Document ofThe World Bank

Report No: 20367 GH

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 3.9 MILLION

US$5.13 MILLION EQUIVALENT

TO THE

REPUBLIC OF GHANA

FORA

RURAL FINANCIAL SERVICES PROJECT

MAY 12, 2000

Rural Development IIICountry Department 10Africa Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 3, 2000)

Currency Unit = CedisCedis 4,000 = US$1.00

US$1.00 = Cedis 4,000

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADB Agricultural Development BankAfDB African Development BankARB Association of Rural BanksASIP Agricultural Sector Investnent ProjectAGSSIP Agricultural Services Subsector Investment ProgramBOG Bank of GhanaBSD Banking Supervision Department (BOG)CAR Capital Adequacy RatioCAS Country Assistance StrategyCBO Community Based OrganizationDANIDA Danish International Development AgencyERP Economic Recovery ProgramFECECAM Federation des Caisses d'Epargne et de Credit Agricole MutuelFINSAC Financial Sector Adjustment CreditFSA Financial Services AgenciesGCE General Certificate of EducationGHAMFIN Ghana Microfinance NetworkGOG Government of GhanaIAPSO International Agency Procurement Service OfficeICB International Competitive BiddingIDA International Development AgencyIFAD International Fund for Agricultural DevelopmentLACOSREP Land Conservation & Smallholder Rehabilitation Project (IFAD)LC Letter of Credit

Vice President: Callisto MadavoCountry Manager/Director: Peter Harrold

Sector manager/Director: Jean Paul ChausseTask Team Leader: Rudolph A. Polson

ABBREVIATIONS AND ACRONYMS (cont'd)

MIS Management Information SystemsMDPI Management Development & Productivity InstituteMOF Ministry of FinanceMOFA Ministry of Food and AgricultureMRFI Micro and Rural Finance InstitutionMTR Mid Term ReviewNBFI Non-Bank Financial InstitutionNCB National Competitive BiddingNGO Non-Governmental OrganizationNPID New Products and Innovations DepartmentNPIF New Products and Innovations DepartmentPSC Project Steering CommitteeQCBS Quality Cost-Based SelectionRB Rural BankRCB Rural and Community BankRFID Rural Finance Inspection Department (BOG)RFSP Rural Financial Services ProjectRMDS Regional Microfinance Development SpecialistSCIMP Smallholder Credit, Input Supply and Marketing Project (IFAD)SHG Self-help GroupSOE Statements of ExpendituresTASC Transition Apex Steering CommitteeUNDP United Nations Development ProgramVIP Village Infrastructure Project

I

GHANARURAL FINANCIAL SERVICES PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 32. Key performance indicators 4

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 52. Main sector issues and Government strategy 53. Sector issues to be addressed by the project and strategic choices 9

C. Project Description Summary

1. Project components 112. Key policy and institutional reforrns supported by the project 133. Benefits and target population 144. Institutional and implementation arrangements 16

D. Project Rationale

1. Project alternatives considered and reasons for rejection 172. Major related projects financed by the Bank and other development agencies 193. Lessons learned and reflected in proposed project design 214. Indications of borrower commitment and ownership 225. Value added of Bank support in this project 23

E. Summary Project Analysis

1. Economic 232. Financial 253. Technical 304. Institutional 305. Environment 316. Social 317. Safeguard Policies 32

F. Sustainability and Risks

1. Sustainability 332. Critical risks 333. Possible controversial aspects 34

G. Main Conditions

1. Effectiveness Condition 352. Other 35

H. Readiness for Implementation 35

I. Compliance with Bank Policies 36

Annexes

Annex 1: Project Design Summary 37Annex 2: Project Description 39Annex 3: Estimated Project Costs 50Annex 4: Cost-Effectiveness Analysis Summary 51Annex 5: Financial Summary 52Annex 6: Procurement and Disbursement Arrangements 60Annex 7: Project Processing Schedule 70Annex 8: Documents in the Project File 71Annex 9: Statement of Loans and Credits 72Annex 10: Country at a Glance 73Annex 11: Innovative Pilots Linking Informal and Formal Financial Institutions 76Annex 12: Classification of Rural Banks, December 1998 78Annex 13: Overview of IT Constraints Facing Rural and Community Banks 81Annex 14: Flowchart of Project Management Organization 86Annex 15: Organizational Chart: Apex Bank for the rural and Community Banks 87

MAP(S)IBRD 30892

GHANA

RURAL FINANCIAL SERVICES PROJECT

Project Appraisal Document

Africa Regional OfficeAFTR3

Date: May 12, 2000 Team Leader: Rudolph A. PolsonCountry Manager/Director: Peter C. Harrold Sector Manager/Director: Jean-Paul ChausseProject ID: P069465 Sector(s): AY - Other Agriculture, FS - Financial Sector

DevelopmentLending Instrument: Financial Intermediary Loan (FIL) Theme(s): Rural Development

Poverty Targeted Intervention: N

Project Financing Data[ Loan Z Credit El Grant OI Guarantee El Other (Specify)

For Loans/CreditslOthers:Amount (US$m): 5.13

Proposed Terms: Currency Pool Loan (CPL)Grace period (years): 10 Years to maturity: 40Commitment fee: % Service charge: %Flnencing 33an: So~urc~ LGOVERNMENT 0.75 0.00 0.75IDA 2.95 2.18 5.13AFRICAN DEVELOPMENT BANK 2.92 2.09 5.01INTERNATIONAL FUND FOR AGRICULTURAL 5.39 4.73 10.12DEVELOPMENTBENEFICIARIES 1.95 0.00 1.95

Total: 13.96 9.00 22.96

Borrower: GOVERNMENT OF GHANAResponsible agency: BANK OF GHANA

Address: Accra, GHANAContact Person: The Director

Rural Finance Inspection Dept. (RFID)Bank of Ghana, Accra

Tel: 233-21-665338 Fax: Email:

Other Agency(ies):Bank Supervision Department (BSD)

Bank of GhanaAddress: Accra, GHANAContact Person: The Director

Bank Supervision DepartmentAccra, Ghana

Tel: 233-21-665034 Fax: 233-21-662038 Email: easiedu@bog.gov.gh

Annual 2.5 4.7 4.9 4.2 2.8 3.8Cumulative 2.5 7.2 12.1 16.3 19.1 22.9

Project implementation period: 6 YearsExpectedeffectivenessdate: 01/01/2001 Expectedclosingdate: 12/31/2006OMs PAD PoF, R.:- 2 -

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A. Project Development Objective

1. Project development objective: (see Annex 1)

1. The Rural Financial Services Project (RFSP) seeks to promote growth and reducepoverty in Ghana by broadening and deepening financial intermediation in rural areas through thefollowing measures: (i) strengthening operational linkages between informal and semiformalmicrofinance institutions and the formal network of rural and community banks in order to expandservices to a larger number of rural clients; (ii) building capacity of the rural and communitybanks, the principal formal financial intermediaries operating in rural areas, in order to enhancetheir effectiveness and the quality of services they provide; (iii) supporting the establishment of anapex structure for the rural banking system to provide the economies of scale needed for theseunit rural banks to address generic constraints related to check clearing, specie supply, liquiditymanagement and training, etc. which have impeded growth of the rural finance sector; and (iv)strengthening the institutional and policy framework for improved oversight of the rural financesector.

2. Strengthening effective linkages between informal and formal financial sector institutionswill involve the following measures: (i) developing, testing and disseminating innovative productsand instruments suitable to the needs of rural clients, often comprising small community self-helpgroups, associations with limited organizational skills, assets and information; (ii) supporting theorganization, training and empowerment of informal financial institutions, community self-helpgroups and associations to enhance their ability to mobilize savings and access credit from formalsources; (iii) investing in various mechanisms for more effective linkages between informal andformal financial sectors for better integration; (iv) improving the regulatory and policyenvironment under which informal financial sector entities operate to enable them to exploit newmarket opportunities; and (v) training and capacity building of microfinance institutions that serverural clients and often help link them to more formal sources of finance.

3. The capacity building program of the rural and community banks will comprise thefollowing measures: (i) undertaking a thorough and in-depth assessment of the financial andmanagement performance of each rural bank in order to determine the extent of the constraintsaffecting their profitability and operational effectiveness and to design appropriate policy response(liquidation/restructuring, capacity building needs, etc.); (ii) supporting a human resourcedevelopment program for key staff and personnel (e.g., managers, accountants, rural creditanalysts) in order to augment the overall quality of rural bank personnel; (iii) upgrading internalcontrols and procedures for greater transparency of operations needed to enhance depositors'confidence; (iv) investing in various technologies needed to promote rural bank-to-rural bankcommunication, operations and synergy; (v) rationalizing agency banking and linking the numberof agencies to each individual rural bank's capacity; and (vi) addressing residual policy constraints(geographical restrictions, secondary reserves, classification standards, etc.) which affect thesmooth operations and functions of the rural banking sector.

4. Establishment of an apex structure for the rural and community banks will entail thefollowing measures: (i) sensitizing of member rural banks, their shareholders, and clients on the

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proposed institutional changes which will be introduced under the apex initiative; (ii) developingand clarifying the institutional and legal framework under which the apex will operate; (iii)supporting technological innovations that will permit more efficient exchange of informationbetween the member rural banks, the apex, and the oversight departments of the Bank of Ghana,the central bank; (iv) strengthening the responsible departments of the BOG for more effectiveoversight of the activities of the apex bank and the member rural banks; (v) supporting trainingand other capacity building activities needed for the effective operations of the apex; (vi)establishing a decentralized clearing and support system of the apex consistent with the regionalclearing systems of the Bank of Ghana; and (vii) financing technical assistance to put into placeappropriate operational procedures and policies needed for transparency and accountability ofapex operations.

5. The program will also strengthen the Banking Supervision Department (BSD) for effectivemonitoring and supervision, as well as strengthen the capacity of the Rural Finance InspectionDepartment (RFID) for rural finance policy and strategy formulation. These two departments arethe focal points for monitoring of the rural and community banks. The investment in newtechnologies will facilitate improved reporting, standardization, and timely analysis of rural banks'returns to more effectively guide decision makers and provide an early warning system of changesin rural banks' performance. It will also reinforce the capacity of the Ministry of Finance (MOF) tocoordinate various programs supporting rural, informal and microfinance institutions and tocollaborate in the development of capacity building programs.

6. The approach and strategy described in paras. 2 to 5 above represent a holistic response tothe deep-rooted malaise of the rural financial sector which has significantly impeded theunleashing of rural economic growth and undermined realization of the benefits of earlier financialsector reforms (FINSAC). The need for a holistic approach is guided by past government policiesand the salient lessons of donor assistance to the sector, which has been piecemeal, uncoordinatedand short-term (as opposed to long-term), and thereby resulting in less-than-optimal developmentimpact. The objectives of this program are therefore consistent with the GOG's overall economicdevelopment and poverty reduction strategy as contained in the CAS and their attainment willlead to the emergence of a strong and vibrant rural financial sector to support private, ruraleconomic initiatives, and complement ongoing operations (rural infrastructure, services, etc.) andexpand benefits of the earlier macro-level reforms to the rural inhabitants.

2. Key performance indicators: (see Annex 1)

Output Indicators

Informal and Microfinance Sector* No. of rural microfinance groups organized and trained (by gender);* No. of clients reached by rural microfinance institutions;* Total deposits mobilized by rural/microfinance institutions;* No. of rural/microfinance groups accessing credit from rural banks.

Rural Banks* No. of clients and % of women as total borrowers;

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* No. of rural banks operating profitably;* Percent increase in loan recovery rates among rural banks; and* Percent increase in annual profitability of rural banks.

The Apex Structure* Perecnt increase in rural savings deposit of member banks;* No. of rural banks meeting capital adequacy ratios;* Level of profitability of apex bank;* No. of rural banks with full share subscription in the apex.

Impact Indicators

* Total annual loans and advances of rural banks;* Total annual savings mobilized by rural banks;* Total number of clients of rural banks

(Apart from quantitative indicators, information on qualitative indicators will also becollected and analyzed, paying special attention to disaggregation of gender aspects. Also,participatory evaluation processes will be implemented).

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 20185-GH Date of latest CAS discussion: 03/08/2000

1. The Country Assistance Strategy (CAS) dated March 8, 2000 supports overall economicgrowth and sustainable poverty reduction through macroeconomic stability, fostering an enablingenviromment for broader private sector participation in economic development, and ensuringbroad-based socioeconomic development through decentralization of core services. The proposedinvestment program is consistent with, and directly supports, these development goals of thegovernment. The rural financial institutions are the primary vehicles for providingcritically-needed financial services to Ghana's rural areas where an estimated 70 percent of thetotal population of 18.5 million live. By helping to better integrate the informal and formalfinancial sectors, strengthen capacity of participant institutions, empower rural groups andassociations, and provide the institutional framework for addressing generic constraints, theproposed operation will help to unleash rural economic growth leading to reduced poverty (animportant GOG objective). It will also help to broaden and deepen coverage of rural financialservices to a larger number of rural dwellers (who otherwise would not have access), help tobetter integrate rural and urban markets, and improve overall efficiency of financial servicedelivery. In addition, the proposed operation strongly complements and adds value to otherongoing and/or planned operations also supported by the CAS.

2. Main sector issues and Government strategy:

Sector Issues

1. With Ghana's rural sector accounting for 60% of total employment and 39% of GDP,efforts to improve the sector's competitivity and productivity remain at the heart of the country's

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accelerated growth and poverty reduction strategy. However, this sector, which is largelydominated by agriculture, remains severely constrained by poor infrastructure, resulting in highinput costs and low output prices, and limited used of improved inputs and modem productionprocesses and methods as a result of poor agricultural services and inadequate access to credit.

2. The lack of access to credit for input purchase (fertilizer, seed, labor), processing, andtrade remains a key constraint to improved economic performance in the rural sector, bothagricultural and non-agricultural. The rural sector's share of total formal credit was a mere 8percent in 1999. In addition, there has been a steady withdrawal from lending to the rural sectorby domestic commercial banks, particularly after the 1990 elimination of the 20 percentmandatory lending to agriculture, and this share (of 8 percent) is likely to fall. There is potentialfor filling part of this void with resources from the 111 small, community owned rural banks, anda multitude of small informal micro finance organizations and specialized microfinance institutions(including NGOs), but these entities are weak, fragmented, and operate with outdatedtechnologies and under residual policy constraints which need to be urgently addressed.However, based on international best practices and lessons of past operations in Ghana's ruralfinancial sector, this would only be effectively filled if rural microfinance institutions areappropriately strengthened to more effectively perform such tasks. Secondly, the lack of access toinstitutional credit further tends to undermine government efforts in other areas as well,preventing attainment of strong development impact. With substantial investments ininfrastructure and services, the lack of a strong rural financial sector is the "critical missing link"of an integrated rural development strategy, the lack of which continues to stifle private sectorinitiatives in the rural economy. Strengthening of the rural financial system will therefore put intoplace the third pillar needed for rural economic growth and poverty reduction. A number of theseconstraints are discussed below.

3. Weak rural banks. Many rural and community banks are weak, with limited skilled staff,and outmoded technologies to adequately deliver services to rural clientele, a diversified groupwith different and often changing needs for financial services. Of the 134 rural banks in existenceas at December 31, 1998, 23 were classified as distressed, with negative capital adequacy ratios(CARs), or a CAR of less than 1 percent. [The CAR measures the ratio of owned funds (such aspaid up capital, free reserves, plus accumulated profits or less accumulated loss) to risk assets].These 23 distressed rural banks were closed in 1999, after ascertainment of their inability toregain financial viability. Of the 111 rural banks remaining, 2 more became distressed during thelast quarter of 1999 alone, and these will likely be closed by BOG in accordance with the bankinglaws. About 56 of the 111 banks are rated as mediocre, defined as rural banks with capitaladequacy between 1 percent and 6 percent. The remaining 52 banks rated satisfactory are basedon the narrow classification of capital adequacy ratio alone, i.e., those with capital adequacy equalto or greater than 6 percent. The performance rating does not take into account other keyperformance measures such as provision for bad and doubtful debt, portfolio quality, shallowcapital and deposit base, etc. If more stringent criteria were applied, many of the banks currentlyranked satisfactory would be further downgraded. The average paid-up capital for the satisfactoryrural banks is only Cedis 48.1 million (UJS$13,000) and average networth of Cedis 282.1 million(US$78,000). Many banks are not often supervised within a given financial year: 29 of the 52satisfactory rural banks were last supervised in 1998, the longest supervision lag being March

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1998. There is also a large divergence in rural bank status, depending on the data source: there isan average divergence of Cedis 56 million in networth based on returns submitted by the ruralbanks and the examination conducted by the Central Bank. This is due mainly to the poorprovisioning for bad and doubtful debts by the rural banks, and the lax supervision provided bythe BSD. Consequently, policy prescriptions are likely to differ, depending on the data sourceused. Another area of weakness is human resources. A training needs assessment undertaken in1999 from a sample of 42 of the rural banks showed that 60 percent of managers had only adiploma or certificate, and 12 percent had GCEs or equivalent; only 28 percent of rural bankmanagers had degrees. Also, 50 percent of all accountants had diplomas, 50 percent had GCElevels, and none had formal degrees in accountancy. All projects officers only had a diploma orcertificate, with many having very little practical knowledge of rural investment appraisal.

4. Poor integration of formal and informal sectors. There is little real formalizedrelationship between formal and informal financial sector entities. Existing relationships are oftenad hoc. This relative isolation of the two sectors impedes effective integration of the rural andurban economies needed to attain sustainable impact on rural poverty reduction. In reality, theformal and informal financial sectors are important parts of the same continuum, and efforts needto be made to remove constraints affecting the smooth flow of information, technology, andresources between them. Some rural banks have increased outreach through association withNGOs that have established methodology, and through linkages with susu collectors and clubs.

5. Uncoordinated nature of past donor efforts. Past donor assistance to the rural financialsector has often been piecemeal, driven by each donor's comparative advantage and ruraldevelopment strategy. IFAD has in the past focused largely on grassroots, micro financeinstitutions; IDA, on the larger financial sector and the rural banks; and AfDB, on lines of creditchanneled largely through the ADB. Until now, there has not been a concerted and coordinatedresponse so much so that in some instances, measures instituted by one donor have often workedat crossed purposes with the efforts of other donors: for example, a line of credit is given to arural bank by one donor while another donor is financing capacity building activities in the samerural bank; or both donors support the same capacity building activities but use different triggersand requirements. Coverage has also been limited: for example, focusing on a few rural banks orinformal associations within a project sphere of influence. Also, experience has often not beenshared, often leading to costly duplication of efforts. Finally, donor assistance has often beenshort-lived, not allowing for sufficient time for reforms to take hold -- for example theIDA-financed project closed in 1995 when some reforms were still in progress, with no follow-upoperation planned.

6. Thin and overextended oversight capacity. The Bank of Ghana (BOG) has the statutorymandate to monitor rural bank operations (as is the case for other, mostly urban based,commercial banks). However, this task is made very difficult by the large number, isolation andwide geographic distribution of the 111 rural banks. As a result, poorly performing banks (thatactually need) do not often receive the intense supervision required and some banks may not besupervised in a given financial year. Current BOG supervision strategy normally consists of a teamvisiting each rural bank for 3 - 4 days to review reports and ascertain data reported. Thisapproach was adequate when there were only a few rural banks in existence. Now, with over 111

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rural banks scattered all over the 10 administrative regions, and many more applications fromcommunities wishing to establish rural banks under consideration, this approach is now costly andunsustainable. The situation is exacerbated by poorly trained staff of the rural banks and poorlymaintained files for quick supervision. Often, the BOG team may need to clean up the recordingsystem first before beginning its supervision, leading to lost time. Hence, new technologicalreporting standards which take into account not only current but future growth needs of the ruralfinancial system are urgently required.

Government Strategy

1. Regarding overall rural development, the government has undertaken a series of reformsand initiatives aimed at improved natural resource management, better rural infrastructure, andimproved quality of agricultural services to the rural population. [Government strategy for thesector is contained in these strategy documents: Vision 2020 (1996); National EnvironmentalAction Plan (1991); Forestry Master Plan 1996-2020 (1996); Land Sector Medium Term Plan1996-2000 (1996); Accelerated Agricultural Growth and Development Strategy (draft 1997,being finalized in 1999); Wildlife Development Plan 1998-2003 (1998); National Soil FertilityManagement Action Plan (1998); and Cocoa Sector Development Strategy (1999)]. In addition,government is undertaking, with multidonor support, major investment programs in ruralinfrastructure (ASIP and VIP) and services (AGSSIP) which will be complemented by theproposed project.

2. Government strategy for promoting rural financial intermediation calls for deepeningoutreach and expanding services to a large number of rural clients by: (i) promoting theformal/informal micro-finance sector through increased networking and capacity building, (ii)strengthening the overall capacity of rural banks for effective intermediation; (iii) creating aconducive environment for commercial bank intervention in the rural sector; and (iv) reviewingthe role of the country's Agricultural Development Bank (ADB) in supporting acceleratedagricultural growth, particularly with regard to medium and long tern lending.

3. In this context, GOG began the first systematic efforts to restructure the rural bankingsector between 1989 and 1995, with the IDA-financed Rural Finance Project. The project, whichwas also implemented by BOG, had a combination of institutional reforms and a line of credit toeligible rural banks. The undertaking of these reforms was a condition for individual bankparticipation in the line of credit scheme. However, experience of its implementation shows thatmany rural banks rushed through with these reforms in order to access the line of credit (whichwas quickly being depleted), and the capacity building process was halted as soon as theonlending resources which acted as a catalyst were exhausted. Additionally, GOG has initiatedother reforms for non-bank institutions, such as the PNDCL 328 (Non-Bank Financial InstitutionsAct) of 1993. Furthermore, the Ministry of Finance, in association with the Ghana MicrofinanceNetwork (GHAMFIN), has prepared a strategic framework for the development of microfinancewhich will be presented to Cabinet after revision following a stakeholders' workshop.

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3. Sector issues to be addressed by the project and strategic choices:

1. There is a clear recognition by policymakers that reform of the rural financial sector iscritical to the offtake and sustainability of economic growth on the one hand, and distribution ofthe growth generated to a larger share of the population, on the other. The latter distribution iskey to attainment of poverty reduction targets which is a cornerstone of government strategy ofpoverty reduction. GOG has made substantial efforts in the past which have had some payoffs:

(a) encouraging and promoting the establishment of rural banks among rural communities,characterized by local ownership and management;(b) undertaking financial sector reforms (FINSAC) which were essential in removinggovernment control of some banks and broadly improving the policy and regulatoryenvironment for the overall financial sector;(c) extending financial sector reforms to the rural banks, and ending a regime of targetedcredit and interest rate ceilings for the agricultural sector, thereby creating a morecompetitive environment;(d) encouraging the establishment of the Association of Rural Banks (ARB) andsupporting its efforts to transform the rural banks into an effective apex structure for amore efficient and responsive rural financial system; and(e) facilitating development of a training program for capacity building of micro and ruralfinance institutions through many private groups, including GHAMFIN.

2. In this context, and in order to build upon the successes of the earlier efforts mentionedabove, this operation will address the following issues:

3. Institutional reforms. Transformation of the rural financial sector will require strong andsustained emphasis on sector capacity building of its constituent institutions. Unlike other sectors,previous capacity building efforts in the rural financial sector have been largely uncoordinated andnarrowly focused at specific nodes along the rural finance continuum, thereby resulting in littlemultiplier effect on the rest of the financial sector, or the rural economy. Based on this lesson, theapproach to capacity building adopted under this program will have the following key attributes:holistic: following the continuum of institutions in the rural financial sector, from the informalfinancial sector, to the rural banks, the apex body and the Bank of Ghana; multifaceted: with manybroad attributes, covering human resource development, institution strengthening of rural groupsand associations, and various technological options; externalinternal linkages: utilizing a judiciousblend of both international and national experiences, best practices and knowledge; and long-term:sustaining reforms for the entire project duration and beyond to allow institutions to grow andbecome less dependent on continued donor or government subsidies.

