Report No. PID7980 Project Name Tanzania-Second Financial Institutions Development Project Project ID TZPE57187 Borrower Government Of Tanzania Implementing Agency Bank Of Tanzania, Directorate Of Bank Supervision P.O. Box 2939 Dar Es Salaam, Tanzania Attn: Mr. L.H. Mkila Tel: 255 51 118021; Fax: 255 51 113941 Date Of This PID March 10, 1999 Appraisal Date March 29, 1999 Projected Board Date April/May 1999 Country and Sector Background. Tanzania is among the poorest countries in the world with a per capita income of about US$ 140. The basic objective of the Government of Tanzania is to reduce poverty by increasing the annual growth rate to at least 6 percent by the year 2000 and to even higher levels thereafter, and by extending access to basic social and economic services. To achieve this, the Government has a strategy which articulates several necessary conditions. These include the continued growth of agricultural production by at least 5 percent per annum, the development of non-farm activities (e.g. tourism and mining) in the rural areas, and the acceleration of industrial growth from 3-4 percent to 6-7 percent per annum. A doubling of the growth rate of the services sector - including banking - will be required to support the targeted rates of growth in the productive sectors. This will be feasible with increased private investment in the financial sector and the successful implementation of banking reforms to promote financial deepening. Following the liberalization of entry into the financial sector that was initiated in 1991, the Tanzania financial sector currently consists of 20 commercial banks (of which only 17 are operating) and 9 NBFIs. There are 232 branches/outlets and over 3,000 people employed in these institutions. In terms of bank penetration and service delivery, this translates to an average of about 129,300 people being served per bank branch. As a consequence of the restructuring of most state-owned banks and the entry of new private banks, banking is substantially more competitive than it was five years ago, especially in Dar es Salaam. The benefits of competition are also slowly spreading to areas outside Dar es Salaam as the larger private banks have begun opening branches in the major towns in these areas. The six largest banks together have 85 percent of the deposit market while the largest bank is about three times the size of the second largest in terms of assets. The largest bank, NBC (1997) has a 56 percent market share for both loans and deposits. This represents a significant improvement in the structure of the banking sector. However, the overall growth of deposit mobilization and credit intermediation remains unsatisfactory. Deposit growth at 12 percent between June 1995 and December 1997 was negative in real terms while credit declined by 10% in nominal terms. Project Objectives. The objective of FIDP II is to create a competitive financial sector that, using commercial principles, will channel domestic savings into increased private investment. This will be accomplished by: (i) facilitating the privatization of state owned banks, (ii) strengthening the supporting financial infrastructure including bank supervision by the central bank, an improved payments system, and the establishment of a private credit information bureau, and (iii) implementing a strategy for the development of capital markets. The project (FIDP II) will help completion of the program of technical assistance begun under the first Financial Institutions Development Project (FIDP). FIDP was approved in 1995 to support the Government's financial sector development strategy. However, most of the resources under FIDP were re-allocated to the critical component for the privatization of National Bank of Commerce (NBC) and there remains a long agenda to be completed on the other components. Project Description. The Project will have the following main components: 1. Privatization of Banks. The credit will finance a management contract, systems improvement and implementation of a training program for the National Microfinance Bank (NMB). It will also finance the process of selecting a strategic investor for NMB. 2. Strengthening of Bank Supervision. To complement the IMF support that is already being provided, the credit will provide financing for a comprehensive program of training in a number of key areas where weaknesses have been identified. These areas include Problem Institutions Management, Managing Financial Institutions, Trade Finance, Credit Risk Management, Internal Control Environment, Treasury Risk Management, Computer Skills, Exposure to other regulatory functions in other countries, and development of an examination manual. By continuing to upgrade the skills of existing staff and developing the skills of new staff, the intention of the project is to create a properly trained cadre of Banking Supervisors which can effectively supervise the Tanzanian financial sector. 