The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) Project Information Document (PID) Concept Stage | Date Prepared/Updated: 22-Dec-2021 | Report No: PIDC31507 Dec 09, 2021 Page 1 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Bangladesh P174678 Supporting Access to Finance for MSMEs Recovery and Growth (P174678) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) SOUTH ASIA Feb 21, 2022 May 16, 2022 Finance, Competitiveness and Innovation Financing Instrument Borrower(s) Implementing Agency Investment Project Financing PEOPLE’S REPUBLIC OF Bangladesh Bank BANGLADESH Proposed Development Objective(s) The objective of the project is to facilitate access to finance for MSMEs post-COVID-19 recovery and growth PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 300.00 Total Financing 300.00 of which IBRD/IDA 300.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 300.00 IDA Credit 300.00 Environmental and Social Risk Classification Concept Review Decision Dec 09, 2021 Page 2 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) Moderate Track II-The review did authorize the preparation to continue Other Decision (as needed) B. Introduction and Context 1. Bangladesh has achieved significant social and economic transformation in recent decades and reached lower middle-income status in 2015. Annual growth of gross domestic product (GDP) averaged close to 6 percent since 2000. Strong labor market gains contributed to a sharp decline in poverty, with the national poverty rate falling from 48.9 to 24.5 percent between 2000 and 2016, with extreme poverty declining from 34.3 to 13.0 percent during this period.1 However, the pace of poverty reduction slowed in recent years even as growth accelerated, particularly in urban areas and in the west of the country. Similarly, the progress on shared prosperity slowed between 2010 and 2016 after a decade of improvements, with annual consumption growth of the bottom 40 percent trailing that of the overall population (1.2 versus 1.6 percent). 2. The COVID-19 pandemic caused major disruptions to economic activity in FY202 and FY21. The initial phase of the pandemic in early 2020 with country-wide lockdowns and closed borders disrupted both the supply of intermediate goods from China and manufacturing output, resulting in sharp decline of exports, especially of ready-made garments (RMG). Although the authorities introduced various support measures, many sectors had to shed labor force. Real GDP growth decelerated to 3.5 percent in FY20. Early signs of a recovery emerged in the first half of FY21 after movement restrictions were progressively lifted and supply chains were recovering. RMG export orders were renewed, that allowed to increase merchandise exports by 15.4 percent. Private consumption increased, underpinned by a recovery in labor income and robust remittance inflows in FY21. Balance of payments (BoP) surplus increased in FY21 and inflation remained benign at 5.4 percent in July 2021. 3. The pandemic has jeopardized gains in poverty reduction and disproportionately hit micro, small and medium enterprises (MSMEs), with economic vulnerabilities on the rise. Poverty increased from 13.9 percent in FY19 to an estimated 18.1 percent in FY203. Surveys throughout the pandemic showed sharp income losses to businesses and rising food insecurity. The Bangladesh Business Pulse Survey by the World Bank Group (WBG), based on interviews of 500 MSMEs in July 2020, showed that 94 percent of businesses experienced sharp drops in sales, 83 percent of firms made losses and 33 percent of firms were not able to pay installments on existing loans. A staggering 37 percent of Bangladesh’s workers lost their jobs, temporarily or permanently. The World Bank’s COVID-19 household monitoring survey, conducted in June/July 2020 in poor areas in Dhaka and Chittagong, showed that about 23 percent of the poor stopped actively working after the national lockdown from March 25, 2020. Of the surveyed people, 80 percent of wage workers and 94 percent of own-account workers were earning lower than usual. The more recent survey shows improvements in these indicators and recovery to the pre-COVID level. 4. To address the COVID-19 crisis, the Government of Bangladesh (GoB) introduced a package of various stimulus measures, with most of the implementation burden transferred to the financial sector. These measures focused on protecting the poor by expanding coverage and levels of existing safety nets, protecting workers impacted through potential job loss, introducing debt and tax payment moratorium, streamlining subsidies transfer, working migrants and wage workers (in particular, RMG employees) access to electronic payments, and providing working capital to firms to 1 Household Income and Expenditure Surveys, 2000/01 and 2016/17. 2 The fiscal year in Bangladesh starts on July 1 similarly to the WB. 3 Using the international poverty rate ($1.9 in 2011 PPP) Dec 09, 2021 Page 3 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) support their immediate needs and retain jobs. Roughly three quarters of the stimulus program were channeled as bank credit to firms, with interest rate subsidies for eligible beneficiaries/sectors borne by the government and additional liquidity provided by BB under various refinancing programs. 