Official PDF , 117 pages

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 67680-ET

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 32.2 MILLION

(US$50 MILLION EQUIVALENT)

TO THE

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

FOR A

WOMEN ENTREPRENEURSHIP DEVELOPMENT PROJECT

APRIL 26, 2012

Social Development Unit

Sustainable Development Department

Country Department AFCE3

Africa Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without World

Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ii

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of Feb 29, 2012)

Currency Unit = Ethiopian Birr

USD1 = BIRR 17

USD1 = SDR 0.6427

FISCAL YEAR

July 8 – July 7

ABBREVIATIONS AND ACRONYMS

AEMFI Association of Ethiopian MFIs

AfDB African Development Bank

AGP Agricultural Growth Program BOM Board of Management

CIDA Canadian International Development Agency CBB Construction and Business Bank

CBE Commercial Bank of Ethiopia CDAs Cluster Development Agents

CEFE Competency based Economies through Formation of Enterprise

CPAR Country Procurement Assessment Report

CQS Selection Based on Qualifications

CSA Central Statistical Agency CPI Consumer Price Index

DA Designated Account

DBE Development Bank of Ethiopia

DFID Department for International Development

DPs Development Partners

EDQAF Ethiopia Data Quality Assessment Framework

EDRI Ethiopia Development and Research Institute EMC Executive Management Committee

EMCP Expenditure Management Control

EPRDF Ethiopia People‘s Revolutionary Democratic Front

ERR Economic Rate of Return

ESMF Environmental & Social Safeguards Management Framework

FA Fiduciary Assessments FAP Finance and Accounts Process

FEMSEDA Federal Micro and Small Enterprise Development Agency

FM Financial Management

FMM Financial Management Manual

FMRs Financial Management Reports

FPPA Federal Public Procurement and Property Administration Agency

FRR Financial Rate of Return

GAC Governance and Anti-Corruption

iii

GDP Gross Domestic Product

GMT Grassroots Management Training

GoE Government of Ethiopia

GTP Growth and Transformation Plan

GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (German

Association for International Cooperation)

HPR House of Peoples‘ Representatives IAP Internal Audit Process

IBEX Integrated Budget and Expenditure

IC Individual Consultants

ICB International Competitive Bidding

IDA International Development Agency

IFAD International Fund for Agricultural Development IFC International Finance Corporation

IFRs Interim unaudited Financial Reports

KAB Know About Business

KfW Kreditanstalt für Wiederaufbau (German Development Institute)

LCS Least Cost Selection

LOC Lines of Credit

M&E Monitoring and Evaluation

MDGs Millennium Development Goals

MDTF Multi Donor Trust Fund

MFI Micro-Finance Institutions

MoFED Ministry of Finance and Economic Development

MOU Memorandum of Understanding

MoUDC Ministry of Urban Development and Construction

MoWY&CA Ministry of Women, Youth and Children‘s Affairs

MSE Micro and Small Enterprise

MSME Micro, Small and Medium Enterprises

NAP National Action Plan for Gender

NBE National Bank of Ethiopia

NCB National Competitive Bidding

NGO Non-Governmental Organizations

NPLs Non Performing Loans

NPMT National Project Management Team

NTA National TVET Agency

OFAG Office of the Federal Auditor General

OM Operational Manual

OSS One Stop Shops

PAD Project Appraisal Document

PBS II Protection of Basic Services Phase II Project

PDO Project Development Objective

PEFA Public Expenditure and Financial Accountability

PFEA Public Financial Enterprise Supervising Agency

PFIs Participating Financial Institutions

PFM Public Financial Management

PIM Project Implementation Manual

PIU Project Implementation Unit

PMT Project Management Team

iv

PPA Property Administration Agency

P-RAMS Procurement Risk Assessment and Management Systems

PSCAP Program Public Sector Capacity Building Program

PSNP Productive Safety Net Program

QBS Quality Based Selection

QCBS Quality and Cost-Based Selection

REMSEDA Regional Micro and Small Enterprise Development Agency RMP Risk Management Process

RUFIP Rural Financial Intermediation Program

SBD Standard Bidding Documents

SIP Strategic Investment Project

SLAs Subsidiary Loan Agreements

SLMP Sustainable Land Management Program

SNNPR Southern Nations, Nationalities, and Peoples Region

SOEs Statement of Expenditures

TA Technical Assistance

TCAs Technical Cooperation Agreements

TOT Training of Trainers

TVET Technical and Vocational Education and Training

UNIDO United Nations Industrial Development Organization

USAID DCA United States Agency for International Development-Development Credit

Authority

WB World Bank

WEDP Women Entrepreneurship Development Project

Vice President: Obiageli Katryn Ezekwesili

Country Director: Guang Zhe Chen

Sector Director: Jamal Saghir

Sector Manager: Ian Bannon

Task Team Leader: Yasmin Tayyab

v

ETHIOPIA

WOMEN ENTREPRENEURSHIP DEVELOPMENT PROJECT

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................1

A. Country Context ............................................................................................................ 1

B. Sectoral and Institutional Context ................................................................................. 2

C. Higher Level Objectives to which the Project Contributes .......................................... 4

II. PROJECT DEVELOPMENT OBJECTIVES ................................................................5

III. PROJECT DESCRIPTION ..............................................................................................6

A. Project Components ...................................................................................................... 6

B. Project Financing ........................................................................................................ 17

C. Program Objective and Phases.................................................................................... 18

D. Lessons Learned and Reflected in the Project Design ................................................ 18

IV. IMPLEMENTATION .....................................................................................................20

A. Institutional and Implementation Arrangements ........................................................ 20

B. Sustainability............................................................................................................... 25

V. KEY RISKS AND MITIGATION MEASURES ..........................................................25

A. Risk Ratings Summary Table ..................................................................................... 25

B. Overall Risk Rating Explanation ................................................................................ 25

VI. APPRAISAL SUMMARY ..............................................................................................26

A. Financial Management ................................................................................................ 26

B. Procurement ................................................................................................................ 27

C. Social and environment (including Safeguards) ......................................................... 28

Annex 1: Results Framework and Monitoring .........................................................................29

Annex 2: Detailed Project Description of Components 1 and 2 ..............................................33

Annex 3: Implementation Arrangements ..................................................................................46

Annex 4: Operational Risk Assessment Framework (ORAF) ... ………………………………….84

Annex 5: Implementation Support Plan ....................................................................................87

vi

Annex 6: Compliance with OP 8.30 Financial Intermediary Lending ...................................91

Annex 7: Map of Ethiopia ........................................................................................................107

vii

PAD DATA SHEET

Ethiopia

Women Entrepreneurship Development Project (P122764)

PROJECT APPRAISAL DOCUMENT .

AFRICA

AFTCS

.

Basic Information

Date: 26-Apr-2012 Sectors: Microfinance (85%), Vocational training (12%), Other industry (3%)

Country Director: Guang Zhe Chen Themes: Micro, Small and Medium Enterprise support (100%)

Sector Manager/Director: Ian Bannon/Jamal Saghir

Project ID: P122764 EA Category: B - Partial Assessment

Lending Instrument: Specific Investment Loan Team Leader(s): Yasmin Tayyab

Joint IFC: No .

Borrower: Ministry of Finance and Economic Development

Responsible Agency: Federal Micro and Small Enterprise Development Agency

Contact: Ato Gebremeskel Challa Title: Director General

Telephone No.: 251-0911254312 Email: [email protected] .

Project Implementation Period: Start Date: 25May-2012 End Date: Dec 31-2017

Expected Effectiveness Date: 02-Jul-2012

Expected Closing Date: 31-Dec-2017 .

Project Financing Data(USDM)

[ ] Loan [ ] Grant Credit Term: Standard with 40 years maturity

[ X ] Credit [ ] Guarantee

For Loans/Credits/Others

Total Project Cost (USDM): 53.00

Total Bank Financing (USDM): 50.00 .

Financing Source Amount(USDM)

BORROWER/RECIPIENT 0.00

International Development Association (IDA) 50.00

UK British Department for International Development (DFID)1 3.00

Total 53.00 .

Expected Disbursements (in USD Million)

Fiscal Year 2013 2014 2015 2016 2017 2018

Annual 4.20 7.30 9.70 12.90 15.90 0.00

Cumulative 4.20 11.50 21.20 34.10 50.00 50.00 0.00 0.00 0.00 .

1 DFID is providing USD 3 million as technical assistance to the Participating Financial Institutions.

viii

Project Development Objective(s)

The project development objective of the WEDP is to increase the earnings and employment of MSEs owned or partly owned by the participating female

entrepreneurs in the targeted cities. This will be achieved by: i) tailoring financial instruments to the needs of the participants and ensuring availability of

finance; and ii) developing the entrepreneurial and technical skills of the target group and supporting cluster, technology and product development for their

businesses. .

Components

Component Name Cost (USD Millions)

Component 1: Access to Microfinance 42.40

Component 2: Entrepreneurial skills, Technology and Cluster Development. 6.10

Component 3: Project Management, Advocacy and Outreach, Monitoring Evaluation and

Impact Evaluation.

1.50

.

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [ X ] .

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

.

Legal Covenants

Name Recurrent Due Date Frequency

The Subsidiary Financing Agreement

Description of Covenant

The Subsidiary Financing Agreement has been entered into between the Recipient and DBE.


The National Project Management Team at FEMSEDA and

the PMT at DBE


The National Project Management Team at FEMSEDA and the PMT at DBE has been established with a composition and mandate satisfactory to the

ix

Association.


Financial management system 31-Oct-2012


(FA, Sched. 2, Sec. II.B.1) Maintain or cause to be maintained a financial management system in accordance with the provisions of Section 4.09 of the General Conditions.


Developing PIM and OM.


The Recipient has adopted the PIM and OM in accordance with the provisions of Section I.B of Schedule 2 to this Agreement.



.

Team Composition

Bank Staff

Name Title Specialization Unit

Yasmin Tayyab Senior Social Development

Specialist

Team Lead AFTCS

Espen Villanger Senior Economist Senior Economist AFTP2

Gelila Woodeneh Communications Officer Communications Officer AFRSC

Meron Tadesse Techane Financial Management

Analyst

Financial Management Analyst AFTFM

Shimelis Woldehawariat Badisso Procurement Specialist Procurement Specialist AFTPC

Elena Bonometti Consultant Gender Specialist PRMGE

Francesco Strobbe Young Professional Financial Economist AFTFE

Desta Solomon E T Consultant Skills Development AFTCS

Senidu Fanuel Private Sector Development

Spec.

Private Sector Development Spec. AFTFE

Niklas Buehren E T Consultant Impact Evaluation AFTPM

Rajiv Sondhi Senior Finance Officer Senior Finance Officer CTRLA

Jonathan David Pavluk Senior Counsel Senior Counsel LEGAF

Ernestina Attafuah Senior Program Assistant Senior Program Assistant AFTUW

Dawit Tadesse Team Assistant Team Assistant AFCE3

Jose C. Janeiro Sr. Finance Officer Financial Management CTRLA

.

Locations

Country First Administrative

Division

Location Planned Actual Comments

Ethiopia Adis Abeba Astedader Adis Abeba Astedader X Addis Ababa - capital chartered

City and the following:

Tigray Region - capital Mekele

Southern Nations Nationalities

http://wbsearch.worldbank.org/people/profile/000194575

x

Peoples Region - capital Adama

Oromiya Region - capital

Hawassa

Amhara Region - capital Bahar

Dar

Dire Dawa - chartered city .

.

1

I. STRATEGIC CONTEXT

A. Country Context

1. Stimulating entrepreneurship can contribute substantially to non-farm income

generation and employment in Ethiopia. Official government figures indicate that the

Ethiopian real GDP per capita has grown by 6.5 percent on average per year since 2001/02.

However, even though the private sector has expanded rapidly in Ethiopia for the last decade, it

has done so from a low starting point. According to the latest figures on employment the formal

private sector is still very small; paid work in this sector accounted for less than 5 percent of total

employment. Most people are dependent on subsistence agriculture, and around 80 percent of the

workforce makes a living in agriculture. The hard and vulnerable life in agriculture, coupled with

few jobs in the formal sector, the large expansion of education, the high population growth and a

rapid acceleration of urbanization (World Bank 2010) all contribute to a large and increasing

percentage of people in the micro and small enterprise (MSE2) sector. Some of these MSEs,

however, have a large potential for income and employment growth but are lacking the necessary

skills, services, finance and support to grow their businesses.

2. MSEs will have to play a major role during the transformation of the Ethiopian

economy. Experience from a range of countries indicate that the Ethiopian economic growth will

not continue unless a structural transformation takes place where workers move from subsistence

agriculture to higher productivity activities.3 The manufacturing sector, which has played the

lead role in initial stages of such transformations, has been growing in value terms at similar

rates as GDP in Ethiopia but remains miniscule in comparison to the total labor force. Only

around 13 percent of the employed population in urban areas is engaged in manufacturing as of

2011, and the corresponding annual growth in employment has been a modest 4 percent during

the last three years (CSA 2009, 2010 and 2011). While there are many initiatives in Ethiopia to

spur high-productive labor intensive production, where the expansion of the rose farm industry is

one success story, it is also recognized that the micro and small enterprises have to play a role in

the transformation (Government of Ethiopia Growth and Transformation Plan 2010/11 –

2014/15, World Bank 2011).

3. Unleashing the potential of women in the economic sector would increase GDP

growth substantially. Recent estimates illustrate the potential of including women in the

economic sectors: reducing gender inequalities in education and the labor market could increase

the annual GDP growth in the country by around 1.9 percentage points (World Bank 2008)4.

Women are marginalized in the business realm in similar ways as in education and the labor

market. Although the potential of unleashing women entrepreneurs is recognized, no estimate of

2 The Government of Ethiopia MSE Strategy 2011 definitions are applied throughout the PAD: A Microenterprise is

defined as a private service/manufacturing business with less than Birr 50,000/100,000 (USD 3,000/6,000) in total

assets excluding buildings and/or less than five employees including family members. A small enterprise is defined

as a private service/manufacturing business with assets in the range Birr 50,000 - 500,000/Birr 100,000 - 1.5 Million

(USD 3,000 – 30,000/USD 6,000 to USD 90,000) and/or 6-30 employees. If there is conflict between the two

criteria, value of assets will determine classification. 3 World Bank (2011): ―Light Manufacturing in Africa‖, Volume I.

4 World Bank (2008): ―Unleashing the Potential of Ethiopian Women‖.

2

the likely impacts on GDP is available (World Bank 2009a). Moreover, data confirms the

disadvantaged position of women in the economic sectors. The unemployment rate among

females is more than twice as large as that of males in urban areas (CSA 2010), the wage gap

between men and women with similar background for doing the same job is around 50 percent

(World Bank 2009a), the share of women without education is almost twice as high as that of

men,5 microenterprises owned by women earn only a fraction of those owned by men (World

Bank 2009b), and women face much larger barriers for doing business than men do (World Bank

2009c). Taking into account the economic potential of women in the society, business

operations, asset ownership, investment and decision-making, the GDP gains of reducing gender

inequalities for the economy as a whole is likely to be higher than the above estimate for

education and the labor market.

4. Supporting female entrepreneurs may be one of the most viable approaches for

realizing the economic potential of the current generations of women– and hence for

increasing economic growth, creating employment and promoting gender equality. The

constraints women entrepreneurs are facing are lack of access to finance, land, training,

education, and effective business networks (Triodos Facet 2011). Particularly, Microfinance in

Ethiopia has a low coverage for women and do not provide suitable financing for women

entrepreneurs. Together with the underdevelopment of the financial sector, this suggests a large

potential for micro finance services. Moreover, in terms of employment in urban areas, the

private sector consists mainly of MSEs. According to the 2011 Urban Employment

Unemployment Survey, over 50 percent of the employed women in urban areas operate or work

for MSEs, which is their main vehicle for income generation.

5. The Government has a strong interest in supporting the MSE sector, particularly

for increasing women‟s income. MSE development is key to the GoE‘s efforts to increase the

economic empowerment of women, and the development of small scale income generating

activities for women is a specific aim of the new 5-year plan of the Government – the Growth

and Transformation Plan 2011-2015 (GTP). The Micro Finance Institution (MFI) sector is also

of particular importance to the GoE. The new National Microfinance Strategy has been

circulated, and the GTP specifically addresses the issue of raising the number of female clients to

access loans from MFIs. In addition, the GoE‘s National Action Plan for Gender (NAP) aims at

eliminating gender and cultural biases that hinder women from participating equally in economic

engagements. The Development and Change Package of Ethiopian Women developed by the

MoWY&CA clearly outlines the Government‘s view that development of micro and small

enterprises has a key role in generating employment for women.

B. Sectoral and Institutional Context

6. The smaller the business, the lower is productivity, so making MSEs grow is key to

income growth. However, MSE growth is limited by entrepreneurs‘ low education, skills and

knowledge (technical, entrepreneurial and managerial). Given that skills and knowledge are

important for business development and growth, this is a main challenge for Ethiopian MSEs.

5 The Ethiopia Demographic and Health Survey 2011, preliminary version. More precisely, women without

education in the age group 15 to 49 account for 50.8 percent, while the corresponding figure for men is 29.5 percent.

3

Unfortunately, the availability of training is limited and the quality of services is often low. Only

7 percent of all MSEs and 6 percent of women in MSEs had access to training (Ethiopia

Development and Research Institute -EDRI, 2004). Moreover, the training is not tailored well to

the needs of those who manage these enterprises, particularly the needs of female entrepreneurs

(Triodos Facet 2011, Grunder 2010).

7. Lack of access to finance is one of the biggest constraints for MSE development in

Ethiopia (GTZ 2007, World Bank 2009b, Triodos Facet 2011). Ethiopia is among the most

under banked countries in Sub-Saharan Africa (2010 Doing Business), and access to finance is

listed as the most severe hindrance by entrepreneurs themselves. The Ethiopian microfinance

sector is relatively young (started in 1997) and consists of 31 regulated MFIs that reach over 2.5

million clients (June 2011) with an outstanding loan balance of Birr 6.5 billion (384 million

USD) and a balance of saving of Birr 3.4 billion (199 million USD). The MFIs have a rural

orientation and largely work with the group-lending methodology. The industry is very

concentrated, with more than 80 percent of the clients (and more than 90 percent of outstanding

loans) being served by the 5 largest MFIs. Moreover, as these large MFIs are restricted to their

own ―territory‖ – being one of the regions – competition in the industry is very limited. These 5

largest MFIs are also very much influenced by their respective regional governments, which

practically own the MFI and provide below market-rate funds. MFIs are supervised by the

National Bank of Ethiopia and operate within a clear regulatory framework6. The Ethiopia

Investment Climate Assessment 2006 finds the huge collateral requirement to be a critical

obstacle as the value of collateral is one of the highest in the developing world (173 percent of

loan amount). Women entrepreneurs face higher barriers than men, especially in providing

collateral. Most assets accepted by lenders are registered to men and there are cultural barriers

for women using collateral, so this avenue of finance is almost closed for female entrepreneurs.

Even if the number of microfinance institutions doubled in the last decade and total lending and

number of clients has increased rapidly, the situation for individual female entrepreneurs in the

cities remains the same. MFI lending is almost entirely group based and the average loan size is

very low – only Birr 2,200 (USD 140) in 2009. Hence, the current MFI lending practice is not

suited for growth-oriented women entrepreneurs.

8. Substantial opportunities exist to increase earnings of existing MSEs by providing

the operators with the necessary entrepreneurial and technical skills, facilitating the utilization of

more productive technologies and making finance for such investments available. High import

costs result in high prices on most imported goods, giving considerable scope to domestic

entrepreneurs to profit from this price differential. Moreover, since well-managed light

manufacturing firms in Ethiopia has a comparable productivity to similar firms in China, there is

a huge untapped potential for Ethiopian entrepreneurs to use existing simple technologies to

compete with imports of simple manufactured products (World Bank 2011). In Ethiopia, three

government technical institutes are mandated to provide technical support and technology

transfer to selected manufacturing industries – the Textile Industry Development Institute, the

Leather Development Institute and the Metal Industry Development Institute. These have

attracted quite some donor attention and support given the perceived potential in these sectors for

export, income and employment growth. This upgrading of the institutes can also benefit MSEs

6 See NBE proclamation no. 40/1996 and no. 626/2009 together with NBE directive no. 18/2006.

4

through transfer of technology and technical assistance especially to strengthen the clusters in the

cities.

9. The new GoE MSE Strategy provides a coherent and suitable framework for

support to growth-oriented female operated MSEs aiming at improving the provision of

demand-driven business development services, high quality technical training and technology

transfer. Nevertheless, there are different levels of understanding and practice in implementing

institutions (REMSEDA, Technical and Vocational Education and Training (TVET) institutions

and One Stop Shops) with respect to how the new strategy should guide the support. In

particular, there is not a clear understanding and appreciation of demand driven approaches, the

benefits of stimulating competition and the role of private initiative and entrepreneurship. It will

be critical to create a level of awareness of the new strategies for MSE development, build

capacity in all implementing institutions and shift the mindset of involved personnel away from

central planning and towards market based approaches. This process will enable them to respond

to the demands of the changing environment.

C. Higher Level Objectives to which the Project Contributes

10. The higher-level goal of the WEDP is to supplement the other interventions in

Ethiopia to accelerate broad-based sustained growth for employment creation and poverty

reduction in urban areas. The WEDP complements several other programs and investments in

Ethiopia. In particular, it provides a platform to stimulate growth in urban areas complementing

the growth-oriented rural Bank funded programs like the Agricultural Growth Program (AGP),

the Productive Safety Net Program (PSNP) and Sustainable Land Management Program

(SLMP). The WEDP also complements and is integrated with several major donors‘ efforts to

expand finance and support entrepreneurship: The KfW Capital Link project provides guarantees

for private banks‘ on-lending to MFIs, the USAID DCA provides guarantees to private banks to

lend to female entrepreneurs with medium businesses, and the RUFIP (Rural Financial

Intermediation Program) funded by IFAD and AfDB provides loans to MFIs for on-lending to

people in rural areas.

11. The WEDP also aims to help achieve the government‟s five year poverty reduction

strategy (the GTP) and the Millennium Development Goals (MDGs). The WEDP will

constitute one implementing tool for achieving the GTP aims in the MSE sector and will

contribute to the first MDG by reducing the number of people exposed to poverty through

employment creation within participating MSEs. The program will also contribute to the third

MDG by promoting gender equality and empowering women – especially through building skills

and knowledge and contributing to their employment and economic independence. Finally, the

WEDP contributes to MDG 8 on partnerships and the Paris Declaration on Aid Effectiveness

through the substantial donor coordination approach taken in the preparation and implementation

of the program.

12. The WEDP will contribute to the fulfillment of the World Bank Africa Strategy

2011-2016, particularly Pillar I (Competitiveness and Employment) by stimulating urban

economic growth and employment generation, and the World Bank‟s Road Map to Gender

5

Mainstreaming ( 2011 -2013) by focusing on the “economic empowerment” of women. The

WEDP will increase productivity in the MSE sector and create new economic opportunities in

the major cities through demand and supply linkages and through direct support of new activities

and introduction of profitable investments for the female entrepreneurs. This in turn will lead to

an increase in employment opportunities – especially among women as female entrepreneurs

tend to hire more women than men. The WEDP will also decrease the vulnerability of urban

households to economic shocks – particularly the recurring food price shocks - since higher

incomes will enable them to create buffers to mitigate impacts of price spikes. Through

transparency in all components of the program—in particular, by emphasizing outreach and

citizen feedback, providing a mechanism for entrepreneurs themselves to suggest improvements

in the program, and building knowledge—the WEDP will also contribute to improved

governance and accountability.

II. PROJECT DEVELOPMENT OBJECTIVES

13. The project development objective of the WEDP is to increase the earnings and

employment of MSEs owned or partly owned by the participating female entrepreneurs in the

targeted cities. This will be achieved by: i) tailoring financial instruments to the needs of the

participants and ensuring availability of finance; and ii) developing the entrepreneurial and

technical skills of the target group and supporting cluster7, technology and product development

for their businesses.

14. Key PDO results indicators will be (1) enterprise earnings and (2) enterprise

employment. In addition, intermediate results indicators for the sub-components are included; for

details refer to the Results Framework, Annex 1.

15. The project beneficiaries are micro and small enterprises in the targeted areas that are:

owned or partly owned by women entrepreneurs, not full-time in school, and who are committed

to growing their enterprise.

16. The program is designed so that female entrepreneur participants choose the

WEDP activity that is most beneficial for growing their MSE, and no compulsory

combination or sequence of activities is imposed. Women interested in participating in WEDP

and fulfilling the criteria for project beneficiaries listed above will be issued a WEDP

membership card before any WEDP finance, training or services are granted. The members will

go through different selection criteria depending on the specific WEDP activity: (1) Those who

seek finance will go through an ―eligibility for finance and granting procedure for growth-

oriented female entrepreneurs‖ as determined by the financial institution involved, (2) those who

want to be trained will be deemed eligible by a skills enhancement/training and selecting

mechanism, and (3) participants within clusters chosen for WEDP support will be qualified by a

separate set of criteria. Estimates of demand for microfinance and projections of loan

disbursement suggest that the WEDP funds for this component will cater for at least 17.500

7 Industrial clusters are the concentration of economic activities of a certain sector in a certain location producing similar and closely related

goods. Industrial clusters provide a wide range of advantages that enable enterprises become competitive and profitable. These advantages could

be generated either through unplanned positive externalities such as industry specialization, labor pooling, and knowledge spillovers or through a deliberate joint action.

6

women entrepreneurs8. Given the indications from the targeted group that training and skills

development are necessary to grow their business, the aim of the entrepreneurial and technical

skill enhancement is to offer such training to all WEDP members that takes WEDP

microfinance. Adding the estimated number of WEDP members that would only seek training

indicates that the total number of WEDP participants will be around 20,000 female

entrepreneurs. Further details of the selection processes and expected number of participants are

presented under each component, below.

17. WEDP will be a national urban project covering the four major cities in four regions:

Mekele in Tigray, Bahar Dar in Amhara, Hawwasa in SNNP and Adama in Oromiya and the two

chartered cities, Addis Ababa and Dire Dawa. Neighboring suburbs and satellite cities may be

included based on the available resources and capacity for program implementation. The exact

definition of eligible cities will be detailed in the Project Implementation Manual and

Operational Manual. The project will undertake a resource and implementation assessment for

Harar and the four emerging regions (Afar, Somali, Benishangul-Gumuz and Gambela) during

project implementation to come up with recommendations to expand WEDP activities to these

four regions in the future.

III. PROJECT DESCRIPTION

A. Project Components

18. The Project has three components with a total investment of USD 53 million, each

described below (See Annex 2 for a detailed project description).

Component 1: Access to Microfinance. (USD 45.4 million)

19. The aim of the component is to facilitate access to financial services for female growth-

oriented entrepreneurs by providing working capital and investment finance through a dedicated

line of credit. At the same time, the component aims at improving the capacity of existing MFIs

to serve female growth-oriented entrepreneurs with tailored financial products. The component is

based on a two-tier structure where the Development Bank of Ethiopia (DBE) will act as an MSE

finance wholesaler engaged in the business of lending to qualified Participating Financial

Institutions (PFIs) with the specific requirement of on-lending only to female-owned or partly

female-owned micro and small enterprises. The PFIs will engage in the retail distribution of sub

loans to this specific target of MSE clients. The lending activities operated by DBE and the MFIs

triggers OP 8.30 Financial Intermediary Lending, and WEDP has been designed to fully comply

with this operational policy (refer to Annex 6 for compliance and clearance).

20. Women entrepreneurs eligible for applying for the financial products provided under

WEDP would be women with full ownership of an MSE or who are at least part-owner of the

enterprise and have a growth-oriented business - as assessed by the PFIs. The PFIs will develop

8 WEDP team‘s projections based on a gradually increasing number of borrowers and average loan size throughout

the WEPD implementation.

7

their own assessment criteria and will determine the granting of finance among eligible women

entrepreneurs.

21. The component will consist of two closely interlinked sub-components: (i) a Credit

Facility in DBE for on lending to Participating Financial Institutions which in turn will on-lend

to female-owned/partly female-owned MSEs and (ii) a TA Facility to support: (a) capacity

building and MSE loan administration in the PFIs; and (b) capacity building of the project

management team (PMT) within DBE.

22. The design of the component follows two guiding principles: on one side removing the

obstacles to access to finance for the targeted women entrepreneurs; on the other side it aims at

using, to the maximum extent possible, existing institutions and services, in order to avoid

duplications.

23. The project uses an incentive approach to support MFI up-scaling to supply loans on an

individual basis9 and other tailored financial products to female-owned/partly female-owned

MSEs. The incentive approach would combine the provision of appropriate financing

instruments to PFIs (i.e. line of credit) with commitments from participating institutions to

strengthen their lending capability to female owned/partly female-owned MSEs over time.

Technical assistance will be a mandatory condition for PFIs to access the Credit Facility.

24. The project plans to establish a dedicated PMT under the DBE. This PMT will act as an

MSE finance wholesaler engaged in the business of lending to qualified PFIs with the specific

requirement of on-lending (and providing additional financial products) only to female-

owned/partly female-owned MSEs . The PFIs will engage in the retail distribution of sub loans to

this specific target of MSE clients.

25. Via the two-tier institutional framework, this component will introduce international best

practices in Ethiopia and promote the engagement in individual lending (versus group lending) in

providing efficient financial services to female-owned/partly female-owned MSEs. The

institutional capacity building of both the PMT in DBE and PFIs will be provided by a

consulting firm with a proven track record of international experience on similar capacity

building assignment. The institutional and human resource development components of the

project are intended to create the culture and lay the foundation for a wider promotion of

financial services to micro and small entrepreneurs throughout the country.

26. Subcomponent 1a: Credit facility (USD 42.4 million). This sub-component will consist

of a credit facility in DBE for on lending to PFIs for the purpose of on-lending to female-

owned/partly female-owned MSEs. Despite the distortions existing in the Ethiopian financial

sector, the subcomponent has been designed in compliance with OP 8.30 requirements (Annex

6). The PMT under DBE will provide medium-term subsidiary loans in domestic currency to

PFIs, with maturity from 3 to 5 years in accordance with the Subsidiary Loan Agreements

between DBE and individual PFIs. DBE would make arrangements for on-lending the funds to

the selected PFIs against the prior month‘s loan book or against a loan demand schedule to be

prepared by the PFI in advance. Once the allocated amount is drawn down, the PFI would be free

9 Although traditional group lending will not be excluded.

8

to revolve the loan as long as it utilizes the funds for supporting female-owned/partly female-

owned MSEs, in conformity with the WEDP guidelines. With the support and technical

assistance from the TA Facility, the PFIs will set their preferred lending conditions and design

the most appropriate instruments to serve the target segment. DBE will assume the full credit risk

on the PFIs and the PFIs will assume full credit risk on the final beneficiaries. DBE will not lend

directly to MSEs.

27. Targeted PFIs will include both government supported and other (NGO or donor backed

or fully private) registered MFIs currently regulated and supervised by the National Bank of

Ethiopia (NBE). A list of potential PFIs have been assessed based on clear eligibility criteria (see

Attachment 1, Annex 2).This due diligence process will ensure minimum performance and

profitability of the PFIs. Table 1 below gives basic information about the most likely MFI

candidates for WEDP.

Table 1: Basic information about the potential PFIs.

28. The selection criteria takes into account PFI ownership and financial situation,

institutional and management capacity, interest in and commitment to servicing the female-

owned/partly female-owned MSE market, quality of financial reporting and governance,

willingness to strictly adopt and adhere to prescribed policies and procedures and to utilize the

TA facility.

