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: 8 | ARCHIVED on 12-Jan-2021 | ISR42980 | Implementing Agencies: Democratic Socialist Republic of Sri Lanka, Sri Lanka Insurance Regulatory Commission (formerly known as 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 Moderately Satisfactory Moderately Unsatisfactory Overall Implementation Progress (IP) Moderately Unsatisfactory Moderately Unsatisfactory Overall Risk Rating Substantial Substantial Implementation Status and Key Decisions 1/12/2021 Page 1 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Following the agreements of June 2020 mission, the project has shown some progress in procurement under Component 2, advancement of some reforms under Component 1, better quality of project reporting and coordination after October 2020 changes in the CPCU management. Yet, due to COVID-19 disruptions, the progress was slower than expected, and many deadlines for the activities in the Action Plan of the June 2020 mission have been delayed. Progress towards achievement of the Project Development Objective (PDO) has been downgraded to MU due to the slower progress under Component 1 and continued procurement delays under Component 2. Delays in larger-value procurement of goods and services (for example, RTGS upgrade, EPF, CBSL payments fraud detection, SEC surveillance system, and CBSL, SEC and IRCSL IT/MIS modernization for introduction of modern risk-based, consolidated supervision) can undermine achievement of the DPO. Although the implementing agencies remain committed and are eager to implement these reforms before the project closing date of December 31, 2022, the project might require extension of the closing date to enable full installation of IT/MIS and implementation of larger-scale reforms. Progress with implementation of the indicators in the results framework is also delayed, as key activities under Components 1 and 2 are still to be implemented. The project results framework needs to be revised to better align it with the market needs, 1st restructuring as well as ongoing activities supported by the project (including proposed revisions to the Disbursement Linked Indicators (DLI) framework under Component 1 and reallocation of uncommitted funds under Component 2). Achievement of some intermediate result indicators has slowed down or saw deterioration during June-December 2020 due to economic downturn caused by the COVID-19 pandemic. In this context, the 2nd project restructuring is proposed to include (i) reallocation of funds under Component 2 to support SME finance; (ii) revisions to the DLI framework under Component 1, and (iii) revisions to the PDO and the results framework to clarify and align the project supported reforms with the market needs and the latest developments. The details of the proposed restructuring will be further discussed during the December 2020 mission. An updated Implementation Status and Results Report (ISR) will be issued upon completion of December 2020 mission. Risks Systematic Operations Risk-rating Tool Risk Category Rating at Approval Previous Rating Current Rating Political and Governance Substantial Substantial Substantial Macroeconomic Substantial Substantial High Sector Strategies and Policies Substantial Substantial High Technical Design of Project or Program Moderate Moderate Substantial Institutional Capacity for Implementation and Substantial Substantial Substantial Sustainability Fiduciary Substantial Substantial Substantial Environment and Social Low Low Low Stakeholders Moderate Low Moderate Other -- Moderate Moderate Overall Substantial Substantial Substantial Results PDO Indicators by Objectives / Outcomes Project Development Objectives IN00877179 1/12/2021 Page 2 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) ►(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-May-2020 18-Nov-2020 30-Dec-2022 IN00877180 ►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 5% increase from Value LKR 6591 Billion LKR 7529 Billion LKR 7529 Billion base line Date 01-Sep-2016 05-May-2020 18-Nov-2020 30-Dec-2022 IN00877186 ►(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 1.26 1.26 3.00 Date 01-Sep-2016 05-May-2020 18-Nov-2020 30-Dec-2022 Overall Comments PDO Intermediate Results Indicators by Components Strengthening Regulators’ Institutional Capacity, Upgrading the Legal and Regulatory Framework and Modernizing Financial Market Infrastructure IN00877187 ►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-May-2020 18-Nov-2020 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. IN00877190 1/12/2021 Page 3 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877193 ►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) 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-May-2020 18-Nov-2020 30-Dec-2022 IN00877194 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877196 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877198 ►Central Counter Party system established for the securities market (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target 1/12/2021 Page 4 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Value Non operational non operational non operational Pilot runs started. Date 01-Sep-2016 05-May-2020 18-Nov-2020 30-Dec-2022 IN00877199 ►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. Date 01-Sep-2016 05-May-2020 18-Nov-2020 30-Dec-2022 IN00877200 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877201 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-May-2020 18-Nov-2020 30-Dec-2022 IN00877202 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877203 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-May-2020 