web view1.this is to seek the regional vice-president’s (rvp) approval for a second-order...

Document ofThe World Bank

Report No: 64858

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING OF

FINANCIAL AND LEGAL SECTOR TECHNICAL ASSISTANCE PROJECT CREDIT

OCTOBER 14, 2004

TO THE

REPUBLIC OF KENYA

September 28, 2011

ABBREVIATIONS AND ACRONYMS

ADR Alternative Dispute ResolutionAFTOS Africa Core Operations ServicesATS Automatic Trading SystemCBK Central Bank of KenyaCFSRD Comprehensive Financial Sector Reform and DevelopmentCMA Capital Markets AuthorityCP Civil ProcedureCRB Credit Reference Bureaus DCA Development Credit AgreementDFI Development Finance InstitutionsDFID Department for International DevelopmentDMS Document Management SystemDPFB Deposit Protection Fund BoardFA Financing AgreementFLSTAP Financial and Legal Sector Technical Assistance ProjectFSAP Financial Sector Assessment ProgramGoK Government of KenyaICT Information and Communications TechnologyIDA International Development AssociationIFRs Interim Financial ReportsISR Implementation Status and Results ReportIRA Insurance Regulatory AgencyKENAO Kenya National Audit OfficeKPI Key Performance IndicatorsKPOSB Kenya Post Office Savings BankMTR Mid-Term ReviewNSE Nairobi Stock ExchangeOTC Over-the CounterPAD Project Appraisal DocumentPDO Project Developmental ObjectivesPPP Public Private PartnershipsRBA Retirement Benefits AuthorityRTGS Real-Time Gross SettlementSACCO Savings and Credit CooperativeSASRA SACCOs Regulatory AgencySDR Special Drawing RightsSMART Specific, Measurable, Attainable, Relevant and TimelySoE Statement of ExpensesUK United Kingdom

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Regional Vice President: Obiageli Katryn EzekwesiliCountry Director: Johannes C.M. Zutt

Sector Manager / Director: Michael FuchsTask Team Leader: Yira J. Mascaro

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KENYA FINANCIAL AND LEGAL SECTOR TECHNICAL ASSISTANCE PROJECT

P083250CONTENTS

PageA. SUMMARYB. PROJECT STATUSC. PROPOSED CHANGESANNEX 1: RESULTS FRAMEWORK AND MONITORINGANNEX 2: KEY REFORMS IN THE LAST 15 MONTHS……………………….………………23ANNEX 3: ANNUAL WORK PLAN …………………………………………………….………………

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FINANCIAL AND LEGAL SECTOR TECHNICAL ASSISTANCE PROJECT

RESTRUCTURING PAPER

A. SUMMARY

1. This is to seek the Regional Vice-President’s (RVP) approval for a second-order restructuring, which includes an cumulative extension request of over two years of the Kenya Financial and Legal Sector Technical Assistance Project (FLSTAP), which requires RVP approval. The restructuring covers: (i) revision of the Project’s Development Objectives (PDO)-level outcome indicators and intermediate-level indicators, which will include replacement and modification of a number of indicators in the Project’s Results Framework, but not the PDO, and with no effect on the likelihood of achieving the objectives; (ii) the second extension of the project’s closing date by 18 months, as anticipated in the 3-year plan presented during the first extension request; (iii) re-allocation of funds from a number of categories to other categories in order to ensure sufficient funds are available in each category of expenditure; and (iv) an upward revision of the percentage of expenditures to be financed by the International Development Association Credit (IDA) to ensure full funding of committed and anticipated expenditures. Given time constraints, the team, on the advice of AFTOS, will subsequent to this restructuring prepare a Level I restructuring package that will formally adopt the PDO which is articulated in the Development Credit Agreement (DCA).

2. The project’s Mid-Term Review (MTR) was completed in February 2010, at which time, given the level of progress for a project seen as important to the country’s development agenda, the Government of Kenya (GoK) requested for an extension of the project’s closing date by 36 months. The agreed implementation plan had suffered significant delays as a result of several compelling circumstances. These ranged from the post-election crisis in 2008 that effectively contributed to a 6-month implementation delay as operations of a number of project implementing agencies and governance structures stagnated, to, among others, initial project management shortcomings when internationally-hired project managers under-performed. Therefore to address project implementation and management shortcomings, processes were started to overhaul and strengthen project coordination and governance; which were completed when the project coordination unit was strengthened in late 2007. However, the unanticipated length of time it took to process the requested first extension) of the closing date also contributed to implementation delays as newly-recruited staff who were to coordinate and manage the project resigned to take up other positions on account of the delayed approval of the extension. The process to strengthen the project unit therefore had to be re-started. The cumulative effect was effectively a 2-year implementation delay leading to a significant lag on disbursement forecasts as progress on implementation of agreed activities suffered causing the project to be rated “Moderately Satisfactory” on Implementation Progress. Given recent progress, it is likely implementation would be upgraded to “Satisfactory”. The likelihood of achieving the PDOs is however rated “Satisfactory” based on implementation of the recommendations from two key strategies in the financial and legal sectors which were financed with Credit proceeds. While approval for the closing date extension was provided, it was for an initial 18-month period, with a further extension of the remaining 18 months to be considered contingent upon confirmation of significant implementation progress and a clearer indication of increased likelihood of achieving the PDOs.

3. Based on the findings of a review during the June 2011 implementation support mission, significant implementation progress has been made over the last 15 months, For example, (a) while the disbursement ratio increased from 25 percent to about 34 percent, disbursements during this period were

over 25 percent of the total disbursed amount, an additional 25 percent have been committed; and close to 40 percent of the total credit is being processed under on-going procurement activities; (b) the strengthened project implementation unit is providing highly satisfactory services to the implementing agencies and is very proactive in its interactions with IDA; and (c) the agreed governance structures are now in place and fully functioning. All of these are in line with expectations outlined at the time of the previous closing date extension request. Also, the likelihood of achieving the PDOs is now substantially increased (with most outcome indicator targets having been met). As such, project implementation is fully on track, i.e. performance has been satisfactory and PDOs continue to be achievable.

