Finance and Private Sector Development Group Middle East and North Africa Region

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Document of

The World Bank




Report No:
XXXXX



MA






PROJECT APPRAISAL DOCUMENT


ON A


PROPOSED GRANT


IN THE AMOUNT OF
4.9

Million USD

EQUIVALENT


FROM THE MIDDLE EAST

AND NORTH
AFRICA TRANSITION FU
ND


TO THE


KINGDOM OF MOROCCO


FOR A


M
OROCCO MICROFINANCE DEVELOPMENT PROJECT
(
MMDP
)






JANUARY

25
,
2013






Finance and Private Sector Development Group

Middle East and North Africa Region



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



CURRENCY EQUIVALENTS

(Exchange Rate Effective
January 25
,
2013
)


Currency Unit

=

Moroccan Dirham

(
MAD
)

MAD

8.35

=

US$1

US$1

=

SDR

$1
.
53


FISCAL YEAR

January 1



December 31


ABBREVIATIONS AND ACRONYMS











AMC

Associations de Micro
-
Credit

BAM

Bank Al Maghrib

(Central Bank of Morocco)

CCG

Caisse Centrale

de Garantie

CDG

Caisse de Dépot et de Gestion

CGAP

Consultative Group to Assist the Poor

CM6

Centre Mohammed VI pour la Microfinance Solidaire

CMU

County Management Unit

CPS

Country Partnership Strategy

CQS

Selection Based on Consultant's
Qualifications

DAAG

Direction des Affaires Administratives et Générales

DECDG

Development Economics, Development Data Group

DPL

Development Policy Loan

DPTF

Deauville Partnership Transition Fund

DPTF OM

Deauville Partnership Transition Fund

Operations Manual

FM

Financial Management

FNAM

National Federation of Micro
-
Credit Associations

GDP

Gross Domestic Product

GID

Gestion

Intégrée

des
Dépenses

GNI

Gross National Income

IBRD

International Bank for Reconstruction and Development

IC

Individual Consultants

IDA

International Development Association

IFC

International Finance Corporation

IFI

International Financial Institution

IFMIS

Integrated Financial Management Information System

IGF

General Inspectorate of Finance

IMF

Internat
ional Monetary Fund

INTOSAI

International Standards on Auditing

ISA

International Standards on Auditing

IT

Information Technology

IUFR

Interim Unaudited Financial Report

J
-
PAL

Jameel Latif Poverty Action Lab

M&E

Monitoring and Evaluation

MAD

Moroccan Dirham



MCA

Millennium Challenge Account

MEF

Ministry of Economy and Finance

MENA

Middle East and North Africa

MFI

Microfinance Institutions

MIS

Management Information Systems

MoEF

Ministry of Economy and Finance

MoF

Ministry of Finance

MSME

Micro Small and Medium Sized Enterprises

NCB

National Competitive Bidding

OP

Operations Policy

PAD

Project Appraisal Document

PDO

Program Development Objective

PEFA

Project Economic and Financial Assessment

PFM

Public Financial Management

PFS

Project Financial Statements

PIU

Project Implementation Unit

PJD

Parti de la Justice et de Développement

PMU

Project Management Unit

PPP

Purchasing Power Parity

QCBS

Quality and Cost Based Selection

SBD

Standard Bidding Documents

SME

Small and
Medium Enterprise

TA

Technical Assistance

TF

Trust Fund

UN

United Nations

USAID

United States Agency for International Development

USD

United States Dollar

VAT

Value
-
Added Tax




























Regional Vice President:


Inger
Andersen

Country Director:


Simon Gray

Sector Director:


Loic Chiquier

Sector Manager:


Simon C. Bell

Task Team Leader:


Teymour Abdel Aziz






KINGDOM OF MOROCCO

Morocco Microfinance Development Project


TABLE OF
CONTENTS


Page

I.

STRATEGIC CONTEXT

................................
................................
................................
.
1

A.

Country Context

................................
................................
................................
............

1

B.

Sectoral and Institutional Context

................................
................................
.................

3

C.

Higher Level Objectives to which the Project Contributes

................................
..........

8

II.

PROJECT DEVELOPMENT OBJECTIVES

................................
................................
8

A.

Project Development Objective (PDO)

................................
................................
........

8

Project Beneficiaries

................................
................................
................................
.....

8

III.

PROJECT DESCRIPTION

................................
................................
............................
11

A.

Project Financing

................................
................................
................................
........

13

Lending Instrument

................................
................................
................................
.....

13

Project Cost and Financing

................................
................................
.........................

14

B.

Lessons Learned and Reflected in the Project Design

................................
................

14

IV.

IMPLEMENTATION

................................
................................
................................
.....
16

A.

Institutional and Implementation Arrangements

................................
........................

16

B.

Results Monitoring and
Evaluation

................................
................................
............

18

C.

Sustainability
................................
................................
................................
...............

18

V.

KEY RISKS AND MITIGATION MEASURE
S

................................
..........................
18

A.

Risk Ratings Summary Table

................................
................................
.....................

18

B.

Overall Risk Rating
Explanation

................................
................................
................

18

VI.

APPRAISAL SUMMARY

................................
................................
..............................
19

A.

Economic and Financial Ana
lyses

................................
................................
..............

19

B.

Technical

................................
................................
................................
.....................

20

C.

Financial Management

................................
................................
................................

20

D.

Procurement

................................
................................
.

Error! Bookmark not defined.

E.

Social (including Safeguards)

................................
................................
.....................

22

F.

Environment (including Safeguards)

................................
................................
..........

22

ANNEXES

Annex 1: Results Framework and Monitoring
................................
................................
...............
23

Annex 2: Detailed Project Description

................................
................................
..........................
27

Annex 3: Implementation
Arrangements

................................
................................
.......................
30

Annex 4: Operational Risk Assessment Framework (ORAF)

................................
.......................
42

Annex 5: Implementation Support Plan

................................
................................
.........................
45

Annex 6: Country At
-
A
-
Glance

................................
................................
................................
.....
47



i



PAD DATA SHEET

Kingdom of Morocco

Morocco Microfinance Development Project

PROJECT APPRAISAL DOCUMENT

.

Middle East & North Africa

Financial and Private Sector Development

.

Basic Information

Date:

January

27
, 2012

Sectors:

Private Sector Development (100

percent
)

Country Director:

Simon Gray

Themes:

Private Sector Development, Micro and small

finance

Sector Manager/Director:

Simon C. Bell/ Loic Chiquier

EA
Category:

C

Project ID:

P144500




Lending Instrument:

Specific Investment Grant


Team Leader(s):

Teymour Abdel Aziz

Joint IFC:

.

Borrower:
Kingdom of Morocco



Ministry of
Economy and Finance

Responsible Agency:
Ministry of
Economy and Finance


Contact:

Nouaman Al Aissami

Title:

Chief of Credit
Division


Telephone No.:


Email:

n.alaissami@tresor.finances.gov.ma

.

Project Implementation Period:

Start Date:

May 15
, 2013

End
Date:

May 15
, 201
7

Expected Effectiveness Date:

June
1
, 2013

Expected Closing Date:

Ma
y 15
, 201
7

.

Project Financing

Data(US$M)

[ ]

Loan

[

]

Grant

[
X ]

Other (Trust Fund Grant)

[

]


Credit

[ ]

Guarantee

For Loans/Credits/Others


ii


Total Project Cost (US$M) :

5.
9

million


Total Bank
Financing :



Total
Transition Fund
Financing

(US$M) :

4.9

million


Financing Gap :



.