29. All PFIs will be required to enter Technical Cooperation Agreements (TCAs) and

subsidiary loan agreements (SLAs). The mandatory technical assistance, and consequently the

access to the line of credit, will be phased in gradually. Additional PFIs can be added

subsequently, subject to their compliance with the set of required eligibility criteria.

30. Subcomponent 1b: TA facility (USD 3million). A critical success factor and a key goal

of the project are to build the institutional and human resource capacity of PFIs to effectively

service the female MSE client market. An assessment study of selected Ethiopian MFIs

conducted in December 2011 revealed a number of institutional weaknesses which need to be

addressed in order to ensure that PFIs are able to properly utilize funds received through the

program and support the WEDP target group with relevant, timely services. In particular,

weaknesses were noted in the areas of cash-flow-based lending techniques, savings mobilization,

financial and operational reporting, risk management and corporate governance.

ADCSI ACSI DECSI OCSSCO SFPI Wasasa Harbu OMO Average Total

Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12

GENERAL INFORMATION

Number of branches 134 238 157 249 10 24 13 168 124 993

Number of employees 690 3,000 2,041 2,407 168 225 88 1,263 1,235 9,882

Number of outstanding loans 159,783 689,951 392,639 515,280 33,421 55,866 19,359 382,405 281,088 2,248,704

Percent of women borrowers 64% 68% 51% 37% 56.3% 43.8% 47.2% 30.3% 50%

Average loan amount (USD) 205 165 281 149 101 127 89 108 153

Government ownership (%) 96% 25% 25% 83% 0% 0% 0% 80% 39%

BALANCE SHEET SUMMARY (USD)

Total assets 45,102,650 195,231,508 155,945,657 95,300,010 4,988,949 8,138,070 2,224,018 50,249,227 69,647,511 557,180,089

Net loans 32,240,577 111,370,377 107,504,628 75,265,986 3,294,712 6,960,469 1,685,636 36,457,709 46,847,512 374,780,093

Total deposits 10,169,317 84,499,941 57,285,914 46,255,892 1,303,928 2,041,725 629,556 18,776,723 27,620,374 220,962,995

Equity 22,845,936 56,162,898 39,625,307 25,684,725 1,993,288 2,865,126 959,121 11,454,809 20,198,901 161,591,209

9

31. In order to make the credit facility effective, PFIs will receive a mandatory, specific,

high-quality, technical assistance by a consulting firm with proven relevant international

experience to help build capacity in individual lending/financial services to female-owned/partly

female-owned MSEs before any credit is given. This capacity building will enable PFI officials

and staff to serve female MSE operators adequately - training them in assessing MSE business

proposals, individual lending provision, gender-sensitive customer care, and developing suitable

financial products for the target group. This will be done in partnership with DFID. All the cost

related to this component will be covered by DFID.

32. The TA facility will work with the PFIs in developing and executing a plan for absorbing

and applying international best practices and credit technologies. New or existing MSE finance

departments that will be set up/empowered by PFIs as a condition of their participation in the

project will be the main focus of this TA. The TA will include training PFI loan officers and the

MSE extension staff at the One Stop Shops, strengthening lending policies and procedures,

putting in place the prerequisites for the accounting, risk management and management

information systems, supporting sub-loan application preparation, screening and decision-

making, and supporting sub-loan monitoring and collections.

33. To benefit from subcomponent 1b, PFIs will be required to enter into TCA with the PMT

in DBE. Under such agreements, PFIs will receive TA free of charge for a period deemed

appropriate after the initial gap assessment for building the necessary capacity to undertake the

WEDP assignment. The PFIs will have access to the Credit Facility only if they enter into such

TCA with the PMT, since the success of the Credit Facility depends on the application of

modern MSE lending technologies, introduction of gender sensitive products and the capacity of

loan administration within PFIs.

Component 2: Entrepreneurial skills, technology and cluster development (USD

6.1million)

34. The aim of this component is to develop growth-oriented women entrepreneurs‟

skills, facilitate their access to more productive technologies that can raise their incomes, and

help unleash synergies from clustering. This will be achieved through designing and

implementing a capacity building technical assistance program to strengthen the capacity of the

institutions that will provide direct services to the WEDP participants, particularly the One Stop

Shops and TVET colleges, and the supporting/coordinating institutions such as the City MSE

Development Offices.

35. FeMSEDA will have the direct responsibility for planning, designing and

coordinating Component 2 in close collaboration with the National TVET Agency. FEMSEDA

will also have the overall responsibility for ensuring the implementation of the delivery of high

quality training and support to WEDP members along two main subcomponents; (1)

entrepreneurship training, technical skills enhancement, technology development and mentoring

and (2) cluster development.

10

36. WEDP members will have to apply for the training module(s) they see most suited

to their needs. The capacity building will aim to develop functional and relevant training

modules suitable to the needs of WEDP members seeking entrepreneurial and technical skills

enhancement. Based on individual participation, the WEDP member will be enrolled in the

module of interest if she meets the following criteria:

having sufficient numeracy and literacy skills to follow the training as determined by the provider of training

committed to focusing on business as a full-time activity, and willing to pay a commitment fee for the training.

37. FeMSEDA will coordinate with relevant implementing institutions to develop an

annual training plan for all entrepreneurship skills and technical training modules required

under WEDP. The training plan will have two components: i) Detailing the capacity building of

the implementing agencies and relevant staff (ReMSEDAs, City MSE Offices, TVET institutes

and the OSS); and ii) Detailing the training modules for the WEDP entrepreneurs. It will be

FeMSEDA‘s responsibility that necessary curricula and training material for all WEDP training

modules are developed and made available to the institutions. All staff in implementing

institutions will have to go through an orientation on the principles of private sector development

programs, the functioning of markets, demand-based approaches and the role of entrepreneurs in

economic growth of a country.

38. WEDP participants will be required to fill out feedback-forms on the relevance,

quality and usefulness of services and trainings provided throughout the program. This feedback

as well as the collection of quantitative and qualitative data (e.g. evaluation questionnaire, focus

group discussions, etc.) will enable FeMSEDA and the TVET institutions, on one side to monitor

the process and revise the support accordingly, and on the other side to identify potential social

issues and other challenges and take corrective actions.

39. Subcomponent 2a: Entrepreneurship and technology development. This subcomponent

will build capacity to ensure delivery of basic and advanced entrepreneurship training, support in

utilizing more productive technology, coaching and mentoring and business information to

growth-oriented women entrepreneurs eager to develop their entrepreneurial skills, improve the

quality of their product and services, and invest in more productive technology or access new

markets. The initial needs assessment of training and related services will be conducted by One

Stop Shops (20 in Addis Ababa and 5 for each of the other cities). A more comprehensive

training needs assessment of the entrepreneurs will be conducted by the TVETs colleges. This

will result in more specific training recommendations to the entrepreneur and in providing

feedback to the TVETs for further development of the training program to better suit the WEDP

members‘ needs.

40. The initial assessment and guidance offered in the OSS to eligible WEDP members

will enable them to select the suitable training module on offer and apply to the relevant TVET

college for WEDP training. The guidance will focus on the business idea of the entrepreneur, on

the viability of the proposed business and the potential participant will be guided on how to

develop the idea further, for example through business health checks and analysis. This process

will help eligible women with desire to grow to expand by identifying growth opportunities

11

within their existing businesses or identify new business opportunities with high potential for

growth. The result of this process will enable WEDP members to further refine their business

idea, which will be a key component for further development in several of the WEDP training

modules. WEDP members seeking training will thus have to invest time and efforts in

developing the business idea from an early stage and also chose and apply for participation in the

training program. This represents an additional mechanism to ensure that only women who are

eager to participate will actually go through the process. Applications will be on an individual

basis, and selected participants will be required to pay a nominal commitment fee.

41. The WEDP entrepreneurship skills development plan for women entrepreneurs will detail

the modules to be provided by TVET colleges to WEDP participants. All modules will combine

classroom teaching with practical workshops where participants are trained in applying the

knowledge to their own business. The full set of modules including the specific curricula and

training material will be adapted according to best international practice with the help of

consultants with appropriate expertise. The modules will likely include (i) basic entrepreneurial

skills training, (ii) advanced entrepreneurial skills training, (iii) technical training suited to

WEDP participants based on their demands, iv) training to introduce new technologies among

WEDP MSEs, (v) advisory services, including coaching and mentoring, and assistance in

business plan preparation, (vi) marketing skills training, and (vii) financial skills training.

42. Combination of services and/or training will be proposed according to the development

stage of the businesses and experience and skills of entrepreneurs (start-ups, experienced micro-

entrepreneurs, or established small enterprises). Delivery of services and training will be shaped

by the principles of relevance of the content and tailored to the needs of the target group.

FeMSEDA will investigate the demand for training from the growth-oriented female

entrepreneurs in ensuring a demand-driven development of the curricula.

43. The training will take into account the specific constraints many women entrepreneurs

face such as time, mobility and level of education. The basic business skills and entrepreneurship

training will be provided through classroom lessons and workshops with practical examples at

TVET colleges to improve their entrepreneurial, business and financial management skills.

Existing training modules used by TVETs will be reviewed and updated and adapted, and new

modules may be developed to meet the different needs of the entrepreneurs. The advanced

training will provide skills for the entrepreneurs with growing and more complex MSEs, and

could include managing financial portfolio, business financing and investment, business

expansion, laws and regulations, registration and licensing, advanced marketing, market and

profit analysis, contract management and labor management. A specific MSE business and

technology development program will be developed within the TVET colleges for addressing

challenges to using more productive and appropriate technology, address production capacity

constraints and quality/standard issues of products and services of MSEs. This will be designed

so as to cater to the needs of the target group as separate from the high school graduates entering

the TVET training colleges.

44. After completing a training module, entrepreneurs will be required to provide a one page

‗action plan‘ that specifies how the knowledge provided will be implemented in her business.

This will both serve to ensure a practical focus of the training and provide feedback to

12

facilitators/trainers whether the entrepreneur was able to understand the content in a useful way.

This would also serve as basis for further advice and coaching purposes.

45. Women entrepreneurs will also be provided with business advice services in OSS on

demand in order to deal with specific business challenges. This service could include basic

support, such as filling in loan applications, how to assess market prices or identifying sources of

supply of inputs. Market studies will be conducted in the localities to identify high potential

businesses ideas in subsectors and to provide up-to-date, relevant and reliable market

information to serve as pointers for the women enterprises. Information resulting from the

different market studies will support the OSS staff in orienting women entrepreneurs towards

specific business opportunities in different sectors and sub-sectors suitable to the WEDP

members. Complemented by the TVET training, these services will be geared towards

supporting the women MSEs to respond to the existing demand – or stimulating the potential

demand.

46. City MSE Offices and ReMSEDAs will, in conjunction with women entrepreneurs

associations, chambers of commerce and other relevant private institutions, organize events to

promote mentoring arrangements and linkages between entrepreneurs. The private institutions

can identify experienced entrepreneurs who would volunteer to mentor or coach WEDP

members on a regular basis, and co-organize the events to let the women MSEs link with the

resource persons on a mutually agreed basis. Mentors and coaches will go through a basic

orientation on aims and responsibilities. Women entrepreneurs associations, chambers of

commerce and other business associations will be encouraged to create space for networking and

to develop linkages between WEDP participants and other successful entrepreneurs to share

information and experiences.

47. All personnel in the OSSs selected for WEDP will be required to take a course with

topics on competition, markets, doing business and the role of public support to the private

sector. The aim is to create a change in mindset towards an appreciation of demand driven

approaches and an understanding of the benefits of stimulating competition. Moreover, the role

of private initiative and entrepreneurship in growing businesses will be elaborated. This training

will also include customer care, communication, net working and information management to

enable OSS staff to play the key role of entry point for women entrepreneurs seeking information

and advice and enable them to respond to changing demands in a changing environment.

48. In addition to support for skill development, some upgrading of the OSS offices will be

included. This will serve a double purpose: A welcoming and user friendly environment will be

more attractive for users as well as for personnel, and an upgrade in the OSS equipment

(including transport and informational technology) will represent an additional incentive for the

personnel, in order to mitigate the high turn-over in these institutions.

49. Subcomponent 2b: Cluster Development. WEDP will support cluster development

according to international best practice and in a way that spurs income and employment growth

for female owned/partly female-owned MSEs. Industrial clusters are the concentration of

economic activities of a certain sector in a certain location producing similar and closely related

goods. Industrial clusters provide a wide range of advantages that enable enterprises become

13

competitive and profitable. These advantages could be generated either through unplanned

positive externalities such as industry specialization, labor pooling, and knowledge spillovers or

through deliberate joint actions. Such joint actions may include bulk purchase and storage of raw

materials, combined marketing campaign, joint advertising, joint purchase and hiring of

equipment, joint lobbying of local authorities, joint application of credit, etc. Joint actions in

clusters do not emerge automatically and require efforts for the identification and achievement of

shared goals and depend on the gradual process of trust building and coordination.

50. WEDP will support natural clusters within the chosen sectors mainly through facilitating

market linkages and technology transfer and inducing network and joint actions among

entrepreneurs in order to help boost their collective power and innovate their ways of doing

business. The approach will be based on the lessons learned from the UNIDO cluster

development program for MSEs implemented in four natural clusters in Ethiopia from 2005 until

2009. A key principle was to train agents who operate as impartial facilitators among cluster

actors and help them share information and coordinate their endeavors. These facilitators known

as cluster development agents (CDAs) worked on a daily basis in a specific cluster supporting all

stages of technical assistance starting from the formulation of a diagnostic study that help

identify core problems faced in the cluster, to organizing and coordinating collective activities,

promoting and coaching business networks, facilitating linkages with input suppliers, designers,

training institutions and medium and large scale firm, in order to solve the identified problems.

51. It will be the City MSE Development offices in each of the 6 target cities that assess and

identify natural clusters with potential (as identified in the project development objective, see

paragraph 13 above) for WEDP support in their city. The City MSE Office will select natural

cluster(s) that is to be supported under WEDP based on the following criteria:

- natural clusters in the priority sectors selected by the government.

- natural clusters that have potential for rapid growth and employment generation.

- clusters where a good proportion of the members are women and/or sectors where a

lot of women operate in and can potentially be supported as a cluster (like pottery,

spinning, bamboo crafting and food processing).

- clusters that are accessible to various supporting institutions and operate in areas that

have appropriate infrastructure.

52. The cluster training program will be based on the need assessment of the potentially

growth-oriented clusters to be supported under WEDP based on the criteria mentioned above,

and will also include a program for training the CDAs. Mapping of existing clusters and

identification of the various stakeholders and partners that can contribute to the clusters‘

development will be conducted such as input suppliers, output buyers and sectoral associations.

53. The core problems in each cluster will be identified through a diagnostic study and a

work plan will be formulated in order to solve these problems through networking and joint

actions. This will be done by the CDAs, who are staff members of the OSS. Among the various

facilitators working at the OSS, potential candidates will be identified as CDAs by City MSE

Office. The selection of the CDA at the OSS will be based on his/her commitment for intense

pro-active interaction with all local players and institutional partners and flexibility to deal with

various administrative bodies in mobilizing their support for the cluster.

14

54. The training module for CDAs will include the specifics of cluster development, conflict

management and resolution, gender issues, network building and project management and

evaluation. The CDA training will be managed by FEMSEDA and conducted by a qualified

institution or consultant in collaboration with FeMSEDA in-house CDA expertise. Moreover, the

training will provide guidelines on how to best support women entrepreneurs across the value

chain in clusters without jeopardizing the existing forward and backward linkages and networks

with the existing male entrepreneurs in the cluster.

Component 3: Project Management, advocacy and outreach, Monitoring & Evaluation

and Impact Evaluation (USD 1.5 million)

55. Subcomponent 3a Project Management Team (USD 0.35 million) will establish a

National Project Management Team (NPMT) within FeMSEDA under the Ministry of Urban

Development and Construction (MoUDC). The operational responsibility for the project

implementation in the regions will rest with the City Offices, MFIs and TVET colleges using

OSS as the entry point. The existing federal coordinating body for MSE development, the

National MSE Development Council, will be supplemented with representatives of the Chamber

of Commerce and Sectoral Association and the Ethiopian Women Entrepreneurs Association and

will have the overall coordinating role of the WEDP. This will ensure coordination and support

from the multiple sectors involved in the project.

56. Subcomponent 3b Communication, advocacy and outreach (USD 0.35 million) will build

awareness; expand the outreach and understanding and acceptance of WEDP among (1) the

beneficiaries and (2) relevant stakeholders, especially the husbands of the participants who will

receive a tailored information package to ensure consent. Potential WEDP participants will be

given detailed and thorough information about the different components of the program and the

respective application and selection procedures, the aims and the requirements of participants. It

will ensure that the objectives of the project as well as the methods for attaining them are clearly

understood and help increase political and social commitment and contribute to the development

objective of the project. This will be achieved through information workshops, trainings to

federal, regional and woreda level implementers and will include preparation and publication of

materials aimed at raising entrepreneurship awareness.

57. This subcomponent will ensure public access to information to make transparency a

foundation of WEDP. Information about the project components, procedures, complaint

mechanisms, processes (especially criteria for selecting participants) and the role and

responsibilities of each stakeholders will be publicly available at all levels. Microfinance

application procedures, entrepreneurial skills development opportunities, means of benefiting

from the technology and product development processes would be made clear using various

channels including meetings, broadcast through public media such as newspapers, mobile

phones, radio and TV.

58. In addition, this subcomponent will document and disseminate results, lessons learned

and good practices. Successful beneficiaries will be recognized and promoted by publicizing

15

their achievements and contributions to the development process and poverty reduction.

Beneficiary testimonials and other channels will be used to spread success stories, document and

disseminate good practices and lessons learned. Showcasing examples of successful

collaborations between government officials, MFIs, project beneficiaries and other relevant

stakeholders will be used to strengthen partnerships and build strategic alliances among

stakeholders. In addition, it will help build a dynamic and evolving knowledge base to improve

the quality of the project activities.

59. Subcomponent 3c Monitoring & Evaluation (USD 0.3 million): The NPMT will be

responsible for developing and establishing a suitable monitoring and evaluation (M&E) system

to accurately track and assess the progress of WEDP implementation. This includes the

identification of mechanisms and methodologies to continuously benchmark the main inputs and

outputs as well as to measure outcomes on the basis of the objectives and targets specified in the

sections above. In addition, the M&E system will prepare and disseminate quarterly reports as

well as meaningful feedback to the NPMT on the advancement of the activities within the scope

of the project and in compliance with the guidelines and procedures developed in the PIM.10

The

WEDP implementing institutions that will collect data and report progress for the WEDP M&E

system will assign direct responsibility for these tasks to staff with adequate competencies to

ensure the fulfillment of all reporting requirements.

60. The NPMT will contract a highly qualified consultant with documented relevant

experience to development a turn-key WEDP M&E system including the design of required

informational channels based on the processes and procedures that will be outlined in the PIM.

This consultancy will also detail the responsibilities of implementing agencies for accurate and

timely reporting. Although the data collection and reporting on WEDP will be based on the

existing structures and FeMSEDA's own M&E system, the consultant will be required to

highlight selective but necessary additions and adoptions in order to provide the full overview of

WEDP activities and progress in a coherent manner. This may also include the development or

alignment of reporting templates. Issuing WEDP membership in the OSS will provide the

foundation for tracking relevant activities of WEDP entrepreneurs. The consultant will be asked

to provide recommendations on how to integrate data collected by all implementing institutions,

namely FeMSEDA, TVET colleges, OSSs and PFIs in order to create a single comprehensive

database capturing all WEDP activities on participant/member level. This task includes the

identification of a suitable place within the organizational M&E structure of FeMSEDA for

placing this database.

61. The PFIs will not be asked to change their internal M&E systems or reporting practices.

However, the PFIs will be required to commit to detailed reporting standards as a prerequisite for

participating in the WEDP line of credit. PFIs will report necessary WEDP information to the

PMT at the DBE, which in turn submits aggregated and systematized information to FeMSEDA.

The DBE PMT will submit various progress reports, the format and required periodicity of

which will be included in the Operations Manual, including output and outcome indicators (six-

monthly) and financial management reports (FMRs) (quarterly).. The information required from

the PFIs will include but not be restricted to the results indicators. The performance and

implementation progress of Component 1 will be monitored through several indicators, in line

10

The PIM will be updated based on the recommendations of the M&E consultancy.

16

with the World Bank Micro, Small and Medium Enterprise (MSME) Finance core sector

indicators: (1) Direct project beneficiaries (borrowers); (2) volume of bank funding: lines of

credit; (3) volume of bank funding: institutional development; (4) outstanding SME loan

portfolio; (5) number of active loan accounts; (6) portfolio at risk; (7) number of PFIs that have

adopted and implemented institution development plans and project-related credit technologies

and (8) number of trained loan officers. The World Bank team will be working with the DBE

PMT and the consultants to design the required reporting templates in the Operations Manual,

and to ensure that the PFIs are well accustomed to collecting such information from their clients.

The financial performance of the PFIs will be monitored through independent auditors‘ reports

and separate letters confirming adherence to prudential norms. PFIs will be required to provide

the relevant data to the project management.

62. The initial TA provided to the PFIs will ensure that the institutions are well accustomed

to collecting the necessary information from their clients and to aggregate the data in order to

compute the specified indicators. Similarly, TVET is already collecting all necessary information

for the computation of the relevant results indicators, namely (1) number of direct project

beneficiaries (trainees) and (2) percentage of trainees passing the end-of-training competency

test. Additional reporting requirements and monitoring indicators are planned to be specified by

the M&E consultant.

63. Subcomponent 3d: Impact Evaluation (USD 0.5 million): Making impact evaluation an

integral part of the WEDP reflects the desire expressed by stakeholders to systematically

investigate the effectiveness of the project. Such analysis will not only allow for a

comprehensive stocktaking and review of the project's achievements but it will also help to

identify the underlying mechanisms and constraints affecting its mode of functioning.

64. The analysis will be based to a large extent on the quantitative comparison of a treatment

group with an adequate control group. By definition, access to all or a specific subset of the

project components is given to the treatment group only. It is crucial, however, to tailor the

selection of the treatment and the control group to the intervention. This exercise is key to

guarantee statistical identification of changes that can be causally linked to the intervention. The

main challenge will lie in identifying project features that offer the potential to select a control

group sufficiently suitable to allow for the envisaged analysis. Such features include but are not

restricted to capacity constraints, phase-in stages, treatment status randomization and cut-off

rules.

65. The empirical analysis will mainly build on survey data deliberately collected for this

purpose: (1) a base-line survey which will be carried out prior to respondents' exposure to any

relevant intervention activities; (2) an end-line survey which will be administered after the

project has been well into operation and (3) conditional on sufficient implementation a mid-term

survey. The information will be collected from representatives of both the treatment group as

well as the control group. While the empirical analysis will be carried out by impact evaluation

experts from the World Bank, the data collection will necessarily be contracted out to an

organization/firm with extensive experience and capacity in the administration of large-scale

surveys. In addition, an effort will be made to integrate other data sources such as the

administrative records compiled through the M&E system at the OSS, TVET and PFI level.

17

66. Primarily, WEDP is designed to allow participating women to materialize their

entrepreneurial potential through access to microfinance and skills development. The main focus

of the impact assessment will be on standard business performance measures such as sales,

profit, investment and employment which are closely connected to the PDO. Nevertheless, the

impact evaluation offers the opportunity to broaden the outcome space such that additional and

potentially important determinants of the well-being of female entrepreneurs can be analyzed as

well. Typically, these determinants lie outside the scope of customary M&E systems and may

include indicators for intra-household bargaining power and decision-making, expectations and

aspirations.

67. Although the empirical research methodology described above will be at the core of the

impact evaluation component, complementary quantitative or qualitative studies may be

conducted selectively in order to investigate project components or features that are identified as

having decisive influence on the impact of WEDP. Primarily, these studies are planned to be

carried out by highly qualified consultants. The research focus of this component will, however,

further expand to potential pilot interventions within WEDP. Conditional on the suitability of

such interventions for carrying out sound impact evaluation, the aim will be to identify

innovative mechanisms through which female entrepreneurs can be supported. Examples for

such pilot interventions explicitly designed as trials may include compulsory training courses,

training with sole focus on innovation like with business idea competitions and crèches/nurseries

offered to full-time female entrepreneurs.

68. The key performance indicators for the project and its components are listed in the

Results Framework Annex 1. The details of the M&E system and the list of indicators to be

collected will be included in the M&E module of the PIM.

B. Project Financing

Lending Instrument

69. Specific Investment Lending (SIL): Although a significant amount of the loan proceeds

would flow through Financial Intermediaries, the project is labeled a SIL rather than a FIL. OP

8.30 envisages FIL as one of the forms of the Bank‘s possible intervention in the financial sector,

but also recognizes that a SIL can include a FIL component to which OP 8.30 applies. The

amount of resources flowing through FIs does not determine the choice of instrument. FIL is

normally used when the project focuses on development of the financial sector policies and

institutions while a SIL is normally used when the project focuses on a specific set of

investments or a specific target group. The development objective of WEDP is to ―increase the

earnings and employment of MSEs owned or partly owned by women‖. In WEDP, FIs are used

as a means to reach the intended project beneficiaries.

18

Project Cost and Financing

70. The financing institutions of the WEDP are presented in Table 2 below. IDA funding will

be USD 50 million. Although formal decisions on their contributions are still pending CIDA will

contribute USD 10 million and DFID has indicated a contribution of USD 3 million earmarked

for TA for PFIs. Counterpart funding is in kind – staff time, office and training locations etc.

Table 2: Project Cost and Financing.

Project Components Project cost IDA Financing % Financing

Component 1: Microfinance.

Component 2: Entrepreneurial skills, technology

and cluster development

Component 3: Project Management, Advocacy,

Outreach and Impact Evaluation

Unallocated funds

45.4

3.6

1.5

2.5

IDA/DfID

IDA

IDA

IDA

93%/7%

Total Project Costs

Total Financing Required

53

IDA/DfID 94%/6%

C. Program Objective and Phases

71. WEDP implementation will start in the capital cities of Amhara, Tigray, SNNPR and

Oromiya together with Dire Dawa and Addis Ababa. The project will conduct an assessment of

institutional capacity of Harar and the capital cities of the emerging regions to undertake the

WEDP activities in the future. The necessary implementing structures and institutions will have

to be in place and functioning before any WEDP activity can be initiated in these emerging

regions.

D. Lessons Learned and Reflected in the Project Design

72. This will be the first World Bank project in Ethiopia to directly and broadly target the

female owned MSE sector through the use of a line of credit. Lessons learned from lines of credit

(LOC) in Ethiopia and other countries that have been taken into account include:

73. During the project preparation phase the Bank has commissioned a study on Ethiopian

Women Entrepreneurship Capacity Building which included also a demand and supply analysis

related to access to financial services with specific focus on the segment of female-owned MSEs.

The design of the access to microfinance components builds on the recommendations of this

study as well as on other analysis conducted by donors (e.g. KfW and DFID) on the

microfinance sector in Ethiopia.

74. Attention needs to be paid to the use of sound eligibility criteria that meet Bank

guidelines in selecting and monitoring the financial intermediaries to ensure their financial and

operational quality. Drawing on lessons learned from past LOC projects, in the proposed project

19

selection of PFIs will receive special attention, because choosing the right PFIs can be critical for

the success of the project. Sample eligibility criteria and specific support will be provided to the

PMT to strengthen its capacity to carry out the screening and evaluation of PFIs to ensure that

they meet requirements satisfactory to the Bank.

75. Chances of success are enhanced by the incorporating experts‘ services to demonstrate

how banks can meet the financial services needs of the targeted beneficiaries on a commercially

sustainable basis. By design, this component incorporates the conduction of a rigorous and

extensive TA at the PFI level to build capacity, as well as to strengthen PMT‘s capacity in

selecting and advising PFIs in MSE lending.

76. Any line of credit should include clearly defined and transparent indicators for

monitoring implementation progress and overall impact, and provide for an orderly exit

mechanism. Monitoring will be an important aspect of the project and will reinforce PFI

performance monitoring by DBE The indicators will help serve as an early warning system if

remedial actions are appropriate. Also, sufficient flexibility is built into the project with an exit

mechanism in the event that a PFI fails to comply with the project eligibility and implementation

criteria.

77. Inadequate demand from ultimate beneficiaries and lack of bankable sub-projects has, in

the past, led to problems in the implementation of lines of credit in other countries. Project

funding will satisfy only a portion of the demand in Ethiopia which is largely underserved. The

TA will help design a simple subloan appraisal system that will be based on intrinsic business

viability, risk-based lending rates and ability to repay (debt capacity) rather than complex

financial analysis, guarantees and collateral requirements.

78. Several alternatives were considered at various stages of project preparation including: (i)

setting up an independent PIU for managing the line of credit; (ii) a PIU under the central bank;

(iii) a PIU within the Association of Ethiopian MFIs. During the project preparation mission, the

World Bank discussed these options with several stakeholders, including the Vice Governor,

Financial Institutions and Supervision of the National Bank of Ethiopia, the Director of the

Microfinance Supervision Department in NBE, the Executive Director of AEMFI and the

manager of RUFIP (the rural finance intermediation program under DBE). The unanimous

suggestion of the above listed stakeholders was to place a PMT under DBE, as it is best

positioned given its experience in managing the line of credit under the RUFIP program.

79. Regarding the introduction of guarantee schemes, the options considered included

providing guarantees to the commercial banking sector for lending to MFIs, but this has been

excluded as it represents a sector wide intervention that would divert from the specific objective

of lending to MFIs for female-owned/partly female-owned MSE financing. Moreover, several

donors (KfW, AFD and USAID) are already active in this segment. As an alternative, partial

credit guarantees directly to MFIs for lending to the specific target segment of female-

owned/partly female-owned MSEs have been considered. However given the complexity of the

design and the associated risks, it is preferred to invest on the mandatory TA component in order

to help the MFIs to introduce an individual loan product with more flexible collateral

requirements based on taking movable assets as security (or update an existing product

accordingly).

20

80. One Stop Shops have primarily worked to support unemployed youth and women by

grouping them and providing resources and support to facilitate creation of livelihoods. The

approach has been supply driven and the groups are mostly passive recipients of the services.

This may be an appropriate approach for unemployed with low skills, resources and abilities, but

not suitable for supporting growth-oriented individual entrepreneurs. Although data was not

available during preparation missions, the impact on income, employment and strengthening

enterprises was generally believed to be poor. Substantial capacity building will be tailored to the

One Stop Shops to enable them to fulfill an important role defined in the new MSE Strategy – as

information and linking centers for growth-oriented individual entrepreneurs seeking knowledge

and support to grow their business.

81. The public and especially potential WEDP participants need to be informed about the

shifting of responsibilities and tasks of the different institutions through a comprehensive

awareness campaign. Women entrepreneurs met during the field visit believe that One Stop

Shops are not entitled to provide services to individuals, but only to groups. The women

entrepreneurs associations and other private sector institutions will be actively engaged in the

mobilization, awareness creation for women entrepreneurs to be able to access such services.

The increased collaboration with non-state actors such as private businesses and industries are

already recognized as important resources in the TVET strategy, but need to be translated into

practice.

82. The cluster development project undertaken by UNIDO from 2005 and 2009 showed the

need for having sector specific interventions that would indulge the active participation of

stakeholders. Although the focus of the project on the facilitation of joint actions may have

helped address some of the problems faced by the enterprises, it is not clear how such joint

actions would be sustained now that the project has ended and the CDAs have withdrawn. The

diagnostic studies of the four clusters done as part of the project would give WEDP a

background to do further analysis especially by focusing on the problems faced by women

entrepreneurs. This will further be complimented by the Urban Employment; Unemployment

Survey of the Statistical Authority of Ethiopia in order to identify women dominated clusters in

other urban centers of Ethiopia.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

83. Ministry of Urban Development & Construction: The MoUD&C is mandated by MoFED

to be the responsible Ministry to host the WEDP program and have the coordinating role with

other Ministries. The Ministry has restructured recently to include the Federal Micro and Small

Enterprise Development Agency, which has the mandate for overall coordination of the

Government‘s MSE development efforts (MSE Development Strategy 2011) - a role it will also

assume for WEDP (see below).

