Page 1 PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: 52312 Operation Name Morocco - Sustainable Access to Finance DPL Region MIDDLE EAST AND NORTH AFRICA Sector General finance sector (35%); Banking (25%); Capital markets (25%); Non-compulsory pensions, insurance and contractual savings (15%) Project ID P117201 Borrower(s) GOVERNMENT OF MOROCCO Implementing Agency MINISTRY OF FINANCE Ministry of Economy and Finance Bd. Med V. Quartier Administratif Rabat Chellah Morocco Tel: (212-3) 5376-77501 Fax: (212-3) 5376-7527 internet@finances.gov.ma Date PID Prepared November 19, 2009 Date of Appraisal Authorization November 30, 2009 Date of Board Approval January 26, 2010 1. Country and Sector Background Morocco has made substantial progress in developing its financial sector. The total assets of Moroccan financial institutions have grown significantly and exceed 200 percent of GDP, a ratio that is well above the level predicted by Morocco’s per capita income. This progress in financial development has been the result of sound macroeconomic policies and important financial sector reforms earlier in the decade, which positioned Morocco to take advantage of favorable conditions (e.g. abundant liquidity and global economic growth). These financial reforms were supported by the Bank through a Financial Sector Development Policy Loan in 2005, and included the restructuring of state-owned financial institutions, the strengthening of the regulatory framework and the improvement of financial infrastructure. While the financial system has grown significantly, access remains an issue and new risks have emerged. The rapid growth of financial institutions in recent years has contributed to Morocco’s growth performance and expanded the frontiers of finance. However, it is also apparent that, despite significant improvements, the financial system is not yet providing services to large segments of low income households and Small and Medium Enterprises (SMEs). Moreover, this rapid growth has also generated new risks in the banking and insurance sectors that need to be effectively managed. In the microcredit sector, an industry generally characterized by very low default rates, a rapid growth combined with inadequate risk management and internal controls resulted in portfolio problems and a loss of outreach. The global financial crisis added importance to further reforms, not only for having produced a credit slowdown that typically affects the most vulnerable sectors, but also for having shown the need to strengthen financial infrastructure and financial regulation to ensure that any further access gains are sustainable. Page 2 2. Operation Objectives The objective of the proposed operation is to support the Government’s efforts to expand further the access of households and small and medium enterprises to finance, while ensuring the stability of the financial system. Expanded access of households and enterprises to finance will contribute to a sound growth performance and further reductions in poverty, but sustained improvements in access require further strengthening of financial regulation and supervision, and effective management of all the risks involved. Unlike other countries, Morocco has been able to preserve financial stability since the start of the international crisis, but needs to ensure that further gains in access are well managed and sustainable. 3. Rationale for Bank Involvement The proposed Sustainable Access to Finance Development Policy Loan contributes to Morocco’s efforts, both financially and technically. First, it contributes to a balanced financing package, helping the Government meet its larger borrowing requirements resulting from the global crisis, while avoiding excessive pressures on the domestic financial market. Second, it provides support to an important reform that will contribute to growth and poverty alleviation. Third, it will allow the World Bank to remain engaged in the design of more challenging reform components, contributing to their quality. Fourth, the Moroccan reform provides important lessons for other countries, for recognizing explicitly the need to combine the objectives of access and stability. The proposed DPL contributes to critical objectives of the Country Partnership Strategy which is currently being finalized. 4. Financing The proposed Sustainable Access to Finance Development Policy Loan is a Two tranche Loan in the amount of 133.1 million (US$200 million equivalent) . The first tranche will be disbursed following Board approval, which will be conditional on the realization of specific reforms and the second tranche upon the fulfillment of a detailed set of measures. 5. Institutional and Implementation Arrangements The responsibility for implementing the program rests with the Ministry of Finance, in collaboration with the Central Bank. The Government will take the lead in monitoring progress in implementation and in updating the program policy matrix as appropriate. The Ministry of Finance is coordinating inputs from all the relevant authorities. 6. Benefits and Risks The operation aims at achieving sustained improvements in access to finance to households and SMEs, while ensuring a resilient and stable financial system. Capital market development is an important objective as well, as it contributes both to access and stability. The first pillar contains measures that promote access to households while the second pillar comprises measures to enhance access to small and medium enterprises. The launch of a credit bureau and revised partial credit guarantee mechanisms will allow further progress in access and improved risk Page 3 management. The third pillar strengthens the resiliency of the financial system through further improvements in financial regulation and supervision. It will allow an early identification of risks and will avoid a repeat of the difficulties experienced by the microcredit industry. The fourth pillar, capital market development, contributes both to access and stability. It promotes competition to banks which will encourage them to go down market, and will make new information and instruments available therefore making further gains in long term financing (e.g. mortgage loans or investment credits) possible. In the short term, Morocco is confronted with uncertainties on the timing and speed of the recovery from the global crisis. Risks are mitigated through continued strong macroeconomic management. A deterioration of the credit portfolios of some institutions (e.g. microcredit associations) could jeopardize expected improvements in access. The Government has proved its resolve and capacity to handle such situation. The resumption of long-term bond issues, which is essential to market development, may imply some increase in the reference rate for existing mortgage holders. However, low income mortgage holders would not be affected and the impact would remain limited for other households. In the wake of the global crisis, some initiatives may be received with more caution. The Government is addressing this risk by proposing only tested instruments which bring clear benefits to the country and setting up appropriate prudential regulations to reduce risks. 7. Poverty and Social Impacts and Environment Aspects Since this proposed operation is a DPL, it falls under Operation Policy 8.60. As the DPL is not expected to have significant environmental effect, according to OP 8.60, safeguard policies and an Integrated Safeguard Data Sheet (ISDS) is not needed as none of the Bank’s safeguard policies are triggered by this operation. The project will not have significant impact on the country’s environment, forests and other natural resources. None of the Bank’s safeguard policies are triggered by the proposed project. 8. Contact point Contact: Cédric Mousset Title: Sr Financial Sector Spec. Tel: (202) 458-9234 Fax: (202) 614-9234 Email: cmousset@worldbank.org 9. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: pic@worldbank.org Web: http://www.worldbank.org/infoshop Page 4