Document of The World Bank Report No: 131853 - MZ ...documents.worldbank.org/curated/en/794581542055996525/pdf/131… · i Document of The World Bank Report No: 131853 - MZ IMPLEMENTATION

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Document of

The World Bank

Report No: 131853 - MZ

IMPLEMENTATION COMPLETION AND RESULTS REPORT

ON A SERIES OF DEVELOPMENT POLICY CREDITS

(IDA-55200; IDA-H9750; IDA-57290)

IN THE AMOUNT OF SDR 34.2 MILLION (US$ 50 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MOZAMBIQUE

FOR

FIRST PROGRAMMATIC FINANCIAL SECTOR DEVELOPMENT POLICY

OPERATION (FSDPO I)

SECOND PROGRAMMATIC FINANCIAL SECTOR DEVELOPMENT POLICY

OPERATION (FSDPO II)

Finance, Competitiveness and Innovation Global Practice

Southern Africa Country Department 2

Africa Region

October 31, 2018

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CURRENCY EQUIVALENTS

Exchange Rate Effective July 16, 2014 (IDA-55200; IDA-H9750)

Exchange Rate Effective September 29, 2015 (IDA-57290)

Currency Unit

US$1.00

Currency Unit = New Metical (MZN)

IDA-55200 and IDA-H9750

US$1.00 = MZN 31.25

US$ 1.00 = SDR 0.648688

IDA-57290

US$1.00 = MZN 42.725

US$ 1.00 = SDR 0.711869

MOZAMBIQUE – GOVERNMENT FISCAL YEAR

January 1- December 31

WEIGHTS AND MEASURES

Metric System

Country Director:

Senior Global Practice Director:

Practice Manager:

Task Team Leader:

ICR Team Leader:

Mark R. Lundell

Alfonso Garcia Mora

Douglas Pearce

Julian Casal

Julian Casal

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ABBREVIATIONS AND ACRONYMS

AML Anti-Money Laundering

ATM Automated Teller Machine

ATS Automated Transfer System

BOM Bank of Mozambique

BT Bilhetes do Tesouro

BVM Bolsa de Valores de Moçambique

CDD Customer Due Diligence

CEL Sistema de Compensação Electrónica

CFT Combating the Financing of Terrorism

CoM Council of Ministers

CPFL Consumer Protection and Financial Literacy

CPS Country Partnership Strategy

CSD Central Securities Depository

CSE Crisis Simulation Exercise

DFID Department for International Development

DGF Deposit Guarantee Fund

DPO Development Policy Operation

DVP Delivery Versus Payment

ELA Emergency Liquidity Assistance

ESAAMLG Eastern and Southern Africa Anti Money Laundering Group

e-SISTAFE Sistema de Administração Financeira do Estado

FDI Foreign Direct Investment

FIRST Financial Sector Reform and Strengthening Initiative

FISF Financial Inclusion Support Framework

FSAP Financial Sector Assessment Program

FSDPO Financial Sector Development Policy Operation

FSDT Financial Sector Deepening Trust

FSTAP Financial Sector Technical Assistance Project

GBM Governor Bank of Mozambique

GDP Gross Domestic Product

GIFiM Financial Intelligence Unit of Mozambique

GIZ Gesellschaft für Internationale Zusammenarbeit

GoM Government of Mozambique

GRS Grievance Redress Service

GTZ Gesellschaft für Technische Zusammenarbeit

ICA Investment Climate Assessment

ICAAP Internal Capital Adequacy Assessment Process

ICR Implementation Completion and Results Report

IDA International Development Association

IFC International Finance Corporation

IFRS International Financial Reporting Standards

IMF International Monetary Fund

ISSM Instituto de Supervisão de Seguros de Moçambique

KfW Kreditanstalt für Wiederaufbau

iv

KYC Know-Your-Customer

LNG Liquefied Natural Gas

LOLR Lender of Last Resort

MDM Mozambique Democratic Movement

M&E Monitoring and Evaluation

MFSDS Mozambique Financial Sector Development Strategy

ML Money Laundering

MEF Ministry of Economy and Finance

MPD Ministry of Planning and Development

MSME Micro, Small and Medium Enterprise

MTDS Medium-Term Debt Management Strategy

MZN Mozambican Metical

NFIS National Financial Inclusion Strategy

NGO Non-Governmental Organization

NPL Non-Performing Loan

OEOT Obligations and Incentives of Primary Dealers

OT Obrigações de Tesouro (t-Bills)

PA Prior Actions

PARP Plano de Acção para Redução da Pobreza

PCN Project Concept Note

PDO Project Development Objective

PFM Public Financial Management

PRSC Poverty Reduction Support Credit

PQG Plano Quinquenal do Governo

PSD Payment Systems Department

PSI Policy Support Instrument

ROA Return on Assets

ROE Return on Equity

RTGS Real Time Gross Settlement System

SC Steering Committee

SDR Special Drawing Rights

SISTAFE Government Financial Management Information System

SME Small and Medium Enterprise

SOEs State Owned Enterprises

SSA Sub-Saharan Africa

TA Technical Assistance

TF Terrorism Financing

UN United Nations

UNCDF United Nations Capital Development Fund

USAID United States Agency for International Development

USD United States Dollar

WB World Bank

v

MOZAMBIQUE

FINANCIAL SECTOR DEVELOPMENT POLICY OPERATIONS

CONTENTS

1. Program Context, Development Objectives and Design ................................................ 1

Context at Appraisal ................................................................................................. 1 Original Program Development Objectives (PDO) and Key Indicators ................... 4

Revised PDO and Key Indicators, and Reasons/Justification .................................. 5 Original Policy Areas Supported by the Program .................................................... 6

Revised Policy Areas ................................................................................................ 9 Other significant changes .......................................................................................... 9

2. Key Factors Affecting Implementation and Outcomes .................................................. 9

Program Performance ............................................................................................... 9 Major Factors Affecting Implementation ............................................................... 10

Monitoring and Evaluation (M&E) Design, Implementation and Utilization: ....... 13 Expected Next Phase/Follow-up Operation: ........................................................... 14

3. Assessment of Outcomes .............................................................................................. 14

Relevance of Objectives, Design and Implementation ........................................... 14 Achievement of Program Development Objectives ............................................... 16

Justification of Overall Outcome Rating ................................................................ 22 Overarching Themes, Other Outcomes and Impacts .............................................. 22

4. Assessment of Risk to Development Outcome ............................................................. 24

5. Assessment of Bank and Borrower Performance ......................................................... 25

Bank Performance ................................................................................................... 26 Borrower Performance ............................................................................................ 28

6. Lessons Learned............................................................................................................ 29

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners............... 31

Annex 1 Bank Lending and Implementation Support/Supervision Processes.................. 32

Annex 2. Summary of Borrower's ICR and/or Comments on Draft ICR ......................... 34

Annex 3. List of Supporting Documents .......................................................................... 35

Annex 4. Analytical underpinnings of the FSDPO series................................................. 38

Annex 5. Results Indicators for FSDPO I and II and Status of Prior Actions .................. 39

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A. Basic Information

Country Mozambique Program Name FSDPO I

FSDPO II

Program ID FSDPO I: P133687

FSDPO II: P151861 L/C/TF Number(s)

FSDPO I: IDA-55200 &

IDA-H9750

FSDPO II: IDA-57290

ICR Date 09/29/2018 ICR Type Core ICR

Lending Instrument DPL Borrower GOVERNMENT OF

MOZAMBIQUE

Original Total

Commitment

FSDPO I: XDR 16.2 M

FSDPO II: XDR18 M Disbursed Amount

FSDPO I: XDR 16.2 M

FSDPO II: XDR 18 M

Implementing Agencies

Ministry of Economy and Finance (MEF); Bank of Mozambique (BoM)

Co-financiers and Other External Partners:

There were no co-financers to FSDPO I and II

Budget support partners: African Development Bank, Austria, Belgium, Canada, Denmark, European

Union, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden,

Switzerland, and UK

B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review:

FSDPO I

FSDPO II

05/16/2013

04/02/2015

Effectiveness:

FSDPO I

FSDPO II

05/16/2013

04/02/2015

09/22/2014

12/15/2015

Appraisal:

FSDPO I

FSDPO II

11/11/2013

08/06/2015

Closing:

FSDPO I

FSDPO II

06/30/2015

06/30/2016

06/30/2015

06/30/2016

Approval:

FSDPO I

FSDPO II

07/15/2014

09/29/2015

C. Ratings Summary

C.1 Performance Rating by ICR

Overall Program Rating

Outcomes Moderately Satisfactory

Risk to Development Outcome Significant

Bank Performance Moderately Satisfactory

Borrower Performance Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

Overall Program Rating

Bank Ratings Borrower Ratings

Quality at Entry Moderately Satisfactory Government Moderately Satisfactory

Quality of Supervision: Moderately Satisfactory Implementing

Agency/Agencies Moderately Satisfactory

Overall Bank

Performance Moderately Satisfactory

Overall Borrower

Performance Moderately Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators

Implementation

Performance Indicators

QAG Assessments (if

any) Rating:

Potential Problem Program

at any time (Yes/No): No Quality at Entry (QEA) None

Problem Program at any

time (Yes/No): No

Quality of Supervision

(QSA) None

DO rating before

Closing/Inactive status Not available

D. Sector and Theme Codes

First Programmatic Financial Sector Development Policy Operation – P133687

Original Actual

Sector Code (as % of total Bank financing)

Banking Institutions 50 50

Other Non-Bank Financial Institutions 25 25

Central Government (Central Agencies) 10 10

Other Industry, Trade and Services 10 10

Services 5 5

Theme Code (as % of total Bank financing)

Public Administration 10 10

Rule of Law 20 20

Financial Stability 40 40

Business Enabling Environment 30 30

Jobs 100 100

Second Programmatic Financial Sector Development Policy Operation – P151861

Original Actual

Sector Code (as % of total Bank financing)

Banking Institutions 37 37

Other Non-Bank Financial Institutions 23 23

Capital Markets 20 20

Services 20 20

Theme Code (as % of total Bank financing)

Public Administration 30 30

Rule of Law 30 30

Financial Infrastructure and Access 10 10

Financial Stability 30 30

Jobs 100 100

viii

E. Bank Staff

Programmatic Financial Sector Development Policy Operations I and II

Positions At ICR At Approval

Vice President: Hafez Ghanem FSDPO I and II

Makhtar Diop

Country Director Mark Lundell FSDPO I and II

Mark Lundell

Practice Manager/Manager: Douglas Pearce FSDPO I and II

Irina Astrakhan

Task Team Leaders: Julian Casal

FSDPO I

Mazen Bouri and Yira Mascaro

FSDPO II

Yira Mascaro and Mazen Bouri

ICR Team Leader: Julian Casal

ICR Primary Author: Aziz Bouzaher

F. Results Framework Analysis

Program Development Objectives (from Program Document)

This FSDPO series of three single-tranche operations was designed to promote financial sector (FS)

development by supporting Mozambique’s Financial Sector Development Strategy 2013-2022. The series

was delivered over a three-fiscal year period (FY14-18) to assist the Government of Mozambique to reinforce

financial stability, increase access to finance by households and firms, and enhance the development of long-

term finance. The series was trimmed to two phases due to issues that arose during implementation of the

second phase.

Revised Program Development Objectives

The Program Development Objectives were not revised.

ix

Indicator(s)

Mozambique Second Programmatic Financial Sector DPO – P151861

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally Revised

Target Values

Actual Value

Achieved at

Completion or

Target Years

PILLAR I: FINANCIAL STABILITY

Policy Area: Enhancing banking regulation and supervision

Indicator 1: Percentage of banks classifying their NPLs according to the regulation

Value

(quantitative)

Regulation not yet

issued

At least 85 percent

of banks,

representing not

less than 90 percent

of the total bank

assets

20% of banks

representing 78%

of assets have

been confirmed

to classify their

NPLs according

to the new

regulation

Date achieved March 2013 2017

Comments (incl. %

achievement)

Largely achieved. Bank of Mozambique (BOM) has applied scarce supervisory

resources to inspecting the bank with the largest share of assets, which is a relatively

small number of banks due to the high degree of concentration in the sector. Since

adopting this risk-based approach to banking supervision, BOM has prioritized on-site

inspections of the four largest banks, which together control 78% of total sector assets.

Bank assets are a more important indicator than the number of banks as a measure of

financial sector performance and risks. The adoption of this risk-based approach to

supervision is in line with Basel II, which is the international standard for banking

supervision. The risk-based approach resulted in confirmation that these four banks (20

percent of banks) representing 78 percent of assets classify their NPLs according to the

regulation (Aviso #16/GBM/2013). More banks likely classify their NPLs according to

the regulation, but the on-site supervision schedule is such that BOM has not yet

verified it although they intend to over the coming years.

Indicator 2: Percentage of banks implementing the new risk management guidelines

Value

(quantitative)

Risk management

guidelines have not

been issued

At least 85 percent

of banks,

representing not

less than 90

percent of the total

bank assets

29% of banks

representing 80%

of assets have

been confirmed


Comments (incl. %

achievement)

Largely achieved. Based on the most recent inspections of the BOM, 29 percent of

banks representing 80 percent of bank assets are implementing the new risk

management guidelines (provided by the Aviso #4/GBM/2013). It is possible that more

banks are applying the new risk management guidelines, but this is not possible to

verify since the BOM introduced risk-based supervision and therefore does not conduct

on-site inspection of all banks in a given year, focusing instead its attention on the

largest banks.

x

Policy Area: Strengthening the banking safety net and crisis management frameworks

Indicator 3: Percentage of deposits balances and accounts covered by the DGF

Value

(quantitative) 0 percent

The DGF is

operational and is

insuring depositors

up to a coverage

limit, which would

insure at least 90

percent of the total

deposit accounts

The DGF is

operational and

88% of deposit

accounts are

covered


Comments (incl. %

achievement)

Achieved. As of 31 December 2017, the DGF insured deposits of individual resident

persons in local currency up to MZN 20,000 (US$ 342). This covered about 4 million

depositors for a total of MZN 12 billion (US$ 205 million). With total bank accounts of

approximately 4.5 million, then 88 percent of deposit accounts were covered.

Policy Area: Improving the AML/CFT frameworks

Indicator 4: Criminalization of terrorism financing

Value (qualitative)

Existing AML/CFT

law does not

criminalize terrorism

financing

Revised AML/CFT

law criminalizes

terrorism financing

demonstrated by

Mozambique’s

progress reports

validated by

ESAAMLG

AML/CFT Law

amended to

criminalize

terrorism

financing.

Date achieved March 2013 2017 May 2018

Comments (incl. %

achievement)

Achieved. In May 2018, Parliament approved amendments to the AML/CFT Law (Law

#14/2013) to enable full implementation of UN Security Council Resolutions related to

the freezing of terrorist assets (Resolutions 1267 and 1373. The next ESAAMLG

mutual evaluation is schedule for 2019.