84. Federal MSE Development Council: Given the complex nature of the project with the

participation of multi-sector ministries, the project will rely on the Federal MSE Development

Council to manage the relationship between the involved federal institutions and ensure timely

21

decisions requiring high-level participation. The council will receive progress reports from the

major implementers of WEDP.

85. The Federal Micro and Small Enterprise Development Agency (FeMSEDA): FeMSEDA

will be responsible for the overall implementation of WEDP and coordination of participating

agencies at all levels - at federal, regional, woreda and kebele levels. A National Project

Management Team (NPMT) comprising of representatives from FeMSEDA will conduct the

daily work to this end. FeMSEDA will work in close cooperation with the DBE, which is

responsible for the day-to-day implementation of Component 1, and with the National TVET

Agency (NTA) and TVET colleges for the implementation of Component 2. WEDP will use the

current M&E system and will fine-tune it to ensure data integration, collection and reporting.

The program will make use of existing structures, institutions and processes, in particular relying

on the Government institutions for MSE support (ReMSEDA, TVET colleges, city MSE

development offices, and One Stop Shops) and the existing MFIs.

86. The Regional Micro and Small Enterprise Development Agency (ReMSEDA): The

ReMSEDAs‘ role in the project will not be in the day to day operations of the project activities.

Rather, it will play a role of repository of monitoring data from the City MSE Development

Offices and will work with these offices to expand the network of MSEs by holding seminars,

arranging networking and mentoring events, acting as a platform for the private sector business

community to interact with the potential MSE to encourage backward and forward linkages.

87. City MSE Development Offices: These city offices will be the main front line agency for

supporting, coordinating and supervising the day to day operation of the OSSs and are mandated

to provide support to the MSEs through linkages with the city TVET colleges, the MFIs and the

clusters. The city offices will compile periodic reports from the OSS‘s and report to ReMSEDA.

The city MSE development office will be responsible to receive and mitigate complaints from

women entrepreneurs.

88. One Stop Shops: The OSSs will be the entry points for the MSEs into WEDP and will

provide basic services like issuing WEDP membership cards to eligible participants, provide

basic support to developing their business ideas and entrepreneurial mindset, supply information

about available support including the WEDP components and where to get additional

information, provide some basic market information, guidance on filling out application forms

for credit and training etc. Based on an initial needs assessment, the OSS staff will recommend

the WEDP participants to apply for (i) the appropriate TVET college training module in

accordance with the revealed needs, and/or (ii) financial products issued by the Credit Officer(s)

located at the OSS, or direct them to the PFI for larger loans or more advanced financial

products. OSSs will report periodically to the city MSE development offices on their

performance and will play a key role in the collection, integration and reporting of M&E data.

89. The National Technical Vocational Educational Training (TVET) Agency: The Federal

TVET Agency will collaborate with FeMSEDA to design specific training modules with detailed

curricula and material for teachers, in a manner that meet the demands of the project participants.

Moreover, the National TVET Agency will ensure that a coherent technical capacity

development program is designed to enable the participating TVET colleges to deliver these

22

modules tailored to the needs of the MSEs. A key element of this will be to train TVET teachers

from the selected TVET centers in the 6 cities (6 in Addis and one in each of the other cities).

90. TVET Colleges: The role of TVET colleges is to train the WEDP participants in technical

and entrepreneurship skills. The colleges will receive the application from the WEDP members

for participation in the different training modules, will undertake the screening of the applicants

to ensure they are qualified for the particular module, and advice them on a training trajectory

suited to their knowledge base. TVET colleges are responsible for all aspects of conducting the

technical and entrepreneurial skills trainings, including collecting and analyzing feedback forms

from the WEDP participants. Moreover, they will inform the OSSs as often as necessary about

the available training modules, eligibility requirements, time-frame for participation, prior

knowledge requirements and commitment fees. They will provide detailed progress reports on

the WEDP participants to the OSSs. In cases where expertise is not available at the TVET

college, the service can be outsourced.

91. Development Bank of Ethiopia (DBE): The Development Bank of Ethiopia has been

selected as the wholesale institution based on its track record of managing lines of credit and on

its management commitment to the project. To carry out the component, DBE will establish a

dedicated Project Management Team (PMT). The PMT will be regularly reporting to the

manager of the Export Credit Guarantee and Special Fund Administration Bureau of the DBE,

which in turn will report once a year to the Federal MSE Development Council and MoFED.

PFIs, when seeking advances, would submit to the Development Bank of Ethiopia information

on the total number of sub-borrowers and total amounts of sub-credits expected over the next 3

months. Based on the submission, DBE would assess the PFI request before submitting to IDA.

DBE would compile this information and present a summary to IDA, inciting the amounts

forecast for each PFI. The PMT will be staffed with qualified personnel capable of satisfactorily

implementing all aspects of the component. Its responsibilities will include:

(i) on-lending to PFIs;

(ii) ensuring effective functioning of the on-lending facility to final borrowers through PFIs;

(iii) on-going monitoring of the PFIs to ensure compliance with project criteria;

(iv) adherence to all fiduciary and safeguard requirements of the World Bank;

(v) monitoring and evaluation based on key project development indicators.

(vi) keeping MoFED and FEMSEDA informed about project implementation progress

through periodic reports;

92. The eligibility criteria for PFIs‘ creditworthiness and internal operating practices and

procedures will be determined by the project in close collaboration with the Government of

Ethiopia and the National Bank of Ethiopia.

93. The PMT will be adequately staffed at all times throughout implementation, strengthened

by the TA for capacity building under the project. The DBE will prepare an Operational Manual

for the component with technical support from the World Bank. The PMT staff qualifications

and responsibilities will be detailed in this manual. Adoption of the Operational Manual,

satisfactory to the Bank, will be a condition of effectiveness of the project.

23

94. PFIs monitoring and evaluation will be undertaken by the PMT, based on clearly

identified benchmarks and performance indicators. PFIs will be required, under the terms of the

Subsidiary Loan and Technical Cooperation Agreements, to submit quarterly reports to PMT

containing both quantitative and qualitative information. PMT will provide implementation

reports on a semi-annual basis to the Bank for the duration of the project.

95. The Ministry of Women Youth and Children’s Affairs (MoWC&YA): The MoWC&YA

will provide the guidance for the advocacy and outreach as outlined above. The Ministry will,

together with the NPMT, develop a detailed advocacy and outreach strategy and facilitate the

implementation of the advocacy, outreach and communication elements of WEDP. Designated

focal people from the respective gender units at the city levels will be trained to ensure

consistency of messages and transparency.

24

Figure 1: Structure of the Implementation Arrangement

25

B. Sustainability

96. The WEDP is designed to maximize sustainability of the support by aiming to fulfill

important GTP aims of entrepreneurship development, employment creation and economic

growth. The WEDP interventions are aligned with the GoE‘s MSE Development Strategy 2011

and the National TVET Strategy 2008. In addition, the program is using existing structures and

institutions to deliver services and support to MSEs, albeit on a gender neutral basis.

Considerable time and effort have been used to ensure the involvement and commitment of all

implementing agencies, and none of the components contain any costly interventions that cannot

be financed by the GoE after WEDP ends.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Rating

Stakeholder Risk M

Implementing Agency Risk M

- Capacity M

- Governance L

Project Risk M

- Design M

- Social and Environmental L

- Program and Donor L

- Delivery Monitoring and Sustainability L

Overall Implementation Risk M

B. Overall Risk Rating Explanation

97. Overall Risk is Moderate. Despite the small scale of WEDP in comparison to the

implementing institutions‘ normal operations, there is a Moderate risk for implementing

agencies since the requirements for delivering WEDP components are more advanced and

different as compared to current operations. Substantial capacity building in all components

mitigates this risk and explains the capacity risk Moderate. Governance risk is very low as

WEDP builds on the Government‘s existing programs and institutions and has strong political

backing at all levels, based on the government‘s commitment the stakeholder risk is Moderate.

Project risk is rated as Moderate since the likelihood of failure of the design is very small as it is

aligned with the Government‘s own design for MSE support. Social and environmental risks are

low as the project has prepared an environment and social management framework which will be

included in the TA for the PFIs. Donor risk is also low due to strong commitment and support of

the partners. Monitoring and sustainability risk is low for reasons mentioned in paragraph 96.

26

VI. APPRAISAL SUMMARY11

A. Financial Management

98. FEMSEDA has never implemented Bank financed programs and requires technical

assistance and training to strengthen its capacity. The FM capacity of the implementing units has

been assessed and provided below. Annex 3 describes FM and procurement risks and provides

action plans to mitigate them.

99. Financial management. The FM arrangements for the WEDP, discussed in Annex 3,

follow the government‘s Channel II fund flow mechanism. The project will have its own FM

Manual, which will describe its budgeting, accounting, internal control, fund flow, financial

reporting, and auditing aspects. The FM manual will also outline the relationship between all

implementing agencies and will be included in the PIM, which will be finalized before

effectiveness.

100. The WEDP will inherit the various strengths of the country‘s Public Financial

Management (PFM) system. Several aspects of the PFM system function well, such as the

budget process, budget classification system, and compliance with financial regulations. The

program will use widely known Peachtree accounting software for recording and generating

financial reports.

101. The Government of Ethiopia has been implementing comprehensive reforms of

public financial management (PFM), with support from development partners, including the

World Bank. The main instrument of reform has been the Expenditure Management and Control

sub-program of the government‘s Civil Service Reform Program. This effort is supported by the

IDA financed PSCAP and PBS II Projects. The PEFA study of 2011 notes that Ethiopia has

made significant progress in strengthening PFM at both federal and regional levels.

Improvements have been noted in budgeting and accounting reform. Although such strengths are

noted, remnant weaknesses in the country‘s PFM system may also impact on WEDP, such as the

shortage of qualified accountants and auditors, delays in reporting, the limited focus of internal

audits, and understaffing of the audit function.

102. The FM risk for the project is rated substantial without mitigating measures but is

expected to be moderate when those proposed actions are implemented. The FM Manual, which

outlines the budgeting, accounting, internal control, fund flow, reporting, and auditing

mechanisms for the project, also documents program-specific FM aspects to be finalized before

effectiveness. Action plans with regard to WEDP FM arrangements are prepared and will be

agreed. Other FM-related covenants include submission of interim financial reports (IFRs) for

the program for each fiscal quarter within 45 days of the end of the quarter; submission of annual

11

For the Technical Description of the project, please refer to Annex 2.

27

audited financial statements and Audit Report within six months at the end of each fiscal year;

and maintain satisfactory FM system throughout the life of the project.

B. Procurement

103. Procurement under the Women Entrepreneurs Development Project (WEDP) to be

financed through IDA and development partners using the multi-donor trust fund administered

by the Bank will be carried out in accordance with the World Bank‘s "Guidelines: Procurement

under IBRD Loans and IDA Credits" dated January, 2011; "Guidelines: Selection and

Employment of Consultants by World Bank Borrowers" dated January, 2011; ―Guidelines on

preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA

Credits and Grants‖, dated October 15, 2006 and revised in January 2011, and the provisions

stipulated in the IDA Financing Agreement.

104. Procurement under WEDP is expected to be carried out centrally at FEMSEDA. The

NCB and Shopping procedures at FEMSEDA would be carried out in accordance with Federal

procurement proclamation which will have been reviewed and modified to be acceptable to the

World Bank and using national SBDs issued by PPA in 2006 subject to the exceptions provided

in Para 85 of the procurement section in Annex 3.

105. The project will finance the four components of WEDP. Most of the financial resource

provided under the project shall be utilized under Component 1 of the project and shall be

allocated to PFIs through the Development Bank of Ethiopia for on-lending to women

entrepreneurs. In the other three components procurement to be conducted under the WEDP

shall provide limited inputs for goods and equipment needed for institutional support;

procurement of small works for the maintenance of one-stop shops of REMSEDAs, procurement

of non-consulting services such as transport, venues for training and workshops for capacity

building needs, as well as consultancy services for technical assistance for capacity building and

institutional support. The procurement of the projects to be provided under these components

will follow procurement procedures of the World Bank‘s Guidelines and IDA Financing

Agreement stipulated in Para 103 above.

106. The procurement capacity assessment was carried out using the questionnaires provided

in the Procurement Risk Assessment and Management Systems (P-RAMS). The procurement

capacity assessment indicates that the agencies reviewed have no experience in handling

procurement under World Bank as well as donor financed projects and have capacity limitations

and systemic constraints. Although there are small procurement units in all the agencies

reviewed and the agencies have introduced public procurement procedures, there are major

procurement performance limitations in all the agencies. In particular, due to the fact that these

agencies or their procurement staff do not have prior experience in Bank financed projects and

the fact that they do not have procurement proficient staff to handle procurement in a

professional manner, the procurement risk of the proposed project is rated ‗HIGH‘ and risk

mitigation measures are proposed as provided in the procurement section of Annex 3.

28

C. Social and environment (including Safeguards)

107. The WEDP will only support micro and small enterprises and will not cause large scale

environmental impacts. Most MSEs will either be in the service sector, or in the supply chain.

However, while the expected actions will be small, in the absence of the specific nature of the

MSEs there could be potential impacts related to waste management, agro-processing etc. in this

context the program is considered as category ―B‖.

108. As the MSEs to be financed under the project are not defined, the client has prepared an

Environmental & Social Safeguards Management framework (ESMF) as an instrument to

manage any potential adverse environmental and social impacts. The overall purpose of the

ESMF is to ensure that all activities within the MSEs supported by the project are

environmentally sound and are in compliance with the requirements of pertinent Ethiopian laws

and regulations as well as World Bank environmental safeguard policies (OP4.01) bearing in

mind the characteristics of MSEs development interventions.

109. The implementing agency for the Access to Credit component will be the Development

Bank of Ethiopia (DBE). Under Subcomponent 1b: TA facility, a critical success factor and a

key goal of the project is to build the institutional and human resource capacity of Participating

Financial Intermediaries (PFIs) to effectively service the female MSE client market. In order to

make the credit facility responsive to mitigating adverse environmental and social impacts of

MSEs, PFIs will receive a mandatory, specific, high-quality, technical assistance by an

international consulting firm to help build capacity in Environmental & Social Assessment of the

MSEs. In the meantime, the client has prepared an ESMF as an instrument to mitigate adverse

impacts for MSEs that will seek funding under WEDP. The key stakeholders are: FEMSEDA,

DBE and the participating Micro Finance Institutions, the association of Women Businesses and

the NGOs providing technical support to MSEs. The ESMF has been finalized through

consultation with these stakeholders.

110. The ESMF has been disclosed in country on FEMSEDA website and in Washington at

the InfoShop.

29

Annex 1: Results Framework and Monitoring

Ethiopia: Women Entrepreneurship Development Project

Project Development Objective (PDO):

To increase the earnings and employment of MSEs owned or partly owned by the participating female entrepreneurs in the targeted cities. This will be achieved by: i) tailoring

financial instruments to the needs of the participants and ensuring availability of finance; and ii) developing the entrepreneurial and technical skills of the target group and supporting

cluster, technology and product development for their businesses.

PDO Level Results

Indicators* Co

re

Unit of

Measure Baseline

12

Cumulative Target Values** Frequency

***

Data Source/

Methodology

Responsibility

for Data

Collection

Description

(indicator

definition

etc.) YR 1 YR 2 YR 3 YR 4 YR5

Indicator One: Increase in

yearly average business

earnings

Percentage n/a n/a n/a (Baseline

+30%)

n/a

Baseline

+50%

Baseline /

(Mid-term) /

Endline

Impact

Evaluation

WB Estimated business profit

during last or a

typical

month/Equivalent

measure at

baseline

Indicator Two: Increase in

numbers of full-time and

part-time employees (paid

and unpaid)

Percentage n/a Baseline

+10%

Baseline

+15%

Baseline

+30%

Baseline

+30%

Baseline

+30%

Baseline /

(Mid-term) /

Endline;

Yearly

OSS Yearly

Monitoring

Report

WB;

FeMSEDA

Number of full-

time and part-

time employees

Indicator Three: Increase

in number of hours of

worked for the MSE per

week (paid and unpaid)

Percentage n/a n/a n/a Baseline

+30%

n/a Baseline

+50%

Baseline /

(Mid-term) /

Endline

Impact

Evaluation

WB

Number of hours worked for the

MSE per week/

Equivalent measure at

baseline

INTERMEDIATE RESULTS

Intermediate Result (Component One):

Access to Microfinance.

12 The baseline will be completed six months after project effectiveness.

30

Intermediate Result

indicator One: Direct

Project Beneficiaries

(Microfinance)

x

Number of

supported

loans

0 2,000 5,000 9,000 13,000 17,500 Semi-

Annual

PFIs and PMT

Reports

PFIs and PMT Number of loans

served by the line of credit

Intermediate Result

indicator Two: Volume of

Bank Funding: Lines of

Credit – MSE

x

Amount USD 0 2.2m

USD

7.5m

USD

16m USD 27.7m

USD

42.4m

USD

Semi-

Annual

PFIs and PMT

Reports

PFIs and PMT Cumulative Amounts

disbursed

Intermediate Result

indicator Three: Volume

of Bank Funding:

Institutional Development

– MSE

x

Amount USD 0 1m USD 2m USD 3m USD 3m USD 3m USD Semi-

Annual

PFIs and PMT

Reports

PFIs and PMT Cumulative

Amounts disbursed

Intermediate Result

indicator Four:

Outstanding MSE Loan

Portfolio°

x

Amount USD 0 2.2m

USD

5.3m

USD

8.5m

USD

11.7m

USD

14.7m

US$

Semi-

Annual

PFIs and PMT

Reports

PFIs and PMT Outstanding (not

yet repaid or

written off) amount of the

SME loan

portfolio

Intermediate Result

indicator Five: Number of

active Loan Accounts° x

Number of

loans

0 2,000 3,000 4,000 4,000 4,500 Semi-

Annual

PFIs and PMT

Reports

PFIs and PMT Total number of active SME loan

accounts for all

institutions supported by the

project

Intermediate Result

indicator Six: Portfolio at

Risk - MSE° x

Percentage 5.1% <5% <4% <3% <3% <3% Semi-

Annual

PFIs and PMT

Reports

PFIs and PMT Outstanding (or not yet repaid)

balance of all

loans where payment is late by

> 90 days / Gross

outstanding loan portfolio

Intermediate Result

indicator Seven: Number

of PFIs that have adopted

and implemented

institution development

plans and project-related

credit technologies

Number of

PFIs

0 3 6 8 10 10 Semi-annual PFIs and PMT

Reports


number of PFIs

Intermediate Result

indicator Eight: Number

of trained loan officers

Percentage 0 10% 20% 20% 20% 20% Semi-annual PFIs and PMT

Reports


number of trained loan officers

31

Intermediate Result (Component Two):

Entrepreneurial skills, cluster and technology development.

Intermediate Result

indicator One: Direct

Project Beneficiaries

(Training)

x

Number

entrepreneurs

trained

0 2,000 6,500 11,000 15,500 20,000 Annual Monitoring

Report

TVET Number of

females trained in

business / technical /

entrepreneurship

skills

Intermediate Result

indicator Two: Percentage

of trainees passing the

end-of-training

competency test

Percentage n/a 80%

80%

80%

80%

80%

Annual Monitoring

Report

TVET Percentage of

trainees passing

competency test measured by

TVET /

Equivalent measure at

baseline

Intermediate Result

indicator Three: Increase

in General Business

Knowledge

Percentage n/a n/a n/a (Baseline

+10%)

n/a Baseline

+10%

Baseline /

(Mid-term) /

Endline

Impact

Evaluation

WB Average general

business knowledge index

/ Equivalent

measure at baseline

Intermediate Result (Component Three):

Intermediate Result

indicator One: Data

collection and reporting°

Data set and

report

n/a n/a n/a Baseline

data set

and report

(Midterm

data set

and report)

Endline

data set

and report

Baseline /

(Mid-term) /

Endline

Impact

Evaluation

WB Impact evaluation

deliverables

Intermediate Result

indicator Two: Fully

staffed, trained and well-

functioning OSS

Number of

OSS

0 45 45 45 45 45 Annual Monitoring

Report

FeMSEDA OSS staff present

at full-time basis, training program

completed,

delivering the basic WEDP

services. At least 70% WEDP

members rating

OSS services as satisfactory or

better

Intermediate Result

indicator Three: Establish

an Women

Entrepreneurship

Development Training

Program with fully

operative modules

Number of

TVETS


Report

TVET Training Program

developed for women

entrepreneurs:

with curricula, training material,

trained teachers

and delivering the courses according

32

to demand.

Intermediate Number of

OSS, PFIs and TVETs

reporting according to the

WEDP M&E system.

Number of

institutions


Report

FeMSEDA Adequate and timely reporting

on the indicators

of the M&E system.

33

Annex 2: Detailed Project Description of Components 1 and 2


Component 1: Access to Microfinance (USD 45.4 million)

Overview

1. The Access to Microfinance component will consist of two closely interlinked sub-

components: (i) a Credit Facility in DBE for on lending to Participating Financial Institutions

(PFIs) which in turn will on-lend to female-owned/ partly female-owned MSEs and (ii) a TA

Facility to support: (i) capacity building and MSE loan administration in the PFIs; and (ii)

capacity building of the Project Management Team (PMT) within DBE.

2. The proposed component design follows two guiding principles: on one side removing

the obstacles to access to finance for the segment of women entrepreneurs; on the other side it

aims at using, to the maximum extent possible, existing institutions and services, in order to

avoid useless duplications.

3. The project uses an incentive approach to support MFI up-scaling to supply loans on an

individual basis13

and/or other tailored financial products to female-owned/partly female-owned

MSEs. The incentive approach would combine the provision of appropriate financing

instruments to PFIs (i.e. line of credit) with commitments from participating institutions to

strengthen their lending capability to female-owned/partly female-owned MSEs over time.

Technical assistance will be a mandatory condition for PFIs to access the Credit Facility.

4. The project plans to establish a dedicated PMT under the Development Bank of Ethiopia.

This PMT will act as an MSE finance wholesaler engaged in the business of lending to qualified

PFIs with the specific requirement of on-lending (and providing additional financial products)

only to female-owned/partly female-owned MSEs. The PFIs will engage in the retail distribution

of sub loans to this specific target of MSE clients.

5. Via this two-tier institutional framework, the Access to Microfinance component will

introduce international best practices and promote the engagement in individual lending (vs.

group lending) in providing efficient financial services to female-owned/partly female-owned

MSEs.

6. The institutional capacity of both, the PMT in DBE and PFIs, will be built up by

international consultants with a proven track record. The institutional and human resource

development components of the project are intended to create the culture and lay the foundation

for a wider promotion of financial services to micro and small entrepreneurs throughout the

country.

Sub-component 1a: Credit Facility

13

Although traditional group lending will not be excluded.

34

7. This sub-component will consist of a credit facility in DBE for on lending to PFIs for the

purpose of on-lending to female-owned/partly female-owned MSEs. Despite the distortions

existing in the Ethiopian financial sector, the subcomponent has been designed in compliance

with OP 8.30 requirements (See Attachment 4 to this Annex). The PIU under DBE will provide

medium-term subsidiary loans in domestic currency to PFIs, with maturity from 3 to 5 years in

accordance with the Subsidiary Loan Agreements between DBE and individual PFIs. DBE

would make arrangements for on-lending the funds to the selected PFIs on a monthly or

quarterly basis against the prior month‘s loan book or against a loan demand schedule to be

prepared by the PFI in advance. Once the allocated amount was drawn down the PFI would be

free to recycle the loan as long as it utilizes the funds for supporting female-owned/partly

female-owned MSEs, in conformity with the WEDP guidelines. DBE will assume full credit risk

on the PFIs and PFIs will take credit risk on the final borrowers.

8. Selection of PFIs. The PFIs will be selected in accordance with criteria agreed with the

Bank. The selection criteria (see Attachment 1 to this Annex) will take into account PFI

ownership and financial situation, institutional and management capacity, interest in and

commitment to servicing the female-owned/partly female-owned MSE market, quality of

financial reporting and governance, willingness to strictly adopt and adhere to prescribed policies

and procedures and to utilize the TA facility. Financial institutions that meet the criteria in full

will be eligible for participation in the MF component of the project.

9. Terms of Subsidiary Loan Agreements with PFIs (see Attachment 3 to this Annex).

DBE will on-lend funds to PFIs as lines of credit denominated in local currency, with a maturity

ranging from 3 to 5 years at a proposed interest rate of 8.5/9%.The arrangements will be

reviewed from time to time during implementation to ensure that they remain satisfactory to the

Bank. PFIs will pay back the loans to DBE for reallocation to existing or additional PFIs. If

desired, a PFI may apply for a follow-up loan from DBE for on-lending to the final borrowers,

with the same objectives and principles. Provision will also be incorporated in the SLA to give

DBE the right to halt or slow lending operations by PFIs under this project in the event of poor

performance and/or deterioration in the financial conditions of the PFI.

10. Terms and conditions of MSE sub loans. Sub loans will be for working capital and

investment purposes for growth-oriented female-owned/partly female-owned MSEs. Women

entrepreneurs eligible for applying for the financial products provided under WEDP would be

those women with full ownership of an MSE or who are at least part-owner of the enterprise and

have a growth-oriented business - as assessed by the PFIs. The PFIs will develop their own

assessment criteria and will determine the granting of finance among eligible women

entrepreneurs.

11. Given the already relevant presence of substantial distortions in the microfinance sector,

no minimum or maximum loans sizes will be imposed to PFIs, beyond the requirements

established by the NBE directives. PFIs will determine the interest rate on the MSE sub loans.

This rate will be adequate to cover their costs of borrowing from the DBE plus a reasonable risk-

adjusted spread and a decent profit margin. PFIs will assume the full credit risk on the sub loans.

35

Sub-component 1b: TA Facility

12. A critical success factor and a key goal of the project are to build the institutional and

human resource capacity of PFIs to effectively service the female MSE client market. An

assessment study of selected Ethiopian MFIs conducted in December 2011 revealed a number of

institutional weaknesses which need to be addressed in order to ensure that PFIs are able to

properly utilize funds received through the program and support female-owned/partly female-

owned enterprises with convenient, timely services. In particular, weaknesses were noted in the

areas of cash-flow-based lending techniques, savings mobilization, financial and operational

reporting, risk management and corporate governance.

13. While a substantial amount of TA is being provided to Ethiopian MFIs at present, most

TA is in the form of classroom trainings, with the expectation that participants in the trainings

will be able and willing to implement the proposed techniques and approaches, and further that

they will be able to properly train other staff members. In many cases this expectation has not

been realized. The TA Facility under WEDP intends to overcome the limitations of a training-

only TA model with a more intensive approach in which training is combined with institutional

development, onsite implementation support, and close monitoring of the diffusion of training

initiatives from trainees to other staff.

14. An approach which has been used successfully in previous World Bank projects to

transfer knowledge and skills among institutions involves the rotation of experienced staff

among MFIs. Under this model, several experienced credit staff work with one MFI to train and

supervise other staff for a period of time, after which their employment with the given MFI is

terminated and they are employed by another MFI, where the process is repeated. The objectives

and the related focus areas of the TA will be:

Strengthen lending operations by improving the credit policies, processes and staff

capabilities of participating MFIs, with a special emphasis on individual lending to

women in urban areas

Assist MFIs to mobilize more savings from customers

Improve the frequency, accuracy, and scope of financial and operational reporting

Strengthen the risk management function of participating MFIs

Improve corporate governance through the introduction of best practices in recruitment

and governance policies

15. To this end, under this sub-component, the PMT will benefit from the provision of

services of an independent TA facility set up by DFID and offered by an international consulting

firm to help build the necessary capacity in the PFIs. The TA facility will work with the PFIs in

developing and executing a plan for absorbing and applying international best practices and

credit technologies. New or existing MSE finance departments that will be set up/empowered by

PFIs as a condition of their participation in the project will be the main focus of this TA. The TA

will involve, among other activities, recruiting and training new loan officers, strengthening

lending policies and procedures, putting in place the prerequisites for the accounting, risk

management and management information systems, supporting sub-loan application preparation,

screening and decision-making, and supporting sub-loan monitoring and collections.

36

16. The TA could last for up to a period of 24 months. It is anticipated that eight MFIs will

participate in the program. The TA will be provided to these eight MFIs on a rotating basis in

groups of three. Each MFI, therefore, will receive roughly eight months of support. The

consultant is expected to assign a sufficient number of experts that it can work with three MFIs

simultaneously on a full-time basis for most of the duration of the project. Experts are expected

to spend at least half of their total working days onsite. PFIs will be asked to employ experienced

credit staff as trainers for a limited period of time, after which the MFIs will allow these staff to

be employed by another institution. The consultant will be expected to clarify the details of how

this model works in practice, integrate these staff members in their own training program, and

facilitate the orderly transfer of these employees from one institution to another through contact

with management of the PFIs.

17. PFI will be required to sign a Technical Cooperation Agreement which will be part of the

Subsidiary Loan Agreements.

Component 2: Entrepreneurship Skills, Technology and Cluster Development

(USD 6.1 million)

18. MSEs currently face many challenges including low productivity levels, limited growth

and development driven by the entrepreneur‘s low education and skill levels as well as weak

business development services. Both entrepreneurial and technical skills development are

important aspects of MSE growth.

19. Addressing the capacity gap of MSEs and developing relevant and flexible training

modules and business development services to improve the entrepreneurial and business skills

and the productivity of the enterprises are important interventions especially for growth-oriented

enterprises. Dynamic MSEs provide a competitive edge in many ways by selling their services

and products – as leading subcontractors, as venture firms in their own right, etc. thus

multiplying their impact on economic growth. The different needs of enterprises in their various

stages of evolution in general and the lack of coherent MSE development support approach in

particular, have been found to be key contributory factors to the identified capacity gap facing

WEDP.

20. The entrepreneurial skill gap of the WEDP participants will be identified through an

assessment of the entrepreneur and her business by well-trained TVET trainers. Based on the

results of the assessment, a coherent capacity development plan will be designed through WEDP

for the enhancement of productivity of the MSE, improving the quality of products and services

and supporting creation and further development of business through the provision of training.

There are four types of capacity building offered to WEDP participants namely: i)

Entrepreneurial skills development, ii) Product and Productivity Improvement, iii) Technical

Competence Building, and iv) Technology Development & Transfer. The training and services

will be offered on the basis of demand and will be tailored to the needs of the specific

entrepreneurs and will include class room, workshop and on-the-job training. Offering an

integrated support for the enterprise combining entrepreneurial skills, technical skills and

technology will help overcome wide spread inefficiencies and fragmentation in training

37

programs. It also explicitly addresses the capacity building requirements in all segments of the

development sectors and targets all growth-oriented groups within the MSE classification.

21. Entrepreneurial Skill Development: This entrepreneurship training module will be an

important route for female WEDP members to develop the necessary skills to growth their

business. The entrepreneurship skills development will target recently started MSEs and the

more experienced entrepreneurs with different modules tailored to their different needs and will

be based on the well established business training modules. Several training tools such as CEFE

(Competency based Economies through Formation of Enterprise), KAB (Know About Business),

GMT (Grassroots Management Training) Basic Business Skills that have been widely tested in

Ethiopia and modified to local conditions will be further adapted to the particular group of

WEDP participants. The basic entrepreneurship development module will help WEDP

participants gain self-confidence, develop their creativity, do realistic market assessments,

develop, assess and implement viable business ideas and strengthen their basic business

management skills. The advanced training modules will be developed for the requirements of

those that have already grown their business to employ others and paying them wages. The main

content of these modules will be developed based on best international practice for such training

and international consultants will be needed to this end. It is a key principle for this component

that demand oriented appropriate training packages are developed corresponding to the

requirements of the different MSE types, sizes and growth trajectories, drawing on the

magnitude of international experience.

