Document of

The World Bank

FOR OFCIAL USE ONLY

Report No. P-6479-TA

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN THE AMOUNT EQUIVALENT TO SDR 7.5 MILLION

TO THE

UNITED REPUBLIC OF TANZANIA

FOR A

FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT

MAY 23, 1995

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit: Tanzanian Shilling (Tsh.)

Official Rate: US$1.00 = Tsh. 530

ACRONYMS AND ABBREVIATIONS

BOT Bank of TanzaniaBSD Bank Supervision DirectorateCMSA Capital Markets Securities AuthorityCRDB Cooperative and Rural Development BankDANIDA Danish International Development AgencyFMD Financial Markets DirectorateFSAC Financial Sector Adjustment CreditGOT Government of TanzaniaLART Loans and Advances Realization TrustMOF Ministry of FinanceNBC National Bank of CommerceNIC National Insurance CorporationNPF National Provident FundPBZ People's Bank of ZanzibarPPRP Parastatal and Public Sector Reform ProjectPSRC Parastatal Sector Reform CommissionPTF Privatization Trust FundSAC Structural Adjustment Credit

GOVERNMENT FISCAL YEAR

July I to June 30

FOR OFFICIAL USE ONLY

REPUBLIC OF TANZANIA

FINANCIAL INSTITUTIONS DEVELOPMENT PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Government of Tanzania

Implementing Agency: Bank of Tanzania

Beneficiaries: Bank of Tanzania, National Bank of Commerce (NBC),People's Bank of Zanzibar (PBZ), Capital Markets andSecurities Authority, Private Financial Institutions.

Poverty: Not applicable

Amount: SDR 7.5 million (US$10.9 million equivalent)

Terms: Standard, with 40 years maturity

Commitment Fee: 0.50% on undisbursed balances beginning 60 days aftersigning, less any waiver.

Financing Plan: See Schedule A

Net Present Value: Not applicable

Staff Appraisal Report: 13713-TA

Project Identification No.: TZ PA 35620

This document has a restricted distribution and may be used by recipients only in the perfomnance of their| official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Memorandum and Recommendation of the Presidentof the International Development Association

to the Executive Directorson a Proposed Credit to the United Republic of Tanzania

for a Financial Institutions Development Project

1. I submit for your approval the following memorandum and recommendation on aproposed development credit to the United Republic of Tanzania for SDR 7.5 million(US$10.9 million equivalent) on standard IDA terms with a maturity of 40 years to helpfinance a project for financial institutions development.

2. Country and Sector Background. In 1991, the Government of Tanzania initiatedits financial sector reform program with support from an IDA credit for financial sectoradjustment (FSAC). The program's major aim was to deregulate and liberalize thebanking system. Consequently, in addition to three Government owned banks, six privatecommercial banks have been licensed. The remainder of the sector consists of threedevelopmental financial institutions -- of which two are state owned and the other ownedby foreign developmental financial institutions -- and five other nonbank financialinstitutions of which only one is private. As part of the reform program, the threeGovernment owned financial institutions were recapitalized and portions of their non-performing assets were transferred to the specially created Loans and AdvancesRealization Trust (LART).

3. Despite the recapitalizations, the state owned banks remain insolvent partly due todelays with the Government's program to reform parastatals, cooperatives and marketingboards which are all major clients of the state-owned banks. Although the financial sectorhas been opened to private participants, the National Bank of Commerce (NBC) stilldominates, in that it accounts for roughly 82% of the deposit base. The new banks havebeen very cautious and have been limiting their activities in terms of deposit mobilizationand lending. Hence, the overall financial sector is still very weak and the reform agenda islarge. The payments system remains very rudimentary and inefficient, there are nofinancial instruments and markets to satisfy the demand for term financing, and there is nocapital market. On the regulatory side, although there have been improvements in BankSupervision, this function remains weak and incapable of overseeing the complex bankrestructuring programs as well as the expansion of the sector.

4. Banks Restructuring. NBC. Overall macroeconomic performance suffered asevere setback in FY93 and the first half of FY94. This was due, in part, to leakagesthrough the financial system as an illiquid NBC extended credit to agriculturalcooperatives and increased its overdraft with the Bank of Tanzania (BOT). A short termaction plan to curtail losses and to begin preparations for a more radical restructuring ofNBC was adopted in February, 1994. A ceiling on outstanding loans was imposed at thelevel of January 31, 1994. NBC also was directed to cease lending to non-performing

2

borrowers. Available data indicate that NBC is complying with the ceiling, which willcontinue until a new and professional management team in key areas in NBC has preparedand begun implementation of a new business plan. The Board of Directors wasreconstituted at the end of March, 1994, and 800 staff were retrenched in April. The NBCAct was amended in August, 1994 to provide for private shareholding. Three detailedportfolio reviews were completed during 1994 and the early part of 1995 of which twocomprised part of a diagnostic evaluation of the bank. The evaluation will firm up thedetails of the Government's privatization strategy for NBC.

