating lending using movable collateral.

No No No Yes Yes Yes Once CBM CBM

DLI 3: Upgrading of the microfinance sector regulatory and supervisory framework


The FRD has issued standardized financial reporting formats for use by MFIs.

No Yes Yes Yes Yes Yes Once MOPF MOPF

Upgrading the supervisory capacity

Percentage of FRD MFI supervision staff whom have been trained in basic credit risk analysis and MFI supervision.

0% 50% 80% 80% 80% 80% Annual MOPF MOPF


Percentage of MFIs reporting to the FRD with annual financial data in accordance with standardized supervision formats

0% 0% 0% 50% 70% 70% Annual MOPF MOPF

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DLI 4: Upgrading of the insurance sector regulatory and supervisory framework


The FRD has issued standardized financial reporting formats for use by insurance companies, adapted from the IAIS Insurance Core Principles (ICPs).

No Yes Yes Yes Yes Yes Once MOPF MOPF

Capacity building for the FRD supervisory staff

Percentage of the FRD insurance supervision staff have been trained in on- and off-site insurance supervisory practices, consistent with the IAIS Insurance Core Principles (ICPs) (monitored by gender).

0% 0% 50% 60% 60% 70% Annual MOPF MOPF

Improved transparency and soundness of insurance

Percentage of insurance companies that have reported to the FRD for the prior fiscal year with annual financial statements in accordance with the standardized reporting formats.

0% 0% 0% 50% 70% 70% Annual MOPF MOPF

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Table 1.1. Link of DLIs and Investments to PDO

Project development objective: To expand access to finance in Myanmar and, in the event of an Eligible Crisis or Emergency, to provide immediate and effective response to such Eligible Crisis or Emergency.

Link to PDO Component 1: Reform of State-owned Banks DLI 1: Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates. Consultancy services to restructure state-owned banks.

Reduces distortions in the financial sector by eliminating subsidized lending and banking practices. This is expected to allow a more competitive market overall, fostering the entry of commercially oriented private financial institutions. The restructuring is also expected to reduce the fiscal liabilities of the government as owner of these loss-making institutions.

Component 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework DLI 2: Upgrading of the banking sector legal and regulatory framework

Establishes the legal basis for offering financial services and improves regulatory certainty for the sector. This is expected to facilitate private investment, transparency, and improved supervision by the CBM. The reform of the legal framework for secured transactions is also expected to facilitate SME lending by reducing the risk for banks.

DLI 3: Upgrading the microfinance sector regulatory and supervisory framework

Establishes the regulatory basis for microfinance operation and enables sustainable provision of transactions, savings, and lending services by the microfinance industry to the underserved

DLI 4: Upgrading the insurance sector regulatory and supervisory framework

Establishes the regulatory basis for insurance companies to provide new insurance products tailored to the financial demands of the underserved

TA and investments for the FRD to improve quality and effectiveness of microfinance and insurance regulation

A cadre of competent and well-trained regulators are required to supervise and regulate the market effectively and put in place sound policies to facilitate stable growth of the financial market.

Component 3: Modernization of the CBM and Financial Infrastructure Investments to enhance the payment system Establishment of CBM Financial Sector Training Center TA for legal and regulatory capacity building

Facilitates the provision of an effective and efficient payment system that supports the safety and efficiency of the financial system and supports enhancing access to transaction accounts. The CBM needs to develop skills and capacity also to implement the new FI Law through effective supervision. This component is critical for the CBM to achieve its objectives with regard to increasing the soundness and stability of the sector. The TA under this component will allow the CBM to build capacity to regulate and supervise effectively.

Component 4: Project Coordination and Monitoring Consultancy services for the PCUs Supports effective implementation of the overall program and monitoring of outcomes of various

interventions Component 5: Contingent Emergency Response To be determined, if triggered Supports emergency response recovery measures as determined

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Annex 2: Detailed Project Description

MYANMAR: Financial Sector Development Project

Project Design and Rationale

1. The project aims to expand access to financial services in Myanmar, and in the event of an Eligible Crisis or Emergency, to provide immediate and effective response to such Eligible Crisis or Emergency. The existence of well-developed and diversified financial markets is a critical development priority for Myanmar and is necessary to help the Government meet its medium-term economic development and poverty reduction goals.

2. The project focuses on assisting the Government to implement a set of highest priority reforms identified both in the Myanmar Financial Inclusion Roadmap 2015–2020 and the Myanmar FSDS. Specifically, the project will provide financing for critical investments and TA to the MOPF and the CBM, the two key public sector institutions driving the financial inclusion agenda. It will also emphasize improving the enabling environment for financial sector development by eliminating some of the key barriers that prevent investment and limit sound and stable development.

3. Complementary TA to support the Government to achieve the goals set forth in the program will also be provided by the World Bank Group to Myanmar with trust fund assistance. This is currently financed through support of the Korean Trust Fund for Poverty Reduction and Social Economic Development and is expected to be financed by DFID through the Myanmar Multi-donor Trust Fund.

Sectoral Context and Background

4. The Government has taken some recent measures to liberalize and modernize the financial sector legal and regulatory framework. Notably, in 2013, a new Central Bank Law was enacted, separating the CBM from the MOPF and giving it an autonomous status. Moreover, more than 200 new MFIs have been licensed in the past two years to serve poor households and micro-entrepreneurs. Further, in October 2014, the Government granted licenses to nine foreign-owned commercial banks to conduct a limited range of business activities in Myanmar but restricted them from offering retail deposit and lending products. The strict interest rate controls on loans and deposits were also partially relaxed in 2014. Further, the Myanmar FI Law was enacted in January 2016, providing the much-needed legal framework for an open and market-based financial sector.

5. However, these reforms have not been able to resolve a wide range of factors affecting the ability of the financial system of Myanmar to serve households and enterprises effectively. The financial system is still stymied by serious barriers. The main barriers to financial sector development, as outlined above, include:

outdated legal and regulatory framework, weak capacity of financial regulators, small and underdeveloped financial institutions,

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limited range of financial products, dominance of state-owned banks, lack of a clear regulatory framework for mobile financial services, and absence of modern financial infrastructure.

Project Components and Key Results Areas

6. The project has five components. Components 1 to 3 focus on achievement of results in three strategic reform areas. Component 4 provides resources for project coordination and monitoring, and Component 5 provides for emergency funding only.

Component 1: Reform of State-owned Banks. The expected result is to build a more competitive financial sector by reducing distortions created by state-owned banks.

Component 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework. The expected result is to improve the overall financial sector legal and regulatory framework and upgrade supervisory capacity.

Component 3: Modernization of the CBM and Financial Infrastructure. The expected result is to support the modernization of the CBM and financial infrastructure, with a focus on payment systems and the framework for secured transactions.

Component 4: Project Coordination and Monitoring. The expected result of this is to support the institutional capacity of the MOPF and CBM to coordinate program implementation and monitoring of key outcomes and results through establishment of a PCU.

Component 5: Contingent Emergency Response. This component has a provisional allocation of US$0 and is designed to allow for rapid reallocation of credit proceeds in the event of an eligible crisis or emergency under streamlined procurement and disbursement procedures.

7. These areas have been selected based on the strategic relevance of the reform areas and specific Government requests for assistance from the World Bank Group. The selection of reform areas also takes into account gaps in assistance and areas already being supported by other development partners (see details in the following paragraphs).

8. Project financing. In each results area, the project will finance activities under two financing modalities: (a) result-based financing using DLIs and (b) input-based financing for complementary physical investments and consultancy services. These are summarized in table 2.1.

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Table 2.1. Project Cost Summary

Lead

Institution

Amount (US$,

millions) Component 1: Reform of State-owned Banks 37.0 Sub-component 1.1: (DLI 1) Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates

MOPF 30.0

Sub-component 1.2: Consultancy services to restructure state-owned banks

MOPF 7.0


37.0

Sub-component 2.1: (DLI 2) Upgrading of the banking sector legal and regulatory framework

CBM 20.0

Sub-component 2.2: (DLI 3) Upgrading of the microfinance sector regulatory and supervisory framework

MOPF 5.0

Sub-component 2.3: (DLI 4) Upgrading of the insurance sector regulatory and supervisory framework

MOPF 5.0


MOPF 7.0

Component 3: Modernization of the CBM and Financial Infrastructure 24.0 Sub-component 3.1: Consultancy services to restructure/modernize the CBM CBM 2.0 Sub-component 3.2: CBM Financial Sector Training Center and legal CBM capacity building

CBM 6.0

Sub-component 3.3: Investments to enhance the payment system CBM 16.0 Component 4: Project Coordination and Monitoring 2.0 Subcomponent 4.1: Staffing of the MOPF PCU (with experts in procurement, M&E, and FM)

MOPF 1.0

Subcomponent 4.2: Staffing of the CBM PCU (with experts in procurement, M&E, and FM)

CBM 1.0

Component 5: Contingent Emergency Response 0.0 Emergency response recovery expenditures, as determined MOPF 0.0

DLIs (US$60 million)

9. Through the use of DLIs, the project will channel resources to the MOPF to cover operational costs and staff salaries to improve capacity building and implement activities needed to expand financial inclusion in Myanmar.