18-Nov-2020 30-Dec-2022 1/12/2021 Page 5 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) IN00877204 ►Outstanding Corporate Debt (% of GDP) (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 1.00 2.00 2.15 15.00 Date 01-Sep-2016 05-May-2020 18-Nov-2020 30-Dec-2022 Supporting Selected Mid-Level Reforms through Results-Based Financing IN00877188 ►Year-end stock market capitalization (% of GDP) (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 27.00 25.00 21.50 50.00 Date 01-Sep-2016 05-May-2020 18-Nov-2020 30-Dec-2022 IN00877191 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877195 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877197 ►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-May-2020 18-Nov-2020 30-Dec-2022 The project is the process of designing the satisfaction survey (with the support of the WB CE team) which is expected to be finalized by the end of FY20. During the upcoming June 2020 mission the project team will discuss with CPCU and other IAs the progress achieved to date and the next steps with CE survey, Comments: including timeline for administering the survey and the modality, considering the constraints caused by the COVID-19 pandemic. Project Implementation and Monitoring 1/12/2021 Page 6 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) IN00877189 ►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-May-2020 18-Nov-2020 30-Dec-2022 IN00877192 ►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-May-2020 18-Nov-2020 30-Dec-2022 Performance-Based Conditions IN00877205 ►PBC 1 Adoption of consolidated, risk-based approach to supervision of financial institutions (Yes/No, Process, 4.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 1.1 FSOC agrees through the MOU that the CBSL will be a lead consolidated supervisor (Text, Process, 1.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No Yes (MOU signed) Yes (MOU signed) -- Date -- 05-May-2020 18-Nov-2020 -- PBC 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%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 1.3 Based on MoU, the CBSL produces 2 consolidated risk-based supervision financial groups for the FSOC meeting confirmed by the chairman of FSOC (Yes/No, Process, 2.00, 0.00%) 1/12/2021 Page 7 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- IN00877209 ►PBC 2 Establishment of the Financial Consumer Protection Authority across all financial services under independent authority or an authority under the CBSL (Yes/No, Process, 3.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 2.1 MoFEPD's submission of request for establishment of authority under the CBSL to conduct FCP (Yes/No, Process, 2.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 2.2 If the decision of the cabinet is to establish FCPA under the CBSL, the CBSL Monetary Board issues decision to establish FCP department within the CBSL*. (Yes/No, Process, 1.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- IN00877212 ►PBC 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%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 3.1 MoFEPD submission of Cabinet memorandum requesting approval to bring the management of EPF's collections (liabilities) and investments (assets) into common information management system under the CBSL (Yes/No, Process, 2.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- 1/12/2021 Page 8 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Date -- 05-May-2020 18-Nov-2020 -- PBC 3.2 The CBSL Monetary Board issues decision to adopt a diversified investment strategy to reach adequate replacement income for retirees (Text, Process, 1.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- IN00877215 ►PBC 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%) Baseline Actual (Previous) Actual (Current) December 31, 2022 No (technical model No (technical model under Value No -- under discussion) discussion) Date -- 05-May-2020 18-Nov-2020 -- PBC 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%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 4.2 Successful CSE Business Continuity Planning test involving the DvP arrangement completed. (Yes/No, Process, 0.50, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value Yes No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 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%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- IN00877219 ►PBC 5 Restructuring of the NITF by separating the underwriting and reinsurance businesses (Yes/No, Process, 3.50, 0.00%) 1/12/2021 Page 9 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 5.1 NITF Board issues decision to restructure NIFT by separating the underwriting and reinsurance businesses (Yes/No, Process, 1.00, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No Yes Yes -- Date -- 05-May-2020 18-Nov-2020 -- PBC 5.2 IBSL/IRCSL issues no objection to separation. (Yes/No, Process, 0.50, 0.00%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- PBC 5.3 MoFEPD submits a 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%) Baseline Actual (Previous) Actual (Current) December 31, 2022 Value No No No -- Date -- 05-May-2020 18-Nov-2020 -- 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 7.04 72.35 8.9% 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 1/12/2021 Page 10 of 11 The World Bank Implementation Status & Results Report Sri Lanka Financial Sector Modernization Project (P159303) PBC Disbursement Achievement Disbursed amount in Disbursement % PBC ID PBC Type Description Coc PBC Amount Status Coc for PBC Restructuring History Level 2 Approved on 15-Feb-2020 Related Project(s) There are no related projects. 1/12/2021 Page 11 of 11