4. The project team’s assessment is that: The project continues to be one of the main and only comprehensive facility for addressing

Kenya’s on-going financial and legal sector reforms, and continues to show relevance in addressing reform issues thrown up by the global financial crisis;

These sector reforms are relevant and critical to achieving Kenya’s priorities, as outlined in the country’s Vision 2030 document (aimed at achieving middle-income status).

An extension of the project closing date would provide adequate time to fully consolidate the progress realized from improved implementation over the last 15 months, as envisaged in the 3-year plan submitted in 2009, enable completion of all of the on-going reforms being financed under the project and substantially contribute to their sustainability, particularly of the relatively weak supervisory agencies that have been created;

A re-allocation of credit proceeds between categories would be necessary in order to fully finance committed and anticipated expenditures under two categories. This is necessary in view of the estimated cost of ICT equipment and other goods and equipment proposed to be procured for a number of financial sector regulatory agencies and Judicial institutions;

The GoK is seeking to cover the remaining counterpart funding requirements by utilizing a larger proportion of funds from the IDA Credit for each of the disbursement categories currently split among DFID, IDA, and GoK counterpart funds. This has become necessary due to the slower than anticipated disbursement of the categories of expenditure which has proportionately more IDA funding, such as goods. The change is in line with the new Country Financing Parameters for Kenya. DFID’s co-financing ratios still remain as originally agreed and had reached the 50 percent disbursement level as at June 2011, well above IDA’s. The proposed change will not lead to a revision of the PDO; and

The Results Framework needs to be revised slightly to ensure (i) continued relevance of the performance indicators; (ii) better consistency in indicators in various project documents, and (iii) project outcomes can be more clearly attributed to the project’s interventions.

5. Based on the above, a second-order restructuring of the project is proposed. Specifically, the proposed modifications to the Credit are:

(i) Extension of the project closing date for an additional 18 months from September 30, 2011 to March 31, 2013 to assure completion of a number of key activities;

(ii) Revisions to the Project’s Results Framework involving minor modifications of a number of outcome and intermediate-level indicators and targets, with a view to improving their attribution and measurability;

(iii) Re-allocation of funds between categories to assure availability of sufficient funding for planned expenditures (see Table 2 below for details);

(iv) Revisions upwards of the percentage of Expenditures to be financed by IDA (see Table 2 below);

(v) GoK will provide all required counterpart funding when the Department for International Development (DFID) funding is exhausted, and will also cover any tax related costs (which the Credit does not cover) and;

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(vi) The revision of the percentage of expenditures financed by IDA and the re-allocation of funds between categories, are expected to significantly increase the likelihood of achieving the PDOs.

6. We also confirm that the remaining amount after the revision to percentage expenditures financed by the IDA credit is sufficient to fully finance the remainder of the agreed activities, though DFID’s co-financing ratios will remain as originally agreed. In order to assure adequate financing for activities under procurement for which contracts are yet to be signed, and anticipated activities that are well advanced, it is proposed to only re-allocate a portion of the unallocated category, allowing the remainder to serve as contingency during the remaining implementation period.

B. PROJECT STATUS

7. The project was approved on October 14, 2004, has been extended once and is currently scheduled to close on September 30, 2011. The original IDA credit amount was SDR 12.2 Million, equivalent to US$18 Million, with DFID providing additional co-financing of US$10 Million equivalent, and the GoK expected to contribute US$2 Million equivalent as counterpart funds. The PDO in the Development Credit Agreement (DCA) is: “to support the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s program. This PDO is not fully aligned with the PDO in the PAD, which the team will address subsequent to this restructuring with a Level I restructuring package that will formally adopt the PDO articulated in the DCA. The program involves enhancing the capacity of the financial, commercial and judicial institutions, promoting reforms within the financial and legal sectors so as to deliver services effectively and efficiently.

8. The project currently complies with all legal and financial covenants, and is rated as “Moderately Satisfactory” on implementation progress and “Satisfactory” on likelihood to achieve the PDO. Despite implementation shortfalls at inception, the introduction of a new project team in 2007 has contributed significantly to the current level of implementation progress, and as at August 31, 2011, a total of US$6.1 Million equivalent to about 34 percent of the original IDA Credit amount, had been disbursed (compared to 50 percent for DFID). Approximately 25 percent of this amount was disbursed during the last 15 months alone when project implementation activities were fully re-started. 9. Commitments, anticipated activities (activities for which procurement processing have started and most of which are at very advanced stage) and proposed activities (activities for which procurement processing has started after having concluded the initial consultancy/advisory phases and for which crucial follow-on phases can only be concluded subject to extension of closing date) amount to an additional US$9.7 Million.

10. The significant progress to date points to the increased and sustained commitment of the GoK and of implementing agencies and partners to assure the project meets its targets and that the credit is also fully disbursed by the proposed revised closing date.

11. On Financial Management, the current Implementation Status and Results Report (ISR) rating is “Satisfactory”; there are no outstanding audit reports, with the last audit report for the fiscal year ending 30 June 2010 received by the 31 December 2010 deadline. The project has been submitting quality Interim Financial Reports (IFRs) within the requisite 45 days after the end of each quarter due date. These have been certified up-to date. The project has also been submitting regular Statement of Expenditures (SoE) and Withdrawal Applications and the Designated Account is active. The project currently complies with all fiduciary arrangements.

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12. There are no outstanding procurement issues and the procurement plan for the remainder of the implementation period was reviewed and cleared. The project is rated as Category C on Safeguards and remains as such, and is currently in compliance with all Legal covenants.