PILLAR II: FINANCIAL INCLUSION

Policy Area: Improving access to financial products in underserved sectors/areas

Indicator 5: Number of e-money accounts

Value (quantitative

or qualitative) 0 (zero)

150,000

(set in FSDPO I)

500,000 (revised in

FSDPO II) 3.8 million

Date achieved March 2013 2016 2017 2018

Comments (incl. %

achievement)

Exceeded. The 2017 Findex survey estimates that 22 percent of the adult population

(15+) in Mozambique (i.e., about 3.8 million people) have used a mobile phone or the

internet to access an account.

xi

Indicator 6: Percentage of the population with access to formal banking services, including

“formal-other”

Value

(quantitative) 12.7 percent 25 percent 36 percent

Date achieved 2009 2017 2016

Comments (incl. %

achievement)

Exceeded. BOM estimates that 36 percent of the adult population (16+) had a bank

account and 38 percent of the adult population (16+) had a mobile money account

(Source: BOM, 2016 Annual Report). The 2017 Findex survey estimates that 42

percent of the adult population (15+) in Mozambique (i.e., about 6.8 million people or

about 23 percent of the total population) have an electronic account.

Policy area: Increasing the efficiency of borrowers’ collateral to promote access to credit

Indicator 7: Call for proposals from service providers to apply for a private credit bureau

license or operate the bureau on behalf of BOM.

Value (qualitative) Law not yet passed Call for proposals

issued

One private

credit bureau

applied for and

has obtained a

license to operate

Date achieved March 2013 2017 2017

Comments (incl. %

achievement)

Achieved. One private firm submitted a request and obtained a license from BoM in

2017 to operate a private credit bureau in Mozambique and is expected to start

operations in late 2018. Following the publication of the Law no. 6/2015 that approved

the framework for private credit bureaus, BOM conducted information campaigns in

Maputo (south), Beira (center), and Nampula (north) in October and November 2016.

Policy Area: Enhancing the transparency of financial information and protecting consumers

Indicator 8: Percentage of banks disclosing to consumers the effective cost of banking services

Value

(quantitative) 0 percent 80 percent

84 percent (16 of

19 banks)


Comments (incl. %

achievement)

Achieved. BOM issued regulations (Notices 13/GBM/2017 and 3/GBM/2018) requiring

financial institutions to disclose pricing information of banking services (including

annual nominal and effective interest rates) and communicate the information to BOM.

All banks (except Ecobank, Opportunity Bank, and UBA) have information about

pricing of their services on their websites.

Policy area: Strengthening and broadening access to payment systems

Indicator 9: Number of days to clear a check

Value

(quantitative)

Two days in

Maputo City and

six days outside

Maputo City

Two days in

Maputo City and

two days outside

Maputo City

Two days in

Maputo City

and six days

outside Maputo

City

Date achieved 2013 2017 NA

Comments (incl. %

achievement)

Not achieved. Clearance of checks takes up to two days in Maputo and around six days

in most other cities. Despite being allowed by regulation, check truncation is still not

available, and clearance still requires the physical exchange of checks. In cities where

one of the banks is not present, the physical exchange of checks usually takes about six

days. While under FSDPO I, BoM strengthened its national payment system by

xii

carrying out an organizational separation between its oversight and operational

function, other measures, including the introduction of failure to settle arrangements

and adoption of an oversight framework for retail payments did not take place.

Indicator 10: Percentage of transactions settled through RTGS

Value (quantitative

or qualitative) Less than 5 percent 70 percent 28 percent

Date achieved December 2012 2017 2017

Comments

(incl. %

achievement)

Partially achieved. Despite strong growth, in 2017 the value of payments settled

through the RTGS was only MZN 293.6 billion or 28 percent of the total volume of

payments settled through the three systems operated by the BOM (the RTGS, the retail

clearance and settlement system [CEL], and the check clearance system). BOM

remains committed to implementing the reforms necessary to strengthen the payment

system and is receiving technical support from the Norwegian central bank (Norges

Bank). BOM is acquiring a new RTGS system utilizing its own resources and expects

to complete the procurement process in late 2018.

PILLAR III: LONG-TERM FINANCIAL MARKETS

Policy Area: Strengthening government securities primary markets

Indicator 11: Number of short and medium-term bonds issued and reopened in the domestic

market through competitive auctions

Value

(quantitative)

At most 1-2 non-

competitive OT

issuance per year; no

re-openings

At least one

issuance and one re-

opening by maturity

bucket (short and

medium term)

issued through

competitive

auctions (set in

FSDPO I)

At least 5 competitive

auctions, including at least

one (1) reopening (revised

in FSDPO II)

The Government

placed bonds

through 5

competitive

auctions. No

reopenings were

undertaken.

Date achieved January 2013 2016 2017 2017

Comments

(incl. %

achievement)

Largely achieved. In 2017, the Government placed government bonds through five

competitive auctions and two direct placements relative six auctions in 2015 and three

auctions in 2016. The 2017 bond issuances did not include any reopened series. The

government bonds issued in 2017 through auctions had maturities between 3 and 4

years. Source: Bolsa de Valores de Mozambique; World Bank TA Report.

Indicator 12: Level of dematerialization and immobilization of all medium and long-term debt

securities registered in Central Securities Depository (CSD)1

Value (quantitative

or qualitative)

Only listed securities

fully dematerialized

Full

dematerialization

and immobilization

of all securities

registered in CSD

82 percent of all

CSD-registered

securities

dematerialized

and immobilized

Date achieved January 2013 2017 2017

Comments (incl. %

achievement)

Largely achieved. As of December 31, 2017, out of 56 registered securities (shares and

bonds), 46 (or 82.1 percent) are dematerialized and immobilized, and five securities (or

8.9 percent) are immobilized but not dematerialized. All listed securities are fully

dematerialized and immobilized. Source: Bolsa de Valores de Moçambique.

1 Dematerialization is the process of converting physical shares into electronic format.

xiii

Policy Area: Enhancing long-term funding sources (insurance and pensions)

Indicator 13: Percentage of members of private pension funds with access to on-line, individual

account information

Value (quantitative


50 percent of

members 0 (zero)

Date achieved 2014 2017 NA

Comments (incl. %

achievement)

Not achieved. Although some private pension funds have showed willingness and have

taken initial steps to give members online access to their individual accounts, this was

still not possible at the end of 2017.

Indicator 14: Percentage of insurance companies presenting Key Facts Statements for

consumers of insurance products

Value (quantitative


50 percent of

insurance

companies presenting Key

Facts Statements for

consumers of

insurance products

20 percent of

insurance

companies

presenting Key

Facts Statements

for consumers of

insurance

products


Comments (incl. %

achievement)

Partially achieved. There were 20 insurance companies in Mozambique in 2017. Four

of the largest insurance companies with 93 percent of the life insurance market and 74

percent of the non-life insurance market (Global Alliance, SIM, EMOSE, Hollard)

publish information on their websites.

G. Ratings of Program Performance in ISRs

First Programmatic Financial Sector Development Policy Operation – P133687

No. Date ISR

Archived DO IP

Actual Disbursements

(XDR millions)

1 11/23/2014 Satisfactory Satisfactory 0.00


Second Programmatic Financial Sector Development Policy Operation – P151861

No. Date ISR

Archived DO IP

Actual Disbursements

(XDR millions)


H. Restructuring

NA

1

1. Program Context, Development Objectives and Design

Context at Appraisal

1. This Implementation Completion and Results (ICR) Report covers the Programmatic

Financial Sector Development Policy Operation Series (FSDPO), consisting of three annual

single-tranche operations delivered over FY14-17. The series program was initially designed as

two single-tranche operations (Financial Sector DPO I, Financial Sector DPO II). A third operation

(Financial Sector DPO III) was foreseen, for which policy triggers were included in DPO II. An

AIS was released for DPO III but it was subsequently dropped before concept review. The series

was an important component of the Bank’s FY12-15 Country Partnership Strategy (CPS) and

supported the implementation of key reforms in the government-approved Mozambique Financial

Sector Development Strategy 2013-2022 (MFSDS). 2 The programmatic series was part of a

broader World Bank program which, through the financing of a significant part of the budget

deficit and total expenditure in 2013 through 2015, supported an important reform program to

consolidate and deepen the scope of reforms in macro-fiscal management, governance, private and

financial sectors, and economic development.

2. This ICR reflects the aftermath –midway through the program– of significant macro-

fiscal risk resulting from the emergence of previously undisclosed debt and leading to the

decision to drop FSDPO III and directly impacting the reform program.3 Revelations in April

2016 of USD 1.4 billion in previously undisclosed borrowing pushed Mozambique’s debt position

in 2016 to an unsustainable level. This debt, equivalent to approximately 10 percent of GDP, had

not been previously disclosed to the World Bank and the International Monetary Fund (IMF).

Mozambique defaulted on its sovereign bond and bilateral debt after failing to meet interest and

principal payments for key loans. Mozambique is likely to remain in debt distress in the medium

term while it works with creditors to reach an agreement on debt restructuring. The WBG Country

Partnership Framework (CPF) for FY17-21 included Financial Sector DPO III in the indicative

IDA lending plan as part of the strategy to support the reform agenda under the scenario of

resuming policy-based lending during the CPF period. Since policy lending remains suspended,

FSDPO III could not go ahead. The Bank is preparing a successor investment project financing to

build on the reform momentum in the sector. 4

3. Mozambique’s economic performance over the twenty-years prior to the design of

this FSDPO series had been strong, driven by government-led structural reforms focused on

private-sector-led growth with macroeconomic stability and fiscal efficiency. Driven by

improvements in infrastructure and market-oriented reforms, annual economic growth averaged

7-8 percent between 2001 and 2014. Several factors contributed to this performance, including

political stability, sound macroeconomic management, several large-scale foreign investment

2 World Bank. Mozambique Country Partnership Strategy FY12-15. Report No. 66813-MZ. 2012. 3 While this ICR reflects the Bank’s policy dialogue over FY14-17 it effectively only covers the first two approved

operations of the FSDPO series (FSDPO I and FSDPO II). 4

Mozambique: Financial Inclusion and Stability Project (P166107).

2

projects (mega-projects), and significant donor support.5 Building on significant physical and

human capital accumulation, and with major discoveries of coal and natural gas, the economy was

poised to benefit from a growing resource sector and potentially undergo significant structural

transformation, which would require the development of government capacity to manage the

country’s extractive industries to bring about sustainable and broad-based growth.

4. While Mozambique made significant progress on development outcomes after the

civil war, progress has slowed down since the early to mid-2000s, as rapid growth has not

translated into significant poverty reduction and improvements in social indicators remained

uneven.6 Whereas poverty fell to 52% between 2003 and 2009, the most recent work on poverty

dynamics 7 shows that rather than suffering economic stagnation, Mozambique continued to

experience a general decrease in poverty, though this has been heavily concentrated in urban areas

where only 30 percent of population resides; meanwhile, rural poverty remained largely

intractable, with the notable exception of rural areas in the greater Maputo region. Mozambique

had made important progress in some social indicators (e.g., school enrollment rates—and gender

parity in enrollment—increased dramatically over the past decade) and limited progress in others

(e.g., water and sanitation). Other key indicators have stagnated or consistently declined (e.g., adult

literacy rate, average life expectancy at birth, and infant and maternal mortality). Moreover, with

the spread of HIV/AIDS and the incidence and mortality rates for malaria and other diseases,

decisive progress towards the Millennium Development Goals (MDGs) remained elusive.

5. When the FSDPO program was prepared, real GDP growth was strong, but declined

considerably by the end of the FSDPO to 3.3 percent in 2016, down from 6.6 percent in 2015

and an average of 8 percent over the past two decades. The decline was due to lower

investment, falling exports and decreasing investor confidence. Growth which in the past had been

broad-based across economic sectors, was driven by financial services, agriculture and trade.

Extractive industries have been an important sector but their contribution to economic growth

during the FSDPO series remained limited given its relatively small share in the economy. While

the services sector grew in relative size, agriculture remained the most important sector (23 percent

of GDP) and is particularly important for the poor.

6. At FSDPO I appraisal, while its overall medium-term macroeconomic outlook was

assessed to be positive, the Mozambican economy was facing downside risks in terms of

worsening current account deficits and increasing external debt. Real GDP growth was

expected to average 8 percent over the period 2013-15, driven by extractive industries, agriculture,

construction, and transportation and communications. Although most of the current account and

trade deficits were being financed by FDI growth and related rising imports, and external debt

growth was mostly private, potential negative developments in natural gas and mining were posing

significant risks to the government’s development plans and overall growth. At the same time, the

overall fiscal deficit (after grants) fell to 3.9 percent of GDP in 2012 and was expected to remain

below 7 percent of GDP through 2015. In addition, from double digits in 2010, inflation was below

the 5-6 percent target which allowed Bank of Mozambique (BOM) at the time of appraisal of

5 World Bank. Mozambique Country Economic Memorandum: Reshaping Growth and Creating Job through Trade

and Regional Integration. Report No. 59356-MZ. 2012. 6 World Bank. Mozambique Systematic Country Diagnostic. Report No. 103507-MZ. 2016. 7 World Bank. Poverty in Mozambique: New Evidence from Recent Household Surveys. 2012.

3

FSDPO I to ease monetary policy and lower policy rates to 8.25 percent (a record low). Since

interest rate transmission channel is weak, there was little response to the lowering of policy rates

and credit growth was low. The authorities remained committed to bolstering macroeconomic

stability in the context of flexible exchange rate by encouraging the use of domestic currency in

financial transactions and by deepening the financial sector.

7. The Government of Mozambique (GoM) recognized the importance of FS

development to reduce poverty and improve the business environment. The preparation of

FSDPO built on a decade-long effort8 by Mozambique to improve the scope and efficiency of the

financial sector given its vital role in facilitating economic and private sector growth, and the Bank

aligned its support with the strategic objectives and the roadmap for reforms set out in the MFSDS.

8. At the time of appraisal of the FSDPO series, while relevant indicators suggested a

healthy and robust FS, significant challenges remained in the areas of finance for firms and

households, as well as banking regulation and supervision. These issues are summarized below:

• Led by credit increases to households and State-Owned Enterprises (SOEs), credit to

the economy reached 37.0 percent of GDP in 2014 (from 33 percent of GDP in 2013).

The ratio of deposits to credit stood at around 127 percent, and profitability levels had

recovered with Returns on Assets and Equity (ROA/E) at 2.1 percent and 22.2 percent,

respectively. In a banking system largely funded by deposits, liquidity was in line with

requirements (30 percent of total assets), and non-performing loans (NPLs) were low (3.2

percent of total loans) albeit on a rising trend.

• Despite significant expansion of bank deposits and credit, access to finance was a

major challenge for the private sector, particularly for micro, small and medium

enterprises (MSMEs). The 2009 Investment Climate Assessment (ICA) had found that

only 13 percent of firms –typically large and able to provide collateral– reported having a

loan or a line of credit from a financial institution. In addition, the 2013-2014 Global

Competitiveness Report had found that access to financing was the top constraint for doing

business in the country, and a 2013 Finscope Survey Report had found that 75% of MSMEs

were financially excluded. The high cost of credit was also a key constraint to the use of

credit to finance investment, as lending rates had remained above 20 percent for years.

• Financial inclusion for individuals was also limited. While the 2009 Finscope

Household Survey for Mozambique found that only 13 percent of the population had access

to formal financial services, and that the problems of access to finance were most severe

in rural areas where only 5 percent had access to formal financial services, the 2013 WB

FinCap Survey found that 27 percent of adults were using a financial product from a bank.

This situation was exacerbated by the limited number of service points. In 2014, there were

8 This effort was supported by the World Bank since the mid-90s and culminated in the Mozambique Financial Sector

Technical Assistance Project (FSTAP - P086169), which provided $10.5 million over the period 2006-2012 for

improving the soundness of the country’s Banking Sector and its public debt management, in support of the

recommendations of the 2003 Financial Sector Assessment Program (FSAP).