5. The economy is expected to continue gradual recovery although downside risks persist. GDP growth is forecast to reach 6.4 percent in FY22 and accelerate to 6.9 percent in FY23. The industrial sector is expected to benefit from increased external demand. Construction activity should also benefit from increased public investment and a more gradual return in private investment as uncertainty assuages. Further progress in vaccination efforts and the lifting of mobility restrictions would support service sector growth. This outlook, however, faces many downside risks. A resurgence in COVID-19 infections could lead to the reimposition of disruptive lockdown measures. Cost overruns and delays in tax reforms could undermine public investment and COVID-19 related expenditure. The realization of financial sector risks triggered by growing non-performing loans (NPLs) and banking sector losses (currently hidden by regulatory relaxation and weak enforcement) could exert additional pressure on fiscal and external balances. Slower global economic recovery and the reduced employment of Bangladesh’s overseas workforce could undermine remittances’ inflows and put additional pressures on the country’s external balance, longer-term growth and domestic jobs creation. 6. Bangladesh is extremely vulnerable to the effects of climate change. The Global Climate Risk Index ranks Bangladesh as the world’s seventh most affected country over the period 2000-2019.4 Rising temperatures leading to more intense and unpredictable rainfalls during the monsoon season and a higher probability of catastrophic cyclones are expected to result in increased tidal inundation. It is estimated that a one-meter rise in sea levels would submerge 18 percent of arable land in coastal areas.5 Recent studies estimate that by 2050 Bangladesh could have 13.3 million internal climate migrants.6 Observed and projected climate change impacts pose significant risks to the financial and private sector, especially MSMEs, due to high risks of losing physical assets from the increased frequency and severity of catastrophic events. MSMEs, particularly in the southern part of Bangladesh, often incur loss of productive assets from floods, cyclones and other climate-related events. Addressing climate risks is increasingly urgent to ensure sustainable economic development and financial stability of the country. 7. Bangladesh’s financial sector is dominated by banks against a backdrop of underdeveloped non-bank financial sector and a nascent capital market. Bank lending is the main engine of growth, as banks are the main source of finance for the productive sectors. The banking sector comprises 61 licensed banks, including nine SOBs7, 43 private commercial banks (PCBs, including 33 conventional banks and 10 Islamic Shariah banks) and nine foreign commercial banks (FCBs). Total banking sector assets equaled US$214 billion (BDT 18,406 billion) or 67 percent of GDP at the end of 2020. Insurance sector penetration is below 2 percent of GDP, with contractual savings market dominated and distorted by the National Savings Certificates (NSC) Scheme8. The capital market remains shallow and mainly equity driven, with market capitalization equal to US$89.8 billion or 27.7 percent of GDP at the end of 2020. Distortionary policies9 impede access to 4 Germanwatch (2021) Global Climate Risk Index 2021. 5 UNFCC (2007) United Nations Framework Convention on Climate Change. 6 World Bank (2018) Groundswell: Preparing for Internal Climate Migration. 7 Nine SOBs include six commercial banks (SCBs) and three development specialized banks (SDBs). SOBs comprise 21 percent of banking sector assets and nearly 50 percent of total NPLs in the banking sector. SOBs have the largest rural branch network, although their share in MSME lending remains negligible. 8 The NSC were issued at above market rates, therefore absorbing significant amount of savings in the country; it has four main distortionary impacts: (i) it offers yield on securities at above market rates, therefore sucking longer term savings and making it more expensive for corporates and banks to raise funds from the market, including capital market; (ii) this results in lower liquidity and higher yield expectation of investors in the capital market and therefore hampers development of capital market; (iii) it increases fiscal costs and moral hazard, and (iv) undermine mobilization of longer term savings by banks and therefore hampers development of longer-term lending by banks. . 9 For example, usage of National Savings Scheme (NSS) for collection of longer-term savings at above the market rates. The government recently issued the decision to reduce NSS rates. Some other distortionary policies (e.g. interest rate caps, NPL definition) are more disruptive for the lending market and impact MSME finance. The WB is actively engaged with the authorities (under DPC and technical assistance dialogue) in discussing the exit the regulatory forbearance strategy and advance these important reforms. Dec 09, 2021 Page 4 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) longer term finance for lenders and the productive sector and hamper enterprise capital investments and modernization, thus undermining productivity growth and export competitiveness. 