10. Given Myanmar’s level of institutional capacity and stage of development of the financial sector, the DLIs focus on a number of interim outcomes and are carried out by the MOPF and CBM. These reforms are expected to translate downstream at the financial institution level, allowing the increased provision of financial services by the private sector and more overall stability in the financial system.

11. Eligible expenditures will be tracked and monitored on an annual basis by the MOPF staff, designated as part of the Program Coordination Unit.

12. Disbursements will be made annually to the implementing agencies to reimburse these eligible expenditures.

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Table 2.2. DLIs with Annual Targets

Component 1: Reform of State-owned Banks DLI 1: Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates Amount: US$30 million; Lead institution: MOPF

December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020 DLI 1.1: The MOPF has established a high-level steering committee for state-owned bank reform and improved transparency of the sector through issuance of a state-owned banks policy framework.

DLI 1.2: The MOPF has developed and approved a comprehensive MEB restructuring plan, based on a detailed financial diagnostic of the MEB and that includes measures to improve corporate governance, strengthen risk management, and meet supervisory standards.

DLI 1.3: The MOPF has amended MEB’s legal structure and corporate governance arrangements in order to strengthen MEB’s managerial autonomy and accountability, in accordance with the approved MEB restructuring plan.

DLI 1.4: The MEB has implemented an improved risk management framework for MEB’s operations, in accordance with the approved MEB restructuring plan.

Value: US$10 million Value: US$10 million Value: US$5 million Value: US$5 million Component 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework DLI 2: Upgrading of the banking sector legal and regulatory framework Amount: US$20 million; Lead institution: CBM

December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020 DLI 2.1: The CBM has issued appropriate regulations that impose new requirements for banks on the submission of information, governance, capital adequacy, acquisition of substantial interest, and large exposures, in accordance with the Financial Institutions Law. Value: US$5 million

DLI 2.2: At least 30 percent of financial institutions have complied with the requirements on submission of information, governance, capital adequacy, acquisition of substantial interest, and large exposures standards set forth in the Financial Institutions Law and implementing regulations for the prior fiscal year. Value: US$5 million

DLI 2.3: The CBM has issued an appropriate regulation that strengthens the legal and regulatory framework for secured transactions by facilitating lending using movable collateral. Value: US$5 million

DLI 2.4: At least 50 percent of financial institutions have complied with the requirements on submission of information, capital adequacy, acquisition of substantial interest, and large exposures standards as set forth in the Financial Institutions Law and implementing regulations for the prior fiscal year. Value: US$5 million

DLI 3: Upgrading of the microfinance sector regulatory and supervisory framework Amount: US$5 million; Lead institution: MOPF

June 30, 2017 June 30, 2018 June 30, 2019 June 30, 2020 DLI 3.1: At least 50 percent of FRD MFI supervision staff have been trained in basic credit risk analysis and MFI supervision. Value: US$2 million

DLI 3.2: The FRD has issued standardized financial reporting formats for use by MFIs. Value: US$1 million

DLI 3.3: At least 50 percent of MFIs have reported to the FRD for the prior fiscal year with annual financial statements in accordance with standardized reporting formats. Value: US$1 million

DLI 3.4: At least 70 percent of MFIs have reported to the FRD for the prior fiscal year with annual financial statements in accordance with standardized reporting formats. Value: US$1 million

DLI 4: Upgrading of the insurance sector regulatory and supervisory framework Amount: US$5 million; Lead institution: MOPF

June 30, 2017 June 30, 2018 June 30, 2019 June 30, 2020

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DLI 4.1: At least 50 percent of the FRD insurance supervision staff have been trained in on- and off-site insurance supervisory practices, consistent with the IAIS Insurance Core Principles (ICPs). Value: US$2 million

DLI 4.2: The FRD has issued standardized financial reporting formats for use by insurance companies, adapted from the IAIS ICPs. Value: US$1 million

DLI 4.3: At least 50 percent of insurance companies have reported to the FRD for the prior fiscal year with annual financial statements in accordance with the standardized reporting formats. Value: US$1 million

DLI 4.4: At least 70 percent of insurance companies have reported to the FRD for the prior fiscal year with financial statements in accordance with the standardized reporting formats. Value: US$1 million

Investments and Consultant Services, Input Based (US$40 million)

13. The project will finance selected investments (physical and IT) and consultancy services through traditional ‘input-based financing’. The goods and services procured under this component have been selected to be financed under this component (rather than through DLIs) because they (a) they are considered significant and critical investments required to meet the PDO and (b) require specialized TA for the procurement process and/or international tenders. As a result, procurement capacity-building support will be provided to assist the government in implementing this project component and build the medium-term capacity to procure such goods and consultancy services.

Table 2.3. Planned Investments in Goods and Services


Component 1: Reform of State-owned Banks Sub-component 1.2: Consultancy services to restructure state-owned banks

Due diligence, international financial diagnostics, technical and operational assessments, and so on

IT upgrade assessments and plans Preparations of restructuring plans Corporate governance reviews and formulations of improvement plans

MOPF 7.0



Capacity building to (a) improve the capacity and quality of supervision for insurance and microfinance sectors; (b) review the overall structure, responsibilities, and functions of the Financial Regulatory Department (FRD) in line with international practices; (c) develop operational policies and procedures for the FRD operations; (d) draft supervisory manuals; and (e) develop a consumer protection framework

IT equipment and purchase of software to improve the quality of supervision and transparency of the microfinance and insurance sectors

MOPF 7.0

Component 3: Modernization of the CBM and Financial Infrastructure Sub-component 3.1: Consultancy services to restructure/modernize the CBM

Development of an institutional development plan, including governance structure and organizational structure, HR policies, IT systems, human resource development, FM, and a training plan, to prepare the CBM to operate effectively in accordance with the new CBM Law and mandate

CBM 2.0

Sub-component 3.2: CBM Financial Sector Training Center and legal CBM capacity building

CBM 6.0

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Establishment of the CBM Financial Sector Training Center: Refurbishment of physical space, training center equipment, and computers

Consultancy services for developing curriculum (financial sector regulation, supervisory training, central banking basic skills, auditing and accounting, finance, and financial literacy)

Delivery of training and capacity-building programs (as above) Legal and regulatory capacity building: Legal and regulatory

advisory/consultants to support banking supervision capacity building, payment system implementing regulations, consumer protection, and development of capacity to oversee and regulate mobile financial services

Sub-component 3.3: Investments to enhance the payment system IT-Investments for upgrading the CBM’s Payment System (for example,

additional CSD functionalities, an ACH [including image-based check clearing] functionality, and an Securities Settlement System, integration of central bank core banking functionalities into the CBM-Net) and respective hardware requirements

Implementation of government payment platform for electronic payments (salaries, conditional cash transfers [CCTs], and so on)

CBM 16.0

Component 4: Project Coordination and Monitoring Sub-component 4.1: Staffing of the MOPF PCU (with experts in procurement, M&E, and FM)

MOPF 1.0

Sub-component 4.2: Staffing of the CBM PCU (with experts in procurement, M&E, and FM)

CBM 1.0

Component 5: Contingent Emergency Response Emergency response recovery expenditures, as determined MOPF 0.0

Project Components

14. Following is a detailed description of each project component and the links to the PDO.

Component/Results Area 1: Reform of State-owned Banks (US$37.0 million)

Summary Amount in US$, millions

DLI 1: Reform of state-owned banks initiated in order to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates

30.0

Consultancy services to reform state-owned banks 7.0 TOTAL 37.0

15. The expected outcome of this component is to improve the overall competitiveness of the banking sector by restructuring state-owned banks. In doing so, the reforms are also intended to reduce the fiscal risks associated with these loss-making institutions, reduce vulnerabilities, and improve delivery of financial services. The Government has placed this issue high on the financial sector reform agenda and requested the World Bank’s assistance for restructuring these banks as a top priority since 2012.

