IEG Report Number: ICRR14918 ICR Review Independent Evaluation Group 1. Project Data: Date Posted: 06/03/2016 Country: Turkey Project ID: P118308 Appraisal Actual Project Name: Second Turkey Project Costs (US$M): 500.0 500.0 Access To Finance For Small And Medium Enterpr L/C Number: Loan/Credit (US$M): 500.0 500.0 Sector Board: Financial and Private Cofinancing (US$M): Sector Development Cofinanciers: Board Approval Date : 06/15/2010 Closing Date: 09/30/2014 03/31/2015 Sector(s): SME Finance (70%); General finance sector (15%); General industry and trade sector (10%); Banking (5%) Theme(s): Micro; Small and Medium Enterprise support (67%); Other Private Sector Development (33%) Prepared by: Reviewed by: ICR Review Group: Coordinator: Nestor Ntungwanayo Victoria Alexeeva Christopher David IEGPS1 Nelson 2. Project Objectives and Components: a. Objectives: "The objective of the project is to broaden and deepen Turkish small and medium enterprises' access to medium- and long-term finance, thereby contributing to an expansion of productive activities and job creation." (Loan Agreement, p.5). While presented in a slightly different way, the project appraisal document (PAD) had a similar statement of objective (PAD, para 24, p.16). b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components: (i) Component I: A wholesale credit line to be intermediated by Kalkinma Bank , which in turn intermediated funds through retail banks and leasing companie s (Appraisal and actual costs of US $100 million): Under this component, the World Bank provided a US$100 million credit line to Kalkinma Bank, which was the Borrower and implementing agency. Kalkinma Bank on-lent project funds to private commercial banks and leasing companies, which were selected pursuant to criteria agreed between Kalkinma Bank and the World Bank and subject to no objection by the Bank. The selected participating financial intermediaries (PFIs) in turn made working capital and investment sub-loans (and lease financing) to private SMEs. The PFIs assumed the credit risk of the sub-borrowers, while Kalkinma Bank, as the wholesale institution, had exposure only to the selected PFIs. (ii) Component II: A retail credit line to be intermediated by Ziraat Bank (Appraisal and actual costs of US $200 million): Under this component, the World Bank provided a US$200 million credit line to Ziraat Bank, which was the Borrower and implementing agency. Ziraat Bank, a public sector bank, had an advantage in offering credit to the SMEs in all regions of the country due to its strong branch presence in the country combined with its focus on the SME segment and its plans to further expand its SME portfolio. Ziraat Bank assumed the credit risk for second component. (iii) Component III: A retail credit line to be intermediated by Vakif Bank (Appraisal and actual costs of US $200 million): Under the third component, the World Bank provided a US$200 million credit line to Vakif Bank, which was the Borrower and implementing agency. Vakif Bank, also a public sector bank, had a comparative advantage in offering credit to the SMEs throughout the country due to its strong branch presence in the country combined with its focus on the SME segment and its plans to further grow its SME portfolio. Vakif Bank assumed the credit risk for the third component. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Project cost: While disbursed amount was US$500.0 million, the total project cost amounted to US$518.5 million at closure, as a result of valuation gains due to favorable exchange rates. Financing: The project was funded by an IBRD loan, provided in the form of three credit lines as follows: (i) a wholesale credit line of US$100 million to be intermediated by Kalkinma Bank, which in turn intermediated funds through retail banks and leasing companies; (ii) a retail credit line of US$200 million intermediated by Ziraat Bank; and (iii) a retail credit line of US$200 million intermediated by Vakif Bank. Borrower contribution and Co -financing: There was no borrower contribution, and no co-financing. Dates: The project was approved on June 15, 2010 and became effective on August 12, 2010. A level 2 restructuring took place on September 17, 2014 to adjust financial covenants of SMEs operating in under-served regions (i.e., requirements related to debt-to-equity and debt service coverage ratios), revise one outcome indicator target, and extend the project implementation duration for another 6 months (from September 30, 2014 until March 31, 2015). The project was closed on the new completion date. 3. Relevance of Objectives & Design: a. Relevance of Objectives: High. The project was designed as a response to a documented country 's priority. SMEs are central to the Turkish economy; at appraisal, they accounted for about 99 percent of all enterprises, for almost 80 percent of total employment, and 40% of total annual value-added. Access to bank credit for SMEs tightened in the aftermath of the 2008 global financial crisis. To address the above situation, the Turkish Government launched programs aimed at making SMEs more competitive and more efficient, notably