5. The portfolio review confirmed that roughly 77% of NBC's portfolio is non-performing, i.e. classified sub-standard or worse. NBC's management and staff aremaking substantial efforts to deal with the significant non-performing portfolio.Measurement of loan collection results has been introduced across the bank, from theboard to the smallest branch. Staff are fully aware of the new priority and their success incollection is being strictly monitored and will impact the personnel appraisal system. Anew loan recovery unit has been established to deal with the largest and toughest credits.A detailed loan recovery plan for the largest 50 credits is under implementation and thiscoupled with evidence of tangible collection results is a precondition for appraisal of theproposed Structural Adjustment Credit (SAC). However, despite these diligent efforts torestructure and strengthen its operations, the bank again is insolvent and is imposing anincreasing burden on Tanzania's real sectors. It is urgent and essential that NBC is farmore fundamentally restructured than what has been envisaged to date. As an initial step,the Board of NBC has agreed to make sizable adjustments to the bank's financialstatements to improve the credibility of the bank's accounts.

6. Cooperative and Rural Development Bank (CRDBJ. From July, 1992 throughJune, 1993 the net worth of CRDB, the other major previously state-owned commercialbank, deteriorated substantially. Since July, 1993 the management has moved aggressivelyto implement a restructuring plan. A new organizational structure for headquarters, zonaland branch offices was prepared and, as a result, a total of 600 staff members wereretrenched; loan recovery and deposit mobilization efforts were strengthened; and aprivatization program was completed in January, 1995 with the sale of 41% of shares tothe public, 29% to a Trust capitalized by DANIDA, and 30% to cooperatives andcorporations. However, the capital adequacy of the bank remains in question until anexternal audit is completed, the level of recovery, provisioning and write-off of impairedassets is finalized, and the statements are approved by BOT. A freeze on lending imposedby BOT will be removed and CRDB will be fully licensed only when these issues havebeen resolved and all prudential requirements have been met.

7. People's Bank of Zanzibar (PBZ). PBZ is the principal commercial bankinginstitution in Zanzibar but accounts for less than 1% of all deposits in Tanzania. It hastraditionally included in its activities quasi-central banking operations for the Governmentof Zanzibar. The last examination of PBZ in 1994 revealed that the bank was insolventand that roughly 70% of its portfolio was rated substandard, doubtful or loss. The mainreasons for its poor financial status are non-commercial credit practices, a failure to

3

recognize non-performing assets (including continued interest accrual on such assets), andfailure to establish sufficient provisions for uncollectible loans. The Government'sstrategy for PBZ is to restructure the bank so that it operates on strictly commercialprinciples under the management of professional bankers. A detailed restructuring planfor the People's Bank of Zanzibar, the remaining state-owned bank, will be finalizedfollowing the recruitment of a private management team.

8. Bank Supervision. The Banking and Financial Institutions Act of 1991strengthened BOT's bank supervision authority and, in November 1992, bankingsupervision was elevated to the status of a Directorate and staffing levels were increased.Since then, the Directorate has begun to develop most of the basic skills necessary toconduct banking examinations and has conducted a series of on-site examinations. Therole of the Directorate is all the more critical and complex given the severe problemswithin Tanzania's financial institutions. Gross errors in basic loan approval systems andaccounting techniques continue. Over the next few months the Directorate will have todevote more attention to the problem banks, even as new banks enter the market. Thiswill severely strain the Directorate's capacity, test the skills of its staff, and curtail itsability to conduct new on-site examinations.

9. Project Objectives. The Government has implemented a short term program tostem the losses in the financial sector and now wishes to regain the momentum forfinancial sector reform by implementing a strategy which would address the fundamentalweaknesses in the sector while building the foundation for the diversification of financialinstruments. The main elements of the strategy are: i) encouraging competition in thecommercial banking sector; ii) strengthening banking regulation and supervision; iii)improving the payments mechanism; iv) promoting and supporting comprehensiveparastatal reforms, including privatization, of state owned enterprises; v) developing amarket for Government securities; vi) establishing a regulatory structure for insurance andsecurities markets; and vii) developing a corporate securities market. In this context, theprimary objectives of the project, which are articulated in the Government's Letter ofFinancial Policy, are to develop a market oriented financial system and to ensure theorderly and gradual evolution of capital markets in Tanzania while supporting theprivatization process.