16. Myanmar’s four state-owned banks dominate the banking sector. As of August 2015, state-owned banks accounted for more just more than half of total bank assets (according to the IMF Myanmar Article IV Staff Report) and 50 percent of all bank branches in Myanmar. The state-

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owned banks were established several decades ago and suffer from weak financial performance and outdated corporate governance practices. Moreover, their business models rely on the use of subsidized lending rates, a situation that poses a heavy and unsustainable burden to the government. For these reasons, reforming these banks is necessary to achieve the Government’s financial inclusion goals.

17. This component focuses on restructuring of state-owned banks initiated to create financially sustainable institutions with sound risk management and corporate governance practices and clear developmental mandates. The Government has stated that it aims to put in place a set of private sector solutions to deal with state-owned banks. Thus, the project will target the partial reform of the two largest state-owned banks: the MEB and MADB in particular. The Government has indicated that it intends to transfer the MADB ownership to the MOPF although this has not yet taken place. Both institutions need to be modernized in their business models, funding structures, corporate governance, and financial products. To achieve the desired transformation of both institutions in a short time frame, the Government would like to attract private sector (local or international) investors to inject new capital, bring in new management, and enhance risk management skills in both institutions.

18. The component will also support the MOPF to develop a high-level policy framework, increasing the transparency of state ownership of the financial sector and establishing policy goals of any continued state ownership through the TA aspect. The policy framework is expected to guide state-bank reform, restructuring, or resolution, as the case may be for various institutions. The framework would also seek to clarify the objectives of any continued state ownership of other financial institutions. The framework would also specify plans with regard to other state-owned banks, such as Myanmar Investment and Commercial Bank and Myanmar Foreign Trade Bank, which appear not to be critical for financial inclusion or to have clear mandates going forward and thus would likely need plans for reform, merging, or resolution.

19. DLI 1. This DLI focuses on the reform of the MEB, as the most strategically significant state-owned bank. It will focus on the first year on the establishment of a high-level committee to guide and make strategic decisions throughout the reform process. The members should include representatives of the MOPF, as owner of the MEB, as well as representatives of the Office of the President. The DLI also supports the development and endorsement of a comprehensive restructuring plan for the MEB that takes into account the findings of a detailed international financial and operational assessment (financed through the TA elements of the project). The restructuring plan should specify reforms, including those related to the MEB’s corporate governance, legal framework, and risk management to promote commercial practices, operational efficiency, and transparency.

20. Consultancy services. The project will finance consultancy services to help achieve the outcomes specified above under DLI 1. This TA will provide the necessary critical resources to help the MOPF prepare both institutions for reform or restructuring within the next two years and attract the desired expertise and investments. The project resources will not be used for any form of recapitalization of these banks. Specifically, the project will support critical international technical expertise and advisors to carry out the following activities:

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Audits and due diligence of state-owned banks in accordance with international standards

Formulation and execution of restructuring plans (partial privatizations, liquidations of impaired assets, gradual phaseout of noncore businesses, and so on)

Upgrade of corporate governance framework, risk management practices, accounting and auditing, IT infrastructure, and operations platform

Enhancement of the role of the state as the (minority) owner of the new institutions

Component/Results Area 2: Upgrading of the Financial Sector Legal, Regulatory, and Supervisory Framework (US$37.0 million)


DLI 2: Upgrading of the banking sector legal and regulatory framework 20.0

DLI 3: Upgrading of the microfinance sector regulatory and supervisory framework 5.0 DLI 4: Upgrading of the insurance sector regulatory and supervisory framework 5.0 Microfinance and Insurance—Consultancy services and IT investments to improve quality of regulation

7.0

TOTAL 37.0

21. The expected outcome of this component is to (a) strengthen the legal and regulatory framework for the financial sector and (b) upgrade human resource capacity and supervisory capacity at the CBM and FRD. The overall weak supervisory capacity at these two institutions are considered critical constraints to achieving the PDO. To date, human resource development and capacity building at these two critical institutions has been very limited and short term. The institutions need to achieve longer-term upgrading to achieve their goals in the medium term.

22. DLI 2. This DLI focuses on the critical reforms needed for Myanmar to modernize its financial sector legal and regulatory framework. The new FI Law that was passed in January 2016 marks a major step toward bringing Myanmar’s financial sector legal framework in line with current internationally recognized good practices and addresses many of the serious gaps in the existing legal framework. The new FI Law is expected to provide a sound basis for the implementation of the Basel Core Principles and a well-structured, modern, and comprehensive legal framework for effective enforcement. The priority next step will be for the new law to be implemented consistently, transparently, and effectively.

23. The recent global financial crisis has highlighted several lessons, the foremost being the importance of a sound legal and regulatory framework for the supervision of banks, consolidated supervision, crisis management, provisions to prevent cross-border insolvency, and consumer protection. Though the Myanmar banking system may be at its early stages of development, the following issues and lessons are nevertheless highly relevant for Myanmar: (a) the need for greater supervisory intensity and adequate resources to deal effectively with systemically important banks; (b) the importance of applying a systemwide, macro perspective to the micro prudential supervision of banks to assist in identifying, analyzing, and taking preemptive action to address systemic risk; and (c) the increasing focus on effective crisis management, recovery, and resolution measures in reducing both the probability and impact of a bank failure.

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24. As part of the implementation of the FI Law, the DLI will support development of a sound financial consumer protection framework, which is seen as fundamental to building trust in the formal financial sector and thus in helping Myanmar meet financial inclusion targets. Consumer protection helps ensure that expanded access benefits consumers and the economy as a whole. The reason is that while increased access can result in significant economic and societal benefits, it can be neutral or even harmful if consumers are not able to (a) exercise their rights as consumers; (c) select the financial products that suit them best; and (c) be protected from mis-selling, fraud, and other market abuses.

25. TA to achieve the DLIs will also be provided by the World Bank through a complementary TA program. Since 2012, the World Bank has been supporting the CBM to achieve results in this area and the outcomes outlined above are expected to help transform the operating environment for sound and stable financial sector development.

26. Legal framework for secured transactions. As part of this DLI, the project will support establishment of the legal framework for secured transactions. This is a key element necessary for a country’s financial industry to function efficiently and effectively. Typically, about 80 percent of loans are secured in an economy by either immovable assets and/or movable assets (‘movables’). In developed markets, most of the secured loans to SMEs involve movable assets, especially accounts receivable and inventory. A good, secured transactions system enables lenders to use movable assets as the basis for lending efficiently and at low cost. A good, secured transactions system has several key elements, including (a) wide, permissible scope of movable assets that can be taken as security; (b) clear priority rules over competing interests; (c) a central electronic security interest registration system; and (d) effective and low-cost enforcement of security interest.

27. In the case of Myanmar, at present, there is no legal and regulatory basis for lenders to take movable assets as security. Business lending in the country depends almost entirely on real estate collateral with a few exceptions (for example, gold and jewelry). Myanmar has about 130,000 registered SMEs. Based on international experience, SME finance will always be very difficult in the country if it does not establish appropriate legal and institutional arrangements to allow for lending based on movable assets.

28. IFC is providing TA in this area though a complementary TA program. The TA focuses on three elements: (a) review of the existing legislative environment and promotion of legal knowledge on secured transactions; (b) registry development; and (c) lender education. The project will work mainly with the CBM and through it with the other relevant government and nongovernmental institutions as necessary (for example, the Office of the Attorney General, the Union Assembly, and the Myanmar Bank Association).

29. DLI 3. Effective supervision of the microfinance sector contributes to the enabling regulatory environment for microfinance to reach the poor and to ensure sustainable development of the sector. Over 200 licensed MFIs served 1.3 million clients as of June 2015. Lack of clarity and uncertainty of the regulatory framework, however, impedes the development of the sector.

30. This DLI covers a range of sequential actions. The project will focus on successful delivery of training on MFI supervision for the FRD staff, which will enhance their ability to monitor the

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sector and intervene to address sector development constraints. Issuance of the MFI examination manual will enhance the quality of the supervision as well as improve the consistency and predictability of the supervisory process and cycle for MFIs. Improvement of the reporting system for MFIs is a critical building block of the supervisory function and implementation of the reporting framework and systems. Gradual adoption of electronic reporting and publication of regular reports by the FRD publicly will also improve sector transparency.