4

about 4.3 bank branches and 8.4 ATMs per 100,000 adults in Mozambique, significantly

below other countries in the region, such as Kenya, and South Africa.

• While the financial system remained stable, there were emerging risks that needed to

be monitored and mitigated. As highlighted in the 2009 Financial Sector Assessment

Program (FSAP) Update, while in the ten years prior to FSDPO, Mozambique had

implemented important reforms that helped strengthen the FS (e.g. the central bank had

passed regulations to strengthen oversight, risk management by banks, and protect against

systemic shocks) there still were important pending reforms to promote financial stability,

including in banking regulation and supervision, financial safety nets and crisis

management frameworks.

Original Program Development Objectives (PDO) and Key Indicators

9. This FSDPO series of, effectively, two annual single tranche operations, delivered

over FY14-16, was designed to assist Mozambique to: (i) reinforce financial stability; (ii)

increase access to finance by households and firms; and (iii) enhance the development of

long-term financial markets. More specifically, the FSDPOs focused on helping the GoM in:

(a) Financial stability (Pillar I) to continue to: (i) strengthen the banking safety net and crisis

management framework by undertaking a crisis simulation exercise and capitalizing the

Deposit Guarantee Fund (DGF); and (ii) improve asset soundness by strengthening the

Anti-Money Laundering and Combating Financing Terrorism (AML/CFT) regulatory

framework.

(b) Financial inclusion (Pillar II) to support: (i) improving access to financial products in

underserved sectors/areas (key to promoting access in rural areas); (ii) increasing the

efficiency of borrowers’ collateral to promote access to credit, through the establishment

of credit bureaus; and (iii) enhancing the transparency of financial information and

protecting consumers, through the establishment of minimum requirements for protecting

bank card account holders

(c) Development of Long-term Financial Markets (Pillar III) to promote: (i) strengthening

government securities primary markets, through implementation of the bond issuance

calendar by conducting at least four competitive auctions and one reopening; and (ii)

enhancing long-term funding sources (insurance and pensions), trough setting maximum

coverage limits for micro-insurance products.

10. At the same time, the series outcomes sought were in line with the following CPS

(FY12-15) outcomes: (i) under Pillar I of the CPS, improved access to financial services by

enhancing financial inclusion and stable financial markets; (ii) under Pillar II of the CPS,

improved financial stability and better access to financial products (e.g. payments, savings,

insurance and credit) that enhance the resilience of individuals and enterprises to shocks; and (iii)

under Pillar III is of the CPS, improved reforms related to public debt management and AML/CFT.

11. Moreover, the Bank’s experience globally with the implementation of FSDPOs

provided important lessons which influenced the design of this series. These included:

5

(i) Ensuring cooperation at all levels of government. This was reflected in the continuing

commitment by GoM to implement FS reforms over the previous decade (as evidenced

by the implementation of 2009 FSAP recommendations), and the close alignment of

FSDPO with MFSDS.

(ii) Supporting the design of the reform program and its implementation with TA and

strong analytical underpinnings. Since implementation capacity in Mozambique was

limited and most FSDPO reforms involved two institutions, the number of reforms

supported by the FSDPO series was kept at a manageable level, and complementary

TA was mobilized to support their implementation.

(iii) Considering the political economy and timing of reforms. The DPO series was

instrumental in prioritizing key MFSDS reforms and boosting the reform momentum

that had been building over the past several years.

(iv) Collaborating closely with donors to ensure a coordinated approach. This was

demonstrated by the continuing FSTAP legacy of a strong cooperation between the

Bank, AfDB, KfW, and GIZ, and the complementary support by DFID through the

Financial Sector Deepening Trust (FSDT), as well as the collaboration with UNCDF

on the promoting of greater financial inclusion.

12. The FSDPO series comprised a total of 20 prior actions: ten prior actions for FSDPO

I and 10 prior actions for FSDPO II. While the reforms were generally evenly spread across the

three reform areas (financial stability, financial inclusion, and long-term financial markets),

strengthening government securities primary markets and strengthening the banking safety net and

crisis management made up almost half of the prior actions, and only one prior action focused on

insurance and pensions.9

13. The following program results and indicators were agreed during appraisal and

included in the program document for FSDPO I:

• 2 indicators on enhancing banking regulation and supervision

• 1 indicator on strengthening the banking safety net and crisis management frameworks

• 1 indicator on improving the AML/CTF framework

• 2 indicators on improving access to financial products in underserved sectors/areas

• 1 indicator on increasing the efficiency of borrowers’ collateral to promote access to credit

• 1 indicator on enhancing the transparency of financial information and protecting

consumers

• 2 indicators on strengthening and broadening access to payment systems

• 2 indicators on strengthening government securities primary markets

Revised PDO and Key Indicators, and Reasons/Justification

9 In part, this is because insurance and pensions are relatively underdeveloped and small. The emphasis given to the

banking sector and capital market reflects their relative size.

6

14. The program development objectives remained consistent throughout the FSDPO

series. Some indicative triggers and prior actions were revised, advanced, or dropped during

preparation of FSDPO II to reflect the country’s evolving conditions and progress on the ground.

At FSDPO II, new prior actions were added to deepen reforms by: (a) supporting the preparation

of implementing regulations for the new legislation on AML/CTF; and (b) enhancing long-term

funding sources by covering insurance and pensions. To reflect the relatively slower pace of

implementation and the need for additional TA –especially on financial inclusion– it was decided

to expand the program series by including a third operation, and therefore, several policy actions

were recast as triggers for FSDPO III, including regulations for: (a) e-banking; (b) methodology

for disclosing the total cost of financial products to consumers; (c) failure-to-settle arrangements

in the electronic clearing system (CEL); and (d) procedures for the CSD to enable delivery versus

payments (DVP). While FSDPO III never materialized, these changes remained consistent with

the 2009 FSAP Update and the priorities of MFSDS and were reflective of the strength of the

policy dialogue between the Bank’s team and development partners with the Government.

15. While there were no changes in indicators, the results framework was expanded

during FSDPO II to reflect the deepening focus under Pillar III on enhancing long-term

funding sources. This resulted in the addition of two new indicators: Indicator 13: (Percentage

of members of private pension funds with access to on-line, individual account information) and

Indicator 14 (Percentage of insurance companies presenting Key Facts Statements for consumers

of insurance products). The achievement of these two indicators was contingent on the approval

of the third tranche of the program, which did not materialize.

Table 1. New Results Indicators Introduced for Pillar III

Reform Areas New Results Indicators for FSDPO II

Strengthening government

securities primary markets

11. Number of short- and medium-term bonds issued and reopened in the

domestic market through competitive auctions

12. Level of dematerialization and immobilization of all medium- and long-

term debt securities registered in Central Securities Depository (CSD)

Enhancing long-term funding

sources (insurance and

pensions)

13. Percentage of members of private pension funds with access to on-line,

individual account information

14. Percentage of insurance companies presenting Key Facts Statements for


16. The results framework was not updated to ensure that the indicators initially

selected would closely reflect progress toward the program development objectives and

consider operational changes during implementation. This limited the ability to demonstrate

the otherwise noteworthy accomplishments of the program, as some indicators measure progress

that can only be weakly attributed to the FSDPO series including indicators that were no longer

consistent with the risk-based supervision approach adopted by the central bank (indicators #1

and #2). Additionally, some of the new results indicators selected for FSDPO II lacked full

ownership by the corresponding regulator (indicators #13 and #14).

Original Policy Areas Supported by the Program

17. In line with the strategic objectives of the MFSDS and its Results Framework, the

FSDPO series supported a set of policies actions to enhance access to finance by households

and firms, and the development of long-term financial markets. Under FSDPO, the GoM

7

successfully completed core policy actions in: (i) maintaining Financial Sector stability; (ii)

improving financial inclusion; and (iii) increasing the supply of private capital to support

development. Under the leadership of the GoM –through the Ministry of Economy and Finance

(MEF) and BOM– policy actions were jointly discussed and agreed between the GoM, the World

Bank, and development partners involved in the FS Working Group10, and were informed by

extensive consultations held around the development of the MFSDS with the Government,

financial institutions, private sector, and donor partners. The FSDPO series supported the

following objectives/pillars:

Financial Stability

18. Under this pillar, the FSDPO series supported reforms in the following three policy areas:

• Enhancing banking regulation and supervision. To bring risk management practices and

banking stability in line with international standards and practices, the objectives of these

reforms were to: (i) enact new regulation on loan classification to revise the definition and

recording of NPLs; (ii) issue new risk management guidelines for banks; (iii) issue new

regulation to increase the minimum capital level for banks; and (iv) adopt regulations on

concentration limits for transfers abroad.

• Strengthening the banking safety net and crisis management frameworks. The objectives

of these reforms were to: (i) enable BOM to act as a Lender of Last Resort (LOLR) by

enacting regulation for Emergency Liquidity Assistance (ELA); (ii) establish a deposit

insurance scheme by nominating the Management Committee of the Deposit Guarantee

Fund (DGF) and ensuring its capitalization; and (iii) strengthen the crisis management

framework by conducting a crisis simulation exercise (CSE), and issuing guidance to the

BOM on how to deal with systemic events and problem banks.

• Improving the Anti-Money Laundering and Combatting the Financing of Terrorism

(AML/CFT). The objectives of these reforms were to bring Mozambique’s capacity to fight

money laundering and terrorism financing into closer compliance with international

standards by: (i) adopting a new Law and implementing regulations for AML/CFT; and

(ii) preparing new Counter Terrorism legislation.

Financial Inclusion

19. Under this pillar, the FSDPO series supported reforms in the following policy areas:

• Improving access to financial products in underserved sectors/areas. To establish a

regulatory framework enabling the growth of innovative financial instruments and

services, the objectives of these reforms were to put in place BOM-issued regulations (i)

protecting e-money custody accounts, and (ii) enabling banks and microbanks to engage

agents for the delivery of basic retail financial services.

10 Reforms were harmonized with the joint donor mechanism for the provision of general budget support and guided

by the 2009 MoU signed by the GoM and 19 budget support donors.

8

• Increasing the efficiency of borrower collateral to promote access to credit. The objectives

of these reforms were to: (i) enact the new Insolvency Law, and secure approval of the

draft Credit Bureau Law by Parliament; (ii) issue regulation guiding the operation of credit

bureaus, and develop monitoring and enforcement mechanisms enabling a safe, reliable,

and efficient credit reporting system; and (iii) initiate the modernization of the legal and

regulatory framework for secured transactions and the establishment of an online movable

collateral registry, allowing movable assets to be used as collateral.

• Enhancing the transparency of financial information and protecting consumers. The

objectives of these reforms were to further strengthen the legal and regulatory framework

for financial consumer protection by: (i) establishing minimum requirements for protecting

bank card account holders; and (ii) broadening the definition of products and services while

increasing the effectiveness of disclosure of fees and charges for basic financial services

and improving provisions regarding sales practices.

• Strengthening and broadening access to payment systems. The objectives of these reforms

were to: (i) strengthen the oversight framework for payment systems by establishing

separate Divisions within the Payment Systems Department (PSD), one for operations

(Development and Services), and one for oversight (Oversight Unit); (ii) eliminate the

remaining risks in the Real Time Gross Settlement System (RTGS), and introduce failure-

to- settle arrangements in the electronic clearing system (CEL); and (iii) support BOM in

(a) adopting an oversight framework for retail payments, including remittances, and (b)

preparing a retail payment system strategy.

Long-Term Financial Markets

20. Under this pillar, the FSDPO series supported reforms in the following policy areas:

• Strengthening government securities primary markets. To support GoM’s effort to develop

a domestic bond market, the objectives of these reforms were to: (i) implement at least two

competitive bond OT (T-bills) auctions in 2013 and four in 2014 consistent with annual

borrowing plans, and the announcement by MEF of its intention to conduct at least one

reopening of OTs in 2015; (ii) develop regulations on the norms and procedures of the

Central Securities Depository (CSD) under BVM (Bolsa de Valores de Moçambique)

oversight; and (iii) have BOM issue a comprehensive set of norms and procedures to update

money market regulations.

• Enhancing long-term funding sources (insurance and pensions). Insurance penetration in

Mozambique was shallow (only 1.5 percent of premium to GDP), and life insurance was

much smaller than the small non-life insurance sector. Following the enactment of a new

insurance law, in 2011 the ISSM was created to oversee the insurance, reinsurance, and

pensions sectors, but needed considerable capacity building to establish the procedures

necessary to supervise the insurance industry according to international best practice. The

objectives of the supported reforms were to enable the Government to grow and promote

the development of the insurance and pensions sector by: (i) strengthening the regulations

for micro-insurance by setting maximum coverage limits for micro-insurance products in

order to expand customer access and strengthen supervision capacity by ISSM (Instituto

9

de Supervisão de Seguros de Moçambique); and (ii) preparing/issuing/ pension regulations

and approving an updated manual for on and off-site supervision in the pensions and

insurance sectors.

Revised Policy Areas

NA

Other significant changes

21. The program series was designed around two single tranche operations at the time of

approval of FSDPO I but at the identification of FSDPO II a third operation was envisage

given the breath and complexity of reforms and the time needed for their implementation.

This was formally approved at the Concept Note review meeting of FSDPO II on April 2, 2015.

The ROC meeting of August 6, 2015 confirmed that the proposed third operation would fall under

the next IDA cycle (starting in Fiscal Year 2017). The revelation of hidden debt combined with

the lack of accountability and transparency around how this debt was contracted, as outlined in

paragraph 2, made it impossible to proceed with the third operation in the series.

2. Key Factors Affecting Implementation and Outcomes

Program Performance

22. Overall, the DPOs being reviewed built on the accomplishments of the Financial

Sector Technical Assistance Project (FSTAP) and of the Financial Sector Reform and

Strengthening Initiative (FIRST) TA and achieved respectable progress. In the main, the

program supported by the first two operations was fully delivered, as all prior actions were

completed before Board approval. The reform program comprised 20 prior actions, 10 in FSDPO

I and 10 in FSDPO II. While 40 percent of the program was devoted to financial stability with an

emphasis on strengthening the banking safety net and crisis management framework, the rest of

the program was equally focused on financial inclusion and long-term financial markets but with

five prior actions dedicated to strengthening government securities primary markets.

23. Overall there was significant continuity in the reforms supported by the first two

operations, which allowed for an incremental deepening of the reforms. Table 2 in Annex 5

summarizes the performance in the prior actions and triggers. The assessment starts with the prior

actions identified in FSDPO I and the indicative triggers for subsequent operations, including

changes that occurred either because of changes in the policy context, the need to further strengthen

certain reform areas, or because of slower implementation progress in other areas.

24. While the FSDPO series incorporated sufficient flexibility to respond to the country’s

circumstances and progress on the ground, the cancellation of the third operation left a

significant part of the revised program pending. At FSDPO I, 10 prior actions (5 under financial

stability, 2 under financial inclusion, and 3 under long-term financial markets) were delivered, and

another 12 indicative triggers were identified for FSDPO II (3 under financial stability, 7 under

financial inclusion, and 2 under long-term financial markets). Likewise, at FSDPO II, 10 prior

actions (5 under financial stability, 2 under financial inclusion, and 3 under long-term financial

markets) were delivered, and another 16 indicative triggers were identified, for FSDPO III (5 under

10

financial stability, 6 under financial inclusion, and 5 under long-term financial markets). Because

of significant continuity of the supported reforms, only three indicative triggers identified in

FSDPO I were dropped from FSDPO II and all were replaced by indicative triggers for FSDPO

III: one due to policy reasons (Government approval of the regulation for increasing minimum

capital requirements required further consultations); one to reflect ongoing progress by BOM on

its oversight function of payment systems; and one due to slow implementation (the draft CEL

regulations needed more TA).