10. Project Description. The project would provide technical support for threecomponents: the downsizing and restructuring of the Government owned banks includingthe National Bank of Commerce and the People's Bank of Zanzibar (DANIDA isproviding technical assistance for CRDB's restructuring); the strengthening of BankSupervision and, more generally, the supporting financial infrastructure; andimplementation of a strategy to promote the gradual evolution of a capital market.

11. Banks Restructuring. ($5.6 million) NBC. In normal circumstances, theappropriate prudential response to NBC's current financial position would be to stop itfrom lending or taking new deposits, pending rapid action to recapitalize the bank orliquidate it. In light of recent experience, new injections of capital into NBC by the

4

Government would be inappropriate. Given the dominance of NBC in the financial sector,and the consequent macro-economic effects of its demise (NBC, with its extensive ruralpresence, is in effect the country's payments system), liquidation is not practical at thistime. The strategy therefore is to aggressively downsize NBC while greatly constrainingits activities until such time as it can meet prudential requirements and be fully privatized.

12. Details of the strategy would be defined by an ongoing diagnostic evaluation ofNBC. However, its broad elements entail: (a) the divestiture of at least one profitableurban branch network (consisting of 8 to 10 NBC branches) while retaining within apartially privatized NBC a national presence in urban areas and a rural branch network; (b)the potential establishment of a joint venture subsidiary of NBC (in partnership with astrong private bank with an international network) to focus on corporate and internationaltransactions; and (c) the restructuring of the retained NBC with new line managers in keyareas.

13. The Government has provided a schedule of activities which constitutes the broadelements of the strategy. First, the diagnostic evaluation, including an updated portfolioreview, would define the strategy for restructuring NBC including recommendations fordivestiture and the disposition of the impaired assets. The Government also has recruitedthree senior, experienced commercial bankers as Deputy Managing Director/ChiefOperating Officer, Director of Finance and Credit Manager in NBC. Second, a review ofthe features of the strategy would occur during the early phases of the diagnosticevaluation so that the remainder of the diagnostic evaluation could concentrate on: (a)analyses of the implementation implications for NBC; (b) rapidly outlining a strategy thatwill maxirnize the value of the branch network(s) sale and maximize the benefit of NBC'sdownsizing on the financial sector overall; and (c) getting the joint venture underway.Third, the pro formas for the entities and/or facilities to be offered for sale would befinalized and agreed by the Government and NBC. This would likely include the removalof some portion of the non-performing loans to a recovery unit that would be moved to asubsidiary for collection. The residual NBC, after charging off the loans, would be asmaller organization and would add some urgency to the tasks of reducing head officeadministrative costs and rationalizing the rural branch network. Fourth, terms andconditions for the sale of urban branch network(s) and the joint ventureinternational/corporate subsidiary would be prepared. Sales memoranda, authority todisclose terms and contact particular buyers would be agreed. The schedule calls for theopening of the urban network(s) under new ownership and for the joint venture to beginoperations by October, 1995.

14. The project would finance the technical assistance required for the implementationof the strategy including the senior management team in NBC. The team is assisting NBCwith the preparation of a business plan acceptable to IDA. The plan would: (i) provide forcontinued credit restraint as NBC is restructured; (ii) address the significant portfolio ofnon-performing assets; and (iii) aim to restructure the remaining bank into a self sustainingand viable going concern. The plan would consist of time-bound performance targetsincluding targets for the reductions in the ratio of operating costs to average total assets,

5

increases on the return on average total assets, reductions in the percentage of non-performing loans in the portfolio, establishment of an appropriate loan to deposit ratio,increases on the ratio of loan collections to scheduled collections and the adequatediversification of credit risk. These ratios, among others, would be defined to ensure thataggregate lending could only increase if there is a substantial strengthening of profitabilityand the quality of the asset portfolio. The plan also would serve as a yardstick forprudential supervision until such time as NBC meets prudential requirements.

15. PBZ. The credit would finance the remuneration of two experts as GeneralManager and Financial Controller of PBZ for three years. Their main responsibilitieswould be to oversee the restructuring of the bank. Specifically, this would include thepreparation of a business plan, the formulation of appropriate policies and operatingprocedures, installation of effective internal control, the design of a marketing strategy,and the introduction of new financial services.

16. Ministry of Finance. The credit would also finance periodic services ofconsultants to provide advice to the Ministries of Finance on the mainland and in Zanzibar,as well as to the Boards of the Government-owned banks, on the progress of therespective restructuring plans.