by promoting their broader access to medium-term finance. One of the Government's policy actions was to enhance the existing Credit Guarantee Fund (CGF) scheme, which supports SMEs' access to credit by providing guarantees for firms lacking appropriate collateral. The second action was to increase funding to the Small and Medium Industry Development Organization (KOSGEB), whose mission was to support existing credit subsidies and technical services. Finally, the project was consistent with the country's Tenth National Development (2014-18), which has a pillar devoted to innovative production, high and stable growth, with activities to strengthen entrepreneurship and SMEs. On their side, the commercial banks considered SMEs credit as a major growth area, but pointed out four major obstacles to a further expansion of their activities in this segment: (i) lack of absorptive capacity, (ii) lack of transparency in financial statements, (iii) lack of proper and sufficient collateral, and finally (iv) an issue of financial product matching. Banks stressed that, while SMEs usually demand medium- and long-term financing, they do not have adequately structured resources to offer them, mostly as a result of the short-term maturity structure of their liability base. The International Financial Institutions (IFIs) were the major source of term finance. The proposed Second Access to Finance for Small and Medium Enterprises Project (SME II) was designed to develop this market and to help maintain credit flows to the SME sector. The project was at the core of the Bank 's strategy in Turkey . A World Bank's enterprise survey (2008) found that access to finance was the biggest business environment obstacle. The proposed lending operation drew on the above finding, and also sought to build on the success of the first Access to Finance for SMEs Project (FY07), a financial intermediation loan (FIL), which was implemented by two Turkish financial institutions, and complemented by two additional financing facilities provided in FY09 and in FY10, for a total loan amount of US$700 million equivalent. The project was designed to develop the SME market and to maintain credit flows to the sector. The project was consistent with the World Bank Turkey Country Partnership Strategy (CPS), the overall World Bank program supporting improved competitiveness and employment opportunities in Turkey. Several ongoing and upcoming World Bank operations would complement the proposed project, ensuring broad impact on economic growth and employment generation. The project is a key element of the World Bank's program aimed at improving Turkey's business environment and economic growth. The CPS 2008-2011 specifically called for improving SMEs' access to finance to improve competitiveness and employment opportunities, a message reiterated in the CPS Progress Report, endorsed by the Board on January 7, 2010. That relevance was confirmed in the new CPS (FY12-16) approved by the Board in April 2012, which has a pillar supporting enhanced competitiveness and employment, through further investment and business environment reforms, and the provision of medium and long-term funding to Small and Medium Enterprises (SMEs) and exporters. b. Relevance of Design: Substantial. The project objectives were clearly stated, and comprised a specific objective (Broadening and deepening the access of Turkish SMEs to medium- and long-term finance), and an overarching objective as well (Contributing to an expansion of productive activities and job creation). The achievement of the specific objective was to feed into the performance of the overarching objective. The results framework was overall sound and comprised the following components: (i) key inputs were three credit lines extended to six financial institutions supporting SMEs in urban and under-served regions, (ii) expected outputs consisted in the number of beneficiary SMEs and the volume of lending extended to them, (iii) expected outcomes included improved quality of the portfolio of supported projects, improved share of the finance provided to under-served regions (as identified in Turkey's Official Gazette), and (iv) impact was expected in the sales level and job creation in beneficiary SMEs. The project was expected to lead to changes in SME financing, in particular the project's requirements for PFIs to comply with banking and leasing regulations and financial covenants were expected to help PFIs build capacity in terms of risk management, procurement, and financial management and environmental safeguards. It was anticipated that the three participating banks would learn from the project's specific lending requirements in terms of credit assessment tools. The project specifically required financial institutions to rely on firms' financial condition for their lending decisions (assessed through cash flows, the debt-to-equity and debt service coverage ratios, instead of collateral). However, the project's requirements may have adversely led to the selection of less financially constrained SMEs, in particular in under-served regions. During implementation, the project's financial covenants had to be dropped in an effort to achieve the project target for the share of finance provided in under-served regions. 