4. Strengthening linkages and Microfinance Capacity The broader issue concerns theextent to which real development impact can be realized without effective integration of the ruraland urban economies. In Ghana, despite years of successful reforms, an estimated 30 percent ofthe rural poor live below the poverty line, with no major change in rural livelihoods. That benefitsof macroeconomic reforms have not yielded the desired impact on rural welfare (to the extentanticipated) underpin the existing rural-urban dichotomy in the economic development process.While a large part of this is due to the difficulties inherent in the rural milieu (transaction costs,

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high risks, uncertainties, inaccessibility, etc.), there is increasing evidence that the weak nature ofrural institutions (both financial and non-financial) is an important constraint in harnessing therural economic potential. On one hand, the informal sector entities are too fragmented and lackthe education, information and assets (collateral) needed to effectively obtain financial services.On the other hand, many of the formal financial institutions in urban (and quasi-urban) settingsfurther lack the experience and organizational arrangements to link "backward" into the ruralsector. For example, although a high proportion of clients of rural banks are informal groups,many of these banks often fail to effectively harness this source by developing appropriateinstruments -- "specialized windows and services" tailored to the needs of these client groups. Inmany instances, rural banks tend to adopt the behavior and mannerisms of the larger commercialbanks in the capital Accra, with very strict and limited hours of operation unsuitable to theirclientele. Many rural banks also tend to use financial products and loans made specifically for theurban clients who have access to capital and collateral. This inflexibility results in a mismatchbetween rural informal clients and formal financial entities. On the positive side, some of theleading rural banks have teamed up with NGOs to introduce microfmance methodologies such asvillage banking. The proposed operation will help develop and test new instruments and productsthat will take into account the important roles and comparative advantages of each actor in therural/micro finance continuum (rural banks, NGOs, community-based organizations, and ruralassociations, susu groups, etc.). The emphasis will be on: (i) identifying, mobilizing and traininginformal groups in mobilizing and managing their funds; (ii) organizing, sensitizing, andempowering informal groups as effective partners with formal financial sector entities; (iii)inculcating savings behavior among group members through practical programs and otherinnovations for more effective group cohesion; and (iv) training and capacity building formicrofmance institutions, including NGOs, to assist in group development and training throughtheir active participation in the provision of rural and microfmancial services.

5. Capacity building. The weak capacity of both formal and informal financial sectorentities is an important issue in developing strategies for a functional rural finance system. Thecapacity dimensions of the rural banks are to a large extent systemic, reflecting both structural andtechnological constraints which they face. The rural setting provides an effective barrier totechnological infusion and adoption, and/or attraction and retention of skilled and experiencestaff. Such staff often opt to stay in the large urban centers with basic social and economicfacilities. This situation is further exacerbated by the lack of adequate resources of the rural banksto provide the incentive to attract skilled staff, even in any setting. An important structural aspectof the capacity dimension relates to the unit nature of the rural and community banks. Forexample, operating in a restrictive catchment area, a small unit bank cannot, in a cost effectivemanner, capture and utilize new information, have strong bargaining position with suppliers ofservices such as training, or upgrade facilities. Hence, support for an apex is consistent with theneed to build strong and functional rural banks, with generic services being provided in a costeffective manner by pooling of resources, experience and expertise. A technological dimension ofthe capacity problem (also linked to the shallow resource base of the rural banks) relates to theinability to invest in, and/or harness basic information technology for operational purposes. Evenin an era when many ready off-the-shelf software exists, such as microbanker, many rural banksdepend on cumbersome ledgers, which makes reporting difficult. Acquisition and training of ruralbank staff to effectively adapt these innovations to rural banking would lead to huge cost savings

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in the long run and higher reporting standards. The program will therefore finance technicalassistance for specific institutional strengthening activities (strengthening internal controls,improving procedures for greater transparency and accountability, strengthening the operations ofsavings mobilization agencies, strengthening capacity for rural investment appraisal, etc).

Strategic Choices

6. Why rural banks and micro-finance institutions? The rural sector comprises nearly80% of Ghana's population of 18.5 million, with rural economic activities providing employmentand incomes for an estimated 60% of rural dwellers. At the same time, nearly 30 percent of ruralinhabitants live below the poverty line. However, financial services remain significantly limited atpresent, mainly provided by informal groups and rural banks. After relatively successfulmacroeconomic and financial sector reforms, the absence of strong rural and micro financeinstitutions have continued to impede the attainment of rapid rural economic development.Existing rural financial institutions are often community-based, with strong sociocultural linkages.The rural banks in particular are characterized by broad-based shareholdings by communitymembers and, compared to the larger commercial banks, have a higher propensity to serve clientswith low asset base, education and/or collateral -- clients who otherwise would have little or noaccess to formal financial services. At the same time, there is an emerging network of specializedmicrofinancial institutions that are testing out international best practice methodologies andadapting them to Ghanaian microfinance context and situations. Given the dispersion of ruralbanks, the nature of community ownership, and rural client base, development of strong rural andmicro finance institutions would provide a coherent framework for rural economic growth thatwould lead to lowered poverty rates and improved standards of living for a majority of thecountry's population.

7. Why an Apex Structure for the rural and community banks? The network of 111 ruraland community banks are widely (but non-uniformly) dispersed throughout the 10 administrativeregions of Ghana. Each rural bank is a separate and free standing, limited liability corporationoperating under the Banking Laws of Ghana (PNDCL 225). Given its limited size and depositbase, each of the rural banks is weak, both administratively and technically, and cannot on its owntackle industry-wide constraints described above. Bilateral protocols established with the largercommercial banks to provide these services are often costly, as these commercial banks are alsocompetitors of the rural banks. There is an existing but albeit limited framework of cooperationamongst the rural banks under the Association of Rural Banks (ARB) for the provision ofcommon services. The apex arrangement is therefore a logical expansion of, and furtherformalizes, the cooperative mechanism established under the ARB for the provision ofcommon/generic services in a more cost effective manner.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

1. The project components (summarized in the table below) are as follows:

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Capacity Building - Informal Financial Sector 6.39 27.8 1.86 36.3Financial Sector DevelopmentCapacity Building of Rural Banks Financial Sector 5.05 22.0 0.00 0.0

DevelopmentInstitution Building - Apex Institutional 9.89 43.1 2.90 56.6

DevelopmentInstitutional Support 1.63 7.1 0.36 7.0

Total Project Costs 22.96 100.0 5.12 100.0Total Financing Required 22.96 100.0 5.12 100.0

1. Capacity Building - Informal Financial Sector. This component will focus onstrengthening informal and microfinancial entities by developing, organizing, and trainingcommunity groups and associations; training and capacity building for microfmance institutions;developing and testing various instruments and products that would foster stronger linkagesbetween the formal rural and community banks and informal financial sector entities; sharing ofbest practices, including those from within the subregion; facilitating the input of NGOs aspartners in rural financial sector institutions; and removing any administrative and/or regulatoryimpediments to achieving effective integration. Activities under this component will build uponexisting initiatives such as the Ghana Microfinance Network (GHAMFIN), susu groups, women's'banking initiatives, cooperatives and credit unions, etc.

2. Capacity Building - Rural and Community Banks. This component will focus on: (i)restructuring weak rural banks and strengthening their operational effectiveness; (ii) strengtheninginternal controls of all rural banks including provision of new information technologies, logisticsand training of key staff; (iii) rationalizing the approach to agency banking (mobilization centers)by improving communication and logistics and better defining criteria for setting up such centersthat are linked to individual rural bank capacity; (iv) updating rural banks operational proceduresand policies; (v) providing support for information technologies (and related training) for moreefficient electronic reporting to the apex and BOG; (vi) developing an overall staff developmentplan for all categories of rural bank staff, including Board of Directors and implementing theseplans; (vii) strengthening rural bank-to-rural bank communication to facilitate greater operationallinkages; and (viii) reviewing and removing residual policies that may impede rural bank efficiencysuch as those restricting geographical area of coverage, secondary reserve requirements, etc.

3. Institution Building - Apex. This component will: (i) finance technical assistance neededto set up, train and operationalize an apex bank for the rural and community banks for thenetwork of 111 rural and community banks, including the key units/departments of the apex; (ii)provide support for initial capacity building activities, logistics (facilities, communications, etc.)and other start-up activities; (iv) support development of operational procedures and policies forthe apex consistent with the requirements of the Banking Law (PNDCL 225); and (v) financeshort-term technical assistance of trained and experienced international experts to assist the ruraland community banks in establishing and operating the apex initiative.

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4. Institutional Support. This component will provide support to the BOG, notably theBanking Supervision and Rural Finance Inspection Departments, to upgrade staff skills andimprove technologies. For the BSD, in particular, this support will be critical in enabling it tomodify its current approach to supervision of the rural banks, and thereby shifting to greaterstandardization and electronic reporting, retrieval and analyses of returns, and more targetedsupervision of banks based on assessment of the returns submitted prior to going to the field.Additionally, establishing a credible database will facilitate better pre-supervision preparationwhich will shorten the time spent by BSD staff at each rural bank. Support will be provided toRFID to strengthen its capacity for rural finance policy and strategy formulation, as well as forprogram implementation and monitoring. Support to the MOF will ensure continuity in ongoingrural microfmance initiatives such' as coordination of various programs and donor initiatives anddevelopment of training programs and funds being supported under the NBFI project. Thiscomponent will enable effective implementation, monitoring and evaluation of project activities,including financial management, reporting and audits (by independent frmns).

2. Key policy and institutional reforms supported by the project:

1. Policy and institutional reforms supported by the project are as follows:

(a) Proliferation of Rural Bank Agencies. Many rural banks have opened branches andagencies without proper clearances by the BOG. In many instances, these branches arelocated in far away towns much removed from the main office of the rural banks. Withweak capacity at the center, lack of proper logistics, and poor rural communications,supervision of these rural branches are often sporadic. The lack of proper monitoring leadsto fraud in some of these agencies, affecting rural depositors. Also, far flung branchesfurther burden the already overstretched supervision capacity of BSD. It is thereforeimportant to rationalize the approach to agency banking of the rural and communitybanks, linked to the capacity of the member banks. The key action steps for these reformswill be as follows: (i) BOG will issue a Memorandum to the management of all rural banksreiterating that henceforth it will close all agencies and branches opened after January 1,2001; (ii) BOG will urgently undertake a study to determine the magnitude of the problem(amount of depositors funds involved, the relative importance of these agencies in theoverall portfolio of the rural bank; the impact of these agencies on lending practices, etc.).The findings of these studies will be discussed with the donors and an agreement will bereached on clear and monitorable Action Steps leading to the rationalization of theseagencies. These steps would include the closing of non-profitable rural bank branchesoperating illegally in the rural areas.

(b) Secondary Reserve Requirement. BOG has established a 10 percent primary and 52percent secondary reserve requirement for the rural banks. Given the weak capacity ofthese rural banks, the key objective of the high secondary reserve ratio is to limit theexposure of depositors funds in the event of rural bank failure. This high secondaryreserve limits the amount of loanable funds available to the rural banks. Also, it undulypenalizes rural banks following prudential guidelines from lending for viable ruralenterprises. The proposed policy change explicitly links the level of secondary reserve to

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the banks' performance and commitment to prudential requirements such as loan recovery,appropriate provisioning for bad and doubtful debts, adequate internal controls, etc. Thefollowing action steps are therefore envisaged: (i) Primary Reserve. Depositing with theapex the primary reserve of 10 percent of all member rural banks of the apex; (ii)Secondary Reserve. The secondary reserve of 52 percent will be modified to ensure thatrural banks meeting all prudential requirements have greater access to loanable funds whilepenalizing those banks which do not apply prudential measures. The secondary reserveratio for all rural banks will therefore be based on the capacity of each rural bank and on agraduated basis (20%, 35% and 52% of secondary reserve, for example) depending onperformance and capacity of each bank. A graduated, risk-based secondary reserverequirement acceptable to IFAD and IDA will be established by BOG before effectivenessof the credit, with implementation monitored by BSD and the Apex Bank.

(c) Inappropriateness of Rural Bank Sanctions. All commercial banks (including ruralbanks) operate under PNDCL 225. Despite their large differences in size and operations,both the large commercial banks (GCB, Barclays) and the small rural banks are subject tothe same sanctions for violations of operating procedures and policies. The stiff penaltiesand fines applicable to larger commercial banks cannot be applied to the rural banks whichhave small capital base and low profitability. The relatively high fines mean in effect thatthese sanctions are not enforced at all on rural banks, further contributing to lax adherenceto rules and policies. The policy change envisaged would be as follows: (i) the apex bankwould become the equivalent of the other commercial banks for purpose of the sanctionsapplicable under PNDCL 225; (ii) a separate (and appropriate) set of sanctions would bedeveloped for the rural banks which are more consistent with their size, profitability andasset base; (iii) violations of PNDCL 225 by the apex would be enforced by BOG, whileviolations by the rural banks would be enforced by the apex bank. BOG will ensure that itdoes not transfer to the apex bank those sanctions over which the central bank hasfudiciary responsibility, such as withdrawal of the license of a rural bank. In all cases, theapex bank will ensure that sanctions applicable to member rural banks are communicatedto these banks via their Board of Directors, which shall have such rights to impose thesesanctions. The apex bank may, upon recommendations of the Board, deny access to apexservices to rural banks in repeated violations of the operating procedures and policies andgeneral code of conduct of participants in the apex arrangment. The BOG will be dulynotified by the apex of changes in the status of a member bank,and BOG reserves the rightto take additional steps as necessary to ensure compliance under the Banking Laws(PNDCL 225). The revised Guidelines of sanctions applicable to the rural banksacceptable to the donors will be prepared by BOG prior to credit effectiveness. Inaddition, the Code of Conduct of rural banks which are members of the apex acceptable tothe donors will be prepared and adopted by member banks prior to effectiveness of thecredit.

3. Benefits and target population:

Benefits

I . The interventions proposed under this operation will have both direct and indirect benefits.

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In general, direct benefits will include increased investment in Ghana's rural sector due to theexistence of a functional rural financial sector, which would lead to-expanded income investmentopportunities in both the rural farm and non-farm sectors. These, in turn, would lead to expandedemployment and improved incomes of rural households, including female-headed households asthey play a more important role in rural credit compared to their male counterparts. The net effectof sustained rural employment and incomes would be measured in terms of greater food security,household incomes, and lowered rural poverty rates. By broadening coverage and diversifying therange of instruments, products and services, these benefits would be captured by a wider segmentof the rural population, including those from among the poorest segments. Improved savingsmobilization would enhance the pool of financial resources available for investment in ruralenterprises, with substantial income effects in the rural economy. Indirect benefits would includestronger and more vibrant rural financial institutions capable of adopting new technologies andbetter managing risks, expanded pool of skilled personnel, more efficient transmission ofinformation, and improved confidence in the rural financial sector by rural depositors, investorsand borrowers.

2. Specific component benefits and targets are described below:

(a) Informalfinancial sector. An additional 330,000 rural clients are expected to benefitthrough access to financial services and products, whether as direct rural bank clients;through an anticipated 8,000 self-help groups (SHGs) to be organized and trained underthe project over the next six years in collaboration with NGOs; through specializedmicrofinancial institutions; through cooperating arrangements with susu collectors andclubs; or through new innovations such as financial services agencies (FSAs). Based onpast experience under the IFAD-financed SCIMP project, about 60 percent of the SHGswould be women's groups, while 70 percent of susu collectors' clients would be women.The total number of women participants is therefore estimated to be in excess of 200,000.At an average deposit rate of about Cedi 30,000 per day per client, incremental ruralsavings mobilized is conservatively estimated as Cedi 10 billion (IJSD 2.5 million) perannum.

(b) Rural and community banks. Investment in communications facilities, both tofacilitate electronic reporting and effective oversight of rural banking activities, would leadto reduced reporting costs (travel from rural towns to the Central Bank in Accra) andmore efficient service provision. Capacity building in agency management and improvedlinkage with informal sectors would lead to increased deposits in the rural banking sector.Investment in human resource development would lead to improved quality of theportfolio of rural banks, improved services, and better capacity to deal with risks. Thelatter is very important as many rural bank staff do not have adequate training oninvestment appraisal and loan administration.

(c) Apex bank. The key benefits would be: (i) more efficient service provision to the ruralbanks through access to the national and regional clearing system; (ii) improved liquidityand reduced costs of transactions through timely provision of specie to member banks; (iii)greater profitability through improved investment decisions and better management of

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risk; and (iv) greater confidence in the rural banking sector.

Target population

3. For informal financial sector institutions, the program will target rural groups andassociations, including women, as well as the poorest segments of the rural population served byinformal and microfinancial entities. For rural and community banks, the program targets the 1 1 1rural and community banks and their managers, Directors and shareholders. More than 1 11managers, at least 220 accountants and over 500 to 800 Directors will be trained under theproject. The program will be national in scope but focused on specific strata of the rural financialsector. However, participation of member banks will be phased, based on clear criteria anddetermined by the needs assessment of these rural banks.

4. Institutional and implementation arrangements:

1. The project will be implemented by the Rural Finance Inspection Department (RFID) ofthe Bank of Ghana. RFID has increased its capacity in recent years to manage similar operations,beginning with the Rural Finance Project which closed in 1995. The scope of responsibilities ofthe RFID has been recently reduced with the transfer of its management audit functions to BSDand a clearer focus on policy and strategy development. This sharpened mandate now betterprepares RFID to implement this program aimed at institutional and policy reforms and capacitybuilding of the rural financial sector. Project implementation will therefore be mainstreamed in theRFID, with key project staff being seconded to the RFID to augment its capacity through acompetitive search process within the BOG departments. Those staff seconded will not havecompeting responsibilities and will spend their time fully in project implementation. Where suchstaff do not have adequate training, training in procurement and financial management will beprovided through the project to augment their technical skills. The key project staff within theBOG will comprise a Project Coordinator, Procurement Specialist, and Accountant. These staffwill report to the Director, RFID.

2. Implementation of the microfinance component will be the responsibility of the RFID, withactivities contracted out to private sector entities, such as GHAMFIN, which will oversee thetechnical support being provided by participating NGOs. Each potential beneficiary group meetingeligibility criteria will prepare a funding proposal requesting support under the Rural andMicrofinance Capacity Building Fund. All such proposals will be reviewed by a committeecomprising the ARB, head of the microfinance clusters, representative of an NGO specializing inrural/microfinance, the Head of the Microfinance Unit of MOF, and the RFSP ProjectCoordinator. The Project Coordinator within RFID shall chair this committee. All proposalsapproved by the Committee will be recorded and sent to the implementing agency which willoversee contracting of services. In its implementing responsibility, the implemenring agency willensure quality of services, as well as timeliness of quarterly and annual reports to the RFSPmanagement. Disbursement under all such contracts will be made by the RFID, based onapplicable disbursement and procurement procedures and thresholds.

3. Similarly, a New Products and Innovations Fund (NPIF) will be established under the NewProducts and Innovations Department (NPID) of the apex to promote research and development

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of new and innovative instruments and products for rural financial intermediation. The NPIFCommittee will comprise of all members of the MFCDF, the Director of the NPID of the apexand the Deputy Managing Director of the apex, who will chair this committtee. For an interimperiod of two years until the NPID of the apex has been established, the Committee will bechaired by the Head, Microfinance Unit of the MOF and the responsibilities transferred to theapex after this transition period. The latter arrangement will ensure continuity in similar ongoingprograms under the NBFI Project while allowing the apex to develop its own capacity.

4. Overall policy guidance on RFSP implementation will be the responsibility of amultisectoral Project Steering Committee comprising the following: (i) The Governor, BOG orhis designee; (ii) the Director, RFID; (iii) one representative of the Ministry of Finance; (iv) onerepresentative of the Ministry of Food and Agriculture (MOFA); (v) one representative of theARB; (vi) one representative of a rural/microfmance network; and (vii) the Project Coordinatorwho shall act as Secretary to the PSC. The PSC will be chaired by the Governor, Bank of Ghana.The terms of reference of the PSC is in the Implementation Manual.

5. Project Monitoring. Project monitoring will include: (i) monitoring of overallimplementation, including procurement, disbursement, and financial management; (ii) monitoringof the rural bank reform processes, including adherence to stipulated legal requirements ofperformance, etc.; (iii) monitoring of supervision input of the agencies of the BOG such as BSDand RFID; and (iv) monitoring of general indicators of project development impact. Aparticipatory baseline survey will be undertaken. The project development impact will take genderand poverty-related aspects into consideration. Apart from quantitative indicators, information onqualitative indicators will also be collected and analyzed.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

1. Several alternative formulations of this operation were considered and rejected by keystakeholders and donor partners as inappropriate for the Ghana rural/micro finance context:

(a) Multiple donor projects targeted at different tiers of the rural finance continuum.Lessons of AfDB, Bank and IFAD-financed operations have shown the need for providingsupport to the rural and microfinancial sector in a holistic manner that adds value to andcomplements each individual donor initiative. Poorly coordinated approaches of the pasthave often resulted in dissipation of scarce resources and efforts, bottlenecks in sharinglessons of experience, institutional rigidities which undermine sustainability, and overall lowdevelopment impact. The approach adopted by this project is based on a coordinatedprogram co-financed by the principal donors active in Ghana's rural finance sector, with eachdonor participation based on its area of comparative advantage.

(b) Capacity building versus lines of credit. The focus of the proposed operation is tostrengthen capacity of formal and informal financial sector institutions for effectiveintermediation given the chronic weakness of the rural banking system: 24 distressed, 56mediocre, and 52 deemed satisfactory based on a narrowly defined CAR criterion. The issue

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is not a line of credit as such but appropriate sequencing of interventions that would ensureenhanced impact of the reforms. The first step toward increasing the liquidity available is toimprove the capabilities of the rural and community banks so that the 52 percent secondaryreserve requirement can be lowered, thereby releasing liquidity to those rural andcommunity banks capable of managing it. If inclusion of a line of credit is not properlysequenced, it would conflict with the core institutional building objectives of this operation,leading to less-than-optimal impact of these reforms on the rural economy. The initialemphasis on capacity building does not preclude all options for a resource infusion to therural financial sector during implementation. For example, some donors would considersupport for a line of credit after the initial period of reforms, and such facility could betargeted at the satisfactory rural banks, with key triggers for participation. Also, after thereforms, many commercial banks, notably the ADB, would consider wholesaling credit tothe rural banks rather than maintaining non-profitable rural branches. Therefore, a short andintense period of reforms would lead to the inflow of new resources to the rural financialsector, both from external and mobilized sources. Hence, the option of including a line ofcredit as a part of this program was rejected as too distractive to its core capacity buildingobjectives.

(c) Use of an Existing financial institution as the apex for the rural banks. Historically,Ghana's rural banks developed under a unit (as opposed to branch) banking culture, wherebyeach bank is independently owned and managed by members of rural communities.Requiring an existing financial entity, such as the ADB, to become the apex structure for therural banks would undermine the community ownership structure and lead to centralizationof decision making and service delivery at the time when the focus is on decentralization offinancial services and decisionmaking, and greater community participation in the ruraldevelopment process. The apex concept builds upon both the culture and history of the ruralbanking sector in Ghana, nurtured on a foundation of voluntary association promoted underthe Association of Rural Banks (ARB). The proposal to have another competitorcommercial bank providing services to the network of rural banks as the apex was discussedand rejected during project preparation by member rural banks during the SensitizationCampaigns held in Accra, Takoradi, Cape Coast, Kumasi, Tamale, Sunyani and Koforiduain 1999. Hence, such imposition would be a top down model, with a high non-participationrate by the member rural banks. Furthermore, the experience of the rural and communitybanks in dealing with commercial and development banks has not proven satisfactory interms of timely provision of services. It also does not appear likely that existing commercialbanks will treat rural and community banks as priority clients.

