The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) @#&OPS~Doctype~OPS^blank@pidconcoverpage#doctemplate Project Information Document (PID) Concept Stage | Date Prepared/Updated: 23-Apr-2024 | Report No: PID209 The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) @#&OPS~Doctype~OPS^dynamics@pidbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Operation ID Operation Name WESTERN AND CENTRAL P181251 Financial Inclusion for Households and MSMEs in the AFRICA WAEMU Estimated Appraisal Date Estimated Approval Date Practice Area (Lead) 15-Oct-2024 12-Dec-2024 Finance, Competitiveness and Innovation Financing Instrument Borrower(s) Implementing Agency Investment Project Banque Centrale des Etats Banque Centrale des Etats Financing (IPF) de l’Afrique d’Ouest de l’Afrique d’Ouest (BCEAO) , West African (BCEAO), West African Development Bank/ Development Bank/ Banque Ouest Africaine de Banque Ouest Africaine de Développement (BOAD) Développement (BOAD) Proposed Development Objective(s) To increase financial inclusion for households and MSMEs in the WAEMU region, including for green investments @#&OPS~Doctype~OPS^dynamics@pidprojectfinancing#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? No Is this project Private Capital Enabling (PCE)? Yes SUMMARY Total Operation Cost 300.00 Total Financing 300.00 of which IBRD/IDA 300.00 Financing Gap 0.00 DETAILS World Bank Group Financing Page 1 The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) International Development Association (IDA) 300.00 IDA Credit 300.00 @#&OPS~Doctype~OPS^dynamics@envsocriskclassification#doctemplate Environmental and Social Risk Classification Concept Review Decision Moderate The review did authorize the preparation to continue Other Decision (as needed) B. Introduction and Context Country Context The WAEMU financial system is dominated by banks, which had total assets of CFAF 64 trillion—or 58 percent of regional GDP—at end-2022. The banking sector accounts for around 72 percent of the financial system (based on 2020 data), while other financial institutions (microfinance, insurance, and pension funds, as well as securities custodians) account for around 28 percent of the financial system’s assets. Of the 155 credit institutions operating in the WAEMU at end-2022, 132 were banks. Their assets’ geographic concentration is broadly in line with that of economic activity, with over half held by credit institutions in the WAEMU two largest economies, Côte d’Ivoire and Senegal (34 percent and 19 percent, respectively). Regional banking groups (34) have emerged as key players, holding nearly 85 percent of banking sector assets. The other players are smaller unaffiliated domestic private and public banks, accounting for four-fifths and one-fifth of banks’ capital respectively. The 13 banks which are majority publicly owned (with public ownership over 50 percent of total capital), hold 10 percent of banking assets and 13 percent of banking capital in the WAEMU. Sectoral and Institutional Context Over the past several years, the WAEMU region has established a solid basis for its regional payment system, which has contributed to the increase in electronic payments and financial account ownership in the region. These efforts have been underpinned by the Regional Financial Inclusion Strategy developed by the BCEAO and the national Financial Inclusion Strategies adopted in all eight WAEMU member countries1. The BCEAO is in the process of developing a regional platform for the interoperability of e-money transactions and the implementation of fast payments. The BCEAO has also developed a solid regulatory framework for the issuance of electronic money, which enabled marked progress in access to and usage of e-money wallets. The recent update to the banking law also enabled the regulation of new payments services providers. This was followed by a new instruction issued in January 2024 on payment services which covers the payment services providers and sets out allowed activities, capital requirements, and reporting and governance standards. The WAEMU region now boasts 40 e-money initiatives, including 13 e-money licenses to the private sector and 27 partnerships between banks and telecommunications operators or technical providers. The BCEAO created a Fintech Knowledge and Monitoring 1 Annex IV presents the Regional Financial Inclusion Strategy Pillars, Progress, Donor Support, and Status of National Strategies Page 2 The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) Office for the exchange of information between the BCEAO and Fintechs and is working on operationalizing the recently established Financial Innovation Lab to promote the development of innovative products and services. Account Ownership According to Findex, between 2017 and 2021, account ownership in the WAEMU region increased by 4% to reach 41% of adults, a modest increase ,though the account ownership had stood at 19% in 2014. This is still less than the SSA average and peers and with still untapped potential for further increase2. While financial inclusion in WAEMU has improved (largely through mobile money) it remains below the Sub-Saharan average, which is at 55%. East Africa boasts an even higher rate of 57.75 % of adults with account ownership. Across the WAEMU region, 26 million unbanked adults have a mobile phone, meaning that they already have one of the necessary components of mobile money account ownership. While account ownership across the WAEMU region has been increasing since 2014, gender and youth gaps in account ownership have persisted, and in some cases, increased. Between 2014 and 2021, the account ownership gap between men and women in the WAEMU region increased from 8% in 2014 to 13% in 2021. This divide is largely driven by unequal increases in mobile money account ownership. The gender gap at financial institutions has remained at about 5% between 2014 and 2021 but the mobile money account ownership gap has tripled from 4% to 12% in 2021. Despite these gender gaps, there has been progress in female account ownership, with overall account ownership increasing from 15% in 2014 to 35% in 2021 and mobile money account ownership increasing from 7% to 24% in the same time period. Account usage Digital payments have been increasing since 2014 with 37% of adults in the WAEMU region making or