Major Factors Affecting Implementation

25. Several factors contributed to the progress in the implementation and outcomes of

this FSDPO series, including: (i) alignment with government’s financial sector development

strategy and policy instruments; (ii) adequacy of government’s ownership; (iii) effectiveness of

donor coordination; (iv) soundness of the analytical basis; (v) complementarity with other Bank

operations; (vi) technical assistance; (vii) risks identification and mitigation; and (viii) governance

issues.

26. Alignment with government’s financial sector development strategy and policy

instruments. The FSDPO series was well aligned with the GoM’s priorities for poverty reduction

and inclusive growth as reflected in the 2011-2014 Poverty Reduction Strategy and the 2015-2019

Plano Quinquenal do Governo. In addition, FSDPO was closely aligned with--and supported the

implementation of—the specific objectives and actions of the MFSDS. The latter focused on: (i)

maintaining financial stability through improving the stability of the banking system and adopting

international standards, enhancing monetary stability and safety nets, and developing and

strengthening the pensions and insurance sectors; (ii) improving financial inclusion by developing

the FS infrastructure (payment and securities settlement, and credit information systems),

increasing access to finance (consumer protection, outreach, and formal financial services); and

(iii) increasing the supply of private capital to support development through approval of a Medium-

Term Debt Management Strategy (MTDS) and broadening the investor base.

27. Government’s ownership of the program was strong. Because of a decade-long

commitment to the implementation of the FSAP recommendations, the government started with

strong ownership of the reform program supported by the FSDPOs. These operations were aligned

with Mozambique’s Financial Sector Development Strategy 2013-2022 and with the joint General

Budget Support Program of the G-19. The country’s economic performance over the past two

decades had been strong, and the government had recognized the importance of FS development

to reduce poverty and improve the business environment, leading early on to a strong focus on FS

stability and access to finance. The FSDPO operations were prepared in a participatory manner

under strong government leadership including: (i) the identification of the prior actions and results

indictors were in full alignment with the specific objectives and action as well as the detailed

Results Framework of MFSDS; (ii) the availability and dedication of technical staff at MEF, BOM,

BVM, and ISSM; and (iii) the supervision of implementation through the MEF-led Steering

Committee, and joint annual reviews with development partners.

28. Effectiveness of donor coordination. The design of the FSDPO series was aligned with

the joint General Budget Support Program of the G-19 and the FS programs of other donors. In

addition to strong cooperation between the Bank, AfDB, KfW, and GIZ on FSTAP, the DFID’s

11

2014 Financial Sector Deepening Trust (FSDT) provided TA for FSDPO-Pillar II policy reforms

promoting access to finance. In addition, the Bank team also coordinated closely with the UNCDF

on their program for promoting financial inclusion. Consultations with other donors took place

regularly through the Financial Sector Working Group, which provided a forum for leading donors

in the FS for periodic exchange of information and coordination of policy dialogue. The Bank was

also an active member of the Private Sector Working Group, which promoted private sector

development and access to finance for MSMEs. Finally, the Bank met regularly with the IMF to

coordinate support for the GoM to promote financial development, including through the provision

of complementary TA. This involved the exchange of relevant TA reports between the Bank and

the IMF, sharing of comments on key legislation and regulation, and participation in program

missions, including Bank participation in regular Article IV consultations to assess economic and

financial developments and discuss financial sector policies with Government and BOM.

29. A sound analytical basis helped identify the priority policy areas and reforms. The

design of the program was supported by extensive country analytical work produced by the Bank,

the Government, and other development partners. Identification of key reforms included in the

FSDPO series benefited greatly from the findings and recommendations of the 2009 FSAP Update

and the Government strategies. Reforms supported under Pillar II on financial inclusion were

informed by: (i) the WB’s 2012 Diagnostic Report for Consumer Protection and Financial

Literacy; (ii) the Government’s Rural Financial Strategy and BOM’s 2013 study on “Challenges

of Financial Inclusion in Mozambique: An Analysis of the Supply”; (iii) the “Mapping of Retail

Payment Services Landscape” (FinMark Trust 2012) and Finscope for SMEs (FinMark Trust

2013), provided data on financial inclusion and related recommendations supporting FSDPO

reforms. Finally, analytical work by the Bank (under the Financial Inclusion Support Framework

(FISF) project, and the Financial Sector Reform and Strengthening Initiative (FIRST) project on

Debt Market Development) provided inputs for the reforms in Pillar III of the program.

30. Targeted technical assistance was used to support preparation and implementation

of the FSDPO series. Learning from the experience of previous FSDPOs, complementary TA by

the WBG and other donors supported reforms under each of pillars of the program (see Table 2):

• Financial stability (Pillar I). TA on crisis simulation was provided under the FIRST

project, which contributed to improvements in coordination and communication of crisis

response. TA on AML/CFT regulations and risk-based banking supervision provided by

the IMF led to the preparation of new asset classification and loan provisioning guidelines.

A subsequent FIRST project supported modernization of the legal framework for bank

resolution and deposit insurance. This was complemented by the preparation of a new

investment operation by KfW to capitalize the deposit guarantee fund.

• Financial Inclusion (Pillar II). Support under the Bank’s FISF program (2014-2017)

provided TA, knowledge, and capacity building for reforms to promote financial inclusion,

including on the development of the national financial inclusion strategy, retail payments,

MSME finance, payment service providers, regulatory sandbox, and financial consumer

protection and literacy. These regulatory measures directly contributed to the results

achieved by the series under the financial inclusion program. This was complemented by

TA support from the DFID-financed Financial Sector Deepening Trust (FSD Mozambique)

12

for private sector innovations for enhancing financial inclusion, and by TA from GIZ and

KfW have on complementary market development interventions.

• Long Term Finance (Pillar III). Reforms to develop debt and capital markets and cash flow

management were supported by TA from the FSDPO team and a FIRST-funded project

(“Mozambique: Debt Markets Development”). A three-year FIRST-funded program

(“Long-Term Finance”) started in 2015 provided TA for expansion of long-term financing

sources with a focus on the pensions and insurance sectors and for development of the local

bond market by implementing measures to increase transparency and liquidity. This was

complemented by efforts made by FSD Mozambique and KfW to introduce new financial

instruments and expand the investor base through the issuance of new corporate bonds.

Table 2. Technical Assistance Support to the FSDPO program

Technical Assistance Grant Resources Key Outcomes Supported

Financial Inclusion

Support Framework

(FISF) - complemented

by TA from DFID

$2.5 million (over

3 years) • Development of a national financial inclusion strategy and

M&E for its implementation including GIS mapping

• Improved retail payment systems

• Improved MSME and agriculture sector finance

• Improved financial consumer protection and literacy

Financial Sector

Reform and

Strengthening Initiative

(FIRST) -

complemented by TA

from KFW

$3 million (over

three years) • Improved crisis response

• Modernized legal framework for bank resolution and

deposit insurance

• Improved markets for treasury bills and bonds (increased

transparency and liquidity in the bond markets and fiscal

projections; and improved information on the pensions

and insurance sectors)

SECO-financed IFC

Advisory Services

Project

$0.9 million • Movable collateral bill and regulations prepared

31. Risks identified at appraisal stage and effectiveness of mitigation measures. The

principal risks to the objectives of this operation at appraisal included capacity constraints,

macroeconomic management, and sustainability of commitment to reforms in the run-up to the

2014 elections and the subsequent change in administration. Risks were broadly well identified

but their severity was amplified by governance issues which were not anticipated.

• Implementation Capacity: This risk (assessed as moderate) was mainly due to the

complexity and far ranging nature of the reform program. In addition, the pace of

implementation could be disrupted by institutional changes in the new government (which

included the merger of MPD and MEF into a single ministry). The concentration of efforts

in the hands of two leading agencies (MEF and BOM) with relatively well-trained staff

and advanced systems was seen as a moderating factor. The mitigation of this risk by the

Bank involved: (i) providing technical assistance in all areas supported by this operation to

help fill the gap where institutional resources were lacking, and coordinating further TA to

be provided by Bank/IFC experts and other donor; (ii) maintaining a continuous dialogue

with the authorities on the reform program; and (iii) adopting a pragmatic approach, taking

into account the political economy of reform.

13

• Macroeconomic management: With rising public debt, expansionary fiscal policy, and

worsening current account deficits, macroeconomic risks were considered moderate

overall. But starting with FSDPO I, fiscal policy had become expansionary and spending

levels considered unsustainable. And whereas this risk was somewhat mitigated by a

National Assembly-approved budget for 2015 which significantly reduced public spending

and narrowed the deficit, the Bank relied on the prior actions in Pillar III of FSDPO, the

PRSC series and the IMF PSI as the main mitigation measures. While the Bank team

proceeded based on a moderate risk rating at appraisal, Mozambique’s macroeconomic

stance would later be negatively and severely affected by the revelation of previously

undisclosed borrowing which lowered confidence and investment and contributed to

heightened inflation.

Monitoring and Evaluation (M&E) Design, Implementation and Utilization:

32. M&E Design: In 2013 the program design was well aligned with the objectives and

action plan of Mozambique’s Financial Sector Development Strategy and the broader 5-year

Government Plan. Within the governance structure of MFSDS (Box 1), M&E was distributed

among key institutional players. As the program coordinating agency--and within it the National

Treasury Department of the Ministry of Finance (later MEF) was responsible for the overall

oversight and implementation of the DPO series. The BOM was responsible for the

implementation of many reforms under the inclusion and stability pillars, BVM was the main

technical agency for the actions related to capital markets, and the ISSM was the main technical

agency for actions related to insurance and pensions.

Box 1. Implementing governance structure for the MFSDS

• Steering Committee (SC) chaired by the Minister of Economy and Finance and tasked with policy decisions

and overall implementation supervision. Its membership includes: The Ministers of Economy and Finance;

Justice; Land, Environment & Rural Development; Labor & Social Security; Public Works & Housing;

Governor of Bank of Mozambique; CEOs of Insurance Supervision & Stock Exchange of Mozambique, and

Banks Association.

• Technical Advisory Committee (TAC) chaired by the National Director of Treasury and tasked with all

technical aspects of implementation. Its membership includes senior officers from sectors represented at SC.

• Implementation Support Unit (ISU) set up within the MEF and responsible for: (a) coordinating the

implementation of activities in line with the agreed sectorial work plans; and (b) preparing progress reports for

review and approval by the SC, and transmission to the Council of Ministers.

33. M&E Implementation: The Bank’s supervision of the FSDPOs was aligned with that

of the GoM. Progress on the FSDPO-series indicators was monitored and evaluated through the

government monitoring and evaluation mechanisms for the implementation of the MFSDS. The

achievement of targets was assessed based on market players and household surveys, and drew on

the regular supervision function of BOM, national level data, and specialized surveys on access to

finance. The supervision of FSDPOs was carried out on a continuous basis by the Bank team, and

through regular joint meetings with the MFSDS Technical Advisory Committee. Bank staff

actively participated in these meetings through its staff in the field office and Washington D.C.

(through missions or by videoconference). In addition, beginning in August 2013, technical

support provided through FISF (followed by FIRST) enabled the Bank team to undertake regular

14

missions to monitor the implementation program and the program outcomes.11 Overall, despite

the challenges of not having a dedicated M&E system for FSDPO with regular reporting, the policy

and institutional actions supported by the FSDPO series were well monitored and assessed.

34. M&E Utilization: The FSDPO program was implemented through Government

systems. There was evidence that data was collected to assist the Government in decision-making

and reported in the Government Economic and Social Plan and the annual State Budget, which are

submitted to parliament for approval. However, the system faced difficulty of precisely monitoring

key indicators related to banks and agents, as BOM switched to a risk-based approach and does

not conduct on-site supervision of all 19 banks annually.

Expected Next Phase/Follow-up Operation:

35. With policy lending suspended, the World Bank has moved to investment project

financing. The most recent CPF (2017-2021) focuses in the near term on helping the country

address macroeconomic challenges and restore the confidence of donor partners. Technical

assistance on fiscal risks, debt management and public investment management are key focus

areas. To help the authorities manage this challenge, in close coordination with the IMF, the CPF

program includes advisory support and possible policy-based lending if the authorities make

progress in restoring macroeconomic sustainability and in transparency and governance measures

around the hidden debt.

3. Assessment of Outcomes

Relevance of Objectives, Design and Implementation

Relevance of Objectives: High

Relevance of Design: Substantial

Relevance of Implementation: Substantial

36. The program was appropriate and timely, and its overall relevance is rated

Substantial. The FSDPO I and II series supported reforms which were and continue to be highly

relevant to Mozambique’s development and the WBG’s twin goals of ending extreme poverty and

promoting shared prosperity. This reflects an adequate diagnosis of FS development priorities

which remain much pertinent at the time of this ICR, despite significant unanticipated events that

led to the cancellation of the third operation. Moreover, the program was flexible and yet fully

consistent with the Bank’s country strategy and corporate agenda, enjoyed strong client ownership,

and leveraged significant donor-supported technical assistance and collaboration.

Objectives

37. The objectives of the FSDPO series were and remain highly relevant to the country’s

priorities and context. The three operations were well aligned with the strategic objectives and

11 Key review and support missions for which AMs/BTORs are available in project files include: (i) For FISF, in

addition its launch in August 3013, the Bank team undertook three missions each year form 2014-2017; for FIRST,

in addition to its launch in March 2016, the Bank team undertook three missions each year during 2016 and 2017.

15

action plan of the Mozambique Financial Sector Development Strategy (MFSDS 2013-2022) and

the priorities of the Government’s new 5-year development plan (PQG 2015-2019). They

continued and deepened support for the Government’s FS strategy implementation in its three core

areas: (i) in the area of financial stability, support was aimed at enhancing bank regulation and

supervision, strengthening the banking safety net and crisis management frameworks, and

improving the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)

framework; (ii) in the area of financial inclusion, the focus was on improving access to finance in

underserved areas/sectors (including rural areas) through e-money and agent banking, improving

the credit reporting system, and enhancing the transparency of financial information and consumer

protection and strengthening payment systems; and (iii) in the area of long-term financial markets,

support targeted further development of the Government bond primary market and the promotion

of secondary markets, as wells as development of the insurance and pension sectors.

Design

38. The design of the FSDPO series was consistent with the objectives of the program and

is considered to have substantial relevance. The policy areas and policy actions were well

aligned with the objectives of the FSDPO series and were sufficient for contributing to the

achievement of the results of the PDO. The FSDPO series contributed to the broader WB’s goals

of ending extreme poverty and promoting shared prosperity and its design was consistent with,

and contributed directly to, the goals of the three pillars of the WB Country Partnership Strategy

(CPS) discussed by the Board in April 2012. Under Pillar I of the CPS (Competitiveness and

Employment), FSDPO promoted access to financial services while consolidating achievements in

FS stability and soundness. Under CPS Pillar II (Vulnerability and Resilience), FSDPO promoted

financial stability and better access to financial products that enhance the resilience of individuals

and enterprises to shocks. And under Pillar III of the CPS (Governance and Public-Sector

Capacity), FSDPO supported reforms related to public debt management and AML/CFT.