17. Financial Infrastructure Strengthening ($4.9 million). Bank Supervision. The IMFis providing a Bank Supervision Advisor to BOT. The project would complement theIMF's technical assistance by providing focused technical assistance to the BankSupervision Directorate for the supervision of problem institutions, on site examinations,methodology development, and training. Technical assistance for the supervision ofproblem institutions would include consultancies to: (1) monitor the restructuring of thethree state-owned banks; (2) advise on the progress of the respective restructuring plans;(3) assist with problem institution supervision of NBFIs and foreign exchange bureaus;and (4) direct the design and delivery of the Problem Institution Management (PIM)training course for all the examination staff of Banking Supervision. Assistance for On-Site Examination would include support for up to two years to bring the skills of the BankSupervision Directorate up to an adequate level in all high risk areas. The main focus willbe on the development of the on-site methodology pertaining to the internal controlenvironment. Emphasis will be placed on the role of the Board, as well as on the treasuryand systems areas, including wire payments and the detection of money laundering.Technical assistance for Methodology Development would include the design anddocumentation of methodology in three crucial areas: off-site examination, on-siteexamination and ladders of compliance. Finally, the component would finance a series ofin-house training courses which, in part, would aim to introduce the examination modulesresulting from the development of the new methodology. These courses would bestrongly promoted to the financial system at large to encourage widespread participationof financial institution personnel.

18. Insurance Adviser. A new Insurance Act was recently drafted and is scheduledfor presentation to Parliament during the first quarter of 1995. The Act provides the

6

framework for the entry of private participants into the Tanzanian insurance market, basedon objective, minimal but prudent requirements. In addition, for the first time, thelegislation provides for prudent regulation of the industry to promote on-going confidencein the system. The Government intends to establish a supervisory authority (an InsuranceCommission). The Commission would develop a supervisory methodology and policyframework, including the drafting of regulatory guidelines and the supporting accountingprinciples and standards to be adopted by the industry to meet the legislative requirements.This component would finance a technical advisor for a period of up to two years. Theadvisor would be required to draft prudential regulations for licensing, regulating andsupervising insurance companies. The regulations would establish prudential controls andlimits, such as exposure limits, capital adequacy guidelines, and controls on related partiesand enforce corrective measures with specific guidance on dealing with troubledinstitutions.

19. Studies Fund The project would finance studies for the development of a nationalpayments system and a Credit Infornation Bureau. Studies on the national paymentssystem would be undertaken in two phases. The first phase would collect and analyze dataabout the payment traffic in Tanzania, assess the related institutional, legal and financialinfrastructure, estimate the costs of transactions, and generate realistic projections of thetransacting environment 5 years hence. The second phase would be the design ofimprovements to the national payments system including an assessment of the feasibility ofthe electronic exchange of data. This component also would finance a feasibility study todetermine: (i) if there is a potential market for a credit information bureau in Tanzania; and(ii) if so, whether it could become self-sustaining within a three year time frame.Specifically, the study would be undertaken in two phases. The first phase would assessthe readiness of private and state-owned companies and financial institutions to participatein such an agency on a structured fee basis, assess whether there is enough capacity in themarket to support such an agency, and review the potential ownership/membershipstructures. The second phase would be contingent upon the outcome of the feasibilitystudy and would entail the preparation of a detailed five year business plan including arecommendation for the ownership structure.

20. Capital Market Development ($2.1 million). The project would provide technicalassistance to promote the development of a capital market keeping in mind theGovernment's preference for a simple and evolutionary approach. Specifically, assistancewould be provided for: (a) the drafting and completion of a core set of enablingregulations; (b) an advisor to provide assistance over the course of two years to theAuthority on a wide variety of regulatory and market development matters; (c) basictraining of would-be stock brokers; (d) basic publicity and educational program for thegeneral public, including nationwide distribution of information; (e) technical assistanceto include completion of a first public issue including design of distribution procedures,determination of offer prices, determination of allotment procedures, provision of short1-2 hour training sessions for personnel nationwide on how to handle the public issue,and supervision of the allotment processing; (f) the preparation of a stock exchangeblueprint and item-by-item action plan together with donor funding requests for start-up

7

costs. This component would also provide funding for the establishment and managementof the first three years of a Privatization Trust Fund (PTF). The Government intends toestablish the PTF mainly to broaden local participation in privatization while maximizingthe financial benefits of the sale of privatized assets. The Government would offer itsretained shares of privatized parastatals to the Trust in exchange for a deferred paymentupon successful disposition.