receiving digital payments in 2021. Like with account ownership, there are usage gaps between men and women and younger and older adults. In 2021, 32% of women made or received a digital payment compared with 44% of men. The age gap is slightly smaller than the gender gap, with 32% of younger adults making or receiving a digital payment compared with 40% of older adults. Access to Finance for SMEs Access to financing continues to be a significant hurdle for private sector development in WAEMU, with the financial sector failing to adequately support businesses, in particular micro, small and medium enterprises (MSMEs) which represent between 80 percent and 95 percent of companies identified in the region. Only 24.4 percent of companies in the region have a loan or a line of credit, with formal borrowing rates notably low across countries, ranging from 10 percent in Burkina Faso to 2.8 percent in Côte d'Ivoire. Although banks are the principal source of finance for MSMEs, only 16 percent of bank lending goes to small enterprises, compared to 35 percent in Morocco for instance. This situation is compounded by high rates of informal borrowing, underscoring a reliance on informal financial networks that is higher than in the East African and non-WAEMU West African region. According to the MSME Finance Gap Report3, the MSME finance gap in WAEMU countries and its proportion to GDP stands as follows; Benin (US$0.689 billion, 8% of GDP) , Burkina Faso (US$1. 6 billion, 15% of GDP), Cote D’Ivoire (US$2.35 billion, 7% of GDP), Guinea Bissau (US$0.13 billion, 12%), Mali 2 The financial inclusion landscape analysis draws from the Findex 2021-2022 Data, unless otherwise referred to. The Findex data does not cover Guinea Bissau. 3 https://www.smefinanceforum.org/data-sites/msme-finance-gap Page 3 The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) (US$0.37 billion, 3% of GDP), Niger (US$3.12 billion, 44% of GDP), Senegal (US$0.92 billion, 7% of GDP), Togo (US$0.39 billion , 10% of GDP ). Relationship to CPF The project is aligned with the WB Africa Regional Integration and Cooperation Assistance Strategy (FY21–FY23) and will directly support the objectives of the Pillar II (Trade and Market Development). In particular the project will support the financial market integration theme of this pillar given the project focus on digital financial services and payments, promoting financial inclusion at scale, and development of long-term financial markets for SMEs. The project will also contribute to Pillar V (Resilience), through its support to building firm resilience and adaptation through promoting climate finance for SMEs. It will further contribute to Pillar I (Building Regional Connectivity), which aims at advancing sustainable business growth and job creation, through promoting access to finance for SMEs. The project will also contribute to the AFW West and Central African Strategy (2021-2025) goals for creating more and better jobs, empower women , and ramp up climate resilience. The project also supports the World Bank Strategy for Fragility, Conflict, and Violence 2020-2025). C. Proposed Development Objective(s) To increase financial inclusion for households and MSMEs in the WAEMU region, including for green investments. Key Results (From PCN) The progress towards achieving the PDO would be monitored through the following proposed indicators: • Increased number of accounts, with gender specific targets • Increased usage of digital financial services, with gender specific targets* • Decrease of the percentage of DFS users who faced risks • Number of MSMEs accessing financing for the first time, with gender and climate specific targets • Amount of green financing lent to MSMEs Amount of private capital mobilized by beneficiary MSMEs, including for climate adaptation and mitigation financing D. Concept Description The project development objective is to promote financial inclusion of households and SMEs in WAEMU region by facilitating access to credit and developing digital financial services. To that end, the project’s intervention support three components, the first of which would be with BCEAO, the second with BOAD, and the third would be for project implementation support. The first component would comprise funding through BCEAO for an Electronic Payment Acceptance (EPA) regional fund and support for regional initiatives such as the BCEAO Innovation Lab, and a regional DFS Hackathon (to promote innovative technology to enable financial inclusion while reinforcing consumer protection). The second component would finance a Line of Credit (LoC) through BOAD for longer-term loans, to be complemented (subject to a demand gap analysis ) with Partial Portfolio Credit Guarantee (PPCG), and Support for SME Portfolio Securitization to facilitate access to finance to SMEs. @#&OPS~Doctype~OPS^dynamics@legalpolicyandscreeningrisk#doctemplate Page 4 The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) Legal Operational Policies Triggered? Last approved Current Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Mazen Bouri Lead Financial Sector Specialist Safia Hachicha Ep Ben Abdallah Senior Financial Sector Specialist Borrower/Client/Recipient Banque Centrale des Etats de l’Afrique d’Ouest (BCEAO) Yaye Aminata SECK MBOW Direction Générale de la Stabilite Financière et du Financement des Economies yasmbow@bceao.int West African Development Bank/ Banque Ouest Africaine de Développement (BOAD) Corell KPOMALEGNI Manager, Institutional Relations – Americas and the Far East, Institutional Relations Department ckpomalegni@Boad.org Implementing Agencies Page 5 The World Bank Financial Inclusion and SME Finance in the WAEMU(P181251) Banque Centrale des Etats de l’Afrique d’Ouest (BCEAO) Yaye Aminata SECK MBOW MBOW Direction Générale de la Stabilite Financière et du Financement des Economies yasmbow@bceao.int West African Development Bank/ Banque Ouest Africaine de Développement (BOAD) Corell KPOMALEGNI Manager ,International Relations ckpomalegni@Boad.org FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects @#&OPS~Doctype~OPS^dynamics@approval#doctemplate APPROVAL Task Team Leader(s): Mazen Bouri, Safia Hachicha Ep Ben Abdallah Approved By Roselyne CH Massanvi Akibode Practice Manager/Manager: 22-Apr-2024 Mabudu Country Director: Boutheina Guermazi 23-Apr-2024 Page 6