4. Achievement of Objectives (Efficacy): The project development objective was "to broaden and deepen Turkish small and medium enterprises' access to medium- and long-term finance, thereby contributing to an expansion of productive activities and job creation". * While the target of one of the outcome indicators was revised, given the marginal difference in the results, IEG has decided not to use a split rating. 1. Broadening and deepening the access of Turkish SMEs to medium - and long-term finance : Substantial. Achievements toward the objective are reflected by the performance of the following indicators: (i) the number of beneficiary SMEs was exceeded and reached 746 against a target of 200, (ii) the number of participating financial institutions (PFI) was also exceeded as there were 6 PFI against a target of 5, (iii) the quality of the project-financed portfolio was exceeded, as the non- performing loans ratio was only 0.7 percent, against a target of 7 percent, and finally (iv) the share of finance provided to under-served regions was also exceeded, as the achieved share reached 20 percent against a revised target of 17 percent, but was below the original target of 25%. The project contributed to the development of financial intermediaries, as it relied on five private and state banks, as well as a leasing company, which fully complied with the project's financial covenants and prudential norms throughout project implementation. Participating banks disbursed 20 percent in under-served regions, twice the usual lending share dedicated to these regions by Turkish banks in general. A total of 956 loans were provided to 746 SMEs operating throughout Turkey, for a total amount of US$518.5 million. The average loan size was US$620,000, with an average size of the beneficiary SMEs of 56 employees, an annual turnover of TL13 million at the time of the loan application, and an average maturity of SME II loans of about four years. Investment loans (US$142 million, 28 percent of total) had an average maturity of 49 months while working capital loans (US$373 million, 72 percent of total) had an average maturity of 47 months. These loans were offered at competitive rates and reflected market conditions and country's monetary policy. The spatial inequality that has been observed in the overall banking system, has been reduced in the SME II project. In developed regions, lending has been much less concentrated in major cities which traditionally account for 57 percent of loans in Turkey, compared with 29 percent in SME II. Even within developed regions, smaller cities and peripheral regions received more financing than usual as a percentage of the total amount distributed in these regions. 2. Contributing to an expansion of productive activities and job creation : Substantial. Impact of the project is reflected by the performance in the following indicators: (i) the target of increasing sales in beneficiary SMEs was substantial, as there was an additional volume of sales by an equivalent of US$900 million (using end-2014 exchange rate), against a target of sales that had to be a positive number, (ii) the target of increase in employment in beneficiary SMEs was also substantial, as there was an additional hiring of 6,918 persons against a target that had to be a positive number. The project contributed to increased gross revenues for beneficiary SMEs, but firms that received financing in 2010 were partially affected by the global financial crisis and mostly maintained, rather than expanded, their activities. Only 15 percent of loans approved in 2010 were for investment purposes, and the project's impact in terms of additional sales was the largest for SMEs that received a loan in 2011, suggesting that the impact of loans was best measured at least three years after the loan was disbursed, and finally providing larger loans to larger firms seems to have had the highest impact in terms of sales growth. Regarding employment, about half of beneficiary SMEs before 2015 created new jobs. According to the ICR (p,16-17), for firms that grew, the employee headcount increased by 16 percent with the project. For SMEs that received a loan only in 2015, an estimated 350 jobs is expected to be created in 2015. Furthermore, the project helped maintain employment at 173 beneficiary SMEs (7,800 jobs). As a result, over 35,000 jobs have been preserved by firms that generated or sustained employment levels after receiving the loan. On average, for every US$75,000 disbursed to an SME, one job was created and five jobs were preserved. The analysis of individual loan data suggests that: (i) providing financing to smaller firms has the highest employment impact; and (ii) SMEs beneficiaries created more jobs than firms that did not receive financing. 