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2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

T 1 g . .g.............. . .Latest SupervisionSector Issue j Project (PSR) Ratings

.____ ____ ____ ____ ____ ____ ____________ (Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)

National agricultural research strategic National Agricultural Research S Splan formulation and its short-term (Closed 12/31/99)implementationRehabilitation and development ofresearch infrastructureHuman resources developmentStrengthening research/extensionlinkages

Development of a unified national National Agricultural Extension S Sagricultural extension system with (Closed 10/31/99)strong research linkages for diffusingimproved agricultural technologyCapacity building

Policy reforms in cost recovery and National Livestock Services U Sprivatization of animal health services (Closed 12/31/99)Getting government out of commercialproduction of livestockInstitutional reformProduction and distribution ofimproved livestock breeds, forage andpasture resources

Increasing exports of non-traditional Agricultural Diversification S Sagricultural exports, horticulture (Closed 12/31/99)capacity building

Legislative reform Fisheries Capacity Building S SFormulation of policy and action plansfor sustainable management of fisheriesresourcesDevelopment of aquacultureCapacity building in public and privatesectors (community-basedorganizations)

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Support to reforms of the formal S Sfinancial sector, and liberalization of FINSACthe financial institutions Closed

Support for capacity building of the Rural Finance Project S Srural and community banks Closed 6/30/95

S SSupport to reforms and capacity Non-Bank Financial Institutionsbuilding of non-bank financial Projectinstitutions

Support to reforms in the public sector Public Sector Financial Mngt S Sand capacity building of key sector Technical Assistance Projectagencies Closingl2/31/01

Access of rural population to Agricultural Sector Investment S Sinfrastructure, i.e. feeder roads, tracks, (Closed 11/30/99)markets, water supply (for humans, Village Infrastructurelivestock and irrigation), storage and (Closing 12/31/04)small scale food processing equipmentOther development agenciesProvision of input supply, marketing IFAD - Small holder Creditand credit services Inputs Marketing

Provision of extension, livestock and IFAD - Upper East Ruralwater supply services Development

Provision of extension, livestock and IFAD - Upper West Ruralwater supply services Development

Research and production of planting IFAD - Root and Tubermaterials ImprovementDevelopment of an integrated pestmanagement systemCommunity support and mobilization

Research, production, inputs and AfDB - Food Cropsmarketing support services Improvement

Rehabilitation of small scale surface Japanese - Irrigation i.water irrigation schemes Rehabilitation

Eradication of Cocoa Swollen Shoot EU - Cocoa Swollen ShootVirus Disease Eradication

Control of Rinderpest disease in cattle EU - Pan African RinderpestPrivatization of animal health services Control

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Production of rice in valley bottoms French - Rice Improvement

Capacity building DANIDA - TechnicalInstitutional strengthening Assistance to Ghana Rural

Banking SectorPromotion of agricultural exports and US - Trade and Investmentinvestment Promotion

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

1. The IDA-assisted Rural Finance Project (closed in 1995) provided the first comprehensivesupport to Ghana's rural banking sector. The project included both a line of credit to eligible ruralbanks and technical assistance for a financial restructuring program for rural banks to enable themto become more efficient in rural savings mobilization and credit delivery. IFAD has supportedmore than five projects in Ghana over the last six years, three with a credit/rural financial servicesstrengthening component focusing on micro lending for small scale on-farm/off-farm incomegenerating activities, with particular emphasis on rural women. The AfDB has had four successivelines of credit (1980, 1985, early 1990s, and 1999) to the Agricultural Development Bank (ADB).All of these donor activities have been largely uncoordinated (until now) and the salient lessonslearned have been incorporated into the RFSP:

(a) Training. Training of RB directors and staff has emerged as an essential element in thedevelopment of a viable rural banking sector with strong internal controls, transparency, betterbusiness practices and management of risks. Consequently, this project will have a heavyemphasis on training throughout all levels of rural, micro and informal financial institutions.

(b) Need for an Apex Institution. Lack of an apex institution has made it difficult forindividual rural banks to sustainably deal with common constraints, e.g. check clearing, speciesupply, and liquidity management. Hence, the project will support the setting up of an apexbank that would permit attainment of a desirable level of economies of scale in dealing withthese constraints.

(c) Need for stronger oversight. Improved oversight of rural bank activities enhanceddepositors' confidence in the overall rural banking sector, and this will be further supportedunder the project.

(d) Timely Reporting of returns. Long distances from the central bank and weak capacityaffect the ability of the rural banks to provide timely returns to the supervising entity, theBank of Ghana. Such delays in reporting undermiine the ability of the BSD to provide timelyoversight of banking activities. Investments in communications and related technologies willhelp to address this problem.

(f) Partnerships with NGOs crucial. Groups organized and trained by NGOs have shownpromising results, especially when group membership remained small and manageable. Thus,NGOs will be contracted to carry out group formation and training activities for the informal

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financial sector.

(g) Emphasis on Savings Mobilization. The IFAD experience confirmed that building andsustaining a strong rural financial system requires emphasis on savings mobilization asopposed to lines of credit, a key feature of this operation.

4. Indications of borrower commitment and ownership:

I1. The activities supported under this operation are the outcomes of consultations amongmany internal stakeholders (Bank of Ghana, ARB, member rural banks, private sector entities)and with the donor partners. They therefore represent a collectively felt need. In addition, theseactivities are the logical continuation of past donor (AfDB, DANIDA, IDA and IFAD) efforts inthe rural financial sector for which the Borrower has requested assistance in the past. Theproposed operation therefore has strong borrower ownership as demonstrated by the following:

* Borrower has undertaken a broad technical review and feasibility study of the apex andhas put together a cogent proposal for support by all participating donors;

5 Borrower's central bank (BOG) allocated and disbursed an amount of Cedis 500 million asseed capital to finance pre-start up activities even before donor funds were available;

* Borrower has initiated broad consultations, including visits both within Asia (PhilippinesRural Banks) and Europe (Rabobank) to assess and gain international experiences andlessons in rural banking. The Borrower has sought the technical partnership of theRabobank (Netherlands) which has a similar apex structure to assist it in implementing thisprogram;

* Borrower has established a high-level Transition Apex Steering Committee (TASC)chaired by the Governor of the Bank of Ghana (the central bank) and, correspondingly, aTechnical Committee to guide the conceptualization and design of this program;

* Borrower has undertaken a nationwide Sensitization Campaign to make all rural banks andtheir management aware of these important changes and the likely impact on theirinstitutions and communities;

* Borrower has supported development of a comprehensive training program formicrofinance institutions through collaboration with GHAMFIN;

* Borrower convened a Multidonor Roundtable on the Apex initiative during whichconsensus was developed on the key activities to be supported and agreement reached onthe next steps; and

* The Apex has been registered and a provisional license for its operations has been issuedby the BOG pursuant to Banking Laws 225.

2. Borrower has therefore strong ownership of the product and has taken clear leadership of

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the process of reforms in the rural financial sector.

5. Value added of Bank support in this project:

1. The Bank has worked closely with the Borrower and with many other donors, notablyAfDB and IFAD, in providing support for strengthening rural financial institutions in Ghana. TheBank has therefore worked at all three levels of the rural financial continuum -- microfinance andthe informal rural and cooperative sector, the rural and community banks, and the central bank.Consistent with its global experience and knowledge base, the Bank brings significantinternational experience from Asia and other regions, in assisting the government's efforts tostrengthen its rural financial sector and implement the reforms needed to unleash sector growth.In addition, the proposed operation complements past and on-going operations in the sectorfinanced by the Bank in rural infrastructure (ASIP and VIP), in agriculture services (AGSSIP),and microfmance (NBFI). The Bank's participation complements well IFAD's comparativeadvantage on rural poverty reduction and informal financial institutions, and AfIB's.comparativeadvantage with Agriculture Development Bank. These two donors would not together constitutethe critical mass of experience and strategic focus needed to provide the holistic support along thecontinuum of rural financial system. The combined participation of these three donors,unprecedented in the rural microfinance sector in Ghana, is therefore needed to support thisprogram.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):

O Cost benefit NPV=US$ million; ERR = % (see Annex 4)3 Cost effectivenessO Other (specify)

1. Cost Effectiveness Analysis

1. The project is an important vehicle for the GOG and the other internal stakeholders (BOG,rural and community banks, informal financial sector actors, etc.) to implement a series of wellcoordinated and targeted reforms of the rural financial sector aimed at inducing an acceptablelevel of efficiency in rural financial intermediation in support of growth and poverty reduction.The cost effectiveness analysis therefore focuses on: (i) the expected reduction in transactioncosts of service delivery; (ii) the reduction in response time to the needs for rural depositors andborrowers; and (iii) the overall quality of the rural financial sector portfolio attainable throughtraining and investments in improved internal control and technology.

2. The key assumptions are as follows:

(a) while a myriad of informal and microfmancial sector institutions are active in the ruralmilieu in Ghana, the assessment will focus on the susu groups, selfhelp associations andGHAMFIN members for which baseline information exists;

(b) for rural and community banks, the cost-effectiveness analysis will focus only on primary

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changes and their impact, for example, the extent to which investment in organizing andtraining groups lead to direct reduction in transaction costs, or how adoption of technologieswould result into time saved. Secondary (but nevertheless important) impact such assubprojects investments, while substantial, will only be described;

(c) where technical data are not available, the cost effectiveness assessment will utilize anassessment based on relative degree of intensity of the induced impact of the change, forexample, negligible, low, medium or high impact; and

(d) for purposes of comparison, the assessment will look at both before and after projectscenarios, and then a relative measure of the magnitude of the expected change.

Background and Context of the Analysis

3. The wide range of infonnal and micro financial institutions in Ghana offer substantialpotential to reach poor people in rural areas and link them up to the financial system (particularlythrough Rural and Community Banks). While a number of institutions-ranging from susucollectors to NGOs to savings and loan companies-have adopted international best practices andmade important advances in recent years, the scale and capabilities of these institutions remainlimited. Building the capacity of these institutions and linking them better to each other and to thefinancial system through RCBs is a critical component of the Project in order to achieve theobjective of making financial services more widely available to the rural poor. Training of thestaff and Directors of specialized MRFIs is expected to improve their application of best practicesand financial accounting systems, resulting in increased operational and financial sustainability andhence greater capacity to reach growing numbers of rural clients. Training to community-basedorganizations, self-help groups, susu collectors and clubs, and other informal institutions isexpected to increase the number of savings and credit groups as well as the ability of the targetpopulation to better manage and mobilize their own funds, establishing a better basis for fornaland semi-formal MRFIs to work with them to provide access to savings, credit, and otherfinancial instruments. Grants will also be provided specifically to facilitate development of suchlinkages, as well as the development of new, innovative financial products suited to rural clientgroups. The expected result will be substantial increases in savings mobilized from ruralhouseholds, as well as an expansion in their share of credit allocations by RCBs.

4. The project would lead to the training of rural bank staff and directors, upgrading internalcontrol procedures to ensure greater transparency in reporting, improving technology for moreefficient reporting, building of capacity for rural credit appraisal, and strengthening mobilizationagencies. It is expected that investment in training will lead to a higher caliber of staff, bettermanaged rural banks with an effective and efficient Board. This in turn will lead to betterinvestment and money management decisions, greater ability to manage risks, and overall healthyportfolio. Improved internal controls would lead to reduced fraud, and enhanced confidence ofrural communities in their local banks. Investment in information technology would lead to morecost-effective submission of rural banks' returns, better economic integration of the rural bankingsector, and reduced operating costs of the rural banks. Support for the mobilization centers wouldlead to increased deposit mobilization, increased deposit base, and more effective oversight of

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agency activities by the rural bank.

Summary Effectiveness Analysis

5. Details of the cost effectiveness analysis is in Annex IV but are summarized below.

6. Impact. The project is expected to substantially increase the number of rural poor withaccess to financial services, whether at the level of community-based organizations, MlRFIs, orrural banks. The direct impact is expected to be an addition of some 100,000 rural poor clients(at least 60,000 of them women), about half linked to rural banks (and an average increase ofabout 500 per bank) and the other half as clients of other MRFIs (an average of about 500 for 30GHAMFIN members), susu collectors and clubs (about 100 benefiting directly from the projectand adding an average of 200 clients), and new community savings and credit groups (about 500formed with an average membership of 30). The data base for monitoring these figures is weak,and it will be important in the early phases of the project to improve baseline data and monitoringsystems. The resulting increase in resource mobilization is expected to show up in a doubling ofdeposits in rural banks (from the Dec. 1998 base of cedis 117 billion). Because of present reserverequirements, no more than 38% of those additional deposits would be able to flow into increasedcredit for RCB clients; nevertheless, it is expected that a lowering of the secondary reserverequirement for satisfactory rural banks would also enable total loans and advances to double(from the Dec. 1998 base of cedis 58 billion). While the share of the poor in rural bank credit isnot available, this share is expected to rise as a result of the linkage efforts, so that loans andadvances to them would rise more than in proportion to the aggregate figure.

7. The ultimate impact of this increase in the financial assets and access to credit and otherfinancial services would be to improve the ability of the rural poor to manage the risks ofeconomic cycles and shocks that lead to fluctuating incomes and to invest and obtain the workingcapital necessary to raise their level of income. Since these effects of increased access to financialservices are well documented, the project's monitoring and evaluation activities will not take onthe expense of systematic measurement of impact at the household level, although an effort will bemade on a sample basis to verify that the impact of increased access to microfmance in Ghanaconforms to experience elsewhere.

8. The training activities of the Informal and Micro Financial Sector Component areinnovative in that they attempt to develop a sustainable market of training services for MRFIs,consistent with the emerging international consensus on best practices for development ofbusiness development service markets. It is expected that MRFIs will increasingly recognize thevalue of training their productivity and performance and hence will be willing to bear an increasingshare of the cost. The subsidy rate on professional development courses for RMFIs is expected tofall from 75% to 25% during the project period, with at least some of the highly-demandedcourses being offered independently by private training providers on a full cost-recovery basis.

2. Financial (see Annex 5):NPV=US$ million; FRR = % (see Annex 4)

Corporate Status and Establishment Costs of the Apex Bank

1. The Apex Bank is a public limited liability company registered under the banking law with

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rural banks as its principal shareholders. A head-office and five branches (Accra, Kumasi,Takoradi, Bolgatanga and Sunyani) will be established for an estimated $8.1million covering therehabilitation of premises, training for apex staff, vehicles, office equipment, furniture, data andvoice communication equipment within the Apex-Rural Bank-Central Bank network, technicalassistance, and initial operating capital. In order to avoid possible dominance of the Apex Bankby the larger rural banks, the Apex Bank's shares will be distributed evenly across all rural banks,regardless of each rural bank's size. In order not to compromise the rural bank's financial health,it will be required that no rural bank's capital adequacy ratio falls below the prudential level of6.5% after its share subscription to the Apex Bank. Based on December 1999 financialperformance data for rural banks, a capital contribution of ¢20 million per rural bank (currentlyequivalent to US$ 5,000) was deemed manageable, which amounts to p2.2 billion (or US$ 0.6million) for all the rural banks combined. The project will provide a capital grant for theremaining US$ 7.5 million needed for the Apex Bank's establishment.

2. However, not all rural banks can afford to make a full payment of their required capitalcontribution at this time. In fact, only 53 of the Ill rural banks are currently in position to pay asignificant portion of the ¢20 million each without compromising their financial health, with only23 rural banks presently in position to make a full payment. The remaining 88 rural banks willmake an initial contribution of at least ¢ 1 million, and pay the remainder in up to five installmentsafter a grace period of up to 5 years during which the rural banks' capacity will be strengthened(the exact number of installments and the length of the grace period to depend upon the individualrural bank's current financial health and projected performance). It is expected that a combinedtotal amount of ¢730 million (or US$ 183,000) will be mobilized at project inception, with theremaining ¢1.47 billion (or US$ 367,500) paid up over the next ten years. For now, thecorresponding capital needs will be financed by the project, bringing the project's contribution toUS$ 7.9 million. The unpaid share capital balance for each rural bank will be valued in US dollarsat the May 31, 2000 exchange rate. Any outstanding balance will attract an interest rate of 4%per annum on the US dollar value in order to preserve its purchasing power. However, actualpayments will be made in the local currency, after converting the installment in question into thelocal currency at the prevailing exchange rate. All rural banks will hold an account with the ApexBank (for the purposes of check clearing, specie management, and primary reserve requirements).All share capital subscriptions due will be deducted by the Apex Bank from the rural bank'saccount. An agreement will be signed between each rural bank and the Apex Bank spelling outthese payment arrangements.

The Apex Bank's Operating Income Projections

3. The Apex Bank's income will mainly comprise the return from investing (in TreasuryBills) the rural banks' primary reserves which the Bank of Ghana has allowed to be deposited withthe Apex Bank. The other relatively minor sources of revenue will come from investing some ofthe rural banks' clearing account balances; brokerage fees from treasury management services torural banks; and the return on invested equity contributions and depreciation provisions. Keyassumptions underlying the analysis are: (i) rural bank deposits grow at a relatively conservative30% per annum (instead of the recently observed 40%); (ii) the primary reserve requirement ismaintained at no less than 10% of total rural bank deposits; (iii) all primary reserves are

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maintained at the Apex Bank which it in turn invests them in Treasury Bills at an interest ratewhich steadily declines from 25% in the year 2001 to 18% by the sixth year to reflect likelymacro-economic improvements in the Ghanaian economy (this rate currently stands at 31%); and(iv) the composite secondary reserve requirement ratio declines from 52% to 50% in the firstyear, and down to 38% by the sixth year in tandem with improved performance among ruralbanks due to the capacity building program and a new risk-based secondary reserve requirementcomputation system. Based on these assumptions, the Apex Bank's income is projected toincrease from ¢5.8 billion (or US$ 1.5 million) in its first full year of operation, to ¢1 5.7 billion (orUS$ 3.9 million) by the end of the sixth year, most of it (average of 73%) coming frominvestments of rural banks' primary reserves.

The Apex Bank's Operating Cost Projections

4. The Apex Bank's operating expenses will cover: (i) rural bank inspection; (ii) rural bankmanagement and staff training; (iii) specie management; and (iv) other operating costs (staffsalaries and wages, utilities, administrative expenses, depreciation, etc.). Major assumptionsunderlying operating cost projections are: (i) the inspection function will start with a small coreunit of 10 inspectors, which will be scaled up gradually to its full strength of 32 inspectors over athree year period (note that full inspection will continue to be adequately provided by the centralbank over this period, and will be gradually transferred over to the Apex Bank in tandem with thelatter's increased capacity. Note also that the central bank will not transfer its statutory mandateof rural bank supervision, but will only delegate the inspection function); (ii) similarly, financingtraining activities from the Apex Bank's own resources will be introduced gradually, starting withthe second year of the Apex Bank's full operation and increasing in tandem with improvements inthe Apex Bank's financial performance (although training itself will be adequately provided, rightfrom the start, under previous arrangements funded by DANIDA, the Bank of Ghana, andcontributions by rural banks themselves and with new funding to be provided under this project);(iii) each of the five branch offices of the Apex Bank will have a bullion van for specie supply anda cross-country vehicle for rural bank inspection and training coordination; and (iv) rural banksare responsible for 50% of the training and specie supply costs, including related depreciation andstaffing charges, and for 100% of the operation of the IT equipment at their disposal, although theequipment's major maintenance and depreciation is the Apex Bank's responsibility. Based onthese assumptions, the Apex Bank's operating costs are expected to increase from ¢5.7 billion(US$ 1.4 million) to 012.7 billion (US$ 3.2 million). The bulk of the costs is constituted ofdepreciation charges, thanks to the sizable amount of rapidly depreciable information technologyunderlying the Apex system's set-up.

The Apex Bank's Operating Profit and Loss Projections

5. In assessing the Apex's profitability and sustainability, the overall financial performance ofthe Apex Bank is considered of prime importance, rather than the profitability of each branchoffice. In this regard, all figures have been consolidated in the financial projections. As a matterof strategy, the Apex Bank phases additional functions into its operations as and when it canafford them. Although it will need an operating grant of ¢3.2 billion in its pre-operation phase tocater for staff recruitment, salaries and training during the start up period, the Apex Bank is

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reduced costs) from more efficient field supervision and timely monitoring and reporting. The 111rural banks are expected to contribute a total of US$1.6 million over six years, largely ascontribution to training, and increasing assumption of the cost of project appraisals within therural banks. The financial burden of the required counterpart funding is again small, averagingabout US$18,0000 per rural bank over the next six years or US$ 3,000 per annum.

3. Technical:

1. The capacity building program for the rural financial sector represents international bestpractices and lessons learned over the last decade of rural and microfmance in Ghana. Theselessons were incorporated in the design of this operation. During the design stage, therepresentatives of the BOG, ARB and rural banks visited the Federation des Caisses d'Epargne etde Credit Agricole Mutuel (FECECAM) and IFAD-supported Financial Services Associations(FSAs) in nearby Benin Republic in 1999 to review operational experiences of an informalfinancial sector apex and visits to autonomous FSA microfinance institutions, including field visitsto their rural branches. Design of the apex arrangement was informed by initial technical feasibilityassessments undertaken in 1997 by SGV (Manila), which took into account lessons from thePhilippines rural banking sector. Also, these experiences were broaden by visits to the Rabobank(Netherlands) between 1998 and 1999. The latter has also assisted the ARB and the rural banks invarious training and capacity building initiatives. The ARB and its member banks have alsobenefited from training provided through a DANIDA technical assistance grant. During 1999,ARB undertook an independent assessment of the viability of the apex and determined that itwould also be financially viable based on certain features incorporated into the design.

2. In addition to these external linkages, preparation of this operation was also guided byinternal client consultations, mainly through Sensitization Campaigns undertaken by the TransitionApex Steering Committee and its Technical Secretariat during 1999. These regional workshopswere held in Accra, Cape Coast, Kumasi, Sunyani, Bonsu, Koforidua and Bolgatanga and wereattended by the regional chapters and members of the rural and community banks. These meetingshelped to validate initial assumptions of on the membership, configuration, and participation of therural and community banks in the apex initiative.

4. Institutional:

4.1 Executing agencies:

The Bank of Ghana, through its Rural Finance Inspection Division (RFID), is thedesignated implementing agency of the project. A key factor in this designation is that the RFSPfocuses on banking regulations, policies and institutional arrangements for which the Central Bankhas comparative advantage, compared to any other stakeholder entity. Additionally, the RFIDmanaged the previous Rural Finance Project funded by the Bank which closed in 1995. The RFIDwas restructured in 1999, divesting it of its inspection management audit responsibility andre-orienting it to focus on rural finance policy and strategy development. The focus onstrengthening rural financial intermediation in Ghana, within the appropriate legal and institutionalframework, is consistent with the revised mandate of the RFID.

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4.2 Project management:

The project would be managed by a team of staff with appropriate training, qualificationand experience that would be transferred from various parts of the BOG. The implementationteam will be selected based on proven expertise and experience, with additional training providedto augment their skills. The core staff will comprise a Project Coordinator, ProcurementManagement Specialist, and a Financial Management Specialist and these staff will have terms ofreference, experience and qualification acceptable to the Association.

4.3 Procurement issues:

A procurement capacity assessment has been undertaken of the implementing unit, theRFID, and a detailed Procurement Plan has been prepared for the first year of projectimplementation. In addition, applicable thresholds have been set based on the findings of theprocurement assessment. There are no specific procurement issue associated with this project.

4.4 Financial management issues:

An assessment of the financial management capacity was also undertaken of theimplementing and concrete steps were defined for further strengthening the implementing agency'scapacity for financial management, including training. In addition, a firm of independent auditorswill be hired to provide annual review of project financial management, beginning with an interimaudit to take place nine months after effectiveness. There are no specific financial managementissues associated with this project.

5. Environmental: Environmental Category: F (Financial Intermediary Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

This is a rural finance sector technical assistance operation focused mainly on institutionalreforms and capacity building. It therefore has no direct environmental impact and noenvironmental assessment is needed.

5.2 What are the main features of the EMP and are they adequate?

N/A

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: N/A

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

N/A

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

N/A

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's social

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development outcomes.