39. The design of the FSDPO series was also flexible and could adjust to the findings and

recommendations of the Bank team’s on-the ground assessments. While there was significant

continuity of the reforms supported and the DPO series was initially envisioned to encompass two

tranches, in recognition of the breadth and complexity of reforms being supported and the time

required for all reforms to be fully implemented, midway through the implementation of FSDPO

I the Bank decided to add a third operation to the series. A Crisis Simulation Exercise revealed

that financial sector supervision needed further strengthening, leading to the addition of five

indicative triggers to be supported under FSDPO III. Under the Financial Inclusion Pillar, where

the development of new modes of delivery of financial services (such as agent and mobile banking

services) were evolving slowly, six new indicative triggers were added under FSDPO III. Under

the Long-Term Financial Markets Pillar, five indicative triggers were added under FSDPO III to

support the nascent capital markets, insurance, and pension sectors. The results framework was

expanded through the addition of two insurance and pensions indicators.

Implementation

40. While remaining focused on progress towards the development objectives, emerging

lessons and the pace of implementation informed the design of subsequent operations with

no modification to the thematic content of the program. Changes in the number of tranches,

16

indicative triggers, prior actions, and results indicators responded to the pace of implementation

and the need to deepen reforms in all three areas of the program. Only three indicative triggers

identified in FSDPO I were dropped from FSDPO II: (i) the draft regulation for increasing

minimum capital requirements was prepared by the BOM but its approval was delayed to ensure

that the regulation did not inhibit competition, inadvertently limit access to finance, and was

benchmarked with that of other countries; (ii) the strengthening of BOM’s oversight function of

payment systems was dropped because it reflected an ongoing process; and (iii) the introduction

by the BOM of failure-to-settle arrangements in the CEL system and address remaining risks in

the RTGS system, was delayed to benefit from newly deployed TA under the Financial Inclusion

Support Framework.

41. Implementation progress was assessed yearly and comprehensively albeit not

systematically well documented within the WB, as work on many of the policy measures was

documented in aide memoires from the various TA programs (FIRST and FISF primarily).

The assessment was conducted jointly by GoM, the Bank, and donor partners, based on the M&E

of the MFSDS. Feedback from this process was used by the Bank team to add a third tranche to

the FSDPO series program, strengthen its results framework, and provide additional technical

assistance to MEF and BOM. The documentation of progress to achieve the policy measures across

the three pillars was documented through bank to office reports, aide memoires, notes to

management, and briefings associated with implementation of the FIRST and FISF programs as

well as preparation of a new investment operation.

Achievement of Program Development Objectives

Rating: Moderately Satisfactory

42. The FSDPO series achieved moderately satisfactory progress in meeting its program

development objectives. Achievement of objectives under Pillar I is rated as substantial due to

improvements in loan classification and provisioning guidelines and the capital increase of the

deposit guarantee fund. This pillar also supported implementation of the new risk management

framework and delivery of a crisis simulation exercise. Achievements under Pillar II are rated as

substantial due to the increase in access to financial products in underserved areas by supporting

the expansion of e-money accounts (a five-fold increase in the number of accounts) and the

percentage of the population with access to banking services. Achievements under Pillar 3 are

rated as modest as the annual issuance of domestic bonds through competitive auctions increased

but issuances continued to be primarily government securities instead of corporate bonds. There

was also limited progress on indicators related to insurance and pensions regulations.

17

Table 3. FSDPO-I-II Results Indicators

Policy Area Monitoring Indicator Baseline Value Target Value Actual Value

Pil

lar

I: R

ein

forc

e fi

na

nci

al

sta

bil

ity

Enhancing banking

regulation and

supervision

Percentage of banks

classifying their NPLs

according to the regulation

(indicator #1)

Regulation not yet issued At least 85% of banks,

representing not less than

90% of the total bank assets

Largely achieved. 20% of

banks representing 78% of

bank assets classify their

NPLs according to the

regulation

Percentage of banks

implementing the new risk

management guidelines

(indicator #2)

Risk management

guidelines have not been

issued

At least 85% of banks,

representing not less than

90% of the total bank assets

Largely achieved. 29% of

banks representing 80% of

bank assets are

implementing the new risk

management guidelines

Strengthening the

banking safety net and

crisis management

frameworks

Percentage of deposits

balances and accounts

covered by the DGF

(indicator #3)

0 percent The DGF is operational and

is insuring depositors up to

a coverage limit, which

would insure at least 90

percent of the total deposit

accounts

Achieved. The DGF is

operational and fully cover

88% of deposit accounts

Improving the AML/CFT

framework

Criminalization of

terrorism financing

(indicator #4)

Existing AML/CFT law

does not criminalize

terrorism financing

Revised AML/CFT law

criminalizes terrorism

financing demonstrated by

Mozambique’s progress

reports validated by

ESAAMLG

Achieved. AML/CFT Law

amended to criminalize

terrorism financing.

Pil

lar

II:

Incr

ease

Acc

ess

to

Fin

an

ce b

y H

ou

seh

old

s a

nd

Fir

ms

Improving access to

financial products in

underserved sectors/areas

Number of e-money

accounts (indicator #5)

0 (zero) 500,000 Exceeded. 3,800,000

Percentage of the

population with access to

formal banking services,

including “formal-other”

(indicator #6)

12.7 percent 25 percent Exceeded. 36 percent

Increasing the efficiency

of borrowers’ collateral to

promote access to credit

Call for proposals from

service providers to apply

for a private credit bureau

license or operate the

bureau on behalf of BOM

(indicator #7)

Law not yet passed Call for proposals issued Achieved. One private

credit bureau license

applied for and approved

18

Enhancing the

transparency of financial

information and

protecting consumers

Percentage of banks

disclosing to consumers the

effective cost of banking

services (indicator #8)

0 percent 80 percent Achieved. 84 percent (16 of

19 banks) disclose pricing

information on their

websites

Strengthening and

broadening access to

payment systems

Number of days to clear a

check (indicator #9)

Two days in Maputo City

and six days outside

Maputo City

Two days in Maputo City

and two days outside

Maputo City

Not achieved. Two days in

Maputo City and six days

outside Maputo City

Percentage of transactions

settled through RTGS

(indicator #10)

Less than 5 percent 70 percent Partially achieved. 28

percent

Pil

lar

III:

Enh

an

ce t

he

Dev

elop

men

t o

f L

on

g-T

erm

Fin

an

cia

l M

ark

ets

Strengthening

Government Securities

Primary Markets

Number of short and

medium-term bonds issued

and reopened in the

domestic market through

competitive auctions

(indicator #11)

At most 1-2 non-

competitive OT issuance

per year; no reopenings

At least 5 competitive

auctions, including at least

1 reopening

Largely achieved. The

Government placed bonds

through 5 competitive

auctions. No reopenings

were undertaken.

Level of dematerialization

and immobilization of all

medium and long-term debt

securities registered in CSD

(indicator #12)

Only listed securities fully

dematerialized

Full dematerialization and

immobilization of all

securities registered in CSD

Largely achieved. 82

percent of all CSD-

registered securities

dematerialized and

immobilized

Enhancing Long-Term

Funding Sources

Percentage of members of

private pension funds with

access to on-line individua

account information

(indicator #13)

0 (zero) 50% of members Not achieved. 0 (zero)

Percentage of insurance

companies presenting Key

Facts Statements for

consumers of insurance

products (indicator #14)

0 (zero) 50% of insurance

companies

Partially achieved. 20% of

insurance companies presenting Key Facts

Statements for consumers

of insurance products

19

Objective 1: Reinforce financial stability

Overall achievement: Substantial

43. Progress on enhancing banking regulation and supervision was substantial with two

of four indicators largely achieved (indicators #1 and #2) and two indicators fully achieved.

The percentage of banks classifying their NPLs according to the regulation was 20% of banks

representing 78% of bank assets relative a target of 85% of banks representing 90% of bank assets

(indicator #1). The percentage of banks implementing the new risk management guidelines was

29% representing 80% of bank assets relative a target of at least 85% representing 90% of bank

assets (indicator #2). The percentage of deposits balances and accounts covered by the deposit

guarantee fund was 88% of deposit accounts relative a target of 90% (indicator #3). Finally, the

revised AML/CFT law criminalized financing of terrorist activities, which will be endorsed by the

next mutual evaluation in 2019 (indicator #4).

44. As part of a risk-based approach to supervision, BOM confirmed via on-site

inspections that the four largest banks (20 percent of banks) representing 78% of total sector

assets classify their NPLs according to the new regulation (indicator #1). Bank assets are a

more important indicator than the number of banks as a measure of financial sector performance

and risks. The adoption of this risk-based approach to supervision is in line with Basel II, which is

the international standard for banking supervision. The risk-based approach resulted in

confirmation that these four banks (20 percent of banks) representing 78 percent of assets classify

their NPLs according to the regulation (Aviso #16/GBM/2013). More banks likely classify their

NPLs according to the regulation, but the on-site supervision schedule is such that BOM has not

yet verified it although they intend to over the coming years.

45. Utilizing the same risk-based approach, BOM confirmed that 29% of banks

representing 80% of bank assets are implementing the new risk management guidelines

(indicator #2). Confirmation of full implementation of the regulatory guidelines takes time,

particularly as additional banks have submitted their risk management programs to BOM and have

adjusted their internal systems and capacities accordingly and are waiting for on-site inspections

to confirm their application. BOM’s decision to conduct on-site inspections of a relatively small

number of banks that together manage almost 4/5th of total sector assets has resulted in a better

application of scarce supervisory resources.

46. The percentage of deposits balances and accounts covered by the deposit guarantee

fund was 88% of deposit accounts relative a target of 90% (indicator #3). The

operationalization and capitalization of the deposit guarantee fund, supported by the FSDPO

series, was an important factor in developing the domestic financial safety nets. The DGF covers

an estimated 88 percent of bank deposit accounts. The Fund’s initial capitalization included

contributions from the Government (MZN 60 million equivalent to USD 1 million), BOM (MZN

30 million equivalent to USD 0.5 million), and commercial banks (MZN 15 million equivalent to

USD 0.25 million). The DGF has already been utilized to pay out depositors at Nosso Banco--

which the authorities closed in November 2016. The DGF fund will continue to increase through

annual contributions of its member financial institutions.

20

47. Approval of a new AML/CFT Law by the Parliament in 2013 and its implementing

regulations in 2014 (decree 66/2014), criminalized terrorist financing (indicator #4). In

addition to criminalizing the collection and provision of funds for terrorist activities and groups

the law also expanded the application of preventive measures, customer due diligence, record

keeping, and reporting obligation, to a broader range of financial and non-financial actors. It

provided a legal framework for Mozambique’s financial intelligence unit and obliged reporting

entities to identify beneficial owners and set up internal systems to assess ML/TF risks. The

reforms also introduced a risk-based approach in the implementation of AML/CFT measures and

transparency measures in the NGO sector to prevent its use in TF. BOM also issued guidelines for

banks and capital market entities in implementing the AML/CFT Law.

48. BOM has continued to reinforce financial stability since the end of FSDPO II. In April

2017, BOM increased banks’ minimum capital requirement from US$ 1.2 million to about US$

27 million, the minimum capital adequacy ratio from 8% to 12%, and introduced stricter limits on

placements abroad (Avisos 6/GBM/2017, 7/GBM/2017 and 4/GBM/2018). In April 2015, crisis

management arrangements were tested through a simulation exercise that evaluated the authority’s

response to financial stress. In May 2018, the Parliament approved amendments to the AML/CFT

Law to enable full implementation of the United Nations Security Council Resolutions related to

the freezing of terrorist assets (UNSC Resolutions 1267 and 1373) and introduce a risk-based

approach to ensure that AML/CFT measures are commensurate with the risks identified.

Objective 2: Increase Access to Finance by Households and Firms

Overall achievement: Substantial

49. Progress on access to financial services in underserved sectors/areas was substantial

with four of the six indicators achieved or exceeded, one partially achieved, and one not

achieved. By the time FSDPO II closed, some 3.8 million people (age 15+) used a mobile phone

or the internet to access an account and 36 percent of the adult population had a bank account, far

exceeding the targets set out for the program (indicators #5 and #6). In response to a call for

proposals, one private credit bureau operator was licensed (indicator #7) and 84 percent (16 of 19

banks) disclose pricing information on their websites (indicator #8) in line with program targets.

The percentage of transactions settled through RTGS increased from less than 5 percent to 28

percent but fell short of the target of 70% and so was only partially achieved (indicator #10). The

indicator on number of days to clear a check was not achieved (indicator #9).

50. Regulatory measures to encourage the growth of e-money account ownership,

including e-money issuance and agent banking regulations, have had significant success.

The 2017 Findex survey reports that 3.8 million e-money accounts are registered in Mozambique

relative a target of 500,000 (indicator #5). This growth has helped increase the percentage of the

population with access to formal banking services. According to the IMF’s Financial Access

Survey, there were more individuals with e-money accounts (370 accounts per 1,000 adults) than

bank account (332 accounts per 1,000 adults) in 2016 (indicator #6).

51. Responding to a call for proposals, one private firm submitted a request and

obtained a license from BoM in 2017 to operate a private credit bureau in Mozambique

and is expected to start operations in late 2018 (indicator #7). Following the publication of

21

the Law no. 6/2015 that approved the framework for private credit bureaus, BOM conducted

information campaigns in Maputo (south), Beira (center), and Nampula (north) in October and

November 2016. A firm with operations in 7 other countries, including South Africa, expressed

interest and obtained a license to operate the first private credit bureau in Mozambique.

52. The target on enhancing the transparency of financial information and protecting

consumers was achieved with 84 percent (16 of 19 banks) disclosing pricing information on

their websites. BOM issued new regulations on bank cards which set minimum requirements on

the content of service contracts, disclosure of terms and conditions, charges, consumers rights, and

minimum services expected, with respect to credit, debit and prepaid bank cards. In addition,

regulations were revised to: (i) increase the effectiveness of disclosure of fees and charges for basic

financial services, and to improve sales practices; and (ii) prohibit fees, such as those for monthly

account statements, withdrawals at bank branches, and balance enquiries. BOM has established a

dedicated unit for market conduct supervision and has continued to strengthen the legal framework

for the protection of financial consumers and the transparency of information in the market.

53. The target on number of days to clear a check was not achieved. Check clearance in

Mozambique continues to be inefficient and slow, especially outside of Maputo City. Check

truncation is still not available, and clearance requires the physical exchange of checks, which

takes six days relative a target of two days (indicator #9). The percentage of transactions settled

through the three systems operated by BOM (the RTGS, the CEL, and the check clearance system)

increased from less than 5 percent to 28 percent to 28 percent but was still below the target of 70

percent and so was only partially achieved (indicator #10).

54. Efforts to increase access to finance by households and firms in Mozambique

continued after the end of the FSDPO series. Reforms to modernize the legal and regulatory

framework for secured transactions and movable collateral registry have with a draft bill

submitted and approved by the Council of Ministers in July 2018. The bill which will support

movable asset-based lending in Mozambique, is expected to be taken up by Parliament at its next

legislative session in March 2019, which demonstrates government commitment to seeing the

reform program through. BOM has also expressed its intention to develop a new RTGS system

which will link the central bank to individual banks and will form the backbone of

Mozambique’s financial infrastructure. Procurement of the new payments infrastructure is at an

advance stage and is being financed from the central bank’s own budget with technical advice

provided by the Norwegian central bank (Norges Bank).