22. Technical Competence Building: Technical Competence, as it is comprehensively

described in the National TVET Occupational Standard, is said to include the entire range of

knowledge, skills and attitudes necessary to perform a specific job. The Occupational Standard

developed by the TVET Agency is also broken down in to units that describe a set of

―Employable Competences‖. The technical training given in workshops of TVET institutions and

classrooms suited for WEDP participants will support them in acquiring practical experiences

suitable to developing their MSEs.

23. Technology Development and Transfer: TVET institutions state that they are replicating

and transferring demanded, effective, efficient and appropriate technologies, benchmarking

international best practices to the relevant MSEs in order to improve products and services and to

enhance productivity and increase the enterprises‘ competitiveness as per defined quality

standards. These efforts and experiences are useful to technology improvements of the WEDP

MSEs and TVETs could play a role in facilitating technology diffusion.

24. Forward Linkages: To stimulate the WEDP participants‘ ability to develop and expand

their business, several initiatives will be introduced to assess the potential for stimulating

business linkages i.e. facilitating the creation of supplier/customer relationships between the

MSEs and larger companies/organizations. For the purpose of WEDP inter-firm business

linkages are defined as an independently initiated partnership between two or more businesses

along a supply-chain that involves an exchange of products or services from at least one MSE.

These inter-firm business linkages can involve horizontal or vertical linkages along the supply

chain. These inter-firm business linkages provide MSEs with the opportunity to generate

revenues while at the same time raising their standards and productivity. In addition, these

38

linkages provide lead firms and multinationals with the ability to acquire operational advantages

by focusing on core competencies, shortening lead times, reducing costs and increasing local

knowledge. Evidence from other countries has shown a large potential for MSE growth from

such linkages, and WEDP will explore this potential for its participants. 25. In support of such business linkage, cluster activities under WEDP will aim to support

growth-oriented MSEs to develop into natural parts of higher productive value chains. The

Cluster Development Agents (CDA) will support the linking the selected WEDP MSEs to larger

companies to allow for a mutually beneficial partnership to develop. These linkages will be well

planned and continuously monitored to ensure that the identified risks of contract failure are

minimized.

26. Risks to successful inter-firm linkages with MSEs have been identified and are related to

the possibility of contract failure. On the part of the MSE, these risks include the possibility of

commitment failure14

or contract failure as a result of the MSE not meeting the quality, volume

and timing requirements. On the part of the larger companies, these risks are identified as the

possibility of a failure to make payment or a failure to provide the MSE with the agreed upon

training or clarity in product specification. These risks will be mitigated by careful selection of

program participants, i.e., MSEs and larger companies to ensure that the program participants are

committed to fulfilling the responsibilities involved. Moreover, continuous monitoring and

evaluation of the business relationships will be undertaken by the CDAs.

27. A well-planned and carefully executed inter-firm business linkage program could result

in increased business earnings for both parties, lower costs and delivery times for larger

companies, and substitution of imports by domestically produced MSE products resulting in

foreign exchange savings and reduced exposure to pricing volatility caused by future devaluation

of the Ethiopian Birr.

28. Cluster Development: Cluster development programs have become increasingly

widespread tools in fostering innovation and growth of competitive private sectors in developing

countries, including in Ethiopia. As part of the new MSE strategy of the Government of Ethiopia,

cluster development is considered as a main tool for spurring income and employment growth

among enterprises.

29. Industrial clusters are defined as the concentration of economic activities of a certain

sector in a certain location producing similar and closely related goods. Industrial clusters

provide a wide range of advantages that enable enterprises to become competitive and profitable.

The availability of inputs, specialized labor and various services in nearby locations helps reduce

costs of doing business within clusters. The presence of various actors close to each other also

facilitates easy flow of knowledge and information exchange. Moreover, the trust that naturally

develops within clusters helps to provide the basis for joint actions (cooperation) to invest in

common facilities and facilitate smoother commercial transaction, reducing risk and uncertainty.

Industrial clusters typically lead to large markets that enable enterprises operate at a larger scale

arising from the division of labor within a cluster. The available large markets within clusters

also provide consumers greater choice and convenience by reducing search cost.

14

Commitment failure refers to the MSE owner simply not delivering because of a lack of commitment.

39

30. There are two main types of industrial cluster in Ethiopia; natural and government

created clusters. The most common type of clusters in Ethiopia is natural clusters that

spontaneously grow out of the concentration of economic activities based on market forces over

a long period of time. Natural clusters in Ethiopia are mostly found among labor-intensive

manufacturing sectors and are often located in urban centers, rural towns and touristic areas.

Government created clusters that are induced through deliberate policy actions are recent

phenomenon in Ethiopia that have begun to be established starting from 2003 through the

construction of sector-specific working premises.

31. WEDP will support natural clusters within the chosen sectors by promoting the supply of

local and regional services that cannot be provided by the market itself. This will be done

through facilitating market linkages and technology transfer and inducing network and joint

actions among entrepreneurs in order to help boost their collective power and innovate their

ways of doing business.

32. WEDP will follow the cluster development approach of UNIDO on MSEs in natural

clusters in Ethiopia. The experience of UNIDO‘s cluster development approach for MSEs in four

natural clusters in the capital city Addis Ababa and Mekele, Tigray from 2005 until 2009 has

been through the initiation of joint actions among enterprises in the cluster and various

institutions. This was done through agents who operate as impartial facilitators among cluster

actors and help them share information and coordinate their endeavors. These facilitators, known

as cluster development agents (CDAs), were assigned to each cluster and work on a daily basis

on a pacific cluster supporting all stages of technical assistance starting from the formulation of a

diagnostic study that help identify core problems faced in the cluster, to organizing and

coordinating collective activities, promoting and coaching business networks, facilitating

linkages with input suppliers, designers, training institutions and medium and large scale firm, in

order to solve the identified problems.

33. Under WEDP, the City MSE Offices will select natural clusters that will be supported

under WEDP in each of the 6 urban centers according to the following criteria: 1) existing

natural clusters in the priority sectors selected by the government, 2) natural clusters that have

potential for rapid growth and employment generation, 3) clusters or sectors where the majority

or a good proportion of the members are women and 4) clusters that are accessible to various

supporting institutions and operate in areas that have appropriate infrastructure.

34. After the identification of the clusters, the core problems in each cluster will be identified

through a diagnostic study and a work plan will be formulated in order to solve these problems

through networking and joint actions. This will be done by the CDAs at the one-stop-shops.

Among the various facilitators sitting at the one-stop-shops, a potential candidate will be

identified as a CDA by FeMSEDA. The CDA at the one-stop-shops will be selected based on

his/her commitment for intense pro-active interaction with all local players and institutional

partners and flexibility to deal with various administrative bodies in mobilizing their support for

the cluster.

40

35. The CDA will be responsible for identifying cluster players and graphing their linkages.

The cluster players may include enterprises providing the backward and forward linkages,

dealers and exporters, technical and financial institutions, associations, governmental

organizations, etc. The CDA will initiate and arrange sufficient number of interactions within

cluster members and other cluster players. This will be done through various awareness

programs, training sessions and visits to existing clusters in order to aid the process of trust

building among the various stakeholders. Depending on the core problems identified in each

cluster through diagnostic studies, various interventions will be implemented such as setting up

of common sourcing of raw material supplies, mutual credit guarantee, common brand creation,

common testing facilities, increased interaction among the cluster players and utilization of

better technologies, etc.

36. Core types of trainings that will be provided to the selected CDAs will be the followings:

1. Orientation training on cluster and cluster development: This training will help broaden

the understanding of the CDAs on what clusters are and how they work. The common

elements of cluster development process will also be outlined in this training.

2. Trainings on the areas of conflict management and resolution, network buildings and

project management and evaluation.

3. Training on gender sensitive value chain analysis. This training will give guidelines on

how to best support women across the value chain in clusters without jeopardizing the

existing forward and backward linkages and networks with men entrepreneurs.

41

Attachment 1 - Eligibility criteria for selection of PFIs

To participate in the project, and qualify as a PFI, a financial institution will need to meet a set of

operational and financial criteria that have been agreed with the Bank, and to have signed a

Subsidiary Loan Agreement and a Technical Cooperation Agreement with the PMT under DBE.

The Technical Cooperation Agreement will, inter alia, reflect the PFI‘s management interest in

and commitment to servicing the female owned/partly female-owned MSE market, willingness

to strictly adopt and adhere to prescribed policies and procedures and to utilize the TA Facility of

the project.

The PMT will monitor the performance of the PFIs to ensure continued eligibility throughout the

project implementation. In the initial screening, PFIs have been selected according to their

number of borrowers, considering only those MFIs having more than 10.000 clients as of March

2011. Moreover, in order to comply with the OP 8.30 requirements, an international consulting

firm has been appointed to conduct an in-depth due diligence on the pre-selected MFIs to check

their compliance with the following eligibility criteria:

1) The MFI must be duly licensed in Ethiopia and at least two years in operation.

2) MFI‘s owners should be ―fit and proper‖. It must have qualified and experienced

management, adequate organization and institutional capacity for its specific risk

profile.

3) The MFI must be in ―good standing‖ with its supervisory authority (i.e., it should

meet all prudential and other applicable laws and regulations) and remain in

compliance at all times.

4) The MFI must have well defined policies and written procedures for management of

all types of financial risks (liquidity, credit, currency, interest rate and market risk, as

well as risks associated with balance sheet and income statement structures).

5) The MFI must maintain capital adequacy prescribed by prudential regulations (i.e.

minimum capital ratio of 12% computed as ratio of total capital to total risk-weighted

assets).

6) The MFI must have adequate liquidity (i.e. shall maintain at all times liquid assets

equal to 20% of their total deposits).

7) The MFI must have positive profitability and acceptable risk profile.

8) The MFI must classify its assets and off-balance-sheet credit risk exposures (at least

four times per year) and make adequate provisions. It must have adequate portfolio

quality (i.e. an NPL ratio as percentage of total assets not exceeding 8%).

9) The MFI must have adequate internal audits and controls for its specific risk profile.

10) The MFI must have adequate management information systems.

11) The MFI must agree to engage in individual lending to female-owned/partly female-

owned micro and small enterprises.

42

12) The MFI must agree to undergo an intensive mandatory technical assistance which

may require substantial changes to their business model.

43

Attachment 2 - Terms and conditions of Agreement between DBE and the Bank

Compliance with applicable laws and regulations issued by the Ethiopian authorities, as well as

compliance with the prudential eligibility criteria.

For the duration of the project implementation period, submission of an audit report, that is:

(i)prepared in accordance with International Standards of Auditing and International Financial

Reporting Standards; and (ii)has an unqualified audit opinion from a reputable international

auditing firm, except as the Bank shall otherwise agree.

DBE will on-lend the funds under the WEDP Credit Facility to PFIs (selected according to

eligibility criteria agreed with the Bank) using Subsidiary Loan Agreements (SLAs). All critical

conditions of the SLAs are subject to prior review by the Bank.

For the duration of the project implementation period, DBE will maintain the PMT, with

appropriately qualified staff, led by a full-time manager, capable to satisfactorily implement all

aspects of the project.

DBE will monitor the performance of the project on a quarterly basis, using performance

indicators agreed with the Bank and will provide the Bank with semi-annual progress reports, in

a format agreed with the Bank.

DBE will also carefully monitor the performance of PFIs to ensure that they do not have

excessive NPLs and ensuring the adequacy of the MSE loan portfolio of PFIs. Provisions will be

built into the Subsidiary Loan Agreements to allow DBE to apply penalties, such as imposing a

moratorium on processing new subloans (if NPLs exceed XX percent for more than two

successive quarters) until a remedial plan has been approved by DBE, or, in extremis, cancelling

the line of credit to the PFI and demand immediate full repayment of the outstanding balance.

DBE will undertake to maintain and oversee the services of the PMT and not make any changes

without the prior agreement of the Bank

44

Attachment 3 - Terms and Conditions of Subsidiary Loan Agreements (Between DBE and

PFIs)

All Subsidiary Loan Agreements will be subject to prior review by the Bank

The ability of financial institutions to lend to the MSE segment will be assessed prior to the

signing of the loan agreement.

The PFI is and will remain in compliance with applicable laws and regulations issued by the

Ethiopian authorities as well as in compliance with prudential eligibility criteria as

summarized in the table below:

Subsidiary loans will be denominated in Ethiopian Birr (ETB)

Maturity of subsidiary loan will be between 3 and 5 years. Grace periods decided on a case

by case basis

Interest rates from DBE to PFIs will be set in accordance with market principles to ensure

profitability of PFIs

The PFIs will keep MSE subloans funded under the WEDP credit facility separate and

distinct from the rest of their loan portfolios.

If not already existing, the PFI will establish new MSE finance departments at headquarters

and designated branches to manage the MSE subloans under the WEDP credit facility.

The PFI will establish credit committees to approve subloans under this facility

MSE lending performance will be subject to evaluation by DBE (using credit evaluation

guidelines as agreed with the Bank) reflected in DBE‘s Operational Manual

The funds available to PFI will depend on the availability of funds to DBE from the Bank

Sub loans to female owned/partly female-owned MSEs from the PFIs will be made in ETB

Indicator Requirement

Regulatory liquidity ratio (as defined by NBE) At least 20%

Liquid assets (as defined by NBE) to total assets At least 10%

Capital adequacy ratio (as defined by NBE) At least 12%

Single credit exposure limit At most 1% of capital

Aggregate credit exposure to related parties

At most 15% of

capital

PAR 90

At most 5% of gross

loans

Equity investments

At most 20% of

capital

Net fixed assets

At most 50% of

capital

Net income

Positive net income

in at least one of the

previous 3 quarters

45

Maximum sub loan size to female-owned/partly female-owned MSEs will be set on an

individual basis by each MFI in consultation with WEDP consultants, considering market

conditions and the MFI‘s institutional and operational capacity.

The PFI will charge interest rates adequate to cover its cost of borrowing from DBE plus a

reasonable risk-adjusted spread and profit margin.

PFI will be responsible for ensuring that MSE sub-borrowers comply with applicable World

Bank procurement rules as well as Bank policy on environmental assessment.

Remedies and penalties to be applied by DBE in the event that a PFI fails to comply with

requirements.

PFI will retain all documentation relating to sub loans until the end of the project and will

provide regular reports to DBE

In the event a PFI is unable to repay the subsidiary loans, the MSE borrowers will repay their

sub loans directly to DBE

46

Annex 3: Implementation Arrangements


Project Institutional and Implementation Arrangements (USD 1.50 million)

1. Ministry of Urban Development & Construction is mandated by MoFED to be the

responsible Ministry to host the WEDP program and have the coordinating role with other

Ministries. The Ministry has restructured recently to include the Federal Micro and Small

Enterprise Development Agency, which has the mandate for overall coordination of the

Government‘s MSE development efforts (MSE Development Strategy 2011) - a role it will also

assume for WEDP (see below).

2. Given the complex nature of the project with the participation of multi-sector ministries,

the project will rely on the Federal MSE Development Council to manage the relationship

between the involved federal institutions and ensure timely decisions requiring high-level

participation. The council will receive progress reports from the major implementers of WEDP.

3. The Federal Micro and Small Enterprise Development Agency (FeMSEDA): FeMSEDA

will be responsible for the overall implementation of WEDP and coordination of participating

agencies at all levels - at federal, regional, woreda and kebele levels. A National Project

Management Team (NPMT) comprising of representatives from FeMSEDA will conduct the

daily work to this end. FeMSEDA will work in close cooperation with the DBE, which is

responsible for the day-to-day implementation of Component 1, and with the National TVET

Agency (NTA) and TVET colleges for the implementation of Component 2. WEDP will use the

current M&E system and will fine-tune it to ensure data integration, collection and reporting.

The program will make use of existing structures, institutions and processes, in particular relying

on the Government institutions for MSE support (ReMSEDA, TVET colleges, city MSE

development offices, and One Stop Shops) and the existing MFIs.

4. National Project Management Team (NPMT): The NPMT will be lead team for

managing and coordinating the implementation activities on behalf of FEMSEDA. The NPMT

will be headed by a competitively recruited Project Coordinator. The NPMT will be responsible

for carrying out all the listed activities under the responsibility of FEMSEDA, and will report

directly to the Director General of FeMSEDA.

5. Specific responsibilities to be carried out by the NPMT, National TVET Agency, TVET

colleges, city MSE Development offices and the One Stop Shops.

National Project Management Team

(i) Prepares and gets approved annual work plans and budgets for the

implementation of all the components of the project,

47

(ii) Is responsible for having all communication, outreach and advocacy of the WEDP

carried out,

(iii) Manages external expertise and outsourcing when needed,

(iv) Ensures that quarterly project implementation progress reports are submitted to

the FeMSEDA Management and to the Federal MSE Development Council on

time reflecting both financial flows and project implementation progress,

(v) Ensures that monitoring and evaluation activities are carried out on a timely

manner and as designed/planned into the project,

(vi) Ensures that proper fiduciary standards (both for procurement and financial

management activities) are maintained in accordance with World Bank and

Ethiopian Government guidelines,

(vii) Maintains proper and complete record keeping for all project implementation

activities as well as procurement and financial management,

(viii) Produces annual financial statements on a timely bases and ensures audit

activities are carried out by independent auditors as specified in the FM and PIM

Manuals,

(ix) Closely follows up day-to-day operation of the implementation of the project with

all implementing agencies,

(x) Ensures that problems encountered in the implementation project activities at all

levels are promptly addressed, and

(xi) Works closely with the World Bank project implementation team to ensure the

achievement of the project development objectives.

6. Regional Micro and Small Enterprise Development Agencies (REMSEDA‟s):

ReMSEDA‘s role in the project will not be in the day to day operations of the project activities.

It will act as repository of monitoring data from the City MSE Development Office, and will, in

close collaboration with the City Office, be responsible to expand the network of MSEs by

holding seminars, arranging networking events, acting as a platform for the private sector

business community to interact with the potential MSEs to encourage backward and forward

linkages. The ReMSEDA‘s will promote the WEDP and act as champions of the program in their

respective regions.

7. City MSE Offices will have full responsibility and accountability for the performance of

OSS‘s under them. They will help the preparation of annual work plans and budgets, review

periodic performances of the OSSs through the periodic reports submitted to them and ensure

that these reports are properly prepared and submitted on time for review both to them,

ReMSEDA and FeMSEDA. In addition they will provide technical backstopping and monthly

operating budget to the OSSs. The OSS will receive the operating funds directly from the City

MSE Offices. In close collaboration with ReMSEDA the City Office will be responsible to

expand the be responsible to expand the network of MSEs by holding seminars, arranging

networking events, acting as a platform for the private sector business community to interact

with the potential MSEs to encourage backward and forward linkages. These offices are also

responsible for carrying out the market assessment that will be used in the OSS as an input for

WEDP participants. The gender focal point at the City MSE Office will be responsible for the

advocacy and outreach activities.

48

8. OSSs are the initial contact or entry points for the MSEs. They are responsible for

promotion of the WEDP activities to all MSEs in their area of operations. The OSSs will

maintain a welcoming and efficient work atmosphere where the MSEs will be received and

provided with the appropriate guidance throughout the support process. Specifically, the OSSs

will be responsible for:

(i) Registering the WEDP members and issue a membership card,

(ii) Carrying out outreach work in their respective areas to promote the WEDP to all

interested women participants,

(iii) Act as a knowledge and information center, have the overview of MSE support and

provide relevant information upon demand,

(iv) Providing guidance to women MSE owners about the process required to benefit from

the project,

(v) Carrying out preliminary assessment of the MSEs that apply in order to help them to

determine gaps in their operations in the areas of basic business skills, entrepreneurial

skills, technical skills and information about market access,

(vi) Providing support in the development of business ideas for the WEDP members that

addresses the challenges to growth that their MSEs are facing,

(vii) Identifying and suggest training needs of the women entrepreneur and coordinating

the delivery of the requisite training(s) through the TVET institutions,

(viii) For women entrepreneurs interested in credit, the OSS staff will direct them to the

MFI credit officer for the assessment of the business ideas and the creditworthiness of

the applicant,

(ix) Following up and supporting the MSEs in the implementation of the business plan

and providing them with further support as required,

(x) Preparing annual work plans and budgets and having it reviewed and approved by the

appropriate authority,

(xi) Preparing quarterly and annual performance reports on time for review by the

relevant City MSE Offices,

(xii) Ensuring that baseline information and data are collected, recorded and compiled

from the MSEs at the point of issuing the membership card,

(xiii) Conducting periodic monitoring and evaluation of the performance of the MSEs and

gathering output and outcome data required for M&E, and

(xiv) Maintaining and sharing proper records for all applicants where all data and

information can be retrieved for reporting and M&E purposes.

9. The National TVET Agency: The NTA will work in close collaboration with

FeMSEDA to design a specific, customized and coherent technical/capacity development

training program to meet the needs of the project clients in a flexible manner to enhancement

their productivity, improve the quality of their products and services and support the creation and

further development of businesses. The NTA will ensure that two levels of trainings will be

provided to the MSE‘s: Training of Trainers and direct training to the MSE‘s through TVET

colleges. As the WEDP mostly caters for exiting MSEs that have business experience and are

owned by adult women, the training to be provided to MSEs will be differentiated from that of

the training of youth aspiring to become MSE businesspersons. In cases where expertise is not

available at the NTA, the service will be outsourced.

49

10. TVET Colleges: TVET colleges will conduct the required technical and entrepreneurial

trainings. They will provide detailed progress reports to the OSSs and the FTA. In cases where

expertise is not available at the TVET colleges, the service will be outsourced. Specifically, the

TVET colleges will be responsible for the following:

(i) Prepare annual work plans and budget requirement for carrying out the planned

activities,

(ii) Undertake the assessment of training needs for MSEs disaggregated by type and level

of training,

(iii) Provide support to MSEs in the area of technology transfer and product development;

and

(iv) Prepare quarterly and annual reports both on performance, (types of trainings

provided, number of MSEs benefitted) and use of project funds.

Financial Management, Disbursements and Procurement

Financial Management

Introduction

11. A financial management assessment was conducted in accordance with the Financial

Management Practices Manual for World Bank financed investment operations issued by the

Financial Management Sector Board on March 1, 2010 and supporting guidelines. The objective

of the assessment was to determine whether the implementing entities have acceptable financial

management arrangements to ensure: (a) that funds are used only for the intended purposes in an

efficient and economical way; (b) that accurate, reliable, and timely periodic financial reports are

produced; and (c) that entities‘ assets are safeguarded.

12. An effective financial management system is vital for the project because of the need to

deliver services quickly to a wide variety of stakeholders. The objectives of the project‘s

financial management system are to: (a) ensure that funds are used only for their intended

purposes in an efficient and economical way while implementing agreed activities; (b) enable the

preparation of accurate and timely financial reports; (c) ensure that funds are properly managed

and flow smoothly, rapidly, adequately, regularly, and predictably to implementing agencies at

all levels; (d) enable project management to efficiently monitor project implementation; and (e)

safeguard the project‘s assets and resources.

13. In conducting the assessment, the Bank team visited FEMSEDA, DBE, Oromia

REMSEDA, SNNPR REMSEDA and Addis Ababa REMSEDA.

A. Project background

14. The FM arrangements for the project will follow Channel II fund flow arrangement of the

government where the parent implementers of the project, FeMSEDA and DBE will be

responsible for receiving the donor transfers and making direct transfers to MFIs, city agencies

50

and one stop shops that are involved in implementing the project. The program will have its own

Financial Management Manual (FMM), which will be included in the Project Implementation

Manual and will describe the budgeting, accounting, internal control, fund flow, financial

reporting, and auditing aspects of the project for both FEMSEDA and DBE. The manual will

also outline the relationship between all implementing agencies. The FM arrangements described

in the FM Manual will cover all program funds including those financed by the Government of

Ethiopia.

15. The PIM, including the FM Manual, will be an effectiveness condition.

B. Implementation arrangements

16. Component 1 (Access to micro finance) will be implemented by DBE. The export credit

guarantee and special fund administration Bureau within DBE is the responsible department for

WEDP. Component 2 (Entrepreneurial skills, technology and cluster development) and

Component 3 (Project Management, advocacy& outreach, Monitoring & Evaluation and

Impact Evaluation) will be implemented by FEMSEDA. Accordingly both DBE and

FEMSEDA will be responsible for the financial management of WEDP for the components they

are handling.

C. Country issues

17. The PFM reform process in the Federal Democratic Republic of Ethiopia has been on-

going for many years, through the Expenditure Management Control Program (EMCP) and the

Public Sector Capacity Building Program (PSCAP). These programs have focused on

strengthening the basics of PFM systems: budget preparation, revenue administration, budget

execution, internal controls, cash management, accounting, reporting and auditing. The reforms

are still on-going. However, with the basics increasingly in place, the Government is beginning

to increase its focus on strengthening the linkages between public policy objectives and

expenditure. In this context a programming/performance budgeting framework is being

developed by MOFED.

18. The latest PFM study for Ethiopia was completed in May 2011 using the Public

Expenditure and Financial Accountability (PEFA) PFM performance measurement framework.

The 2010 PFM assessment only covered the federal government in form of Ministries and

Agencies as well as five regions. The PFM study notes that Ethiopia has made significant

progress in strengthening PFM at both federal and regional levels. Improvements have been

noted in budgeting and accounting reform. The credibility of the budget improved during

2006/07-2008/09 (EFYs 1999-2001) relative to the three years covered by the first PEFA

assessment (2002/03-2004/05; EFYs 1995-97). The predictability in the composition of

expenditure improved sharply, the variance in excess of the aggregate deviation falling to 5.7

percent. The main reason for the improvement appears to be strengthened in-year predictability

in the availability of funds for the commitment of expenditures. Improved predictability meant

that budget institutions could more confidently plan ahead for execution of their budgets, thereby

increasing the likelihood that their actual expenditures would reasonably closely match their

originally approved budgets. The budget is reasonably realistic and is reasonably implemented as

51

intended, and performance in this regard has improved marginally since the period covered by

the first PEFA assessment.

19. Comprehensiveness and transparency improved somewhat during the period covered by

the 2010 PEFA assessment. Notable areas of improvement are: Increase in the amount of

budgetary documentation submitted to House of Peoples‘ Representatives (HPR), strengthened

reporting on donor projects and programs, improved transparency in inter-governmental fiscal

relations, through greater timeliness in the provision of information to regional governments on

the size of the budget subsidies that they will receive, and improved access by the public to key

fiscal information through audit reports. A key challenge remaining to be addressed is for the

Government to make available to the public information on the incomes and expenditures of

extra-budgetary operations. The quality of debt management improved relative to the 2007

PEFA assessment, but the periodicity of reconciliation remains annual.

20. Due to the increased coverage of the internal audit function in terms of numbers of

budget institutions, the additional experience gained by internal auditors since the previous

assessment, increasing focus on systems audit, and increasing management response to audit

findings. Further strengthening of the internal audit function is a key challenge for the future.

Overall controls in public procurement are satisfactory with a fair degree of justification for the

use of less competitive procurement methods and the existence and functioning of a good

procurement complaints mechanism. A key issue remains the insufficiency of reporting on

procurement according to the numbers of contracts and the type of procurement method. Bank

reconciliations continued to be carried out in a timely fashion for all Treasury-controlled

accounts, as were reconciliation and clearance of suspense accounts and advances. The full roll-

out of IBEX has helped to strengthen the quality of in-year budget execution reports, Annual

financial statements prepared for 2006/07-2008/09 (EFYs 1999-2001) included information on

revenue and expenditures, financial assets and liabilities, but excluded information on donor-

financed projects and programs, A limiting factor continued to be the use of non-IPSAS

compliant accounting standards; compliance with IPSAS would require disclosure of information

on donor-financed projects and programs.

21. Overall performance of external audit has improved due to increased coverage (to 51

percent of 2008/09 budgetary expenditures from 23 percent of 2006/07 budgetary expenditures)

and a lessening of the time needed to audit annual financial statements. Audits conducted by

OFAG generally adhere to INTOSAI auditing standards and focus on significant issues.

Developments being planned at the time of the 2010 PEFA assessment indicated further

strengthening of external audit in terms of both dimensions and a plan to strengthen follow-up.

Project financial management arrangements

Budgeting

22. The Ethiopian budget system reflects the fiscally decentralized structure. The budget is

processed at the federal, regional, zonal (in some regions), woreda, and municipality levels.

52

Budget procedures are documented in the Budget Manual.15

The federal budgeting process

usually starts by issuing the budget preparation note to the Budgetary Institutions. The Budgetary

Institutions prepare their budgets in line with the budget ceilings and submit these to MoFED

within six weeks following the budget call. The budgets are reviewed initially by MoFED and

then by the Council of Ministers. The final recommended draft federal budget is sent to

Parliament in early June and is expected to be cleared at the latest by the end of the previous

Ethiopian Fiscal Year.

23. Budget preparation at FeMSEDA begins from the different units under its administration.

Each unit prepares its budget and submits it to FeMSEDA‘s planning department. Budgets are

based on valid assumptions and developed by knowledgeable individuals. Actual expenditures

are compared with the budget for significant variances which are examined by the head of

finance.

24. FEMSEDA will be responsible for preparing the annual work plan of the program in

consultation with National TVET Agency and City MSE development offices. The overall

budget for WEDP will be consolidated and submitted to the Director General (DG) of

FeMSEDA. The budget should be prepared for all significant activities in sufficient detail to

provide a meaningful tool with which to monitor subsequent performance. After approval by the

Director General of FeMSEDA the budget will be submitted to MoFED for final approval. The

WEDP budget for parts implemented by FeMSEDA will be proclaimed in the budgets of the

Federal government in the name of FeMSEDA.

25. DBE has a planning department responsible for the budgeting process. All units are

involved in the process of budgeting which prepare individual unit budgets, submit to the

planning department which compiles and consolidates the master budget for discussion with

management. The budget is subsequently forwarded to the Board of Management for approval.

After approval it is sent to PFEA (Public Financial Enterprise Supervising Agency) a directorate

under the Prime Minister‘s Office which regulates the bank. The bank prepares three types of

budgets (Capital budget, Recurrent Budget, and the Loan performance budget). Performance is

monitored on a quarterly basis and variances must be justified. These quarterly reports are

presented to the board to evaluate performance. The Loan performance budget is used to budget

credit activities at the beginning of every fiscal year to determine how many loans to approve,

disburse and monitor performance of these loans.

26. DBE will be responsible for preparing the annual work plan and budget for component

one. The projects budget will form part of the annual budget of DBE and needs to be approved

by the board of directors as well as PFEA.

27. The detailed budget should be disseminated to all implementing agencies at all levels for

proper follow-up. Actual expenditures should be compared to the budget on a quarterly basis and

explanations should be sought for significant variations from the budget. The FM Manual will

describe detailed procedures for budget preparation and approval.

15

Revised Federal Budget Manual

53

28. Detailed WEDP work plans, project costs, and procurement plans are being developed

and will be finalized and agreed by effectiveness. This information is the basis for the project

costs included in the PAD (which will also be reflected as the program budget in financial

reports). Activities and costs noted in the work plans and budgets would be ―eligible

expenditures‖ under the project.

29. The government‘s regular budget execution/utilization reports and IFRs as well as

progress reports will be used for budget monitoring. These reports are discussed in the section on

Financial Reporting below.

