The World Bank Modernizing Afghan State-Owned Banks Project (P161348) REPORT NO.: RES42836 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF MODERNIZING AFGHAN STATE-OWNED BANKS PROJECT APPROVED ON MARCH 28, 2018 TO ISLAMIC REPUBLIC OF AFGHANISTAN FINANCE, COMPETITIVENESS AND INNOVATION SOUTH ASIA Regional Vice President: Hartwig Schafer Country Director: Henry G. R. Kerali Regional Director: Zoubida Kherous Allaoua Practice Manager/Manager: Shabih Ali Mohib Task Team Leader(s): Andrej Popovic The World Bank Modernizing Afghan State-Owned Banks Project (P161348) ABBREVIATIONS AND ACRONYMS MASOB Modernizing Afghan State-Owned Banks Project MOF Ministry of Finance SB Supervisory Boards SOB State-Owned Banks The World Bank Modernizing Afghan State-Owned Banks Project (P161348) BASIC DATA Product Information Project ID Financing Instrument P161348 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 28-Mar-2018 28-Mar-2023 Organizations Borrower Responsible Agency ISLAMIC REPUBLIC OF AFGHANISTAN Ministry of Finance Project Development Objective (PDO) Original PDO The proposed project development objective is to enhance the corporate governance and operational efficiency of the supported Afghan state-owned banks, thereby contributing to their improved financial soundness and outreach. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-D2830 28-Mar-2018 10-Apr-2018 10-Apr-2018 28-Mar-2023 12.00 7.62 2.52 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Modernizing Afghan State-Owned Banks Project (P161348) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING This Restructuring Paper seeks the Country Director’s approval for the proposed Level 2 restructuring of the Modernizing Afghan State-Owned Banks (MASOB) project -- Grant No. D2830-AF (P161348). The MASOB Project was approved by the World Bank’s Board on March 28, 2018 with a commitment amount of SDR27.5 million (US$40 million equivalent) and the project became effective on April 10, 2018. At the request of the government, SDR20,328,158 was cancelled in June 2020 to release funds for the emergency response to COVID-19 pandemic. As of February 28, 2021, the project disbursed SDR5,428,058.74, or 75.7 percent of the amount available following the cancellation, with the undisbursed balance remaining SDR1,743,786.26. The project design was informed by the Government of Islamic Republic of Afghanistan’s vision for the financial sector and the reform of state-owned banks (SOB) in particular, as outlined in the long-term strategy for the reform of SOB’s which was approved by the High Economic Council. Through strengthening the Ministry of Finance’s (MOF) oversight of SOB’s and upgrading their operational framework, as well as improving their information technology infrastructure, the project aimed to foster the stability and operational efficiency of the institutions and, thereby, enhance financial intermediation in Afghanistan. The Project has three components: i) Component 1: Improving MOF’s Ownership Role and the Corporate Governance of State Banks. This component aimed to support the MoF and the SOBs to address the governance challenges through technical assistance. Key achievements to date include development of the SOB Ownership Policy, establishment and staffing of the SOB Ownership Unit at the Ministry of Finance, and establishment of the Supervisory Boards (SBs) at each of the three SOBs. While earlier in the project all SBs were fully staffed with five members each, currently, Bank-e-Millie Afghan has three SB members and Pashtany Bank has four. ii) Component 2: Institutional Development, Business Strategy, and Information Technology of State Banks. This component aimed to support a full-scale re-engineering of almost all the banks’ operations, based on a defined mission and business strategy. The required diagnostic assessment, resulting information technology policy, and business plans have not been prepared as planned, and the project has, to date, focused on supporting emergency IT investments in each of the SOB. Notable project investments include procurement and installation of new IT equipment and the necessary software in Pashtany Bank to secure its database and backup servers. In addition, a new core banking system was procured for New Kabul Bank in 2020, but the full installation has been delayed. Finally, the planned merger of Bank-e-Millie Afghan and New Kabul Bank has been substantially delayed due to governments’ prolonged consideration of the most appropriate technical approach. iii) Project Implementation and Monitoring. As of October 2020, both project implementation progress and progress towards achievement of project development objectives were rated unsatisfactory (U). Rationale for the Restructuring: Since the project has experienced substantial implementation delays and over 70 percent of its funds were cancelled in June 2020, on February 28, 2021 the Ministry of Finance officially requested the World Bank to cancel the undisbursed balance and close the project early through a project restructuring. The request also included a two-month disbursement grace period post-closure. Subsequent engagement with MOF indicated the need to maintain the standard grace period The World Bank Modernizing Afghan State-Owned Banks Project (P161348) of four months to mitigate the risks related to potential delays. More details are available in the letter from the MOF in Annex 1. II. DESCRIPTION OF PROPOSED CHANGES The proposed project restructuring includes the following: i) Changing the project closing date from March 28, 2023 to May 31, 2021. ii) Canceling the undisbursed balance as of February 28, 2021 in the amount of SDR1,743,786.26. The available balance in the designated account is US$2,678,704.73 of which US$927,727.73 has been utilized and is yet to be documented. The actual balance available in the designated account is US$1,750,977 which is deemed sufficient to settle all outstanding payments estimated at US$1,661,344.3 before the new closing date. iii) Standard four-month disbursement grace period following the project closure (i.e. through September 30, 2021). III. SUMMARY OF CHANGES Changed Not Changed Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Disbursements Arrangements ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ The World Bank Modernizing Afghan State-Owned Banks Project (P161348) Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-D2830 Effective 28-Mar-2023 31-May-2021 30-Sep-2021 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IDA-D2830- Disburs XDR 7,171,845.00 1,743,786.26 28-Feb-2021 5,428,058.74 FOR 001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-D2830-001 | Currency: XDR iLap Category Sequence No: 1 Current Expenditure Category: Gds NCS CS IOC - Part 1, 2a, 3 The World Bank Modernizing Afghan State-Owned Banks Project (P161348) 7,098,596.25 3,436,859.26 5,354,809.99 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: Gds NCS CS IOC - Part 2b 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: Gds NCS CS IOC - Part 2c 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: PPF REFINANCING 73,248.75 73,248.75 73,248.75 Total 7,171,845.00 3,510,108.01 5,428,058.74 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2018 781,480.00 0.00 2019 3,407,720.00 0.00 2020 6,230,240.00 0.00 2021 11,827,840.00 0.00 2022 16,653,440.00 0.00 2023 1,099,280.00 0.00 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  High  High Macroeconomic  High  High Sector Strategies and Policies  Substantial  High The World Bank Modernizing Afghan State-Owned Banks Project (P161348) Technical Design of Project or Program  Substantial  Substantial Institutional Capacity for Implementation and  Substantial  High Sustainability Fiduciary  Substantial  Substantial Environment and Social  Low  Low Stakeholders  Substantial  Substantial Other Overall  Substantial  High . Annex 1: Government Request for Project Restructuring The World Bank Modernizing Afghan State-Owned Banks Project (P161348)