Objective 3: Enhance the Development of Long-Term Financial Markets

Overall achievement: Moderate

55. Progress on enhancing the development of long-term financial markets was moderate

with two of the four indicators largely achieved (indicators #11 and #12), one partially

achieved (indicator #14) and one not achieved (indicator #13). The Government placed bonds

through 5 competitive auctions but did not undertake any reopenings as outlined in the target,

which results in largely achieved (indicator #11). The target regarding the level of

dematerialization and immobilization of all medium and long-term debt securities registered in

CSD was largely achieved with 82 percent of all CSD-registered securities dematerialized and

22

immobilized (indicator #12) relative a target of 100%. The target related to the percentage of

members of private pension funds with access to on-line individua account information was not

achieved (indicator #13). The indicator monitoring the percentage of insurance companies

presenting Key Facts Statements for consumers of insurance products was partially achieved with

20% of insurance companies relative a target of 50% (indicator #14).

56. The government has made substantial progress in strengthening Government

Securities Primary Markets. Government bonds were placed through competitive auctions

on five instances in 2017 in line with the target but did not reopen any bond series (indicator

#11). The level of dematerialization and immobilization of all medium and long-term debt

securities registered in CSD (indicator #12) was 82% relative a target of 100%.12

57. The government has made modest progress in enhancing long-term funding sources.

The percentage of members of private pension funds with access to on-line individual account

information (indicator #13) was zero relative a target of 50% of members, resulting in the target

not being achieved. The percentage of insurance companies presenting Key Facts Statements for

consumers of insurance products (indicator #14) was 20% of insurance companies relative a

target of 50%, which is only partial achievement of the indicator. Pension and insurance reforms

was not part of the original design and added in FSDPO II.

Justification of Overall Outcome Rating


58. Based on the combined assessment of relevance and efficacy in the achievement of

program objectives, overall outcome is rated moderately satisfactory. The FSDPO series

supported a financial sector reform program which was and continues to be highly relevant to

Mozambique’s development priorities and the WBG’s twin goals. The design of the FSDPO series

was consistent with these objectives. Overall achievement for the first two objectives were

assessed as substantial with half of indicators (50%) achieved or largely achieved under Objective

1 and four out of five indicators (80%) achieved or exceeded under Objective 2 with one not

achieved (20%). Overall achievement for the third objective was assessed as modest with two of

four indicators (50%) largely achieved, one partially achieved (25%) and one not achieved (25%).

The result of two objectives assessed as substantial and one objective modest results in an overall

outcome rating of moderately satisfactory.

Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

12 Reopening of a security = Additional amounts of a previously issued security re-auctioned (or reopened at auction),

using the same maturity date and interest rate, but with a different issue date and price as the original.

Dematerialization of securities = The elimination of physical certificates or documents of title that represent

ownership of securities so that securities exist only as accounting records. Immobilization of securities = The

placement of certificates or other documents of title of financial instruments in a central securities depository to reduce

the movement of physical securities in the marketplace and to facilitate book entry transfers.

23

59. The FSDPO series helped reinforce financial stability, increase access to finance by

households and firms, and develop long-term financial markets. This is expected to have

positive impacts on poverty, and more specifically:

(i) Strengthening the stability of the financial system will indirectly benefit the poor in

the longer term mostly by mitigating the impact of potential financial crises. Support

for the DGF is expected to minimize the fiscal costs associated with the resolution of

financial institutions and protect the savings of smaller depositors. In addition, while

stronger AML/CFT safeguards for the financial system may limit access to low income

clients as banks impose additional documentation and Know-Your-Customer (KYC)

requirements, this adverse impact is being mitigated by banks applying a risk-based

approach to KYC requirements so that low income clients are not negatively impacted.

(ii) Financial inclusion has a more direct benefit to the poor. Reforms to expand agency

banking and mobile money are expected to have a positive impact on vulnerable groups

and underserved areas, by expanding financial services and reducing transactions costs

(e.g. traveling costs).13 Measures to promote credit bureaus are particularly beneficial for

individuals and enterprises with little or no collateral, especially in the rural areas where

land cannot by law used as collateral; a better credit information system can help poor

households and small enterprises access the financial system to start, operate, or expand

their businesses. Stronger consumer protection and financial information will benefit the

less sophisticated consumers, as lack of knowledge about bank charges often push away

uneducated and low-income individuals from the financial system, and into the more

expensive informal micro money lenders. Women are more likely to benefit from these

reforms and improve their access and usage of financial services.

(iii) Diversification of funding sources is expected to improve the capacity of the

Government to stimulate private investment and economic growth, which can have

an indirect impact on poverty. Regular issuance of government bonds and auctions will

improve predictability, transparency, and pricing of financial instruments, leading to

stronger government debt markets and reducing costs in the banking sector. Moreover,

while providing a source of long-term capital for investment, stronger insurance and

pensions sectors will also reduce individuals and enterprises vulnerability to shocks and

the risk of poverty in old age.

(b) Institutional Strengthening

60. Many reforms supported by the FSDPO series supported institutional strengthening

and capacity building, although Mozambique continues to have limited institutional capacity.

The series was accompanied by a three-year program of technical assistance. Trust fund resources

to support institutional strengthening were considerable (FISF: $3m, FIRST: $2.5m, SECO:

13 Despite recent improvements, the Findex 2017 survey estimates that 58 percent of adult Mozambicans still do not

have a transaction account. The growing share of households with access to formal sector financial services is still

concentrated in urban centers (World Bank. Global Findex 2017).

24

$0.9m). The FSDPO series had been preceded by the five-year FSTAP which supported

institutional strengthening, raising awareness, and building capacity in MEF and BOM.

61. The FIRST catalytic project helped the authorities undertake a crisis simulation

exercise that improved risk management at BOM and identified areas for further

improvement. A subsequent FIRST project on bank resolution and deposit insurance supported

the creation of a financial stability department within BOM and is helping the preparation of a new

framework for addressing weak or failing financial institutions.

62. The FISF Country Support Program for Mozambique helped establish a Technical

Implementation Unit (TIU) within the central bank to provide secretariat services to the

NFIS coordination structure. FISF also helped to launch three Working Groups with

representatives from different government agencies, private sector, development partners, and civil

society. FISF facilitated training of technical staff to use a geo-spatial mapping platform to share

financial access data for the population. It also advised on the legal framework for payment

systems and facilitated a workshop with Payment Systems Department and Licensing and

Regulation Department staff on the legal gaps and recommendations for addressing them.

63. The FIRST project on long term finance supported the preparation of an on-site

supervision manual and helped the ISSM in conducting its first three on-site inspections of

insurance companies. The FIRST project on debt markets has helped increase the capacities of

MEF and BVM to manage the primary bond market by reviewing the primary dealer framework

regulations and supporting enhancements in the transparency and predictability of bond auctions.

(c) Other Unintended Outcomes and Impacts (positive or negative):

64. The FSDPO series helped bring into focus the synergies between financial stability

and environmental governance. The new AML/CFT legislation helps Mozambique abide by

good governance standards in the environmental sector, as the law broadens the scope of

underlying offences for money laundering to include organized crime, corruption, and

environmental crimes, and facilitates international cooperation in money laundering cases. Given

the transnational dimension of illegal logging and wildlife trafficking, as well as their well-

established links to organized crime syndicates and corruption, the AML/CFT legislation is being

used to trace, locate and recover illicit revenues from these crimes, including illegal sales and

exports of timber, ivory, and rhino horn.

4. Assessment of Risk to Development Outcome

Rating: Significant

65. The risks to development outcomes for the FSDPO series are rated significant. This

is based on the assessment of the main factors likely to influence the effectiveness and

sustainability of the FSDPO series development outcomes. These are related to implementation

capacity, macroeconomic management, and political commitment to reform.

66. Implementation capacity risk is significant. While the two lead implementing agencies

–MEF and BOM–have relatively well-trained staff and advanced systems, the range, relevance,

and highly technical nature of the reforms they oversee is an enduring source of risk that reforms

25

may not be sustained. This is amplified by the absence of budget support for implementation of

the remaining policy measures. This risk is partially mitigated by the continued provision of TA

by WBG experts and other donors and plans by the Bank to provide a grant to support investments

in financial inclusion and stability, using a combination of results-based financing and TA.

67. Macroeconomic risks are rated high and mostly emanate from low growth and weak

fiscal capacity, including high levels of public debt.14 While fiscal risks had been anticipated by

the Bank, the IMF, and budget support donors, the debt crisis emerging from the undisclosed non-

concessional borrowing was not anticipated, and therefore the mitigation measures implemented

throughout the program were not commensurate with the severity of the risk.15 Other medium and

long-term risks are the exposure of the economy to the volatility of natural resource prices.

68. The economic slowdown has amplified macroeconomic risk as monetary policy

remains tight, fiscal resources are stretched, and the business environment remains subdued

due to weak demand. Vulnerabilities in the financial sector have also grown.16 Debt restructuring

continues to be urgently needed to bring the debt trajectory of the country to a more sustainable

path and restore confidence. The World Bank program is seeking to mitigate these risks in

coordination with the IMF through policy dialogue and technical assistance.

69. Political and governance risk and risk of government’s commitment are rated

significant. The main source of risk relates to the fragile political situation in the country stemming

from the underlying unresolved political conflict. There are risks that (i) the political dialogue will

continue to absorb government attention at the expense of policy making until a lasting agreement

is reached, and (ii) frequent episodes of localized unrest and violence—as well as unofficial labor

protests—could severely disrupt the economy.

70. Weak governance and public-sector management are another source of risk as

demonstrated by Mozambique’s declining scores on the World Bank’s Governance

Indicators. These risks could undermine the achievement of the policy reform program supported

by the FSDPO series and delay the reform process. This is mitigated by the highly participatory

process through which the MFSDS and the resulting FS reform program was developed and

followed through by successive administrations. The new CPF (FY17-FY21) places emphasis on

operations that help address governance constraints and political economy dynamics which may

affect the effective and timely achievement of the development objectives of the operations.

5. Assessment of Bank and Borrower Performance

14 The IMF 2017 Article IV Consultation Report (No. 18/65) noted that “The outlook [to the Mozambican economy]

remains challenging. Absent further policy action, real GDP growth is expected to further decline over time while

inflation would remain at current levels. The fiscal deficit would expand, leading to further accumulation of public

debt and crowding out of the private sector. Banks’ rising exposure to the government, combined with high interest

rates, create potential macro-financial vulnerabilities.” 15 At the time of appraisal macroeconomic risks were rated moderate by the FSDPO series while they were rated high

by the PRSC-9-10-11 series. The two operations were designed and implemented contemporaneously. 16 A combination of slower growth, currency depreciation and tighter monetary policy heightened the exposure to

risks. The Central Bank intervened in Mozambique’s fourth largest bank, Moza Banco in September 2017 and

ordered the closure of Nosso Banco two months later.

26

Bank Performance


(a) Bank Performance in Ensuring Quality at Entry


71. Bank performance in ensuring quality at entry of the operations being reviewed is

rated as moderately satisfactory. The Bank made important contributions to the financial sector

reform agenda in Mozambique through this FSDPO series. The Bank program consolidated and

deepened support for the implementation of the Government’s MFDS which built on findings and

recommendations of the 2009 FSAP update and the FSTAP. Bank support focused on reinforcing

the stability of the financial system, increasing access to finance by households and firms, and

enhancing the development of long-term financial markets. The content and design of the FSDPO

program benefitted from a long engagement between the Bank and GoM; it was supported by

extensive consultations with key government agencies, development partners working in

Mozambique through the G19 donor support, and private sector and consumer groups, which

helped to ensure its relevance, alignment with the Government’s MFSDS strategic objectives and

action plan and the priorities of its 5-year development plan, and coordination with the initiatives

by other development partners in Mozambique.

72. The FSDPO series was strongly aligned with the Bank’s country, regional, and

corporate strategies. The FSDPO series was part of an integral program to support Mozambique’s

growth and poverty reduction agenda. It was prepared alongside the PRSC 9-10-11 series, the

Agriculture DPO series, and the climate change DPO series17, and complemented the WB’s 2009

Competitiveness and Private Sector Development Project and the 2013 Integrated Growth Poles

Project. Moreover, the reforms supported by the FSDPO series strongly complemented the IFC

program, which included the FIG’s Africa Micro Small and Medium Enterprises (AMSME)

advisory projects, and the F&M’s Global Index Insurance Facility (GIIF) advisory projects. The

program also built on lessons learned from global experience with FSDPOs and benefitted from a

close collaboration with the IMF and technical assistance provided by IFC and other donors.

73. The analytical work and TA, together with continuous World Bank field presence

helped ensure the technical soundness, institutional feasibility, and alignment of the DPO

program with the financial sector development agenda of the government. The program had

strategic relevance and soundness. It was implemented in a flexible and pragmatic manner as

exhibited midway through the program when it was decided to add a third operation to deepen

reforms particularly in relation to the development of long-term capital markets, but also to provide

more time for complex financial sector reforms to be implemented. At the same time there were

shortcomings on the part of the Bank in the appraisal of government capacity to design and

implement leading-edge and complex reforms. While a cross-cutting Bank-supported TA program

17 While the PRSC had already committed to implementing the third operation in the series (PRSC-11), the climate

change and Agriculture DPOs ended up cancelling their third operation following the revelation of hidden debt.

27

helped the government prioritize policy reforms requiring highly technical decisions, significant

capacity gaps plagued policy implementation.

(b) Quality of Supervision (including M&E arrangements):


74. World Bank quality of supervision is rated moderately satisfactory. Since the Bank’s

supervision of the FSDPOs was aligned with that of the GoM, the Bank supervised the program in

cooperation with the Government and other development partners providing technical assistance.

Progress on the FSDPO-series indicators was monitored and evaluated through the government

monitoring and evaluation mechanisms for the implementation of the MFSDS (see Box 1 above).

75. The supervision of FSDPOs was carried out on a continuous basis by the Bank team,

through regular communication with the Implementation Support Unit (ISU) and regular

meetings with the MFSDS Technical Advisory Committee. Bank staff actively participated in

these meetings through staff in the field office and Washington D.C. (through missions or by

videoconference). Together with Government and donor representatives, World Bank staff also

participated in the meetings of the Finance Sector and the Private Sector working groups which

met regularly to assess progress. On the other hand, the Bank team could have proposed

adjustments to some of the results indicators to ensure that they can be measured and tracked (e.g.,

for Results Indicators 1 & 2: “percentage of assets” would have been a more appropriate basis of

measurement than “percentage of banks”). The lack of a dedicated M&E system for FSDPO with

regular reporting created some obstacles. At the time of the preparation of this ICR, comprehensive

and detailed results information was not readily available, and the system faced considerable

difficulty of precisely monitoring key indicators.

76. World Bank field presence enabled the 3-year program to be designed and

implemented coherently and relatively smoothly. Intensive interaction with the authorities

helped resolve issues as they arose and provided continuous feedback. Moreover, supervision of

the program supported implementation of selected FSDPO-supported reforms and provided

valuable input to tracking progress on program implementation. Cooperation between the Bank

and other development partners and the IMF was excellent.

77. Implementation Status and Results (ISR) reports for FSDPO I and FSDPO II were

prepared. While these reports contributed to the continuous supervision of the program, they did

not raise or discuss implementation issues. The ISR for FSDPO II simply stated that “it was

important that the reform momentum continues in order to deepen the reforms in the areas of

banking supervision, financial inclusion, and long-term capital markets as well as the insurance

and pensions sectors,” This was to be the role of third DPO in the series, which was planned for

2017 but ended up being cancelled.