Financing Source

Amount(US$M)

BORROWER/RECIPIENT

1

IBRD


IDA: New


IDA: Recommitted


Other

4.9

Financing Gap


Total

5.9

.

Expected Disbursements (in USD Million)

Fiscal Year

2013

2014

2015

2016






Annual

0.1

1.6

1.6

1.6






Cumulative

0.1

1.7

3.3

4.9






.

Project Development Objective(s)

The proj
ect objective is to promote access to fi
nance to low income households and
micro

and small
enterprises through the promotion of a sustainable and inclusive microfinance sector.
This objective will be
achieved through a comprehensive package of analytical work and technical assistance aimed at supporting
the
enabling environment for mic
rofinance and financial inclusion, leading to enhanced financial services to
wider segments of the population.




.

Components

Component Name

Cost (USD Millions)

Component
1
: Strengthening the
institutional,
legal, regulatory, tax and
governance
framework for microfinance

1
.9

Component
2
:
Supporting

the market infrastructure
, product innovation

and funding sources for microfinance

1.5

Component
3
: Integrating Microfinance into a national financial
inclusion

strategy

1.5

.

Compliance

Policy


iii


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

[ ]

.

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





Description of Covenant


.

Team Composition

Bank Staff

Name

Title

Specialization

Unit

UPI

Teymour Abdel Aziz (TTL)

Economist

TTL

MSNF1

326872

Gabriel Sensenbrenner

Lead Financial Economist

FSD

MNSF1


Peter McConaghy

Junior Professional Associate

FSD

MNSF1


Philippe de Meneval

Senior PSD Specialist

PSD

MNSF1


Steve Wan

Operations Analyst

Operations

MNSF1


Abdoulaye

Wade

Senior Procurement Specialist

Procurement



Khadija Faridi

ETC

Procurement




iv


Lamyae Hanafi Benzakour

Financial Management
Specialist

FM



Laila Moudden

Operations Assistant


MNCM
A


Hassine Hedda

Finance Officer

Disbursements



Suzanne Parris

Program Assistant


MNSF1

















Non Bank Staff

Name

Title

Office Phone

City





.

Locations

Country

First Administrative
Division

Location

Planned

Actual

Comments

.



1


I.

STRATEGIC CONTEXT

A.

Country
Context


1.

The Arab Spring continues to affect Morocco, although its experience has been relatively
peaceful. King Mohammed VI proposed, in March 2011, a package of constitutional reforms that
garnered the support of the electorate in a referendum he
ld on July 1, 2011. Parliamentary
elections, held on November 25, 2011, were won by the Parti de la Justice et du Développement
(PJD), an Islamist party that had traditionally been in active opposition. The PJD formed, in early
January 2012, a coalition go
vernment, headed by Mr. Benkirane.


2.

The Arab Spring has put real pressure on the Moroccan State for democratic change. The
electorate is expecting that the new Government will usher in more credible and faster reforms to
create more jobs and improve the qu
ality and equity of public services. If the new Government
can deliver, this will transform the social and political landscape of Morocco.


3.

The 2011 Constitution introduced a new institutional model based on separate, balanced and
complementary powers. The

main changes are: (i) strengthening the role of Parliament in its
oversight of Government; (ii) elevating the Prime Minister to Head of Government; (iii)
enhancing the independence of the judiciary; (iv) promoting human rights and equal opportunity
to acc
ess public services, (v) establishing the National Council for Human Rights, the
Ombudsman system, the Competitiveness Council, the National Authority for Integrity, the
Prevention and Fight against Corruption, and the Council for Youth and Community Work;

and
(vi) advancing regionalization as a democratic and decentralized system of governance.


4.

Morocco made significant economic headway during the decade preceding the Arab Spring.
Growth averaged 4.7 percent over 2001
-
11, compared to 2.8 percent in the 199
0s. Inflation was
less than 2 percent over the period. Gross domestic product (GDP) per capita doubled to reach
US$3,100 in 2011; unemployment declined from 13.6 percent in 2000 to 9.1 percent in 2011;
absolute poverty decreased from 15.3 percent to roughl
y 9 percent between 2001 and 2007.


5.

Morocco weathered the first round of the global financial crisis relatively well, maintaining
an investment grade rating since 2007. This reflected sustained efforts to implement sound
macroeconomic policies and ambitio
us structural reforms. Morocco liberalized a number of
sectors, including transport, energy, and telecommunications, and signed many Free Trade
Agreements, including with Europe. The financial sector was strengthened to support the new
dynamism of the nona
gricultural sector and (although much still remains to be done) the
microfinance segment is among the most developed in the MENA region.


6.

However, Morocco has confronted growing economic challenges in the second round of the
global financial crisis. Devel
opments in the euro area and continued high fuel and food import
prices are expected to put sustained pressure on fiscal and external balances. The fiscal deficit
deteriorated to 6.9 percent of GDP in 2011 and central government debt jumped to 53.7 percent

of GDP. Measures to reduce fuel subsidies should contain the fiscal deficit to around 6
-
6.5
percent of GDP in 2012. The current account deficit is estimated to reach 10 percent of GDP in
2012 from further losses in terms of trade, and lower tourism receip
ts and remittances. The
Government’s decision to issue a US$ 1 billion international bond in November 2012, coupled

2


with higher official financing, should provide breathing space to carry on with reforms in an
orderly way.


7.

The recent shocks have left the
Government with much smaller policy margins at a time
when the population has higher expectations for job creation and poverty alleviation.
Unemployment remains high (9 percent), especially among the urban youth, despite one of the
lowest participation rat
es (49 percent) among comparator countries. 4 out of 5 unemployed are
urban, 2 out of 3 are youth aged 15
-
29, 1 in 4 jobless holds a university diploma. About a quarter
of the population

around 8 million people

is either in absolute poverty or under consta
nt threat
of falling back into poverty. 70 percent of poverty is still rural and in 2007 the urban poverty rate
was 4.8 percent compared to 14.5 percent in rural areas. Income of the poor has been growing at
a slower rate than the average income.


8.

In the c
urrent political and economic environment, inclusive growth and job creation by the
private sector dominate the policy debates. With government increasingly financially
constrained, there are high expectations that SMEs and micro
-
enterprises can increasing
ly
contribute to private sector job creation in Morocco. The World Bank’s 2011 financial sector
flagship showed that access to finance is a key constraint in areas and income levels underserved
by conventional banks, such as the informal sector.


9.

Microfina
nce institutions (MFIs), by the very nature of their business model and cost
structure, are particularly well equipped to move the poor from the informal to the formal
financial sector. Morocco’s MFIs have established a solid track record in expanding acce
ss to the
formal sector
.
Morocco’s MFIs have established a solid track record in expanding access to the
informal sector, despite problems resulting from an initial period of high growth without an
adequate institutional and governance framework. The recen
t consolidation of the sector, as well
as other central bank measures that led to improved governance, supervision, and more and
better sharing of information on the borrowers of microloans, paved the way for further
expansion of access.


10.

The proposed oper
ation would support the roll
-
out of the national microfinance strategy that
aims to further strengthen the resilience and impact of the microfinance sector, both for lending
to enterprises as well as households for investment. Morocco’s low competitiveness
, particularly
in the context of a tightly managed exchange rate regime, has become a key constraint to better
economic and social outcomes, and higher worker productivity would help release this
constraint. Microloans to households are often the initial s
teps toward consumption smoothing,
which helps raise living standards and thereby worker productivity in formal enterprises. MFIs
also generate “self
-
employment” which helps alleviate the incidence of absolute poverty in the
informal economy.


11.