5. Efficiency: Substantial. An economic and/or financial analysis was not carried out at appraisal, as explained in the PAD (p.27), SME sub-projects to be funded by this operation were not pre-identified and project costs were not defined. The approach to assess efficiency developed in the ICR consisted in measuring the development results in relation to the amounts intermediated. The ICR (p.17) found that the project was efficient in boosting the SMEs growth as illustrated by the following developments, partially attributable to the project: (i) SMEs growth: The SMEs sector expanded as the median sales growth for beneficiary SMEs was 14.5 percent after receiving the loan. Most firms were able to keep and/or increase their employment levels thanks to the project. (ii) SMEs graduation: Some SMEs graduated as the project allowed banks to provide financing to SMEs over a longer period of time, thereby making available financing to accompany these firms to grow. The project accompanied 11 firms in graduating from SME status, with an average headcount growth rate of 57 percent. (iii) Financial gains: There were financial gains during project implementation, as the US$500.0 million loan amount generated SME lending in the amount of US$518.0 million, due to exchange rates gains. On the lower side of efficiency, delayed restructuring and the absence of a medium term review affected the efficiency of the project management. a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return (FRR) at appraisal and the re-estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal No ICR estimate No * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The objectives of the project were highly relevant, while the relevance of project design was substantial. The project responded to a well documented country's priority and was at the core of the Bank's strategy in Turkey. Efficacy was substantial. Toward the specific objective, key achievements included an increase in the number of PFI supporting the SMEs, a pick up in the number of beneficiary SMEs, in the quality of the project financed portfolio, and in the share of long-term finance provided to under-served regions. Toward the overarching objective, project impact was reflected by the surge in volume of sales and in employment for the SMEs that benefited from project lending, albeit there were no precise targets regarding the surge in sales and job creation. Efficiency was rated substantial. a. Outcome Rating: Satisfactory 7. Rationale for Risk to Development Outcome Rating: Key outcomes were achieved in broadening and deepening the access of Turkish SMEs to medium- and long-term finance, and in contributing to an expansion of productive activities and job creation of SMEs themselves. Risks to development outcome will arise from future micro- and macro-economic developments affecting the country's SMEs sub-sector and the financial sector. At the micro-level, project-specific risks are related to the future performance of the financial institutions that intermediated the provision of medium and long-term finance to SMEs, and the SMEs themselves. The financial performance of financial intermediaries were monitored during supervision missions and all of them complied with project requirements. With regards to credit demand, there has been sustained demand from SMEs for term finance. Moreover, one of the financial institutions (Kalkinma Bank) was able to find additional borrowers for reflows, thus providing a sustainable element of this type of operation, and this was incorporated in the design of the follow-up SME III and Innovative Access to Finance projects. However, going forward, credit line operations may become more difficult to implement and their development outcome compromised, if project requirements naturally exclude the most financially constrained firms. At the macro-level, risks to the performance of SMEs are linked to general country and financial sector risks and export performance. Country risks include the geo-political context and turbulence in the financial markets. The ICR reported (p.20) that the International Monetary Fund and other capital markets observers had warned against foreign funding dependence and foreign exchange lending in the Turkish banking sector. Central bank data show that the short-term foreign debt of banks more than doubled over the past four years to reach 40 percent of the total foreign debt of banks. These trends may affect the provision of medium to long-term funding to SMEs, although non-performing loans in the banking sector have remained low. If the medium and long-term finance to SMEs is hindered, the gains in sales and job creation by SMEs supported by the project may be affected negatively. a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: a. Quality at entry: The project design was largely based on the predecessor SME I operation, and other Bank lending to the Turkish financial sector. The project relied also on a multiple delivery model, as an improvement from the SME I project, which included one on-lender and two direct lenders. Several improved features of the loan included: (i) a longer minimum maturity requirements; (ii) full flexibility for banks to manage the foreign exchange risk and on-lend in currency of their choice; (iii) diversity of financial intermediaries with the inclusion of a leasing company, which helped