Experience from similar projects show that self-help groups which are well organized andhave the capacity to manage their deposits have higher probability of success. The programproposes to develop such groups. In this context, qualified NGOs will work closely as partnerswith rural banks to develop awareness of such self help groups. Ghana has a strong culture ofvolunteerism and NGOs are active in the rural sector. This grassroots presence makes them idealpartners as well as intermediaries between the informal and formal sector entities. Also, forindividuals whose social and economic disadvantages place then "beyond the frontier" of theformal financial sector, successful financial intermediation is often accompanied by socialintermediation, with the groups' cohesiveness a key factor in their success. These socialdimensions of this program have been taken into account in the design and implementationarrangements of this project.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Participatory approaches for community involvement in rural finance are now widelyrecognized in Ghana and were designed as an integral part of this program. Successfulimplementation of this program is contingent upon close collaboration between a wide range ofstakeholder groups (rural banks, informal groups, NGOs, local government agencies, includingDistrict Assemblies, agricultural cooperatives, farmer groups and traditional institutional entities,etc.), and a participatory process will be the key variable to this success. During projectpreparation, participatory methods were used to: (i) identify and discern among various optionsfor capacity building amongst informal groups and associations; (ii) ascertain donors' commitmentand support through a multidonor Roundtable workshop. Beyond the preparatory phase,participatory approaches will be used to determine priority areas for support, the nature of groupsto be financed, the sequencing of activities, and the various mechanisms for effective linkages withthe formal sector. The level of consultative dialogue to be undertaken will minimize theprobability of some groups being negatively affected by the proposed changes.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

N/A

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

N/A

6.5 How will the project monitor performance in terms of social development outcomes?

N/A

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

O Environmental Assessment (OP 4.01. BP 4.01. GP 4.01) r Yes 1 NoEl Natural habitats (OP 4.04. BP 4.04. GP 4.04) El Yes 1 NoE Forestry (OP 4.36, GP 4.36) El Yes M NoO Pest Management (OP 4.09) El Yes 1 No

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El Cultural Property (OPN 11.03) l Yes 1 NoEl Indigenous Peoples (OD 4.20) L Yes 1 NoEl Involuntary Resettlement (OD 4.30) E Yes 1 NoEl Safety of Dams (OP 4.37. BP 4.37) ElI Yes M NoEl Projects in International Waters (OP 7.50. BP 7.50, GP 7.50) El Yes IZ NoEl Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) E] Yes ER No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

N/A

F. Sustainability and Risks

1. Sustainability:

1. Certain design features of this project provide a high probability of sustainability. First, theholistic approach adopted allows for transmission of best practices and the building up of initialcritical mass of skilled staff. Focusing on the continuum provides broad ownership beyond thetraditional stakeholder groups. Linking group development and training with the provision offinancial services of the rural banks is essential in their sustainability, as such groups will beprofitable and therefore will require no subsidies beyond the initial (start-up) phase. The proposedinstitutional reforms have been discussed with the key stakeholders who have also seen the highfinancial profitability and the cost effectiveness it would bring to their operations. This providesan important buy-in and a strong incentive to keep these reforms on track. Additionally,assessment of the apex indicates that it can be maintained without any subsidy from governmentor donor support beyond the initial capital investment period. Hence, it is financially viable.

2. The key risks are as follows: (i) unstable macroeconomic environment apex; (ii) lack ofcommitment to financial sector reforms; (iii) unclear governance relationships between the CentralBank and the Apex body; and (iv) weak management of the apex. The implications of these risksand likely mitigatory measures are discussed below.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Rating Risk Minimization MeasiureFrom Outputs to ObjectiveUnstable macroeconomic environment M In a high inflationary environment coupled with

high agriculture sector risks, rural banks preferto hold treasury bills. While this risk is beyondthe apex, it can be mitigated by the capacitybuilding initiatives which will enable the ruralbanks to better manage risk associated with, andinvest in the real sector.

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Lack of Commitment to the reform M Inability to keep the financial sector reforms onprocess track undermine the attainment of project

development objectives. This risk is minimizedby undertaking the administrative stepsnecessary to complete some key measuresupfront, such as the granting of license to theapex and agreement on reducing secondaryreserves from 55 to 30 percent.

From Components to OutputsUnclear governance arrangements M Unclear governance arrangements will lead tobetween the Central Bank and apex intrusion in the affairs of the apex by the Central

Bank. While the BOG maintains oversightresponsibility of all financial entities, undueinterference in the operations of the apex willlead to reduced confidence of member banks inthe apex body. This risk is mitigated by BOGapproval of the articles governing the apex andgranting of a special license for its operations asa quasi-central entity for the network of ruralbanks.

Weak management of the apex M As a new entity, many of the staff to berecruited will have little previous knowledge ofthe apex arrangements and its special legal andclient status. If the management of the apex isweak, it will affect the entire transformationprogram. This risk is mitigated by therecruitment of long-term TA to train apex staff,by secondment and attachments to similar apexentities such as the Rabobank; and byrecruitment of very experienced managers.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)M

3. Possible Controversial Aspects:

This operation is a straight forward capacity building operation focusing on institutionbuilding within the continuum of rural financial institutions (informal and semi-formalmicrofmance, rural and community banks, and the apex). It has no controversial aspects.

G. Main Credit Conditions

1. Effectiveness Condition

The following constitute conditions precedent to effectiveness:

(a) The deposit by the Government of Ghana of US$100,000 equivalent into the ProjectAccount in the Bank of Ghana;

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(b) Completion and installation of a financial management system (FMS) of the RFSPacceptable to the Association;

(c) The Subsidiary Administration Agreement has been executed on behalf of theBorrower and BOG;

(d) Appointment of the independent auditor acceptable to the Association in accordancewith the agreed terms of reference; and

(e) The Borrower and BOG have submitted to the Association the ProjectImplementation Manual in form and substance satisfactory to the Association.

2. Other [classify according to covenant types used in the Legal Agreements.]

Financial Covenants

(a) The Borrower shall maintain adequate records in accordance with sound accountingpractices on the operations and expenditures of the project;

(b) The Borrower shall have the records and accounts (including the Special Account)audited at least once a year, in accordance with appropriate auditing principles; and

(c) The Borrower shall maintain adequate records on the basis of Project ManagementReports or statements of expenditures.

Implementation

(a) The Borrower shall not later than December 31, 2003 carry out jointly with theAssociation a mid-term review (MTR) of the progress made in meeting project objectivesand the assessment of the overall performance of the Borrower and the Association.

H. Readiness for Implementation

O 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

El 4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. Ihe project complies with

all other applicable Bank policies.

7tlY son Jeanl& shausse Peter C. HarroldTeam Leader Sector M nager/Director Country Manager/Director

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Annex 1: Project Design Summary

GHANA: RURAL FINANCIAL SERVICES PROJECT

;A SectorSector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Accelerate rural development and Percent increase in per capita Core Welfare Indicators Survey Stable macroeconomicpoverty reduction in Ghana with GDP of rural population; Ghana Living Standards Survey environment for povertyrural financial institutions playing (GLSS) reduction;a pivotal development role Percent reduction in rural pop. National Accounts

below poverty line; Government commitment toproposed financial sector reforms

Project Development Outcome I Impact Project reports: (from Objective to Goal)Objective: Indicators:Strengthen rural financial Total annual savings mobilized Quarterly reports BOG maintains supportive policyinstitutions in order to broaden by rural banks; and regulatory environment;and deepen services and enhance Mid-Term Reviewthe efficiency of rural financial Total no. of clients of rural banks; Apex Bank established andintermediation leading to Project ICR providing key services to memberaccelerated growth and poverty Total annual loans and advances rural banks.alleviation, of rural banks

Output from each Output Indicators: Project reports: (from Outputs to Objective)component:EMPOWER rural informal No. of informal groups organized Mid-Term Review Rural banks adopt and pursue afinancial institutions to expand and trained (by gender); corporate policy to promote theservices to rural clients, including No. of clients reached by rural informal financial sector.the disadvantaged and women microfinance institutions;

Total deposits mobilized byrural/microfinance institutions;No. of rural/microfinance groupsaccessing credit from rural banks;No. of clients and % of women asas total borrowers

RESTRUCTURE and strengthen No. of RB successfully BOG Annual Reportsthe network of rural banks with restructured; Project M&E Reportseffective internal control and No. of rural banks operatingmanagement profitably;

Percent increase in loan recoveryrates among rural banks;erecntage increase in annualprofitability of rural banks

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ESTABLISH the apex bank as a Percent increase in rural savings Mid-Tern Review Legal framework for the apexbroad institutional framework for deposit of member banks; established, with clearprovision of common services to No. of rural banks meeting capital Periodic Reports governance and entry and exitRB adequacy ratios; criteria

Level of profitability of apexbank;No. of rural banks with full sharesubscription in the apex;No. of rural banks clearing checksvia Apex;No. of rural banks receivingspecie from Apex

SUPPORT specialized No. of rural banks supervised Mid-Term Reviewdepartments of the BOG for annually;timely supervision and oversight No. of BSD staff trained in use of

IT based monitoring program;No. of staff of RFID trained

Support MOF for more effective No. of microfinance entitiescoordination of microfinance assisted by GHANFIN:initiatives, includmig GHAMFIN. No. of members of MRFIs trained

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)

Capacity Building - Informal 6.39Financial Sector

Capacity Building of Rural 5.05Banks

Institution Building - Apex 9.89

Institutional Support 1.63

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Annex 2: Project Description

GHANA: RURAL FINANCIAL SERVICES PROJECT

By Component:

Project Component I - US$6.39 million

1. Capacity building under the Rural Financial Services Project (RFSP) is intended tostrengthen the full range of institutions and groups engaged in providing micro-financial servicesin rural areas, differentiated into two components operating at three main levels: (a) capacitybuilding of the informal financial sector; (b) specialized micro and rural finance institutions(MRFIs, including NGOs with a microfinance focus and licensed non-bank financial institutions(NBFIs) such as credit unions and savings and loan companies); and (c) informal financialinstitutions and community-based groups (including susu collectors and clubs; savings and creditassociations; and local self-help groups, NGOs, cooperatives, women's societies, etc., with creditprograms or an interest in linking up with rural and community banks or specialized MRFIs). Thelatter two groups are important in enabling rural and community banks to realize their potentialfor extending financial services to the grassroots level. Hence the project aims to strengthen thecapacity of these institutions both in themselves, to become more effective managers andmobilizers of funds, and as mechanisms for linking the rural client base to the financial system.The focus during an initial pilot period of one to two years will be on training and linkagedevelopment, through special funding for this purpose. A review of experience during that pilotperiod will form the basis for deciding how to expand and institutionalize the program.Complementary support for new products and innovations on a selective basis will also beprovided.

2. The program will build on the initial work undertaken on training and capacity-building bythe Ministry of Finance and the Ghana Micro-finance Institution Network (GHAMFIN) under theNon-Bank Financial Institutions (NBFI) Project. This includes preparation of several componentsof a sensitization and training program for specialized MRFIs and draft studies on:

* Establishment of a Pilot Training Fund for Micro and Rural Finance Institutions; and* Feasibility Study for Capacity Building Fund for MRFIs

The latter study incorporates relevant aspects of the UNDP/AfDB MicroStart program, whichwill provide complementary experience with capacity-building that should be taken into accountin the review and institutionalization process.

Activities and Institutions Supported

3. During the pilot phase, the main types of capacity-building activities to be developed andfunded would fall under the headings of training and linkages. Based on experience during thepilot phase, as well as experience with selective capacity-building under MicroStart, additionalcapacity-building activities could then be incorporated.

4. Training would include:

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* Core training courses for management of MRFIs, including RCBs (where suchcourses go beyond those in the basic capacity-building program for RCBs underRFSP) as well as specialized RMFIs;

* Basic sensitization and "prerequisite" skills for staff and Directors of informalinstitutions and specialized RMFIs, to raise understanding of basic concepts andmethodologies in rural microfmance (including linkage banking);

* Management of community-based savings and credit associations;* Group formation and management (for informal self-help groups that want to

engage in savings and credit activities);* Follow-up consultations to ensure effective utilization of the training, in all of the

above cases (by the training provider or a specialized follow-up consultant);* Participation in selected regional seminars/conferences on micro and rural finance

and intensive overseas training, on a selective, competitive basis, to facilitatecontinuous injection of new ideas and international experience.

In addition, to support the development of high-quality supply of training providers to implementthe above program, some funds would be made available to the facilitating agency fortraining-of-trainers and collaboration with CGAP's Africa Capacity-Building Program. Fundswould also be available to facilitate the development of new training modules, if warranted bydemand and needs assessment, as well as to undertake needs assessment, develop monitoring andevaluation systems, and publicize training programs.

5. Linkage activities could include:

* Establishing or scaling up a "mobile banking" program (primarily for RCBs);3 RCB working with an NGO with a proven methodology to introduce the program and

train staff over a period of 2-3 years to be integrated as a product of the RCB;* Linking susu collectors or clubs with RCBs or MRFIs to improve the flow and

management of savings and credit;e Other mechanisms to facilitate financial intermediation between rural communities and

the formal financial system.

6. Applications for grant funding for these activities could come from:

* Rural and Community Banks;* Specialized MRFIs;* Informal savings and credit institutions;* Community groups and associations.

Selection would be based on pre-established criteria for the performance and capability of theapplying institution or group, such as those set out in the study on "Establishment of a PilotTraining Fund," and on the applicant's commitment to contributing a share of the cost.Implementation could be directly by a RCB or MRFI, or in collaboration with a facilitatingorganization such as an NGO.

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Administrative Arrangements

7. The two NBFI-funded studies mentioned above discuss the advantages and disadvantagesof alternative administrative mechanisms for implementing training and capacity-building funds,ranging from an apex organization to contracting with a consulting firm. At this stage, withoutadequate experience and a tested operational manual, it appears premature to resolve this questiondefinitively. In undertaking preliminary studies, the Ministry of Finance evidently has in view aneventual central fund through which funds from various sources could be passed in a mannerconsistent with the national strategy for developing the micro and rural finance sector.

8. At present, since implementation of capacity-building will be piloted initially through theRFSP, some of the administrative mechanisms that may be required may not suit the eventualinstitutional format. It is therefore considered advisable to utilize existing institutions andmethodologies during the pilot phase to gain further experience, without prejudging whatinstitutional mechanisms might eventually be decided upon. The review process would be utilizedto reach such a decision by the time of the RFSP Mid-Term Review, at which point a newapproach could be adopted if appropriate. The Microfinance Coordinator, located in the Ministryof Finance, will facilitate design and piloting of the grant program and will play a coordinatingrole to ensure that this process is carried out consistent with the programs of the Government anddonors for development of the micro and rural finance sector, and hence will be supported underRFSP for the initial two years.

9. As part of the RFSP, the Capacity Building program will be under the overallresponsibility of the Rural Finance Inspection Department (RFID) of the Bank of Ghana (BOG).It will be carried out by the following:

* Management Committee: will make funding and policy decisions. It will consist ofrepresentatives of a range of stakeholders, chaired by a high-level official of BOG, andfacilitated by the Microfmance Coordinator;

* Facilitating Agency: will be delegated the responsibility for making the arrangementsnecessary for program promotion, needs assessment, implementation, monitoring, andevaluation; this role will be taken up by a qualified microfinance institution and willcomplement training and capacity building program under the NBFI project; theMicrofinance Specialists in the Apex Bank clusters may also assist in facilitation,especially with respect to promotion and processing of applications;

* Implementing Agencies: Actual delivery of training, capacity-building, monitoring andevaluation, and other services will be contracted to qualified providers, which couldinclude private consultants and firms, NGOs, public sector agencies such as MDPI andthe Universities, etc. One role of the Facilitating Agency will be to prequalify and selectimplementing agencies, as well as manage certain aspect of service delivery.

Because disbursement of Project funds will be handled by the RFID's RFSP project

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management team, there will be no need initially to set up an independent fund.

Modalities

10. Grants would be on a matching or cofinancing basis; that is, the applicant/participantswould always be expected to bear a portion of the cost. Rates of copayment would be expectedto be highest for formal training courses aimed at specialized MRFIs, which should increasingly beable to incorporate such training in their budgets. Copayment would be presumably be lowest forbasic sensitization and training at the level of communities and self-help groups. In addition, therate of copayment might be designed to rise for a given institution or group with each successiverequest (or year of participation). Details of the matching grant program will be designedfollowing discussion by stakeholders at a workshop to discuss the studies on pilot training andcapcity building funds, which are expected to set out the issue and suggest some illustrativenumbers.

11. The program is intended to be demand-driven. To promote the program in the pilotphase, however, the facilitating agency may undertake needs assessment at the level of informalinstitutions and community-based organizations in order to design a program that would bemarketed to them (with an appropriate level of copayment).

12. Monitoring and evaluation will be critical to ensure that the grants are appropriately andeffectively used and to gather data for assessment of the pilot program. The facilitating agencywill be expected to design and implement the modalities for monitoring and evaluation of thecapacity-building component, including:

X Baseline inventory of MRFIs to be targeted for training;* Validation that contracted services have been delivered satisfactorily [e.g., evaluation or

validation forms signed by the participants in the training, which can also serve as abaseline for follow-up and evaluation, as well as for disbursement];

* Compilation of data on the services provided and beneficiaries;* Follow-up consultations, both to evaluate initial impact on the behavior of beneficiaries

and to reinforce (or solve implementation problems of) the initial training;* Annual audits, including verification on a sample basis;* Annual evaluation and needs assessments study to identify mid-course modifications after

the first pilot year and to serve as a basis for decisions about institutionalization atMid-Term Review;

* Periodic benchmarking for comparison with baseline data.

Innovation and New Products Fund

13. A second aspect of the Capacity Building program will be an Innovation and NewProducts Fund, aimed at improving the services and efficiency of RCBs and specialized MRFIs.These will be highly selective grants to finance the development and piloting of new financialproducts and innovations that could contribute to development of the micro and rural financeindustry, for example: new approaches to savings mobilization; innovative credit products or

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methodologies; micro-insurance; micro-leasing; payment transfer mechanisms; smart cards; etc.

14. Eligibility would be limited to high-performing RCBs and specialized MRFIs that havedemonstrated satisfactory financial and management performance and have the potential toimprove efficiency or extend outreach through the proposed product or innovation. A possiblemodality would be to make a fixed amount of funds available for awards on a competitive basisevery six months. Some copayment would be required, though relatively small (10-20%), giventhe highly developmental and innovative nature of the activities to be supported.

15. This program is intended as the precursor to a Research and Development Department inthe Apex Bank that would be charged with developing products and innovations to enhance theefficiency and outreach of micro and rural financial institutions. It will be administered separatelyuntil such time as the proposed Department is established and staffed.

Administration: Decisions will be made by a small Management Committee, chaired by ahigh official of BOG or the Apex Bank and comprised of representatives from a variety offinancial institutions.

Implementation will be done by the recipient institutions, which should be capable ofcarrying out the specified activities (according to established procurement procedures).

Monitoring and evaluation, as well as facilitation on an as-needed basis, will be handled bya microfinance network until such time as the program is fully integrated into the Apex Bank.

Key Steps

A. MRFI Training

A. 1. Workshop on Establishment of a Pilot Training Fund and Feasibility for a CapacityBuilding Fund"

A.2. Design of pilot program for matching grants for training to be implemented under RFSP,taking into account workshop recommendations and adapting to the modalities of RFSP. Defineroles of Microfmance Coordinator and implementing network (and prepare Form 384 for thelatter).

A.3. Design of monitoring and evaluation system, including:

* Inventory to establish baseline* Design of data systems* Periodic benchmarking

A.4. Continued revision and delivery of MRFI training courses building upon those initiatedunder the NBFI Project (with possible support from DANIDA, especially during the transition

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period between NBFI and RFSP).

A.5. Development and delivery of additional MRFI training courses and training of trainers,based on feedback from initial courses and needs assessment (with possible collaboration withCGAP's Capacity-Building Program for Africa).

A.6 Implementation of monitoring and evaluation system, including annual review andrevisions, and a full-scale evaluation at the end of two years as a basis for decisions aboutinstitutionalizing the program (at Mid-Term Review, if not before).

B. Grants for Linkage Development

B. 1 Workshop to discuss findings of two studies (carried out under NBFI) of linkagemechanisms:

* Ghanaian Microfmance Best Practices, focusing on linkages between MRFIs andself-help groups and community-based organizations;

* Review of Pilot On-lending Schemes, focusing on susu collectors and clubs.

B.2 Incorporation of demand for linkage mechanism in training needs assessment for informaland community-based institutions (see section C).

B.3 Design of criteria and modalities for grants under RFSP to RCBs, MRFIs, and communitygroups to develop linkage mechanisms, utilizing the process and institutional structure of thetraining grants (see section A) and drawing on the workshop discussions.

B.4 Publicity and initiation of grant process.

B.5 Monitoring and evaluation, as in A.6.

C. Trainingfor Informal and Community-Based Institutions

C. 1 Training needs assessment and review of available literature, including:

* Types of savings and credit associations and activities in rural communities; demandfor training to build capacity or form new groups; and willingness to share cost;

* Demand by community groups for linkages with RCBs and other MRFIs;* Capabilities of MRFIs and NGOs in Ghana to facilitate such linkages.

C.2 Feasibility study presenting options for cost-effective provision of training tocommunity-based savings and credit associations, self-help groups, informal agents, and othersengaged in financial services at the grassroots level.

C.3 Design of modalities for implementing informal training program, including:

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* Development of training materials and courses;* Process for identifying and certifying NGOs and others capable of delivering training at

the local level throughout the country;* Appropriate financing mechanisms (including grants through the training fund to either

demanders or providers of services; or direct procurement of training programs);* Incorporation of appropriate indicators and processes into the monitoring and evaluation

system.

C.4 Initial sensitization and piloting.

C.5 Roll out implementation more widely.

C.6 Monitoring and evaluation, as in A.6.

D. Innovation and New Products Fund

D.1 Consultant study to:

* Review literature on new instruments and innovations relevant to rural and micro finance;* Survey leading MRFIs (including RCBs) regarding their interest and capabilities in

developing new products;3 Consult with Apex Bank management regarding expectations for a Research and

Development Department;3 Prepare options and recommendations for selective awarding of grants for innovations and

new products, to pilot such a function for the eventual R&D Department.

D.2 Design of pilot program for funding grants for innovation and new products, based on theconsultant study and stakeholder consultations (or workshop, if appropriate), as well asexperience with the pilot training grant program, in consultation with a Procurement Officer toestablish acceptable funding and documentation procedures. Design to include suitable indicatorsfor evaluating impact.

D.3 Implementation of program as per agreed upon terms of reference and action steps.

Project Component 2 - US$5.05 million

1. The key activities under this component are: (i) building capacity within individual banksfor rural project appraisal, including the provision of logistics; (ii) strengthening internal controlsby investing in simple equipment which provide greater transparency in conducting rural bankbusinesses, and training staff in the use of such equipment; (iii) providing logistics and training tostrengthen linkages between rural banks and their agencies certified by the Bank of Ghana toensure better reporting, accountability for mobilized funds, and efficiency of responding to ruralclients' needs; (iv) investing in logistics to increase the efficiency of intrabank services, such ascash movements; (v) investing in basic communication equipment to ensure improved linkagesbetween rural banks and between rural banks and their certified agencies; and (vi) given the ruralnature of many of these banks, investing in the development of an improved reporting system

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which will ensure timely reporting and monitoring of rural bank activities. These activities will belinked to the existing DANIDA training programs. This component will be parallel financed byAfDB.

Project Component 3 - US$ 9.89 million

1. Key project interventions are as follows: (i) technical assistance related to start-up of theapex body, including consultation workshops and sensitization training of apex members; (ii)specific studies to more thoroughly define the functions of key departments responsible forclearing, deposit insurance scheme, treasury operations, and MIS; (iii) rehabilitation of head officebuilding, facilities, and procurement of logistics (equipment and vehicles); (iv) training for keypersonnel, including attachments at the Rabobank in the Netherlands; (v) the cost of technicalassistance which would be provided by Rabobank staff, and (vi) operational cost of the apex on adeclining basis.