Accounting

30. The Ethiopian Government follows a double entry bookkeeping system and modified

cash basis of accounting, as documented in the government‘s Accounting Manual16

and these

procedures have also been implemented in many regions. The main elements of the accounting

reform are the adoption of (a) a comprehensive Chart of Accounts consistent with the budget

classification; (b) a system of ledgers accommodating all types of accounts (including transfers,

assets, liabilities, and fund balance in addition to revenues and expenditures); (c) double entry

bookkeeping (thus, a self-balancing set of accounts); (d) a system of control for budgetary

commitments (recording commitments as well as actual payments); (e) modified cash basis

transaction accounting; and (f) revised monthly report formats to accommodate double-entry

bookkeeping and commitment control and permit better cash control. The government‘s

Accounting Manual provides detailed information on the major accounting procedures.

31. As noted, WEDP will have its own FM Manual, which will be prepared under the scope

of the country‘s accounting system with some modifications to specifically align it to the

WEDP‘s needs. The manual should incorporate mechanisms for properly recording transactions,

including the allocation of expenditures in accordance with the respective project components,

disbursement categories, and sources of funds. The Chart of Accounts for the WEDP should thus

be developed to adequately and efficiently account for transactions and to report on project

activities. Monthly, quarterly, and annual reports will be produced directly from the financial

management system and thus a well-developed Chart of Accounts is crucial.

32. Accounting centers for program funds will be (i) FEMSEDA, (ii) DBE and (iii) PFIs.

These institutions will maintain accounting books and records and prepare financial reports in

line with the system outlined in the FM Manual. The FM Manual must be reviewed and cleared

by the Bank before the project becomes effective. Arrangements for consolidation of WEDP

financial information are discussed under Financial Reporting below.

33. Fund for operating cost of One Stop Shops (OSS) will be transferred by FeMSEDA in the

form of advance to city agencies that will ensure that the money is spent accordingly and submit

the relevant documents to FeMSEDA. After verifying the payments and documents submitted by

city agencies, FeMSEDA will pass the necessary accounting entries. The FEMSEDA and DBE

16

FGE Accounting system, Volume I

54

will retain all accounting documents on a permanent basis in a defined system that allows

authorized users easy access.

34. Information system. For normal government funds, FeMSEDA uses an Integrated

Budget and Expenditure (IBEX) accounting system that is operational at the federal level and in

most regions. DBE will use its Globus banking software application T‘24 (terminals) integrated

system to prepare the project accounts. Since WEDP follows the Channel II mode of fund flow,

it will use the Peachtree accounting software mainly for FeMSEDA which is widely used in the

country and will simplify the posting of transactions and generation of reports. The software

should be installed by a professional with finance staff trained in its application. The software

should be used to its maximum potential, which includes features to safeguard the

confidentiality, integrity, and availability of data. DBE will continue to use its own accounting

system.

35. The due diligence consultancy report on MFIs indicates that the MIS of Ethiopian MFIs

are characterized by limited availability of computers in the branches, extensive use of manual

accounting, limited networking capacity and connectivity, and slow, sometimes inaccurate

reporting of financial and operational data. Peachtree accounting software is currently used by

many MFIs, but typically only at the head office level after aggregating data compiled manually

in the branches. Peachtree is not designed for financial institutions or large organizations and is

thus not an optimal solution. A few MFIs use core banking software purchased from vendors or

internally-developed Excel models for accounting. Most of the MFIs indicated that they would

like to purchase an advanced core banking solution in the future, although many cannot afford it.

A few are in the process of selecting a vendor and are planning to make a purchase in 2012.

36. Capacity building/training. Focused and continued FM training is essential for the

success of WEDP. The training responsibility for the project will be borne by the government,

FEMSEDA, DBE and Development Partners. The World Bank will train project staff about

Bank FM policies and procedures and will involve the project during the different trainings that

it conducts both at the federal and regional levels. FEMSEDA and DBE will hold the

responsibility to continuously train its accounting staff. Areas for which training is required

include the FM Manual, Peachtree accounting software, Bank policies and procedures, document

filing mechanisms, and preparation of interim financial reports, among others.

37. Staffing. FEMSEDA‘s finance department is currently staffed with 6 personnel. The

positions of the personnel are classified as one finance head, one payment and settlement senior

officer, one revenue and budget control senior officer, two accounting clerks and one cashier.

The finance head has BA degree in accounting and 9 years of experience. The senior finance

officers have BA degree in accounting and 8 years of experience. The accounting clerks have

Diploma in vocational field with 9 years of experience. The finance staffs are trained once in a

while at the management institute but there is no pre defined training policy laid out in the

Agency. Since it is for the first time that the Agency will be implementing Bank financed

project, there is a great need of training the finance staff on Bank procedures before the launch of

the project. It is recommended that the project needs to recruit or assign a finance officer well

versed with project handling and World Bank procedures to facilitate the work of the project

before the project becomes effective.

55

38. DBE has a total of 73 staff in the Finance and accounts management process. This

department is divided into 4 teams which is; (i). The Domestic Banking Team responsible for

delivering baking services and the capturing of transactions into the financial system. (ii).

Accounts management and reconciliation team, responsible for checking transactions processed

under the domestic and fund management teams. They check the reliability and accuracy of the

transactions and do the reconciliations for the inter branch accounts. (iii). Management

Information system Team responsible for producing reports, analyze financial information,

update the credit reference bureau and forward reports to the strategic planning and development

effective process. (iv). Fund Management Team responsible for mobilizing funds in form of

Ethiopian Government Savings Bonds, Corporate Bonds from corporate investors, priority sector

loans and are responsible for managing the resources at optimal level. The staffing is deemed

adequate, most staff have a BA in accounts, 2 staff including the head have a Masters in

Business Administration. For this project the bank will appoint one staff to be focal points for all

issues pertaining to the project. The staff will have to be trained in World Bank Financial

Management and Disbursement guidelines and this training will be done by the Bank FMS.

Internal Controls

39. General issues. Internal control comprises the whole system of control, financial or

otherwise, established by management to: (a) carry out project activities in an orderly and

efficient manner; (b) ensure adherence to policies and procedures; (c) ensure maintenance of

complete and accurate accounting records; and (d) safeguard the project‘s assets. Regular

government systems and procedures will be followed, including those relating to authorization,

recording, and custody controls.

40. All implementing agencies are using those control procedures prescribed by the

government. These procedures are adequate to ensure authorization, recording and custody

controls. The project‘s internal controls—including processes for recording and safeguarding of

assets, segregation of duties, procedures for periodic accountability, fund flow arrangement,

auditing, and so on—will be documented in the FM Manual.

41. During the assessment, it has been noted that FEMSEDA has adequate segregation of

duty, monthly bank reconciliations and proper asset management.

42. The internal control system for DBE is strong and robust, there are clear lines of

communication, segregation of duties, procedural and policy manuals, clear authorization,

transactions are reconciled on a daily basis, bank reconciliations are regularly done however

there is a general capacity issue as far as staff are concerned and a number of weaknesses are

identified within the processes such as receiving incomplete loan applications, poor document

screening, incomplete project appraisal reports, missing conditions of appraisal, approving loans

on the basis of the incomplete appraisal reports, in some cases failing to prepare loan contracts as

per decision of the loan approval team, failing to maintain the required debt-equity, long delays

in to block equity, releasing loans before preconditions are fulfilled, disbursing loans without

verifying the utilization of equity or previous disbursements, failure to conduct proper follow up,

56

long outstanding receivables and payables, long outstanding un-cleared effects, lack of source

documents, absence of subsidiary accounts for some assets, high differences between the General

Ledger and Subsidiary ledgers, missing documentation etc. During the course of implementation

follow up on these issues will be made to monitor rectification. The bank has a risk management

team that assesses the risk and prepares a risk profile which is updated annually.

43. Internal audit (post audit reviews). The government civil service reform program is

building the internal audit capacity in the country. So far, Internal Audit Manuals have been

issued and training has been provided to internal auditors. The improvement in internal audit has

been recognized in recent diagnostic work, such as the FA and PEFA. The internal audit

department of FEMSEDA uses the Internal Audit Manual issued by MoFED. The department is

currently staffed with three internal auditors. The auditors conduct their review very frequently

and submit their reports to MoFED, MoUDC and the general director of FEMSEDA.

44. DBE has an independent internal audit department reporting to the Board of

Management. It has a total number of 24 staff including 1 Internal Audit Manager (Bsc in

Agriculture Economics), 2 Principle Auditors (Bsc in Agriculture Economics), 7 auditors

financial (BA Accounting), 7 auditors operational (Bsc in Economics and Management), 1

Auditor BSC IT, 1 Auditor Civil Engineering, 1 Auditor (LLB). They are divided into two

teams; one team is responsible for the operational audits (Process audit, procurement, risk

analysis, property management, IT Audit, legal and audit) the second team is responsible for

financial related audit and international banking. The teams are guided by the internal audit

charter formulated specifically for the bank. It provides the framework for operations and the

enhancement of the independence of the internal audit functions within the bank. They prepare

an annual plan which is followed throughout the year. Quarterly reports are prepared and

submitted to the President of the bank. The reports examined reveal internal control weaknesses

within the bank.

45. Based on the due diligence report on MFIs done by the Bank, Internal auditors at

Ethiopian MFIs perform both ―pre-audit‖ financial and operational control activity as well as the

traditional internal audit. Pre-audit control activity may include checking ledger entries as they

occur or visiting clients during the loan appraisal phase. In some cases auditor approval is even

required for loan disbursal. The internal audit manuals that were reviewed tended to be much

more theoretical and/or outdated than the other manuals. At a majority of MFIs, the head of

internal audit reports to management, although MFIs are increasingly requiring dual reporting to

both management and the board of directors. Although various types of employee fraud have

been encountered by the MFIs, the frequency and amounts of losses do not appear to be

excessive in most cases.

46. The internal audit departments of FEMSEDA and DBE will incorporate WEDP in their

annual work program and will conduct post audit reviews. The findings arising from the review

will be communicated to the Project management for proper follow up and action. The Bank will

review whether timely action has been taken by the project team. The Bank will also through the

various supervision missions, look into the internal audit reports to ensure that the control

environment is still intact.

57

FINANCIAL REPORTING

47. FEMSEDA‘s finance department prepares the Agency‘s financial statement as per the

government requirements issued by MoFED. Modified cash basis of accounting is used to

prepare the accounts. FEMSEDA is expected to prepare and submit the necessary report to

MoFED on a monthly basis. The content of the reports include the trial balance, revenue details,

receivable/payable details, transfer details, expenditure details, bank reconciliation with the Bank

statement , and monthly transaction detail.

48. Financial reports will be designed to provide high-quality, timely information on project

performance to project management, IDA, DPs, and other relevant stakeholders. Peachtree

software is capable of producing the required information regarding project resources and

expenditures. Duties of each implementing entity in preparing regular financial reports are

explained below:

It is the responsibility of FEMSEDA to prepare consolidated quarterly unaudited IFRs,

consolidate annual accounts, and facilitate the external audit of the consolidated accounts

for the components implemented by FEMSEDA. The report must be submitted to the

Bank within 45 days of the quarter end.

It is the responsibility of DBE to receive and review reports from PFIs and prepare

consolidated quarterly unaudited IFRs, consolidate annual accounts, and facilitate the

external audit of the consolidated accounts for component one. The consolidated IFR

must be submitted to be the Bank within 45 days of the quarter end.

Each PFI must prepare its quarterly reports and submit the same to DBE within 30 days

of the quarter end.

Each beneficiary of the sub credit is only expected to maintain basic book of accounts

showing how much has been received from the PFI under this project, how much has

been spent for the approved sub projects and the remaining unutilized balance. This

report must be submitted by each MSE to the respective PFI on quarterly basis. In

addition, each MSE is expected to properly retain the relevant source documents such as

receipts and invoices for the expenditure they incur.

49. Given the elevated number of loans to women entrepreneurs that PFIs are expected to

disburse to beneficiaries and their relatively small average loan size, the women entrepreneurs

will not be required to submit any formal financial reporting for World Bank's FM disbursement

purposes. A more simplified accountability mechanism is proposed to ensure that funds have

been used for productive and intended purposes. Under the proposed mechanism, PFIs will be

required to obtain from each sub-borrowers summary information on how much funds were

received and what these were spent on. This information would be retained by PFIs and made

available for Bank supervision and audits. Based on this information, a summary report will be

prepared quarterly by each PFI and sent to DBE. This report would comprise a list with (as a

minimum) the name of the sub-borrowers, the amount given as sub-loan to the sub-borrower, the

amount spent by the sub-borrower, the balance left unspent, and the overall use of funds by the

sub-borrowers. This requirement will be part of the sub-loan agreement between DBE and the

58

PFIs. DBE will keep these lists and present a summary report to the WB (attached to the

disbursement letter of the project), duly certified by DBE management. Based on that summary

report, WB supervision (and auditors) will perform random checks to verify the correctness and

accuracy of the reported information.

50. Each of the implementing entities is required to submit their quarterly Interim Financial

Reports to DPs within 45 days of the quarter end.

51. For monitoring purposes, both FEMSEDA and DBE will send their financial reports to

MoFED and MoUDC. DBE and the participating TVETs will also send their reports to

FEMSEDA.

52. Formats of IFRs developed by FEMSEDA and DBE were agreed with IDA during

project negotiations, and the same should be included in the FM Manual. The format of IFRs will

be produced from the accounting system (the report should not compile transactions from

separate systems, as this procedure could lead to inefficiency and inaccuracy). The IFR will

include:

(a) A statement of sources and uses of funds and opening and closing balances for the

quarter and cumulative.

(b) A statement of uses of fund that shows actual expenditures, appropriately classified

by main project activities (categories, components, and sub-components). Actual

versus budget comparisons for the quarter and cumulative will also be included.

(c) Notes and explanations.

(d) A statement on movements (inflows and outflows) of the project Designated Account,

including opening and closing balances.

(e) Other supporting schedules and documents.

53. The annual financial statements will adopt the same format as the quarterly reports and

may also include other issues. The audit terms of reference will include the content of the audited

project financial statement.

External auditing

54. Annual audited financial statements and the annual Audit Report (including the

Management Letter) for the project will be submitted to IDA within six months from the end of

the fiscal year.17

The annual financial statements will be prepared in accordance with the

International Financing Reporting Standards and include the sources and uses of funds for the

project (containing the same information as similar statement in the IFRs), with supporting

schedules and other information. The formats of the annual financial statements will be included

in the FM Manual. The draft annual financial statements will be prepared within three months of

the end of the fiscal year and provided to the auditors to enable them to carry out and complete

their audit on time.

55. A review of DBE‘s most recent audited accounts for the period ended June 30, 2009

showed that DBE had a qualified opinion stating that due to the limitation in scope the auditor

17

IDA will share these as well as the results of its review with other development partners.

59

could not sufficiently form an opinion on a number of issues that are material in nature. DBE

needs to resolve the issues rose in this report and provide sufficient documentation to the Bank

showing that the issues have been resolved as an indicator of having a good financial

management system. We also note that their accounts are not up to date, financial statements for

two years (2010 & 11) are not audited. The reason for the back log we are informed has been

resolved, therefore DBE should work on expediting the outstanding audits. Important to note is

that this qualification does not relate to World Bank funding.

56. The audit will be carried out by the Office of the Federal Auditor General (OFAG) or a

qualified auditor nominated by OFAG and acceptable to IDA.18

The auditor will be appointed

within six months of effectiveness. To ensure rotation of auditors in line with good practice and

considering the five-year life of the project, private auditors would have a maximum term of

three years (non-renewable).

57. The auditor will express an opinion on the project financial statements. The audit will be

carried out in accordance with the International Standards of Auditing issued by the International

Federation of Accountants. The scope of the audit would also cover the reliability of the SOEs

used as the basis for disbursements and the use of the Designated Account. The auditor will also

provide a Management Letter which will, among other things, outline deficiencies or weakness

in systems and controls provide recommendations for their improvement, and report on

compliance with key financial covenants.

58. The audit will also cover for the FEMSEDA audit transactions handled through MOU

with the TVETs involved in the project. In addition, for the audit of the DBE part of the project,

sample of PFIs and end loan users will be reviewed to ensure that funds are used for the intended

purposes. The terms of reference for the audit will be agreed at negotiations and will be included

in the FM Manual. The audit fee can be paid from the proceeds of the credit. FEMSEDA will be

responsible to effect the payment to the external auditor on behalf of DBE since additional

budget is not allocated to the later one. The procurement procedure and recruitment of the

auditor will be done by DBE for its part of the project although the budget is held by

FEMSEDA.

59. FEMSEDA and DBE will take the necessary follow-up actions on the Audit Reports.

Both FEMSEDA and DBE will submit the government‘s response to the findings in the annual

Audit Report to IDA and an action plan for any follow-up actions. Audit Reports to be submitted

are summarized in Table A7.1.

60. All selected MFI‘s should have their accounts audited on yearly basis. DBE has a

responsibility to collect the annual audit report of the participating MFIs under the project on

yearly basis and submit the same to the Bank for monitoring purposes.

18

According to the Ethiopian Constitution, OFAG is responsible for auditing all financial transactions of the federal

government as well as subsidies to the regions.

60

Table 3: Audit Reports and Reporting Schedule for the WEDP

Report Responsible

Agency

Due Date

Audited Project Financial

Statements and audit opinion thereon

for each fiscal year (including

Management Letter) for component

two and four

FEMSEDA By January 7 of each year.

Audited Project Financial

Statements and audit opinion thereon

for each fiscal year (including

Management Letter) for component

one

DBE By January 1 of each year.

Institutional oversight

61. The overall responsibility for the oversight of the project will lie with the Ministry of

Urban Development & Construction. The Ministry has restructured recently to include the

Federal Micro & Small Enterprise Development Agency, with a mandate to increase MSEs and

create employment.

Financial management support and capacity building

62. Since FEMSEDA has no experience in implementing Bank financed operations, there is

the need for FM support and capacity-building mechanisms to be built into project design.

Within the WEDP, mechanisms would be established and revised, based on implementation

progress, at the federal and/or regional levels to provide support to regions and one stop shops to

assist project management in FM.

63. FEMSEDA will provide FM support to help the other agencies to implement the FM

arrangements through the financial management specialist to be recruited or assigned at the

federal level for WEDP. Training will include: (a) initial dissemination and orientation training

by World Bank; (b) hands-on implementation support and troubleshooting on aspects of FM for

AGP; (c) periodic training; (d) training on the FM Manual as needed; (e) carrying out any FM-

related technical work or studies; (f) preparing progress reports on FM aspects of WEDP; and (g)

supporting the consolidation of financial reports, preparation of IFRs, and annual financial

statements.

E. Financial management risk assessment, strengths, weaknesses, and lessons learned

64. The FM risk assessment and the corresponding mitigation measures are shown in the

Table below.

61

Table 4: Financial Management Risk Assessment and Mitigating Measures, WEDP

Risk Risk

Rating

Risk Mitigating Measures Incorporated into

Project Design

Resi-

dual

Risk

Rating

Effective-

ness

Condition

(Y/N)?

Inherent Risk

Country Level

Risk arises from weak

capacity especially at the

Regional and woreda levels.

There is high turnover and

shortage of qualified

accountants and auditors

S A comprehensive PFM reform program is being

addressed by the government‘s Civil Service

Reform Program supported by PSCAP and PBS II.

Some of the reforms include OFAG and ORAG

capacity building, internal audit capacity building,

and IBEX roll-out to woredas.

S N

Entity Level

FEMSEDA and other

implementing entities such

as REMSEDAs, city

agencies and OSS, have low

capacity in accounting,

financial reporting, and

auditing.

S

The PIM for this project stipulates the coordination

among the implementing entities. The FM Manual

defines the respective FM responsibilities of players

in the program.

There will be continuous training to ensure that the

main implementers are well versed with Bank rules

and procedures.

The access to microfinance component will be

implemented by DBE which has a good experience

in handling such projects from different donors.

The TA to be provided to DBE and MFIs allows for

key workers of the institutions to undergo as

training on the job. It will also focus on accounting,

financial reporting and understand key auditing

concepts. The TA will begin from the first year and

continue to the end of the project life.

M N

Project Level

The project involves

transfer of money to

FEMSEDA and which has

never implemented project

at this level. In addition

money will also go to MFIs

which needs close follow up

and help them establish

strong internal control

systems given that most of

their systems are manual

and underdeveloped

S

The PIM, which includes the FM Manual, outlines

the responsibility of each implementing entity. It

also describes how best they can coordinate their

efforts.

Qualified FM officer will be in place at FEMSEDA.

The administration of the fund flowing to MFI will

be disclosed in the operational manual for selecting

and administering the MFIs. The manual is a

condition of effectiveness.

Training and workshops provided to project

accountants and relevant internal auditors will be

conducted as agreed in the action plan. Internal

audit annual work plan should also include review

of systems for transfer of funds and also review

beneficiary control of such funds on a sample basis.

M N

Inherent risk S M

Control Risk

62

Risk Risk

Rating


Project Design

Resi-

dual

Risk

Rating

Effective-

ness

Condition

(Y/N)?

Budgeting

Delay in appropriate

budgeting process.

Lack of satisfactory

variance analysis to monitor

budget implementation may

also be a risk.

S

FEMSEDA and DBE will set up a timetable for

budget preparation for all implementing entities at

all levels to align the process with the government‘s

budget preparation timetable.

Variance analysis will be part of the IFR content to

be submitted by FEMSEDA and DBE. The annual

training to be given to implementers, as indicated in

the agreed action plan, will incorporate training on

budgetary control and preparation of variance

analysis. A process of mid-year review of the

approved budgets should be done so that any

shortfalls noted can be catered for through

supplementary budgets.

M N

Accounting

High staff turnover.

Risk of delay in recording

transactions and making

mistakes which would

cumulatively affect the

accuracy of financial

information in absence of

strict internal checking and

internal control.

S

Qualified accountant will be placed at FEMSEDA

Accountants in implementing entities will be

trained in the FM Manual and Bank procedures so

that they can replace vacant positions in

implementing WEDP.

Detail accounting policies, including accounting for

transfer to MFIs, will be outlined in the FM

Manual. The manual will also emphasize

appropriate segregation of duties and ensure that

senior officials check entries of transactions made

on a monthly basis and sign off that they are

satisfied on the accuracy of the recording.

New staff will be trained in the manual and also in

Bank procedures within one month.

M

Y (for the

Federal

level)

N

N

Internal control

Internal audit function is

weak due to understaffing.

No subsidiary records are

maintained for fixed assets,

leading to mishandling of

funds.

H The capacity-building component under PBS II

(sub program C1) is expected to enhance the

effectiveness of the current regional/federal internal

audit departments.

Internal auditors of FEMSEDA and DBE will

include the program in their annual plan and audit.

DBE, MFIs and FEMSEDA have the responsibility

to implement previous internal control weaknesses

as recommended by their auditors and also ensure

that they will implement such recommendations for

upcoming years. A program of addressing past

internal control weaknesses will be prepared and

will be reviewed by the Bank at each supervision

mission

All implementers will keep records of fixed assets

as depicted in the FM Manual and ensure that all

such Fixed Assets have asset numbers and a check

on their existence is done every year as part of the

annual audit.

S N

63

Risk Risk

Rating


Project Design

Resi-

dual

Risk

Rating

Effective-

ness

Condition

(Y/N)?

Funds flow

There may be delays in flow

of funds to the lowest

implementation levels.

S Funds will be released to the next implementing

entity based on their annual work plan and budget,

which will be prepared in detail and communicated

to all entities. MFIs will only receive fund when

they meet the eligibility criteria set on the

operational manual. FEMSEDA and DBE will also

establish a complaint handling desk which receives

all complaints on delays in funds received and any

other. A register of complaints should be kept also

showing how the issues were handled. Monthly IEC

campaigns should also be organized through radio.

The detail of this will be clearly laid out on the

PIM.

M N

Financial reporting

Delays in financial

reporting and report being

not to standard

S Regular training on the preparation of IFRs will be

conducted for FEMSEDA and DBE by DPs.

Since the fund flow is not widely disbursed, report

producing can be easily managed.

The content of the IFR will be agreed during

negotiation.

M N

Auditing

Delays in preparation of

financial accounts for

consolidation necessary for

submission of external audit

reports could be

encountered.

H External auditors will be recruited before six

months of the close of the fiscal year.

Audit terms of reference will be agreed upon

negotiations.

Preparation of financial statements will be done in

the first three months of the close of the FY to

ensure an early start of audit of the financial

statements.

S N

Control Risk S M

Total Project FM Risk S M

Note: H=High; S=Substantial; M=Moderate; L=Low.

65. In view of the information in the table above, the inherent risk of the project is

substantial, while the control risk is moderate. The overall financial management risk rating of

the project after risk mitigating measures is moderate.

Strengths and weaknesses

66. The WEDP will inherit the various strengths of the country‘s PFM system. As discussed

earlier, several aspects of the PFM system function well, such as the budget process,

classification system, and compliance with financial regulations. Significant ongoing work is

directed at improving country PFM systems through the government‘s Expenditure Management

and Control sub-program. The government‘s existing arrangements are already being used in a

number of projects, including PSNP APL III and PBS, which are under implementation. WEDP

also benefits from the country‘s internal control system, which provides sufficiently for the

64

separation of responsibilities, powers, and duties, and it benefits from the effort being made to

improve the internal audit function. The availability of the Federal MSE Development Council at

the federal level is an advantage to the project in enhancing its internal control.

67. The main weaknesses in FM arrangements continue to be high turnover and a shortage of

qualified accountants and auditors (mainly at the lower level), delays in reporting and the largely

ineffective internal audit function. FEMSEDA does not have previous experience in Bank

financed operations hence there is a need for continued support and capacity building. In

addition, there is a great need of coordination amongst the various implementers of the project

for the success of the project. MoFED‘s level of involvement should also increase to facilitate

the various players in performing their expected duties.

F. Action plan, covenants, and conditions for negotiations

Action plan

68. The FM action plan, presented in the Table below, was confirmed at negotiations.

Table 5: Financial Management Action Plan

Action Date due by Responsible

1 Preparation of the FM Manual in terms of budgeting,

accounting, fund flows, internal controls, segregation of

duties, financial reporting, and auditing issues; manual will

also include new developments like the procedures pertaining

to access to microfinance, Chart of Accounts, and other

relevant aspects.

Before effectiveness FEMSEDA

2 Training will be provided in the FM Manual, with particular

emphasis on budget preparation and variance analysis, and

covering all relevant issues on accounting, reporting, and fund

flow arrangements.

Initial training to be given

1 month after project

effectiveness.

FEMSEDA

3 The PIM should clearly indicate a complaint handling

mechanism which receives all complaints on delays in funds

received and any other issues. A register of complaints should

be kept also showing how the issues were handled.

This should form part of

the PIM which needs to

be finalized before project

effectiveness.

3 Recruitment of external auditors at early stages of the project. Six months before the end

of the fiscal year.

OFAG /

FEMSEDA/DB

E

4 Ongoing training will be conducted. Budget analysis training,

IFR preparation training, and other themes to be covered.

Annual training for

implementing entities by

region. During such time,

review of each region‘s

FM performance will be

discussed and tailored

training will be given to

each region.

FEMSEDA

5 FEMSEDA should conduct regular field visit to support as

well as monitor the performance of REMSEDAs, city

agencies and OSS.

Ongoing. FEMSEDA

65

Action Date due by Responsible

6 Increased engagement of internal audits at all levels to

identify control weaknesses early.

Ongoing. FEMSEDA/

DBE

7 Recruitment/placement of qualified financial management

officer at FEMSEDA and DBE

Before effectiveness. FEMSEDA/DB

E

8 FEMSEDA should undertake adequate robust reviews and

checks on the reports submitted from city agencies and OSS

Ongoing. FEMSEDA

9 DBE should receive the quarterly report from MFIs and also

the annual audit reports and closely monitor their

performance

Ongoing DBE

Financial management covenants and other agreements

69. FM-related covenants in the Financing Agreement would include: (a) maintenance of a

satisfactory FM system for the program; (b) submission of IFRs (one from FEMSEDA and one

from DBE) for the program for each fiscal quarter within 45 days of the end of the quarter; and

(c) submission of annual audited financial statements and Audit Report ( one from FEMSEDA

and one from DBE) within six months of the end of each fiscal year;

G. Supervision plan

70. The FM risk for the WEDP is rated moderate. Accordingly, the project will be

supervised twice per year. After each supervision, risk will be measured and recalibrated

accordingly. Supervision will be carried out in coordination with other DPs and will include:

On-site visits to the various project institutions at all levels, including FEMSEDA, DBE

and a sample of one stop shops. These visits would include a review of controls and the

overall operation of the FM system; review of internal audit, selected transaction reviews,

and sample verification of existence and ownership of assets.

Reviews of IFRs and follow-up on actions needed.

Review of Audit Reports and Management Letters, and follow-up on actions needed.

H. Governance & anti-corruption and control of soft expenditures

Governance and anti-corruption

71. The governance and anti corruption aspects dealt in this section are solely for FEMSEDA

and other implementing entities of WEDP. The risks identified are based on the financial

management capacity assessment conducted by the Bank for FEMSEDAs, REMSEDA and

DBE. The nature of the components and the implementation arrangement of WEDP have been

considered in laying out the mitigating measures.

72. FEMSEDA has an Anti-corruption Officer who has the responsibility of acting on

suspected incidents of fraud, waste, or misuse of project resources or property. Employees of the

ministry are advised to raise any governance and anti-corruption concerns with this officer. The

Table below presents the GAC risks identified and corresponding mitigating measures in the

design of the project.

66

Table 6: Governance and Anti-corruption Risks and Mitigation Measures Incorporated into WEDP

FM Risk Area Identified GAC Risks Mitigating Measures in the Project Design

Fund flow Financial reports that are not prepared

on time, in agreement with underlying

records and supporting evidence, may

be fraudulent. Lack of timely and

accurate reporting allows misuse of

funds to remain un-detected.

Fund flow is designed by attaching the

coordination unit to the sector ministry and

bureaus, which have strong internal control

mechanisms. All transactions between

implementing entities will be made through

Acceptable Banks.

Internal

controls Client staffing is inadequate to ensure

effective fiduciary oversight of complex

project transactions.

Lack of effective internal audit

department at FEMSEDA, DBE and

PFIs.

Failure to regularly monitor the

existence and quality of assets presents

a risk of fraudulent delivery, misuse,

and theft.

Lack of control over soft expenditures

such as stationary, fuel, and training

materials.

Appointment of qualified finance staff members to

carry out and supervise key control functions at

federal level is agreed for WEDP.

The internal audit functions of FEMSEDA and

regions are being strengthened by projects such as

PBS II. Despite the capacity limitations, the

internal audit departments will review the projects

as per their annual program. The internal audit unit

of DBE will also audit the program.

Physical inventory of fixed assets will be taken

annually.

The FM Manual will include detailed internal

control procedures with regard to soft

expenditures, starting from the initiation of

transactions to the approval of the expenditures,

and also on safeguard of assets, including annual

physical inspection.

External audit External auditors fail to identify

material risks or report control failures.

Scope of the financial audit is

insufficient to address identified high-

risk areas.

Failure to address audit findings in a

timely manner represents a significant

deficiency in accountability and control.

The external auditors assigned for the project, if

apart from OFAG, must be acceptable to the Bank.

The terms of reference of the FM specialist to be

assigned by FEMSEDA and DBE will indicate

that he/she is responsible for addressing audit

findings in a timely manner. DPs will also follow

up on action plans and rectifications made.