reach smaller SMEs; and finally (iv) inclusion of three borrowers that could substantially benefit from exposure to IFI procedures to raise funds with other IFIs, and ensure greater spatial diversification. When the loan was being negotiated, the Bank was constrained by the fact that all international financial institutions operating in Turkey had to comply with a lending target in the under-served regions required by the Turkish government. On the Bank side, the financial covenants to which SMEs had to comply proved to be an obstacle in achieving the regional lending target of disbursed loans on time. Given the lack of flexibility in the minimum lending requirements in under-served regions and the lower capacity of SMEs in these regions, it would have been preferable to set differentiated project requirements for SMEs operating in developed and under-served regions. For the Bank, it was a matter of reconciling the growth of SMEs, while ensuring that they remain profitable and sustainable by abiding to higher banking standards. The balance was achieved during the restructuring phase when the regional lending target was reduced, and that the Bank revised the financial covenants to facilitate access to credit by SMEs located in the under-served regions. There was a comprehensive review of the risks associated with this project, which varied from substantial to low, and were mitigated accordingly, drawing on the lessons learned from the first project of the program, and the expanded Bank portfolio in the country. The only risk that materialized arose from the limited credit demand from SMEs located in under-served regions, which was mitigated by reducing the target level in this area, and relaxing the financial covenants. Monitoring and evaluation arrangements were overall adequate. Finally, implementation arrangements were made easier, because this operation was a repeater project, and it benefited from institutional and technical capacity established during the first project. Quality-at-Entry Rating: Satisfactory b. Quality of supervision: Project supervision entailed field visits to borrowers, PFIs, and end beneficiaries. Aide-memoires and Implementation Status and Results Reports (ISRs) following implementation support missions were submitted on time and provided updated information on country's economic developments. The field-based presence of the project leader and the fiduciary and safeguards team was an asset for the project implementation. ISRs were comprehensive, however they were not disaggregated at the level of an individual borrower in terms of the number of beneficiaries, amount disbursed, and loan maturity that would help better assess the performance of each borrower. While medium term review was planned for July 2012 (PAD, Annex 11), as explained by the ICR (p.22), in 2013 the team worked intensively with Ziraat Bank and Vakif Bank to identify measures that could be undertaken by both banks to accelerate disbursements in under-served regions. When all alternatives failed to produce the expected results, discussions on project restructuring were initiated in May, 2014, and the Bank team proceeded with project restructuring in September 2014 to cancel legal covenants and extend the project for another six months. A mid-term review might have been helpful to undertake an earlier project restructuring. Quality of Supervision Rating : Satisfactory Overall Bank Performance Rating : Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: Beyond being the guarantor of the loan, the Government showed ownership of the project and commitment to its objectives. The Government also supported the development of the leasing industry with the adoption in November 2012 of a specific law that recognizes the activity and allows for new products, such as operational leasing, sale and lease back. Furthermore, in 2011, the Government reduced the value added tax (VAT) for machinery and equipment leases from 18 to 1 percent, which stimulated productive investments. Although effective in enhancing the development outcomes of credit line operations in Turkey, regional lending targets were applied across the board to all IFI operations, regardless of eligibility criteria, financial instruments, and project requirements. As noted by the ICR (p.22), a thorough assessment of the absorption capacity of under-served regions had not been undertaken for this project. Regional lending requirements were set at 25 percent in 2010 and 15 percent in 2012. Government Performance Rating Satisfactory b. Implementing Agency Performance: As reported in the ICR (p.23), all three participant banks performed well during project implementation as detailed in the following paragraphs. Kalkinma Bank, an on-lender financial institution, exceeded all project development outcomes, and upgraded its internal system to comply with monitoring and reporting requirements. It further proceeded with a reallocation of funds between PFIs to accelerate project implementation and complied with all project requirements. Finally, this bank disbursed fully its credit line two years ahead of schedule. Vakif Bank, the first direct