31. The Microfinance Law was passed by Parliament in November 2011. The Notification 277 and Instructions and the Microfinance Law allow for local and foreign investors to establish fully privately owned MFIs. As a result of this law, the microfinance sector is growing rapidly. The FRD needs to significantly upgrade its skills to monitor the sector to keep pace with the industry development. The World Bank Group has been actively engaged in this area since 2012 and with the support of the LIFT program, it has helped implement a first-phase training program for the FRD staff in microfinance regulation and supervision. In the future, the project will support this continued TA as well as purchase of IT equipment to enhance the efficiency and quality of the FRD’s supervision of the sector.

32. DLI 4. This DLI supports the FRD to upgrade the insurance sector legal and supervisory framework. Supervision is part of the foundation of effective insurance markets; without it, markets fail to develop and grow. The insurance sector currently consists of only one state-owned company, but 12 new licenses have been granted in 2013, including for five local banks. Entry of foreign insurance companies in 2015 is being considered. The 1993 Insurance Law governs insurance in Myanmar and is outdated, given the changes in the industry.

33. The sector requires a modern legal framework and supervisory approach to protect policyholders and consumers and develop insurance as a way to reduce risks for the public, preserve their incomes, and establish it as a basis for mobilizing long-term funds. The new framework and supervisory approach should establish an operationally independent, modern regulator, which will grant licenses based on the quality and reputation of the applicant and which will supervise market participants’ (insurance/reinsurance companies and intermediaries) capital, investments, policies, and governance, with the right to timely intervention in the event of developments that threaten the policyholders.

34. To meet the medium-term demands in the sector, the FRD needs to substantially upgrade the legal, regulatory/supervisory architecture; improve the level of compliance with ICPs; and build the capacity of the insurance regulators in the newly created department. The first phase will focus on delivering basic training for regulators, designing a model for operational independence for the FRD, and reviewing insurance law and regulations while identifying gaps and determining required changes to achieve the legal framework for operating smart risk-based supervision8 in an independent and effective way. The second phase will focus on improving supervisory capacity through familiarization with ICP standards, setup of off-site monitoring including financial reporting standards, and implementation of on-site supervision functions. In the medium term, the

8 The smart risk-based approach to supervision uses, in a proportionate manner, both off-site monitoring and on-site inspections to examine the business model of each insurer and evaluate its condition, risk profile and conduct, the quality and effectiveness of its corporate governance, and its compliance with relevant legislation and supervisory requirements.

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goal will be to market initiatives for expansion of the market for insurance products and increase the insurance penetration ratio and access to insurance in Myanmar.

35. Consultancy services and IT investments to build capacity and to improve quality and effectiveness of microfinance and insurance supervision. The FRD of the MOPF has been established with the responsibility for oversight of MFIs, private insurance, state lotteries, and state-owned banks. The FRD replaces the Myanmar Microfinance Supervisory Enterprise (MMSE) as a supervisor for microfinance. The FRD is expected to have around 600 staff, primarily former MMSE staff. The FRD has limited capacity in microfinance supervision and no experience in supervising insurance, state lottery, and state banks. This component will focus on addressing the challenges outlined below.

36. Specifically, the project will finance the following activities:

Microfinance supervision and regulation capacity building. This will include TA to (a) establish a modern supervisory structure, processes, and supervisory manuals for microfinance, and (b) upgrade supervisory practices and develop reporting and monitoring mechanisms for insurance and microfinance.

Insurance regulation and supervision capacity building. This will include TA for (a) design of a model for operational independence for the FRD; (b) design and implementation of an information system to capture insurance supervisory information to the granularity required for smart risk-based supervision; (c) building of a smart risk-based supervisory approach for the FRD; (d) setup of on-site inspection and off-site monitoring mechanism along with guidelines or manuals for supervisory reporting and prudential supervision; (e) capacity building in effective supervision for the FRD; and (f) development of a protection mechanism for policyholders along with claims management and public awareness on insurance coverage/protection.

Consumer protection and financial literacy. This will include TA to enhance the regulatory framework and the FRD’s supervisory capacity for consumer protection in the microfinance sector, provide a financial literacy program for MFI customers, and improve fair treatment of consumers in the MFI sector. The activities will include TA in relation to (a) the development of regulatory requirements for customer complaints processes to be maintained by MFIs and the related requirements for reporting complaints statistics to the FRD; (b) a complaints monitoring and final resolution system to be maintained by the FRD; (c) the development of requirements in relation to transparency of terms and conditions, interest rates, and fees; (d) the development of requirements for responsible lending practices to be followed by MFIs; (e) design and implementation of a financial literacy campaign for MFI customers and for public awareness of microfinance services and financial consumer rights and responsibilities; (f) capacity building for the FRD staff in relation to supervision of consumer protection legal and regulatory framework; and (g) finalization of a Microfinance Code of Conduct in conjunction with the Microfinance Association.

IT equipment. The equipment is for the FRD to upgrade supervisory practices and enhance efficiency. This will be required to provide basic computer systems and

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software to improve supervision of the insurance and MFI sectors. Complementary TA will be provided for identification of the system.

Component/Results Area 3: Modernization of the CBM and Financial Infrastructure (US$24.0 million)


TA to restructure/modernize the CBM 2.0 CBM Financial Sector Training Center—physical investments and TA for capacity building and legal and regulatory capacity building

6.0

IT investments to enhance payment system 16.0 TOTAL 24.0

37. The objective of this component is to support the modernization of the CBM and the financial infrastructure. The World Bank Group is providing support to the CBM to restructure/modernize the CBM and develop the payment system through a parallel TA program. Thus, this project will focus on developing an institutional development plan for the CBM and financing the critical IT investments that are required by the CBM to modernize its payment system.

38. Consultancy services to modernize the CBM. The Union Bank of Burma was established in April 1948 and in July 1952. It replaced the Burma Currency Board, having been conferred the normal powers of a central bank under the Union Bank of Burma Act. Subsequently, the CBM Law was enacted in 1990 and the central bank was established with paid capital. In 2013, the CBM Act established the CBM as an autonomous central bank. While the CBM obtained a new legal identity, the institution retains most of its processes, procedures, and institutional arrangements from 1990. The CBM needs to retool, restructure, and modernize itself to be an effective central bank and bank supervisor. The restructuring and modernization is required to pave the path for the CBM to meet key international standards of Monetary Policy and Transparency, Basle Core Principles, and Core Principles for Payment Systems.

39. Restructuring and modernization of the CBM entails reviewing the following aspects:

Vision and mission of the bank Reengineering structure Restructuring work processes and decision making Communication and accountability Human resource management Training of staff Computerization and IT systems

40. CBM Financial Sector Training Center. The establishment of a CBM Financial Sector Training Center is proposed to help Myanmar meet demands for longer-term human resource development in the financial industry. The training center will aim to create a cadre of highly skilled financial regulators that is needed to regulate and supervise the growing financial sector and promote the development of a vibrant and competitive banking and financial sector industry.

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Such training centers have been used effectively both in other countries in the Association of Southeast Asian Nations (ASEAN) region and around the world.

41. To date, much of the TA to the CBM, MOPF, and private banks has been short term in nature and funded heavily by various development partners. A recent training needs assessment of the CBM conducted with IMF support found that aid has not been optimally streamlined, not all topics have been covered thoroughly, and there have been too many short-term or one-off training programs. The needs assessment also indicated the need for longer-term capacity-building support, courses conducted in the local language, and upgrading financial sector skills more broadly.

42. Thus to address these gaps, the training center is proposed to be anchored in the CBM and will serve as a platform to streamline developmental assistance and institutionalize the capacity-building program to meet longer-term demands. Specifically, the project will finance establishment of the training center through financing of the following:

Refurbishment of office space (proposed to use existing space at the CBM or rental space, without structural changes to the existing buildings)

Basic training equipment needed for the training center (that is, computers, office furniture, video equipment, books, materials, and so on)

Curriculum development, including consulting services for basic curriculum development for the CBM

Financing of training program for the first two years Workshops, seminars, exchange of international good practices, and so on

43. Legal and regulatory capacity building. As part of the overall upgrading and modernization of the CBM, the project will directly support capacity building related to strengthening the legal, regulatory, and supervisory practices of its staff. This is an urgent priority given the recent and dramatic changes to the financial sector and the CBM’s role since 2012 with the passage of the CBM Law and the FI Law. The TA will include but not be limited to

legal and regulatory advisory to support banking supervision capacity building; payments system implementing regulations and legal and regulatory framework

reform; consumer protection; and development of capacity to oversee and regulate mobile financial services.

44. Payment Systems Development. The objective of this component is to establish safe and efficient financial infrastructure in Myanmar to support expansion of access to transaction accounts and usage of electronic payment services as a gateway to broader financial inclusion. The main drivers of the reform are described in the following paragraphs.