Control of soft expenditures

73. A number of measures to strengthen the controls related to soft expenditures (e.g. per

diems, travel, accommodation, fuel, training, workshop and seminar costs) will be described in

the FM Manual. Proper budgeting, authorization, control, monitoring and accounting of these

expenditures are the responsibility of the Project implementers. The Finance Section will have

special oversight responsibilities. The project financial officers will be responsible for ensuring

that the management controls specified in the FM Manual are enforced. These controls included:

Procedures for Budgeting and Acquitting of Expenditures for Workshops. This will

include, for example, controls on attendance, controls against budgeted expenditures,

and the Finance Section undertaking verification (including where appropriate spot

checks).

67

Procedures for control of fuel

Maintenance of Advance Records

Disbursements

74. Funds flow into the project and within the project among various institutions is depicted

in the Figure below. For component one of the project, MoFED will sign a subsidiary financing

agreement with DBE as a lead implementing agency. Accordingly DBE will open a separate

designated account at the National Bank of Ethiopia (NBE) specifically for WEDP. DBE will

transfer funds to selected and approved PFIs based on the guidelines in the WECF operations

manual regulating the access to microfinance component of the project.

75. DBE will transfer the required amount to the eligible microfinance institutions as per the

operations manual developed for the same. The amount that is lent by the PFIs to the women

entrepreneurs will be the basis of documentation of expenditure for the advances given to DBE.

The operations manual will clearly lay out the eligibility criteria to receive the funds.

76. DBE will enter an agreement with each PFI indicating how much will be advanced to the

PFI at the initial stage and how the next subsequent tranches will be released. To document the

advances provided by DBE, each PFI must submit a report to DBE indicating at minimum the

identity of the borrower, the amount lent, the type of sub-project and so on. The detail of this will

be documented in the operations manual.

77. Another separate designated account will also be opened at the NBE for FEMSEDA.

Funds from the foreign currency accounts will be further transferred in to pooled Birr account to

be held by FEMSEDA. From the pooled local-currency account, FEMSEDA will effect

payments necessary for the implementation of the project. In addition, FEMSEDA will transfer

the annual operating cost needed by the one stop shops through the city agencies on quarterly

basis. The city agencies will transfer funds to forty five one stop shops for operating costs only in

forms of advance and the same should be settled on monthly basis. FEMSEDA needs to sign

Memorandum of Understanding (MOU) with TVETs as the need arises to implement part of

component 2. The MOU should clearly indicate the financial management aspect as well as the

costs to be covered. The MOU needs to be reviewed by the Bank before it is signed with the

respective TVETs.

78. FEMSEDA shall release funds to each implementing entity according to its respective

annual work plan and budget. Any implementing entity that does not report in a timely manner

on how the advance is expended will not receive additional funds until the initial advance is

settled. The FM Manual will indicate in detail the fund flow to each tier of implementing entity.

79. Canadian International Development Agency (CIDA) is also interested in providing

funds to the project. Once the arrangements are finalized, the fund will flow to the implementing

agencies using the same rules and principles discussed above through the Multi Donor Trust

Fund (MDTF) mechanism. Other donors that will be interested in the project and are willing to

pool their funds will use the MDTF. The program is also expected to receive USD 3 million from

DFID in terms of technical assistance for sub component 1(b) which DBE needs to disclose in its

68

financial reports. The cost and fund flow of the TA is not indicated in the table and fund flow

chart shown below.

80. The estimated cost per component is depicted below:

Category Amount of the

Grant

Allocated

(expressed in

USD) for IDA

part

Amount of Grant

expressed in SDR

Percentage of

Expenditures to be

financed ( Inclusive of

taxes)

(1) Sub-Credits

under Part 1(a) of

the Project

42,400,000 27,300,000 100% of amounts

disbursed by PFIs

(2) component 2,

Goods, works,

non-consulting

services,

consultants‘

services, audits,

Training, and

Operating Costs

3,600,000 2,100,000 100%

(3) component 3,

Goods, works,

non-consulting

services,

consultants‘

services, audits,

Training, and

Operating Costs

1,500,000 1,000,000 100%

Project

Preparation

Advance

270,000 200,000

Unallocated 2,500,000 1,600,000

TOTAL

AMOUNT

50,000,000 32,200,000

81. Disbursement method. WEDP will follow the transaction-based disbursement method—

that is, disbursement will be based on monthly submission of Statements of Expenditures

(SOEs). Each SOE should clearly indicate if the expenditure is from IDA or MDTF, once the

latter becomes effective. The disbursement method could be changed from transaction-based

disbursement (using Statements of Expenditures) to reports-based disbursement using IFRs if:

(a) FEMSEDA submits quarterly reports on time; (b) the FM rating of the program is

satisfactory; and (c) the annual Audit Report does not reveal major internal control issues that

could indicate that the IFRs submitted are not dependable.

69

82. Designated accounts. There will be two separate designated accounts for the IDA credit.

FEMSEDA and DBE will each open one Designated Account denominated in US dollars in NBE

on terms and conditions acceptable to IDA. The ceiling of the DA for DBE part of the DA will

be a variable ceiling equivalent to expenditure forecast of one quarter. The forecast to serve this

purpose needs to be prepared by each PFI with the content of the number of beneficiaries

expected to be included in the project, the amount expected to be lent and a confirmation that the

forecast is for the MSEs that meet the eligibility criteria under WEDP. Once DBE assesses and

confirms the validity of the forecasts submitted by the PFIs, it will summarize the information

per PFI and submit the same to the Bank to effect the advance. The detail of the forecast

calculation should be retained by DBE and should be made available for supervision missions

and auditors when required.

83. The ceiling of the DA for FEMSEDA, as has been stipulated in the disbursement letter

for the project, would be a variable, equivalent to the aggregate of the forecasts provided by each

of the PFIs for the succeeding three months‘ (on rolling basis) of eligible expenditures under the

PFIs‘ respective lines of credits (with each PFI aggregating the equivalent amounts to

corresponding clients (beneficiaries) to whom Sub-credit financing commitments are due for the

corresponding period). The fund flow diagram shows the fund flow arrangement for WEDP.

Once the MDTF are approved and active, both implementers will open additional designated

accounts to accommodate for MDTF transactions.

70

Figure 3: Funds Flow for WEDP

USD segregated Designated

Account at NBE

FEMSEDA

Pooled Birr account at FEMSEDA

IDA Credit

Fund Flow

Reporting

PFIs

MDTF

US$ segregated Designated

Account at NBE

DBE

World Bank

Women

Entrepreneurs

71

Procurement

84. A new Procurement Law of the Federal Democratic Republic of Ethiopia, Proclamation

No. 649/2009, came into effect upon its publication in the Negarit Gazeta on September 9, 2009,

which provides for the establishment of new bodies, including the Public Procurement and

Property Administration Agency (PPA), and the Complaints Review Board. The federal

procurement proclamation has entrusted the PPA with the responsibility of preparing, updating

and issuing authorized versions of the procurement directives and manuals, Standard Bidding

Documents (SBDs), procedural forms, and any other attendant documents pertaining to

procurement and property administration at the federal level. Currently, updated National SBDs

for procurement of goods, works, and services in conformity commensurate with the new

proclamation are being prepared by the PPA through support provided by the Bank. However,

not all the implementing legislation and documents envisaged by the federal procurement

proclamation have been issued yet. An additional factor to consider is the fact that the overall

procurement regime in the Federal Democratic Republic of Ethiopia now envisages various

legislation and ancillary authoritative documents to be issued at the Regional level, which should

include regional proclamations, SBDs, manuals and forms, in conformity with the procurement

proclamations at the regional levels. At this time, not all Regions have issued conforming

procurement proclamations, and those that have, may not have not been able to issue all ancillary

procurement related documents as yet. Until all such new National and Regional SBDs are

issued, transitional procurement practices may be utilized: some procurement actions may still be

subject to the previous regime, with contracts required be awarded in conformity with the

National SBDs that were issued under the old previous (pre-2009) federal proclamation.

85. The World Bank has reviewed the existing national bidding documents for procurement

of goods and works and has found them to be generally acceptable. Based on this review,

contracts that will be procured under National Competitive Bidding (NCB) may follow the

Recipient‘s procurement procedures, subject to the following additional procedures: (i) the

Recipient‘s standard bidding documents for procurement of goods and works shall be used; (ii) if

pre-qualification is used, the World Bank‘s standard prequalification document shall be used;

(iii) margin of preference shall not be applicable; (iv) bidders shall be given a minimum of 30

days to submit bids from the date of availability of the bidding documents; (v) use of merit

points for evaluation of bids shall not be allowed; (vi) foreign bidders shall not be excluded from

participation; and (vii) the results of evaluation and award of contract shall be made public, and

(viii) in accordance with paragraph 1.16(e) of the Procurement Guidelines, each bidding

document and contract financed out of the proceeds of the Financing shall provide that: (1) the

bidders , suppliers, - contractors and subcontractors shall permit the World Bank, at its request,

to inspect their accounts and records relating to the bid submission and performance of the

contract, and to have said accounts and records audited by auditors appointed by the World

Bank; and (2) the deliberate and material violation by the bidder, supplier, contractor or

subcontractor of such provision may amount to an obstructive practice as defined in paragraph

1.16(a)(v) of the Procurement Guidelines.

86. Under the project, the Recipient is obliged to continue to apply the above mentioned

NCB modifications to its procurement procedures notwithstanding the adoption of the new

procurement proclamation. The World Bank will review the new procurement proclamation

72

together with the new directives and revised SBDs in order to determine the modifications

needed for Ethiopia‘s revised NCB procedures to be acceptable for use in World Bank-financed

contracts.

87. The ―Ethiopia 2002 Country Procurement Assessment Report‖ (CPAR) identified

weaknesses in the country procurement system and recommended actions to address these areas.

The new federal procurement law addresses some of these shortcomings but the Bank will need

to assess the new procurement regime when the new directives and revised SBDs are available to

it. In October/November 2010 the draft Ethiopia Country Procurement Assessment Report was

produced to update the 2002 CPAR. Key findings include lack of directives, manuals and SBDs

at federal and regional level, lack of independent procurement bodies at Regional level, low

management capacity, capacity problem of procurement personnel at all level, and low level of

monitoring and oversight, and non-functional complaint mechanisms. This is supplemented by

Regional CPARs by incorporating the assessment of the procurement systems in the Regional

States. As the current CPAR is validated by stakeholders and finalized the Federal and Regional

Governments are expected to follow-up and implement the recommendations provided under the

2010/11 CPAR to address the shortcomings identified.

88. General Procurement under the WEDP: Procurement under the Women Entrepreneurs

Development Project (WEDP) to be financed through IDA and development partners using the

multi-donor trust fund administered by the Bank will be carried out in accordance with the

World Bank‘s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated January,

2011; "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated

January, 2011; and the provisions stipulated in the IDA Financing Agreement.

89. Procurement under WEDP is expected to be carried out centrally at FEMSEDA. The

NCB and Shopping procedures at FEMSEDA would be carried out in accordance with Federal

procurement proclamation which will have been reviewed and modified to be acceptable to the

World Bank and using national SBDs issued by PPA in 2006 subject to the exceptions provided

in Para 2 above. Under WEDP the Recipient is obliged to continue to follow the NCB

modifications to its procurement procedures as stated above notwithstanding the adoption of the

new procurement proclamations. When the revised SBDs will be available, the World Bank will

review the new procurement proclamations at Federal level together with the new directives and

revised SBDs in order to determine the modifications needed for Ethiopia‘s revised NCB

procedures to be acceptable for use in World Bank-financed contracts.

90. Procurement under WEDP: The project will finance the four components of WEDP.

Most of the financial resource provided under the project shall be utilized under Component 1 of

the project and shall be allocated to PFIs through the Development Bank of Ethiopia for on-

lending to women entrepreneurs. In the other three components procurement to be conducted

under the WEDP shall provide limited inputs for goods and equipment needed for institutional

support; procurement of small works for the maintenance of one-stop shops of REMSEDAs,

procurement of non-consulting services such as transport, venues for training and workshops for

capacity building needs, as well as consultancy services for technical assistance for capacity

building and institutional support. The procurement of the projects to be provided under these

73

components will follow procurement procedures of the World Bank‘s Guidelines and IDA

Financing Agreement stipulated in Para 4 above..

91. The various items under the different expenditure categories are described in general

below. For each contract to be financed by the Credit, the different procurement methods or

consultant selection methods, the need for, estimated costs, prior review requirements, and time

frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement

Plan will be updated at least annually or as required to reflect the actual project implementation

needs and improvements in institutional capacity.

92. Procurement under Component 1 of the Project: Component 1 of the project makes

provision for USD 31 million through Development Bank of Ethiopia (DBE) to be channeled to

Micro Finance Institutions (MFIs) to be on-lent to women entrepreneurs who are the

beneficiaries of the project. Procurement of goods, works and non-consulting services is

undertaken by the women entrepreneurs, who are the beneficiaries of the project, in accordance

with well established private sector procurement methods or acceptable commercial practices.

The project implementation manual shall describe the basic guiding principles and acceptable

procedures applicable to procurement under component 1 which shall be in line with the

provisions of paragraph 3.13 of the Guidelines.

93. Procurement of Works: Works procured under this project would include: the

maintenance of 45 one-stop shops in the REMSEDAs. These are basically small value works and

the procurement of these maintenance works shall be carried out using National SBD agreed

with or satisfactory to the Bank for NCB contracts or using Shopping procedure.

94. Procurement of Goods: Goods and equipment to be procured under the Project include:

office furniture and office equipment, audio-visual equipment, limited number of vehicles, and

motorcycles, IT equipment and related accessories including printers, scanners and software.

Goods will be packaged whenever possible in packages higher than US$500,000 and tendered

under international competitive bidding (ICB) procedures described under Section 2 of the

Procurement Guidelines. The Bank‘s standard bidding documents would be used for all ICB

contracts. Contracts for goods procurement under the monetary value of US$500,000 equivalent

will be tendered through National Competitive Bidding (NCB). Goods procurement contracts

below the monetary threshold of US$50,000 equivalent shall be procured through shopping

procedure. Procurement of goods other than through ICB would use the national procedures and

SBDs as agreed with and deemed satisfactory to the World Bank. Direct contracting will be used

where it is to the benefit of the project and in accordance with the provisions of paragraph 3.7 of

the Bank‘s Procurement Guidelines.

95. Procurement of non-consulting services: Depending on the nature of the services,

procurement of non-consulting services, such as transport, will follow procurement procedures

similar to those stipulated for the procurement of goods. NCB procedures acceptable to the Bank

would be used for contracts above an estimated monetary amount of US$50,000. Contracts

valued at less than $50,000 equivalent shall use shopping procedures in accordance with the

provisions of paragraph 3.5 of the Bank‘s procurement Guidelines or in accordance with

established Commercial practices of common use in Ethiopia acceptable to the Bank.

74

96. Selection of Consultants: The project will make use of consultant services for training,

technical assistance and other capacity building activities, monitoring and evaluation studies,

studies of emerging regions not included in the project, different consultants for the PIU, and

annual financial audits of project activities. Contracts above US$200,000 will be awarded

through the use of the Quality and Cost-Based Selection (QCBS) method described under

Sections 2 of the Consultant Guidelines. Consulting Services for audit and other contracts of a

standard or routine nature may be procured under the Least Cost Selection method (LCS)

described under Section 3.6 of World Bank Consultants Guidelines. Small Consulting

assignments in the amount of USD 200,000 or less may be procured through the Selection Based

on Qualifications (CQS) method. Shortlists of consultants for services estimated to cost less than

US$200,000 equivalent per contract may be composed entirely of national consultants in

accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Contracts for

individual consultants will be advertised on national papers of wide circulation to allow for the

drafting of shortlists. Single-source selection may be used where it is to the benefit of the project

in accordance with the provisions of paragraphs 3.9 or 5.4 of the Bank‘s Consultant Guidelines.

97. Operating Costs: Expenditures made for operational costs such as fuel and stationery,

cost of O&M of equipment, communication charges, transportation costs and travel allowances

to carry out field supervision, will follow Ethiopian Government practices that have been found

acceptable to the Bank and included in the PIM.

98. Training and workshops will be based on capacity building needs. Venues for

workshops and trainings as well as purchases of materials for the trainings and workshops will

be done on the basis of at least three quotations. The selection of institutions for specialized

training will be done on the basis of quality and, therefore, using the QBS method. Annual

training plans and budget shall be prepared and approved by the World Bank in advance of the

trainings and workshops.

99. Margin of Preference for Domestic Goods: Under the Women Entrepreneurs

Development Project, in accordance with paragraph 2.55 and 2.56 of the Procurement

Guidelines the borrower may grant a margin of preference of 15% (fifteen percent) in the

evaluation of bids under ICB procedures to bids offering certain goods produced in the Country

of the Borrower, when compared to bids offering such goods produced elsewhere.

100. Assessment of the Implementing Agencies‟ Procurement Capacity: Procurement

Capacity Assessment for WEDP was undertaken by the World Bank Ethiopia Country Office

procurement specialists in three WEDP implementing agencies: Federal Medium and Small

Scale Enterprises Development Agency, Addis Ababa City Administration Medium and Small

Scale Enterprises Development Agency and Oromiya Region Medium and Small Scale

Enterprises Development Agency. The procurement capacity assessment of the Federal Medium

and Small Scale Enterprises Development Agency was carried out on October 7, 2011 while the

procurement capacity assessment of the Addis Ababa City Administration and Oromiya Region

Medium and Small Scale Enterprises Development Agencies were carried out in January 2012.

75

101. The procurement capacity assessment was carried out using the questionnaires provided

in the Procurement Risk Assessment and Management Systems (P-RAMS). The procurement

capacity assessment indicates that the agencies reviewed have no experience in handling

procurement under World Bank as well as donor financed projects and have capacity limitations

and systemic constraints. Although there are small procurement units in all the agencies

reviewed and the agencies have introduced public procurement procedures, there are major

procurement performance limitations in all the agencies. In particular, due to the fact that these

agencies or their procurement staff do not have prior experience in Bank financed projects and

the fact that they do not have procurement proficient staff to handle procurement in a

professional manner, the procurement risk of the proposed project is rated ‖HIGH‖.

102. The procurement assessment of the three implementing agencies included a review of the

11 risk factors of the P-RAMS for the respective institutions reviewed:

Risk Factor 1: Accountability for Procurement Decisions in the Implementing Agencies;

Risk Factor 2: Internal Manuals and Clarity of the Procurement Process;

Risk Factor 3: Record Keeping and Document Management Systems;

Risk Factor 4: Staffing;

Risk Factor 5: Procurement Planning;

Risk Factor 6: Bidding Documents, Pre-qualification, Short listing and Evaluation

Criteria;

Risk Factor 7: Advertisement, Pre-bid/proposal Conference and Bid/Proposal Submission;

Risk Factor 8: Evaluation and Award of Contract:

Risk Factor 9: Review of Procurement Decisions and Resolution of Complaints;

Risk Factor 10: Contract Management and Administration;

Risk Factor 11: Procurement Oversight.

103. The FEMSEDA has an organizational structure in which Supplies and Procurement Case

Team is organized under the Finance and Procurement Directorate of the Agency. The Supplies

and Procurement Case Team is responsible for the procurement activities of the Agency. The

supplies and procurement unit of the Agency is staffed with one coordinator, one expert and two

purchasers. The coordinator of the case team has a Baccalaureate degree in purchasing and

supplies management and several years of experience in purchasing. The remaining staffs,

including the expert, are either ATVET or high school graduates with some experience in

purchasing. The staffs in the Agency carry out procurement through NCB and shopping

procedures. However, the existing staffs at FEMSEDA have no experience on procurement

under Bank financed or donor supported projects.

104. The procurement capacity assessment was carried out at the Supplies and Procurement

Case Team of the FEMSEDA which is expected to handle the procurement of the WEDP. The

assessment carried out in light of the above parameters reveals that the procurement capacity

situation of the agency is weak to handle procurement of project financed by the World Bank.

The Agency is using the Directive issued by the Federal Public Procurement and Property

Administration Agency (FPPA) in 2010. But they are not aware of the procurement manual

which is as well issued by FPPA. There is some level of record keeping and document

management system. But this is not adequate enough for a Bank supported project and it is

76

composed of only documents which are kept by the financial unit of the implementing agency. It

is not clear if the staff have a clear understanding of the national procurement process. Although

there is a ‗procurement plan‘ prepared by the unit as a requirement of PPA for annual budget it is

composed of only the list of equipment and the quarter the respective items are to be procured.

Overall the agency‘s internal manuals and clarity of the procurement process, record keeping and

document management systems, procurement planning, staffs with experience and satisfactory

track record, handling procurement processes in a professional manner, contract management

and administration are all found to be requiring strengthening. The unit, as indicated above is

staffed with one coordinator, one expert and two purchasers and is engaged in handling the

routine purchasing activities of the FEMSEDA. There are no staffs with experience and

satisfactory track record in procurement in general and on WB financed projects specifically to

handle all aspects of procurement under the WEDP. Moreover, there have not been attempts by

the agency to provide procurement training to its staff for continuous skill development in

procurement and contract management.

105. The procurement capacity assessment was also carried out in Addis Ababa City

Administration and the Oromiya Region Medium and Small Enterprises Development Agencies.

Both institutions were Departments within the Bureaus of Urban Development and Construction

of the Addis Ababa City Administration and Oromiya Region, respectively. They are currently

organized as Regional/City Administration Medium and Small Enterprises Development

Agencies and are in the process of reorganization. The procurement unit of the Addis Ababa

City Administration REMSEDA is organized under the Finance, Procurement and Property

Administration Process of the Agency. It is staffed with 2 officers who are essentially serving as

purchasers and who do not have experience in WB or donor financed projects. The procurement

unit of the Oromiya REMSEDA is placed under the Finance and Procurement Process. It is

staffed with one Market Analyst (Team Leader) with a Baccalaureate degree in Supply

Management and some experience and one diploma level purchaser with no experience in

procurement.

106. The general procurement capacity situation of the REMSEDAs, as revealed through the

above parameters, is also found to be weak. The agency‘s procurement processes, organization

and staffing, control mechanism, staff capacity, procurement planning and completeness of

procurement records leaves much to be desired. Moreover, lack of an independent procurement

oversight body in such REMSEDAs is another limitation in the accountability of the

procurement function of the Regions.

107. At the FEMSEDA and REMSEDAs limitations in the capacity of the staff to plan and

process procurement under donor supported projects is a major weakness. The fact that there is a

general public procurement performance gaps in the country and high procurement staff turnover

may undermine procurement implementation of the Project unless specific capacity building

actions are designed and implemented. This combined with inadequate internal and external

control mechanism in procurement makes the procurement risk rating for the project: ―HIGH‖.

108. Institutional Setup for Procurement: The institutional setup for procurement under the

WEDP would be maintained at FEMSEDA. The FEMSEDA shall be responsible for oversight

and coordination of the WEDP through the Project Implementation Unit (PIU) to be established

77

in FEMSEDA. FEMSEDA shall provide the necessary technical support for WEDP planning

and implementation. The Program will be largely implemented through FEMSEDA but there

would be a decentralized arrangement for the implementation of component 1 and aspect of the

capacity building of the project. The procurement aspect of the project is by and large to be

handled by FEMSEDA in a centralized manner though the regional REMSEDAs and one-stop

shops are the beneficiaries of some of the goods and equipment, works and non-consulting

services to be procured at FEMSEDA.

109. Procurement risk rating and mitigation plans: The key systemic issues and risks

concerning procurement for implementation of the WED project have been identified. The

overall project risk for procurement is rated ―HIGH‖ and the thresholds for prior review, for

ICB, including the maximum contract value for which the short-list may comprise exclusively

national firms in the selection of consultants are agreed (Table 7).

Table 7: Table of Thresholds

Category Prior

Review

Threshold

(US$)

ICB

Threshold

(US$)

National Short-

List

Max Value (USD)

Works

Goods

≥5,000,000

≥500,000

≥5,000,00

0

≥500,000

NA

NA

Consultants (Firms)

≥200,000

NA

<200,000

Consultants

(Individuals)

≥100,000

NA

NA

110. Table 9 summarizes the procurement issues identified and the proposed action plan to

enhance the capacity of the FEMSEDA to implement project procurement. The matrix covers

findings and actions to be taken at FEMSEDA to strengthen the procurement capacity of the

Agency. Hence these recommendations need to be strictly followed and implemented for a

proper implementation of the procurement aspect of the project.

78

Table 8: Summary of Findings and Actions (Risk Mitigation Matrix)

Major

findings/issues Actions proposed Responsibility Targeted date

1 Lack of qualified

procurement

proficient staff

The FEMSEDA will recruit a

procurement proficient specialist with

adequate experience on procurement

in World Bank financed projects to

coordinate and execute the

procurement processes of the project.

The procurement unit under the

FEMSEDA shall recruit at least one

additional graduate as a procurement

staff and the staff shall be provided

with basic procurement training

offered at the Ethiopian Management

Institute

FEMSEDA Before project

launch

2 Clarity on

procurement

procedures to be

followed for

WEDP

WEDP Procurement Manual shall be

prepared by an experienced

procurement consultant to provide

detailed procedures to be followed in

the procurement process including

procurement by ultimate beneficiaries

of the project

FEMSEDA A At project launch

3 Lack of staff

skilled in

procurement

management

The procurement staff, the project

coordinator and the tender committee

members of FEMSEDA should

undertake basic procurement training

offered at the Ethiopian Management

Institute.

FEMSEDA At the

beginning of

project

implementation

4 Inadequate

Procurement

planning and

records keeping

1. Training on procurement planning

and records keeping shall be provided

to the procurement staff as outlined in

3 above.

2. The procurement office shall be

provided with necessary office

equipment and supplies (computers,

scanners, printers, box files, file

folders, etc) from the project.

FEMSEDA At the

beginning of

the

implementation

of the project

111. Procurement Plan: The Borrower has submitted a procurement plan for the first 18

months of the Project that will provide the basis for the procurement methods and

implementation schedule. The approved final procurement plan is provided herein and will be

included in the project database and made available for inspection at FEMSEDA. The Plan will

79

be updated in agreement with the Project Team annually or as required to reflect the actual

project implementation needs and improvements in institutional capacity.

112. Frequency of Procurement Supervision: In addition to the prior review of procurement

actions under ICB and QCBS to be carried out from the World Bank Country Office, at least two

supervision missions per year will be carried out.

1. Goods, Works, and Non Consulting Services

(i) Table 9: List of Goods Contract Packages to be procured during the initial 18 months of

implementation:

Ref.

No Contract Description

Estimated

Amount

(USD„000)

Procure-

ment

Method

Prior or

Post

Review

Bid

Closing-

Opening

Date

Contract

Signature

1 Procurement of vehicles and

motorcycles 358,400.00 NCB Prior 24 Sept 12 5 Nov 12

2. Procurement of furniture 39,300.00 Shopping Post 22 Aug 12 12 Sept 12

3. Procurement of IT Equipment 137,000.00 NCB Post 1 Oct 12 12 Nov 12

4. Procurement of office equipment 322,300.00 NCB Post 8 Oct 12 19 Nov 12

(ii) Table 10: Works Contract Package to be procured during the initial 18 months of implementation:

Ref.

No Contract Description

Estimated

Amount in US

$(000)

Procure-

ment

Method

Prior or

Post

Review

Bid

Closing/

Opening

Date

Contract

Signature

1. Office upgrading of 20 one-stop

shops in Addis Ababa 115,606.00 NCB Prior 24 Sept 12 5 Nov 12

2. Office upgrading of 5 one-stop-

shops in Adama City 29,500.00 Shopping Post 22 Aug 12 12 Sept 12


shops in Hawassa City 29,500.00 Shopping Post 22 Aug 12 12 Sept 12


shops in Makelle City 29,500.00 Shopping Post 22 Aug 12 12 Sept 12


shops in Bahir Dar City 29,500.00 Shopping Post 22 Aug 12 12 Sept 12

6 Office upgrading of 5 one-stop-

shops in Bahir Dar City 29,500.00 Shopping Post 22 Aug 12 12 Sept 12

2. Consulting Services

(a) Table 11: List of consulting assignments with short-list of international firms.

1 2 3 4 5 6 7

Ref.

No.

Description of

Assignment

Estimated

Cost

Selection

Method

Review

by Bank

(Prior/Pos

t)

Expected

Proposals

Submission

Date

Date of Contract

Signature

1. Project Coordinator 13,900.00 IC Post 24 Aug 12 28 Sept 12

2. Procurement Specialist 13,900.00 IC Post 24 Aug 12 28 Sept 12

80

3. Financial Management

Specialist

8,300.00 IC Post 24 Aug 12 28 Sept 12

4. M&E System Design 50,000.00 CQS Post 2 Nov 12 21 Dec 12

5. Baseline Data Collection 600,000.00 QCBS Prior 9 Oct 12 28 Dec 12

6. Consultancy for Training

Modules and TOT

1,000,000 QCBS Prior 2 Oct 12 21 Dec 12

7. Identification of Clusters

and Diagnostic Study

30,000.00 IC Post 31 Aug 12 5 Oct 12

8. Orientation on Demand

Driven Private Sector

Development to

Implementing Agencies

20,000.00 IC Post 31 Aug 12 5 Oct 12

9. Development of

Communication Materials

and Conducting Outreach

Campaign

200,000.00 QCBS Prior 2 Oct 12 21 Dec 12

10. Market Assessment 20,000.00 IC Post 7 Sept 12 12 Oct 12

11. Financial Audit 5,000.00 LCS Post 17 May 13 8 July 13

81

Monitoring & Evaluation

WEDP data and results indicators.

113. The implementation of the WEDP M&E system at federal, regional, sub-city (in Addis

Ababa) and woreda level will ensure that all data necessary for the reporting on the results

indicators will be collected. The data will draw on four major sources:

114. Membership registration. WEDP membership registration will be done at the OSS for all

participants in WEDP, and the registration form will capture basic information from female

entrepreneurs and their MSEs. The Project Implementation Manual (PIM) will detail the process

to be followed as well as the outline of the relevant administrative questionnaire. This baseline

data will help to inform the analysis of beneficiaries' performance and will additionally qualify

its findings. The assigned membership number will serve as the central individual identifier that

will enable the establishment of linkages between different data sources.

115. FeMSEDA institutional reports. The reports are compiled at woreda, sub-city, regional

and federal levels on a quarterly and yearly basis. Under the new TVET/MSEs strategies,

FeMSEDA´s reporting system will also integrate data on TVET training targeted at MSEs and

supported by FeMSEDA. Therefore, this data source will be informative about participation in

the training component of WEDP and will hence need to separate between WEDP participants

and other participants in the system. The annual reports will contain information on the results

indicators for WEDP participants and MSEs.

116. PFIs institutional reports. All MFIs tapping the line of credit offered by WEDP are

required to fulfill a number of reporting requirements which will provide a wealth of information

to the staff at DBE designated to work on the WEDP account. It is planned to use this

information for the reporting on the results indicators, and the information flow will be shared

with FeMSEDA to enable them to fulfill their mandate of having the overall coordination

responsibility of WEDP.

117. Impact evaluation surveys. The impact evaluation will largely build on a panel data set

containing information on individuals in the treatment and control group. Conditional on

sufficient implementation, the baseline and endline data collection will be complemented by a

midterm survey. The survey tools will be designed to capture extensive information on the

entrepreneurial/business activities of respondents. The impact analysis will be able to measure

the project's effectiveness on indicators for standard business performance including the three

PDO level indicators for earnings and employment. The impact evaluation will also contain

qualitative studies of a range of issues to provide evidence on the results of the program.

Data collection

118. The WEDP M&E system will be built on the existing M&E systems used by FeMSEDA,

which will collect information from all relevant institutions but especially the participating

TVET colleges and the PFIs. FeMSEDA will be responsible for the design, coordination and

implementation of the integration of WEDP M&E into the existing system. The procedural

82

details of gathering data and the aggregation of data at the NPMT level will be specified in the

PIM. In addition, FeMSEDA will be in charge of data analysis and overall reporting on the

project implementation progress.