MFIs contrib
ute significantly to the production of quality credit information on borrowers in
the informal sector. When these borrowers are seasoned and reach a critical size, they become
more attractive to traditional banks and can transition to the more productive f
ormal sector where
they typically benefit from a better safety net. By enabling this transition, MFIs may also
contribute to net job creation, though only with long lags and in limited quantity. More
importantly, greater MFI penetration lays the foundation

for a financial system less geared to the

3


few borrowers with valuable collateral, prominent supporters or implicit guarantees.


B.

Sectoral and Institutional Context



12.

Morocco has a well thought
-
out strategy for the sustainable development of its financial
sector, inspired by a drive to learn from and adapt best practices to the need of Morocco’s
modernizing economy. Over the past 20 years, important reforms of the institutional and legal
framework helped sustain the development of a capable financial indus
try. The sector is wide
open to international practices, with a view to balance financial sector stability objectives with
diversification and innovations that meet the needs of households and enterprises. Advances
include the governance of financial insti
tutions and of regulatory authorities, oversight practices
and crisis preparedness, finance for small enterprises, capital market development, and financial
inclusion. The strategy aims to establish Morocco as a regional hub for the dissemination of best
p
ractices in financial sector development, and Moroccan financial institutions have established
important beachheads in Africa. The strategy has been supported by Bank DPLs and several TA
projects, as well as IFC investments in and advisory services to the
larger AMCs.


13.

Financial inclusion is one of three dimensions of the strategy, with capital market
development, and continuous refinements of oversight standards and practices. The Bank has
partnered with Morocco on financial inclusion under successive fina
ncial sector DPLs, the
MSME trust fund, or a CCG Investment loan (to ramp up the provision of guarantees to
MSMEs). Several dimensions of a full
-
fledged financial inclusion strategy have achieved
consensus and are being launched. In particular, BAM has bee
n working since 2007 with the
national association of banks and finance companies, and has launched an action plan that
includes: a foundation for financial education; a center for financial mediation; the licensing of a
second credit bureau; the licensing

of intermediary banking agents for wider access to banking
and payment services; dedicated bank reporting to monitor inclusion; a financial literacy survey;
and other initiatives to enhance consumer protection and choice. However, the lack of a well
-
fund
ed microfinance lobby (FNAM) and the sector’s heterogeneity delayed a full integration of
microfinance initiatives in BAM’s plans. Accordingly, there is a need to take stock, and through
a process of consultation, achieve synergies, and mitigate implementa
tion risk across various
inclusion initiatives.


14.

Despite limited institutional capacity from the
industry

association
lobby, demand from
underserved segments of the population has led to the emergence of large microcredit
institutions. Indeed, Morocco lead
s in the Arab world. Its sector represents 40% of all
microfinance clients across the region, 80% of branches, and 50% of MFI employment (Livre
Blanc, 2012), for a share of Arab World population of 10 percent. The Moroccan micro
-
credit
sector consists of 1
3 not
-
for
-
profit associations (Associations de Micro Credit
-

AMC) with some
800,000 accounts and outstanding loans of MAD 5 billion (0.4% of GDP; 0.7% of credit to the
private sector) (MixMarket, December 2012).
1

The four largest AMCs account for 95 perce
nt of
the outstanding, and the five smallest, 1 percent. With AMCs prohibited from collecting
deposits, liabilities are 80% bank lines, 15% s
ubsidized refinance facility
for the ones not
fulfilling bank lending conditions

(through Jaida


a private fund aimed at refinancing MFIs)
,



1

Not
-
for
-
profit status means that net earnings accrue entirely to equity and all activities are tax
-
exempt, incl. VAT.


4


plus government and donor funds. In 2010, the sector’s equity/asset ratio was 25 percent and its
return on equity 15 percent.


15.

The Microcredit Law of 1999 provided a framework for the nascent in
dustry to take off.
The law established Jaida and attracted equity support from international donors. Government
sources (e.g., fonds Hassan II) also contributed equity during take
-
off. In just four years, from
2003 to 2007, MFI loan portfolios grew 11 tim
es and outreach four times, to 1.2 million accounts
(CGAP 2010). Growth was driven by four leading MFIs (Zakoura, Al
-
Amana, Fondation des
Banques Populaires (FBP), Fondep) with 90% of client outreach. With the emergence of socially
systemic AMCs, oversight

responsibilities shifted from the Ministry of Finance to BAM, which
started to supervise the sector in 2007, although the Ministry retained licensing power until 2012.


16.

Unbridled growth overwhelmed not
-
for
-
profit governance arrangements, risk control, and

information systems. Starting in 2007, BAM inspections revealed alarming financial conditions,
sometimes from outright fraud. BAM’s interventions resulted in the clean
-
up of loan portfolios, a
pause in lending, and consolidation. Portfolio
-
at
-
risk greater

than 30 days (PAR30) increased
from 2% in 2007 to 10% in 2009, and client accounts quickly dropped below 1 million, including
through paring back cross
-
borrowing.
2

The sector and regulators had focused on quick gains
(building size and outreach) at the ex
pense of qualitative actions to develop the literacy of the
client base, implement responsible lending practices, and introduce risk management and
commercial standards. In May 2009, Zakoura, Morocco’s leading MFI, reported a PAR30 above
30% and the author
ities organized its absorption into FBP, backed by a large commercial bank.


17.

The authorities and key financial stakeholders took swift action to stabilize the sector. In
addition to the Zakoura operation, local commercial banks have kept their financing li
nes, and
other financial backers have maintained their stakes or waived financial covenants. The
confidence of financiers was buttressed importantly by BAM’s close oversight of MFIs’
deleveraging measures, through slower growth and efforts to collect from
delinquent or
fraudulent borrowers.


18.

Stabilization was accompanied by the launch of root
-
and
-
branch reforms designed to put
the sector on a sustainable commercial and financial footing. BAM mandated a comprehensive
review of underwriting and credit apprais
al, improvement of risk and internal controls, and
governance arrangements more in line with those of financial institutions. Assistance from key
donors, such as the Millennium Challenge Account or IFC, focused on introducing modern
banking practices, obta
ining external ratings, developing human resource strategies, and better
meeting client needs.


19.

Under BAM’s impulse, particular attention was paid to sector
-
wide information systems
to identify and control concentration risk and weed out risky borrowers. M
FIs entered
agreements with the private credit bureau providing them access to the database at preferential
rates in exchange for information on client profiles. As of 6 June 2011, 50 percent of MFI clients
were in the credit bureau database, about a fifth

of economy
-
wide records. With donor support,
the more advanced MFIs are in the process of updating their information management systems,
for example, in order to consult the database in real time or feed transactions initiated by MFI



2

40 percent of beneficiaries had loan
s

from different institutions
, with no integrated view of cross
-
borrowing.


5


agents on the ground
directly into accounting and risk management systems.


20.

The crisis and comprehensive reforms that followed have primed the sector for a phase of
more mature growth. Key stakeholders engaged in wide
-
ranging consultations that culminated in
the October 2012 F
irst International Symposium on Microfinance in Morocco. The aim of the
Symposium was to present and discuss a white paper outlining a national strategy for
microfinance in a public forum. Workshops covered the job creation potential of microfinance;
integ
ration of global best practices; from microcredit to microfinance; and funding needs.


21.

In addressing the event, His Majesty the King endorsed the strategy and emphasized its
key principles: help the informal sector create jobs; developed new products and p
ractices to
reach the underserved; incorporate best financial management and control practices; achieve
synergies by integrating the objectives of government policies across regions, types of income
generating activities, age or gender. The King also calle
d on continued support from
international entities.


22.