45. First, modernizing the payments system is needed to reduce dependence on cash transactions. The absence of an electronic system has high costs in terms of efficiency of the financial sector—creating risks and resulting in a large dependence on cash, manual, and paper-based processing of payments. While some important payment systems reforms are under way (such as the establishment of the CBM-Net with the support of JICA), further enhancements are urgently needed to allow banks to process large volumes of financial transactions on a rapid, cost-

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effective, and secure basis. This component will aim to build on the existing systems to include additional features and take into account international standards (especially ISO 20022) to allow for the integration within the Association of Southeast Asian Nations (ASEAN) into consideration.

46. Second, the modernization of the payment infrastructures in Myanmar is urgent to enable banks to scale up the provision of transaction accounts and payment services at low cost. A modern payment system would provide the much-needed platform to allow for introducing innovative payment instruments (for example, mobile money) that are interoperable among service providers (for example, banks and nonbanks). Interoperability will increase the positive network externalities of payment services for customers and providers alike. Furthermore, modern payment infrastructures will allow for migrating large-volume payment programs (for example, government payments) and remittances from cash-in/cash-out to fully electronic transactions from one account to another.9

47. Third, Myanmar lacks a government payment program. Government payment programs have been shown to play an important role in expanding financial inclusion in many countries when channeled in the form of electronic payments through authorized service providers. Once a transaction account is established, low-income households often benefit from the ability to save and make payments cheaply and safely. Similarly, government payment programs, such as those for salaries, can serve as springboards for expanding financial access.

48. Thus, the project will finance a set of critical IT investments, including:

IT-Investments for upgrading the CBM’s Payment System, for example, additional CSD functionalities, an ACH (including image-based check clearing) functionality, and a Securities Settlement System, integration of central bank core banking functionalities into the CBM-Net), and respective hardware requirements.

A cash management system to increase efficiency of the CBM. A government payment platform for electronic payments (for example, salaries,

CCTs, or other). This will include implementation of a technical platform to allow the Government to initiate and collect payments in electronic form (for example, as credit transfers to other accounts, mobile money, and so on).

Component/Results Area 4: Project Coordination and Monitoring (US$2.0 million)


Staffing of the MOPF PCU (with experts in procurement, M&E, and FM) 1.0 Staffing of the CBM PCU (with experts in procurement, M&E, and FM) 1.0 TOTAL 2.0

49. The project will finance operational costs of the PIU (including consultant services, salaries, training, utilities, basic IT acquisition, and so on) related to the establishment and operation of two PCUs. This will include staff at the CBM and MOPF. The objective of this 9 Myanmar also lacks a liquid and efficient interbank market. Only a few banks participate in the incipient interbank market, with banks adjusting their liquidity with the CBM through the deposit and credit auction window. In the absence of a liquid interbank market, there are no market benchmarks, which render risk pricing and the execution of monetary policy difficult.

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component is to provide implementation support to the project. The unit will be responsible for the following:


Component/Results Area 5: Contingent Emergency Response (US$0.0 million)


Emergency response activities 0.0 TOTAL 0.0

50. A component with a provisional allocation of US$0 is included under this project that will allow for rapid reallocation of credit proceeds in the event of an eligible crisis or emergency under streamlined procurement and disbursement procedures in accordance with the Immediate Response Mechanism Manual that has been adopted by the Government. In the event of an emergency, financial support could be mobilized by reallocation of funds from the other components or application for additional financing. In the case of such reallocation, the other component activities will be reviewed and revised as necessary.

Project Cost and Financing

51. The proposed project will be financed by an IDA Credit. The instrument will be Investment Project Financing. The expenditures related to DLIs will provide flexible, predictable, and transparent funds for operational expenditures of the MOPF by using the GOM budget lines under ‘Current Budget and Expenditure’.

Table 2.4. Project Costs and Financing

Financing Categories Project Cost

(US$, millions) IDA Financing (US$, millions)

% Financing

1. DLI-based financing 2. Input-based financing

60 40

60 40

100 100

Total Financing Required 100 100 100

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Annex 3: Implementation Arrangements

MYANMAR: Financial Sector Development Project Project Institutional and Implementation Arrangements

1. The project will provide resources for PCU staff at the MOPF and CBM. Among PCU staff, an international procurement specialist will be hired under the project to provide technical support to both the MOPF-FRD and CBM to carry out the project’s procurement. For Financial Management, a local financial management specialist for FRD and CBM and, where required, an international financial management specialist for a short period will be hired under the project. The PCU will also have resources to hire an IT specialist, as needed, to advise on certain IT investments. An M&E specialist will also be hired to monitor overall outcomes and results under the project and ensure the necessary reporting overall.

2. The two main implementing agencies will be the MOPF and the CBM. At each institution, a PCU will be maintained under Component 4 to provide implementation support to the project. Oversight, implementation guidance, and support will be through existing mechanisms of the GOM. The PCUs will be responsible for the following:


3. On behalf of the Borrower, the MOPF PCU will have overall project reporting, monitoring, and FM responsibilities. The MOPF will report on a consolidated basis on the EEPs.

4. An Operations Manual that will set forth the overall project protocols and procedures.

5. Flow of funds. The Republic of the Union of Myanmar is the Borrower for the Credit and will sign the Financing Agreement with IDA. The MOPF will onlend US$25 million to the CBM through a Subsidiary Agreement, on the same commitment/service charge and repayment terms as the IDA Credit. A Project Agreement between IDA and the CBM will define the responsibilities of the CBM under its respective components of the project.

6. This annex provides a description of the main roles and responsibilities of the MOPF and CBM for the relevant project activities and the allocation of funds to each institution under the various disbursement categories.

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7. A summary of the main roles and responsibilities for the activities under the various disbursement categories is given below. Table 3.1 also provides a summary by institution.

(a) For the DLIs. The MOPF will have overall responsibility to monitor and report on the progress made with regard to the DLIs and the project as a whole. The MOPF and CBM will also ensure that the project disbursements are used to finance eligible project activities as agreed with the World Bank.

(b) For investments and consultancy services. The MOPF will be responsible for carrying out the activities described in the project description: (i) restructuring of state-owned banks and (ii) upgrading the microfinance and insurance sector legal and regulatory framework. The CBM will be responsible for (i) carrying out the establishment of the CBM Financial Sector Training Center and (ii) upgrading financial infrastructure.

(c) For the PCU. This component will be implemented by the MOPF and CBM to carry out procurement, FM, monitoring, and coordination responsibilities in their respective areas.

(d) For the contingent emergency response. The component will be implemented in accordance with the Immediate Response Mechanism Operation Manual adopted by the Government and the contingent response implementation plan that would be developed in accordance with that manual in the event that the component is triggered in response to an eligible crisis or emergency.

MOPF CBM

CBM Project Coordination Unit MOPF Project Coordination Unit

IDA Credit US$100 million Project Agreement

(World Bank and CBM)

Subsidiary Agreement (MOPF and CBM), for

Transfer of US$25 million

Credit Agreement (World Bank and

MOPFMOPFMOPF)

Figure 3.1. Implementation Arrangements

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Table 3.1. Summary of Implementation Responsibilities

Responsible institution MOPF DLI 1: Reform of state-owned banks initiated to create financially sustainable

institutions with sound risk management and corporate governance practices and clear developmental mandates DLI 3: Upgrading of the microfinance sector regulatory and supervisory framework DLI 4: Upgrading of the insurance sector regulatory and supervisory framework Consultancy services for the MOPF to restructure state-owned banks Consultancy services and investments for the FRD to improve the quality and effectiveness of microfinance and insurance regulation Consultancy services to staff the PCU

CBM DLI 2: Upgrading of the banking sector legal and regulatory framework CBM Financial Sector Training Center—Physical investments and consultancy services for capacity building and legal and regulatory capacity building Consultancy services to restructure/modernize the CBM Investments to enhance the payment system Consultancy services to staff the PCU

Results Monitoring and Evaluation

8. The project will provide substantial resources to support a strong M&E system through the PCU at the MOPF and the focal unit at the CBM. This goal is to (a) ensure effective and timely implementation of the financial inclusion reform program according to plan and apply midcourse corrections; (b) provide a robust basis for the disbursement of IDA funds; and (c) measure achievement of results envisaged in its objectives and learn lessons for future operations and TA programs supporting financial sector development.

9. The project system will seek to use the main Government systems that are already in place. It will also provide resources through each activity to build capacity among staff of the implementing agencies to monitor the results with regard to financial sector development and access to finance.