13. We have listed here some of the key activities financed under the Credit completed in the last 15 months, that have led to significant reforms in the financial, and legal sectors, including key reforms that are in the process of being completed. A more comprehensive list is provided in Annex 2:

(i) Ongoing preparation of a Comprehensive Financial Sector Reform and Development Strategy (CFSRDS), which will inform 2012 -16 mid-term plans of Vision 2030; and

(ii) Development and ongoing implementation of the Judiciary Service Strategic Plan for the period 2009-12, which reviews and builds on earlier reform activities and proposes various judicial reform measures in critical areas, such as, drafting of new Civil Procedure (CP) rules that promote alternative dispute resolution (ADR), and introduces provisions on court-mandated mediation Improvements to the lending environment by supporting preparation of Banking Act(Credit Reference Bureaus) Regulations that ushered in credit information sharing in Kenya and has seen two Credit Reference Bureaus (CRB) licensed.

14. As previously noted, in order to consolidate the gains realized from the reforms supported to date and to complete the pipeline of existing/ongoing activities, and new but related initiatives, a number of activities, some of which are listed here would require additional time to complete. Consequently, the GoK and the World Bank team have agreed on an action (work) plan for implementation of the remaining activities. These have been translated into a procurement plan to support implementation for the remainder of the proposed extension period, which has been reviewed by the Procurement Unit. These include procurement and installation of ICT equipment for several regulatory agencies, in line with the 2010 Financial Sector Assessment Program (FSAP) recommendations; and other key advisory services.

15. We estimate the costs of these activities to be at a minimum of about US$5 Million, but more importantly, that their completion/success is at risk if not supported by this project.

16. We have documented in the table below progress on key aspects related to the PDOs, which had been recorded since 2007, and reported regularly by Government of Kenya.

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Table 1: PDO related aspects- progress report

PDO-related aspects 1 Baseline Target2 Dec. 2010 Target Met(a)Number of accounts in the financial sector increases by 20 percent.

2,204,000 2,645,000 12,803,500 Yes

(b) Proportion of adult population over 18 accessing financial services provided by formal financial service providers rises.

11.6 % 29 % 47.9 % Yes

(c) Credit extended to the private sector as a percentage of GDP increases to 34 percent.

25.4 % 34 % 35.3 % Yes

(d) Interest rate spread between lending rate and average deposit rate falls below 6 percent

9.48 % Below 6 % 10.28 % No

(e)Nonperforming loans (NPLs) drops below 10 percent of total loans (net of interest in suspense).

20.4 % Below 10 % 6.3 % Yes

(f) Backlog of cases over three years old in the Milimani commercial court falls.

No baseline survey

(g) Legislation drafted with support of the project published by the Attorney General’s office

16 bills drafted and or

gazetted

Target met.

(h) Increase in measured satisfaction of the business community with the judiciary by 25 percent

No baseline or /periodic survey(s) conducted

1 Revised (informal) Results Framework (May 2007)2 Dec. 2010

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C. PROPOSED CHANGES

17. Key Performance Indicators: While the PDO will not be revised and remains as: Support the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s Program (DCA), it will be important to restate in the Project Appraisal Document (PAD) the PDOs to be in tune with the DCA, which will be done in another restructuring after this one is processed, due to time constraints. The Program involves enhancing the capacity of the financial, commercial and judicial institutions, promoting reforms within the financial and legal sectors and deliver services effectively and efficiently. However, a number of Key Performance Indicators at the PDO-level and the intermediate-level and their targets will either be replaced or modified in order to assure reconciliation of differences in project documents, ensure clear linkage to the PDO, captures the project interventions more clearly and recognizes the project’s focus more clearly. All changes to the indicators tighten the target, except the one related to spreads, which is more conservative partly due to the financial crises effect and overly ambitious estimates at design. Project outcomes are largely unchanged.

18. Components: There are no changes proposed to the components as originally designed, however as part of the comprehensive financial sector strategy, GoK proposes to use part of the Credit proceeds for financing the purchase of equipment to be installed in the proposed Nairobi International Financial Center.

19. Financing Plan: Based on activities already undertaken, and activities proposed to be implemented during the requested extension period, and in view of the financing arrangements agreed during the design phase, going forward the remaining uncommitted IDA credit proceeds will be re-allocated and the percentage of expenditures to be financed by IDA revised upwards. This will allow full financing of agreed activities and coverage of 100 percent financing of the proposed GoK counterpart contributions (therefore, GoK contribution now reduced to 0 percent). The DFID co-financing ratios remain unchanged, and the GoK will take up any lingering counterpart funding requirements when the DFID funds have been exhausted, which we estimate will happen around June 2012.

Table 2: Proposed Withdrawal of the Proceeds of the Credit*

CategoryOriginal Amount of the Credit Allocated (SDR M)

Revised Amount of the Credit (SDR M)

Disbursed Current percent of Expenditures to be financed by IDA

Current percent of Expenditures to be financed GoK

Current percent of Expenditures financed by DFID

Revised percent of Expenditures to be financed by IDA

1. Goods & Equipment

2.42 3.97 0.38 57 percent 10 percent 33 percent 67 percent

2.Consultants Services including Audit


3.Training and Workshops


4.Operating Costs


5.Refunding of PPF

0.51 0.51 0.05 0

6.Unallocated 1.90 0.70 0SA 0.62

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TOTAL 12.20 12.20 3.92GoK will cover taxes (not covered by the project) and any additional co-financing expenditures after DFID funds run out.

20. Variations from the original project allocations as described above reflect the anticipated impact of the components, and current developments in the financial and legal sectors, requiring commensurate responses. This is notably the case for goods and equipment, as well as operating costs accounting for the longer period of the project.

21. Financial Management: There will be no revisions to the financial management and disbursement arrangements.

22. Closing date: The closing date is extended for the second time and for a period of 18 months to March 31, 2013. This is in line with anticipated additional extension noted during the first extension, in the context of three year plan and implementation progress since the first extension.