8. The country entered the COVID-19 pandemic with significant pre-existing financial sector vulnerabilities, while distortionary public policies further weaken banks’ financial performance and new lending. The aggregate banking sector capital adequacy ratio (CAR) remained largely unchanged in the past two years at 11.6 percent as of June 2021, supported by relaxed regulatory requirements10. However, at least 10 out of 61 banks (including SOBs) failed to meet the BB CAR requirements in 2020 and before. Weak corporate governance, related parties lending and poor banks’ risks management practices result in high level of NPLs, especially at SOBs, while deviation from international standards in recognition and loss provisioning, regulatory enforcement, and resolution of NPLs lead to their systematic underreporting. Following the BB May 2019 regulation on NPL restructuring, reported NPLs dropped from 11.99 percent of total loans in September 2019 to 9.3 percent in December 2019, and further declined to 8.2 percent in June 2021. As banks provide regulatory reports according to the relaxed regulatory requirements introduced by BB in April 2020 in response to Covid- 19, the numbers do not fully reflect the rising credit risks in the financial sector. In parallel, banks financial returns are declining due to interest rate caps introduced in April 2020. As a result, the banking sector aggregate net interest margin (NIM) dropped from 3.12 percent in 2019 to 2.48 percent in June 2021 and is one of the lowest in the region. Declining margin and high NPLs weaken banks’ capital formation capacity and hamper new lending. 9. Despite significant BB liquidity support to banks under the 2020 stimulus package, credit growth moderated in parallel to banks’ increased investments into risk-free government securities and public sector lending. Despite accommodative monetary policy throughout 2020-2021, lenders became more risk averse, especially in lending to MSMEs, due to rising credit risks and lower returns. While MSME lending increased by 9.6 percent yoy in June 2021, compared to 6.5 percent MSME credit growth in 2020 and 7.56 percent growth in 2019, banks’ credit to larger borrowers and the public sector grew even faster. Although the authorities have launched comprehensive stimulus program to stimulate banks’ lending to MSMEs, including interest rate subsidies, debt payment moratorium and tax payment deferrals, partial credit guarantee program for micro and cottage enterprises, liquidity support, the total new lending to MSMEs was lower than expected. Moreover, private sector credit growth further moderated to 8.77 percent in September 2021 compared to 9.48 percent in September 202011, suggesting the need for revising the impact of the proposed stimulus measures and implementing additional reforms to address risks in lending to MSMEs, especially in the light of economic uncertainty during the continued pandemic and growing financial stress and debt burden of firms. Although deposit growth outpaced credit growth, banks’ excess liquidity was channeled into the lower-risk government securities, as credit risks in lending to the real sector, especially MSMEs, increased. 10. MSMEs are the backbone of the country’s economy and one of the major sources of jobs generation in Bangladesh, but their growth is hindered by limited access to finance. MSMEs are key drivers of the national economy in Bangladesh. They account for 25 percent to the country’s GDP, about 45 percent of manufacturing value addition, about 80 percent of industrial employment, about 90 percent of total industrial units, and about 25 percent of the labor force12. The MSMEs total contribution to export earnings varies from 75 percent to 80 percent. According to the Economic Census and Enterprise Survey13, some 99 percent of all non-farm enterprises fall into the micro and small enterprises categories, providing employment to 20.3 million Bangladeshi workers. There are more than 6 million of individual entrepreneurs, micro and cottage enterprise, and nearly 80,000 small and medium enterprises (of which 93.6 percent are small, and 6.4 percent are medium size firms). Almost half of MSMEs reported that their development and growth being fully or partially 10 As part of Covid-19 response, BB allowed banks not to change loan classification and not to provisions for NPLs (first, during the payment moratorium during April- December 2020, and after January 1, 2021 for loans with at least 20-25 percent debt servicing by the clients, along with additional loan restructuring. 11 Major Economic Indicators Monthly update -October 2021, Bangladesh Bank 12 Government of Bangladesh Planning Division, 2013 13 Bangladesh Enterprise Survey, 2013, World Bank, https://microdata.worldbank.org/index.php/catalog/1929 Dec 09, 2021 Page 5 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) hindered in their access to credit, according to firm-level surveys from 201914. According to a survey of over 5,000 enterprises by BRAC Bank in June 2020, almost two-thirds of MSMEs were able to resume operations after the lockdown was lifted in June 2020. However, many MSME indicated severe liquidity constraints and insufficient working capital inflow necessary to resume normal operations due to (i) steep fall in sales (-44 percent in June 2020), (ii) difficulties in collecting receivables (only 15 percent of MSMEs were able to collect more than half of amount owed to them), and (iii) high reliance on personal savings (“reserve funds�) to meet current obligations. 