lender, fully complied with all requirements throughout project implementation, and ensured good quality reporting. This bank mitigated the foreign exchange risk and disbursed the majority of loan proceeds to SMEs in local currency. This flexibility enabled Vakif Bank to achieve the greatest spatial distribution of loans (with 45 provinces in total). In under-served regions, this bank provided loans to SMEs in 24 provinces located in under-served regions, compared with a maximum of 17 provinces by other financial intermediaries. However, the average loan amount in under-served regions was lower for Vakif Bank compared to other intermediaries. Ziraat Bank, the second direct lender, complied with requirements throughout project implementation, and effectively staffed the PIU. The bank managed to disburse US$218 million to SMEs based on US$200 million funding. Also, Ziraat Bank provided longer term funding compared to the other two participating banks. Implementation delays for this project can be partly attributed to initial shortcomings in ensuring compliance with fiduciary standards, and its lengthy reorganization after two years of good performance. Its disbursement rate in under-served regions was the lowest among the participating banks. Implementing Agency Performance Rating : Satisfactory Overall Borrower Performance Rating : Satisfactory 10. M&E Design, Implementation, & Utilization: a. M&E Design: As reported in the ICR (p.11), the PAD and the project's operations manuals provided explicit M&E arrangements, as well as a clear definition of expectations in terms of reporting. However, the quality of indicators could have been improved, as some of them did not have baselines, and some target indicators were imprecise (sales and jobs creation levels). The participating banks (PBs) were to prepare yearly reports including output and outcome indicators in the results framework and semi-annual financial management reports included in the Operations Manuals. The Bank team was to monitor core indicators from PBs' internal reports and from reports provided by the PFIs. The project had a clearly defined framework for the monitoring and evaluation (M&E) of the project outcomes and impact with appropriate data collection mechanisms to obtain information at the PBs/PFIs level, and at the sub-borrowers level. A survey of SME beneficiaries was to be conducted, which was to include beneficiaries of two Bank projects, including the SME I project, and a group of non-participating SMEs. The M&E framework also anticipated the undertaking of a survey of project beneficiaries, in order to better assess the impact of lines of credit operations and Bank-wide monitoring of Micro-and Small/Medium Enterprise Finance (MSME) projects. M&E arrangements were adequate and the Bank also developed reporting templates that helped ensure the availability of quality data at the time of the ICR. b. M&E Implementation: Indicators were effectively monitored during project supervision. Aide Memoires and Implementation Status and Results Reports (ISRs) provided updated information for the results framework. A level two restructuring took place to adjust SMEs financial covenants for under-served regions and review one outcome indicator target, but this did not affect substantially the result framework. An impact evaluation analysis was undertaken in 2011 and included data on SME I/II and the clients of two other Bank project supporting the financial sector. The study was useful in providing insights on the additionality of such credit lines. A beneficiary survey was not undertaken at project completion. c. M&E Utilization: M&E utilization had strengths and weaknesses. On the one hand, the 2011 impact evaluation analysis of the project, and results of the implementation of the SMEII were used to design a third phase of the project approved in December 2015. M&E Quality Rating: Substantial 11. Other Issues a. Safeguards: The project has been assigned Category "FI" in accordance with World Bank safeguard policy OP/BP/GP 4.01 (Environmental Assessment). The Participating Banks have each prepared Environmental Assessment Framework documents acceptable to the World Bank. The frameworks defined environmental assessment procedures to be used in sub-project evaluations. Environmental Assessment (OP/BP 4.01) and Physical Cultural Resources (OP 4.11) were to apply to the proposed project. The ICR (p.11) reports that implementation of safeguard procedures was overall satisfactory. For loan applications which involved new construction (category B), the FIs and PFIs were more hesitant to submit these to the World Bank since they believed SMEs would be resistant or not capable enough to prepare environmental management plans, which is not a requirement under the Turkish legislation, but was a requirement under the project (as per operations manual). b. Fiduciary Compliance: Assessment of fiduciary compliance was reported (p.12) in the ICR as summarized below: Financial management : The three participating banks ensured that their operating systems were fully aligned with the project's accounting, supervision, and reporting