2. Structure and Legal Framework. The apex is a quasi-central bank to the Ill rural banksproviding common services in check clearing, specie supply, liquidity management, rural depositsinsurance (at a later date), and other services which it might, from time to time deem essential forits members. The apex bank is registered under the Banking Law (PNDCL 225) of the Bank ofGhana, the central bank. The apex bank will be managed by Managing Director, a DeputyManaging Director, and other officers as appropriate. Structurally, it will consist of a BankingServices Department, which will have responsibility for check clearing, specie supply and otherrelated banking activities, an MIS unit which will have responsibility for information technology,and associated training, an Inspection Department, with responsibility for providing primaryinspection of member bank activities and for monitoring rural banks performance, a Training andCapacity Building Department which will have primary responsibility for coordinating trainingneeds of member banks. The apex will also have a New Products and Innovations Unit which willfocus on developing new ideas and concepts for improving rural banking, piloting innovationsfrom other countries and localities, and disseminating best practices to member banks.

3. Financial Viability of the Apex. Several simulations confirmed the financial viability ofthe apex arrangement, mainly from the flows of investments from initial shareholder subscriptions,placements of the member rural banks with the apex, and through cost recovery for services suchas check clearing and training. It is assumed that proceeds of the credit will be used for officebuilding, structures, equipment and logistics, including information technology. The precedinganalysis assumes that GOG will provide basic facilities as part of its contribution to the apex andthat credit proceeds would be used for rehabilitation and upgrading to meet the technicalrequirements of the apex. Assurances will be sought during negotiations that GOG will providethe appropriate facilities for housing the apex bank in Accra and its branches in the key cities(Kumasi, Cape Coast, Bolgatanga and Sunyani).

4. Transition to the apex bank. It is important that all rural and community banks wishingto participate in the apex initiative be able to do so during the first round, in order to avoidsending a negative image of the rural financial system, and to prevent further stigmatizing of thosebanks which are weak. Having said that, it will be essential that the weak rural banks be subject tosubstantial restructuring, including retooling of staff and preparation of an action plan that will

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guide their activities as a condition for participating in the apex initiative. The primary idea is thatat the end of the transition period, all banks would now be satisfactory, with good managementand strong internal controls. Seen from this perspective, the apex is a vehicle for capacity buildingand for maintaining a higher quality of rural banks as a sine qua non for membership. All memberbanks would then be subject to regular inspection services, and banks about to slip belowprescribed threshold of performance would be warned by the apex that such slippage would leadto disciplinary actions by the apex. Such disciplinary actions would include suspension of servicesand finally expulsion from the apex. Maintaining such high standards of quality and service will beessential in transforming the image of the rural banking sector. The criteria and critical steps aredescribed below:

5. Membership. Membership of the apex bank will be opened to all rural and communitybanks on a voluntary basis. The Association of Rural Banks as the promoter of the concept, hasundertaken substantial degree of consultation with all the rural banks and the results of theseconsultations have demonstrated an overwhelming support for the apex by the rural andcommunity banks. The next steps will be as follows: (i) clear information to all shareholders of themember rural banks on the apex as has been done through the sensitization programs; (ii)thereafter, each Board of individual rural bank will meet in session and resolve on the question ofparticipating in the apex initiative; (iii) each rural bank will through their Regional Chaptersparticipate in the selection process of the Regional Chapter's representative on the Board of theapex bank; (iv) each rural bank will subscribe to the share of the apex bank as stipulated in theOperational Guidelines of the apex; and (v) each member rural bank will abide by all policies andprocedures including a Code of Conduct governing the operations of members of the apex.

6. Share Subcriptions. All rural and community banks participating in the apex initiative willeach subscribe to an equitable number of shares. The number of initial share offering will bedetermined by the Board of the Apex. It is acknowledged that not all of the rural banks are in afnancial position for full share subscription at inception of the program. In such a case, theproject will provide support to the apex in terms of initial capitalization, with the value of theinitial capitalization divided equally between all the participating rural banks. The details of theshare subscriptions and capitalization of the apex are described below:

(i) the total capitalization of the apex bank is estimated at US$5.2 million;

(ii) in accordance with the Banking Law, Cedis 5 billion is required to set up a financialinstitution such as the apex bank, and the member rural banks will each pay Cedis 20million totaling Cedis 2.2 billion or 44 percent of the minimum capitalization required bythe BOG;

(iii) all rural banks capable of retaining a capital adequacy ratio (CAR) of 6 percent afterpayment of the Cedis 20 million will subscribe fully to the apex, while all other banks willcontribute up to an amount after which they will be able to retain the capital adequacyratio of 6 percent;

(iv) rural banks currently at or below the 6 percent capital adequacy ratio will contribute a

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minimum token of Cedis 2 million or any amount determined by its Board in excess of theCedis 2 million subscription;

(v) as the project will meet the unsubscribed portion of the shares in capitalization of theapex, it will pay the amount of the shortfall of the Cedis 5 billion and attribute anequivalent portion of the capital paid to those banks not fully subscribing. For example, fora rural bank which will only buy Cedis 10 million or 50 percent of its share subscription,the project will attribute Cedis 10 million of the capital to that bank;

(vi) For all such capitalization described in (v), each bank will have a five (5) yearmoratorium during which it will have ample time to build up its asset base and implementall capacity building programs that would help to strengthen its operations and increase itsprofitability. After the initial 5 year moratorium, the rural banks will buy back the shareoutstanding and unsubscribed over a period of five years at 20 percent redemption peryear in the equivalent dollar value of the shares. All such redemptions will be deducted atsource within the apex bank from the account of the member rural bank.

7. Entry and Exit Criteria. The apex, as designed, will not be a monopolist provider ofservices to its member banks. There will be clear criteria for entry and exit for member banks andany member may decide to opt out if, in the views of its shareholders and board, the apexarrangement no longer serves its corporate interests. This aspect of the design is essential toensure that the apex remains cost effective and competitive as well as innovative and forwardlooking. The procedure for entry will include formal resolution of the Board of the rural banks toparticipate in the apex arrangement, purchase shares, and take other steps necessary to satisfymembership. For banks wishing to leave the apex, a formal resolution of the Board andconfirmation by vote of the shareholders and notice to the Board of Directors of the apex and theBSD of the Bank of Ghana of the intention to leave will be required, after which all steps will betaken to divest the financial interests of the member rural bank from that of the apex. The sharesof the bank leaving the apex will be available for subscription by a new rural bank or if there is nonew bank, divided equally among the remaining banks. For new banks, the Board of Directors ofthe Apex will issue an amount of shares equivalent to that of the existing members based on theprinciple of equity. Such shares will be procured at the existing par value. All new rural bankscoming into being after the formation of the apex will as a condition for membership in the apex,subscribe fully to the shares at the existing par value.

8. Decentralization of Apex Services. Given the large number of rural banks (about 111), itwill be essential to decentralize the activities of the apex to regional clusters of banks in order toensure broader and efficient coverage. Five such clusters are proposed. These are the AccraCluster with 34 rural banks, the Kumasi Cluster with 29 rural banks, the Sunyani Cluster with 22rural banks, the Takoradi Cluster with 17 rural banks, and the Bolgatanga Cluster with 9 ruralbanks. Each cluster will represent a service center comprising check clearing, specie supply,training and capacity building services, with appropriate logistics and equipment.

9. Within each cluster, a Regional Microfinance Development Specialist (RMDS) and anM&E officer will be assigned, with primary responsibility for coordinating the development of

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informal financial sector groups, piloting new ideas, and assisting in group formation anddevelopment related to rural banking activities in the cluster. Each rural bank within a servicecluster will also have a Project Officer with adequate logistical support who would workproactively in organizing and training community groups and associations. Each cluster will alsobe a focal point for training and dissemination of best practices. Just as with the regional apexcenters, it will be essential to phase in the establishment of the microfinance clusters, and to learnfrom their operations so as to guide in scaling up to other areas. Given this approach, two pilotsclusters will be established, the first in Kumasi, to be followed in a few months with a second inBolgatanga. These pilots take into consideration existing activities of IFAD (SCIMP in Kumasiand LASCOREP in Bolgatanga) in group formation and linkages with the rural banks. It must benoted that implementation of the pilot will be selective, beginning with one or two banks whichare satisfactory, and expanding to other banks gradually. Capacity assessments of participatingbanks will be undertaken as a condition for their participation. Lessons learnt from these twopilots will be used in finalizing the operational arrangements for the remaining four clusters.

Project Component 4 - US$1.63 million

1. This component will focus on providing key logistics, including training, which may beneeded by the BOG to provide effective supervision of the apex and its constituent banks. Thiswill include the provision of information technology support linked to the apex MIS unit. The twokey departments will be the BSD and the RFID. This will include the incremental cost of theproject implementation unit, such as vehicles, equipment and salaries and allowances forconsultants, as well as travel and related costs. The Microfinance Unit will be supported under theprogram to ensure that a cohesive policy environment is established and that close coordinationand linkages are promoted with other programs and activities in the field of micro and ruralfinance, notably CGAP, AMINA and AFRACA.

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Annex 3: Estimated Project CostsGHANA: RURAL FINANCIAL SERVICES PROJECT

Capacity Building - Informnal Financial Sector 4.88 0.55 5.43Capacity Building - Rural and Community Banks 2.50 1.81 4.31Institution Building - Apex Bank 3.73 4.96 8.69Institutional Support 0.93 0.47 1.40

Total Baseline Cost 12.04 7.79 19.83Physical Contingencies 1.08 0.78 1.86Price Contingencies 0.85 0.42 1.27

Total Project Costs 13.97 8.99 22.96Total Financing Required 13.97 8.99 22.96

.RN Prol ot aeo U$ilo IJ$MA!*1 U $iUo

Civil Works 1.17 0.29 1.46Vehicles, Goods and Equipment 1.93 3.83 5.76Consultants Services 2.19 2.35 4.54Training and Studies 3.10 0.08 3.18Support to Rural and Community Banks 2.97 2.08 5.05Recurrent Costs 2.61 0.36 2.97

Total Project Costs 13.97 8.99 22.96Total Financing Required 13.97 8.99 22.96

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Annex 4: Cost Effectiveness Analysis Summary

GHANA: RURAL FINANCIAL SERVICES PROJECT

Summary of benefits and costs:

Main Assumptions:

The weak baseline data and monitoring systems in the informal and micro financial sector meanthat indicators will have to focus on those directly assisted by the project, using GHAMFINmembers as a proxy because it is undertaking an inventory and will establish a monitoring andbenchmarking system under the project. The total number of rural poor benefiting from increasedaccess to financial services under this component is expected to be on the order of 5 to 6 timesthe numbers assisted directly, through the impact on household income levels and stability. Theappropriate baseline data will be established for purposes of monitoring project implementationand undertaking impact assessment.

Cost-effectiveness indicators:

Existing ExpectedChange Effic'y

Informal and Micro Finance Sector

* Number of clients reached by all segments: 100,000by specialized MIRFIs

* Proportion of women clients in informal/micro finance programs 60%* Number of community groups 500

trained or organized* Number of staff and officials of MRFIs trained 600

1/4 professional courses/year x 25 participants x 6 yrs//* Percentage of cost of professional 25% 75%

training courses for MRFIs beingpaid by the MRFIs themselves

* Share of credit in rural banks' assets 33% 40% +7%For satisfactory-rated RCBs 50% +17%

* Increase in the level ofrural banks' 117 234 100%deposits (Cedi Million)

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Annex 5: Financial SummaryGHANA: RURAL FINANCIAL SERVICES PROJECT

I. FUNCTIONS OF THE APEX BANK

BANKING SERVICES

1. Check Clearing. Rural banks are not members of the National Bankers' Clearing Houseand have difficulties clearing checks through their correspondent banks (viz. long delays,expensive arrangements like the maintenance of non-interest bearing current account balances inseveral correspondent banks to meet clearing settlement needs).

2. Specie Management and Specie Movement. Currently rural banks receive very poorservices from their correspondent banks (excessive delays, mutilated notes), and move large sumsof money by insecure transportation means (between ¢54.0 million and ¢300.0 million per trip).

3. Treasury Management for Rural Banks. Rural banks are constantly in the market buyingand selling Treasury Bills (to ftlfill the mandatory secondary reserve requirements or trade onbehalf of their clients), but untimely transactions by their correspondent banks result in potentialrevenue losses.

4. "Central Banker" to Rural Banks. Lend to rural banks facing temporary liquidityproblems. Receive and safeguard rural banks' primary reserves.

5. Rural Bank Inspection. Complement Bank of Ghana's Banking Supervision Departmentthrough regular reviews of rural banks' prudential returns, on-site visits, and ensuring compliancewith banking regulations.

6. Guarantee Support for Rural Banks' Checks. Payments due to third parties outside thelocal clearing system may be made by draft drawn on the Apex Bank which will debit therespective rural bank's account with the value of the draft, thus guaranteeing payment instrumentsissued by the rural banks and thereby restoring public confidence in rural banks' instruments.

7. Sourcing of Domestic and External Funds. Act as a conduit for additional resources foron-lending to member rural banks.

NON-BANKING SERVICES

8. Training. Upgrading the skills of the management and employees of rural banks.

9. Deposit Insurance. A study will be conducted during the first two years of the project toassess the possibilities of setting up a deposit insurance scheme, including the possibility ofestablishing in-house services or through a subsidiary company or completely out-sourcing the

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services.

II. APEX BANK'S ESTABLISHMENT COSTS

10. A head-office and five branches (Accra, Kumasi, Takoradi, Bolgatanga and Sunyani) willbe established for an estimated US$ 8.1 million as presented in Table 5.1. Only summary figuresare presented in this annex. Please refer to project files for a much more detailed presentation ofthe analyses.

Table 5.1 Apex Bank Establishment Costs ('000 US Dollars)Head Accr Kumasi Takoradi Sunyani Bolgatanga TotalOffice a

1. Rehabilitation of Premises 707.6 29.0 29.0 29.0 29.0 29.0 852.62. Furniture 45.6 7.0 7.0 7.0 7.0 7.0 80.63. Office Equipment 320.1 20.2 20.2 20.2 20.2 20.2 421.14. IT Link with Rural Banks 3,348.4 3,348.45. Vehicles 166.4 95.1 95.1 95.1 95.1 95.1 641.96. Apex Staff Training 63.1 63.17. Initial Operating Capital 680.2 11.0 11.0 21.9 68.4 68.4 860.98. Technical Assistance 1,851.4 1,851.4

Total Capital Requirement 7,182.8 162.3 162.3 173.2 219.7 219.7 8,120.0

11. Premises donated by the Government of Ghana will be converted into suitable bankingpremises and suitably furnished and equipped. Communication (VSAT Satellite Dish System fordata transmission, and High Frequency Radio units for voice communication) between the Apex'sfive branch offices and head-office on the one hand, and the branch offices with their respectivecluster of rural banks on the other, as well as personal computers together with appropriatebanking software and their accessories for more efficient banking and accounting operations ofthe Apex Bank and its branches will be installed. Bullion vans for specie supply to the rural banksby the Apex Bank branch offices and cross country vehicles to provide transportation for branchmanagers when visiting rural banks, as well as for banking inspectors and training officers will beprovided. Training will be provided for Apex Bank staff, as well as initial operating capital, andtechnical assistance.

III. CORPORATE STATUS OF THE APEX BANK

12. The Apex Bank is a public limited liability company registered under the banking law withrural banks as its principal shareholders. In order to avoid possible dominance of the Apex Bankby the larger rural banks, the Apex Bank's shares will be distributed evenly across all rural banks,regardless of each rural bank's size. In order not to compromise the rural bank's financial health,it will be required that no rural bank's capital adequacy ratio falls below the prudential level of6.5% after its share subscription to the Apex Bank. Based on December 1999 financialperformance data for rural banks, a capital contribution of ¢20 million per rural bank (currentlyequivalent to US$ 5,000) was deemed manageable, which amounts to ¢2.2 billion (or US$ 0.6million) for all the rural banks combined. The project will provide a capital grant for the

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remaining US$ 7.5 million needed for the Apex Bank's establishment.

13. However, not all rural banks can afford to make a full payment of their required capitalcontribution at this time. In fact, only 53 of the 111 rural banks are currently in position to pay asignificant portion of the ¢20 million each without compromising their financial health, with only23 rural banks presently in position to make a full payment. The remaining 88 rural banks willmake an initial contribution of at least ¢ 1 million, and pay the remainder in up to five installmentsafter a grace period of up to 5 years during which the rural banks' capacity will be strengthened(the exact number of installments and the length of the grace period to depend upon the individualrural bank's current financial health and projected performance). It is expected that a combinedtotal amount of 0730 million (or US$ 183,000) will be mobilized at project inception, with theremaining ¢1.47 billion (or US$ 367,500) paid up over the next ten years. For now, thecorresponding capital needs will be financed by the project, bringing the project's contribution toUS$ 7.9 million. The unpaid share capital balance for each rural bank will be valued in US dollarsat the May 31, 2000 exchange rate. Any outstanding balance will attract an interest rate of 4%per annum on the US dollar value in order to preserve its purchasing power. However, actualpayments will be made in the local currency, after converting the installment in question into thelocal currency at the prevailing exchange rate. All rural banks will hold an account with the ApexBank (for the purposes of check clearing, specie management, and primary reserve requirements).All share capital subscriptions due will be deducted by the Apex Bank from the rural bank'saccount. An agreement will be signed between each rural bank and the Apex Bank spelling outthese payment arrangements.

IV. ANALYSIS OF THE APEX'S OPERATING INCOME AND OPERATING COSTS

INCOME PROJECTIONS

14. The Apex Bank's income will mainly comprise the return from investing (in TreasuryBills) the rural banks' primary reserves which the Bank of Ghana has allowed to be deposited withthe Apex Bank. The other relatively minor sources of revenue will come from investing some ofthe rural banks' clearing account balances; brokerage fees from treasury management services torural banks; and the return on invested equity contributions and depreciation provisions. Keyassumptions underlying the analysis are: (i) rural bank deposits grow at a relatively conservative30% per annum (instead of the recently observed 40%); (ii) the primary reserve requirement ismaintained at no less than 10% of total rural bank deposits; (iii) all primary reserves aremaintained at the Apex Bank which it in turn invests them in Treasury Bills at an interest ratewhich steadily declines from 25% in the year 2001 to 18% by the sixth year to reflect likelymacro-economic improvements in the Ghanaian economy (this rate currently stands at 3 1%); and(iv) the composite secondary reserve requirement ratio declines from 52% to 50% in the firstyear, and down to 38% by the sixth year in tandem with improved performance among ruralbanks due to the capacity building program and a new risk-based secondary reserve requirementcomputation system. Based on these assumptions, the Apex Bank's income is projected toincrease from ¢5.8 billion (or US$ 1.5 million) in its first full year of operation, to ¢15.7 billion (orUS$ 3.9 million) by the end of the sixth year, most of it (average of 73%) coming frominvestments of rural banks' primary reserves (see Table 5.2 below).

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Table 5.2: Projected Apex Bank Income For The First Six Years (millions of cedis)Year I Year 2 Year 3 _ Year 4 Year 5 Year 6

A. Projected Total Deposit Liabilities of Rurl Banks 184,000 230,000 287,500 359,375 449,219 561,523

B. Volume of Investment

i. Primary Reserves of Rural Banks (10% of total deposit 18,400 23,000 28,750 35,938 44,922 56,152liab.)

ii. Sec. Reserves of Rural Banks

Aggregate Sec. Reserve Requir. Ratios: 0.50 0.47 0.45 0.43 0.40 0.38

Total Sec. Reserves: 92,000 108,100 129,375 154,531 179,688 213,379

iii. Clearing A/c Balances of (05% of A) rbs 9,200 11,500 14,375 17,969 22,461 28,076

iv. Depreciation Reserves (starting w. end of Ist year) _2,506 5,388 8,703 12,514 16,898

C. Estimated Income from Investment/Brokerage Services

Assumed Treasury Bill Interest Rates: 0.25 0.24 0.23 0.22 0.2 0.19

i. Investment income from primary reserves at various int. 4,600 5,520 6,613 7,906 8,984 10,669rates on B(i) aboveii. Income from Clearing A/c Balances (20% of B[iii]) 920 552 661 791 898 1,067

iii. Brokerage fee of 0.25% on B(ii) above 230 270 323 386 449 533

iv. Income from depreciation reserves 601 1,239 1,915 2,503 3,211

v. Income from equity capital payments (installment plan)

Assumed proportion of outstanding balance paid 0.05 0.05 0.05 0.05 0.05 0.15

Amount paid 73.5 73.5 73.5 73.5 73.5 220.5

Total C(i)+(ii)+(iii)+(iv)+(v) 5,824 7,017 8,910 11,071 12,908 15,700

Percentage of C(i) relative to total revenue 0.79 0.79 0.74 0.71 0.70 0.68

Percentage of C(ii) relative to total revenue 0.16 0.08 0.07 0.07 0.07 0.07

Percentage of C(iii) relative to total revenue 0.04 0.04 0.04 0.03 0.03 0.03

Percentage of C(iv) relative to total revenue 0.00 0.09 0.14 0.17 0.19 0.20

Percentage of C(v) relative to total revenue 0.01 0.01 0.01 0.01 0.01 0.01

OPERATING COST PROJECTIONS

15. The Apex Bank's operating expenses will cover: (i) rural bank inspection; (ii) rural bankmanagement and staff training; (iii) specie management; and (iv) other operating costs (staffsalaries and wages, utilities, administrative expenses, depreciation, etc. ). Major assumptionsunderlying operating cost projections are: (i) the inspection function will start with a small coreunit of 10 inspectors, which will be scaled up gradually to its full strength of 32 inspectors over athree year period (note that full inspection will continue to be adequately provided by the centralbank over this period, and will be gradually transferred over to the Apex Bank in tandem with thelatter's increased capacity; note also that the central bank will not transfer its statutory mandateof rural bank supervision, but will only delegate the inspection function); (ii) similarly, financingtraining activities from the Apex Bank's own resources will be introduced gradually, starting withthe second year of the Apex Bank's full operation and increasing in tandem with improvements inthe Apex Bank's financial performance (although training itself will be adequately provided, rightfrom the start, under previous arrangements funded by DANIDA, the Bank of Ghana, andcontributions by rural banks themselves and with new funding to be provided under this project);(iii) each of the five branch offices of the Apex Bank will have a bullion van for specie supply and

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a cross-country vehicle for rural bank inspection and training coordination; (iv) rural banks areresponsible for 50% of the training and specie supply costs, including related depreciation andstaffing charges, and for 100% of the operation of the IT equipment at their disposal, although theequipment's major maintenance and depreciation is the Apex Bank's responsibility. Based onthese assumptions, the Apex Bank's operating costs are expected to increase from p5.7 billion(US$ 1.4 million) to ¢12.7 billion (US$ 3.2 million). The bulk of the costs is constituted ofdepreciation charges, thanks to the sizable amount of rapidly depreciable information technologyunderlying the Apex system's set-up.

Table 5.3. Summary of the Apex Bank's Operating Costs (million cedis)Activity Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Inspection cost 400 800 1,200 1,380 1,587 1,825

Training Cost 100 150 300 345 397 456

Specie Management Cost 150 173 198 228 262 302

Staff Cost 1,217 1,241 1,427 1,641 1,887 2,170

Administrative Expenses (5% of total income) 295 354 449 556 648 780

Utilities 48 55 63 73 84 97

O&M (communication and office equipment) 459 528 607 698 802 923

Insurance (10% for vehicles, and 5% other 238 273 314 361 416 478equip)-.