119. Although the project is planned to largely utilize the existing reporting system in the

various involved institutions, selective changes and improvements may be necessary in order to

strengthen the reporting and monitoring capability. The transmission and integration of data as

well as data quality assurance mechanisms require refinements despite the existence and

maintenance of electronic databases at the woreda, sub-city, regional and federal level.

Consequently, the existing information flow chart shows weak linkages between the reporting

systems of FeMSEDA, TVET colleges and MFIs. The project will focus its M&E support on

strengthening Femseda´s reporting system through a separate M&E consultancy. This will be

done mainly through:

- Assessment of the quality of M&E data and institutional capacity. CSA´s new

Ethiopia Data Quality Assessment Framework (EDQAF) will be replicated in

FEMSEDA, and an action plan for improvement of their M&E system will be

developed.

- Ensure integration of M&E across implementing institutions. FeMSEDA will be

capacitated to collect and analyze WEDP progress data from all implementing

institutions in an integrated manner. This includes the development of compatible

electronic data and reporting formats across institutions.

- Tailored M&E training. A training of trainers on M&E activities will be provided to

Femseda, TVET colleges, OSSs and MFIs staff at federal and regional levels, who

will replicate the training at woreda and sub-city levels. Building on existing and

functioning Government M&E systems, training manuals on M&E will be developed.

- IT capacity. Assessing capacity of the database software and consulting on

improvements of quality verification and data transmission system.

- Documentation. Development of M&E manuals and upgrading of existing reporting

formats for woreda, sub-city and federal level.

Using data to assess project effectiveness during implementation

120. Project outcomes will be assessed using the M&E system and the data it generates. While

some of the data (e.g. loan disbursement) will be informative about the implementation status

and progress of WEDP, especially the PDO level indicators will provide guidance to the project

management on the suitability and effectiveness of the actions taken. While the majority of the

results indicators will already be tracked through this system, the data collection for the impact

evaluation will allow an in-depth analysis of the project's impact on project beneficiaries. The

analysis will include but not be restricted to results indicators for individual participants.

Moreover, a midterm data collection and review, depending on sufficient project

implementation, will be useful to provide meaningful evidence on the influence of WEDP on

participants as well as on its outreach to interested individuals (those who do initially register for

WEDP membership).

83

Role of Development Partners

121. The Canadian International Development Agency (CIDA) participated in the WEDP

preparation and appraisal mission. Subject to approval by Canada's Minister of International

Cooperation, CIDA will consider making a contribution of up to C$10 million to WEDP. This

contribution would be the form of a grant to the World Bank trust fund established for WEDP

and would be deployed over the five-year timeframe of the program in accordance to the terms

and conditions of a CIDA-World Bank agreement and per WEDP's cash flow requirements.

122. At appraisal, the joint view of CIDA, the GoE and the World Bank was that the CIDA

contribution, if approved as such, would be available for use in an unearmarked fashion across

WEDP components. However, it was also agreed at appraisal that the optimal deployment of

CIDA's contribution may be revisited over the next few months. Without being able to commit

to a timeline for a final decision by Canada's Minister of International Cooperation, the CIDA

Ethiopia Program will prepare and submit to the Minister the necessary WEDP approval

documentation in mid-2012. If its contribution is approved, CIDA would participate actively

alongside the GoE and the World Bank in the WEDP monitoring, supervision and review

process in order to help ensure the most successful outcome of this initiative. In the follow-up to

the appraisal, CIDA looks forward to continued participation in detailed operational and

implementation discussions concerning WEDP.

123. DFID is very supportive of the WEDP and intends to provide $3m over the program‘s

lifetime to financial year 2013/17 to fund the provision of technical assistance to Micro Finance

Institutions benefitting from, or standing to benefit from, credit line support from the World

Bank under the program. Such support will be subject to confirmation around June 2012, once

DFID has completed internal approval processes. DFID looks forward to continued close

cooperation in the implementation of the WEDP, especially to facilitate alignment between

activity under it, and that envisaged under DFID‘s wider Private Enterprise Program in Ethiopia.

124. The total project financing with the participation of CIDA and DIFD is now USD 63

million.

84

Annex 4: Operational Risk Assessment Framework (ORAF)

Ethiopia: Women Entrepreneurship Development Project – P122764

Stage: Appraisal

1. Project Stakeholder Risks Rating: M I Description :

1. GoE is the main stakeholders for WEDP. The Growth & Transformation Plan of the

GoE has MSE development as key to Ethiopia‘s economic development in the coming 5 years. In response to the MSE growth, GoE has recently released their National Strategy

on MSEs. The political commitment to implement the strategy is high but WEDP type

project requires close cooperation of multi sector ministries.

2. Federal Micro & Small Enterprise Development Agency (FeMSEDA) under the

Ministry of Urban Development & Construction has been assigned the responsibility of implementing the MSE strategy. The agency does not have the right mix of expertise to

implement the strategy

Risk Management:

1. The project will actively seek support from the National MSE Development Council set up by the government to ensure

coordination for the implementation of the National MSE strategy.

2. The recent restructuring of FEMSEDA has brought in staff with the required expertise to ensure effective implementation. In addition, under the WEDP FeMSEDA will contract a National Coordinator and other expertise

under the project implementation component to support implementation.

Resp: Stage: Due Date : Status:

2. Implementing Agency Risks (including fiduciary)

2.1 Capacity Rating: M Description :

8. FeMSEDA has very little experience of implementing large donor financed programs and may not be able to realize the donor expectation. In addition, funds flowing to

MFIs and beneficiaries require a satisfactory system in place to function well.

9. FeMSEDA‘s aggressive plan to implement the MSE strategy and to show results in a very short term is unrealistic, especially in targeting women, the urgency to achieve

―numbers‖ of self employed will result in a mere show of numbers without creating

concrete and sustainable self employment.

10. The financial management risk arises from weak capacity, including turnover and

shortage of qualified accountants and auditors. There might be delays in financial reports and audit reports.

Risk Management :

8. FEMSEDA will have the overall responsibility to ensure effective implementation of the project, the 2 main components ―Access to Micro Finance ‖ and ―Skills, Technology and Cluster Development‖ will be implemented by the

relevant sector agencies; Development Bank of Ethiopia and TVET Institutions. FeMSEDA has recently been

strengthened with additional expert staff and WEDP will provide capacity building support not only to the Project Implementation Team, but to all the implementing partners in the targeted cities. The operational manual will give clear

guidance on the access to micro finance component and the Project Implementation Manual will serve as a guide to

overall implementation, especially component 2.

9. WEDP is designed in a conservative manner to ensure that the project activities are well planned and phased in after

ensuring the capacity of the implementing partners is in place. Orientation of implementing staff in favor of demand driven and private sector development approach to service provision will be provided by the project. The project

includes a robust monitoring and evaluation component to ensure realistic and sustainable outcome.

10. A comprehensive PFM reform program is being addressed by the government‘s Civil Service Reform Program

supported by PSCAP and PBS II. WEDP will build the FM systems on this reform program.


3. Project Risks

85

3.1. Design Rating: M Description :

14. There is a substantial risk in designing a multi sectoral entrepreneurship development

project. Unlike brick & mortar projects, most components are complex and ―soft‖ in

nature making it difficult to measure the progress.

15. Women entrepreneurs do not come forward and demand services due to the perceptions about One Stop Shops as serving only group enterprises formed by the unemployed and

have a reputation as centers for only business registration and taxation purposes.

Risk Management :

14. The project preparation process has been participatory and conducted in close collaboration with multiple stakeholders

to seek ideas and lessons learned. The preparation of the components has actively sought input from these stakeholders

through technical workshops and interactions for exchange of ideas to fine tune the concepts and design elements and critically to seek the buy-in of the stakeholders, especially the implementing agencies.

15. The project includes a robust public awareness raising campaign, an outreach strategy and communication to inform the potential clients to assure informed decisions. In addition, the project will make the One Stop Shops welcoming

and customer friendly through ―customer relations‖ training program and giving a ―face-lift‖ to the OSS premises.


3.2. Social & Environmental Rating: L Description :

16. The project has triggered OP 8.30 Support to Financial Intermediaries this in turn has

also triggered OP4.01 Environmental Assessment to conduct an environmental assessment of the MSE receiving financing from the participating MFIs.

Risk Management :

16. The project has developed an ESMF, and includes environmental screening tools based on this framework in the

Operational Manual for the Credit line, which will be finalized by the client prior to Board. In addition, the TA under component 1 for the MFIs will include the environmental and social assessment as one of the key aspects of the

training program.


3.3. Program & Donor Rating: L Description :

17. DFID and CIDA have shown a keen interest to participate in the project through

provision of financing. Their processing constraints and deferred decision making may create

lack of clarity in their specific focus in the project.

Risk Management :

17. The project team has continued their dialogue with both CIDA and DFID during the project appraisal process. Both

donors have participated in the project preparation studies and continue to affirm their commitment to fund the project.

CIDA has committed to provide 10 million USD pending the final approval from their head office. Similarly, DFID has

committed to funding a 3 million USD TA under component 1 for capacity strengthening of the MFIs.


3.4. Delivery Monitoring & Sustainability Rating: L Description :

18. FeMSEDA has recently been given the mandate to implement the national MSE strategy;

it is an emerging agency to implement the mandate and may take some time to create its

capacity to implement the assigned mandate.

Risk Management :

18. The project builds on the existing structures and has aligned its program activities to the national MSE strategy to ensure

harmonization and sustainability. WEDP will adapt the existing M&E processes at OSS, MSE Agencies, TVET and

FeMSEDA to develop a robust M&E system.


3.5. Access to Microfinance component Rating: L Description :

19. The PMT disburses funds to PFIs for the line of credit before the institutional

arrangements, capacity and structure are in place in the PFIs

Risk Management :

19. Close involvement of the Bank during project preparation as well as oversight during implementation to ensure

capacity is built up, including on-site evaluation of PFIs. Moreover provision of TA from high caliber experts in the

field will also be in place. This risk is moderate

86

20. Lack of uptake from MFIs for the proposed line of credit due to i) improved financing conditions for Ethiopian MFIs by alternative sources; ii) lack of interest in the proposed

instrument.

21. Political influence on borrowers

22. An insufficient number of MFIs qualify as PFIs

23. PFI default risk

24.PFI Board and Management fail to take all the necessary steps to establish and implement

appropriate credit technologies and practices

20. In case MFIs can access alternative (more convenient) sources for financing the specific target segment of female-led micro and small enterprises, then the development objective is not at risk, but it creates a risk to project implementation.

However the current outlook confirms the scarcity of liquidity for MFIs and the absence of alternative sources of

funding for the specific target. This risk is low

21. Prospective PFIs include both (regional) government-owned institutions as well as private ones. There may be a risk of

political interference on selection of sub-borrowers in the government-owned institutions. Selection of PFIs themselves will be based on a stringent quantitative and qualitative process and will include World Bank no-objection. This risk is

moderate

22. The selection of PFIs is made from a large pool of public and private MFIs operating in the project intervention areas

and meeting key selection criteria assessed through a due diligence process. Action plans for borderline MFIs to meet

the criteria for becoming PFIs are also prepared. This risk is moderate

23. Careful selection and monitoring of PFIs based on agreed criteria. Diversification of risk by working with multiple

MFIs. Close coordination with the MFI Supervision Department in the National Bank of Ethiopia. This risk is low

24. There will be an early commitment of PFIs and the provision of mandatory TA linked to the use of the credit facility.

The subsidiary loan agreements will include specific terms in order to allow the PMT to take corrective actions, including an exit mechanism, if PFIs fails to comply with the project requirements. This risk is low


5. Project Team Proposed Rating Before Review M

5.1. Preparation Risk Rating: M 5.2 Implementation Risk Rating: M

87

Annex 5: Implementation Support Plan


Strategy and Approach for Implementation Support

1. WEDP is a complex project involving multi sector ministries such as; the Ministries of

Industry, Education, Urban Development & Construction, Women Child & Youth Affairs, and

the Development Bank of Ethiopia. To ensure effective communication and coordination among

these ministries the project will utilize the existing Federal MSE Development Council, chaired

by the Ministry of Urban Development & Construction. In addition, the implementation of the

project will be supported by a full time National Coordinator, a procurement specialist, and an

accountant. Expert consultants will be contracted by FeMSEDA to provide technically support

tailored to the needs of the Project at the different stages of its implementation.

Implementation Support Plan

2. During the first year of implementation, technical implementation support will focus on

ensuring timely contracting of the National Project Coordinator, procurement specialist and an

accountant for the Project Management Team at FeMSEDA. The PMT will ensure putting in

place the procurement processes, FM systems, designing of the M&E system, contracting for the

market assessment studies at the City levels, initiating the baseline collection, contracting

consultancies for the development of the training program for the implementing agencies and the

development of the training modules for the ToT for technical and entrepreneurship development

training program. In addition, the project will undertake the orientation program for all

implementing staff at all levels in all cities.

3. The project will officially kick off with intensive outreach and communications campaign

at national regional and city levels, including an official launch ceremony. To support this effort,

FeMSEDA will develop an action plan under the Communication, Outreach and Advocacy sub

component 2a, including the production of communication material to initiate the introduction of

WEDP to the potential clients using various communication channels.

4. In the first year of implementation, the project will design the Monitoring & Evaluation

program and undertake a training program to ensure effective and timely flow of information to

and from the One Stop Shops, the TVET agencies, participating MFIs, City Agencies,

ReMSEDA and FEMSEDA.

5. Under Component 1, the project has designed a robust technical Assistant program and

will set up a TA facility at the Development Bank of Ethiopia. A critical success factor and a key

goal of the project are to build the institutional and human resource capacity of PFIs to

effectively service the female MSE client market. An assessment study of selected Ethiopian

MFIs conducted in December 2011 revealed a number of institutional weaknesses which need to

be addressed in order to ensure that PFIs are able to properly utilize funds received through the

program and support the WEDP target group with convenient, timely services. In particular,

88

weaknesses were noted in the areas of cash-flow-based lending techniques, savings mobilization,

financial and operational reporting, risk management and corporate governance.

6. In order to make the credit facility effective, PFIs will receive a mandatory, specific,

high-quality, technical assistance by an international consulting firm to help build capacity in

individual lending/financial services to female-run MSEs before any credit is given. This

capacity building will enable PFI officials and staff to serve female MSE operators adequately -

training them in assessing MSE business proposals, individual lending provision, gender-

sensitive customer care, and developing suitable financial products for the target group. This will

be done in partnership with DFID. Based on the MoU currently under discussion with DFID, all

the cost related to this component will be covered by DFID.

7. The TA facility will work with the PFIs in developing and executing a plan for absorbing

and applying international best practices and credit technologies. New or existing MSE finance

departments that will be set up/empowered by PFIs as a condition of their participation in the

project will be the main focus of this TA. The TA will involve, among other activities, recruiting

and training new loan officers and the MSE extension staff at the One Stop Shops, strengthening

lending policies and procedures, putting in place the prerequisites for the accounting, risk

management and management information systems, supporting sub-loan application preparation,

screening and decision-making, and supporting sub-loan monitoring and collections.

8. At this stage, selection procedures governing the treatment status of loan applicants

necessary for the planned rigorous impact evaluation will be developed simultaneously. PFIs will

consecutively receive guidance and assistance on how to implement these procedures as well as

on how to meet the reporting requirements. Strict compliance is crucial as the research design

and the baseline data collection for the impact evaluation will essentially depend on the ability to

differentiate between loan applicants in the treatment and in the control group.

9. To benefit from subcomponent 1b, PFIs will be required to enter into Technical

Cooperation Agreements (TCA) with the PIU in DBE. Under such agreements, PFIs will receive

TA free of charge for a period of 8 months. The PFIs will have access to the Credit Facility only

if they enter into such TCA with the PIU, since the success of the Credit Facility depends on the

application of modern MSE lending technologies, introduction of gender sensitive products and

the capacity of loan administration within PFIs.

10. The Team will also support implementation of WEDP through continuous technical

advice especially in the first year of implementation. The Bank team will include HQ and CO-

based staff and consultants. During subsequent years, focus will shift to monitoring the MSEs.

89

Time Focus Skills Needed Resource

Estimate First twelve

months

i. Project

management team,

including the National

Project Coordinator,

procurement specialist and

accountant

ii. Procurement of

goods and services for

OSS

iii. M&E system

design

iv. baseline data

collection

v. MFI Technical

Assistance

vi. Orientation of the

implementing agencies

vii. Training modules

and ToT

viii. communication

material and outreach

campaign

ix. Identification of

clusters and diagnostic

study

x. Market assessment

xi. Financial Audit

Expertise in : project

management including

M&E, procurement,

finance, PSD,

communications, business

skills, technology, master

trainers, MFI TA experts,

baseline experts

12-60

months

Review of progress in

provision of services at the

OSS, TVETs and access to

credit at MFIs.

Micro credit specialists,

M&E and Impact

evaluation specialists,

MSE and gender

specialists

Mid-term

review

Review the progress of the

project, the participation of

the MSEs, identification of

gaps in implementation,

mid-term data collection

and qualitative analysis

Completion

report

Impact evaluation based on

end line

Skills Mix Required

Skills Needed Number of

Staff Weeks

Number of

Trips per year

Comments

Team leader 12 2

Micro Finance Specialist 6 2

Gender Specialist 4 2

MSE/Private Sector

Specialist

4 2 Depending on the availability of the

experts in the CO.

90

M&E expert 6 2

Specialized technical

experts

As required

Communication 4 In country

Administrative support 6 0 In country

Disbursement specialist 2 In country

Procurement specialist 2 In country

FM specialist 2 In country

Impact evaluation expert 6 2

Partners

Name Institution/Country Role

Ato Deselagne Minister of State

Ministry of Urban development

& Construction

Chair Inter Ministerial Steering

Committee

Ato Gebremeskal Director General,

Federal Micro & Small

Enterprise Agency

Overall supervisor WEDP

Ato Yohannes Solomon Director, Marketing & Market

Development

Project Coordinator

Stuart Lane Counselor Development

Canadian International

Development Agency

Co-financier

Paul Walters Deputy Head

DFID

Co- financier

91

Annex 6: Compliance with OP 8.30 Financial Intermediary Lending


1. The project design is fully compliant with Bank operations policy on financial intermediary

lending, as contained in OP 8.30. The Project was cleared by the World Bank MSME Finance Service

Line on February 22, 2012

Macroeconomic policies and sectoral conditions.

2. The Government of Ethiopia (GoE) reported that GDP grew at 11.4 percent in FY2010-11 (vis-à-

vis the Fund‘s estimate of 7.5 percent). Estimates of sectoral growth indicate that agriculture grew by 9

percent, while the industrial and service sectors expanded by 15 percent and 12.5 percent, respectively.

The Fund‘s estimate of GDP growth rate (Table 1) appears to be reasonable, especially if seen through the

lens of tight credit ceilings on private sector through April 2011, mounting domestic inflation, and

irregular power supply arising from distribution difficulties that could account for a lower growth rate

than the Government‘s own estimate.

Table 1. Comparison GDP estimates, GoE and IMF

3. Figure 1 shows that inflation continues to decline after its acceleration in the first half of 2011.19

The Central Statistical Agency statistics indicate that the year-on-year inflation decreased from 39.2% in

November to 35.9% in December and further down to 32.0% in January. The food inflation rate is the

main driver – it decreased from 50.3% in November to 46.5% in December to 41.4% in January. Non-

food inflation also decreased, from 24% in November to 21.8% in December to 19.2% in January.

Despite the decreasing trend, the inflation levels are still a painful reminder of the inflation spikes of

2008-2009.

19 The impact of inflation is an issue affecting the whole World Bank‘s portfolio in Ethiopia. The WEDP is not an exception to it

and will face important limitations due to high inflation translating into negative interest rates on the credit line, as it will be done

in local currency. The Bank team has extensively discussed this issue both internally and with the Government of Ethiopia. While

being aware of the important risks associated to lending funds in a high-inflation environment, it has also being concluded that,

given the forecasts of a decline in inflation over the coming years, such risks are expected to decrease over time.

2007/08 GOE Fund GOE Fund GOE Fund

Real GDP growth 11.2 10.1 10.0 10.5 8.0 11.4 7.5

Nominal GDP Billion Birr 248.0 335.4 335.3 382.9 383.4 511.2 486.3

GDP deflator, growth 30.3 24.1 24.2 1.4 3.8 20.1 17.9

2009/10 2010/112008/09

92

Figure 1. Inflation in Ethiopia. CPI from CSA, year on year.

4. Inflation is forecasted to continue its decline in 2012 owing to improved domestic food

production, lower global commodity prices and lower rates of money supply. Prices increased in 2011 on

the back of rising global food and fuel prices, rapid expansion of the broad money supply and large

currency devaluations. Global food and fuel prices are expected to moderate as a result of weaker global

demand, and the lower oil price will also reduce the cost of imported goods. Domestic food production is

expected to pick up in line with better weather, following a poor harvest in 2011 caused by substandard

rainfall. Forecasts indicate that inflation will be halved - from an estimated 33% in 2011 to 16% in 2012.

However, it is expected to remain in double digits because of persistent fiscal deficits, weak monetary

policy, a depreciating exchange rate and a pick-up in global oil prices from 2013 onwards.20

5. The banking sector. Currently, the banking system consists of 17 banks, 3 of which are owned by

the State. Before the financial sector reform in 1994 only state-owned banks were operational in Ethiopia.

The reform opened the sector to private ownership even if the state owned banks still make up of half of

the system, with the domination of the Commercial Bank of Ethiopia (CBE), far and away. The banking

system remains closed to foreign ownership. However, Ethiopia‘s 14 private banks showed generally

positive results for the year ending in June 2011. For the private banking industry as a whole, deposits

rose by 30 percent while loans were up 21 percent, with the latter‘s slower growth due to credit caps in

place till April 2011. Foreign assets held by banks fell during the year, despite a strong balance of

payments surplus, but this partly reflected a deliberate sell-off of foreign exchange holdings to build up

local currency liquidity following a new NBE Bills Purchase Directive that came into force towards the

end of the fiscal year. Profits were up 45 percent for the year (same growth as the year before) and returns

on equity averaged 30 percent for the industry as a whole. Because of a volatile macro-economic

environment, deposits have a short term maturity. Currently, DBE and the Construction and Business

Bank (CBB) are the only banks which provide medium and long term loans. The banking sector is also

very small to any criteria, both in absolute size and in relative figures. The level of loans to private sector

was around 10% of GDP as of June 2010. The NPL ratio is 5% in average in the system, with a range up

to 20% in some banks. Currently, interest rates in the banking system are well below the inflation rate of

37%. Interest rates on savings deposits, set as minimum by NBE, and lending rates are around 5% and

12% on average, respectively.

6. The microfinance sector. The Ethiopian microfinance sector is relatively young (started in 1997)

and consists of 31 regulated MFIs that reach over 2.5 million clients (June 2011) with an outstanding loan

balance of Birr 6.5 bill. (384 mill. USD) and a balance of saving of Birr 3.4 bill (199 mill. USD). The

MFIs have a rural orientation and largely work with the group-lending methodology. The industry is very

20

Inflation may be higher if instability in South Sudan cuts off Ethiopia‘s main oil supply and forces it to import oil

at a higher cost from elsewhere. Conversely, it may be lower if the government agrees to a program with the IMF

and reduces public spending and tightens monetary policy as a result.

93

concentrated, with more than 80% of the clients (and more than 90% of outstanding loans) being served

by the 5 largest MFIs. Moreover, as these large MFIs are bound to their own ―territory‖ – being one of the

regions – competition in the industry is very limited. These 5 largest MFIs are likely to be influenced in

different ways by their respective regional governments, which practically own the MFI and provide

below market-rate funds. MFIs are supervised by the National Bank of Ethiopia and operate within a clear

regulatory framework21

.

Financial Institutions Selection and eligibility criteria.

7. This section will separately focus on the selection of the Development Bank of Ethiopia (DBE) as

a wholesaler and on the selection of the participating MFIs as retailers.

Development Bank of Ethiopia (DBE)

8. The Development Bank of Ethiopia has been initially selected as the wholesaling institution

based on its track record of managing lines of credit and on its management commitment to the project. In

order to ensure compliance with the eligibility criteria set out under OP 8.30 a due diligence assessment

of DBE has been conducted during project preparation.22

DBE`s eligibility as a PFI has been confirmed

provided that the DBE strengthens the following areas:

risk management and internal audit,

human capital and performance assessment,

loaning process,

MIS and IT.

The World Bank will offer technical assistance to address the identified gaps.

9. Key information collected through the due diligence assessment of DBE covered the following

areas:

Governance: DBE is owned by the government and has a Board of Management (BOM)

appointed by and answerable to Public Financial Enterprises Agency (PFEA). PFEA, a

directorate which reports directly to the Prime Minister`s Office, is in charge of overseeing the

operations of all state-owned financial institutions. BOM is comprised of seven directors with one

of them acting as the Chairman. BOM has the authority to appoint a president and management

team, Executive Management Committee (EMC), who are responsible to the BOM for the day-to-

day management of the business of the bank.23

BOM approves the bank`s five-year strategic plan

and its annual implementations prepared by EMC. So far, the HR has not provided any training to

the directors of BOM. For BOM`s effective oversight over the bank`s senior management, the

directors need to be provided training on banking business, financial and operational risks, and

financial reporting on a regular basis.

Supervision: DBE is supervised by the National Bank of Ethiopia (NBE). NBE`s on-site

examination team visited the bank in May-June 2011, but the examination report has not been yet

completed. Prior to that, NBE had performed an on-site examination of the bank in 2007. In

addition to an on-site examination on a yearly basis for risky banks, NBE performs an off-site

examination of all banks on a quarterly basis. In its latest draft off-site report, DBE has been rated

21

See NBE proclamation no. 40/1996 and no. 626/2009 together with NBE directive no. 18/2006. 22

A due diligence assessment of DBE has been conducted by Mr. Murat Arslaner (World Bank) in January 2012.

The information related to DBE contained in this Annex is therefore based on the financial analysis report prepared

by Mr. Arslaner. 23

The Chairman is the Minister of Revenue; and the other directors are mostly senior officials at various ministries.

94

at ―3‖ fair by NBE. NBE pointed out the inadequate board and management oversight and weak

asset quality as a supervisory concern in its letter.

External Auditing: DBE`s annual financial have been audited by a private audit company,

Taddesse Woldegabriel & Co., since 2009. The company performs audit according to the

generally accepted accounting principles. The audit of the financial reports of 2010 has not yet

been completed. The audit company gave a qualified opinion under 15 items on the financial

reports of 2009 because of non-compliances with the accounting standards. The major breaches in

the standards are: not measuring bonds at amortized cost, including suspended interest

receivables in the accrued interest on balance sheet, not reversing the accrued but uncollected

interests related to NPLs, not maintaining provision for short term receivables past due more than

a year, not provisioning against deterioration of assets waiting in resale, capitalizing the interest

accruals related to a rescheduled loan, not provisioning against NPLs and related interest accruals

according to NBE`s directives, and not measuring completely the gains and losses from FX

fluctuations. The auditors were also not able to ascertain the completeness and accuracy of the

interest incomes on loans and were not provided by the bank with Board minutes and

correspondence files with the regulatory bodies.24

Internal Audit Process: the Internal Audit Process (IAP) conducts, financial, operational, and

special investigative audits based on its annual audit plan or request of Executive Management or

BOM. In 2011, IAP performed audit in loaning, property management, procurement, finance and

accountants (in cash management and international banking) functions minimum once a year.

According to IAP, main deficiencies with loaning functions are incomplete due-diligence, lack of

background check with tax authorities and other banks, and missing audited financial reports.

Risk management: Risk Management Process (RMP) was established in 2008. The RMP

generates reports on portfolio concentration, loan quality, and provisioning on quarterly basis.

The RMP reviews about 80% of the loan portfolio every year. It is also in charge of reviewing

loan procedures and updating internal risk rating criteria. The reports are sent to BOM and

President. The bank`s major risks are credit, liquidity, and interest rate risks. The RMP needs to

be strengthened in the areas of liquidity, interest rate, and operational risks. The Executive

Management Committee should implement the recommendations of RMP especially on credit

risk. Currently, the bank has established credit limits for sectors but not clients. The bank does

not comply with these risk limits for sectors. Because of a mismatch between the maturities of

assets and liabilities, the bank is exposed to interest rate and liquidity risk in the medium and long

term. Up to a year, the bank is not exposed to liquidity risk.

Human resources: DBE has 509 staff in the HQ and 548 staff in the branches and regions, of

which significant numbers are non-professional staff. Although most of the professional staff has

a university and college degree, the HR, Internal Audit, Risk Management, Strategic Planning

and Change Management Processes underlined that lack of skills are major weaknesses of the

bank. The skills gap is manifested by poor loan quality and the bank`s dependence on government

support. The bank put in place a transformation program in 2006 to reengineer the business

processes with an aim of enhancing the capacity. However, the bank lags behind the target

because of budget constraints. Currently, the bank does not have a performance assessment

system for staff.

IT and MIS: DBE generates its financial reports in monthly, quarterly, and annual frequency

within a few weeks after the closure of accounts. However, the Finance and Accounts Process

24

The bank has two different versions of the audit report of 2009, for internal and external purposes. The version on

the website and printed hard-copies are missing the qualification pages about the breaches in accounting standards.

Moreover, the audit report did not include any information about the NPL portfolio, a generic issue with all banks.

The audited reports of banks do not provide the reader with comprehensive corporate, financial, and risk-related

information, as opposed to the international reporting standards.

95

(FAP) is in charge of analyzing and reconciling accounts, producing financial statements, as well

as managing payment systems, operating the MIS, and managing non-lending interest earning

assets and interest bearing liabilities. FAP is having difficulties to measure the bank`s results with

precision according to Generally Accepted Accounting Principles and NBE`s regulations,

originating from poor IT support, manual entries, and skills gap. The IT Process needs to be

improved in order to support the bank`s operations vigorously.

Profitability: According to the audited and un-audited financial statements, interest incomes on

loans and provisions against NPLs have been the main drivers of the bank`s financial results.

Since the bank had a loose policy in reversing the accrued interests of NPLs and provisioning

against NPLs in accordance with NBE`s regulation, the bank had achieved a reasonable amount

of profitability until 2010.

Table 2: Selected Income Statement Items (Million Birr)

2008 2009 2010 2011

Net Interest Income 267 265 328 152 Net Gain and Loss on

Foreign Exchange 0 0 0 340

Operational Expenses(-) 64 68 93 112 Provisions for Doubtful

Debts & Investments(-) 150 198 250 88

Net Income 66 53 51 205

Given the problems with measuring DBE`s operational results in accordance with the Generally

Accepted Accounting Principles, the Bank has achieved relatively high ROA and ROE in 2011,

in comparison with the past. However, this improvement in the bank`s profitability ratios were

mainly the result of Birr`s depreciation against foreign currencies. Except that year, the bank`s

profitability ratios had been below the sector averages.

Table 3: Profitability Indicators (%)

2008 2009 2010 2011

ROA 1.22% 0.38% 0.48% 1.00%

ROE 4.50% 1.60% 2.68% 9.01%

Capital adequacy: Currently, DBE has a paid up capital of Birr 1.8 billion Birr. Its capital

adequacy ratio is 16.66% with a downtrend as of 2011, in excess of the minimum regulatory

requirement of 8%. The bank`s very fast growth strategy in lending in the recent years is one

of the reasons in deteriorating capital adequacy. Moreover, most of the new loans are still on

a grace period. As the potential problems with these loans fully emerge in the future, the bank

may face further deterioration in its capital adequacy. The bank has also substantial amount

of legacy NPLs, originating from politically driven lending decisions during the previous

regimes. Although the bank has written off some portion of these NPLs so far, further write

offs to clean out the balance sheet may lead to a capital shortage in the future. Indeed, as a

preemptive action, NBE has already requested the MoFED to increase the bank`s capital to

the registered level of Birr 3 billion.