As part of the national strategy, Parliament passed in 2012 important amendments to the
1999 microcredit law. One amendment formalizes a framework for the consolidation of micro
-
credit associations, thro
ugh acquisitions or mergers. This amendment introduces into law the
kind of operation that underpinned the resolution of Zakoura. The authorities have been
encouraging the smaller AMCs to consolidate in order to achieve critical mass. A larger AMC
can more

easily partner with a bank to secure funding in exchange for distribution and outreach
services. It is expected that the promulgation of the new law will trigger such moves. A second
amendment allows AMCs to create finance companies under Morocco’s corpor
ate law. The aim
is to attract new investors into the finance company, which in turn can borrow from banks at
more attractive terms than the AMC, given BAM’s tighter prudential rules. So
-
called
“transformation” into finance company would allow AMCs to secu
re more stable funding of
current assets, as well as increase capital to support future growth.


23.

The 2012 law calls on the MoF to regulate the costs that AMCs can pass through to
microcredit beneficiaries. This amendment came about during parliamentary
review of the draft
and was not envisaged in the reform strategy. The industry has worked closely with MoF and
BAM to devise a solution. The current proposal envisages an all
-
in cost comprising staff costs,
other operational expenses, funding costs, credit

risk premia (reflecting recent credit losses),
remuneration of capital, plus a margin.
3

The large MFIs have indicated that attracting new
investors in the context of “transformation” hinges on maintaining the prior regulatory regime
and generally the tax
-
free regime of not
-
for
-
profit entities (VAT exemption).


24.

Through “transformation” and other measures, the sector aims in the next ten years to
multiply by four the number of accounts (to 3.2 million), and by five the volume of credit (to 2%
of GDP). If rea
ched, 40
-
50 percent of the population would be served, assuming 4
-
5
beneficiaries per account. Comprehensive financial inclusion would be well within reach given
overlap between these targets and parallel financial inclusion initiatives. The postal bank cr
eated
in 2009 as part of BAM’s inclusion plan already has in excess of 5 million accounts, although it



3

Mof has regulated the
all
-
in
-
cost of credit extended by banks and finance companies since 1997, and limits the
margin to 200 basis points.


6


does not yet offer lending services, but partners with a large MFI to this end. The commercial
banks are also developing inclusion tools (so
-
called “low
income banking”) through partnerships
with telecom or remittance operators, with 3.5 million accounts opened in the recent past.
BAM’s targets under its financial inclusion plan are for 2/3rd of the population formally
accessing banks by 2014, either direc
tly or via intermediaries.


25.

MFI stakeholders are working on other financial inclusion projects that are at various stages
of maturation. However, the design of transformational projects has been hampered by a lack of
knowledge management platforms and inte
grated information systems for analysis and policy
formulation. Stakeholders indicated that much data is available, and with suitable granularity.
However, the data is dispersed and highly unwieldy for analysis, outreach, and policy. A leading
industry adv
ocate that attempts to conduct analysis has been the Centre Mohammed VI pour la
Microfinance Solidaire (CM6). The center was created in 2007 at the initiative of CDG and
banks that control AMCs. Its mission is: training of AMCs, including in the developmen
t of
innovative products; studies and outreach (it hosts the microfinance observatory); market access
and basic management advice for microenterprises; and financial education. The Centre aims to
develop new products and design common technology and inform
ation platforms that could
provide industry
-
wide services, especially to the small AMCs. For example, CM6 and Jaida are
conducting background work to assess the regulatory and technical feasibility of an m
-
banking
platform that would be common to all AMCs.

However, CM6 does not engage in policy
formulation or interface with the regulatory authorities on behalf of the industry.


26.

FNAM as the microfinance industry association has been absent from inclusion initiatives.
The 1999 law provided that all AMCs are m
embers of FNAM to ensure a strong interlocutor for
the authorities in what was then a nascent industry. The mission of FNAM is to represent the
industry in the public arena and with oversight authorities, and spearhead sector
-
wide initiatives.
However, lac
k of resources since inception means that FNAM has no permanent staff, nor
offices, and is thus unable to fulfill its mandate. A critical factor preventing agreement among
FNAM members to develop the institution appears to have been heterogeneous membershi
p,
with large and financially savvy MFIs at odds with small charitable MFIs. For the past several
years, a large commercial bank with an AMC subsidiary has been filling in for FNAM on its own
resources. The bank has also been trying to organize and provide

basic financial services to a
loose grouping of smaller AMCs. FNAM estimates it would need a budget of USD 0.5 million
per year to begin work. A key aim of the proposed project is strengthening FNAM.


27.

Microfinance donors are in various stages of evaluatin
g the impact of their strategies and
planning possible follow
-
on projects. Donor activities are generally coming to a close or have
already been discontinued. In particular, MCA/USAID will close a wide
-
ranging microfinance
project (see table below) that be
gan in 2007, with MAD 42 million in technical assistance to
finish disbursing by June 2013 and MAD 33 million in IT, management information systems and
risk control systems. The size of these projects (compared with the sector’s need for additional
capital

of MAD 5 billion to support MAD 25 billion lending by 2023) suggests that substantial
investments in human capital, processes and systems may come to an end, with no replacement
contemplated at this stage. The Bank has conducted a series of consultations
with microfinance
donors active in Morocco to coordinate efforts and better identify the Bank’s value added. A
brief summary of donor activities is provided below:


7




TA provider

Beneficiaries

Focus

Duration

Funding
Source

IFC

Al
-
Amana,
Fondep

Governance,
Risk
Management

ongoing

MENA MSME
Facility (50%
Cofinance)

MCA

Ardi, Reseau
microfinance
solidaire

Marketing

Diversification of
funding sources
Geographical
coverage strategy

2007
-
13

80% USAID
The rest by
beneficiaries

MCA

All MFIs

Strengthening
internal controls
,
improving
risk
management and

organization of

MFIs

2007
-
13

80% USAID
The rest by
beneficiaries

MCA

RMS, FONDEP
-
MC

Change
management

2007
-
13

80% USAID
The rest by
beneficiaries

MCA

Al AMANA

FONDEP
-
MC

Implementation of

Mobile Banking

Improving
customer
relationship

2007
-
13

80% USAID
The rest by
beneficiaries

GiZ

CM6

Financial
education of
micro
-
entrepreneurs

2011
-
13

GiZ

Banque de
France/AFD

CM6

Microfinance
observatory

2012

AFD

Source: World Bank staff interviews with donors and implementing agencies.


28.

The MoF asked the World Bank to be implementation support agency for the proposed grant
in light of its long
-
standing engagement with the Moroccan authorities on financial inclusi
on
issues. In addition, the Bank hosts the secretariat of the G
-
20 Global Partnership for Financial
Inclusion and develops policy documents with the Financial Inclusion Expert Group for the
GPFI. The Bank also has close links with and hosts CGAP, the leadi
ng policy group on
microfinance. A financial sector DPL planned for end
-
2013 will include an important financial
inclusion pillar and the proposed grant will help inform the design of the DPL.



29.

Morocco has been the recipient of considerable assistance
from the do
nor community (see
section III B
for additional detail
s
) and as such, incorporating core lessons and designing a
project that complements rather than duplicates is of significant importance to the overall success
of the project.



8


C.

Higher
Level Ob
jectives to which the Project C
ontributes

30.