(c) Justification of Rating for Overall Bank Performance

Rating: Satisfactory

28

78. Overall Bank performance was rated moderately satisfactory due to the combination

of moderately satisfactory ratings for quality at entry and supervision.

Borrower Performance

(a) Government Performance


79. The Government showed strong political will and commitment to the program. The

Ministry of Finance was the overall coordinator of the reform program during FSDPO I, and after

the formation of a new Government in 2015, this role was taken over by the new MEF which

coordinated and, in collaboration with BOM, led the preparation and implementation of FSDPO

II and started the preparation of FSDPO III.

80. The government had strong ownership of the reforms and its efforts and commitment

at preparation are rated satisfactory. The Government had been pursuing FS reforms since the

early 1990s but it wasn’t until the development and approval of a national strategy (MFSDS 2013-

2022), informed by comprehensive assessments and surveys (the FSAP 2003 & 2009, and

FinScope 2009 demand survey) that government attention at the highest level was focused on the

need to deepen reforms in key areas including: the legal and regulatory framework; financial

architecture and intermediation; the quality of financial services and products offered and its

adequacy to the economy and the needs of households and firms; financial education and

consumers protection; and capital market development.

81. GoM has shown commitment to continue to strengthen the Government Securities

Primary Markets. By the time FSDPO II closed, supported by Bank TA, preparatory work for

enabling reopenings was underway, including the assessment of IT bottlenecks and the

identification of volumes, maturities of securities to be reopened, as well as the frequency of such

operations. Likewise, work had started on improving the regulation on auction rules and

Obligations and Incentives of Primary Dealers (OEOTs), include aligning auction mechanism

rules to the best international practices and revising the set of incentives and obligations of OEOTs

to encourage participation in primary and secondary markets.

82. Reforms to develop the insurance and pensions sector in Mozambique are also

underway. Through the FIRST Long Term Finance Program, the insurance and pensions

supervisor has finalized a draft off-site supervision manual and undertaken on-site examinations

of life, non-life, and composite insurance firms. They are also preparing a feasibility study for a

new off-site supervisory IT platform and identifying resources for its implementation.

Table 1: Reforms continued by the Government following the end of the FSDPO series

• Financial stability. The authorities increased minimum capital and solvency levels for banks and placed

limits on concentrations abroad. They are also implementing measures to address weaknesses in their

crisis management capability by preparing a new bank resolution law that would provide new tools to

address financial institution weaknesses and reinforces the role of the deposit insurer.

• Financial Inclusion. The authorities prepared, with support from the Bank, new legislation for secured

transactions and finalized a new retail payments strategy.

• Long-Term Financial Markets. The authorities have taken steps to improve transparency and

governance of government bonds by communicating a calendar of public auctions to the market with

29

notice and is continuing to work on other technical improvements including reopening of bonds and

improvements in the CSD with support from the FIRST program. These were triggers under FSDPOIII.

(b) Implementing Agencies Performance


83. BOM was the key technical agency responsible for the implementation of the

program. It had oversight over the securities exchange (BVM) and oversaw the design and

implementation of all technical aspects related to banking regulation and supervision, risk

management, and payment systems. Cooperation with the Bank team was strong, despite at times

difficult discussions as to specific reform measures. The dedication and professionalism of the

BOM, BVM, and ISSM teams were exemplary, and while many results have not been attained yet,

these agencies were instrumental for the completion of all prior actions and continue to implement

reforms despite a challenging macro-fiscal environment.

(b) Justification for Rating for Overall Borrower Performance


84. The Government showed strong commitment to the reform program and achieved

good progress in implementation of policy actions.

6. Lessons Learned

85. Several key lessons emerge from the review of the FSDPO series. While global

experience pertaining to government ownership, strong in-country cooperation, harmonized donor

support, the use of TA and strong analytical underpinnings, are relevant and were effectively

internalized by the present DPO series, what also emerged from this series is the need to consider

the governance and institutional capacity context in which reforms take place as well as measures

to mitigate macroeconomic risk and promote transparency. The series highlighted the need to

thoroughly understand the political economy and governance context in which reforms take place,

particularly given the links between sovereign borrowing and the health of the financial sector,

and how this context might impact the achievement of results.

86. Government ownership and commitment are necessary to the success of FS reforms,

but they need to be assessed within the broader governance context of the country and

reflected in operational design. With benefit of hindsight, the program could have focused on

financial stability and inclusion, particularly on the central bank’s supervisory capacity and

financial safety nets, including deposit insurance and resolution frameworks, instead of broadening

the scope to capital markets and adding a third operation, which ended up being cancelled because

of the undisclosed debt, leaving pending a significant portion of the program. This lesson appears

to have been informed the Bank’s decision to, following a request by BOM, approve the “Bank

Resolution and Deposit Insurance Strengthening Project” in April 2017 under the FIRST program.

The Bank has also provided TA on supervisory capacity and financial safety issues, resulting in

draft amendments to the Financial Institutions Act.

30

87. Implementation capacity is a strongly limiting constraint on the scope, depth, and

timing of the reform program. From the outset, FSDPO clearly flagged the issue of

implementation capacity as a key constraint, and by keeping the number of reforms supported at a

manageable level and providing extensive complementary TA to support implementation, helped

move the program forward. However, given that BOM is the key technical agency in charge of

implementation, its capacity, which was limited to start with, was quickly stretched. While

regulation on risk management was issued and most banks prepared risk management programs,

increasing the minimum capital levels for banks, and the establishing a crisis management

committee within BOM were delayed because of capacity constraints and competing priorities. A

key lesson emerging from this experience is the need to methodically assess and calibrate the

targets to be achieved to Government’s implementation capacity and to sequence reforms and

technical assistance in such a way as to gradually build and sustain institutional strengthening.

88. An effective M&E system is essential to support the implementation of Government

action and generate the necessary information needed to track progress. The FSDPO series

relied on the Government’s monitoring and evaluation mechanisms for the implementation of the

MFSDS, which is a comprehensive but complex document including some 13 strategic objectives

and over 150 strategic actions, almost half of which are under BOM’s direct responsibility. While

an implementation support unit (SIU) was established under the Ministry of Finance to manage

and coordinate the implementation of the MFSDS, it was also tasked with establishing measurable

time bound indicators for the MFSDS (“the M&E Framework”) and provide the Government and

donors a means to monitor the implementation of the MFSDS, including FSDPO. However, by

the time of this evaluation, no systematic and detailed M&E reports were available to ascertain

progress on the specific results indicators of FSDPO. Therefore, whereas the results indicators

chosen for the FSDPO series were selected with a view to the ready availability of data of

reasonable timeliness and quality, it is important to ensure at the onset of the budget support

program that an effective M&E system is in place and operational.

89. Despite the unforeseen exogenous circumstances which led to its early termination,

the DPO series supported relevant and complex reforms and achieved progress in key areas.

The program was particularly impactful in financial inclusion, supporting the expansion of

branchless banking and services, as well as improving access in the rural areas, and for MSMEs

and agriculture. These achievements can be attributed to the use early on by the Bank of a strong

TA program. The FISF Country Support Program for Mozambique was instrumental in getting a

Technical Implementation Unit (TIU) within the central bank and several Working Groups in place

which enabled the initiation of reforms in the following areas: (i) use of technology to enhance

access to finance in underserved sectors/areas; (ii) financial infrastructure reforms (credit

reporting, secured transactions, and insolvency and creditor rights); (iii) consumer protection and

financial literacy; (iv) development of microfinance/rural finance; and (v) development of a

financial inclusion strategy.

31

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/Implementing agencies

None.

(b) Co-financiers

N/A

(c) Other partners and stakeholders

32

Annex 1 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Mozambique FSDPO I (P133687)

Names Title Unit Responsibility/Specialty

Lending

Mazen Bouri Senior Private Sector Development

Specialist AFTFE Team Leader

Yira Mascaró Lead Financial Sector Development

Specialist AFTFE Technical guidance & support

Valeria Salomao Garcia Senior Financial Sector Development

Specialist FFSAB Technical guidance & support

Carlos Leonardo Vicente, Financial Sector Specialist FFSDR Technical guidance & support

Paola Granata Consultant AFTFE Technical guidance & support

Alejandro Alvarez de la

Campa

Global Product Leader, Access to

Finance Advisory Services IFC Technical guidance & support

Chabir Hassam Operations Officer IFC Technical support

Fredes Montes Senior Infrastructure Finance

Specialist FFIFI Technical guidance & support

Marilyne Goncalves Senior Financial Sector Specialist FFSFI Technical guidance & support

Rosario Marapusse Private Sector Officer AFTFE Technical guidance & support

Douglas Pearce Practice Manager FFIDR Technical guidance & support

Bujana Perolli Financial Sector Specialist FFIDR Technical guidance & support

Johanna Jaeger Financial Sector Development

Specialist FFIDR Technical guidance & support

Cigdem Aslan Senior Financial Officer FABOM Technical support

Rodrigo Silveira Veiga

Cabral Senior Financial Officer FABOM Technical support

Anderson Caputo Silva Lead Securities Market Specialist FCMSM Technical guidance & support

Alice Zanza Senior Financial Sector Specialist FFIFI Technical guidance & support

Magalie Pradel Program Assistant AFTFW Operations and administrative

support

Julio Revilla Lead Economist AFTP1 Technical guidance & support

Enrique Blanco Armas Senior Economist AFTP1 Technical guidance & support

Furqan Saleem Financial Management Sector

Leader AFTFM Technical guidance & support

Cheikh Sagna Senior Social Development Specialist AFTCS Technical guidance & support

Jose Janeiro Senior Finance Officer CTRLA Technical guidance & support

Luz Meza-Bartrina Senior Counsel LEGAM Legal counsel

Jose María Garrido Senior Counsel LEGPS Legal counsel

Supervision

Mozambique FSDPO II (P151861)

Names Title Unit Responsibility/Specialty

Lending

33

Yira Mascaró

Lead Financial Sector Development

Specialist GFMDR Team Leader

Mazen Bouri Senior Financial Sector Specialist GFMDR Technical guidance & support

Valeria Salomão Garcia Senior Financial Sector Specialist GFMDR Technical guidance & support

Carlos Leonardo Vicente Senior Financial Sector Specialist GFMDR Technical guidance & support

Paola Granata Consultant GFMDR Technical guidance & support

Marilyne Goncalves Senior Financial Sector Specialist GFMDR Technical guidance & support

Bujana Perolli Financial Sector Specialist GFMDR Technical guidance & support

Cigdem Aslan Lead Financial Officer FABOM Technical guidance & support

Anderson Caputo Silva Lead Securities Market Specialist GFMDR Technical guidance & support

Alice Zanza Senior Financial Sector Specialist GFMDR Technical guidance & support

Fiona Elizabeth Stewart Senior Financial Sector Specialist GFMDR Technical guidance & support

Peter Friedrich Wilhelm

Wrede Senior Insurance Specialist GFMDR Technical guidance & support

Jan Philipp Nolte Senior Financial Sector Specialist GDMDR Technical guidance & support

Katie Kibuuka Financial Sector Specialist GFMDR Technical guidance & support

Jorge Joao Faria Financial Sector Analyst GFMDR Operations and administrative

support

Magalie Pradel Program Assistant GFMDR Operations and administrative

support

Enrique Blanco Armas Senior Economist GMFDR Technical guidance & support

Elvis Teodoro Bernado

Langa Financial Management Specialist GGODR Technical guidance & support

Cheikh Sagna Senior Social Development

Specialist AFTCS Technical guidance & support

Luis Schwarz Senior Finance Officer WFALA Technical guidance & support

Carlos Da Maia Consultant GPVDR Technical guidance & support

Pedro Olinto Senior Economist GPVDR Technical guidance & support

Denise Leite Dias Senior Financial Sector Specialist GFMDR Technical guidance & support

Jose Antonio Gragnani Senior Securities Market Specialist GFMDR Technical guidance & support

Furqan Ahmad Saleem Senior Financial Specialist GGODR Technical guidance & support

Peter Moll Senior Economist OPSPQ Technical guidance & support

Maiada Mahmoud Abdel

Fattah Kassem Finance Officer WFALA Technical guidance & support

Dionisio Augusto

Nombora Public Sector Specialist GGODR Technical guidance & support

Luz Meza-Bartrina Senior Counsel LEGAM Legal counsel

Supervision

(b) Staff Time and Cost LEN

(USD)

SPN

(USD)

Total

(USD)

First Programmatic Financial Sector Development

Policy Operation - P133687

303,189.21 303,189.21

Second Programmatic Financial Sector Development


202,123.62 12,1817.32 323,940.94

Third Programmatic Financial Sector Development


80,260.29 80,260.29

Total 585,573.12 12,1817.32 707,390.44

34

Annex 2. Summary of Borrower's ICR and/or Comments on Draft ICR

The full Borrower’s ICR will be attached as a separate file to this report once received.

35

Annex 3. List of Supporting Documents

1. Program Document FSDPO I, June 16, 2014

http://wbdocs.worldbank.org:/wbdocs/drl/objectId/090224b08252ada3

2. Program Document FSDPO II, August 20/ 2015

http://wbdocs.worldbank.org:/wbdocs/drl/objectId/090224b0830879d5

3. The complete list of documents and instruments verifying the implementation of the

policy actions under the DPO series is available in WBdocs under P133687, and P151861

(details below)

Mozambique First Programmatic Financial Sector Development Policy - P133687

1. Letter of Development Policy for Fist Programmatic Financial Sector Development

Policy Operation, May 14 /2014

http://wbdocs.worldbank.org:/wbdocs/drl/objectId/090224b082868d87

2. Financing Agreement August 7 /2014

http://wbdocs.worldbank.org:/wbdocs/drl/objectId/090224b08267f428

3. The Banco de Mocambique (BdM) has issued a loan classification regulation that revises

the definition and recording of non-performing loans to bring them more in line with

international best practices as evidenced by the Recipient's Official Gazette (the Official

Gazette) Nr.104 dated December 31, 2013.

4. The BdM has issued risk management guidelines for banks fostering better risk

management practices in line with international best practices as evidenced by the

Official Gazette Nr.75 dated September 18, 2013.

5. The BdM has developed and approved regulations pertaining to emergency liquidity

assistance for banks enabling it to act as a lender of last resort as evidenced by the

Official Gazette Nr 46 dated June 11, 2013.

6. The Ministry of Finance (MoF) and the BdM have concluded the nomination of all

members of the management committee for the Recipient’s Deposit Guarantee Fund as

evidenced by the letters issued by the Minister of Finance on May 31, 2013 and by the

Governor of the BdM on June 10, 2013 respectively.

7. The Recipient’s Parliament has enacted the Anti-Money Laundering/Combating

Financing of Terrorism Law as evidenced by the Official Gazette Nr.64 dated August 12,

2013.

8. The Recipient’s Council of Ministers has approved a draft insolvency law as evidenced

by the Official Gazette Nr. 53 dated July 4, 2013.

http://wbdocs.worldbank.org/wbdocs/drl/objectId/090224b08252ada3

http://wbdocs.worldbank.org/wbdocs/drl/objectId/090224b0830879d5

http://wbdocs.worldbank.org/wbdocs/drl/objectId/090224b082868d87

http://wbdocs.worldbank.org/wbdocs/drl/objectId/090224b08267f428

36

9. The BdM has strengthened its national payment system by carrying out an organizational

separation between the oversight and the operations functions as evidenced by the letter

from the General Manager and Board Member of the BdM dated November 13, 2013.