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Annex I: Results Framework and Monitoring

Kenya - Financial and Legal Sector Technical Assistance Project

Revisions to the Results Framework Comments/Rationale for Change

PDO

Current ProposedSupport the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s Program (DCA)

No change

PDO indicators

Current (PAD) Proposed change

FINANCIAL SECTOR:

Improved access to financial services

(a) Number of accounts in the financial sector increases to 15 million by end of project. -New

Number of bank accounts as measured by CBK is a key objective measure of access. The newly licensed deposit taking MFIs (DTMs) that are regulated by CBK (which was supported by the project) are further increasing the number of accounts held at formally regulated entities

(a) Percentage of population with access to appropriate financial services increases by 20%

(b) percentage of population with access to formal financial services increases to 50 percent by end of project. Revised

(c) percentage of population with access to formal rural financial services increases to at least 40 percent by end of project – New

Indicator remains a reasonably “objective” and independent measure from tri-Annual FINACCESS surveys.

“Formal rural” is included to better reflect improvement in access, as the constraints are worse in rural areas. Project intended to achieve impact in increasing access to finance in rural areas.

(b) Increase in private credit provision relative to GDP by 30%.

(d) Credit extended to the private sector as a percentage of GDP increases to at least 37 percent by end of project. – Slightly Revised

Retain as a broad indicator of the stock of credit and proxy measure of improvements in lending environment supported by FLSTAP. Target increased to reflect trends.

Improved efficiency of financial services

(d) Spread between average deposit rate and lending rate for

(e) Interest rate spread between Average Deposit Rates and Lending

To reflect reality that current spreads at 10 percent are unlikely

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PDO

Current Proposedprime customers decrease by 30 percent.

Rates falls below 8 percent by end of project. Slightly Revised

to reduce to 6 percent (for a 30 percent decline from 8.6 in December 2005), which in hindsight, was a very ambitious target for a country with the level of financial system development Kenya had in 2005. Spreads had declined to 8 percent partly reflecting project supported activities. Shocks after crises (domestic, international) have led to increase to 10, but ongoing reforms are still expected to have an impact.

Improved stability of the financial system

(c) The ratio of non-performing loans (NPLs) to the total loan portfolio of the banking system is reduced to less than 10%

(f) Non-Performing Loans (NPLs) drop to 8 percent of Total Loans (net of interest in suspense) by end of project. Slightly Revised.

Definition made more precise and adjusted target to stay at, and to decline continuously below 2009 levels of 8 percent (still more aggressive than at project approval). The 2010 Industry NPL levels at 6.3 appear to have been artificially low, not yet reflecting current external shocks. Hence NPLs are expected to increase first in 2011 then decline slightly given external shocks (increase in interest rates, depreciation of the shilling against the USD and higher inflation, plus some instability expected around 2012 that is an election year). In addition to strengthened prudential regulation movement towards risk-based supervision and prompt corrective action and higher provisioning and capital requirements, increased use of credit information sharing will mitigate some upward movement in NPLs, leading a smaller net movement-all supported by project.

LEGAL SECTOR Commercial Justice is more efficient and effective Legal framework and judicial capacity strengthened to ensure broader access to, and efficiency of, financial and related legal services.

(g) The rate(s) of case clearances by No baseline surveys carried out at

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PDO

Current Proposed(e) Reduction of backlog in commercial cases by 25 percent (dropped)

Milimani Commercial Courts, or in respect of major types of commercial cases, improves significantly by at least 5 percent annually from 2011 -New.

inception. Judiciary confirms they now have records (and have cleaned up data going back as much as 11 years) for: Cases filed: cases disposed off annually. Activities supported by the project such as the new civil procedure rules have enabled availability of statistics.

. h) At least 15 new or upgraded key Commercial/ Financial and related laws and subsidiary legislation developed, approved by Cabinet and published by the State Law Office (Attorney General’s Office) by end of project New

Tracks a set of key legislation, regulations and Rules that follow FSAP and FSAP update recommendations, which were developed with project support at different stages towards the broad objective. Submission to the AGs is the last stage under executive power, hence reflected here. At project inception legislation related to commercial and financial activities such as payments systems, SACCOs, capital markets, microfinance, Credit reference, insolvency, deposit insurance, small claims court, etc had not been drafted.

Direct Project Beneficiaries: Number of accounts in the financial sector increases to 15 million by end of project. New

Selected one of the indicators listed above to track direct project beneficiaries.

Intermediate Results indicators

Current (PAD) Proposed change Comments/Rationale for Change

Component 1: Financial and judicial sector strategies necessary to achieve the Government’s policy objectives have been adopted.1. Components of financial sector strategy have been completed

2. DFI and Rural finance strategies have been completed (Dropped)

3. Strategy for the judiciary has been designed

4. Pilot and baseline studies have been carried out. (Dropped/revised into previous indicator)

1. Comprehensive Financial sector Reform and Development (CFSRD) Strategies adopted by the Cabinet (Revised)

2. Judicial Sector Strategic Plan adopted and being implemented by the Judiciary (Revised)

Components of the financial sector strategy have been completed now as part of an overall CFSRD expected to be adopted by Cabinet.

The DFI strategy is also in progress, but the CFSRD is a better measure of achievements (also to reduce number of indicators).

Judiciary pilots are already underway so incorporated as ongoing implementation.

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PDO

Current ProposedComponent 2: Government-owned financial institutions restructured and privatized1. State-influenced shares in banks have been substantially reduced.

2. DFI strategy has been implemented

3. Co-op Bank in full compliance with regulatory requirements.

4. Strategic and operational audit of KPOSB and implementation of its recommendations

3. Submission to Parliament of the transaction to dispose of state-influenced shares of National Bank of Kenya and Consolidated Bank. Revised

Project early on supported extensive work on privatization of the state owned banks to the current status where the disposal of state owned shares is wholly controlled by the Privatization Commission under its Act (reflecting a major and improved change in Cabinet and Parliament perceptions about Government shares in banks). Revised wording will tract extent of Executive arms involvement up to stage where it’s wholly in hands of legislature to approve.

