The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Sri Lanka Financial Sector Modernization Project (P159303) SOUTH ASIA | Sri Lanka | Finance, Competitiveness and Innovation Global Practice | IBRD/IDA | Investment Project Financing | FY 2017 | Seq No: 6 | ARCHIVED on 09-Dec-2019 | ISR39380 | Implementing Agencies: Democratic Socialist Republic of Sri Lanka, Insurance Board of Sri Lanka, Securities and Exchange Commission of Sri Lanka, Central Bank of Sri Lanka Key Dates Key Project Dates Bank Approval Date: 05-Apr-2017 Effectiveness Date: 22-Feb-2018 Planned Mid Term Review Date: 15-Nov-2019 Actual Mid-Term Review Date: 16-Sep-2019 Original Closing Date: 31-Dec-2022 Revised Closing Date: 31-Dec-2022 pdoTable Project Development Objectives Project Development Objective (from Project Appraisal Document) The Project Development Objective (PDO) is “to contribute to increasing financial market efficiency and use of financial services among micro, small and medium enterprises (MSMEs) and individuals”. The project will achieve the PDO through modernizing financial market infrastructure, upgrading the legal and regulatory framework for the financial system, and strengthening the institutional capacity of financial sector regulators (Central Bank of Sri Lanka, [CBSL]; Securities and Exchange Commission of Sri Lanka, [SEC]; and Insurance Board of Sri Lanka, [IBSL]). On account of its comprehensive approach to creating an enabling environment for robust financial development, the project is also expected to advance financial inclusion through (a) increased financial efficiency and competition and (b) the greater reach and financial connectivity of MSMEs and individuals that the new and more inclusive financial market infrastructure shall enable. Has the Project Development Objective been changed since Board Approval of the Project Objective? No Components Table Name Supporting Selected Mid-Level Reforms through Results-Based Financing:(Cost $15.00 M) Strengthening Regulators’ Institutional Capacity, Upgrading the Legal and Regulatory Framework and Modernizing Financial Market Infrastructure:(Cost $59.00 M) Project Implementation and Monitoring:(Cost $0.81 M) Front-end Fee:(Cost $0.19 M) Overall Ratings Name Previous Rating Current Rating Progress towards achievement of PDO Satisfactory Moderately Satisfactory Overall Implementation Progress (IP) Moderately Unsatisfactory Moderately Unsatisfactory Overall Risk Rating Substantial Substantial Implementation Status and Key Decisions 12/9/2019 Page 1 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) The project has made positive progress since the last implementation support mission. Two Disbursement Linked Results (DLRs) have been achieved (DLR 1.1 [Financial Sector Oversight Committee (FSOC) agrees through the MoU that CBSL will be the lead consolidated supervisor] and DLR 5.1 [National Insurance Trust Fund (NITF) Board issues decision to restructure NITF by separating the underwriting and reinsurance business]) and disbursements totaling USD 2.5 million have been made against these DLRs. The Central Project Coordination Unit (CPCU) is closely monitoring the progress of achievement of the DLRs. There have been procurement delays but the pace has picked up. The CPCU is closely monitoring the procurement challenges and where possible supporting the Implementing Agencies in resolving such challenges. It is envisaged that this pace will continue, and disbursements for component 2 will begin shortly. Risks Systematic Operations Risk-rating Tool Risk Category Rating at Approval Previous Rating Current Rating Political and Governance Substantial Substantial Substantial Macroeconomic Substantial Substantial Substantial Sector Strategies and Policies Substantial Substantial Substantial Technical Design of Project or Program Moderate Moderate Moderate Institutional Capacity for Implementation and Sustainability Substantial Substantial Substantial Fiduciary Substantial Substantial Substantial Environment and Social Low Low Low Stakeholders Moderate Moderate Low Other -- -- -- Overall Substantial Substantial Substantial Results PDO Indicators by Objectives / Outcomes Project Development Objectives IN00768343 ►(1) Increased transactions of retail electronic payments on the modernized infrastructure (measured by the cards issued under NCS to total debit cards in the system– target 15%) (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 1.00 1.00 1.00 15.00 Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768344 ►Increased participation (trading) in the secondary market Central Government bonds (measured by the growth in secondary market trades of Central Government Debt in value terms—target 5%) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target 12/9/2019 Page 2 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) 5% increase from Value LKR 6591 Billion LKR 5952 Billion LKR 7529 Billion base line Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768345 ►(3) Increased share of private insurance companies (newly issued) insurance policies (measured by the growth of insurance premiums to GDP—target 3%) (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 1.05 1.21 1.26 3.00 Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768431 ►Increased financial soundness of MFIs (measured by establishing and complying with the regulatory minimum capital requirement (MCR) by MFIs—target all MFIs complying with (MCR) Regulation) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Minimum core capital Minimum core capital regulation No 1 of regulation No 1 of 2016. All MFIs are complying Value MCR not established 2016. (1 MFI registered and in with MCR (3 MFI registered and compliance) in compliance) Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 31-Dec-2021 Intermediate Results Indicators by Components Strengthening Regulators’ Institutional Capacity, Upgrading the Legal and Regulatory Framework and Modernizing Financial Market Infrastructure IN00768432 ►CBSL has undertaken consolidated risk-based supervision of banks on both solo and group wide basis, and performs risk assessment on a stand-alone and consolidated basis (Basel Core Principles for effe (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Compliant. CBSL produces 2 consolidated risk Value Non compliant non compliant non compliant based supervision reports for identified financial groups. Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 CBSL has signed an MOU with SEC and IRCSL to be the lead consolidated risk based supervisor. It is expected that they will be able to prepare consolidated supervision reports for identified financial groups in Comments: years two and three. IN00768435 ►RTGS new system with multi-currency settlement and convertibility features and the Scripless Securities Settlement System (SSSS) with Central Depository System operational (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target New system Not New system not New system not New RTGS and SSSS Value operational operational operational with CDS operational. Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768438 ►SEC’s regulatory framework and supervisory practices have a significantly high level of observance of the International Organization of Securities Commission’s (IOSCO) Objectives and Principles of Se (Text, Custom) 12/9/2019 Page 3 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Baseline Actual (Previous) Actual (Current) End Target 3 of 38 principles fully 3 of 38 principles fully 3 of 38 principles fully implemented, 13 of 38 implemented, 13 of 38 implemented, 13 of 38 Broadly implemented, 17 Broadly implemented, 17 Broadly implemented, At least 28/38 Value of 38 partially of 38 partially 17 of 38 partially principles observed. implemented; 6 of 38 not implemented; 6 of 38 not implemented; 6 of 38 implemented; 1 of 38 not implemented;1 of 38 not not implemented;1 of applicable applicable. 38 not applicable. Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768439 ►IBSL’s regulatory framework and supervisory practices have a significantly high level of observance of the International Association of Insurance Supervisors- Insurance Core Principles (IAIS-ICPs) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Largely observed (6 of 26 principles; partially At least 12/26 observed 3 of 26 Insurance law drafted in Insurance law drafted principles observed Value principles; assessed yet line with ICPs - under in line with ICPs - and 6/26 principles not finalized 10 of 26 review under review partially observed. principles; not assessed 7 of 26 principles) Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768441 ►CBSL & LankaClear Assessment of Observance of the CPSS_IOSCO Principles for Financial Market Infrastructures completed (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target All applicable PFMIs Observed or Broadly Observed by each FMI type (i.e., 18/18 observed or broadly Value Not assessed not assessed not assessed observed or not applicable for RTGS; 21/21 observed or broadly observed or not applicable for CSD/SSS). Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768443 ►Central Counter Party system established for the securities market (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Value Non operational non operational non operational Pilot runs started. Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768444 ►Regulatory and supervisory framework for financial consumer protection established and in use (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Regulations issued and FIs abide by FCP law. Value Non-existent non-existent non-existent Framework in use. 12/9/2019 Page 4 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768445 ►Outstanding MSME Loans from commercial banks (Note: Value of total loans granted by commercial /development banks) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Publishing of SME Published disaggregated Published data Published disaggregated data not N/A. disaggregated data not data not N/A. (total Value N/A. (total estimated Total loans granted by estimated around LKR (total estimated around around LKR 685 banks increased by 685 Billion) LKR 685 Billion) Billion) 30% Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768446 Outstanding MSME Loans from commercial banks by females (% of total commercial bank loans) (Text, Custom Breakdown) Baseline Actual (Previous) Actual (Current) End Target Not available/ gender disaggregation Not available/gender Not available/gender Data available and Value not done disaggregation not done disaggregation not done published Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768447 ►Outstanding Microfinance lending from licensed microfinance institutions (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target None (not licensed Data available and Value None (not licensed yet) None (not licensed yet) yet) published Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768448 Outstanding Microfinance lending from licensed institutions to women (% of MFI loans) (Text, Custom Breakdown) Baseline Actual (Previous) Actual (Current) End Target Data available and Value None (not licensed yet) None (not licensed yet) None (not licensed yet) published Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768449 ►Outstanding Corporate Debt (% of GDP) (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 1.00 2.00 2.00 15.00 Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 Supporting Selected Mid-Level Reforms through Results-Based Financing IN00768433 ►Year-end stock market capitalization (% of GDP) (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target 12/9/2019 Page 5 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Value 27.00 25.00 25.00 50.00 Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768436 ►Change in investment portfolio composition of EPF (% in government securities) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target 90-95% in government 91.3% in government 91.3% in government less than 89% in Value securities securities securities government securities Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768440 ►Regulatory and supervisory framework with proportionate risk-based supervision for microfinance established