The proposed operation contributes directly to the objectives of the Country Partnership
Strategy (CPS) for Morocco (FY2010
-
2013) discussed by the World Bank’s Board of Executive
Directors on January 26, 2010. The CPS proposes three thematic pillars aligne
d with the
development priorities of the country. The first pillar states that the structural transformation of
the Moroccan economy will require a comprehensive and coordinated set of policies in many
areas, underpinned by a financial sector that better s
erves smaller firms and microenterprises.
The proposed operation is targeting precisely the financial inclusion of this underserved segment
of the Moroccan economy, as well
as women
, which have been amongst the key beneficiaries of
the Moroccan microcredit

sector: Of all microloans issued in Morocco, 55.3% have benefitted
women and 46.9% have benefitted age groups between 30 and 49 years . These objectives are
also central to the MENA Regional Framework for Engagement, discussed by the Board in
February 201
2.


31.

The government’s support for a strong and sustainable microfinance sector has been
endorsed in the
in the First International Sympo
sium on Microfinance in Morocco

held in
October 2012. As this
public
forum
the country’s microfinance strate
gy was introd
uced and
discussed.
Workshops covered the job creation potential of microfinance; integration of global
best practices; from microcredit to microfinance; and funding needs.

In addressing the event, His
Majesty the King endorsed the strategy and emphasized
its key principles: help the informal
sector create jobs; develop

new products and practices to reach the underserved; incorporate best
financial ma
nagement and control practices;
achieve synergies by integrating the objectives of
government policies acros
s regions, types of income generating activities, age or gender. The
King also called on continued support from international entities.




II.

PROJECT DEVELOPMENT
OBJECTIVES


A.

P
roject Development Objective (PDO)

32.

The project objective is to promote access to fi
nance to low income households and
micro
and small enterprises through the promotion of a sustainable and inclusive microfinance
sector. This objective will be achieved through a comprehensive package of analytical work and
technical assistance aimed at su
pporting the enabling environment for microfinance and financial
inclusion, leading to enhanced financial services to wider segments of the population.


Project Beneficiaries



33.

The project’s direct and indirect beneficiaries fall into four categories and reflect key
actors at different institutional levels within the microfinance sector in Morocco. Beneficiaries
are: i) industry regulators and policymakers including BAM and the M
inistry of Finance; ii)
coordinating agencies/service providers including FNAM and the Centre Mohammed VI; iii)
microfinance institutions; iv) low
-
income
individuals, particularly women, and v)
microenterprises and small businesses, including women
-
led fir
ms.


34.

Industry Regulators and Policymakers:

The project will provide technical assistance

9


through diagnostic studies and policy development support on key legal, regulatory, and
governance issues affecting the microfinance sector. Policy support will also
be provided to
promote innovation and regulate new product development such as mobile banking. The project
will also develop a financial inclusion strategy (based on stock
-
taking and impact evaluation
work) and provide assistance in disseminating this stra
tegy accordingly. These activities will
benefit industry regulatory and policymakers, most notably the
BAM

and the Ministry of
Finance, allowing them to develop an enabling environment that promotes efficiency, stable
growth, and access to finance for unde
rserved people in Morocco.


35.

Coordinating Agencies/Service Providers:

This project seeks to provide FNAM the
capacity and strategy needed to become an effective and sustainable industry association.
Technical assistance provided through the project will al
low FNAM to effectively coordinate
information amongst MFIs and engage with policymakers on key sectoral issues. Similarly, the
project also seeks to reinforce service providers within the industry, most notable Center
Mohammed VI, which will benefit from
project assistance to expand their role in financial
education, knowledge management, and research. Together these activities seek to strengthen the
market infrastructure surrounding MFIs through enhancing the capacity of coordinating agencies
and service
providers.


36.

Microfinance
i
nstitutions:

Microfinance institutions (MFIs) will benefit directly from
technical assistance and policy work designed to build common platforms to enhance the
efficiency of the sector. MFIs will benefit from technical assistance designed to mutualize back
office and
other support functions, diversify and expand funding sources, and provide guidance
on transforming to finance companies. MFIs will also benefit from policy guidance on product
innovation, particularly mobile banking. More indirectly, MFIs will benefit thr
ough a
strengthened industry association (FNAM) and an improved regulatory and legal environment
through assistance provided to regulators and policymakers.


37.

Low
-
Income
individuals
,
p
articularly
w
omen:

The project seeks to enhance the ability
of low
-
incom
e individuals, particularly women, to access quality microfinance services. Low
-
income individuals will benefit from more efficient and strengthened MFIs, which can translate
into greater product offerings, expanded geographic reach, and more competitive p
ricing for
clients. They will also benefit from the development of a national financial inclusion strategy
that seeks to address gaps in financial access and usage, particularly for rural poor and the
poorest segments of society who are not served by banks

or microfinance institutions. Low
income individuals will also benefit from financial education training that is prioritized in this
project. Finally, low
-
income individuals will benefit indirectly through more a more effective
legal, regulatory, and gove
rnance environment for the microfinance industry developed through
the project.


38.

Microenterprises and small businesses
, including women
-
led firms
:

Microenterprises
and
small firms

will benefit from the project through a strengthened and more efficient MFI
sector. MFIs will be able to offer microenterprises and
small firms

more innovative product
offerings, more competitive pricing, greater geographical reach, and improved efficiencies when
accessing microcredit. Microenterprises and
small firms

will also be
nefit indirectly from the
policy guidance provided through the project to MFIs transforming into finance companies.

10


Transformation allows MFIs to tap into significantly more diverse funding sources, most notably
equity investments through shareholders. Thi
s additional funding will help MFIs serve
microenterprises that have larger financing needs than average MFI clients but are not yet served
by banks or non
-
bank financial institutions. Additional financing as a result of transforming will
also enhance the
geographic reach through which MFIs can serve
small firms
.


Box:
Inclusion

of Gender in Project Design and Implementation


Microfinance is considered a relatively successful example of gender
-
inclusive development.
Globally 75% of the more than 205
million customers served by MFIs are women, including
82% of the 137.5 million poorest clients (Microcredit Campaign Report 2012). In Morocco 27%
of women have an account at a formal financial institution (Findex 2012) while 43% of women
have taken a loan
(formal or informal) in the past year. Approximately 46% (368,000) of total
MFI clients are women in Morocco. Women are viewed as key beneficiaries for MFIs because
they are often responsible for the well
-
being of the family, and thus seen as a conduit fo
r
conferring income and consumption smoothing benefits to the greatest number of people.
Microfinance also supports females economic empowerment because it creates opportunities for
business expansion and productive investment at the household level, bypas
sing many socio
-
economic barriers that prevent women from participating in the local economy. Qualitative and
quantitative studies (e.g. those from Women’s World Banking) have demonstrated the access to
microfinance services empowers women through an incre
ased likelihood to own assets (land,
houses, etc), greater control over household assets, and an ability to invest and grow in
microbusinesses.


An impact evaluation in Morocco (Duflo et al 2011) estimated the effect of Al Amana opening
60 new branches in
sparsely populated rural areas on credit allocation, consumption, and
business activity, among others. The main effect of improved access to credit was to expand the
scale of existing self
-
employment activities of households, including both keeping livesto
ck and
agricultural activities. The evaluation revealed important limitations to female empowerment in
rural areas in Morocco. The studies found that only a small proportion of women borrow in rural
areas. The study finds that out of those women who borrow
ed there was little change with
regards to bargaining power in the household, decision
-
making, or mobility between villages.


Recognizing the gender
-
specific benefits of microfinance, as well as challenges outlined by the
recent impact evaluation (detailed

above), this project seeks to mainstream gender into all
activities. All diagnostic work completed will incorporate gender analysis. For example, an
assessment of regulatory burdens on MFI growth will include gender
-
specific consideration and
policy sugge
stions. Policy guidance on product development will prioritize how to effectively
innovate for female client segments. The financial literacy activities will include specific
modules on financial literacy of women and girls, recognizing the differences in
asset allocation
and household bargaining power women are subject to. An impact evaluation will be completed
to measure the effect of existing financial literacy efforts (mainly by BAM although also
supported by MFIs) on the economic participation of women
. Connected, women will be placed
at the center of the national financial inclusion strategy, particularly for strategies addressing
female microfinance access in rural areas. Specific gender targets have been included and will be
tracked by the M&E framew
ork.