Original intermediate indicators 2-4 deleted to have a shorter list and because these are less relevant at this point in time, but progress has been achieved and not reverted on each of them (also supported by Financial Sector Deepening Trust)

Component 3: Increased soundness of the financial system through greater effectiveness of financial sector regulators1. Improved performance along the dimensions of CAMEL.

2. Autonomy of financial regulators has been established.

3. DPF relevant legislation has been passed

4. MFI and SACCO regulatory framework has been established

4. CBK’s compliance (Compliant or Largely Compliant) with Basel Core Principles (BCP) rises and is maintained to at least 18 principles. New

5. Autonomy of Financial Sector Regulators (IRA, CMA, RBA, Saccos Regulatory Authority and CBK-BSD) established. New

BCP compliance improved from 2004 to 2009, reaching now at least 18 (out of 25+5 principles, per FSAP update 2009). This is more comprehensive than a CAMEL measure.

The project supported the work that led to establishing or strengthening legislative autonomy of Regulatory Agencies, including IRA (Act separated it from being a department of the MoF); SASRA (Act set it up as independent regulator) plus ongoing capacity building of regulators, automation, installation of document management systems. MFI Act and further improvements to it and CBK Act were also supported and passed. The project supported

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PDO

Current Proposed

6. Financial Sector Regulators adopt Risk-Based Supervision framework. New

7. Proportion of banks in compliance with capital adequacy ratios rises. New

work to complete DPF Bill, now in Cabinet. It is supporting stakeholder consultations and will support implementation, once approved by the legislative. Since all work has been done and it is now in the hands of the legislative, this was excluded to reduce overall number of indicators.

Crucial activity supported by FLSTAP for all regulators, all at various stages of implementation of RBS. Full implementation will build on progress under current project cycle following formal adoption.

Kept because this was a major issue at the time Credit was taken to the board, now largely addressed including through strengthened regulation and supervision supported.

Component 4: Well-developed primary market and secondary market for government securities and the money market.1. Large auction sizes of Government securities. Dropped

2. Reduced Government borrowing costs. Dropped 3. Sustainable lengthening of maturities. Dropped

4. Increased secondary market activity across the yield curve.

5. Debt Management Office is operational. Dropped

6. Government securities traded OTC

8. Integrated Debt Management system in place. Revised

Government securities are expected to be traded OTC within a year, while original indicators 3 and 4 have improved substantially. Per Comprehensive Financial Sector Strategy, turnover is potentially a better indicator for the market but excluded due to volatility. Nonetheless, it has improved markedly.

Original indicator 2 and 5, are largely covered under the overall debt management strategy now in place, which is implemented by the debt management office that is operational (original indicator 5), hence combined into new indicator 8.

Component 5: Reduced transaction costs for financial transfers as a result of the increased stability and soundness of money transmission systems.1. Substantial reduction in the use of paper based payment instruments.

9. Percentage of clearing house transactions being processed through

New wording to address same aspect, to better reflect significant

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PDO

Current Proposed

2. Same day availability of all large value and time critical transfers.

3. Elimination of settlement risk (payments and primary/secondary market securities transfers.

Real Time Gross Settlement rises to at least 95 percent. New

increase in adoption of electronic transfers since introduction of Kenya’s RTGS system (called KEPSS) in 2005. ACH remains a systemically important payments system, but will gradually decline (by share of value). Backup systems installed recently after FSAP update. Urgent recommendations are now going to ensure reliability and security of the RTGS system

Component 6: Improved access to credit as a result of a better lending 1. Increase in private credit provision by 30 percent Dropped (now as PDO indicator)

2. 30 percent of MSME surveyed report improved access to credit Dropped (now reflected as part of PDO indicators)

3. Volume of leasing finance increased by 30 percent Dropped

4. Private credit registries operational.

5. Backlog in registration of companies eliminated

6. Unified notification system for charges on movable assets (collateral registry) set up. .

10. Private credit bureaux operational and sharing data. Revised

11. Time taken to register companies’ declines to 8 days by project end. Revised

Improvements in private credit provision, particularly in the rural sector (typical for MSMEs) are included in PDO level indicators b and c above. Leasing finance framework being improved through work supported by this project, including under Comprehensive Financial Sector Reform & Development (CFSRD) Strategy.

Credit reporting Bureaux or CRBs are vital to improving the lending environment and reducing information asymmetries and inculcating a culture of repayment. Efforts ongoing for extending it to NBFIs and positive information, per Finance Bill 2011.

Time taken to start and register company can be a good proxy for reforms in the Registrar Of Companies that, in part, have benefited from Project support and address items noted in the PAD.

Component 7: Strengthened capacity in the law and justice sector that supports financial and commercial sector development.1. Reduction of average processing time for all commercial cases by 25 percent

2. Appropriate revisions of key commercial laws adopted

3. Increased satisfaction among users

12. Civil Procedure Rules reviewed and published. New

13. Automation of recording and transcription services in at least the commercial and civil divisions of the High Court completed. New

The indicator suggested measures the outcomes of project interventions that, though limited, improved Court And Case Management. These has allowed measurement of backlog and progress on cases with data for at least 10 years

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PDO

Current Proposedof the commercial justice system

4. Increased satisfaction of legal profession in the judiciary

5. Increased satisfaction of judiciary in the legal profession.

6. Reduction of substantiated complaints regarding legal profession and judiciary

14. Number of courses offered at the University of Nairobi School of Law and the Kenya School of Law on commercial and financial law rises.

15. Laws of Kenya revised and online access provided and enhanced with Judges Help Desk established and operational.

Important area of project support to raise quality of legal services provided in the area of commercial and financial law, which should increase satisfaction of practitioners (not easily measured).