21. Project Costs and Financing. The project cost is estimated at US$13.4 million(Tsh7.4 billion) which includes project management costs and contingencies. The foreignexchange component of the program is estimated at 66% of the total cost. The proposedIDA credit of US$10.9 million would finance 90% of project costs net of duties and taxes.The Government's local contribution would be for an estimated US$1.2 million. Inaddition, the Government would finance the payment of taxes and duties amounting toroughly US$1.4 million. A breakdown of costs and the financing plan are shown inSchedule A. Amounts and methods of procurement, disbursements and the disbursementschedule are shown in Schedule B. The key processing events are shown in Schedule Cand the status of Bank Group operations is shown in Schedule D. The Staff AppraisalReport (13713-TA) is being distributed separately.

22. Project Implementation. The project would be implemented by the Bank ofTanzania. The Director of the Financial Markets Directorate in the Bank of Tanzaniawould be responsible for: (i) administering project funding and procurement processing(including the employment of consultants) and managing the Project Accounts and theSpecial Account; (ii) overseeing project implementation activities by various institutionsand coordinating activities; (iii) following up on the agreed conditionalities and financialprovisions and proposing any necessary adjustments and amendments to implementation:(iv) providing periodic project progress reports; and (v) acting as the focal point ofcontacts between the Government of Tanzania and IDA during the project implementationperiod.

23. Although BOT would assume day to day responsibility for implementation, theMinistries of Finance for the United Republic and Zanzibar, as the sole shareholders of theGovernment owned banks, will bear ultimate responsibility for the restructuring of bothinstitutions. Given the complexity of the issues involved, experienced commercial bankerswill be recruited to advise the Ministries on the overall progress of the program. Issuesraised by the Advisors would then be discussed during meetings of the Boards ofDirectors. The Advisors would be expected to liaise with the Parastatal Sector ReformCommission. They would not be expected to reside in Tanzania but would be contractedto visit three times per year. This arrangement will be reviewed as the project issupervised and will be amended if necessary. A mid-term review is proposed for March1997.

24. Project Sustainability. The project would address a major market imperfectionby supporting a strategy for aggressively reducing the market share of the Governmentowned banks and enhancing competition in the banking sector. The strategy, which is

8

embodied in the Government's Letter of Financial Policy, recognizes that increasedcompetition, in an appropriately regulated environment, would increase efficiency,profitability and sustainability both in the financial and capital markets. Also, thedevelopment of a credit information bureau should substantially lower the risk profile ofTanzania's businesses and, accordingly, reduce lending costs. Finally, the development ofthe capital markets and the insurance sector would provide additional savings to financeTanzania's investment needs.

25. Lessons from Previous IDA Experience. Although the program supported byFSAC (1992) legally deregulated and liberalized the banking system, it failed toaccomplish the intended restructuring of NBC for the following reasons: first, theprogram assumed that the emergence of competitive private banks would gradually erodeNBC's market share. Although there has been some erosion, future expansion by theprivate banks is constrained by their limited Dar es Salaam branch networks and theirstrategic targeting of relatively narrow niches. As a result, NBC remains dominant. Theproposed project supports a more aggressive strategy to reduce NBC's market share.Second, FSAC financed advisers to NBC's management. However, there was no incentivefor NBC's management practices to change and the experts were not held accountable forperformance. The proposed project includes professional bankers in line managementpositions who would be evaluated, in part, on the basis of NBC's financial performance.Third, FSAC did not include timebound performance targets against which NBC'sperformance could be judged. The proposed project includes dated monitorable targets.IDA's overall experience with financial sector operations has influenced the proposedproject in that the design is very selective with a strong emphasis on the restructuring ofthe Government owned banks and improving the regulatory environment for the financialsector. The project also is front-loaded in that most of the critical actions are requiredeither upfront or very early in the project's implementation.

26. Rationale for IDA Involvement. The Bank's country assistance strategy,which was discussed by the Executive Directors on April 7, 1994, is to assist theGovernment to reduce poverty through an acceleration in the pace of structural reformand the provision of infrastructure and social services (especially targeted to the poor),while ensuring an environmentally sustainable development path. Specific criteria fordetermining Tanzania's eligibility for substantial IDA support and continued adjustmentlending included improvements in the operation of public sector banks through strongmeasures to stem losses and increase the quality of their portfolios, and the introduction ofprivate management with eventual divestiture as an objective. The proposed FinancialInstitutions Development project seeks to support this strategy and, more broadly,improve the access of the private sector to the banking system in general and to capitalmarkets. The project would provide technical assistance to implement the policy reformsin the financial sector supported by the proposed SAC which is under preparation. IDAalso is assisting the Government with the formulation of a strategy for the development ofrural banking.