11




PDO Level Results Indicators



39.

The

performance of the project will be assessed ag
ainst the following indicators
that will
also serve as project milestones:



Increase in number of end
-
beneficiaries of Microfinance Institutions (MFIs)



Reduction in portfolio at risk of MFIs by
5
%



% of adults and women with an account at a formal financial institution



# of beneficiaries receiving financial literacy training



III.

PROJECT DESCRIPTION


40.

The project
aims to support

access to finance to low income households, micro
-

and
small enterprises through the promotion of a sustainable and inclusive microfinance sector. This
objective will be achieved through a comprehensive package of analytical work and technical
assistance
aimed at supporting the enabling environment for microf
inance and financial
inclusion. The program is structured around three core components: (1)
Strengthening the
institutional, legal, regulatory, tax and govern
ance framework for microfinance, (2)
Streng
thening the market infrastructure, product innovation and f
unding sources for
microfinance, and (3)
Integrating Microfinance into a national financial inclusion strategy
. A
brief description of the respective components is included below

(See Annex
2
for d
etailed
project description).


Project Components


Component
1
:
Strengthening

the
institutional,
legal, regulatory, tax
and govern
ance
framework for microfinance (USD
1.9

million
)


41.

This component aims to support activities contributing to the strengthening of the
institutional, legal, regulatory and governance framework of the microfinance sector.
This
component aims to
a) assess and
reinforce the capacity of the National Federation
of Microcredit
Associations of Morocco (FNAM)

and b) support activities contributing to the strengthening of
the legal, regulatory, tax and governance framework of the microfinance sector. This component
will also finance

goods, services, travel, and incre
mental operating costs incurred by
the PMU

in
the implementation and management of the project.


a)

Assess and reinforce the capacity of the National Federation of Microcredit Associations
of Morocco (FNAM):

FNAM is the primary industry association responsibl
e for
development of the microfinance sector in Morocco through policy guidance, MFI
coordination, and engagement with key actors including funders and regulators. The
institutional capacity of FNAM needs to be strengthened to ensure the sector can
effecti
vely restructure, expand, and respond to changing regulatory and market
conditions. The project will assist the FNAM in fulfilling its core mandate of acting as
the industry’s steering body by centralizing information and disseminating studies, acting

12


as a
n intermediate body between state regulating bodies and microfinance institutions,
developing and delivering services that address member’s needs/issues, and providing
support across all levels and in all regions and districts in the Country. FNAM also pla
ys
the role of an intermediary between Microfinance Institutions and key stakeholders of
Microfinance services of Morocco, including the Government, Central Bank, Donors,
Development partners, financiers, investors and clients of microfinance services.


This component will be implemented in two stages: First, a comprehensive diagnostic
will be conducted to assess the current role, funding structure, statutes, governance and
capacity of the FNAM, measuring the gap between its current status and desired fut
ure
role, benchmarking it with other global best practice examples. In a second step, a
technical assistance program will be developed building on the recommendations of this
diagnostic, with the objective of transforming the FNAM into a proactive industry

organization and knowledge hub of the Moroccan microfinance sector.


b)

Strengthening of the legal, regulatory and governance framework of the microfinance
sector:

This
sub
-
component aims to support activities contributing to

the modernization
of the legal,
regulatory

and fiscal

framework for microfinance, as well as the
development of governance and risk management standa
rds for the microcredit sector.
Activities
will

include
, inter alia,

studies

that inform the development of
a tax policy
adapted to the spe
cific needs of the MFIs, review the cap on
borrowings for clients of
MFIs, the regulation of remuneration of credit,
reviews and adapt the solvency and
liquidity ratios of the MFIs, and strengthen the financial reporting and regulatory
oversight of BAM ove
r MFIs. Improving the use of judicial and non
-
judicial (arbitration,
mediation) means for recovering unpaid loans will also be a key activity of the project
under this component.


Component
2
:

Strengthening the market infrastructure
, product innovation

an
d funding
sources for microfinance (USD
1.5

million)



42.

This component focuses on activities aimed at

a)
building common platforms
improving
the efficiency and effectivene
ss of microcredit associations, b) build market infrastructure in
support of microenterprises, and c) promote the strengthening and diversification of funding.


a)

Promoting innovative

common platforms
and
new products for MFIs.
This sub
-
component will suppo
rt the development of
common platforms,
systems

and products
aimed at improving the efficiency and effectiveness of
MFIs
. Activities
will include
studies on the development of new products for the microfinance sector,

the
development of a mobile banking pl
atform for MFIs, which is expected to have a
transformational impact on the sector through the significant reduction of transaction
costs for cash transfers for low income households and microenterprises.
Other
proposed activities
include the development o
f a

training and cert
ification program for
MCA officers.


b)

Building market infrastructure for
micro entrepreneurs
:

This sub
-
component will
support the development of market infrastructure aimed at facilitating microenterprises’

13


access to markets.
Activitie
s supported will include
studies on how microenterprises
can improve the commercialization of their products, and the development of an
electronic platform allowing microenterprises to market their goods
, or the
development of a e
-
project platform
through
which microentrepreneurs can get
information
on

innovative business models
, and supporting the development of a
micro
-
credit mediation function within the framework of BAM’s mediation center
.


c)

Strengthen and diversify funding

sources
:

This
sub
-
component aims to support
activities which would inform policymakers, regulators, supervisors and MFIs on how
the
microfinance sector

can diversify and strengthen its funding sources to ensure its
financial sustainability o
ver the medium and longer term.

P
roposed activities include,
inter alia, studies aimed at assessing
refinancing possibilities to MFIs and amend
existing regulations to allow MFIs tapping into new financial resources
, and
structuring
and designing a guarantee mecha
nism including all stakeh
olders
.

In a second phase,
this sub
-
component would, building on the findings of the aforementioned studies,
finance the design and structuring of mechanisms (eg. stabilization fund, guarantees,
etc.) aimed at

strengthen the
financial sustainability and s
tability of the sector.


Component
3
:
Integrat
ing Microfinance into
a national financial inclusion strategy

(USD
1.5

million)



43.

This component
aims to integrate the national microfinance
roadmap

into a wider,
comprehensive

national financial inclusion
strategy. I
n a first step, this component

aims to
conduct a cross
-
cutting stocktaking exercise of all previous and ongoing activities aimed at
promoting financial inclusion, putting the microfinance sector in a larger financial sector
development context.
This component will also finance the design and roll out of financial
literacy programs for low income households and microenterprises, the key beneficiaries of
microfinance, within the framework of the proposed ‘foundation for financial education’, which
is in the process of being rolled out under the leadership of BAM. T
his
component will also

finance studies and impact evaluations assessing the effectiveness of public policies and private
initiatives aimed at promoting financial inclusion
, as well as
the impact of financial inclusion,
including microfinance, on employment creation, poverty reduction and growth
.


44.

In a second phase, this component aims to build on the findings of the aforementioned
activities to develop a comprehensive national financia
l inclusion strategy, to be developed in a
structured consultative process with all key public and private sector stakeholders, and develop
an action plan with specific objectives and targets to achieve the aims of the strategy, as well as a
clearly define
d M&E framework to measure
progress
.



A.

Project Financing

Lending Instrument


45.