Readily available updated laws are critical to the efficiency and effectiveness of commercial justice, which indicator seeks to measure.

* Indicate if the indicator is Dropped, Continued, New, Revised, or if there is a change in the end of project target value

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REVISED PROJECT M&E ARRANGEMENTS

Project Development Objective (PDO):

Click here to enter the revised PDO of your operation

PDO Level Results Indicators3

Cor

eUnit of

Measurement

BaselineOriginal Project

Start(2005)

Progress To Date

(2011 latest available)4

Cumulative Target Values5

Frequency Data Source/Methodology

Responsibility for Data

Collection

Comments

March 2012 March 2013

(a) Number of accounts in the financial sector increases to 15 million accounts by project end.

Number 2,204,000 Jun2005

10.35mnDec.2010 13.0mn 15.0mn Annually

CBK and DPFB records of customer deposit accounts

CBK Banking Supervision Department (BSD)

Number of accounts is to the financial sector, as defined by the CBK

(b) Percentage of population with access to formal financial services increases to 50 percent by end of project.

percent26.4 percent

2006 Finaccess

Survey’06

40.5 percent2009

FinaccessSurvey’09

50 percent 50 percent Every 36 months (Triennial)

Independent Finaccess Surveys every 3 years. next due 2011/12

CBK and Financial Sector Deepening Trust (FSD)

Independent FINACCESS Surveys remain a good indicator of access. 2009 survey includes access to mobile accounts

3 Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators)4 For new indicators introduced as part of the additional financing, the progress to date column is used to reflect the baseline value5 Target values should be entered for the years data will be available, not necessarily annually. Target values should normally be cumulative. If targets refer to annual values, please indicate this in the indicator name or in the “Comments” column.

http://coreindicators/



PDO Level Results Indicators

Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date

(2011 latest available)

Cumulative Target Values



Collection

Comments


(MPESA)(c) Percentage of population with access to formal rural financial services increases to at least 40 percent by end of project.

percent

23.4 percent2006

Finaccess Survey’06

34.6 percent2009

FinaccessSurvey’09

40 percent 40 percentEvery 36 months (Triennial)

Independent Finaccess Surveys every 3 years. next due 2011/12

CBK and Financial Sector Deepening Trust (FSD)

Independent FINACCESS Surveys remain a good indicator of access. 2009 survey includes access to mobile accounts (MPESA)

(d) Credit extended to the private sector as a percentage of GDP increases to at least 37 percent by end of project

percentage GDP

25.8 percent

Dec.2005

35.29 percentDec.2010 36 percent 37 percent Annual

Semi-annually for credit data; Annual GDP

CBK

An overall indicator that tracks the lending environment

(e) . Interest rate spread between Average Deposit Rates and Lending Rates falls below 8 percent by end of project

percent 8.6 percent Dec.2005

10.28 percentDec.2010 9 percent 8 percent Monthly CBK

CBK average monthly deposit and lending rates

Interest rates spreads remains good measure of lending environment

16




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


(f). Non-Performing Loans (NPLs) drop to 8 percent of Total Loans (net of interest in suspense) by end of project percent 19.3 percent

Jun.2005

6.3 percentDec.2010 9 percent 8 percent Annual CBK CBK-BSD

NPLs adopted early as proxy for stability of banking system and have reduced significantly.

(g) The rate(s) of case clearances by Milimani Commercial Courts, or in respect of major types of commercial cases, improves significantly by at least 5 percent annually from 2011

Case Clearance None

No Baseline Survey:

planned from 2011

Case clearance

increases by 5 percent annually

Case clearance

increases by 5 percent annually

Annually

Inventory / Survey of backlog of cases

High court / Judiciary

Project recommends commissioning independent research house to conduct survey

(h) At least 15 new or upgraded Commercial/ Financial and related laws and subsidiary legislation developed, approved by Cabinet and published by the State Law Office (Attorney General’s Office)

Laws and regulations

Legislation not drafted.

1. Insurance (Amendment) Act 20062. Microfinance Act 20063. Sacco Societies Act 20084. Credit Reference Bureau Regulations

2008 -Gazetted5. Sacco Regulations 2010 -- Gazetted 6. Microfinance Regulations 2008 --

Gazetted 7. Civil Procedure Rules 2010 -- Gazetted8. Court of Appeal Rules 2010 -- Gazetted

Continuous as laws & regulations are prepared, approved by Cabinet, published by State Law Office (Attorney

PIU monitoring of government reports, updates on status of laws, regulations supported by project

PIU, MoF

17




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


9. Companies Bill 201010. Insolvency Bill 201011. Partnership Bill 201012. Limited Liability Partnerships Bill 201013. Draft Banking Bill14. Draft Capital Markets Authority Bill15. Draft Securities Bill16. Draft Capital Markets Regulations17. Draft Kenya Deposit Insurance

Corporation Bill 18. Draft National Payments System Bill 19. Draft Small Claims Court Bill

General)

Beneficiaries 6

Number of accounts in the financial sector increases to 15 million by end of project

Number

2,204,000 Jun2005

10.35mnDec.2010 13.0mn 15.0mn Annually

CBK and DPFB records of customer deposit accounts

CBK Banking Supervision Department (BSD)

Number of accounts is to the financial sector, as defined by the CBK

Intermediate Results and Indicators

Intermediate Results Indicators

Cor

e

Unit of Measuremen

t

BaselineOriginal ProjectStart

(2005)

Progress To Date


Target Values

FrequencyData Source/Methodolog

y

Responsibility for Data Collection

CommentsMarch 2011 March 2012

6 All projects are encouraged to identify and measure the number of project beneficiaries. The adoption and reporting on this indicator is required for IDA-supported investment projects which have an approval date of July 1, 2009 or later.

18




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


Intermediate Result 1: Financial institutions and the judiciary targeted by the strategies implement reforms named in the strategies, creating the basis for improving access, enhancing efficiency, and strengthening the soundness of Kenya’s financial system.