3. Improving the Payments System. The effective functioning of a financial system depends on the efficiency with which financial transactions are carried out. An inefficient payments system hinders economic growth and is a binding constraint to domestic and foreign trade. The first phase of the National Payments System Modernization Project (Situation Stocktaking) was completed under FIDP. The credit (FIDP II) will finance the continuation of the Vision and Conceptual Design, and the Technical Specifications phases. The second phase requires detailed knowledge of best international practice in a variety of specialist topics. Accordingly, BOT will use an experienced consulting firm to guide and support the subsequent detailed work. 4. Credit Reference Bureau. There is no formal mechanism in Tanzania for the sharing of credit information. Prior to the financial sector reform program, when the market was dominated by Government-owned banks and when there were few private borrowers, there was no demand nor need for sharing of credit information. A feasibility study for a Credit Reference Bureau (CRB) was financed under FIDP. This indicated that there was significant demand for a CRB and that the potential customers of such a service strongly favored a cooperative-type arrangement whereby the primary users of the credit information would also be the primary owners of the bureau. FIDP II will finance an initial subsidy to launch the Credit Reference Bureau in conjunction with private sector shareholders with the intention that it would -2 - reach financial sustainability within two years from the start of operations. 5. Capital Markets Development. Under FIDP, the CMSA successfully established the Dar es Salaam Stock Exchange (DSE) to the point where two Initial Public Offerings (IPOs) took place during the first half of 1998. DSE now has a small pipeline of further IPOs which, based on listing fees, will allow it to become financially viable within the next two years. Under FIDP II, the project will continue to support CMSA by financing a package covering incremental operating costs, short-term technical assistance, training, research activities and an ongoing program of public education. CMSA is expected to reach financial sustainability within the first two years of the project as it realizes fee income from IPOs and listings on the DSE. 6. Contractual Savings-Insurance Supervision. As a first step towards the regulation of the insurance industry, the Government has established a supervisory authority (an Insurance Commission). With support from FIDP II, the Commission will develop a supervisory methodology and policy framework which will include the drafting of regulatory guidelines and the supporting accounting principals and standards to be adopted by the industry to meet the legislative requirements. In addition, and concurrent with this activity, the Government intends to address the dearth of actuarial expertise in Tanzania which is required to support the development of the sector. The credit will also finance a study to help formulate a policy framework for pension regulation, including the feasibility of creating a single institution to oversee pension and insurance regulation. 7. Privatization Trust Fund. This component would also provide funding for the establishment, on a pilot basis, and management of the first three years of the Privatization Trust Fund (PTF). The Government intends to establish the PTF mainly to broaden local participation in privatization while maximizing the financial benefits of the sale of privatized assets. The day to day operations of the PTF will be carried out by a private management company with access to merchant banking expertise. 8. Studies Fund. This component would finance studies on the options available to the Government for the restructuring and/or privatization of the other remaining public sector banks, namely People's Bank of Zanzibar, Tanzania Investment Bank and Tanzania Postal Bank. Project Financing. Initial estimates show that the project costs will be around US$ 29 million of which US$ 26.1 million would be contributed by IDA and the Government would provide the remaining costs. Poverty category. NMB, which has started off as a savings bank, is expected to eventually make short term micro-loans to groups and individuals without collateral. This will lead to increased incomes and employment opportunities for the poor especially in the rural areas. Environmental Aspects: The project is classified as Category C. This is a technical assistance project for the financial sector which will not have any direct or indirect environmental impact. Program Objective Categories - Implementation Arrangements: The Directorate of Bank Supervision in Bank of Tanzania will coordinate the implementation arrangements. The Directorate will keep in constant consultation with all the beneficiary agencies who will supply it with periodic project progress reports. It will also act as the focal point of contact between the Government of Tanzania and IDA during the project implementation period. Contact Point: -3- The InfoShop The World Bank 1818 H Street, N.W. Washington D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Processed by the InfoShop week ending July 23, 1999. Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. - 4 -