Depreciation - computers, vehicles, other equip. 2,506 2,882 3,314 3,812 4,383 5,041

Contingency(5%/.) 271 323 394 455 523 604

Total Cost 5,683 6,779 8,267 9,549 10,990 12,674

V. PROFITABILITY AND SUSTAINABILITY

16. In assessing the Apex's profitability and sustainability, the overall financial performance ofthe Apex Bank is considered as of primne importance, rather than the profitability of each branchoffice. In this regard, all figures have been consolidated in the financial projections. As a matterof strategy, the Apex Bank phases additional functions into its operations as and when it canafford them. Although it will need an operating grant of 03.2 billion in its pre-operation phase tocater for staff recruitment, salaries and training during the start up period, the Apex Bank isexpected to break even on its operations starting from its first full year of operation (see Table 5.4below).

Table 5.4. Operating ProfitsALosses (Millions of Cedis)Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Operating Income 5,824 7,017 8,910 11,071 12,908 15,700

Operating Costs 5,679 6,775 8,263 9,546 10,987 12,680

Net Income 145 242 647 1,525 1,921 3,020

17. Since almost all the Apex Bank's revenue comes from investments in Treasury Bills, it'sincome is expected to be very sensitive to changes in the Treasury Bill rate. Different operatingstatements were simulated over a ten year period with varying degrees of declines in the Treasury

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Bill rate: a very favorable case with interest rates declining slowly and remaining around 20%; amoderate case with interest rates steadily declining to, and stabilizing around, 18%; and a lessfavorable case with interest rates dropping rapidly to, and stabilizing around, 15%. On the basisof these simulations, no external support will be needed for the Apex Bank's operating budget ifTreasury Bill rates stay around 20% per annum in the near term. However, in the third scenariosimulating a rapid drop in Treasury Bill interest rates, the Apex Bank would be in need of supporttotaling ¢76 million (or US$ 19,000) over two years. While possible, this scenario is very unlikelyunder the current macro-economic projections.

Table 5.5: Operating Support Requirements Under Various Interest Rate Scenarios, With50% and 100% Cost Recovery for Training and Specie Supply (Millions of Cedis)

Scenario 1 Scenario 2 Scenario 3Relatively high interest Moderate interest rate decline Rapid interest rate declinerates

Treasury Bill Rates Support needs at 50% cost recovery Support needs at 100% cost recovery

Year 1 25% 0 025% 0 025% 0 0

Year 2 25% 0 024% 0 023% 21 0

Year 3 24% 0 023% 0 021% 55 0

Year4 24% 0 022% 0 019% 0 0

Year s 23% 0 021% 0 017% 0 0

Year 6 23% 0 020% 0 015% 0

Year 7 22% 0 018% 0 015% 0 0

Year 8 22% 0 018% 0 015% 0 0

Year 9 21% 0 018% 0 015% 0 0

Year 10 20% 0 018% 0 015% 0 0

Total 0 0--- 0 0--- 76 0needs

VI. COST OF THE SPECIAL SERVICES TO A RURAL BANK

18. Rural banks currently pay 50% of actual training costs. At an average of 4 staff trainedper year, this amounts to approximately ¢0.5 million. This cost sharing formula remainsunchanged under the Apex arrangement, thus there is no additional financial burden to the ruralbanks as a result of the Apex's take over of training management. Similarly, on the basis of a50% cost sharing arrangement with the Apex Bank, and a twice-a-month specie supply schedule,rural banks will be responsible for ¢290 million in specie management fees, costing each bank ¢2.7million in the first year and thereafter increasing by 20% annually (inflation provision). Thus, thecost of the combined services amounts to ¢3.4 million per rural bank. Rural banks currentlyspend between ¢2 million and ¢5million per annum on training and specie supply. It is expectedthat the demand for these services will continue to vary across rural banks, as has been the case inthe past. Overall, the new system is affordable and will enhance security and reliability, inaddition to providing rural banks with "normal" specie, which will contribute to enhancing the

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rural banks' image.

Table 5.6. Cost of Services to a Rural BankYear 1 2 3 4 5 6

A. Training

i. Total Cost of Training 111.0 127.7 146.8 168.8 194.1 223.3

ii. 50% of the cost allocated to all Rural Banks 55.5 63.8 73.4 84.4 97.1 111.6

iii. Cost to a Rural Bank 0.5 0.6 0.7 0.8 0.9 1.0

B. Specie Management

i. Total Cost of Specie Management 580 688 724 764 808 856

ii. 50% of the cost allocated to all Rural Banks 290 344 362 382 404 428

iii. Cost to a Rural Bank 2.7 3.2 3.4 3.5 3.7 4

C. Total Cost of all Rural Banks

(A(ii) + B(ii)) 345.5 407.8 435.4 466.4 501.1 539.6

D. Total Cost of Services to a Rural Bank

(A iii + B iii) 3.2 3.8 4.1 4.3 4.6 5.0

E. Cost of Services to a Rural Bank

Assuming Payment of 75% of costs (D x 1.5) 4.8 5.7 6.1 6.4 6.9 7.5

F. Cost of Services to a Rural Bank

Assuming 100% Payment of costs (Dx2) 6.4 7.6 8.1 8.5 9.1 10.0

VII. RURAL BANK PERFORMANCE

19. About one half of the rural banks currently display mediocre performance, i.e. marginalprofitability. Mediocre banks tend to be characterized by high loan to securities ratios (thus ahigher risk profile), poor interest income on the loan portfolio, and high operating costs. Underthe project, training and logistical support will be provided in order to improve their investmentplanning and portfolio management. Without the project, such a bank would continue to registera very low return on assets, in several cases in the neighborhood of 1%, and a capital adequacyratio of less than the required 6.5%. With the project's intervention, mediocre banks will berequired to secure their asset portfolios by realigning them in favor of government securities andstrictly adhering to secondary reserve requirements, which will be relaxed gradually in tandemwith their financial and managerial performance. With better training in loan screening,investment planning, credit recovery, and the reinforcement of greater transparency in thegranting of credit, mediocre banks will gradually build their loan portfolios. It is projected that byproject's end, at least 90% of the mediocre banks will be earning a return on their assets of in theexcess of 3% (after taxes), with capital adequacy ratios above the statutory 6.5%.

Table 5.7. Projected Performance of a typical "mediocre" bank with project intervention2000 2001 2002 2003 2004 2005

i. Assumptions used in projecting future balance sheetitems and cash flows

Treasury Bill Rate: 0.22 0.21 0.20 0.19 0.17 0.15

Lending Rates: 0.27 0.26 0.25 0.24 0.22 0.20

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Deposit rates: 0.12 0.11 0.11 0.10 0.09 0.08

Poorly Performing Loans: 0.45 0.40 0.35 0.31 0.27 0.24

Cash on Hand: 0.07 0.06 0.05 0.05 0.05 0.05

Applicable Secondary Reserve Ratio: 0.52 0.50 0.47 0.45 0.43 0.40

Proportion of Loans in Asset Portfolio: 0.29 0.34 0.40 0.44 0.47 0.51

Proportin of Other Assets: 0.07 0.06 0.04 0.04 0.03 0.02

Proportion of Fixed Assets: 0.05 0.04 0.03 0.03 0.02 0.02

Deposit Growth Rate: 0.25 0.25 0.30 0.35 0.35 0.35

ii. Evolution of Balance Sheet Items (million cedis)

Cash and Balances: 126 85 91 95 119 148

Investments - ST: 360 632 759 892 1,068 1,275

Advances/Loans: 410 352 522 765 1,041 1,397

Other Assets: 54 85 85 85 85 85

Fixed assets: 22 61 61 61 61 61

Total Assets 972 1,215 1,519 1,898 2,373 2,966

Deposits 622 1,027 1,315 1,663 2,091 2,628

Other Liabilities 65 22 27 34 43 53

Short Term Debt 193 61 46 38 35 30

Paid-up capital 25 30 37 47 58 73

Reserves 67 75 93 116 146 182

Total Liabilities 972- 1,215 1,519 1,898 2,373 2,966

iii. Financial Statement Information (million cedis)

Interest Income: 110 188 237 297 349 404

Commissions & Fees: 43 53 66 83 104 130

Other operating Income: 2 3 3 4 5 6

Other Income: 0 0 0 0 . 1 I

Gross Operating Income: 154 244 307 384 458 541

Provision for Bad Debts: 19 24 29 37 46 57

Operating Exp. (incl. depreciation): 51 85 96 114 135 152

Interest Expense: 75 118 143 172 194 215

Total Operating Expenses: 144 227 269 323 375 425

Operating Profits Before Taxes: 10 17 38 61 83 116

Provision for tax: 2 3 6 9 12 17

Net Profit 9 15 32 52 70 99

Op. Profits bef. Taxes as a % of Revenue 0.07 0.07 0.12 0.16 0.18 0.21

Return on Assets 0.01 0.01 0.02 0.03 0.03 0.03

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Annex 6: Procurement and Disbursement Arrangements

GHANA: RURAL FINANCIAL SERVICES PROJECT

Procurement

Guidelines

1. All works and goods financed under the IDA credit and/or IFAD loan would be procuredin accordance with the Guidelines: Procurement under IBRD Loans and IDA Credits, January1995 and as revised in January and August 1996, September 1997 and January 1999.Consultants will be selected in accordance with the Guidelines: Selection and Employment ofConsultants by World Bank Borrowers, January 1997 and as revised September 1997 andJanuary 1999. National Competitive Bidding (NCB) procedures will include: (a) an explicitstatement to bidders of the evaluation and award criteria; (b) national advertising with public bidopening; (c) award to the lowest evaluated responsive and qualified bidder and (d) foreign bidderswould not be precluded from participation in NCB.

2. The Bank's Standard Bidding Documents (SBD) would be used for all ICB (and withappropriate amendments for all NCB) for works and goods. The Bank's Standard Request forProposals would be used for all consulting assignments.

Project Management

3. Procurement of works and goods and the selection of consultanits will be the responsibilityof the various implementing agencies under the project. The Rural Finance Inspection Division(RFID) of the Bank of Ghana (BOG) will coordinate procurement activities and will provideprocurement support to the implementing agencies. A Procurement Specialist who is familiar withgood public procurement practice will be seconded from within the BOG to provide similarservices to the project. The Procurement Specialist will be part of management team which alsoincludes a Project Coordinator and a Financial Management Specialist, all staff of BOG. Themanagement team will report to the Director of RFID. The Project Coordinator, ProcurementSpecialist and Financial Management Specialist will be provided with accelerated training on Bankprocurement and Consultants Selection policies and procedures at the Ghana Institute ofManagement and Public Administration (GIMPA). The secondment of the management team withqualification, education and experience acceptable to the donors will be a condition foreffectiveness

Advertising

4. A General Procurement Notice (GPN) is mandatory and will be published in the UNDevelopment Business and in a newspaper with national circulation as provided under theGuidelines. The GPN would be updated on a yearly basis and would show all outstanding ICBand all consulting services estimated to cost US$200,000 or more. Specific Procurement Notices(SPN) will be required for contracts to be procured under ICB and NCB procedures and forconsultant contracts estimated to cost US$100,000 or more; prior to the preparation of the

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shortlist. SPNs will as (a minimum) be published in a newspaper with national circulation.Consultant contracts estimated to cost US$100,000 or more shall be advertised in DevelopmentBusiness to obtain expression of interest. Specific contracts below US$50,000 will be advertisedin two local newspapers.

Works

5. The project will support the rehabilitation and completion of five service centers of theApex in Accra, Bolgatanga, Kumasi, Sunyani and Takoradi. The use of ICB is not practicalbecause works are small and scattered geographically and unlikely to attract foreign contractors.Contracts for works estimated to cost US$100,000 equivalent or less, up to an aggregatedamount of US$460,000, will be awarded on the basis of lump-sum, fixed price quotationsobtained from at least three qualified domestic contractors following written requests. Theaggregate of US$460,000 has been arrived at from the procurement plan and may not beexceeded unless justified and IDA has given prior no-objection. The RFID will track theaccumulation of such contracts during project implementation so as to assure that the aggregateamount is not exceeded. The requests will include a detailed description of the works, includingbasic specifications, the required completion date, a basic form of agreement acceptable to theBank, and relevant drawings, where applicable. The award shall be made to the contractor whooffers the lowest price quotation for the required work, and who has the experience and resourcesto successfully complete the contract. If the estimated contract value exceeds US$100,000, thenNCB procedures will be followed.

Goods

6. The project would finance vehicles, office equipment and computers as well astelecommunications equipment. To the extent possible and practicable, goods and equipment tobe purchased under the project would be combined into packages worth at least US$100,000 andwill be procured centrally by REID. Packages estimated to cost the equivalent of US$100,000 ormore would be procured under ICB procedures using IDA Standard Bidding Documents.Domestic preference will apply for goods subject to ICB if they are manufactured in Ghana, inaccordance with Appendix 2 of the Guidelines. Contracts for goods between US$30,000 -US$100,000 available locally, up to an aggregate of US$250,000 will be procured through NCBusing national procurement procedures which have been reviewed during appraisal and werefound acceptable to IDA. Vehicles may be purchased from IAPSO up to an aggregate amount ofUS$200,000 equivalent. "Off-the-shelf' goods, or specific items costing less than US$30,000,which cannot be grouped, will be procured following written quotations obtained on the basis ofwritten solicitations from at least three qualified domestic suppliers, up to an aggregate amount ofUS$250,000. If such goods are not available, international shopping may be used. Requests forsuch quotations will include a clear description and quantity of the goods, as well as requirementsfor delivery time, if they are not immediately available. The aggregate amount of US$250,000 forboth categories of goods have been arrived at from the procurement plan and may not beexceeded unless justified and IDA has given prior no-objection. The REID will track theaccumulation of such contracts during project implementation so as to assure that the aggregateamount will not be exceeded.

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Services/Training

7. These services consist of consultancy services for studies and technical assistance for startup of the Apex, coaching, training and workshops for the various implementing agencies underthe project. Consultancy services estimated to cost more than US$100,000 will be procured usingthe Quality and Cost Based selection method. In the case of assignments estimated to cost lessthan US$100,000, the shortlist may be made up entirely of national consultants, provided that atleast three qualified national consultants are available in the country and foreign consultants whowish to participate are not excluded from consideration. Consultant services estimated to cost lessthan the equivalent of US$50,000 may be contracted by comparing the qualifications ofconsultants, including individual consultants, who have expressed an interest in the job or whohave been identified. Auditors would be selected using Least-Cost-Selection procedures.

8. Training programs are geared toward building capacity and improving management andskills of RFID staff, Rural Bank staff and Susu groups. These training programs would be subjectto the Bank's prior review and approval, as would be workshops.

9. Setting up of the apex bank will require strong technical support from the Rabobank of theNetherlands which has a long tradition of working with the rural banks in Ghana. Given the pastlinkages with Rabobank, the IFAD project will provide up to US$ 1.2 million for various technicalassignments from Rabobank. The terms of reference and scope of work of the Rabobank technicalsupport will be firther reviewed by the Borrower in terms of its costs and the timing of theinputs/outputs before final signature. In all such assigmnents, the Rabobank will undertake duedeligence to provide quality and cost effective serivces.

IDA Review

10. As a result of the capacity assessment of the implementing agency (summary attached), thefollowing prior reviews are being set. All works and goods contracts estirnated to cost US$100,000 or more will be subject to IDA review of bidding documents including draft contract andtechnical specifications prior to inviting bids and IDA review of bid evaluation prior to contractaward. In addition, the first two contracts for goods and works below US$100,000 will be subjectto prior review to verify if corrections are needed. The TOR for all consulting assignmentsirrespective of value will be subject to IDA prior review. For consultancy contracts with firms andestimated value of US$ 50,000 or more, and US$ 20,000 or more in the case of individuals, thedraft Request for Proposals (RFP) and the shortlist of consultants must be cleared by IDA prior toinviting proposals from consultants, In addition, the evaluation of technical proposals must becleared with IDA before financial proposals of the qualifying firms are opened. All the proceduresin Appendix I of the Consultants Guidelines would apply. Contracts which are not subject to priorreview will be selectively reviewed by the Bank during project implementation and will begoverned by the procedures set forth in paragraph 4 of Appendix I to the Guidelines.

Procurement Plans

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11. In consultation with the implementing agencies, RFID has prepared an indicativeProcurement Plan (PP) for the whole project, and a Detailed Procurement Plan (DPP) for the firstyear of the project showing contract packages, and for each package its estimated cost andprocurement method and processing times till completion. The plans will be agreed with IDA andthe other donors by appraisal. Three months prior to the start of each subsequent fiscal year, theRFID will submit up-dated versions of the PP, and the annual DPPs in respect of the followingyear.

Procurement methods (Table A)

Works ___0.460 | 1.003 1.463(0.439) (0.00) (0.439)

Goods & Equipment 1.540 0.170 4.06 5.776(I1.470) (0.160) (0.00) (1.630)

Consulting Services 1.342 3.190 4.531(1.342) (0.00) (1.342)

Training and Studies 0.939 2.231 3.170(0.939) (0.00) (0.939)

Support to Rural Banks (a) 5.05 5.05_ _ _ _ _ _ _-- (0.00) (0.00)

Recurrent Costs 0.820 2.150 2.972___________________ _ - -(0.781) (0.00) (0.781)

1.540 0.171 3.560 17.68 22.96(1.470) (0.160) (3.500) (0.00) (5.13)

Figures in parenthesis are amounts financed by the IDA Credit(a) Parallel financed by the AfDB.

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Prior review thresholds (Table B)

Works Above US$ 100,000 NCAlcotasAt or Below US$ I100,000 Price Quotation First 2 contracts

Goods US$ I100,000 or above ICB all contracts

US$ 30,000 - US$ 100,000 NCB First 2 contracts

Below US$ 30,000 Shopping NoneServices QCBS (National and/ all contracts

Firms US$ 100,000 or above international advert)LC

Firms US$ 50,000 - <US$ 100,000 QCBS (National advert)LC all contracts

Firms/Individuals US$ 20,000 - <US$ 50,000 CQ/CV All contracts withindividuals

Individuals Below US$ 20,000 CV None, except TORTotal value of contracts subject to prior review: US $ 3m

All single source procurement and consulting assignments and all TORs for consulting services irrespective of value are subject to prior review.

Selection based on consultants' qualification

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Disbursement

Allocation of credit proceeds (Table C)Summary of Financial Assessment

Background

The Government of Ghana is currently undertaking major financial and structural reformsto improve the control environment of its public sector accounting and reporting systems with thehelp of the World Bank. These reforms have resulted in the introduction of the MTEF Budgetingsystem in the country and work is progressing to computerise GOG budgeting system.

The Rural Financial Services Project will be implemented by the Rural Finance InspectionDivision (RFID) of the Bank of Ghana (BOG). The RFID unit as part of BOG has no independentaccounting system of its own but uses that of BOG for all its transactions. The BOG, the centralBank of Ghana has previous experience in the implementation of Bank funded projects, it had theresponsibility for implementing the first Rural Finance Project in Ghana. This new project, willinvolve several beneficiary groups (Susu, NGOs Rural Banks, and the new Apex body), and toensure that its implementation is devoid of the BOG bureaucracies, a new and separate financialsystem within RFID will be set up rather than use BOG's accounting system. This approach willhave the added advantage of ensuring smooth and accelerated implementation process.

Project Implementation and Budgeting

The Director of the department will have the day to day responsibility anrd will reportdirectly to a Rural Finance Project Steering Committee (RFPSC). The RFPSC will haverepresentatives from participating agencies, NGOs; Ministry of Finance, and private sector andchaired by the Governor of BOG or his appointee. RFID will also be responsible for projectco-ordination, maintenance of the projects assets, contract management, monitoring of projectprogress and submission of Project Management Reports (PMRs) to the Steering Committee,IDA and other donors.

Annual budgets will be prepared in accordance with the project implementation manual byeach of the participating and co-operating institutions and approved by the Steering Committee.The budgets will be the basis of resource releases and reporting to and by the participatinginstitutions.

Financial Control and Accounting System

Financial control will be centralized and will be the responsibility of the finance unit thatwill be created within the RFID of the BOG. RFID will have the responsibility for themaintenance of the Project books of accounts, the Special Account that will be opened for theproject, and the smooth flow of funds for effective project implementation. The participatinginstitutions will be provided with working capital for the purposes of meeting their incrementaloperating cost, on an imprest accounting basis. The project books of accounts will be kept on

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cash basis. In addition, a memorandum statement will be kept for all unpaid liabilities to ensurethat all project liabilities are accounted for.

The finance unit should be adequately staffed and trained to be able to carryout theseresponsibilities. The BOG will second an accountant from its own accounting unit to head thefinance unit. The accountant will be a professional accountant with the requisite qualification andexperience to manage the financial and accounting functions under the project. If the BOG isunable to provide RFID with such a staff then the project will recruit such a person for a period oftwo (2) years to specifically set up the system, train RFID account staff and hand over themanagement to RFID. Two additional accounting staff will be selected from BOG to assist theaccountant in the performance of his duties. In order to mitigate institutional risk, capacity of FMstaff will be built in accordance with the agreed time-bound action plan which will include reviewof Curriculum Vitae of staff nominated and training of the key staff.

Detailed procedures will be outlined in the financial procedures manual on the step thatwill be adopted by participating agencies to access and account for funds to meet theirincremental operating costs.

Auditing under the Project

The audit of the project will be conducted annually and carried out by independent andqualified auditors acceptable to the Bank. The selection of auditors shall be on competitive basisin accordance with the Bank's consultants' selection guidelines. The audit report will besubmitted to the Bank within 6 months after the end of the reporting period.

Project Management Reports (PMRs)

The Bank has introduced a new initiative, the Loan Administration Change Initiative(LACI). This initiative has been formally launched in Ghana and it is expected that all projectswill comply fully with this new requirement at the start of implementation or put in place an actionplan to ensure compliance in 12 to 18 months of commencement of implementation. LACIrequires projects to prepare quarterly projects management reports (PMRs) in the areas offinance, procurement, including contract details, and project progress.

The Quarterly Financial Reportwill consist of Sources of funds and their Uses of Funds,statement of Uses of Funds by Project Activity, Project Cash Withdrawals, Special AccountReconciliation statement and a six months Project Cash Forecast.

Quarterly Project Progress Report will consist of Output Monitoring Report on contractManagement and on Unit of Output by project activity.

Quarterly Procurement Management Report will consist of procurement processmonitoring for goods and works and that for consultants' services, and contract Expenditurereports for goods, works and consultants' services.

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A financial management assessment was undertaken and it was concluded that the RFIDdoes not have the financial capacity to be eligible for PMR-based disbursements. It was alsoconcluded that the RFID couldn't produce all the required PMR reports. An action plan has beenput in place to ensure that RFID is able to produce the required reports within 12 months ofeffectiveness.

Action Plan Agreed with GOG Team At Anpraisal

Action Plan.

Action Step Due Date Responsibility or Date ActionAction By Completed

1. Agreeing TOR for Project Accountant and February 28, 2000 Completed, RFID March 20, 2000other contract staff.

2. Secondment of Accountant and other key May 15, 2000 RFID / BOGstaff completed.

3. TOR for the design of Financial February 28, 2000 RFID (in March 20, 2000management system. consultation with

IDA)4. Selection of consultant for the FM system to April 30, 2000 RFID

be completed.

5. Consultant completes design, and documents Prior to Board (June RFIDit in an accounting and procurement manual. 2000)Manual to include:- flow of funds anrangements- chart of accounts- intemal control measures- reporting requirements- procurement processes

6. Review and Comments by WB on Manual Prior to Board (June FMS2000) OQKS/LOAAF

7. Finalization of accounting and procurement Prior to Board FMS/OQKS/procedure Manual LOAAF/RFID

8. Training of BOG staff nominated on WB May 30, 2000 RFID___ procedures and reporting requirements.

9. Selection of appropriate accounting software August 15, 2000 RFID (infor project. consultation with

___ __ __ __ ___ __ ___ _ _IDA )

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10. Adaptation of PMRs format to RFSP July 31, 2000 RFIDproject.