requirements as per World Bank procedures, and final assessment is that financial arrangements were mostly satisfactory. Kalkinma Bank developed a web-based platform that was used by PFIs for both the application process and financial management purposes. Ziraat Bank and Vakif Bank each developed internal systems to improve loan monitoring by the PIU, and access to documentation for verification purposes. Financial reporting between PIUs and branches for the SME II loans improved in quality during project implementation. However, the ICR did not report on the findings of the audit report expected to be completed after the project completion as scheduled in the loan agreement. Independent audit reports of the three participating banks were provided later on by the TTL, and the report opinion was qualified for two banks (Ziraat, and Vakif), and was related to the fact that the two banks did not recognize in their accounts the accrued interest income and accrued interest expenses on the amount due to IBRD, and any commission amounts in the project financial information. Procurement: Overall, all financial intermediaries followed the procedures described in the Operations Manuals. A few ineligible expenditures were identified during reviews and subsequently addressed. The participating banks and leasing company complained on the systematic requirement to justify their eligibility by keeping records of working-capital expenditures, which often comprise of several small-amount items. PFIs preferred to have sub-borrowers keep their own records, and rely on audit reports to verify the eligibility of expenditures. c. Unintended Impacts (positive or negative): d. Other: 12. Ratings: ICR IEG Review Reason for Disagreement/Comments Outcome: Satisfactory Satisfactory Risk to Development Moderate Moderate Outcome: Bank Performance: Satisfactory Satisfactory Borrower Performance : Satisfactory Satisfactory Quality of ICR: Satisfactory NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons: The review agrees with three lessons identified in the ICR as summarized below: (i) There is a trade off between expanding SMEs access to long -term finance and maintaining the alignment with business practices for financial institutions : The financial covenants, along with project's fiduciary and environmental requirements increase the transaction costs for PFIs and lead to the financing of only larger and more sophisticated firms. The desire to increase the project's development impact impeded swift project implementation, because of the disconnect between eligibility criteria and disbursement targets in under-served regions. A more effective approach to lending in these under-served regions needs to be considered, in order to address other financing constraints in these regions beside unavailability of financing. (ii) A wholesale lending model is most appropriate for an increased outreach to SMEs : An on-lending design increases the project's overall impact, for the following reasons: (i) a wider range of financial intermediaries increases the number and diversity of potential project beneficiaries and may ultimately lead to funding of under-served firms, (ii) the on-lending design enables new financial intermediaries to gain experience in working with international organizations, which will help them develop other sources of funding, and finally (iii) on-lending encourages healthy competition and causes less market distortion than direct lending, as the benefits are spread over a large share of the financial sector. (iii) Midterm reviews provide opportunities for strengthening a project : Bank teams should take advantage of midterm reviews to assess performance holistically and set expectations for end-project results. Project restructuring may be recommended before midterm review based on borrowers' commitments, changing economic conditions and prior experience with similar operations. While project restructuring can be highly administrative and may put undesired attention on a project, quick restructuring is advisable to avoid losing momentum in project implementation and may yield higher-than-expected results. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: This is a candid, comprehensive, and well documented ICR, but it could have been more concise. The storyline of project design and implementation is centered around the health and efficacy of financial institutions involved in the lending activity to SMEs. Sufficient attention was paid to the evidence related to results in terms of outputs, outcomes and impact of the lending activity spurred by the project's credit lines. Areas that could have been improved include the following: (i) while substantial parallel financing was well documented, its contribution to project outcome was not discussed, (ii) the report on performance in implementing safeguard policy and fiduciary compliance could have been improved, and (iii) the need to further explore gender issues and implications with regard to SME expansion. Additional information was provided by the Bank team to fill most of the gaps identified above. a.Quality of ICR Rating : Satisfactory