1. Comprehensive Financial Sector Reform and Development (CFSRF) strategies adopted by the Cabinet.

Strategies adopted

Background studies

for strategies completed

.

Comprehensive Financial Sector Reform & Development (CFSRD) Strategy Under preparation due for completion September 2011.

CFSRD completed

CFSRD approved by

Cabinet, adopted for

implementation

AnnuallyMOF-EADCRSRD Document

MOF-EAD

2. Judicial sector strategic plan adopted and being implemented by the judiciary.

Strategies adopted

Judicial sector

strategy

Judiciary Strategic Plan

2009-2013 prepared and approved for

implementation

JSP under implementati

on

JSP under implementati

onAnnually

Judiciary/ PIUStrategy Document

Judiciary/ PIU

Intermediate Result 2: .Government’s ownership stake in the banking sector reduced, enhancing its soundness.

3. Submission to Parliament of the transaction to dispose of State-influenced shares of National Bank of Kenya &Consolidated Bank.

Privatization status,

percent of GoK

shareholding

NBK 22 percent by GoK; 48 percent by NSSF; CB 100

Plans for the privatization of GoK stakes in National Bank of

Plans for the privatization of GoK stakes in NBK and

Plans for the privatization of GoK stakes in NBK and CB approved by Cabinet

Annually MOF-EADUpdate on Privatization Status, GoK shares disposed off

MOF-EAD

19




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


percent by GoK and State Corporations

Kenya (NBK) and Consolidated Bank (CB) submitted to Cabinet.

CB approved by Cabinet and submitted to Parliament.

and submitted to Parliament.

Intermediate Result 3: Effectiveness of financial sector regulators strengthened.

4. CBK’s compliance (Compliant or Largely Compliant) with Basel Core Principles (BCP) rises to at least 18 principles.

No. of BCP compliant /

Largely compliant

CBK compliant /largely compliant with 16 BCPs (FSAP 2004)

CBK compliant /largely

compliant with 18 BCPs

at least 18 at least 18 Annually

CBK –BSDCompliance status (FSAPs, BCPs)

CBK-BSD, PIU; WB/IMF

5. Autonomy of Financial Sector Regulators (IRA, CMA, RBA, Saccos Regulatory Authority and CBK-BSD) established.

Legal autonomy,

Operational/ Budget

independence

CMA, RBA partially autonomous; Commissioner of Insurance is a dept. of MoF; DPFB operated CBK though it

CMA, RBA, IRA all have legislative and budgetary autonomy and financed by levies on their licensees;CBK-BSD under CBK; DPFB remains

CMA, RBA, IRA, CBK –BSD remain autonomous.

SASRA more

autonomous.

CMA, RBA, IRA, CBK –BSD remain autonomous.

SASRA more

autonomous.

Annually Assessment s of Autonomy under Act; operational independence from MoF, Budget independence (e.g. funded by Levy on Industry); Regulators Annual Reports

MoF-EAD, PIU,Sector Regulators

20




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


has separate BoardJune 2005

under CBK control until its own law Kenya Deposit Insurance Corporation is enacted;SASRA is established as an autonomous regulator but is still new and is supported by Cooperatives and Finance Ministry

6. Financial Sector Regulators adopt Risk-Based Supervision.

Adoption of RBS

Regulators at various stages in

implementing RBS.

CBK-BSD partially

implemented RBS

preparing risk

manageme

RBA, CMA, IRA introduce RBS under Annual self assessment of RBS;

RBA, CMA, IRA

implement RBS

RBA, CMA, IRA

implement RBS

Annual Assessment of RBS Adoption, Regulators Annual Reports


21




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


nt guidelines

for FIs

7.. Proportion of financial institutions in compliance with capital adequacy ratios rises

Number, percent

compliance93 percent

95 percent compliant with CBK

Capital Adequacy

Ratios (CAR)

measured by Total Capital to Total Risk

weighed Assets

TC/TRWA.


Capital Adequacy

Ratios (CAR)


Capital Adequacy

Ratios (CAR)

Annual

CBK –BSD Annual Bank Supervision Report, Regulators Annual Reports for RBA, CMA, IRA, SASRA


Intermediate Result 4: Integrated debt management system in place.

8. Integrated debt management system in place.

Report from MoF/ DMD

Government debt management is divided between the MoF and CBK, with little coordination or consolidation of

Comprehensive debt management strategy

Annual Debt Management Reports issued

Comprehensive debt management strategy Annual debt management reports issued

Comprehensive debt management strategy

Annual debt management reports issued

Annual Medium term Debt Strategy Report from Debt Management Department (MoF/DMD);

MoF/ DMD

22




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


functions. No comprehensive debt management strategy developed.

Intermediate Result 5: Stability and soundness of money transmission systems increased.

9. percentage of clearing house transactions being processed through Real Time Gross Settlement rises to at least 95 percent

percent 0 percent

RTGS established 2005 and handles 94.3 percent of Clearing House transactions

RTGS Backup site set up’; handle s At least 95 percent of CH transactions

RTGS Backup site

set uphandle s At

least 95 percent of CH transactions

Annual

CBK –BSD Annual Reports for KEPSS volumes and values transacted

Intermediate Result 6: Legal and institutional framework strengthened to encourage financial institutions and others to increase lending, especially to small and medium size enterprises.