* Financial Reports

* Procurement

* Project Progress

11. Draft PMR Formats (Forms) for financial August 15, 2000 RFIDReports sent to WB

12. WB review and comments. August 30, 2000 IDA - FMSOQKS/LOAAF

13. Program of software to produce reports and September 30, 2000 RFIDtesting.

14. Training of staff of the project. September - October RFID

15. Opening Special Account (with signaturesetc)

16. First set of PMRs to be produced 3 months after RFIDeffectiveness October2000

17. Second set of PMRs 6 months after RFIDeffectiveness date

18. Third set of PMRs 9 months after RFIDeffectiveness date

19. Comply fully with LACI -PMR reporting. 12 months after IDA, MOF (GOG)effectiveness date & BOG & RFID

Table C: Allocation of Credit Proceeds

Civil Works 0.44 100% of foreign exchange and 90% oflocal costs

Vehicles, Goods and Equipment 1.63 100% of foreign expenditures and 95%of local costs

Consultants Services 1.34 100%Training and Capacity Building 0.94 100%Support to Rural Banks 0.00 (Financed by AfDB)Recurrent Costs 0.78 100% of foreign expenditures and 90 of

local costs

Total Project Costs 5.13

Total 5.13

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Disbursement

Use of Statement of Expenditures (SOEs)

Disbursements for all expenditures would be against full documentation except forcontracts less than US$100,000 equivalent each for works, goods and US$ 50,000 for consultingfirms and US$ 20,000 for individuals, training and incremental operating costs for whichdisbursements would be based on Statement of Expenditures (SOEs). Supporting documentationfor SOEs would be retained by the borrower for review by IDA missions and external auditors.All expenditures above the threshold indicated above will be eligible for direct payment.

Special Account

To facilitate disbursement, a special account will be established at the Bank of Ghana withan authorized allocation of US$500,000. An initial deposit of US$250,000 to cover 4 months ofeligible expenditure, will be paid into the special account upon effectiveness of the credit and theremaining balance paid when aggregate disbursement under the project exceeds US$1.4 million.Further deposits by IDA would be made into this special account against withdrawal applicationssupported by appropriate documents.

Procurement Capacity AssessmentSummary of Findings and Actions

- smen. Assess MentItem Assessed Satis. Major Weaknesses Actions Proposed

Null Poor Fair factory Low Ave. High Proposed Completion Date

(a) Leeal Aspects . _ _ _

(i) Laws & - Procurement Laws & v Procurement Code isRegulations Regulations are not scheduled to be

consolidated. provided underProcurement practices FIMTAP,are not consolidated CD/TTL/PS forinto a procurement FIMTAP and MoFcode. are discussing an Plan will be

action plan for finalized byimplementation of 5/31/2000procurement reformscomponent of

_______ _______ _____ FIM TAP(ii) NCB Procedures _ No uniform national V2 -- Ditto-' -- Ditto--

procedures(iii) Internal codes and " Draft Internal " Procedures should be

manuals operational and operationalized by 6/3012000

administrative manuals BoG. Training onhave been orenared, torocedures to be held

(bl Proc. Cycle Memo ._t(i) General handlirig - Bank procurement Orientation and basic 6/30/2000

procedures are seen by procurement trainingtop officials as a Bank for identified staff ofrequirement rather than BoG, RB, ARB, bya means to obtain value Bank PS

._____________________ _ for money

Bank procurement guidelines will be followed.

2 The Bank's SBDs will be used for NCB. NCB procedures would be subject to confirmation by GoG that: (i) There will be national advertising; (ii) public bid opening; (iii) prior disclosure andclarity of evaluation criteria; (iv) award to the lowest evaluated responsive and qualified bidder and (v) non-exclusion of foreign bidders who wish to participate.

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Annex 7: Project Processing Schedule

GHANA: RURAL FINANCIAL SERVICES PROJECT

Time taken to prepare the project (months) 14 16First Bank mission (identification) 07/15/99 07/15/99Appraisal mission departure 02/21/2000 03/20/2000Negotiations 03/13/2000 04/18/2000Planned Date of Effectiveness 01/01/2001

Prepared by:

Rudolph A. Polson (TTL), BankPerin Saint Ange (CPM), IFAD

Margaret Karuri (AfDB, Abidjan)

Preparation assistance:

IFAD provided an estimated US$150,000 for preparation assistance as part of a co-financing arrangement.

Bank staff who worked on the project included:

Rudolph Polson Sr. EconomistEustacius Betubiza Ag. EconomistPatience Mensah Operations OfficerFred Yankey Financial AnalystKofi Awanyo Procurement SpecialistWilliam Steel Lead Specialist (Rural/Microfinance)Bikki Randhawa Peer Reviewer

Wendy Wiltshire Program AssistantPatricia Ashby Team Assistant

- 70 -

Annex 8: Documents in the Project File*GHANA: RURAL FINANCIAL SERVICES PROJECT

A. Project Implementation Plan

The project implementation plan (PIP) will be finalized during Appraisal and cleared by RegionalProcurement.

B. Bank Staff Assessments

Ghana; Rural Financial Services Project: Identification Report

Strategy and Business Plan for An Apex Bank for the Rural Banks

Informal Financial Institutions; Technical Report

Capacity Building of Rural and Community Banks

Information Technology for the Rural Banks

C. Other

*Including electronic files

- 71 -

Annex 9: Statement of Loans and CreditsGHANA: RURAL FINANCIAL SERVICES PROJECT

Difference between expectedand actual

Original Amount in US$ Millions disbursementsProject ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frrn Revd

P000975 1996 Ghana BASIC EDUCATION 0.00 50.00 0.00 31.70 23.60 0.00

P040659 1999 Ghana COMMUNITY DEV. 0.00 5.00 0.00 4.98 0.48 0.00

P000924 1994 Ghana COMMUNITYWATER&SA 000 21.96 0.00 4.48 4.50 0.00

P050616 2000 Ghana COMMUNITY WATER II 000 25.00 0.00 25.15 0.00 0.00

P000948 1995 Ghana EDUCNOC.TRNG 0.00 9.60 0.00 3.22 2.62 -0.35

P040557 1999 Ghana ERSO II 0.00 180.00 0.00 99.10 79.43 0.00

P000962 1995 Ghana FISHERIES 0.00 9.00 0.00 2.97 1.93 0.00

P000949 1998 Ghana HEALTH SCTR SUPPORT 0.00 35.00 0.00 24.17 6.00 0.00

P000957 1996 Ghana HVWY SECT INV.PROG 0.00 100.00 0.00 39.61 10.40 0.00

P000936 1994 Ghana LOCAL GOVTDEV. 0.00 38.50 0.00 12.56 8.25 0.00

P000966 1995 Ghana MININGSEC.DEV&ENV 000 12.30 0.00 3.31 3.07 0.00

P000974 1999 Ghana NATFUNCLITPROG 0.00 32.00 0.00 31.87 3.09 0.00

P000946 1998 Ghana NAT.RES.MANAGEMENT 0.00 9.30 0.00 8.05 5.95 0.00

P000943 1996 Ghana NON-BANKFININSAST 0.00 23.90 0.00 15.14 16.55 0.00

P000960 1995 Ghana PRIV SECTOR DEV 0.00 13.00 0.00 6.71 6.97 0.00

P045588 1997 Ghana PUB. FIN. MGMT. TAP 0.00 20.90 0.00 15.18 12.66 0.00

P050615 1999 Ghana PUB.SECTOR MNGT.PROG 0.00 14.30 0.00 11.99 1.91 0.00

P042516 1996 Ghana PUBLIC ENTERPRISE/PR . 0.00 26.45 0.00 16.47 10.58 0.00

P000926 1995 Ghana THERMAL (P-VII) 0.00 175.60 0.00 36.78 40.62 40.66

P000970 1999 Ghana TRADE GATEWAY & INV. 0.00 50.50 0.00 47.03 4.46 0.00

P050624 2000 Ghana URBAN 5 0.00 10.83 0.00 10.88 0.00 0.00

P000973 1996 Ghana URBAN ENV.SANITATION 0.00 71.00 0.00 40.60 38.73 0.00

P041150 1997 Ghana VILLAGE INFRASTRUCTU 0.00 30.00 0.00 21.70 -0.49 0.00

Total: 0.00 964.14 0.00 513.65 281.31 40.31

-72 -

GHANASTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1993 AEF Afariwaa 0.18 0.00 0.00 0.00 0.18 0.00 0.00 0.001990 AEF Alugan 0.05 0.00 0.00 0.00 0.05 0.00 0.00 0.001992 AEF BMK 0.46 0.00 0.00 0.00 0.46 0.00 0.00 0.001992 AEF CFL 0.28 0.00 0.00 0.00 0.28 0.00 0.00 0.001995 AEF Dupaul Wood 0.25 0.00 0.00 0.00 0.25 0.00 0.00 0.001993 AEF GHUMCO 0.02 0.00 0.00 0.00 0.02 0.00 0.00 0.001998 AEF NCS 0.00 0.00 0.67 0.00 0.00 0.00 0.67 0.001997 AEF PTS 0.00 0.00 0.31 0.00 0.00 0.00 0.31 0.001991 AEF Packrite 0.05 0.00 0.00 0.00 0.05 0.00 0.00 0.001994 AEF Shangri-la 1.10 0.00 0.00 0.00 1.10 0.00 0.00 0.001996 AEF Tacks Farms 0.37 0.00 0.00 0.00 0.37 0.00 0.00 0.001988/89/91/93 Bogosu 4.50 0.00 0.00 9.34 4.50 0.00 0.00 9.341989/91/93 Cont Acceptances 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001993/96 Ecobank - Ghana 4.10 0.00 0.00 0.00 0.00 0.00 0.00 0.001990/91/96 GAGL 4.22 0.00 0.00 0.00 4.22 0.00 0.00 0.001994 GHACEM 0.01 0.00 0.00 0.00 0.01 0.00 0.00 0.001991 GHANAL 0.00 0.44 0.00 0.00 0.00 0.44 0.00 0.001992/93 Ghana Leasing 0.75 0.73 0.00 0.00 0.75 0.73 0.00 0.001991/92 Hotel Inv. Ghana 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001989/92 Wahome Steel 0.87 0.00 0.00 0.00 0.87 0.00 0.00 0.00

Total Portfolio: 17.21 1.17 0.98 9.34 13.11 1.17 0.98 9.34

Approvals Pending Commitmnent

FY Approval Company Loan Equity Quasi Partic

1995 AEF GHANA PACK 360.00 0.00 0.00 0.001999 AEF Garden Court 1500.00 0.00 0.00 0.001999 AEF Japan Motors 1500.00 0.00 0.00 0.001999 AEF PharnaCare 400.00 0.00 0.00 0.00

Total Pending Commitment: 3760.00 0.00 0.00 0.00

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Annex 10: Country at a Glance

GHANA: RURAL FINANCIAL SERVICES PROJECTSub.

POVERTY and SOCIAL Saharan Low-Ghana Atrica incorRe Development diamond

1998Pnortlation. mid'verarIfmifionsl 18 4 628 3 5t5 Life expectancy(G"P ncrtcanita (Atlas method. USS) 390 480 520G4t,P 1AMs method. USS bilosl s 7-2 i 304 1 44

Averae annualt rowtth 192;-98

Pa nulation fl 2 f 2 A 1 7Labor force (m61 2.7 2,8 lg9 GNP Gross

Moat recent astimate (latest veartvailIabl. 199298A1 per primari z~~~~~~~~~~~ : ~~~~~~capita Aen1rn,AMen

Povertv (% ofaouladion belownational ooverv iinel 31Urbasnontulation (f oftotalooouff/ionl 377 33 31lI lithe exoetancyat birth /deart 050 51 f 3tnfantrnortelitvfoerl.OOOl/r,eblrth :0:js ) 0 69 91j 69C;hild nalrenutrition of children underS) 51 0ilf 27 t00 t i j; iAccess to safe waterAccess to safe wateir ofqooouliati* 56 47 74111iterarns/% of Dooulation ace 15+j 3as 42 32Gross orimarv enrollment I% of school-aeo o otulat ioot 76 77 108 - Ghana Low-income group

MaWlelt i00 W l:t :: t:: X R83 R4 I1grFemAle 70 80 103 : :

K£Y ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1987 1997 1998IEconomic ratios*

GOP fUSS billio.ns) 3.2 5.1 6 9 7.5Grnss dortetir. invRstment/G fP 11 1 10 4 24 1 22.9 TradeFx>orts of ooods and services/GOP '1S0 19.7 24.0 26,7 TtGross dornestic.'sasvinstGnP 100 39 9.8 132Gross national savinns/GI 1)P 08 58 i f4 19 4

Ctirrent account halance4rGO)P i4.5 .44 11.1 -b6 Interst n nvtslGlP 5 II s1 1fi 2.0s DomeesticstnentTotal debtlGDP 33.4 64.6 92.2 92.0 Savings IT1tal dh1t servicef/eonrts 3 7 4 81 32.8 28.0Present value of debt/GDP I ,, 54,2 650aPresentvalu or deh/extonarts. 220.3 1886.

Indebtedness1j7747 1988.98 1997 I99J 199943

(averaae annual orowtf)enP 0.tititX ::;o4 403 42 4.8 6i Ghana -Low-incomegroupGNP Rner ranita -7 7 1 4 1 7 1 3:5 LExoodsl of ooods and services _47 9. 7 -0,4 14.4 5.6

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and investment(%)

/% of GDPJAorirsrlti,re 58.2 50.6 35 8 37 6 20lndtlstrv 15.8 16 3 25 7 248 R 1

Manulfactirina 10 8 0 9 8.2 8.2 0SServices 28.0 33 1 38.5 37 6 -8 o - 93 94 1V 96 97 98

Private consirmotion 77 4 8S 6 77.8 768. -209Genneral nveromment consirmntion 12 6 10.6 12.4 10 3 GDl - -GDPImoorts of ooods and services 11.6 26.2 38.4 36.4

1977-87 1988-98 1997 1998 Growth rates of exports and imports (%)iaveraoe annua/ arowthlAoriculture 0.8 2.7 4.3 5.3 30Industrv -4 0 4.8 8.4 2.f 20

Manufacturina -4.0 3.1 7.3 3.0Services 1 9 5.8 3 4 45 1f

Private consumotion 0.3 3.7 12.1 1.6 oGeneral onvermment consqumntion 1.4 4.6 -11 7 11 3 93 94 96 97 99Gross domestic investment -4.6 3.8 3 4 2 8 toImnorts of onads and services -7.o 7 3 14.7 7 9 8xports - nmportsGronss national orndujct 0.2 4.3 4 3 4.6

Note: 1998 data are preliminary estimates.

The diamonds show four kev indicators in the countrv (in bold) comoared with its income-oroun average. If data are missinog the diamond willhe inromnlAtA.

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Ghana

PRICES and GOVERNMENT FINANCE1977 1987 1997 1998 Inflation (%)

Domestic prices(Y. change) 80 AConsumer prices 116.5 39.8 27.9 19.3 60Implicit GDP deflator 67.3 39.2 19.5 17.6 40-

Govemment finance 20

(%6 of GDP, includes current grants) 0Current revenue .. 14.1 17.8 18.9 93 94 55 ff 97 98

Current budget balance .. 2.9 1.6 1.6 GDP deflator ' CPIOverall surplus/deficit .. -5.1 -10.8 -9.7

TRADE

(UIS$ millions) 1977 1987 1997 1998 Export and Import levels (USS mlillons)

Total exports (fob) 824 1,491 1,830 3,000

Cocoa .. 495 470 629Timber .. 91 172 170 2000

Manufactures . .Total imports (cif) . 1,009 2,321 2,417

Food .. 73 aFuel and energy 145 240 212Capital goods .. 166

Exoort Drice index (1995=100) .. 97 93 98mDort orice index (1995=1001 .. 69 97 81 a Exports *ImportsTerms of trade (1995=1001 .. 141 96 121

BALANCE of PAYMENTS

(USS millions) '1977 1987 1997 1998 Current account balance to GDP ratio I%)

Exports of goods and services 1,018 903 1,656 2,004 0Imports of goods and services 1,121 1,203 2,645 2,732

Resource balance -103 -300 -989 -728 -4

Net income -35 -127 -134 -142 11111Net current transfers -6 202 360 378 '8Current account balance -144 -225 -763 -492 -12

Financing items (net) 254 363 787 591Changes in net reserves -109 -138 -25 -99 l1e

Memo:Reserves includino aold (USS millions) 182 332 508 502Conversion rate (DEC. local/USS) 3.5 147.0 2.050.2 2.314.0

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

fuss millions) Composition of total debt, 1998 (US$ millions)Total debt outstanding and disbursed 1,067 3,280 6,345 6,900

IBRD 43 151 30 27 G 737 A:27IDA -79 700 2,617 2,962

Total debt service 38 415 552 572IBRD 5 22 15 6 F:842IDA 1 7 31 34 8: 2,962

Compositon of net resource flowsOfficial grants 65 122 160 230Official creditors 70 254 333 295Private creditors 22 3 88 -25 E. 1,432Foreign direct investment 19 5 110 152Portfolio equity 0 0 46 80 .D, 56s c: 334

World Bank programCommitments 57 233 54 147 A - IBRD E - BilateralDisbursements 30 194 237 261 B - IDA D - Other multilateral F -PrivatePrincipal repayments 3 13 23 19 C - IMF G - Short-termNet flows 27 181 214 241Interest payments 3 16 22 20Net transfers 24 165 192 221

Development Economics- 75 -

Annex 11: Innovative Pilots Linking Informal and Formal Financial Institutions

A. Innovation Type: Inventory Credit

Promoters: Technoserve (NGO), Natural Resources Institute (NRI) of the UK, and theADB.

Approach: Provision of inventory credit (farmers receiving loans against their own producestored in cooperatively managed warehouses) to alleviate the traditional post-harvest cashsqueeze which farmers face.

Recent Evaluation: The scheme was successfully operated as a pilot program in UpperWest Region under the IDA-assisted Rural Financial Project (RFP) and later extended toBrong Ahafo Region, where farmers participating in the program received an effective salesprice premium of 36% over what they would have earned had they sold their produce(maize) immediately after harvest. The premium of 36% was realized even after retiringtheir inventory credit and paying storage/treatment fees. When properly designed andmanaged, inventory credit can allow small-scale farmers to progress from being "pricetakers" to "price negotiators" and to operate successfully in the local market economy.

B. Innovation type: Group Empowerment and Savings Scheme

Promoters: Nsoatreman Rural Bank in association with as Sasakawa 2000,AMASACHINA

Approach: Providing micro-credit for off-farm income generating activities and marketing.

Recent Evaluation: Nearly 100 percent recovery, to smallscale producer groups anirnatedand trained by APPLE, an NGO, and mobilizing group savings, under IFAD-assistedSCIMP. Many other NGOs such have similarly mobilized and developed groups of ruraldisadvantaged including women, for linking with rural banks.

C. Innovation Type: Credit Delivery with Associated Technology

Promoters: Sasakawa 2000, MOFA's Department of Agricultural Extension Services andrural banks.

Approach: Credit delivery combined with dissemination of technology to smallholders suchas agroprocessing or improved varieties/;

-76 -

D. Innovation Type: Credit with Education

Promoters: Freedom from Hunger, an NGO, in association with Nsoatreman and Builsarural banks.

Approach: Three key services offered to poor women in rural areas as follows: (i)group-based financial services, including credit to generate extra household income whichbuilds self-confidence and opens women's mind to believe that they can change and improvetheir lives; (ii) education, delivered non-formally, which stimulates behavior changes thatimprove the health, nutrition, and family planning of women and their families; and (iii) aforum for peer group support to help build women's leadership skills and self-confidence tomake decisions that affect their families' health and well-being.

E. Innovation Type: Mobile Banking

Promoters: Akuapem RB in the Eastern Region

Approach: Useful for reaching remote and isolated areas and extending the outreach offormal financial services. Rural bank identifies several points or centers for stationing amobile unit at a predetermined hour and for specific days, often market days. Theseschedules are announced to residents of the villages. The mobile unit also disburses loansapproved at HQ to beneficiaries in the outlying areas.

Recent evaluations. Since its introduction last year, the Akuapem Rural Bank has mobilizeddeposits of Cedi 37 million exclusive of deposits mobilized at agencies The Akuapem RB'splans are to undertake an evaluation of the scheme at the end of the first three years toascertain whether income on business handled fully covers the costs of the mobile bankingunit, and if not, to fix and levy an appropriate service charge for door-step deposit and loanservices to make good the shortfall.

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Annex 12: Classification of Rural Banks, December 1998

Cbssfircation of Rural Banks, December M9S (000 Cedis, where applicable)

Pad-Up Networth Network Exam. Loans & Total

Bank Capital Return Exam Report Return sam Repo Date Advances lnvestmenUts Liquidity Deposits Assets

1 UNION RURAL 61,300 67,315 67,315 150.53% 150.53% 30/06/99 1,086 40,000 129.00. 52,382 129,387

2 MEPE 20,349 287,160 294,433 115.62% 147.50Yo 31/05199 184,179 510,959 101.74% 546,641 897,105

3 ASSINMAN 7,865 40,873 35,722 22.91% 73.37%. 31/10/98 60,569 125,360 106.89% 232,986 305,700

4 EASTERN GAMOA ASSIN 21,526 57,081 39,401 87.37% 73.20% 31/10/98 51,655 247,130 111.2S% 364,495 469,644

5 GARURAL 50,437 175,011 171,038 27.03% 71.90Y. 31/05198 190,204 898,725 101.70% 1,10,427 1,473,S21

6 AGAVE 60,308 287,259 252,237 49.91% 69.60Y 31/05198 339,934 536,154 91.33% 790,051 11,336,882

7 ENYANDENKYIRA 61,336 326,989 203,881 59.35% 66.87/. 30/11/98 499,108 386,950 76.00% 692,507 1,060,331

8 UNITY 10,540 105,995 110,676 45.21% 65.94% 31/05/99 229,983 110,200 103.35% 277,302 510,053

9 NWABIAGYA 39,241 872,202 720,706 49.00% 64.31% 30/09/98 1,126,731 1,918,915 97.14% 2,414,826 3,798,576

10 MANYAKROBO 99,951 509,942 496,856 50.80% 63.29% 30/04/99 833,452 1,516,143 94.40% 2,347,306 3,136,204

11 WEST MAMPRUSI 20,500 163,452 157,973 92.20% 59.70% 29/05198 137,498 304,360 111.30% 363,327 583,754

12 ADA RURAL BANK 90,964 169,331 291,771 15.77% 54.409. 31/05/98 412,126 550,562 63.22% 1,069,174 1,346,342

13 BRAKWABREMAN 52,953 377,213 375,999 47.86% 51.82% 30/06/99 598,336 420,450 75.53% 701,630 1,241,083

14 AVENOR 27,432 186.623 73,677 52.80% 51.40% 31/05/98 298,290 311,000 80.30% 485,001 717,793

15 EAST MAMPRUSI 37,320 55,662 32,705 39.80°% 47.40% 30/06/98 67,092 185,000 92.80% 274,046 378,679

16 KWAHU 39,649 435,953 348,670 28.60% 46.74% 30/11/98 626,8S1 1,090,625 78.50% 1,553,205 2,194,395

17 NAND3OM 22,674 15S,656 124,2S0 38.76% 46.17% 31/05/99 384,729 638,550 112.65% 694,200 1,173,651

18 AMANTINKASE1 108,388 108,455 94,729 25.40% 38.86% 31/12/98 149,535 180,000 89.00% 260,912 499,711

19 3OMORO 22,882 355,325 252,331 38.50Y% 37.60Y. 30/04/98 814,913 588,267 58.60% 1,361,724 1,904,334

20 BUILSA COMMUNITY BANK 35,787 155,373 144,690 34.80% 34.22%. 31/05/99 370,751 331,600 91.70% 530,041 914,197

21 SHAI 16,577 74,794 47,573 44.60% 30.58% 30106/99 128,539 240,300 90.40%/6 464,000 553,710

22 ATWIMAKKWANWOMA 127,507 684,937 568,460 33.00% 30.4 7% 31/05/99 1,302,735 4,020,000 95.16% 5,017,778 6,334,384

23 AKUAPEM 58,748 468,916 297,713 23.01% 28.26% 30061/90 799,521 1,030,241 84.34% 1,712,571 2,475,826

24 LA COMMUNITYBANK 363,246 2,262,162 1,841,300 8.75% 26.20Y% 30/10/98 1,143,626 2,990,403 82.58% 4,455,841 7,130,334

25 ODOTOBRI 24,081 168,850 122,140 39.50% 26.1S% 31/05/99 357,102 506,012 80.80% 722,229 1,031,899

26 UPPER MANYA KRO 13,220 205,530 134,872 20.00% 23.76% 30/04/98 679,570 1,052,750 88.74% 1,754,160 2,511,840

27 SONZELE 33,137 58,551 36,111 35.00% 23.15% 16/03/98 121,935 240,000 131.53% 259.058 491,459

28 ANUM 66,365 445,293 383,462 7.60% 20.80% 31/05199 883,904 838,871 73.00% 2,018,999 2,693,640

29 BIATORYA 35,350 188,670 131,207 19.50% 20.74% 30/11/98 297,006 130,000 64.07% 621,340 916,160

30 AHAFO CUMMUNITY BANK 30,253 29,081 28,996 15.00%. 19.94% 15/03/99 65,622 195,500 80.20% 211,618 258,074

31 KINTAMO 42,953 182,744 144,763 19.00% 19.61% 31/12/98 562,212 651,818 91.00% 1,100,247 1,793,395

32 TWIFO 20,608 187,551 107,504 24.60% 17.S4% 26/2/99 408,301 253,000 52.60% 841,313 1,112,501

33 NZEMA MAMLE 78,904 16.82% 30110/98

34 AWUTU EMASA 25,054 173,890 128,839 10.20°/. 15.S4% 30/04198 538,881 879,167 163.20% 1,087,795 2,412,906

35 AKOTI 19,939 96,623 70,375 6.60Y% 15.42%. 31/05/99 253,243 377,296 59.20% 926,512 1,648,198

36 AKYEMPIM 37,473 243,315 169,001 12.00% 15.40D!. 31/05/99 571,366 530,075 37.08% 2.420,716 2,745,636

37 NAARA 105,551 205,818 93,170 27.75% 14.89!. 31105/99 371,382 468,190 102.98% 515,384 1,026,857

38 NAYKROM 45,827 290,708 248,772 20.53% 14.54% 30/11/98 690,121 500,650 64.38% 1.085,155 1,584,845

39 AWUTUBAWJIASE 38,364 129,358 108,422 12.10Y. 14.2S% 30/10/98 3S6,214 870,397 78 30°/. 1,609,512 1,861,604

40 BESSFA 38,277 157,916 122,300 22.80% 13.80% 31/05199 465,337 411,500 105.50!. 998,104 1,601,813

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41 SOUTHBIRIM 26,404 67,913 64,862 15.40% 13.80%/ 30/06/99 152,987 152,000 68.70% 380,760 472,900