27. Agreed Actions. The following are the conditions for Credit Effectiveness: (a)completion of the diagnostic evaluation of NBC and a timebound action plan (including an

9

interim business plan and a recovery plan for NBC's top fifty non-performing loans),satisfactory to IDA, for the downsizing and restructuring of NBC; (b) appointment of aconsulting firn/investment bank acceptable to IDA to implement the divestiture strategyon the basis of terms of reference acceptable to IDA; and (c) appointment of BankingAdvisors under terms of reference acceptable to IDA.

28. The following assurances were received during negotiations: (1) Governmentwould implement the program described in the Letter of Financial Policy; (2) NBC: (a)implementation of agreed actions under NBC's divestiture strategy as a result of thediagnostic review, including the divestiture of an urban branch network(s) and theidentification of a joint venture partner for the corporate subsidiary by October 31, 1995;(b) the submission of annual audited accounts within six months of the end of NBC'sfinancial year and that appropriate adjustments will be made and all loans classified as losswill be written-off prior to the finalization of the accounts; (c) the submission to IDA ofthe finalized business plan by October 31, 1995; thereafter, NBC would take actions tomeet the plan's performance targets. NBC's overall lending as well as lending toparastatals and cooperatives would be within agreed ceilings until the plan is implemented;(d) NBC will submit monthly reports to BOT on outstanding loans to large borrowers.(3) PBZ (a) a General Manager and Financial Controller, acceptable to IDA, would beappointed by October 31, 1995; (b) the submission of annual audited accounts within sixmonths of the end of PBZ's financial year and that appropriate adjustments will be madeand all loans classified as loss will be written-off prior to the finalization of the accounts;(c) a restructuring plan, acceptable to the Borrower and IDA, would be adopted for PBZ.(4) Bank Supervision (a) the annual work program for 1995/1996 for the BankSupervision Directorate, including terms of reference and work program for theconsultants required for this component, would be submitted for IDA's approval byOctober 31, 1995; (b) the annual work programs for the following years (beginning with1996) will be submitted for IDA's approval by September 30 of the preceding year; (c) thesubmission by October 31, 1995, for IDA's review and comments, of a report on thestatus of all financial institutions with action plans for the problem institutions; and anannual report on the status of all financial institutions by September 30 in each yearcommencing 1996 with action plans for problem institutions. The action plans wouldinclude a timetable, acceptable to IDA, for reaching regulatory targets. (5) Insurance thesubmission for IDA's approval, by December 31, 1995 of the work plan for theestablishment of the Commission, including details of the resource requirements (e.g, size,scope, staffing, technology, etc.) (6) CaDital Markets (a) agreement on the 1996 annualwork program and budget for the Authority by October 31, 1995. The annual workprograms beginning with 1996 will be submitted for IDA's approval three months prior tothe end of the preceding year; and (b) maintenance of a CEO under TOR acceptable toIDA during the term of the project. (7) PTI Draft management contract and theselection of a management team acceptable to IDA by December 31, 1995.

29. Environmental Impact. The project's environmental category is C. There wouldbe no adverse environmental impact.

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30. Program Objective Categories. The primary emphasis is private sectordevelopment through improvements in financial intermediation and the divestiture ofCRDB and parts of NBC to private investors. The secondary emphasis is on economicmanagement.

31. Participatory Approach. The project was prepared by BOT's Financial Marketsand Banking Supervision Directorates with IDA's support. The project stemmed from arequest by the Government for IDA's assistance with the development of Tanzania'sinsurance and capital markets. However, during project preparation the Governmentchanged the emphasis to the restructuring of the banking system as NBC's poor financialstatus became more apparent and critical.

32. Project Benefits. Increased competition in the financial sector would improve thequality of banking services and lower the costs of financial intermediation. Theelimination of losses by NBC and PBZ would contribute to fiscal and monetarystabilization and improve overall macroeconomic performance. Also, strengthened banksupervision will help build public confidence and mobilize savings. The capital marketcomponent would help to address the Government's concern about the need for broadbased participation in the privatization effort.

33. Project Risks. The project is designed to mitigate the major risk to NBC'ssuccessful restructuring: a possible reversal of Government's stated commitment to thebank's commercialization and privatization. Consequently, the actions required for thesignificant downsizing of NBC are all either upfront or very early in the project'simplementation. Conversely, the aggressive downsizing of NBC could result in the rapidentry of new banks to fill the void and could stretch the limited capacity of BankSupervision. The extensive amount of technical assistance provided under the credit toBank Supervision is meant to reduce this risk. Another risk stems from the rapid openingup of Tanzania's capital market in the absence of an appropriate regulatory framework.The project would support the gradual evolution of the capital market while putting inplace an appropriate regulatory framework

34. Recommendation. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association and recommend that the Executive Directorsapprove the proposed credit.