10. The MoF has conducted at least two competitive bond auctions following the 2013

annual borrowing plan published in January 2013and in line with Decree No. 5 dated

March 22 2013 and Ministerial Diploma No. 90/2013 dated April 16, 2013, and has

publicly announced the auction results on the Bolsa de Valores de Mocambique

(BVM)’s website as evidenced by www.bvm.co.mz.

11. The MoF has approved the operational norms of the central securities depository for the

BVM as evidenced by the Official Gazette Nr 71 dated September 4, 2013.

12. The BdM has issued a comprehensive set of norms updating money market regulations

including on: (a) interbank markets; (b) repos/reverse repos in the interbank money

market; (c) money market operations amongst banks and between BdM and banks; and

(d) primary and secondary markets of treasury bills, as evidenced respectively by Notices

5 through 8 all dated June 6, 2013.

Mozambique Second Programmatic Financial Sector Development Policy - P151861

1. Letter of Development Policy for Second Programmatic Financial Sector Development

Policy Operation, August 19/2015

http://wbdocs.worldbank.org:/wbdocs/drl/objectId/090224b0830879a7

2. Financing Agreement October 22/ 2015

http://wbdocs.worldbank.org:/wbdocs/drl/objectId/090224b083180007

3. The Recipient’s Banco de Mozambique strengthens the crisis management framework by

conducting a crisis simulation exercise to identify weaknesses and gaps as evidenced by

the letter dated June 5, 2015 issued by its Governor.

4. The Recipient’s Ministry of Economy and Finance (MoEF) capitalizes the Recipient’s

Development Guarantee Fund with initial Recipient contribution based on Decree No.

49/2010 dated November 11, 2010 as evidenced by the Boletim da Republica No. 45

dated November 11, 2010 and Extract No. 004947519006 issued by MoEF on July 2,

2015 and document (Transferencia de Valores) No. 9502581067 issued by the Banco de

Mozambique dated June 30, 2015.

5. The Recipient’s Council of Ministers (CoM) approves Anti-Money Laundering/ Counter

Financing of Terrorism (AML/CFT) Law Regulations as evidenced by Decree No.

66/2014 published in the Boletim da Republica No. 87 dated October 29, 2014.

6. The Banco de Mozambique issues regulations regarding protection of e-money custody

accounts as evidenced by document (Aviso) No. 6/GBM/2015 dated July 13, 2015

regarding e-money custody accounts.

http://wbdocs.worldbank.org/wbdocs/drl/objectId/090224b0830879a7

http://wbdocs.worldbank.org/wbdocs/drl/objectId/090224b083180007

37

7. The Banco de Mozambique regulates the access and exercise of activities for banking

agents as evidenced by document (Aviso) No. 3/GBM/2015 dated April 13, 2015.

8. The CoM re-submits the draft law to Parliament (Assembleia da Republica) for the

creation of credit bureaus in line with international principles as evidenced by the letter

(Oficio) No. 84/PM/152/2015 from the Office of the Prime Minister.

9. The Banco de Mozambique establishes minimum requirements for protecting bank card

account holders as evidenced by document (Aviso) No. 1/GBM/2014 dated June 4, 2014

published in the Boletim da Republica No. 45 dated June 4, 2014 (Regulamento de

Cartões Bancários).

10. The MoEF implements the bond issuance calendar envisaged in the 2014 annual

borrowing plan by conducting at least four competitive auctions as evidenced by letter

Ref. 420/GP-BVM/2015 from the Council of Administration of the Mozambique Stock

Exchange (Bolsa de Valores de Mozambique).

11. MoEF announces its intention to conduct at least one re-opening of OTs in 2015 as

evidenced in the Recipient’s Annual Domestic Borrowing Plan (Plano de Endividamento

Interno 2015) published on the MoEF website dated 1 July 2015.

12. ISSM sets maximum coverage limits for micro-insurance products as evidenced by

document (Aviso) No. 3/ISSM/2015 issued by the Recipient’s Institute of Insurance

Supervision dated June 11, 2015.

38

Annex 4. Analytical underpinnings of the FSDPO series

Analytical Reports Policy Areas Supported

2009 FSAP Update; MFSDS (2013-2022); IMF Reviews Under the PSI for

Mozambique; FIRST project on Contingency Planning analytical work.

Banking regulation &

supervision;

Strengthening the banking

safety net & crisis

management frameworks

FSAP Update; MFSDS (2013-2022). Improving the AML/CFT

framework

2009 FSAP Update; MFSDS (2013-2022); Diagnostic Report for Consumer

Protection and Financial Literacy for banking and microfinance (2012), and for

insurance, pensions, securities (2015); Mapping of Retail Payment Services

Landscape; Challenges of Financial Inclusion in Mozambique; 2014 Finscope

Mozambique Survey Report; Finscope for SMEs; An Overview of the

Constraints to the Development of Housing Finance Sector; Financial Inclusion

and Capability Survey Report (“Enhancing Financial Capability and Inclusion

in Mozambique: A Demand-Side Assessment”); National Financial Inclusion

Strategy (2014 – draft); Mozambique Financial Inclusion Support Framework

(FISF -ongoing)

Improving access to financial

products in underserved

sectors/areas

2009 FSAP Update; MFSDS (2013-2022).

Increasing the efficiency of

borrowers’ collateral to

promote access to credit

MFSDS (2012-2022); Diagnostic Report for Consumer Protection and Financial

Literacy; Challenges of Financial Inclusion in Mozambique: An Analysis of the

Supply; Financial Inclusion and Capability Survey Report; Mozambique

Financial Inclusion Support Framework (FISF- ongoing)

Enhancing transparency of

financial information and

protecting consumers

2009 FSAP Update; MFSDS (2013-2022); Diagnostic Report for Consumer

Protection and Financial Literacy; Mapping of Retail Payment Services

Landscape.); Mozambique Financial Inclusion Support Framework (FISF-

ongoing).

Strengthening and broadening

access to payment systems

2009 FSAP Update; MFSDS (203-2022); Medium Term Debt Management

Strategy; Government Debt Management Performance Report; FIRST Debt

Market Development TA Project (ongoing).

Strengthening government

securities primary markets

MFSDS (2013-2022); Access to Insurance in Mozambique (Cenfri 2012);

CPFL Report on insurance, pensions, securities (2015).

Enhancing long-term funding

sources (insurance and

pensions)

39

Annex 5. Results Indicators for FSDPO I and II and Status of Prior Actions

(New indicators are shown in underlined italic)

Reform Areas Indicator for FSDPO I Indicator for FSDPO II

Pillar I: Financial Stability

Enhancing banking

regulation and

supervision

1. Percentage of banks classifying their

Non-Performing Loans (NPLs)

according to the new regulation

1. Percentage of banks classifying their Non-

Performing Loans (NPLs) according to the

new regulation

2. Percentage of banks implementing

the new risk management guidelines

2. Percentage of banks implementing the

new risk management guidelines

Strengthening the

banking safety net and

crisis management

frameworks

3. Percentage of deposits balances and

accounts covered by the Deposit

Guarantee Fund (DGF)

3. Percentage of deposits balances and

accounts covered by the Deposit Guarantee

Fund (DGF)

Improving the

AML/CTF Framework

4. Criminalization of terrorism

financing

4. Criminalization of terrorism financing

Pillar II: Financial Inclusion

Improving access to

financial products in

underserved

sectors/areas

5. Number of e-money accounts

5. Number of e-money accounts

6. Percentage of the population with

access to formal banking services,

including “formal-other”

6. Percentage of the population with access

to formal banking services, including

“formal-other”

Increasing the

efficiency of borrower

collateral to promote

access to credit

7. Call for proposals from service

providers to apply for a private credit

bureau license or operate the bureau on

behalf of BOM

7. Call for proposals from service providers

to apply for a private credit bureau license or

operate the bureau on behalf of BOM

Enhancing the

transparency of

financial information

and protecting

consumers

8. Percentage of banks disclosing to

consumers the effective cost of banking

services

8. Percentage of banks disclosing to

consumers the effective cost of banking

services

Strengthening and

broadening access to

payment systems

9. Number of days to clear a cheque 9. Number of days to clear a cheque

10. Percentage of transactions settled

through the Real Time Gross

Settlement System (RTGS)

10. Percentage of transactions settled

through the Real Time Gross Settlement

System (RTGS)

Pillar III. Long-Term Financial Markets

Strengthening

government securities

primary markets

11. Number of short- and medium-term

bonds issued and reopened in the

domestic market through competitive

auctions

11. Number of short- and medium-term

bonds issued and reopened in the domestic

market through competitive auctions

12. Level of dematerialization and

immobilization of all medium- and

long-term debt

securities listed in Central Securities

Depository (CSD)

12. Level of dematerialization and

immobilization of all medium- and long-

term debt securities registered in Central

Securities Depository (CSD)

Enhancing long-term

funding sources

(insurance and

pensions)

13. Percentage of members of private

pension funds with access to on-line,

individual account information

14. Percentage of insurance companies

presenting Key Facts Statements for


40

Table: Status of Prior Actions for DPO Series FSDPO I: Prior Actions Status


Policy area: Enhancing banking regulation and supervision

1. BOM has issued a loan classification regulation that revises the

definition and recording of non-performing loans (NPLs) to bring them

more in line with international best practices.

Delivered

2. BOM has issued risk management guidelines for banks fostering better

risk management practices in line with international best practices.

Delivered

Policy area: Strengthening the banking safety net and crisis management framework

3. BOM has developed and approved regulations pertaining to emergency

liquidity assistance (ELA) for banks enabling it to act as lender of last

resort.

Delivered

4. MEF and BOM have concluded the nomination of all members of the

Management Committee of the Deposit Guarantee Fund (DGF).

Delivered

Policy area: Improving the AML/CFT framework

5. AML/CTF Law has been enacted by Parliament Delivered


Policy area: Improving access to financial products in underserved sectors/areas

Policy area: Increasing the efficiency of borrower’ collateral to promote access to credit

6. Council of Ministers has approved a draft Insolvency Law Delivered

Policy area: Enhancing the transparency of financial information and protecting consumers


7. BOM has strengthened its national payment system by carrying out an

organizational separation between the oversight and operations functions

Delivered

Pillar III: Long-Term Financial Markets

Policy area: Strengthening government securities primary markets

8. MEF has conducted at least two competitive bond (OT) auctions

following the 2013 annual borrowing plan published in January 2013

and in line with Decree No. 5 dated March 22, 2013 and Ministerial

Diploma No. 90/2013 dated April 16, 2013 and has publicly announced

the auction results on BVM’s website.

Delivered

9. MEF has approved the operational norms of the Central. Securities

Depository for the BVM.

Delivered

10. BOM has issued a comprehensive set of norms updating money market

regulations, including on: (a) interbank markets; (b) repos/reverse repos

in the interbank money market; (c) money market operations amongst

banks and between BOM and banks; and (d) primary and secondary

markets of treasury bills, as evidenced respectively by Notices 5 through

8 all dated June 6, 2013

Delivered

FSDPO II: Prior Actions Status


Policy area: Enhancing banking regulation and supervision

FSDPO II Trigger 1:

• The BOM continues to strengthen bank regulation and supervision by: (i)

increasing minimum capital levels for banks; (ii) incorporating capital

requirements for operational and foreign exchange risk (following Basel

2 simplified standardized approach)

Delay in increasing minimum

capital requirements for banks

and adoption of regulations on

country and transfer risk led to

this action becoming FSDPO III

Triggers 1 and 2

Policy area: Strengthening the banking safety net and crisis management framework

1. The BOM strengthens the crisis management framework by conducting a

crisis simulation exercise (CSE) to identify weaknesses/gaps

Delivered

(With slight revision of wording)

41

Implementation of actions to

address CSE weaknesses

identified as FSDPO III Trigger

3

2. The MEF capitalizes the DGF with initial Government contribution

based on Decree No. 49/2010

Delivered

Initial capitalization not enough

to reach an adequate size.

Adequate capitalization becomes

FSDPOIII Trigger 4

Policy area: Improving the AML/CFT framework

3. The CoM approves AML/CFT Law Regulations (new prior action, was

not identified at FSDPO I)

Delivered

Submission of draft Counter

Terrorism Law to Parliament


5


Policy area: Improving access to financial products in underserved sectors/areas

4. The BOM issues regulations regarding protection of e-money custody

accounts (Aviso sobre Protecção de Fundos Resultantes da Emissão de

Moeda Electrónica).

Delivered

5. The BOM regulates the access and exercise of activities for banking

agents.

Delivered

Policy area: Increasing the efficiency of borrower’ collateral to promote access to credit

6. Council of Ministers re-submits the draft Law to Parliament for the

creation of credit bureaus in line with international principles

Delivered

Implementing regulation for the

operation of credit bureaus


6

Modernizing the legal and

regulatory framework for

secured transactions identified

as needing support. Becomes

FSDPO III Trigger 7

Policy area: Enhancing the transparency of financial information and protecting consumers

7. The BOM establishes minimum requirements for protecting bank card

account holders

Delivered

Strengthening scope and

effectiveness of disclosure of

protective provisions identified

as FSDPO III Triggers 8

Submission of draft Law on

Secured Transactions to

Parliament is FSDPO III

Trigger 9


FSDPO II Trigger 8:

• The BOM passes a regulation that establishes a standard methodology

for financial institutions to disclose the total cost of financial products to

consumers (‘effective interest rate’)

New TA under FISF to inform

design recently started. Becomes

FSDPO III Trigger 10

FSDPO II Trigger 9:

• BOM strengthens its oversight function of payment systems by: (i)

staffing the oversight unit and (ii) the implementation of an oversight

manual

Dropped (ongoing process)

FSDPO II Trigger 10:

• The BOM introduces failure- to- settle arrangements in the CEL system

and addresses risks remaining in current RTGS system

New TA to inform design under

FISF provided advice on

introduction of “failure to settle

42

arrangements’ in the CEL

system. While the proposal to

amend the CEL regulations were

approved by the Board, they

were yet to be implemented.

Becomes FSDPO III Trigger 11

Pillar III: Long-Term Financial Markets

Policy area: Strengthening government securities primary markets

8. The MEF implements the bond issuance calendar envisaged in the 2014

annual borrowing plan by conducting at least four competitive auctions

Delivered

(Timing adjusted to take into

account delay in the passage of

the 2015 Borrowing Plan)

9. MEF announces its intention to conduct at least one re-opening of OTs

in 2015

Delivered

FSDPO III Trigger 12 will

enable progress on reopening of

the OTs. FSDPO III Trigger 13

will revise regulations to

improve auction rules and

incentives and obligations of

OEOTs.

FSDPO II Trigger 12:

• The BVM approves the procedures for the CSD to enable delivery versus

payment (DVP)

Becomes FSDPO III Trigger 14

Policy area: Enhancing long-term funding sources (insurance and pensions)

10. ISSM sets maximum coverage limits for micro-insurance products Delivered

TA under FIRST is supporting

the preparation of pension

regulations whose issue becomes

FSDPO III Trigger 15.

Approval of an updated manual

for on and off-site supervision in

the pensions and insurance

sector becomes FSDPO III

Trigger 16

43

Annex 6: Map