42 ASUBONTEN 35,280 18,200 15,499 16.81% 13.15% 30/06/99 10,650 38,000 75.70%/. 75,360 95,900

43 WETO 24,714 108,504 86,445 13.37/. 12.44% 30106/99 522,472 109,150 86.84% 164,794 794,650

44 OTUASEKAN 34,500 479,400 248,582 18.56% 12.20% 30111/98 1,621,800 1,094,800 71.96% 1,899,420 3,355,980

45 JUABEN 45,438 337,504 197,422 10.18% 11.64% 31112/98 1,575,466 1,346,721 68.12% 2,506,268 3,590,385

46 KAASEMAN 34,246 384,023 298,863 7.90°% 10.68% 31/08t98 1,555,113 471,038 30.57% 2,418,546 3,492,216

47 MANSOMAN 42,125 (21,626) 193,983 -7.35% 9.84% 30104/98 488,123 33,275 0.00% 1,336,220 2,167,453

48 BOGOSO 45,355 705,394 420,949 26.00% 9.53% 26103/99 1,415,600 520,000 44.00%/ 1,909,944 2,798,356

49 NSAOTREMAN 68,410 988,494 336,723 23.09W/. 9.50% 30/09/98 3,062,449 704,300 59.04% 2,504,945 5,088,582

50 WAMFIE 43,535 123,296 94,713 8.75% 8.86% 30/06/99 597,489 550,300 73.11% 1,103,856 1,515,188

51 ATIWA 34,988 129,647 96,651 8.72% 7.72% 11/06/98 546,223 919,055 79.57% 2,106,406 2,828,240

52 AHANTAMAN 449,058 7.70% 28/02/99

53 ASANTEAKYEM 32,422 198,005 100,254 20.00%° 6.90%/. 30110/98 510,257 739,450 60.00%. 1,298,110 1,588,224

54 SOUTH AKIM 245,376 5.77% 30/04/99

55 StMA 28,570 90,952 61,080 9.60%/ 5.46% 30/04/98 749,896 219,040 58.10%/. 1,246,775 1,513,926

56 NKORANMAN 18,287 41,079 30,588 4.37% 4.03% 30/04/98 345,798 232,370 60.20%/! 773,085 889,970

57 DROBO COMMUNITY 32,202 39,018 14,829 26.20% 3.55% 30/11/98 65,773 147,800 80.20-/A 245,975 293,273

58 BADUMAN 44,790 130,600 52,700 9.29% 2.82% 30/06/99 1,329,290 389,510 77.50 % 805,890 1,865,970

59 KUMAWUMAN 35,539 99,719 23,803 10.43% 2.05% 30111198 690,504 781,910 89.00%/ 1,553,004 2,111,585

60 LOWER PRA 119,229 662,535 564,957 7.02% 1.55% 28102199 2,637,588 2,366,620 69.60%/! 5,596,306 7,048,438

61 MUMUADU 37,515 170,622 95,947 8.50/A 0.56% 30104/99 620,926 540,950 70.40/A 1,495,977 2,340,145

62 NKORANZA KWABRE 22,297 66,650 (3,513) 4.22% -0.70% 31/08/98 757,633 363,150 95.70%/o 450,932 1,296,872

63 DUMPONG 791 -1.72% 31/10/98

64 AMANSIE WEST 51,703 267,356 124,042 4.80% -2.32% 30/11198 1,068,947 930,041 27.10% 2,774,400 3,517,045

65 AYANFURI 14,671 22,846 (9,482) 6.20% -3.15% 28/02/99 48,999 10,000 63.80% 45,463 390,171

66 KAKUM 58,356 242,942 101,321 9.90% 3.17% 31/03/98 1,345,743 1,047,850 43.52% 2,799,354 3,604,735

67 BOSOMTWE 77,108 327,167 116,472 6.72% -3.19% 31105/98 1,581,683 1,592,629 82.95% 3,353,361 4,801,121

68 MFANTEMAN 53.476 23,375 8,191 -5.70% -3.31% 30/11/98 66,219 111,000 65.00% 316,833 377,519

69 ADANSI 6,803 18,899 1,609 2.90% -3.50% 31/12/98 241,813 211,800 58.40% 717,261 758,023

70 AMENFIMAN 80,650 526,560 102,061 24.42% -4.17% 31/12/98 1,260,010 1,139,000 67.00%h 222,080 2,960,790

71 ATVW1MA 25,667 43,656 24,636 4.10% -5.97% 30/08/98 1,580,620 1,501,150 78.00% 2,364,549 3,588,618

72 NYANKUMSAI AHENKRO 13,702 32,244 (12.257) 3.00% -6.26% 26/03/99 394,776 234,900 43.34% 865,874 903,086

73 SEKYERE 87,863 497,954 387,212 4.51% -6.56% 31/08/98 1,219,985 1,944,350 90.24% 3,559,981 4,878,904

74 ADONTENG COMMUNITY 78,700 44,547 18,252 15.20% -8.01% 31/12/98 101,940 280,000 85.00% 484,362 576,087

75 AKtM BOSOME 7,519 44,803 18,006 -3.00% 4.17% 30106/99 253,307 125,821 50.60% 735,025 850,053

76 ODWEN ANOMA 21,460 90,670 12,048 12.69% -8.39% 31/10/98 347,618 425,000 58.35% 805,037 923,408

77 ASOKORE 13,483 69,641 (17,869) 7.70% -8.40% 30/11/98 332,854 570,150 70.22% 999,319 1,143,213

78 KWAMAMANMAN 36,610 214,940 (13,549) 2.78% -8.83% 31/12/98 1,877,400 286,200 26.44% 2,717,950 3,337,480

79 DERMA 63,604 6,472 (38,236) -1.80% -8.99% 31/07/98 903,671 350,800 61.20% 797,369 1,421,582

80 MPONUA 36,914 68,651 (38,850) 4.70% -9.09% 30111/98 515,138 370,180 47.50% 892,475 997,427

-79 -

81 KWAEBIBIREM 3,920 64,960 (726) 6.83% -10.72% 31/05199 197,300 79,160 63.15% 484,830 781,100

82 ABOKOBI 53,270 45,646 8,303 7.90% -11.15% 31105/99 289,660 510,600 85.00% 782,088 959,564

83 YAPRA 18,283 214,875 (56,506) 7.10% -12.93% 31112198 1,515.255 411,750 65.00% 1,035,980 2,372,186

84 AKATAKYIMAN 68,400 87,640 54,566 1.16% -16.49% 31105/99 180,860 141,540 33.04% 451,920 570,615

85 UPPER AMEFI 14,350 12,590 (14,908) -0.25% -16.71% 31112/98 65,313 64,470 49.43% 349,734 402,704

86 BONZALI 10,343 54,643 (14,869) 7.80% -18.81% 30108198 209,183 118,120 33.44% 595,698 659,773

87 AFRAM (61,591) -18.94% 30111/98

88 FIAGYA 22,727 (21,240) (37,692) -15.70% -19.66% 28/02/99 208,964 106,575 36.40% 352,609 411,813

89 KWAHUPRASO 31,251 31,376 (15,051) -5.80% -21.31% 31/08/98 195,226 59,900 37.00% 540,062 554,592

90 ATOBIASE (93,580) -22.99% 31/05/99

91 ASAWINSO 29,100 9,080 (65,924) -2.95% -33.27% 31/05/98 442,600 112,000 27.00% 754,760 827,670

92 NORTH TONGU 23,068 3,925 (108,958) -1.40% -33.37% 31/05/99 283,271 526,725 62.00% 985,212 1,093,325

93 EKUMFIMAN (260,019) -35.00% 30/04/98

94 GOMOAAJUMAKO 16,456 14,007 (24,116) 12.26% -35.75% 30/11/98 92,804 160,050 82.22% 419,265 451,212

95 AGONA 26,227 106,064 (12,032) 28.20% -37.86% 31/10/98 219,612 638,024 74.00% 862,693 1,077,971

96 DANGRE 45,336 (111,451) (171,035) -10.59% -42.60% 31/05/98 690,650 690,650 69.50% 1,793,774 1,894,600

97 SEKYEDUMASE 28,264 60,988 (214,640) 1.30% -56.45% 30/06/99 605,424 306,401 39.50% 1,073,832 1,828,053

98 AMANANO 46,969 263,422 175,989 3.59% -65.05% 31/12/98 543,540 412,950 55.63% 1,610,423 1,974,554

99 TANOAGYA 23,471 69,226 (128,814) 9.00% -66.48% 31/12/98 319,480 144,043 34.00% 681,708 889,133

100 GOMAO 13,229 4,781 (46,018) -0.80% -67.00% 31/05/99 143,752 244,000 87.20% 309672 468,467

101 AKYEM MANSA 3,210 (12,200) (20,116) -23.60% -69.58% 31/05/99 41,770 4,000 70.30% 145,037 156,875

102 BOMAA 10,868 (59,963) (58,937) -41.50% -72.50% 28/02/99 91,672 53,350 33.40% 262,632 289,951

103 OKOMFO ANOKYE 21,780 7,250 (193,638) 2.30% -84.67% 31/08/98 276,370 242,870 40.88% 767,590 856,440

104 ASUrIFI (116,814) -98.59% 31/03/99

105 TANO (176,793) -131.65% 31/08/98

106 AHAFOANO 10,751 105,141 (55,877) 1.10% -135.49% 21/02/98 161,219 139,340 47.00% 464,049 596,078

107 GUAMAN 23,548 (79,085) (143,475) -20.78% -140.01% 30/0/699 142,664 45,000 62.56% 566,929 548,701

108 ASUOPRA 11,555 (9,790) (40,777) -13.90% -142.87% 30/09/98 79,225 85,000 77.50% 142,135 186,329

109 ATWIMA 86,435 282,911 (1,489,684) 9.05% -156.13% 30/11/98 1,327,728 1,800,950 71.99% 3,690,071 4,149,207

110 AKROFUOM ID

111 ESIAMA \D

TOTAL 4,210,878 19,658,025 10,233,411 58,123,950 57,024,898 117.460,624 178,443,051

AVERAGE 37,936 177,099 92,193

Notes: \D = Distressed Classificaton: Nunber

Salfactoiy 53

Medvioae 56

DistBssed 2

- 80 -

Annex 13: Overview of IT Constraints Facing Rural and Community Banks

Scope of the Problem

The existing communication infrastructure within rural banks vary widely, from slightlycomputerized to non-existent. A 1999 survey revealed that there is virtually no network betweenthe rural banks and the central bank and between rural banks. All communication between therural banks and the Bank of Ghana, the central bank, is by weekly returns submitted in paperform. Only 56 (5 1%) of the existing 110 rural banks have any forrn of telecommunication,basically telephones. Only 16 (15%) of rural banks have Local Area Networks (LAN), which isthe basis for effective networking of the banks. The rural bank with the biggest LAN is the LowerPra Rural Bank in the Western region with 20 computers in a LAN, followed by NsoatremanRural Bank with 18 computers. Most of the LANs run peer to peer networks and one of them isrunning Windows NT. To graduate to a scaleable network, TCP/IP should be used as the defaultprotocol for interconnecting the LANs together. There are only two banks with IT staff who lookafter the networks. There is the need to hire and train more IT staff to look after any futuresystems that will be employed for the rural banks.

Proposed Architecture

The proposed architecture is designed with the BOG logically and physically at the core,with the Apex Bank as an intermediary Hub linked to the rural banks. The regional Apex entitiesand head offices of the member rural banks are connected to both the BOG and Apex Bank viaVSATs, with a 2MB Back haul connection to the BOG. With this architecture, Rural Bank HeadOffices will be grouped in a manner that ensures that at the minimum all members of the group areless than 30km away from one member of that group. The idea will be to use spread spectrumradios to gather data traffic at one of the Rural Banks within the group for onward transmissionthrough the VSAT network to the Head Office in Accra.

The proposed Rural Bank network will be a private network with a single exit/entry into thepublic networks. Hence security would be controlled at this gateway where firewalls and othermonitoring services may be implemented. Within the private network, a properly authorized RuralBank staff is able to use all aspects of the private network. Access from outside the privatenetwork will however restricted to specific services and logs necessary for monitoring intrusionimplemented. It is always advisable for the rural banks to maintain and monitor their ownnetworks in order to guarantee the uptime and availability of the network.

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Diagram 1: IT Technology Linkage for the Rural Banking System

APEX Reigronal OfcAPEX Reigional Offic APEX Reigional OficAPEX Rei fi

0 ~ ~ or

Rural Bank Head 0Th Rural Bank Head 0 ( Rural Bank Head 0ThA Ruaa Ban H

APEX Reig ion A ffic e | APEX Reion A ffiRein A n APEX Rein A nOffice offr offc orfc orfc offr offic Office i OffiOce offic

Rural Bank Rural Bank Rural Bank Rural Bank Rural Bank Rural Baak RuralBBank Rural Bank Rural BankHead Head Off ead foe Head OffHea d ead omce Head Office Head Office H

Recommended Solution

Based on the geographic distribution of the Rural Bank Head Offices through out thecountry, the recommended solution for connecting all the Rural Bank Head Offices as well as theAPEX Offices there by providing total data communication between the various Banks and APEXOffices, is the VSAT option. This option provides a vertical (Bank-to-Bank) as well as horizontal(Bank-to-APEX) data communication. It is also affords a uniform solution for linking the RuralBanks to each other as well as to the APEX Offices.

Another solution considered was the use of Spread Spectrum radio technology. Thishowever requires that the rural banks and APEX offices be clustered such a way that each clusterhas at least one Bank less than 30km away from the remaining banks in that cluster for effectivedata communication to take place amongst them (Please refer to Appendix A). In some cases thetopography of the areas did not augur well for the use of this technology. Repeater stations wouldhave to be setup for retransmission of weak data signals due to the distance/terrain of the RuralArea.

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Connectivity for the Bank of Ghana Supervisory Division (BSD) and the Rural FinanceDivision (RFD) will be via Spread spectrum radio links. This recomnmendation assumes that theBSD and the RFD are located in an area less than 30 km away from the APEX Head Office.Below is a diagram of the recommended connectivity for the project.

Training & Recruitment

The recommended recruitment and training of IT resources to maintain, administer and providefirst level support for the LAN and WAN in the Rural financial services project are as follows.

Training. The approach to training the anticipated large number of IT professionals will be thetrain the trainer method. In this a selected number of human resources will be trained as trainersand these resources will in turn train the users and operators of the system in the Rural Banks andthe other institutions associated with the project.

The recommended protocol for communication within the system is TCP/IP. It is recommendedfor its simplicity and its extensive use worldwide. The following training courses arerecommended for the various players of the system.

APEX IT Staff

* TCP/IP* Domain Name Services (DNS)X Simple Network Management Protocol (SNMP)X WAN Technologieso Introduction to Routers* Satellite Technologies & Diagnostics

Rural Bank Head Offices (IT Staff)

* Introduction to MS Windows 95/98* Introduction to Microsoft Office* Introduction to MS Windows NT Administration* Introduction to MS TCP/IP* Operator Level Training for Satellite Diagnostics* Operator Level Training for Routers

Access Restrictions and Protection

Firewalls are part of a good defense in depth strategy. The idea is to place several layers ofprotection between machines in a LAN and the potential threats. In this case the threats from theoutside are other Rural Banks in the WAN. A firewall between the outside and the Banks internalnetwork(s) protects the bank from potential threats. Because a firewall is placed at theintersection of two networks, it can be used for many other purposes besides simply controllingaccess. Firewalls can be used to block access to particular sites in the WAN, or to prevent certainusers or machines from accessing certain services or servers. A firewall can be used to monitor

- 83 -

communications between the banks LAN and other banks LANs. For example it can be used tolog the endpoints and amounts of data sent over every TCP/IP connection between banks and theAPEX offices

Services between Apex and Rural Banks

Based on the geographic distribution of the Rural Bank Head Offices through out thecountry, the recommended solution for connecting all the Rural Bank Head Offices as well as theAPEX Offices there by providing total data communication between the various Banks and APEXOffices, is the VSAT option. This option provides a vertical (Bank-to-Bank) as well as horizontal(Bank-to-APEX) data communication. It is also affords a uniform solution for linking the RuralBanks to each other as well as to the APEX Offices.

Another solution considered was the use of Spread Spectrum radio technology. Thishowever requires that the rural banks and APEX offices be clustered such a way that each clusterhas at least one Bank less than 30km away from the remaining banks in that cluster for effectivedata communication to take place amongst them (Please refer to Appendix A). In some cases thetopography of the areas did not augur well for the use of this technology. Repeater stations wouldhave to be setup for retransmission of weak data signals due to the distance/terrain of the RuralArea.

Benefits

I1. Broad and high value range of features:

* Concurrent multiple protocols and applications* Migration from legacy to client/server environment* Single platform optimal batch, interactive, voice and broadcast data* Added value through voice and video capabilities

2. High reliability:

* Better availability* Smallest lower power indoor/Outdoor equipment

3. Economical:

* Small antennas* Low space segment requirement

4. Network sharing for load over space segment:

* Greater stability for volatile traffic and better balancing

5. High throughput due to high loading:

-84 -

* Flexible Network Management System (NMS)

VSAT-based satellite networks generally offer a number of advantages over traditionalnetworks of terrestrial telephone links:

* Cheap installation cost;* Large coverage area (satellites can cover a large area);* Rapid deployment (it takes only a few days to install a site and it does not depend on

distance. Note that for terrestrial links, time and cost are constraints);* Flexibility: new sites can be added or existing connections reconfigured in matter of

hours. Two to three terminals can be installed in a day;* High availability: Up to 99.99% transmission uptime, which translates to less than I

hour down time in a whole year.

SATCOM provides:

* Data Broadcast* Internet/Intranet* Rural Telephony

Its capabilities are extensive and can provide private/shared networks with future growth inmind. It has multiple backbone and supports varied system interconnection.

Implementation

The implementation of the Rural Finance Services Project will be broken into phases. Thefirst phase will be the pilot phase. In the pilot phase the APEX Head Office, the five APEXRegional Offices, BSD, RFD and ten Rural Bank Head Offices will be interconnected. The tenRural Bank Head Offices will be selected based on the level of computerization in the Banksoperations. This phase will take approximately 20 months to be completed.

The second and subsequent phases will be to bring in about ten banks at a time. This willbe ongoing till all the banks, the APEX Offices, BSD and the RFD are all interconmected.

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Annex 14: Flowchart of Project management Organization

BO(!

|Progranm Steering Cornmittee (PSC)|

Rulral Finance Inspection -1 ~~~~~Department (RFID) f s *~~~~~ Project Implementation BnigSpevso

Microfinance Unit, * Financial ManagementDeatn(B)MOF * Procurement De* Irspent(fon

*Informal Sector * Monitoring and Evaluation *IMnspetintAds*PromotionalMaaentAds*Capacity Building.._

/ _ ~~~~~_

|Apex Bank /

Apex 1 Regional/

Clearing Centers/

Infomal inacial Sector Rural and Community Bankst JGOs Local ~Communities Rural Private Sector

-86 -

Annex 15: Organizational Chart: Apex Bank for the Rural and Community Banks

Board of Directors

Managing Director

Deputy Mana&gDmcwr]

| Accra | |Kumasi | |Takoradi ||Bolgatnmga n Sunyani

-87 -

IBRD 30892

3 B U R K IF A S O X M%ogS,gB a

Nadosli '5ong.\ . '. TOGw BEN IN

ngan and-i.

q- | -PRIMARY ROADS

/ iy . asa \ Wenchiki ySECONDARY ROADS

Dori)onA > s<ub g¢nS < Chere7rM\ N it PORTS

10° ) vTenn a . 0 ° a shiegu 0 RIVERS 10-

, 8) / Wechinu

. .. -i-----7'-----'¢- RAILROADS

.B paCulSi s 9 Ssols; * NATIONAL CAPITAL\u ( Tuna < X ) cTiia \%y {Ss < REGIONAL HEADQUARTERS

~~~Tuna ~ ~ ~ ~ ~ TmleYndi DISTRICT AND SUB-DISTRICT

s2| { ; N gnkp aHEADQUARTERSS ,, a J b aa Ne/ \, , '7' gu *Zobzugu a OTHER SELECTED TOWNS

C,aoch mango ,J ./ REGION BOUNDARIES

I.' fBole Damongo 50rri ufA \ Nakpali INTERNATIONAL9'1] (qheriPe f tgkPan \3>WangosTuru Bin, BOUNDARIES 9'

C6TE INak ~~~~~~~~~~~~~~~~ aThe boundaries, caolors,

u umpe 4 ca a ~ mbulother information shown

D'IVOIRE irungo Kp eimply, on the prt aof

~~, Malsoago lrekant The Wor(d Bank Group,K wadweonany lud?ment an the legal

ngo- r ~~~~~~~ttus af any territory,

:~~~~~~~~~~~~~~~~ 5

Po aiI or acceptAnce of such

-8~~~~~~~~~~~~~~~~~~~~~~ ~~~~a~boundaries. B

biso~~~~~~~~u at e~ s

"pjAk nt 7a TOG'O , BENIN

A ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ aDorma 0; nkro~~~~~~~~~~~~~~~~~~~,a'~l6

.6io ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~MY20