11. Access to finance for MSMEs (especially women-led MSMEs) was already one of the main impediments to firms’ growth, but COVID-19 has made it more difficult for MSMEs to survive and grow. A pre-Covid MSME financing gap was estimated by IFC at TK237 billion or $2.8 billion equivalent15. This problem was especially acute for smaller and women MSMEs, 60 percent of which have no access to formal finance due to limited collateral16. Access to finance was the top obstacle17 to MSME growth and innovation in Bangladesh. With the majority of Bangladesh MSMEs concentrated in trade, services and manufacturing, Covid-19 lockdowns and contraction of domestic and international trade increased MSMEs liquidity problems. While the pandemic is impacting businesses of all sizes, micro, small, and medium enterprises (MSMEs) are hit especially hard due to pre-existing vulnerabilities and their lower resilience. Moratorium on debt and tax payments introduced by the authorities in April 2020 helped defer firms’ obligations to early 2021 or even end 2021 thanks to additional accommodative rules of Bangladesh Bank that allowed banks not to provision and restructure loans with client’s payments up to 25 percent of loan due amount. However, the MSMEs’ debt servicing burden grew during the pandemic as cash constrained firms had to borrow to pay salaries and cover business losses. Financial distress and economic uncertainty triggered multiple businesses’ closure, rising unemployment and poverty18. 12. MSMEs post-Covid MSME recovery and building back better will depend on continued robust reforms aimed at improving access of MSMEs to finance and markets. MSMEs future survival and recovery will depend on, among other things such as skills, access to markets and removal of trade barriers, continued access to finance, including working capital and investment finance for business modernization (including digitalization of processes, development of new products and distribution channels, investments in energy efficiency and technologies for optimization of costs). This is even more true for women led MSMEs. In a WBG survey19 in October 2021, most of the banks reported that they were facing increasing demand for both working capital and investment loans from MSME borrowers in the past year and expect a loan growth of over 15 percent per annum on average in the future. At the same time, MSME access to finance became even more difficult due to rising credit risks on the back of weaker financials and poor collateral of MSMEs, while traditional insurance and risk sharing (such as partial credit guarantee20) instruments remain underdeveloped in Bangladesh. Growing climate change risks and increased frequency of catastrophic events make it even more challenging for lenders to secure sufficient collateral, as physical/tangible assets (real estate, infrastructure, equipment) are highly 14 Gu, Yunfan; Nayyar, Gaurav; Sharma, Siddharth. 2021. Gearing Up for the Future of Manufacturing in Bangladesh. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/35879 License: CC BY 3.0 IGO. 15 https://www.worldbank.org/en/topic/smefinance 16 https://www.worldbank.org/en/topic/smefinance 17 “Poor infrastructure and electricity are the main constraints to start up new SME. Access to finance is the second major proble m to SMEs’ development�. Constraints to small and medium-sized enterprises development in Bangladesh: Results from a cross-sectional study, Md. Shahidul Islam, Md. Faruk Hossain, The European Journal of Applied Economics, October 2018 18Growth, poverty & inequality implications of Covid-19, June 2020, Center for Policy Dialogue, https://cpd.org.bd/growth-poverty-and-inequality-implications-of-covid- 19 19 In October 2021, as part of this project preparation, the WB conducted a survey of 36 banks and 7 non-bank lenders to assess the MSME credit environment and short to medium term outlook. 20 In December 2020 as part of the Covid response stimulus package, BB launched unfunded, partial credit guarantee scheme with 70 percent coverage for government- subsidized loans to micro and cottage enterprises. As of December 2021, BB signed agreements with 31 lenders, but only six of them (four banks and two NBFIs) have registered a total of 274 loans for total value of US$3.5 million in guarantees. The implementation of the program is constrained by (i) loan-by-loan approval requirement, (ii) linkage to government subsidized lending, and (iii) weak BB institutional capacity (including absence of respective skills, technologies and processes for guarantees’ issue, monitoring, risks management and payout). Dec 09, 2021 Page 6 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) exposed to environment/climate change risks, while the market for non-tangible and movable assets is underdeveloped21. Therefore, creating enabling framework for expanding financial inclusion and strengthening financial and credit market infrastructure, including through partial credit guarantee schemes (PCGS), is essential for expanding access to finance for MSMEs and supporting their post-Covid survival and revival. 