The lending instrument is a Specific Investment Grant in the amount of
US
$
4.9

million,
which will be
financed

through trust fund financing. The project will be submitted for finan
cing
by
the Ministry of Economy and Finance

to the
MENA

Transition Fund.


14




Project Cost and Financing


46.

The project costs and financing are detailed in the table below.


Project Components

Project cost

(US$M)

Trust Fund

Financing

% Financing

Component
1
: Strengthening the
institutional,
legal, regulatory, tax
and governance framework for
microfinance

2.9

1.9

39

Component
2
: Supporting the
market infrastructure, product
innovation and funding sources for
microfinance

1.5

1.5

30.5

Component
3
:
Integrating
Microfinance into a national
financial inclusion strategy

1.5

1.5

30.5

Total Project Costs

Interest During Implementation

Front
-
End Fees

Total Financing Required

5.4



5.4

4.9



4.9




100.0



47.

Retroactive financing will be

sought in accord
ance with the financing trust fund
requirements
for
the bank executed component in
an amount not to exceed
10

percent

of the total
grant amount
incurred prior to the
grant approval
, but on or after
June

31
st
, 2012
.


B.

Lessons Learned and Reflected in the P
ro
je
ct D
esign


48.

The project design is reflective of key lessons from existing projects providing support to
the Moroccan microfinance both inside and outside of the World Bank Group. The project is also
reflective of recent analytical and research work on the

microfinance sector.


49.

Existing Development Projects to the Sector:
The Millennium Challenge Corporation, as
part of a broader $700 million dollar global compact signed between the government of Morocco
and the Kingdom of Morocco, is in its final year of
implementing a $42.6 million dollar financial
services project. Project activities consisted mainly of providing technical assistance to MFIs to
increase institutional capacity. Assistance was provided to nearly every MFI in the sector and
focused on stren
gthening institutional capacity on topics including internal management (human
resources, employee skills training), systems development (MIS, internal audit, risk
management, credit scoring), and market development (new product development, expanding
fund
ing sources) Equally, the International Finance Corporation (IFC) has a robust TA program
with leading MFIs Fondep and Al Amana that has recently focused on streamlining credit
operations.


50.

Lessons leant from these projects are three
-
fold. First, large MFI
s have been relatively
successful at completing TA projects and have relatively robust internal and external procedures.
Thus, a project seeking to provide TA to these MFIs risks duplicating efforts. Any direct TA
provided to MFIs should focus on smaller M
FIs that lack capacity and resources to grow and

15


sustain themselves. Second, there is a need to address the institutional, regulatory, and
governance framework that surrounds the sector for a number of these TA initiatives to prove
successful. For example,

scoping and diagnostic work on mobile banking was completed with a
leading MFI (Fondation
Banque

Populaire
) although currently there lacks a legal and regulatory
framework to support this. Finally, there is a significant need to deepen sectoral reforms th
rough
increase coordination between MFIs and regulators through common platforms that promote
communication and policy dialogue. This can help reduce duplication, help market actors learn
from each other, and promote coordination innovation and growth in t
he sector.


51.

Analytical and Research Work in the Sector:
This project is informed by recent resear
ch
work on the microfinance sector utilizing a variety of approaches, including randomized control
trials, financial diary research, qualitative focus groups
and analytical studies.
4

This
research

has
pointed out
limitations in both impact

and outreach

of microfinance institutions. Impact
evaluations have pointed out that while microcredit access is crucial for low
-
income households
to smooth consumption, manag
e risks, invest productively, and respond to financial shocks, it
often as little impact on poverty alleviation.
5

Similarly, improved data
, for example global
Findex data and Finmark Trust Finscope’s surveys, have pointed out that despite exponential
growth in the microfinance sector, a significant majority of the world’s poor are not served by
formal financial services. For example, recent
survey work completed by the Jameel Latif
Poverty Action Lab (J
-
PAL) pointed to the fact that only 2.5% of those in Morocco living on less
than $2/day borrow from formal credit sources.


52.

T
hese research findings ha
ve
led to two
a shift in industry thinking

away from enhancing
MFIs alone towards an
interest in
developing
the broader financial ecosystem
.
In addition to a
renewed focus on consumers (demand),
this approach
acknowledge
s
the need for effective and
appropriate supporting functions such as credit b
ureaus or payment systems and rules that govern
the system. Ensuring adequate infrastructure and developing a policy and regulatory environment

that enables increased outreach in a way that meets the needs of poorer consumers, has become a
priority for gov
ernments and other stakeholders. The result has been a much more holistic view
of the sector and a more coordinated effort by government and industry to focus on increasing
financial inclusion and ultimately, making microfinance work better for the poor.


53.

This project incorporates this recent research and subsequent shift in industry thinking by
focusing on the institutional change required at both the MFI level as well as the broader market
eco
-
system. Significant project resources are dedicated to diagnos
tic work, stock
-
taking, and
impact evaluation, recognizing the importance of understanding in scientifically rigorous way
current impediments to growth in the microfinance sector. Similarly, the project focuses on
changes to the legal, regulatory, and gove
rnance framework surrounding MFIs. These activities
provide strategic investments in an enabling environment that will allow MFIs and other



4

For example, national level FinMark Trust’s FinScope surveys
www.
finmark
.org.za

and Global Find
ex databases
www.data.
worldbank
.org/data
-
catalog/financial_inclusion
;
Also see, see Financial Access Initiative (FAI)
http://financia
laccess.org/
; Abdul Latif Jameel Poverty Action Lab (J
-
Pal)
http://www.povertyactionlab.org/about
-
j
-
pal
;
Innovations for Poverty Action (IPA)
http://poverty
-
action.org/


5

See: Bauchet, Jonathan et al.
Latest Findings from Randomized Evaluations of Microfinance.
Report. Washington: CGAP,
December 2011.




16


providers to overcome current market bottlenecks (for example, transformation or lending
limits). The project also f
ocuses on building a national financial inclusion strategy, seeking to
coordinate diverse market actors towards promoting financial inclusion of all Moroccans. This
extends significantly beyond the purview of MFIs alone. Finally, the financial literacy
com
ponents in the project help ensure the project supports the direct financial needs of low
-
income Moroccans themselves, embodying the recent research shift towards understanding client
needs.

This project complements
a related

ongoing

regional project withi
n World Bank MENA
FPD
(P144655)
focused on
completing
demand
-
side research and implementing financial
literacy modules across Egypt, Morocco, and Tunisia.


IV.

IMPLEMENTATION

A.

Institutional and Implementation A
rrangements

Institutions

54.

The project is proposed to

be implemented by the Ministry of Finance and Economy. The
Ministry is in charge of the regulation of the microcredit sector: Its competencies include the
regulation of the maximum amount of microcredit (currently capped at 50,000 MAD); the
sector’s accou
nting framework; The maximum interest rate; asset/liability ratios, etc., in
consultation with the Micro
-
Credit Advisory Board (see box). This overarching regulatory role
qualifies the Ministry of Finance and Economy as a well suited implementing agency fo
r this
cross
-
cutting project.


Box: Micro
-
Credit Advisory Board



The micro
-
credit advisory board is consulted on all matters related to the licensing and the development of micro
-
credit associations. It is composed of the following members:




Representatives of the administration;



Representatives of professional associations;



Representatives of the National Federation of Micro
-
credit Associations (FNAM);



a representative of Bank Al
-
Maghrib;



a representative of the Moroccan Banking Association;



a representative of the Moroccan Association of Finance Companies.


The number, operating procedures and terms of appointment of members of the Advisory Board are set by decree.




Implementation of Activities


55.