10. The two implementing agencies (the MOPF and CBM) will conduct overall monitoring and coordination of project activities in accordance with the indicators included in the results framework (Annex 1). The PCU will submit biannual progress reports to the World Bank, drawing upon inputs from the MOPF, FRD, and CBM. Biannual reviews, the first one to take place six months after IDA Credit effectiveness, will provide a detailed analysis of implementation progress toward achievement of the PDO and will include an evaluation of FM and procurement.

11. The implementing agency will (a) no later than two years after the effectiveness date (or such other date as agreed with the World Bank), carry out a midterm review of the project and prepare and furnish a midterm report to the World Bank, documenting progress achieved and implementation challenges and (b) review the said midterm review with the World Bank, about one month after its submission, and thereafter take all measures required to ensure the continued efficient implementation of the project and the achievement of its objectives.

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Financial Management, Disbursements, and Procurement

Financial Management

12. An assessment of the FM arrangements has been conducted based on the guidelines issued by the FM Sector Board, as stipulated in OP/BP 10.00. The overall FM risk is assessed as Substantial. The main risks are associated with (a) inadequate documentation of policies and procedures and lack of clarity on applicable government rules; (b) finance staff who are inexperienced with financial management of development partner-financed projects at the FRD and CBM; (c) not having a proper mechanism for preparation of work plans and allocation of budget; and (d) the use of manual processes to capture and record data and transactions.

13. The FM mitigating measures proposed to address these risks include (a) having in place an acceptable FM manual which is part of the Project Operations Manual for the project; (b) recruiting a short-term local FM specialist for the FRD and CBM and, where required, an international FM specialist for a short period to provide support on project financial matters; (c) training in financial management for staff involved in the implementation of the project; and (d) for the input-based operations, setting up initially a Microsoft Excel system, including the establishment of ‘chart of accounts’ to allow the recording of transactions according to government codes as well as by project components and disbursement categories until the Government introduces the computerized accounting system. The FM arrangements have been deemed acceptable given that these appropriate risk mitigation measures will be implemented during the course of the project.

14. Project FM. There will be two implementing agencies under the project: the MOPF and the CBM.

15. The MOPF and CBM will assign accounts staff—with qualifications and experience acceptable to the World Bank to manage the project funds. The nominated staff should be graduates with accounting or commerce degrees and must have attended at least two accounting and finance training events organized by the Office of the Auditor General (OAG) of the Union of Myanmar. Both implementing agencies have limited experience with implementation of donor projects and will therefore need guidance and assistance from an FM consultant, particularly during the initial stages of implementation. The project will document and follow the FM processes and internal controls in the Project Operations Manual throughout project implementation.

16. Budgeting. The budget under the project will follow the GOM budget cycle to ensure that the project funding is on budget. To facilitate this, the project will prepare its work plans and budget by end of January each year before the fiscal year starts to enable the project budget figures to be included in the overall budgets of the MOPF for submission for parliament approval. The MOPF and CBM should ensure that the project budgets for their respective components are realistic and can be implemented in the budget year. There should also be clear guidance in the Project Operations Manual to ensure that any unspent project funds are available to be carried forward to the ensuing year.

17. Financial reporting. There will be two different reporting mechanisms under this project. For the DLI component, the MOPF will be responsible for financial reporting for the certification of the EEPs. These financial reports will be used to support the disbursements when the DLIs are

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fully or partially achieved. Under the input-based financing components, each implementing agency—the MOPF and CBM—will prepare an unaudited interim financial report (IFR) consisting of, at the minimum, the sources and uses of funds by project components or activities and the uses of funds compared with their approved budget under the project. The CBM will furnish the IFR for its component to the MOPF, and the MOPF will submit the combined IFR to the World Bank. These reports will be prepared on a semester basis and be submitted to the World Bank within 45 days after the end of the semester to which they relate. The format and content of these reports were agreed at appraisal and confirmed during negotiations.

18. Under the DLI approach, payments for the reimbursement of EEPs will be made to the MOPF when the agreed DLIs are met and certification of the agreed statement of EEPs are submitted to the World Bank. The MOPF may request an advance on credit effectiveness, not to exceed 50 percent of the value of the DLI targets expected to be achieved by December 2017 and represents EEPs not yet incurred in the first year. Such an advance will be made available for the first year only.

19. The DLIs reimbursements (for the first year, less any advance) will take place once the DLI achievement has been verified and the World Bank has received the MOPF financial statements. The MOPF will provide World Bank staff timely access to the MOPF books and records to allow them to confirm the EEP line items.

20. The first year advance will be paid directly into the designated account (DA) in U.S. dollars, which will be opened specifically for the DLI sub-components and used in line with the MOPF’s own rules and regulations. This is to avoid any limitations on the MOPF bank accounts (MD accounts) and to facilitate tracking of the funds flow into the GOM account. The advance will be accounted for and reconciled at the end of the year.

21. In subsequent years, disbursements for EEP will be through reimbursement upon the Borrower fulfilling two requirements: (a) achievement of agreed targets of DLIs, documented in an annual DLI report, verified by the World Bank and (b) IFR which includes certification of the EEP statements of the related year of the MOPF that confirms that the information correctly reflects the MOPF expenditure for the year. The World Bank staff will then confirm the EEPs information back to the MOPF’s accounting records. The Withdrawal Application will be supported by the reconciliation of the DA (for the first year only) and other documents specified in the Disbursement Letter.

22. Partial achievement. Following are the arrangements for partial DLI achievement:

Disbursements withheld due to nonachievement of DLIs in a given year may be released in subsequent years once the DLI target is achieved.

Partial achievement of a DLI target may result in a partial disbursement on a pro rata basis.

Disbursements for any DLI will be capped at the amount allocated for that year for the concerned DLI target, that is, any overachievement of a DLI will not result in any additional payments.

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23. Eligible expenditures. Based on the MOPF consolidated statement of receipts and expenditures, the Eligible Expenditure Program (EEP) under this project will be the expenditures incurred against the following MOPF budget/expenditure lines:

0101. Pay 0102. Allowance 0201. Internal travelling allowance

24. The above list may be modified as agreed upon with the World Bank and as specified in the Project Operations Manual. The detailed composition of the selected MOPF’s current expenditure headings are as follows:

(a) ‘Pay’ (0101) includes salaries of all MOPF’s staff at the Union and States/Regions levels and all full-time public staff, including wage laborers.

(b) ‘Allowance’ (0102) is provided to the MOPF staff for housing, other costs apart from travel costs, and food and hardship allowance.

(c) ‘Internal travelling allowance’ (0201) includes vehicle expense/ticket fares and fixed travel costs for the MOPF staff travel within Myanmar to carry out their responsibilities.

Disbursements

25. The project will open two Designated Accounts (DAs) for the MOPF, both DAs will be denominated in U.S. dollars: DA-A for DLI operations and DA-B for input based operations.DA-A will receive the DLI advance for the project in first year and the DLI reimbursements in subsequent years. For the input based operations that will be managed by FRD, FRD will open a departmental (OA) account in MMK and use this account for any MMK denominated local payments. Amounts sufficient to cover this MMK expenditure that will be transferred from the DA-B and they will use the exchange rates at the time of the transfers. As the project has only DAs in USD, FRD will need to pay sufficient attention to calculate the forecast amount of MMK required so as to ensure that the balance held in the DA account is minimized and the risk of exchange losses is properly managed. The CBM will receive funds from the MOPF into a CBM bank account that will be solely used for the project purposes. This account’s bank statement will clearly show all project funds’ transactions and the balance at any point of time. The CBM will request funds from the FRD based on its project’s work plan and cash flow forecast. For subsequent replenishment requests, the MOPF will prepare statements of expenditure that are linked with their cash flow forecasts.

26. The ceiling for the initial two DAs will be variable, based on a six-monthly forecast. Subsequent documentation and disbursements for eligible expenditures paid from the DAs will be based on summary sheets with records and statement of expenditures. Reimbursements will also be allowed to be documented by statements of expenditures. Direct Payments will be documented by records. The frequency of reporting of expenditures paid from the DAs will be monthly or a period not exceeding three months.

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27. Table 3.2 lists the expenditure categories against which the disbursements from the credit will be made.