13. This Project is aligned with the Country Partnership Framework (CPF) FY16-20 and is designed to address two main challenges. First, it aims to facilitate access to working capital and investment finance for MSMEs to both support their post-Covid recovery and jobs retention, as well as modernize business processes for higher productivity and resilience to future climate change and catastrophic events, including for women-led businesses. Second, it supports mitigation of risks in the financial sector through developing an MSME partial credit guarantee scheme (PCGS) in line with international standards and contributes to ensuring financial and macro-economic stability as a major prerequisite for the country’s continued sustainable growth, post-COVID-19 recovery and exit from the status of least-developed countries (LDC). Development of a more viable, innovative and green inclusive MSME sector supported by deeper, more resilient private financial intermediation market, sector would be key to achieving the country’s longer-term development goals and reducing poverty. 14. The project is fully consistent with the WBG Covid-19 crisis response agenda, specifically, Pillar 3 that focuses on ensuring sustainable business growth and job creation, as well as Pillar 2 that supports restructuring and resilient recovery activities. It is expected that implementation of a viable MSME PCGS along with strengthening enabling financial market infrastructure for improved financial access and inclusion, will help incentivize new lending to existing and new, underbanked MSMEs, especially women-led MSMEs, thus supporting their survival and jobs retention. In parallel, through training of lenders and MSMEs on environment, social and climate risks assessment and management the project will contribute both to preparing MSMEs and participating financial institutions (PFIs) to better understand and manage environment, social and climate change related risks, as well as incentivizing lenders and MSMEs to invest into energy efficiency, alternative energy and climate change related projects (with respective targets established in the results framework) to support MSMEs’ post-Covid recovery, sustainability and growth. 15. The project also responds to the Government 2021-2025 economic reform strategy. The Government economic reform program for 2021-2025 “Promoting prosperity and fostering inclusiveness� centers on reforms aimed at sustaining existing jobs and fostering new business development and growth to reduce unemployment and poverty aggravated by the pandemic. The country’s priorities to exit LDC status and ensure higher and sustainable GDP and export growth in the medium to longer term require transformational changes in the private and financial sector, resulting in increasing role of MSME in economy from the current 23 percent of GDP, as well as building more resilient and inclusive financial sector. As the authorities are keen to rely upon private financial sector investments to finance MSME growth and, creation of a viable credit guarantee scheme for MSME financing is as one of the current GoB’s priorities, to be supported by the WBG lending and knowledge transfer under this project. C. Proposed Development Objective(s) The objective of the project is to facilitate access to finance for MSMEs post-COVID-19 recovery and growth The PDO progress will be measured by the following proposed outcome level indicators: 1) An independent, well governed, funded and staffed Credit Guarantee Institution (CGI) is created and fully operational in line with best practice 2) Number of MSMEs, including women-led MSMEs, that received PFI financing covered by the MSME PCGS 21 The draft Secured Transaction Act is being revised by the Ministry of Finance and is expected to be submitted to Parliament in 2022 (it is one of the WB DPC2 triggers). Dec 09, 2021 Page 7 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) 3) Cumulative value of MSME loans issued by PFIs – participants of MSME PCGS 4) Jobs created/retained through improved access to MSME finance under the MSME PCGS 16. The proposed corporate results indicators to be included are (i) Number of women-led MSMEs that received loans covered by MSME PCGS, (ii) Number of PFIs and MSMEs staff trained on Environmental and Social Risk Management; (iii) Number of PFIs and MSMEs staff trained on Climate Change; (iv) Share of PCGS-covered MSME loans contributing to climate change risk mitigation and adaptation; (v) Share of PCGS-covered MSME loans issued by PFIs for investments into energy efficiency and alternative energy, and (vi) private capital mobilization (PCM). These will be included into the results framework as output level indicators. D. Concept Description 17. The project will support the Government of Bangladesh in fostering access to finance for MSMEs’ post -Covid recovery and growth through creation and implementation of a viable MSME partial credit guarantee scheme (PCGS) . The project will comprise the following components: # Component/million SDR US$ equivalent 1 Component 1. Creating and Capitalizing a MSME PCGS (Performance Based Conditions (PBCs), 3 192.8 270 tranches) 2 Component 2. Strengthening MSME PCGS institutional capacity and financial market infrastructure 20 28 3 Component 3. Project management and monitoring 1.43 2 4 Contingent Emergency Response Component (CERC)* TOTAL 215 300 18. The project will help Bangladesh to: • Component 1: in line with agreed performance-based conditions (PBCs) as specified in Annex 2, (a)develop, capitalize, and implement a viable MSME PCGS, (b)establish and fully operationalize an independent CGI according to the World Bank 2015 Principles for Effective public SME guarantee schemes, and (c) establish effective BB regulatory oversight over CGI/PCGS. The MSME PCGS will provide a portfolio-based partial guarantee with initial 70 percent coverage per MSME loan (see MSME PCGS details in Annex 3) for the new MSME lending by a PFI in line with the WB ESD framework. It is expected that MSME PCGS covered MSME lending activities will be implemented throughout the country encompassing urban and rural areas without limits and thresholds for specific sectors. • Component 2: strengthen institutional capacity of MSME PCGS and CGI, as well as support core financial market infrastructure and enabling environment22 to expand MSME financial access and foster financial inclusion for underbanked clients, including women-entrepreneurs. • Component 3: support project implementation, monitoring and evaluation, ESF and climate change awareness building and capability for PFIs and MSMEs. 22 The authorities requested the WB to support (i) single repository and streamline electronic client identification (e-KYC) as a key step to development of electronic/mobile financial services, including online account opening in line with anti-money laundering and counter-terrorist financing (AML/CTF) compliance framework, (ii) strengthen BB regulatory/supervisory capacity through adopting modern regulatory and supervisory standards, implementing risk-based supervision supported by modern supervisory technologies (suptech) for increased supervisory efficiency and enforcement, enhanced data quality, management, risks monitoring, early warning and response; (iii) foster financial inclusion through increased access of underbanked clients to core financial/payment services and financial education to be supported by the financial inclusion survey/gap analysis and financial literacy campaign for underbanked clients, including MSMEs and women-entrepreneurs Dec 09, 2021 Page 8 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) • Component 4: CERC (unfunded, subject to confirmation by the authorities). Given high incidence of catastrophic events, including negative impact of climate change, the project teams are recommended to include CERC into investment lending operations, subject to confirmation by the authorities. 19. Climate Change. The project will support increasing awareness of PFIs and MSMEs’ about climate change risks, adaptation and mitigation measures and instruments, environment and social risks management, mitigation and investment strategy, and through MSME PCGS and thresholds will contribute to increased PFIs’ lending to MSMEs investments into energy efficiency, renewable energy, while reducing environment footprint/GHG emissions etc. and adopting measures for climate risk mitigation and adaptation. This information will be regularly collected and analyzed as part of the project results framework monitoring and reporting, with details outlined in the project operations manual (POM). 20. Environment and Social Risks. MSMEs in Bangladesh are responsible for a substantial share of air and water pollution (due to their large numbers, even though individual contributions are small), notably in urban areas and clusters, and generally use environmentally and economically inefficient technologies.23 The project is expected to bring positive environmental and social impact by adopting a comprehensive ESMS by BB and PFIs and applying the environmental and social sustainability due diligence to the MSMEs/related MSME activities. The due diligence criteria will promote green, resilient and inclusive development by promoting resource efficient technology, enhanced waste management capacity, better OHS management and establishing strong environmental and social monitoring system. The project does not envisage any significant or irreversible environmental/social risks. The MSME sub-projects’ E&S risk will be either low or moderate in nature, with the negative list24 adopted by the project though BB and PFIs Environment and Social Management Systems (ESMS) to screen out high/substantial risk activities. From the nature of proposed MSMEs and likely activities, it is expected that there will be localized minor impacts causing noise, dust, both solid, liquid and electronic wastes and involve risks regarding workplace and community health and safety and labor and workplace related risks. COVID -19 related OHS measures and waste management issues will also need to be addressed at enterprise level. Adherence to labor standards as per ESS2, aspects of inclusion of vulnerable people, women and ethnic minorities (amongst others) will need to be ensured through appropriate incentives at the project level and proper consultation, monitoring and GRM focus through the ESMS. A Gender Action Plan and SEA/SH mitigation plan will be adopted (see below). The expected impacts and risks can be mitigated through implementation of appropriate code of practice and management plan. 21. The project will follow the WB Environmental and Social Framework (ESF) consisting of ten (10) Environment and Social Standards (ESS). BB