10. Private credit registries operational and sharing data.

Effective Credit Information sharing (CIS); CRBs licensed, Credit Reports accessed per month

0 Credit Reference Bureaus (CRBs) established. 2 CRBs licensed by CBK and operational. Number of credit

Preparation for or drafting of regulations for NBFIS reporting and Drafting of Code of Conduct commences

Preparation for or drafting of regulations for Positive credit reporting and Drafting of Code of Conduct commences

Avg Number of

Annual KBA;Kenya CIS Initiative (KCISI) ;Licensed CRBs,CBK

MOF-EAD, PIU, KBA,

23




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


reports on borrowers accessed average 82,000 monthly

. Avg Number of credit reports accessed: 90,000

credit reports accessed: 180,000

11. Time taken to register companies’ declines 8 days by project end.

Time,(Cost, # of

procedures as available)

60 days (DB2004) 47 days

(DB2005)

33 Days (DB 2011 in respect of Year 2010)

27 8 AnnualWB Doing Business (DB) Surveys

MOF-EAD

Intermediate Result 7: Commercial justice is more efficient.

12. Civil Procedure Rules reviewed and published. Civil

Procedure Rules approved

Existing Civil procedure rules outdated.

Civil Procedure rules reviewed and new Rules published.

Civil procedure rules being implemente

d

Civil procedure rules being

implemented

Annual Judiciary Judiciary, PIU

13. Automation of recording and transcription services in at least the commercial and civil divisions of the High Court completed.

Laws and regulations; # processes automated/ improved

No automation of court processes and case management

ICT Strategy and policy developed to provide roadmap for Court automation

Automation of recording

and transcription services in at least one of the two divisions

completed

Automation of recording

and transcription

services completed in both divisions

Annual Judiciary Judiciary, PIU

14. Number of courses offered at the University of

Number of Courses

16 courses

Number of courses on

UON (20 Courses) UON (20

Annual UON, KSL

PIU

24




Cor

e

Unit of Measuremen

t


Start(2005)

Progress To Date





Collection

Comments


Nairobi School of Law and the Kenya School of Law on commercial and financial law rises.

for the 2004/05 academic

yearNone for

KSL

commercial and financial law

KSL (10 Courses)

Courses)KSL (10 Courses

PIU

15. Laws of Kenya revised and online access provided/enhanced with Judges Help Desk established and operational. Judges Help-Desk;

Real time information on the laws of

Kenya not available

online

Real time legal information available online.

More than 10 Laws available online in acceptable format (PDF, WORD, HTML);Grey book volumes of selected chapters in Hardcopy

All Laws of Kenya Revised, and available in Hardcopy, CD-ROM, Online (in acceptable formats

Annual

NCLR, eKLRWebsite, PIU

PIU

25

Annex 2:A- Key Reforms in the Financial and Legal Sectors in the Last 15 months

(i) Establishment of a Privatization Commission and engagement of a transaction adviser to support privatization of NBK and creation of a Public Private Partnerships (PPP) Unit at the Ministry of Finance that has submitted a new draft PPP law and Policy to Cabinet, as well as assessing the PPP pipeline with IDA support;

(ii) Preparation of a Development Finance Institutions (DFI) Strategy (now in progress after having stalled for several years) and Shareholder strategy for reform of Kenya Post Office Savings Bank (KPOSB) completed, resulting in GoK’s approval for introduction of new business model at KPOSB.

(iii) Strengthening of Financial Sector Regulators including preparation and revision of the legal, regulatory and institutional frameworks of key financial sector regulators; support for risk-based supervision; improvements in their operational processes; provision of ICT equipment; and extensive training and capacity building. Examples of reforms and positive outcomes from project support include preparation of a new Banking Bill/revisions to the Banking Act that overhauls the existing Banking Act; enactment and ongoing revisions to the Insurance (Amendment) Act 2006 that created an autonomous insurance regulator, the Insurance Regulatory Authority - (IRA); enactment of the SACCO Societies Act 2008 that created an autonomous regulator, the Sacco Society Regulatory Authority (SASRA); ongoing demutualization of the Nairobi Stock Exchange (NSE) and publication of the Demutualization Bill that introduces far reaching reforms in the governance of the NSE. In addition there are ongoing revisions to the legal and regulatory framework of the capital markets culminating in the Capital Markets (Amendment) Bill and the Central Depository (Amendment) Bill; and further improvements to the financial sector through preparation of the Kenya Deposit Insurance Corporation Bill and the National Payments System Bill, both now in Cabinet after lingering for years.

(iv) The setting up of the Debt Management Office in the Ministry of Finance and the launch of the Medium Term Debt Strategy in June 2009 to guide debt management for the next three years;

(v) Establishment of Central Security Depository system at CBK for all government securities, and a Real-Time Gross Settlement System (RTGS) and installation of RTGS back-up facility (hardware and software procurement)

(vi) Establishment of over-the counter (OTC) trading and Electronic trading in government securities through the Automatic Trading System (ATS) is live at the NSE;

(vii) Refurbishment and installation of Document Management system (DMS) in Companies Registry;

(viii) Improvements to the business environment through preparation of new and revised commercial laws and regulations that impact significantly on the financial services sector. These have helped preparation of legislation, such as the Companies Bill, Partnerships Bill, Limited Liability Partnerships Bill, and Insolvency Bill

(ix) Development of a Judiciary Training Policy and Program and appropriate curriculum for commercial/financial law training by the Judiciary Training Institute;

(x) Improved Admission, Graduating and Bar Membership standards established at the Council for Legal Education School’s Advocacy Training Program.

B-Key Reforms in the Financial and Legal Sectors needing to be completed

(i) Consultancy to compile potential list of PPP transactions and other ancillary consultancy services to support the institution of PPPs within the normal government budgeting cycle;

(ii) Activities to support the establishment of the Nairobi International Financial Centre including the related development of the required legal, regulatory and institutional frameworks;

(iii) Attachment of Resident Advisors to a number of regulatory agencies to further strengthen the capacity of the staffs of these recently established agencies; and

(iv) Installation of audio-visual court recording and transcription system in the Supreme Court, Court of Appeal and Milimani Law Courts in addition to the support already agreed automation of the Commercial /Civil Division of Law Courts/Milimani Commercial Courts. This addition will enhance the comprehensive solution being proposed for improving the efficiency of the Judiciary in adjudicating commercial and financial cases

27

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