The MoF will be responsible for the
implementation of all project components, in close
collaboration with FNAM, BAM and Centre Mohamed VI. The MoF

has ultimate responsibility
for the implementation of the project and exercises
oversight

functions

including approval of the
Operations Manual,
work plan, and budgets, and oversight of fiduciary implementation and
progress towards implementation and results.
Detailed implementation arrangements are
available in Annex
3
.


17



56.

The MoF

will
prepare a work plan

describing
activities, timeline, and
budgets for activity
implemen
tation.
The MoF

will also develop an Operations Manual, the development of which
will be subject to World Bank no objection

and will be completed prior to negotiations or
otherwise will constitute a condition of grant effective
ness
. The operations manual

will describe
the policies to be followed for
all project components
. The Operations Manual will be supported
by sub
-
manuals with detailed procedures, instructions, and templates, which will not require
Bank
’s

no objection.


57.

Project Team:

The Project will be implemented by leveraging the
MoF’s

in
-
house team
with a team of local consultants
, managed by a dedicated Project Manager reporting to the
MoF
.

The MoEF will contribute an estimat
ed in
-
kind contribution of USD 1,0
00,000 t
o support the
implementation of this project (USD 400,000 in staff time and USD 100,000 in other expenses
[travel, material, etc.]).


58.

Ad
-
hoc Advisory Committee:

An ad
-
hoc advisory committee comprising
representatives from
BAM, FNAM and Centre Mohamed VI

w
ill be formed to advise the project
based on ad
-
hoc briefings provided by
the MoF

throughout the lifetime of the project
.
The
advisory committee will provide strategic input and guidance throughout project implementation.
The committee will
provide technic
al expertise to project implementation and help ensure the
project is effectively addressing key regulatory, legal, governance, and market development
issues in order to successfully help the industry overcome market bottlenecks.

The committee
also serves
coordination and communication functions, ensuring all partners involved are aware
of progress and key lessons learned across project sub
-
components.


59.

Coordination Activities:
The project will be implemented in coordination with
complementary projects to
take advantage of synergies between different donor
-
funded
activities. The team has undertaken consultations with a number of donors active in private and
financial sector development in Morocco, and this project has strong potential complementarities
with

many planned and ongoing activities, including, among others, the Financial Sector
Strengthening Project of the USAID/Millennium Challenge Corporation (MCC). The
MCA/USAID project began in 2007 and provided MAD 42 million in technical assistance to
MFIs a
nd MAD 33 million in IT, management information systems and risk control systems.
The
MCA/USAID
project will finish disbursing in June of 2013.
This project has been designed
to build off of the USAID/MCA project while minimizing duplication (see paragraph

49 for
additional information).


60.

This project also fits within a broader, long term engagement with the Moroccan
authorities aimed at expanding access to finance for households and MSMEs. The World Bank
has supported crucial
institutional

and legal reform
s through a series of DPLs focusing on
financial inclusion and stability, and promotes enhanced access to financing to MSMEs though
the support of the national partial guarantee mechanism [MSME Development Project
(P129326)], technical assistance in suppor
t of the MSME sector [MENA MSME Facility
(P124341)]
, as well as analytical and programmatic
work to enhance microfinance access
amongst women and youth (P144655).



18


B.

Results Monitoring and E
valuatio
n

61.

The

results framework for the project is centered around
the PDO and specifies PDO
level and intermediate indicators which will be monitored to evaluate project performance
tow
ards the objectives (see Annex X
)
.

Primary responsibility for results monitoring will fall on
MoEF, which will
present an M&E
report
to t
he W
orld
B
ank

on a quarterly

basis.



C.

Sustainability



62.

The sustainability of the project results will be achieved through adoption of policies and
programs informed by the diagnostic and capacity building work completed during the project. A
core focus of the project is to provide industry actors
-

regulators,

government, MFIs, service
providers, and microentrepreneurs


knowledge and capacity building to overcome sectoral
bottlenecks and impediments to growth. These bottlenecks include the institutional capacity of
FNAM, regulatory and legal impediments to MFI

transformation and growth, information
asymmetries preventing access to finance amongst microentrepreneurs, or the lack of a
coordinated strategy on financial inclusion. This project equips industry actors with the capacity
and resources needed to overcom
e such bottlenecks to promote growth and diversification in the
microfinance sector, to bridge microfinance with larger financial inclusion efforts, and to
promote an enabling regulatory and legal environment. These changes lays the foundation for
long
-
ter
m future growth in the sector, particularly as the sector continues to mature and diversify
in terms of products offered, geographic reach, institutional capacity of MFIs, and the
prioritization of financial inclusion.


63.

The project’s sustainability is
further strengthened through the project’s focus on expanding
national financial literacy efforts. Financial literacy equips low
-
income beneficiaries and
microentrepreneurs with the knowledge, skills, and motivation to make effective financial
decisions ac
ross a variety of contexts. This behavior is sustainable in that once financial literacy
skills are taught and adopted, they can be used over and over again across a variety of contexts.
Furthermore, there are many secondary benefits to financial education
. More efficient financial
behavior can increase productive activity, which can promote private
-
sector development, job
creation, and innovation. Financial education also allows for more effective management of
household financial assets, which can help wo
men specifically as they often play dual roles of
income generators and household financial managers.




V.

KEY RISKS AND MITIGA
TION MEASURES

A.

Risk Ratings Summary

Table

Stakeholder Risk

Moderate

Regional Implementing Agency Risk

Moderate

-

Capacity

Moderate

-

Governance

Moderate


19


Project Risk

Moderate

-

Design

Moderate

-

Social and Environmental

Low

-

Program and Donor

Low

-

Delivery Monitoring and Sustainability

Moderate

-

Other (Optional)


Overall Implementation Risk

Moderate

Overall Preparation Risk

Moderate


B.

Overall
Risk
Rating Explanation

64.

The overall risk for this operation is moderate. There is a
moderate

risk associated with
ensuring the implementing agency’s capacity is adequate
, and to ensure effective coordination of
project activities with other key sta
keholders
. Similarly, the project must be designed to promote
the effective participation of industry actors in various project components and to ensure
technical assistance is translated into lasting institutional change.


VI.

APPRAISAL SUMMARY

A.

Economic and
Financial A
nalyses

65.

The Microfinance Development project is a comprehensive, demand
-
driven

approach
aimed at increasing employment and incomes of poor segments of the Moroccan population
which are currently underserved by the Moroccan financial system.
Economic benefits and
outcomes include:




Enhancing
income generating activities and job creation though the
improved access to financing for microenterprises and small firms.



Positive

spillover effects to the overall
private sector by

enhancing
the
compet
itiveness of microenterprises and small firms
.



Substantial growth in
revenue and employment for microenterprises and
small firms though an improved market infrastructure
.



Fiscal return for the government from taxation on incremental revenues,
income and em
ployment.


66.

The outcomes of capacity changes, incremental revenues, and empl
oyment effects
generated by this project
would, as
seen

in

other

similar
projects,
be o
nly visible at the
completion
.
The project incorporates an M&
E framework that aims to measure the impact of this
project beyond its termination, as well as the impact of other public policies on employment
generation, poverty reduction and growth.



20


B.

Technical


67.

The project is appropriate to
Morocco’s

needs and te
chni
cally viable. It focuses on
key
economic development priorities in the Government of
Morocco’s economic and social
development strategy
: The promotion of very small enterprises and the microfinance sector has
been endorsed by the highest levels of governme
nt, most recently during the national
microfinance symposium held in October 2012.

The design is informed by lessons learned from
previous
W
orld Bank
projects and other studies on the impact of the microfinance sector on