has acquired considerable expertise and institutional capacity to manage World Bank financial intermediation projects and developed reasonable capacity to oversee ESS management in MSMEs. Working over the years, many of the PFIs have also already developed reasonable ESMS capacity to oversee environment and social risks in MSMEs. The World Bank provided large number of trainings to BB and PFIs in the last ten years. BB has an ESMS in place which has been operating well but will be updated to be fully compliant with the ESF standards. Brief information on representative PFI ESMS evaluation will be added as well. It will also be updated to be cognizant of the capacity issues and additional needs of MSMEs to meet those standards. The capacity of PFIs will also be assessed in this regard and third- party monitoring arrangements will be put in place to conduct field level monitoring. The Environment and Social Commitment Plan (ESCP) will be prepared by the borrower and disclosed prior to the project appraisal. The project will also provide additional training to PFIs and MSMEs and collect regular information on ESF compliance by the PFIs and MSMEs. 23World Bank, Bangladesh Systematic Country Diagnostic. 24The substantial and high-risk activities generating hazardous wastes and high carbon emissions, land acquisition and displacement, and biodiversity and natural habitat loss, and any situation requiring FPIC etc. will be placed on a negative list. Dec 09, 2021 Page 9 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) 22. Sexual Exploitation and Abuse/Sexual Harassment Risks: SEA/SH risk level is assessed as moderate. The gender gap in labor force participation is wide in Bangladesh and the country has a particularly low share of female-majority ownership of formal enterprises—a mere 1.7 percent of firms are owned by women. Women face constraints to accessing quality jobs and starting and operating businesses, including lack of access to finance, markets, information, and networks as well as safety and sexual harassment issues, deficient workplace infrastructure and harmful social norms. In this context, the risk of women facing SEA/SH in exchange for selection as recipients of the MSME PCGS and during training and skills building activities must be considered. At this stage, there is limited information on the capacity of PFIs to monitor and address SEA/SH risks induced by project activities. Moreover, there is an added layer of understanding the capacity of MSMEs on SEA/SH issues. The training activities especially with women, LGBTI+ and other vulnerable groups also raise concerns. SEA/SH risks resulting from supporting MSME investments and projects, particularly any requiring construction work by means of a temporary influx of workers to vulnerable local communities also exist. Project activities taking place in both rural and urban settings have been factored in for the assessment. As more information becomes available during preparation, the risk level will be reassessed. The project will include mitigation measures such as codes of conduct for all project actors, trainings and sensitization, SEA/SH-responsive GRM, develop PIU capacity, assess PFI capacity to respond to SEA/SH, and develop an SEA/SH action plan. 23. Gender. The Project places great emphasis on closing gender gaps in financial including and consequently promoting women’s employment and supporting female entrepreneurship. The gender gap in labor force participation is wide in Bangladesh and the country has a particularly low share of female-majority ownership of formal enterprises—a mere 1.7 percent of firms are owned by women. Limited access to finance is one of the fundamental barriers. Bangladesh presently has one of the world's widest financial gender disparities25. Only 36% of women have access to a bank account, compared to 65% of males. Despite greater access to microfinance, the Global Financial Inclusion (Findex) database reveals that the gender gap in financial inclusion rose by 20 percentage points between 2014 and 2017. Women's lack of collateral in the form of assets owned by them is one factor for low credit availability and hence denial by banks. The lack of collateral drastically limits the types, sizes, and terms of loans available to women. Even with access to finance, disbursement of credit doesn’t follow-through. According to the National Industrial Policy 2016, banks in Bangladesh are required to designate 10% of loans for women-led SME’s, to be raised to 15% in 2021 (of total loans set aside for SMEs). Though access to finance may have increased over time for women, the level of disbursement to women entrepreneurs remains very low- they got just approximately 3% of total credit awarded to cottage, micro, small, and medium firms between 2010 and 2017.26 Women-led SME’s lack of awareness of complex procedures and documentation (eg. lack of Trade licenses and /or updated business account records) required by financial institutions serve as obstacles to access to finance. Despite high repayment rates at 93%, women’s low financial literacy is associated with high loan processing costs, which leads to financial institutions hold reservations against women borrowers.27 The project aims to promote improved access to finance for women entrepreneurs and women owned and/or managed