Richard H. FrankPresident ad interim

AttachmentsWashington, D.C.May 23, 1995

SCHEDULE A

TANZANIA

FINANCIAL INSTITUTIONS DEVELOPMENT

Estimated Project CostsMillions of TSh Millions of US$ Foreign as

Local |Foreign Total Local Foreign Total % of Total

Bank Restructuring 876.0 21 19.6 I 3095.6 1.6 4.0 5.6 72%NBC 612.7 1,350.2 1,962.9 1.1 2.4 3.6 69%PBZ 218.6 556.4 775.0 0.4 1.0 1.4 72%MOF 44.7 313.0 357.7 0.1 0.6 0.6 88%

Financial Infrastructure Strengtheninc 1,037.3 1,693.1 2,730.4 1.9 3.1 4.9 62%Bank Supervision 386.4 1,130.6 1,517.1 0.7 2.0 2.7 75%Insurance 71.2 203.7 274.9 0.1 0.4 0.5 74%Studies Fund 579.6 358.8 938.4 1.1 0.7 1.7 38%

Capital Markets 284.8 874.3 1J159.1 0.5 1.6 2.1 75%Capital Markets Securities Authority 174.4 432.7 ] 607.1 X 0.3 0.8 1.1 71%PTF 110.4 441.6 552.0 0.2 0.8 1.0 80%

Proiect Management 245.6 0.0 _ 245.6 0.4 0.0 0.4 0%

Base Cost 2,443.8 4,787.0 7,230.8 4.4 8.7 13.1 66%

Contingencies 58.0 110.8 168.8 0.1 0.2 0.3 66%Total 2,501.7 1 4,897.8 7,399.5 4.5 8.9 13.4 66%

Note: Totals may not add due to rounding.

Project Financing Plan(US$ million equivalent)

Local Foreign Total % of CostIDA 1.9 8.9 10.9 81%

Government 2.6 0.0 2.6 19%Total 4.5 8.9 13.4 100%

Note: Includes contingencies. Also, totals may not add due to rounding.

SCHEDULE BTANZANIA

FINANCIAL INSTITUTIONS DEVELOPMENT

Summary of Procurement Arrangements(US$ million equivalent)

Total

ICB LCB Other Cost

Goods

Vehicles 0.1 0.1

(0.1) (0.1)

Computers & Office Equip. 0.2 0.2 0.4

(0.2) (0.2) (0.4)

Consultancies

Technical Assistance 10.1 10.1

(8.3) (8.3)

Studies 1.7 1.7

(1.5) (1.5)

Trainin 0.7 0.7

(0.7) (0.7)

Incremental Operating Costs 0.5 0.5

(0.0 ) (0. 0)

Total Costs 0.2 0.1 13.2 13.4

IDA Financed (0.2) (0.1) (10.7) (10.9)

Note: Totals do not add due to rounding.

IDA Credit Disbursement Summary Allocation

US$ Million Proposed DisbursementEquipment, vehicles and 0.5 100% foreign and 75% localcomputers.Training 0.7 100%Technical Assistance 7.0 80%Studies 1.5 80%Refund of PPF 0.8Unallocated 0.4TOTAL 10.9

PROJECTED DISBURSEMENTS(US$ million equivalent)

IDA FY: FY96 FY97 FY98 FY99

1st Half 2nd Half 1st Half 2nd Half 1st Half 2nd Half

Total 2.6 2.1 2.0 1.6 1.2 0.9 0.5Cumulative 2.6 4.7 6.7 8.3 9.5 10.4 10.9

SCHEDULE C

TIMETABLE OF KEY PROJECT PROCESSING EVENTS

a. Time taken to prepare: 4 months

b. Prepared by: IDA in collaboration with Government of Tanzania. TheIDA members consisted of Mr. Gerard Byam (TaskManager), Redha Behbehani, Dong He, Nancy Mclnerney-Lacombe and Paul Murgatroyd. The mission also includedconsultants Wendy Abt, Ray Astin, Robin Marriott, EricPostel, Qamar Siddiqi and Paul Vonckx. The Governmentteam consisted of Dr. I. Rashidi (Governor, BOT), Mr. G.Mgonja and Mr. A. Mwinyimvua (BOT), and Mr. G.Mbowe (Chairman, PSRC). The mission was assisted inpreparation of this document by Ellen Martin and MarielFiat. The Lead Advisor is Mr. R. Pardy and Peer Reviewersare Luigi Passamonti (IFC) and Charles Enoch (IMF). TheSector Division Chief and the Acting Country Director areR.E. Hindle and Michael Carter, respectively.