and operational (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target law passed Dept. law passed Dept. Value Non-operational established but Non- established but Non- Operational operational operational Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768442 ►Citizen engagement indicator of percentage of project beneficiaries that feel project activities/services/results reflected their needs. (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 0.00 0.00 0.00 75.00 Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 Project Implementation and Monitoring IN00768434 ►Plans and reports are generated and discussed in a timely manner (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Procurement Plans Procurement Plans Procurement Plans implemented; Value implemented; Operations Completed approved Operations Manual Manual agreed with IAs agreed with IAs Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 IN00768437 ►Audit reports completed and submitted within six months of closing of the financial year. (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Value None IUFRs submitted IUFRs submitted Submitted Date 01-Sep-2016 05-Apr-2019 04-Oct-2019 30-Dec-2022 Disbursement Linked Indicators IN00768450 ►DLI 1 Adoption of consolidated, risk-based approach to supervision of financial institutions (Yes/No, Process, 4.00, 0.00%) 12/9/2019 Page 6 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 1.1 FSOC agrees through the MOU that CBSL will be lead consolidated supervisor (Text, Process, 2.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No Yes (MOU signed) Yes (MOU signed) Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 1.2 Implementation of the MOU evidenced by a minumum of four (4) meetings (from four quarterly sessions in one (1) year) of the FSOC, confirmed by the chairman of FSOC (Yes/No, Process, 1.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 1.3 Based on MoU, CBSL produces 2 consolidated risk-based supervision financial groups for FSOC meeting confirmed by the chairman of FSOC (Yes/No, Process, 2.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- IN00768454 ►DLI 2 Establishment of the Financial Consumer Protection Authority across all financial services under independent authority or an authority under CBSL (Yes/No, Process, 3.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 2.1 MoF's submission of request for establishement of authority under CBSL to conduct FCP (Yes/No, Process, 2.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 2.2 If the decision of the cabinet is to establish FCPA under CBSL, CBSL Monetary Board issues decision to establish FCP department within CBSL*. (Yes/No, Process, 1.00, 0.00%) 12/9/2019 Page 7 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- IN00768457 ►DLI 3 Establish an information system for holistic management of EPF’s assets (investment) and liabilities (collections), and adopt a diversified investment strategy. (Yes/No, Process, 3.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 3.1 Submission of cabinet memorandum, requesting approval to bring the mgt of EPF’s collections (liabilities) and investments (assets) into common information management system under CBSL (Yes/No, Process, 2.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 3.2 CBSL Monetary Board issues decision to adopt a diversified investment strategy to reach adequate replacement income for retirees (Text, Process, 1.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- IN00768460 ►DLI 4 Establishment of Delivery vs Payment (DvP) mode of settlement for corporate securities to minimize possible risks to financial stability. (Text, Process, 1.50, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 No (technical model No (technical model under Value No Yes under discussion) discussion) Date -- 05-Apr-2019 04-Oct-2019 -- DLI 4.1 SEC & CSE adopt rules and regulations necessary to enable the settlement of the corporate securities segment on DvP basis. (Yes/No, Process, 0.50, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- 12/9/2019 Page 8 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) DLI 4.2 Successful CSE Business Continuity Planning test involving the DvP arrangement completed. (Yes/No, Process, 0.50, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value Yes No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 4.3 SEC undertakes on-site or off-site inspection/audits one year after enabling DvP to ensure DvP is happening. (Yes/No, Process, 0.50, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- IN00768464 ►DLI 5 Restructuring of the NITF by separating the underwriting and reinsurance businesses (Yes/No, Process, 3.50, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 5.1 NITF Board issues decision to restructure NIFT by separating the underwriting and reinsurance businesses (Yes/No, Process, 2.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No Yes Yes Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 5.2 SLIRC issues no objection to separation. (Yes/No, Process, 0.50, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- DLI 5.3 MoNP&EA/MoF submits cabinet memorandum, requesting to approve the proposed restructuring of NITF and such a request is approved by the cabinet (Yes/No, Process, 2.00, 0.00%) December 31, Baseline Actual (Previous) Actual (Current) 2022 Value No No No Yes Date -- 05-Apr-2019 04-Oct-2019 -- 12/9/2019 Page 9 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Data on Financial Performance Disbursements (by loan) Project Loan/Credit/TF Status Currency Original Revised Cancelled Disbursed Undisbursed % Disbursed P159303 IDA-60060 Effective USD 75.00 75.00 0.00 6.51 69.85 8.5% Key Dates (by loan) Project Loan/Credit/TF Status Approval Date Signing Date Effectiveness Date Orig. Closing Date Rev. Closing Date P159303 IDA-60060 Effective 05-Apr-2017 04-Oct-2017 22-Feb-2018 31-Dec-2022 31-Dec-2022 Cumulative Disbursements Restructuring History There has been no restructuring to date. Related Project(s) 12/9/2019 Page 10 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) There are no related projects. 12/9/2019 Page 11 of 11