Table 3.2. IDA Credit Expenditure Categories and Amounts

Category Amount of the Credit Allocated (expressed

in SDR)

Percentage of Expenditures to be

Financed (inclusive of Taxes)

(1) Eligible Expenditure Programs under Parts 1.1, 2.1, 2.2, and 2.3 of the Project

43,000,000 100

(2) Goods, non-consulting services, consultants’ services, Operating Costs and Training and Workshops under Parts 1.2, 2.4 and 4.1 of the Project

10,800,000 100

(3) Goods, small works, non-consulting services, consultants’ services, Operating Costs, and Training and Workshops under Parts 3 and 4.2 of the Project

17,900,000 100

Figure 3.2. Flow of Funds

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(4) Emergency Expenditures under Part 5 of the Project

0 100

TOTAL AMOUNT 71,700,000

28. External audit. In Myanmar, it has been agreed that the audit of all World Bank-financed projects will be carried out by the Office of the Auditor General of the Union (OAG) in line with use of country systems for Overseas Development Assistance. The OAG will conduct separate audits of the MOPF and CBM components’ financial statements. The audits will be in accordance with a TOR acceptable to the World Bank. The annual audited financial statements and auditor’s opinion and the management letters are expected to be completed within six months after the end of each fiscal year and copies submitted to the World Bank. In line with the current World Bank Access to Information Policy, the audited financial statements and auditor’s opinion will be required to be made public by the implementing agencies.

Table 3.3. FM and Disbursement Action Plan

Action Responsible Institution 1 Identify and assign appropriately qualified staff to take responsibility of the

FM function of the project MOPF and CBM

2 Agree on format of the interim unaudited financial report MOPF and CBM 3 Open DAs (OAs) at MEB MOPF 4 Review and revise FM consultant’s TOR MOPF-FRD 5 Recruit a short-term local/international FM consultant MOPF-FRD 6 Agree on audit TORs for input-based financing and EEPs’ verification MOPF and CBM

Procurement

29. Procurement arrangements. The bulk of the project funds (US$60 million going to the DLIs) will be linked to results or outputs, with disbursements contingent on achieving the DLI targets. These funds will be used for non-procurable expenditures consisting of selected operational costs and staff salaries of the MOPF (as defined in the EEP), as specified above.

30. Procurable items under the project will include refurbishment of office space and establishment of the CBM Financial Sector Training Center, IT systems and computers, TA of the state-owned banks’ international diagnostics, legal and restructuring advisory services, and TA for insurance and microfinance policy development. Both the MOPF and the CBM will be involved in procurement of goods, minor works, and services as they relate to their respective components. Each will establish a PCU staffed with at least one person with sound knowledge of World Bank Procurement Guidelines and Procedures.

31. The Procurement and Consultant Guidelines, dated January 2011 and revised in July 2014, will apply to the input-based components of the project. Myanmar is a fragile country with low procurement implementation capacities. The World Bank has streamlined the procurement process for new and ongoing projects in Myanmar, effective February 2016. These streamlined procedures take into account the country situation and capacity and are in line with the World Bank Guidance Note on Projects in Situation of Urgent Need of Assistance or Capacity constraints, dated April 2013. These procedures offer simplified procurement arrangements, higher thresholds for

58

shopping, and use of consultant qualification selection method as well as select use of tender securities. In addition to the above, provisions of the IRM Operations Manual agreed between the World Bank and Government will be applied for Component 5. Bank Standard Bidding documents will be used for all International Competitive Bidding (ICB) packages and Bank Standard RFP for all consultant selection requiring international competition. Shopping procedures will use customized templates with appropriate contract formats that are in use in the Myanmar portfolio as part of the simplified procurement procedures introduced in February 2016.

32. Procurement arrangements under MOPF: Key procurement activities under the MOPF will be large value consultancy services for restructuring of state owned banks. The FRD will be responsible for all procurement activities. Technical units within FRD will be responsible for preparing terms of reference and technical specifications for procurable activities. The MOPF has appointed a Project Coordinator who will coordinate all activities, manage a Project Coordination Unit and overall coordinator of the Project including CBM activities. The Project Coordinator will report to the Deputy Minister of Planning and Finance through the Director General FRD. The PCU will be responsible for preparing procurement documents and coordinating evaluation of proposals. The MOPF has an established Executive Tender Committee chaired by the Deputy Minister of Finance. Membership of the Committee comprise Director Generals of each department. The Committee will be responsible for approval of award of all tenders.

33. The FRD within MOPF does not have experience to manage a large project nor to carry out procurement activities. However, the MOPF is currently implementing the PFM project and the same Executive Tender Committee is responsible for approval of awards. The PCU will include international procurement expertise and technical persons. Key risks include limited technical skills to prepare scope of work for consultants, procurement of international consultants and management of consultants’ contracts.

34. Procurement under the CBM: The CBM is an autonomous organization headed by Governor. Procurable activities will include IT infrastructure and systems, IT equipment, Training and infrastructure rehabilitation within the mandates of three deputy governors. IT infrastructure and systems will involve new and upgrade of existing infrastructure. Business continuity and maintenance requirements will be key considerations in deciding procurement methods. Procurement implementation arrangements may be summarized by diagram below:

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35. The CBM has experience in implementing an IT system project financed and procured by JICA. The staff have limited capabilities to define technical specifications and manage contracts. They have, however, experience in maintenance of IT systems. The CBM has assigned a Project Leader, who is the Director General responsible for Payments, Settlement and Accounts. The Project Leader will coordinate inputs from three departments involved in procurement activities, establish and manage a PCU, sign procurement contracts. Technical Units under the three Deputy Governors will provide inputs for preparation of procurement documents to the Project Leader. The CBM has an established Tender Committee comprising DGs responsible for Administration and IT, Internal Audit, Information security and bank supervision. The Project Leader will submit tender evaluation report to the Tender Committee for approval of award. Key risks relating to the CBM are coordination risks across three departments, limited experience to manage projects, lack of expertise and experience in management of procurement activities and transparency and economy related to existing systems that needs to be upgraded. A gap analysis has been carried out to determine upgrade requirements but no decisions have been made and results of the gap analysis was yet to be transformed into specific requirements.

36. Procurement capacity and risk assessment and mitigation measures. The project’s procurement risk is High. The World Bank’s September 2016 assessment of implementing entities identified the major procurement risks which could arise during project implementation and suggested appropriate measures to mitigate these risks. Table 3.4 lists the risks and mitigation measures.

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Table 3.4. Risks and Mitigation Measures

Issue/Risk Proposed/Agreed Mitigation Measure Responsibility Lack of legal framework of public procurement: There is no national-level legislation on public procurement and no official procedures in writing within the MOPF and CBM. In project implementation, there may be confusion to the project regarding the procedures and rules to be followed.

The World Bank Procurement/ Consulting Guidelines will be strictly followed.

MOPF and CBM

Lengthy approval process of procurement

Major milestones for each contract will be identified in the procurement plan.

MOPF and CBM

Procurement approval process in the MOPF and CBM to be prepared as a flowchart with the agreed timelines in the Project Operations Manual

MOPF and CBM

Responsibilities for preparing the TOR, technical specifications, or designs to be clearly specified in the Project Operations Manual

MOPF and CBM

The World Bank will provide training for all senior officials and staff involved in the approval process.

World Bank

Price negotiation after bid opening The practice of price negotiations will not be used.

MOPF and CBM

Limited capacity and no experience with procurement in the MOPF and CBM

An international procurement specialist will be employed to assist the MOPF and CBM and provide knowledge transfer and capacity building to the assigned MOPF and CBM staff.

MOPF

The MOPF and CBM to assign at least one full-time officer to work with the international procurement specialist.

MOPF and CBM

The World Bank will provide procurement training to the implementing agencies’ staff to familiarize them with the World Bank’s procurement policy and procedures.

World Bank

An international procurement consultant will guide the procurement through the National Competitive Bidding (NCB).

MOPF and CBM

Limited economy and transparency to existing systems to be upgraded at CBM.

The World Bank will carry out due diligence of existing infrastructure and systems to establish minimum economy and transparency requirements. The World Bank will also require inclusion of audit requirements in existing contracts to be financed by the project.

MoPF, CBM and Bank

37. To facilitate project readiness, a set of TORs have been prepared for the highest priority assignments during year one of the project. This includes draft TORs for (a) staff of the PCUs, (b) the design of the CBM Financial Sector Training Center Business Plan, (c) curriculum

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development for the CBM Financial Sector Training Center, and (d) the international special diagnostics of the MEB and MADB. In addition, with regard to the payment systems component, at the request of the CBM, the World Bank team conducted a gap analysis of the CBM’s existing system with comprehensive RTGS needs during 2016. The CBM will use this as part of the basis to determine the IT investments to be financed.