C. First IDA mission: February 1994

d. Appraisal: June 1994

e. Negotiations: December 1994

f. Date of Effectiveness: August 1995

g. List of Relevant PCRs: Financial Sector Adjustment Credit (Report No.2308-TA)

SCHEDULE DPage 1 of 2

STATUS OF BANK GROUP OPERATIONS IN TANZANIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS(as of March 31, 1995)

~~~~~. ....... .. ...... .. .. .. ....... ;.7 ...... .... ... . .. . . T. . . ... -. ..:: T i-h .E-

Nineteen (19) Loans and seventy five (75) Credits fully disbursed, 313.06 1,637.91of which SECALS, SALs and Program Loans/Credits: (795.42)

Cr. 18910 1988 Tanzania Agr. Exports Reh. I 30.00 12.79Cr. 19700 1989 Tanzania Nat'l. Ag. & Liv. Res. 8.30 4.91Cr. 19940 1989 Tanzania Agric. Ext. 18.40 5.38Cr. 20500 1989 Tanzania Tree Crops 25.10 11.89Cr. 20950 1990 Tanzania Ports Modernization 37.00 20.92C'r. 20980 1990 Tanzania Health & Nutrition 47.60 39.83

Cr. 21370 1990 Tanzania Educ. Planning & Rehab. 38.30 31.39C.r. 21490 1990 Tanzania Roads I 180.40 100.56Cr. 22020 1991 Tanzania Petrol Rehab 44.00 50.41Cr. 22670 1991 Tanzania Railways Restructuring 76.00 73.89

Cr. 22910 1992 Tanzania Urban Sector Eng. 11.20 5.15

Cr. 23300 1992 Tanzania Engineering Credit 10.00 2.58

Cr. 23350 1992 Tanzania Forest Resources Man 18.30 14.93Cr. 24130 1993 Tanzania Financial & Legal Ma 20.00 15.98Cr. 24860 1993 Tanzania Telecom III 74.45 78.03Cr. 24890 1993 Tanzania Power VI 200.00 211.09

C'r. 25070 1993 Tanzania Priv. Pub. Sect. Mgt. 34.90 32.64Cr. 25370 1994 Tanzania ASMP 24.50 20.73Cr. 25980 1994 Tanzania Roads II 170.20 179.49

Cr. 26480 1995 Tanzania Mineral Sector Dev. 12.50 12.52

Total 313.06 2719.06 925.11of which repaid 242.61 76.36

Total held by Bank & IDA 70.45 2642.70

Amount sold 0.09of which repaid 0.09

Total Undisbursed 925.11

SCHEDULE DPage 2 of 2

B. STATEMENT OF IFC INVESTMENTS IN TANZANIA

(As of March 31, 1995)

ObIt0Ajr L<aa EqukyleAeg$ my oh

1994 AEF-NOMAD SAFARI Tourism Services 0.15 0.00 0.151995 AEF-RAFFIA BAGS Mfg. of Plastic Products NEC 0.50 0.00 0.501995 AEF-TANBREED Agric. & Livestock Products 1.00 0.00 1.001994 AEF-Tanganvika Transport and Storage 0.25 0.00 0.251985 Amboni Agricultural and Livestock Prod. 5.36 0.00 5.361994 Eurafrican Bank Commercial Banks 0.00 0.75 0.751978 Highland Soap Mfg. of Soap & Cleaning Prep 1.38 0.37 1.751960 Kilombero. Mfg. of Food Beverages & Tobacco 3.50 0.00 3.501964 Kilombero Mfg. of Food Beverages & Tobacco 4.37 0.70 5.071979 Metal Products Mfg. of Fabric Metal Products 1.33 0.18 1.511991 Mufmdi Tea Beverage Industries 2.80 0.00 2.801995 Tanzania Brewery Malt Liquors and Malts 18.40 6.00 24.401990 Tasco Spinning Weaving & Finishing 2.00 0.00 2.001993, 1994 TPS Tanzania Tourism Services 8.04 1.06 9.101994 TPS Zanzibar Restaurants & Hotels 0.00 0.16 0.161995 TPS Zanzibar Restaurants & Hotels 1.25 0.00 1.25

Total Gross Commitments 50.33 9.22 59.55

Less: repayments, cancellations,exchange adjustments, writeoffs,terminations and sales 25.73 1.25 26.98

Total Commitments now held by IFC 24.59 7.97 32.56Total Undisbursed 19.36 6.55 25.91Total Outstanding IFC 5.23 1.42 6.65