MSMEs. It will address gender gaps in financial inclusion and by (i) building capacity of PFIs on banking services accessible to women MSME through targeted outreach to women, mobile banking solutions, sensitization on GoB and BB policies that encourage financing solutions for women- led, (ii) incorporate loan policies more favorable to women, and (iii) build capacity of MSME to enhance financial literacy, (iv) hile this project can’t address all concerns, it aims to promote improved access to finance for women entrepreneurs and women owned and/or managed MSMEs. PFIs will be encouraged to extend finance to women led MSMEs and will be 25 https://www.cgap.org/blog/2017-global-findex-behind-numbers-bangladesh 26 Solotaroff, Jennifer L.; Kotikula, Aphichoke; Lonnberg, Tara; Ali, Snigdha; Pande, Rohini P.; Jahan, Ferdous. 2019. Voices to Choices : Bangladesh's Journey in Women's Economic Empowerment. International Development in Focus;. Washington, DC: World Bank 27 Solotaroff, Jennifer L.; Kotikula, Aphichoke; Lonnberg, Tara; Ali, Snigdha; Pande, Rohini P.; Jahan, Ferdous. 2019. Voices to Choices : Bangladesh's Journey in Women's Economic Empowerment. International Development in Focus;. Washington, DC: World Bank Dec 09, 2021 Page 10 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) required to provide respective statistics as part of the agreed project results framework to capture closing of gaps. A Gender Action Plan will be developed. 24. Main beneficiaries. The beneficiaries of the proposed project would include: (i) MSMEs, including women- entrepreneurs as direct recipients of MSME PCGS and training under the project; (ii) eligible PFIs that will participate in the MSME PCGS; (iii) Bangladesh Bank, CGI and the government, including ERD, FD, FID. 25. Cooperation with IFC. The WB and IFC had extensive discussions on all potential forms of IFC engagement (including equity financing, fund management, 2nd loss guarantees directly to the MSME PCGS and PFIs). It was agreed that given early stage of MSME PCGS development and the overall market conditions, IFC would limit its immediate support to the provision of technical assistance to BB, in close coordination with the World Bank, and in parallel will explore private sector demand for direct 2nd loss guarantee from IFC. In the future, once CGS is established and have proven track record, IFC would consider potential support for Tier 1 and/or Tier 2 financing and expansion of 2nd loss guarantees. 26. Governance and Institutions: The project is expected to meet corporate commitments on Citizen Engagement, with three client satisfaction surveys (baseline, mid-term, and at project completion) envisioned both by the proposed project results framework, as well as the list of activities under Components 2 and 3. While BB has extensive experience as demonstrated in BB implementation of other projects, additional support will be provided to both strengthen BB capacity for project’s results monitoring, impact evaluation and collecting feedback from PFIs and the MSMEs borrowers, as well as supporting BB in streamlining internal processes, building additional skills and technologies to enhance BB and CGI governance capacity. Selected financial infrastructure and BB reforms envision specific interventions to help BB better perform its regulatory/supervisory functions and improve data quality and supervisory response. 27. Jobs and Economic Transformation (JET): The project seeks to contribute to the JET goal of better jobs for more people by both supporting retaining of the existing jobs and helping MSMEs to scale up and grow, as well as bringing currently underbanked, unbanked and/or informal MSMEs to the formal financial sector and put them on a better path for survival and growth. 28. Mobilizing Finance for Development: This operation has a strong Private Capital Mobilization (PMC) focus since it will rely upon PFIs own financing of the MSMEs loans covered by the PCGS. With the initial leverage of 1, 70 percent coverage of new MSME loans value (only principal amount) and envisioned capital of the MSME PCGS of US$270 million, the PFIs will need to bring their own financing equivalent to at least US$300 million. With leverage increased to 1.3 or 1.5 through the life of the project, PCM can increase up to US$450-525 million (that includes PFIs’ funding of the loan credit underwriting, plus 30 percent risk sharing under the 70 percent PCGS coverage). Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts . Dec 09, 2021 Page 11 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) . CONTACT POINT World Bank Anzhela Prygozhyna, A.K.M. Abdullah Senior Financial Sector Specialist Borrower/Client/Recipient PEOPLE’S REPUBLIC OF BANGLADESH Implementing Agencies Bangladesh Bank Abu Farah Md. Naser Deputy Governor farah.naser@bb.org.bd Kamrul Hasan Azad Joint Director, Credit Guarantee Scheme Unit kamrul.azad@bb.org.bd A.K.M. Fazlur Rahman Executive Director, SME and Special Programs Department fazlur.rahman6@bb.org.bd Dec 09, 2021 Page 12 of 13 The World Bank Supporting Access to Finance for MSMEs Recovery and Growth (P174678) 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 APPROVAL Task Team Leader(s): Anzhela Prygozhyna, A.K.M. Abdullah Approved By APPROVALTBL Country Director: Dandan Chen 22-Dec-2021 Dec 09, 2021 Page 13 of 13