38. Procurement plan. The implementation agencies have prepared their procurement plan dated October 26, 2016 for the first 18-month implementation period which has been discussed and agreed with the Bank. The additional procurement packages will be added in when there are additional needs identified The summary of the procurement plan is given in Table 3.56.

39. Prior review threshold. Procurement decisions are subject to prior review by the World Bank as stated in Appendix 1 to the Procurement Guidelines.

Table 3.5. Prior Review Thresholds

Procurement Method for Goods Method Threshold (US$)

Prior Review Threshold (US$)

1. International Competitive Bidding (ICB) and Limited International Bidding (Goods)

Above 500,000 All

2. Shopping (Goods) Below 500,000 First above 200,000 3. ICB (Works) Above 1,000,000 All 4. Shopping (Works) Below 1,00,000 First above 200,000 5. Direct Contracting – Above 10,000 6. Procurement from United Nations

agencies – Above 100,000 provided standard

contract is used.

Selection Method for Consultant

Servcies Method Threshold

(US$) Prior Review Threshold

(US$) 1 QCBS, QBS Above 500,000 300,000 2 CQS, LCS Below 500,000 First above 100,000 3 Individual Consultant (IC) - SSS contract above 10,000 and all

fiduciary and legal positions. Competitive selection above US$100,000

Single Source (Firms) - All above 10,000 and all fiduciary and legal

40. Reference to (if any) Project Operations Manual. The Project Operations Manual has been reviewed and found acceptable by the World Bank.

41. Summary of the procurement packages planned during the project period is given in table 3.6.

Table 3.6. Summary of Procurement of Goods

Ref. No.

Description Estimated Cost (USD)

Packages Review by Bank (Prior / Post)

Comments

1 Summary of ICB (Goods) packages

2 mil. 1 Prior

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2 Summary of other (Goods) packages

1.03 mil. 7 Prior and Post

3 Summary of ICB (Works) packages

1 mil. 1 Prior

42. Consultancy assignments with selection methods and time schedule is given in table 3.7.

Table 3.7. Consultant Assignments Summary

Ref. No.

Description of Assignment

Estimated

Cost (USD)

Packages Review

by Bank

(Prior / Post)

Comments

1 Summary of number of contracts that will be let under QCBS

4.5 mil. 4 Prior

2 Summary of number of contracts that will be let under Selection based on Consultants’ Qualification

800,000 4 Prior

3 Summary of number of contracts that will be let under IC

3.5 mil. 15 Prior and Post

43. All terms of reference will be reviewed by the World Bank. The World Bank has an electronic internet based communication system for procurement requests called Systematic Tracking of Exchanges in Procurement (STEP). This system will be used to request approvals for procurement plans and individual packages processes at each stage. Both CBM and FRD will nominate at least two individuals to be responsible for entering data and requests in STEP.

44. Frequency of procurement support. Based on the findings of the procurement capacity and risk assessment, the need and frequency of implementation support missions to assist in the project implementation will be determined. The frequency and sampling size for procurement post reviews will also depend on the capacity and risk assessment and will be recommended after the assessment findings.

Environmental and Social (including safeguards)

45. The project is assigned an Environmental Category C. The project does not expect to have negative social effects. The proposed components aim to improve the enabling environment for the poor to get access to finance by mainly focusing on improving institutions and staff capacity of the MOPF and CBM and legal and regulatory frameworks for the sector. It is unlikely that any particular social group, including ethnic minorities, will be negatively affected. The project will establish the CBM Financial Sector Training Center which may include some minor refurbishments of existing buildings. Good environmental practices will be adopted and included in the Project Operations Manual for the minor refurbishment. Land acquisition or access restriction will not occur. OP 4.10 or OP 4.12 will thus not be triggered.

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Monitoring and Evaluation

46. Annex 1 lists the PDO indicators and intermediate indicators for the project. These will serve as the basis for results M&E. The PCUs will be responsible for collecting the data required for M&E and for verification of the DLIs based on an agreed-upon DLI verification protocol in the Project Operations Manual. Indicators will be measured against agreed targets and compared to defined baselines. Project progress reports will be prepared by the PCU on an annual basis.

47. The project will support capacity building for M&E by providing resources for the hiring of M&E specialists, improved reporting requirements for financial institutions, investments in monitoring infrastructure, and training programs for supervisors.

Role of Partners

48. The project has been designed to address gaps in current development assistance in the financial sector in Myanmar and help streamline aid. The project design reflects consultation with a wide range of development partners that are supporting the MOPF and the CBM to build a stable and inclusive financial sector. The Financial Inclusion Roadmap and Financial Sector Development Strategy also include broad development partner consultation and support. The World Bank also participates in a number of coordination fora in the sector, including the Committee on Financial Sector Technical Assistance for Myanmar (COFTAM), which is anchored in the CBM and co-chaired by the IMF. A summary of some of the main development partners’ activities are listed in table 3.8.

49. Additional World Bank Group trust fund resources are also being sought to support the Government, the CBM, and the private sector in upgrading skills and capacity and to access the TA needed to achieve the goals set forth in this program.

Table 3.8. Development Partner Financial Sector Activities in Myanmar

Institution/Agency Primary Focus IMF Monetary policy, foreign exchange management, financial sector

liberalization, interest rates deregulation, banking supervision, anti-money laundering

Asian Development Bank Financial literacy, consumer protection, and insolvency framework DFID (UK) Support for complementary TA to the MOPF and CBM for

implementation of the overall financial sector development program. Livelihoods and Food Security Trust Fund (LIFT)

Agriculture finance and microfinance

JICA Payment and settlement system for the CBM; possible line of credit to the MADB to support agriculture finance

GIZ SME finance, training of bankers (middle management), regulation of the NBFIs

UNCDF Studies on financial inclusion, surveys, and financial inclusion road map China Export-Import Bank Line of credit to support cooperatives and agriculture finance Bank Negara Malaysia Supervision of development finance institutions, corporate governance,

bank supervision, and SME finance Bank of Thailand Bank supervision Monetary Authority of Singapore Bank supervision Japan’s Financial Supervisory Agency Capital market development and insurance sector strengthening

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Annex 4: Implementation Support Plan

MYANMAR: Financial Sector Development Project

Strategy and Approach for Implementation Support

1. The implementation support strategy for this intervention will comprise regular dialogue with the MOPF and CBM, semiannual joint review of program implementation, and regular oversight of project fiduciary activities, which includes detailed analysis of protocols to verify compliance with the DLIs. Regular dialogue and implementation support will facilitate early identification of problems and obstacles and will enable timely provision of technical advice and support to address any obstacles. Joint reviews will take place twice a year, aimed at reviewing the progress and achievement of agreed results. As part of these reviews, lessons learned from the implementation progress will be drawn to make adjustments to the program.

2. With regard to the supervision of fiduciary aspects of the operation, the World Bank will conduct FM supervision at appropriate intervals. As a member of the task team, an accredited FM specialist will participate regularly in project supervision. Additionally, the World Bank’s team will continue to work with the MOPF to further improve its financial and budget management capacity and performance, including its ability to monitor and oversee financial sector development. During implementation, the World Bank will supervise the FM arrangements of the project through a review of budgeting and financial reports, disbursement management, and financial flows, as applicable.

3. Table 4.1 presents the implementation support plan for the project.

Table 4.1. Implementation Support Plan

Time Focus Skills Needed Resource Estimate Partner Role First 12 months Legal and

regulatory reform

State-owned bank reform

Payment system infrastructure

Legal, banking, financial inclusion, insurance, and payment system, including specialized consultants

US$500,000 Funded by World Bank Budget and selected BETFs

12–48 months Legal and regulatory reform

State-owned bank reform

Payment system infrastructure

Insurance Microfinance

Legal, banking, financial inclusion, insurance, and payment system, including specialized consultants

US$1,200,000 Funded by World Bank Budget and selected BETFs

Other FM Procurement

FM and procurement

US$300,000 World Bank Budget

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Table 4.2. Skills Mix Required

Skills Needed Number of Staff Weeks/Year

Number of Trips

Comments

Team leader 20 5 — Microfinance specialist 15 4 — Insurance specialist 10 4 — Banking - legal and regulatory specialists 30 6 — Payment systems specialists 20 4 — Financial sector specialists - local and international

15 6 For specialized topics, state-owned banks, agriculture finance, and auditing

FM specialists - local and international 15 4 — Secured transactions specialist 6 4 — Procurement specialists - local and international

15 4 —

Consumer protection specialist 15 3 — Social safeguards, including gender specialist 5 2 — Environmental safeguards 5 2 — Operations officer 15 3 Results monitoring

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