96

Table 4: Regulatory Capital Adequacy Ratios (CAR, %)

2008 2009 2010 2011

CARs 22.93% 18.43% 16.80% 16.66%

Leverage Ratios 3.65 4.13 5.57 6.93

Portfolio quality: The bank has grown very fast after 2009 under the new management with

the mobilization of domestic funding sources. Indeed, the bank`s total assets were up to Birr

13,841 million in June 2011 from Birr 6,408 million in June 2009. Because of the difficulty

of identifying viable lending projects in such a short period, most of the new funds have been

invested in liquid instruments, such as cash& banks, short-term deposits, and government

securities. The majority of the banks and short term deposits are placed in overseas banks

which have contributed substantially to the bank`s profitability after 2010 with the

depreciation of Birr against foreign currencies.

Table 5: Selected Assets (Million Birr)

2008 2009 2010 2011

Cash & Banks 584 512 1,465 1,469

Short-term Deposits

1,600

Government Securities 254 219 184 150

Loans 5,389 6,441 8,532 11,246

Non-performing Loans 1,660 2,386 1,941 1,312

Provisions (-) 1,153 1,313 1,525 1,300

Total Assets 5,658 6,408 9,266 13,841

The bank`s NPL balance as of June 2011 amounts to 11.7% of the total loan portfolio,

substantially down from its level of 30.8% in 2008. 25

The improvement in NPL ratios is the

result of rehabilitative actions (write offs and loan reschedules) against NPLs and the rapid

expansion of the lending portfolio since 2009. Since most of the new loans are on a grace period,

it is premature to conclude that the recovery of NPL ratios would continue in the future.

Table 6: Selected Asset Quality Ratios (%)

2008 2009 2010 2011

NPL Ratios 30.8% 37.0% 22.8% 11.7%

Provisioning Rates 69.5% 55.0% 78.6% 99.1%

Lending operations and dedicated units: The lending operations in the HQ are organized

under Credit Process, Project Appraisal Sub-Process, and Corporate Loan Approval Team.

Credit Process is under a Vice President, while Project Appraisal Sub-Process and Corporate

Loan Approval Team report directly to the President. The Bank has also separate units to

25

The bank has classified more than half of the NPL balance in ―Loss‖ category, while the rest falls into

―Substandard‖ and ―Doubtful‖ categories, almost in equal amounts. Despite a significant improvement of the NPL

ratios in aggregate basis since 2008, the NPL ratios for the Regions deviate substantially from the average. For

example, NPL ratios for Western, Southern, and Central Regions are higher than 50%. The bank`s senior

management explained this as a result of having transferring some NPLs granted by HQ to the regional offices in

2011.

97

manage Rural Financing Project (RUFIP) and Export Credit Guarantee and Special Fund,

which are under the same Vice Presidency as Credit Process.

To carry out the project, DBE will establish a WEDP dedicated team26

under the Export

Credit Guarantee and Special Fund unit.27

The dedicated WEDP team at DBE will report to

the WEDP Project Steering Committee once a year. The PIU will be staffed with qualified

personnel capable of satisfactorily implementing all aspects of the project. Its responsibilities

include:

(i) on-lending to PFIs for final lending to sub-borrowers;

(ii) effective functioning of the on-lending facility to final borrowers through PFIs;

(iii) on-going monitoring of the PFIs to ensure compliance with project criteria;

(iv) adherence to all fiduciary and safeguard requirements of the World Bank for final

borrowers;

(v) monitoring and evaluation based on key project development indicators.

Participating MFIs

10. Letters requesting expressions of interested for participating in the line of credit for the WEDP

were sent to all Ethiopian MFIs operating in the 6 planned intervention areas of the project28

. Out of 18

MFIs expressing interest, a group of 12 MFIs (i.e. only those MFIs having more than 10.000 clients as of

March 2011)29

were selected in order to undergo a full due diligence assessment by an international

consulting firm appointed by the World Bank30

.

11. All 12 MFIs have been assessed against the following criteria:

The MFI must be duly licensed in Ethiopia and at least two years in operation.

MFI‘s owners should be ―fit and proper‖. It must have qualified and experienced management,

adequate organization and institutional capacity for its specific risk profile.

The MFI must be in ―good standing‖ with its supervisory authority (i.e., it should meet all

prudential and other applicable laws and regulations) and remain in compliance at all times.

The MFI must have well defined policies and written procedures for management of all types of

financial risks (liquidity, credit, currency, interest rate and market risk, as well as risks associated

with balance sheet and income statement structures).

The MFI must maintain capital adequacy prescribed by prudential regulations (i.e. minimum

capital ratio of 12% computed as ratio of total capital to total risk-weighted assets).

The MFI must have adequate liquidity (i.e. shall maintain at all times liquid assets equal to 20%

of their total deposits).

26

DBE prefers the use of the expression ―WEDP dedicated team‖ rather than PIU. 27

The actual composition of the team is currently being discussed with DBE presidency and MoFED. 28

The 6 major Ethiopian cities planned to be covered by the project are Mekele (Tigray), Bahir Dar (Amhara)

Adama (Oromiya), Hawassa ( SNNPR) and Addis Ababa and Dire Dawa. 29

Data collected and provided by Association of Ethiopian MFIs (AEMFI) 30

The World Bank appointed the firm Business & Finance Consulting on November 2011. The assignment started

on November 28, 2011 and ended with the submission of the final report on January 20, 2011. The experts first

conducted a desk study and then a site visit to Ethiopia from December 12—23, during which time they held

meetings with the management of all 12 MFIs as well as with the head of MFI supervision of the National Bank of

Ethiopia (NBE), with the National Association of MFIs (AEMFI), and with the World Bank Ethiopia country office.

The 12 MFIs evaluated as part of the assignment were Addis CSI, Africa Village Financial Services, Amhara CSI,

Dedebit CSI, Dire-dawa MFI, Harbu MFI, Meklit MFI, Metemamen MFI, Omo MFI, Oromia CSSCO, Specialized

Financial and Promotional Institution, and Wasasa MFI.

98

The MFI must have positive profitability and acceptable risk profile.

The MFI must classify its assets and off-balance-sheet credit risk exposures (at least four times

per year) and make adequate provisions. It must have adequate portfolio quality (i.e. an NPL

ratio as percentage of total assets not exceeding 8%).

The MFI must have adequate internal audits and controls for its specific risk profile.

The MFI must have adequate management information systems.

The MFI must agree to engage in individual lending to female-led micro and small enterprises.

The MFI must agree to undergo an intensive mandatory technical assistance which may require

substantial changes to their business model.

Table 7 below summarizes the consultant‘s conclusions regarding the compliance of the MFIs with each

of the OP 8.30 requirements listed above.31

Table 7: MFIs‟ Compliance Table

Lic

ense

d a

nd

op

erat

ing

2

yea

rs

Fit

and

pro

per

ow

ner

s an

d

man

agem

ent

In g

ood

sta

nd

ing

wit

h

NB

E

Wel

l-d

efin

ed r

isk

man

agem

ent

po

lici

es

Ad

equ

acy

of

cap

ital

Ad

equ

ate

liq

uid

ity

Po

siti

ve

pro

fita

bil

ity

an

d

acce

pta

ble

ris

k p

rofi

le

Ad

equ

ate

po

rtfo

lio q

ual

ity

and

pro

vis

ion

s

Ad

equ

ate

inte

rnal

aud

its

and

con

tro

ls

Ad

equ

ate

MIS

Co

mm

itm

ent

to l

end

ing t

o

wo

men

Inte

rest

in

th

e p

rog

ram

Addis CSI

AVFS X

Amhara CSI

Dedebit CSI

Dire MFI * X X

Harbu MFI

Meklit MFI X X

Metemamen MFI X

Omo MFI

Oromia CSSCO

SFPI

Wasasa MFI * Dire-dawa’s license was just renewed in late December 2011.

12. Four MFIs did not meet one or more of the requirements, thus excluding them from participation

in WEDP. These MFIs are AVFS, Dire-dawa MFI, Meklit MFI, and Metemamen MFI.

13. Given that 8 MFIs passed the OP 8.30 requirements, yet only 3 MFIs are likely to be initially

accepted into WEDP32

, the following ranking of MFIs based on their overall institutional and financial

31

Compliance is indicated by the color green. Non-compliance is indicated by the color red and an ―X‖ mark.

32

As none of the top 3 MFIs is operating in Addis Ababa, the intention is to replace the third ranked MFI (Oromia

CSI) with Addis CSI, as the latter operates in Addis Ababa and has the largest outreach. Oromia CSI will then be

part of the second wave of TA and disbursements.

99

performance has been provided. Amhara, Dedebit, and Oromia were notably stronger than the other MFIs

with regard to the evaluation criteria and thus are identified separately in the ―top tier‖ of the list below.

Table 8: MFIs‟ ranking

Top tier 1. Amhara CSI

2. Dedebit CSI

3. Oromia CSI

Middle tier 4. SFPI

5. Addis CSI

6. Wasasa

7. Harbu

8. Omo MFI

Bottom tier (non-

compliant) 9. AVFS

10. Metemamen MFI

11. Meklit MFI

12. Dire MFI

14. Each of the twelve MFIs studied requires extensive technical assistance in a variety of areas in

order to be in line with international best practices. The TOR for technical assistance elects to focus on

five key areas, as reflected in the following five objectives:

Strengthen lending operations by improving the credit policies, processes and staff capabilities of

participating MFIs, with a special emphasis on individual lending to women in urban areas

Assist MFIs to mobilize more savings from customers

Improve the frequency, accuracy, and scope of financial and operational reporting

Strengthen the risk management function of participating MFIs

Improve corporate governance through the introduction of best practices in recruitment and

governance policies

15. TA is expected to be provided as a mandatory condition to the 8 MFIs accessing the WEDP credit

line. The TA project is expected to last for 24 months. The TA will be provided to these 8 MFIs on a

rotating basis in groups of 3. Each MFI, therefore, will receive roughly eight months of support. The table

below summarizes key general information (as of Sept 2011) for the 8 eligible MFIs identified by the due

diligence. The last row shows the % of Government ownership. Ethiopia represents a very special

context, where the presence of the Government in the economy is pervasive at all levels. The story of

microfinance in Ethiopia is intimately linked to the country‘s historical background. The Ethiopian

government has assumed a dominant role in providing microfinance at various levels. It owns the largest

MFIs and has been directly involved in other ways such as targeted lending programs. Against this

background, the WEDP line of credit will necessarily work with MFIs whose share of Government

ownership vary from 25% to 96% as specified in the table below, as these are the largest and most

financially viable MFIs operating in Ethiopia. Managers of the government-owned MFIs stated during

interviews that the government did not control or influence their strategy or operations. The presence of

government employees on the boards of directors of many MFIs, however, ensures that some level of

government influence is present.33

Even in MFIs which are not government-owned, the influence of the

government is apparent in the relatively low interest rates (compared to other countries), small average

loan sizes, and the prevalence of group lending techniques, all of which are encouraged by the

33

This is particularly true for MFIs like Omo, at which 9 of 10 directors are from the government.

100

government, whether local or federal. The WEDP will try to limit the Government‘s influence through the

TA program, where the design of tailored financial products and the structuring of operational procedures

will take into account the necessity to limit such sphere of influence. At the same time, by supporting also

MFIs which are not Government-owned, the WEDP line of credit will provide an important support to the

creation of a level playing field in the microfinance sector.

Table 9: General information on compliant MFIs

Key financial data for the same subset of MFIs are reported in the table below.

Table 10: Financial information on compliant MFIs

ADCSI ACSI DECSI OCSSCO SFPI Wasasa Harbu OMO

Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12

GENERAL INFORMATION

Number of branches 134 238 157 249 10 24 13 168

Number of employees 690 3,000 2,041 2,407 168 225 88 1,263

Number of active borrowers 160,971 689,951 392,639 515,280 55,866 19,359 509,888

Number of outstanding loans 159,783 689,951 392,639 515,280 33,421 55,866 19,359 382,405

Number of active savers 1,705,683 484,626 672,000 33,335 58,036 22,232 51,227

Percent of women borrowers 64% 68% 51% 37% 56.3% 43.8% 47.2% 30.3%

Average loan amount (USD) 205 165 281 149 101 127 89 108

Avg. deposit balance (USD) 50 118 64 39 35 25 367

Government ownership (%) 96% 25% 25% 83% 0% 0% 0% 80%

ADCSI ACSI DECSI OCSSCO SFPI Wasasa Harbu OMO

Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12 Q1 2011-12

BALANCE SHEET SUMMARY (USD)

Total assets 45,102,650 195,231,508 155,945,657 95,300,010 4,988,949 8,138,070 2,224,018 50,249,227

Net loans 32,240,577 111,370,377 107,504,628 75,265,986 3,294,712 6,960,469 1,685,636 36,457,709

Total deposits 10,169,317 84,499,941 57,285,914 46,255,892 1,303,928 2,041,725 629,556 18,776,723

Equity 22,845,936 56,162,898 39,625,307 25,684,725 1,993,288 2,865,126 959,121 11,454,809

CAPITAL ADEQUACY

Regulatory capital adequacy ratio 61.9% 36.0% 36.0% 30.4% 44.7% 37.0% 46.8%

Total equity to total assets 50.7% 28.8% 25.4% 27.0% 40.0% 35.2% 43.1% 22.8%

Paid-up capital (ETB) 231,017,000 2,000,000 4,775,000 65,050,000 406,000 201,000 200,000 1,896,250

PROFITABILITY

Return on assets 5.6% 6.4% 2.5% 3.7% 3.7% 8.3% 1.8% 0.7%

ROA less donation & non-oper. income 5.6% 4.1% 2.5% 3.7% 8.3% 1.8% 0.6%

Return on average equity 11.3% 22.4% 10.4% 14.2% 8.5% 23.7% 3.7% 2.7%

LIQUIDITY

Regulatory liqudity ratio 90.4% 54.1% 38.0% 23.0% 50.7% 20.1% 36.9% 42.0%

Gross loans to deposits 322.6% 135.0% 192.9% 165.8% 258.4% 348.1% 274.3% 219.2%

Liquid assets to total assets 20.4% 23.4% 14.1% 11.1% 13.2% 5.1% 10.4% 15.6%

CREDIT RISK

PAR ratios:

31-90 days 0.1% 0.3% 2.6% 0.00% 0.1%

91-180 days 0.9% 0.1% 0.3% 0.0% 0.5% 0.00% 0.2% 2.7%

181-360 days 0.9% 0.3% 1.3% 0.0% 0.3% 0.00% 0.1% 2.0%

361+ days 1.1% 1.1% 2.0% 2.9% 4.2% 2.49% 3.2% 14.0%

Total classified loans (91+) 3.0% 1.5% 3.5% 2.9% 5.0% 2.49% 3.5% 18.8%

PAR 31+ to total loans 1.5% 3.8% 5.5% 2.49% 3.6% 18.8%

Loan loss reserve to PAR 91+ 58.0% 162.7% 75.9% 65.4% 43.9% 83.1% 68.5% 60.8%

Exchange rate 16.98 16.98 16.98 16.98 16.98 16.98 16.98 16.98

101

16. Some MFIs are more active than others in issuing individual loans, as shown in the following

table, where the % of individual lending declared by each of the 8 compliant MFIs is reported.34

Two out

of the three MFIs that will be in the initial batch for receiving the line of credit (i.e. Amhara CSI and

Dedebit CSI) are already active in individual lending. This indicates that these MFIs do not necessarily

need to wait for the completion of the TA before being able to disburse individual loans.

Table 11: Individual lending by compliant MFIs

Interest rates and on-lending terms.

On-lending terms from DBE to PFIs:

Interest rate. Based on the due diligence conducted on the MFIs, the interest rates from DBE to

MFIs should be in the range of 8.5% to 9.0%. This range of interest rates is higher than the

subsidized rates offered by a few sources in Ethiopia but lower than the rates at which MFIs have

been borrowing from purely commercial sources. Nearly all of the MFIs considered for this

project are borrowing from RUFIP35

and Commercial Bank of Ethiopia (CBE) at low interest

rates. RUFIP charges 6.0% annually. CBE charges 7.25% for loans guaranteed by the

government or international organizations and around 9.5% for loans without a guarantee. A few

MFIs are also borrowing from humanitarian NGOs at 0% interest rate, although the amounts

borrowed in these cases tend to be very small. After exhausting these inexpensive sources, MFIs

have increasingly been borrowing from commercial sources with rates going from 9.5% to 14%.36

Other MFIs expressed interest in applying for commercial loans in the future. International

development institutions are lending across the globe at interest rates which roughly average 9%

per year.37

The high demand of Ethiopian MFIs for funding, which is a product of the large

supply-demand gap for credit among MSEs, ensures that demand for WEDP financing will be

high, even at interest rates above those of RUFIP and CBE.

34

MFIs are not required to report the number or volume of individual loans to NBE, so the availability of data was

limited. 35

Rural Financial Intermediation Program, a 90 mill. USD line of credit financed by IFAD and AfDB and managed

by DBE, addressed to MFIs and rural saving and credit cooperatives to promote the delivery of financial services to

rural poor, including smallholder farmers. 36

Three MFIs – Harbu, SFPI, and Wasasa – reported receiving funding on commercial terms from Oromia

International Bank, Zemen Bank, and Awash Bank. The interest rates were 14% for Zemen (to SFPI), 12.5% for

Oromia International Bank (to Harbu and Wasasa), and 9.5% for Awash (to Wasasa). 37

Rough estimate based on the BFC consultant‘s research in recent years on funding sources of MFIs in Africa,

Asia, and Eastern Europe.

MFI %

Addis CSI n/a

Amhara CSI 19%

Dedebit CSI 22%

Harbu MFI 15%

Omo MFI 1%

Oromia CSSCO n/a

SFPI 3%

Wasasa MFI 1%

102

Maturity. Loans from DBE to PFIs will have medium-term maturities of 3 to 5 years. RUFIP is

lending at very long maturities of ten years with a five-year grace period. CBE‘s loan maturities

are closer to commercial terms at 4 - 5 years with no grace period. Purely commercial sources

such as Zemen Bank generally lend at shorter maturities of around 3 years. Loans from

international development institutions to MFIs in other countries and regions typically have

maturities of 3 to 5 years. WEDP may reserve the option to include a grace period of no more

than twelve months for its loans to MFIs; however, most MFIs are not expected to need a grace

period. Participating MFIs are expected to receive steady cash flows from clients relatively soon

after disbursal, as the funding is intended for urban borrowers, for whom regular monthly

payments will be the most appropriate repayment method. Nevertheless, there may be MFIs

which intend to use WEDP funds primarily for on-lending to urban residents engaged in

agriculture or for clients‘ investments in fixed assets, which may require bullet repayments or

grace periods between the client and the MFI. In such cases, which are expected to be

uncommon, a grace period from WEDP to the MFIs would be appropriate.

Allocation of the loan amount to PFIs: The loan amount will initially be credit capped for the

PFIs based on their financial strength and perceived absorptive capacity. But loans will be

provided on a first come first serve basis, until the PFI achieves its credit cap.

On-lending arrangements. DBE would make arrangements for on-lending the funds to the

selected PFIs on a monthly or quarterly basis against the prior month‘s loan book. PFIs may be

eligible for advance payments from DBE against a loan demand schedule to be prepared by the

PFI in advance.38

. Once the allocated amount was drawn down the PFI would be free to recycle

the loan as long as it utilizes the funds for supporting female run MSEs, in conformity with the

WEDP guidelines.

Arrangements for Closing of the Line. Interest payments on the line and principal payments

after year five (or year three, depending on the original maturity) by the PFIs would be channeled

to the PIU in DBE. The PIU will have the responsibility, subject to approval by MoFED, to

channel the reflows back to selected MFIs to extend more sub-loans to female run micro and

small businesses. The PIU could choose at that point to select additional MFIs or to award the

amount to the best performing of the initially chosen MFIs.

On-lending terms from PFIs to final beneficiaries:

17. PFIs will be free to set their own MSE on-lending rates on the basis of market conditions and

without interest rate caps. The PFIs will bear the full risk of the loans to MSEs.

Loan amount. It is likely that many borrowers are receiving loan amounts which are less than

their repayment capacity, creditworthiness, and financial needs would justify. A number of

factors contribute to this problem:

Graduated loan amounts are still applied to most products, indicating that a cash flow

analysis of repayment capacity is still not the driving force behind setting loan amounts

In cases where cash flow analysis is used, staff‘s ability to assess cash flows is weak,

which may lead MFIs to set loan amounts too low in order to provide a large cushion for

error in the cash flow estimates

High inflation in recent years is being reflected in higher loan amounts demanded by

clients

Inflexible collateral requirements may result in loan amounts being reduced due to

inadequate collateral

Strong GDP growth has led to higher incomes and thus higher repayment capacity

38

Details on the terms of advance payments and loan allocation will be accurately outlined in the Operational

Manual.

103

The former regulatory maximum loan amount of ETB 5,000 may continue to act as a

psychological barrier to MFI management

Most MFIs assessed for the WEDP acknowledged that higher loan amounts are needed in many

circumstances. Therefore, WEDP will support the gradual increase of loan amounts for qualifying

borrowers. This change can be effected through technical assistance which focuses on improving

cash-flow-based financial analysis and making modifications to product conditions and lending

policies. However, maximum loan amounts should be raised gradually in line with improvements

in staff capacity in order to avoid excessive risk-taking. Maximum loan amounts should be set on

an individual basis by each MFI in consultation with WEDP consultants, considering market

conditions and the MFI‘s institutional and operational capacity.

Interest rate. WEDP will not influence lending interest rates of participating MFIs in any

systematic manner. The 8 MFIs presented above all generate a satisfactory return on assets at the

present interest rates. Although many MFIs are able to generate this satisfactory return thanks to

direct and indirect subsidies and support from the government and various NGOs, such support is

not expected to decrease dramatically in coming years.39

Even in the event of a decrease in

subsidies, the large supply-demand gap for credit among MSEs in Ethiopia suggests that MFIs

would have the ability to increase interest rates as necessary without a significant reduction in

demand. WEDP will, however, support greater transparency of MFI interest rates through the

disclosure of the effective interest rate to borrowers.40

Monitoring arrangements

Monitoring of DBE

18. The PIU will be expected to inform the Project Steering Committee once a year and to report to

the Bank on the program‘s progress on a quarterly basis. During project implementation regular reviews,

which include inter alia,

(i) assessing capital adequacy, profitability and asset quality;

(ii) compliance with prudential and regulatory requirements of NBE;

(iii) ownership structure;

(iv) corporate governance and risk management will be carried out.

Specifically the following indicators will be regularly monitored:

Table 12: Compliance with the National Bank of Ethiopia (NBE) Prudential Provisions.41

Normative Prescribed

Value Capital adequacy ratio 8% Liquidity ratio-general 20% Total open foreign currency exposure toward capital 15% Maximum exposure to single borrower relative to capital (*) 25%

39

This implies that the chance that some MFIs participating in the WEDP line of credit might continue to receive

subsidies (e.g. as mentioned above, they are all lending from RUFIP at a highly subsidized rate, or some MFIs are

using Government‘s guarantees for some part of their portfolios) cannot be ruled out. All this needs to be seen in the

perspective of the strong governmental presence in the Ethiopian financial sector described above. The WEDP line

of credit is therefore inevitably forced to deal with this context. 40

Although interest rates reported by MFIs range from 10% to 20%, AEMFI estimates that the effective rates are as

high as 30% to 40%. Ethiopian MFIs currently apply flat rates (except DECSI, which uses the declining balance

method) and do not include commissions in the interest rate calculation. 41

These are based on current NBE prudential requirements and are subject to change.

104

Maximum exposure to group of related borrowers relative to capital (*) 35% NPL Ratio <=15%

(*) These criteria will apply to loans granted as part of the lending operations

Monitoring of PFIs

19. The performance of the PFIs will be evaluated based on the following: (i) number of loans

provided through the WEDP line of credit; (ii) average loan size; (iii) total amount disbursed; (iv)

collection rate through a report on portfolio aging; (v) portfolio at risk greater than 30 days. Loan

agreements with PFIs will contain covenants designed to encourage MFIs to maintain acceptable financial

performance (see table below).

Table 13: Financial covenants for PFIs

Indicator Requirement

Regulatory liquidity ratio (as defined by NBE) At least 20%

Liquid assets (as defined by NBE) to total

assets

At least 10%

Capital adequacy ratio (as defined by NBE) At least 12%

Single credit exposure limit At most 1% of capital

Aggregate credit exposure to related parties At most 15% of capital

PAR 90 At most 5%42

of gross loans

Equity investments43

At most 20% of capital

Net fixed assets At most 50% of capital

Net income Positive net income in at least one of the

previous 3 quarters

20. Non-compliant PFIs will have their access to the LOC suspended, and ultimately terminated. If

satisfactory corrective action is not taken, PFIs will be subject to a substantial penalty44

. Additionally, the

independent external auditors of the PFIs will be required as part of each PFI‘s annual statutory audit to

provide a report to DBE regarding the accuracy of the MSE loan balance information supplied by the PFI

to the DBE when determining the amount of its MSE lending eligible for WEDP financing. Reporting and

compliance checks should be performed quarterly based on the full set of reports required by NBE.

21. The PIU under DBE will have the responsibility of supervising and monitoring the credit line

implementation progress. The PIU will monitor the PFIs by the receipt of monthly loan portfolio

schedules and supplemental information on loan performance. After the draw down period reports will be

quarterly. The PIU will also receive audited financial statements from the PFIs annually with a

certification by the auditor of the PFI‘s activity on the MSEs‘ portfolio financed through WEDP. In

addition, PIU staff will be expected to visit the PFIs and interview their management on a periodic basis.

Should an MFI prove unable to on-lend its allocation within two years from the first loan draw down, the

PIU would be free to allocate the remaining amount to the other MFIs. The PIU and the World Bank,

during loan supervision, would have access to the books of the MFI, upon reasonable notice, to do ex-

post review of the portfolio under the loan.

42

For the purposes of this calculation the MFI can exclude loans which have been delinquent more than 3 years, as

some MFIs do not write off old bad loans. 43

Excluding investments in subsidiaries which would be consolidated under IFRS 44

Details on the amount of the penalty and related procedures will be outlined in the Subsidiary Loan Agreement.

105

Use of Bank’s funds

22. The following figure shows the planned flow of funds from the World Bank to the final

beneficiaries based on a two-tier structure. Final beneficiaries are female-owned (partially or fully) MSEs.

Figure 2: Flow of Funds for Micro Finance Component

Directed credit

23. Several studies have identified a number of factors which have constrained the supply of credit to

females MSEs in Ethiopia45

. Being a female entrepreneur in Ethiopia is not easy. Low levels of female

education and low literacy rates put women at a disadvantage from the start. Moreover, Ethiopian society

discourages women from taking a career in business, especially outside traditional women sectors such as

food processing. Women entrepreneurs tend to operate in competitive markets with low value-added

businesses. Women tend to pursue a low risk strategy (copying others), have few business skills, limited

access to relevant networks and finance for investment. Whereas these bottlenecks are also relevant for

male entrepreneurs, they are more severe for women entrepreneurs.

24. Microfinance institutions in Ethiopia do hardly target growth-oriented women entrepreneurs.

Most MFIs provide small loans, based on group lending methodology to clients in rural areas. MFIs have

a social mission and choose to concentrate their (limited) funds on the poor. Also, MFIs have limited

knowledge of the size and attractiveness of the growth-oriented entrepreneurs as a target market and lack

skills for appraising individual loans. As a result, MFIs rely on real estate as collateral for larger loans.

45

Triodos Facet (2011), Ethiopian Women Entrepreneurship Capacity Building Studies.

Tsegaye, T. & Tsega, L. (2010). Gender mainstreaming in Microfinance Institutions in Ethiopia. Occasional

paper no. 28. AEMFI / OXFAM Novib.

World Bank

MoFED

Development Bank of Ethiopia

PFI 1 PFI 3PFI 2

Sub-borrower 1

Sub-borrower 2

Sub-borrower 3

Sub-borrower 4

Sub-borrower 5

Sub-borrower 6

Bank loan is passed through MoFED to DBE

DBE provides medium-terms lines of credit to eligible PFIs

Mandatory TA

Mandatory TA

Mandatory TA

PFIs on-lend to female-run MSEs

Tier 1: wholesaling

Tier 2: retailing

106

Finally, MFIs lack sophisticated internal management systems that allows for a more qualified approach

to risk management.

25. The outreach to women among all Ethiopian MFIs amounts to approximately 30%, which is

considerably lower than the African average of 57%. Taking into account that women constitute 75% of

the MSE operators, the women access to finance seems even more alarming. Some general conclusions

can be drawn regarding the outreach to women, based on interviews with MFIs and the Oxfam Novib

Gender mainstreaming report (2010):

Generally, the outreach to women is higher in urban areas compared to rural areas.

The MFIs that report high outreach to women are generally small MFIs.

98% of the MFIs do not have a gender policy.

Women represent 26% of MFIs‘ staff and the majority is concentrated in administrative &

support staff functions.

Few MFIs offer ―women-friendly‖ financial products and collateral requirements require

involvement of the husband.

Women tend to take smaller loans as their businesses have smaller capital requirements and

because women estimate their repayment capacity more conservatively than males.

MFIs do not have the right products and procedures to profitably serve the female-run MSE

segment which, if served with the appropriate credit methodology could be a highly profitable

and low risk undertaking.

The vast majority of MFIs that have an interest in developing micro and small business lending to

female entrepreneurs do not have the liquidity to start this new line of business.

26. The WEDP project is seen as essential by the government to promote female oriented

opportunities reforms in the MSE sector. The new GoE MSE Strategy provides a coherent and suitable

framework for support to growth-oriented female operated MSEs aiming at improving the provision of

demand-driven business development services, high quality technical training and technology transfer.

This project can have a strong demonstration effect and encourage other MFIs to enter the segment on

their own initiative. These benefits should over time substantially increase the flow of formal credit to

female run MSEs and reduce the constraints to growth of the sector caused by very limited access to

finance, justifying the provision of free technical assistance and the direction of the LOC to female run

MSE credit.

Consultation with IFC

27. The World Bank has received IFC support since the preparation phase of the project, when

discussions were held between IFC and the Bank on how to better coordinate and exploit synergies. IFC

has been invited to consider its involvement in the provision of credit guarantees to MFIs even if no

concrete decision on this has been taken by IFC by the time of project‘s appraisal. While IFC is

increasing its presence within the Ethiopian private and financial sector, it is recognized that it is not

positioned to lend to a policy bank as a wholesaler, as envisioned under this project.

Ras DashenTerara (4620 m)

E t h i o p i a nP l a t e a u

De

na

ki l D

es

er

t

Gr

ea

t

R

if

t

V

al l

ey

O g a d e n

T I G R AY

A FA RA M H A R A

S O M A L I

O R O M I YAG A M B E L A

DIRE DAWA

SOUTHERN NATIONS,NATIONALITESAND PEOPLES

ADDIS ABABA

BENSHANGUL

HARARI

Dinder

Tekeze

Atbara

Blue Nile

Aw

ash Akobo

Genale

Dawa

Baro

Abay

Hang

er

Didesa

W

abe Shebele

Ramis

Wabe G

estro Wabe Shebele

WeldiyaDebraTabor

Axum

Adigrat

Sodo

Negele

Mega

Imi

DoloOdo

Degeh BurAware

Warder

Domo

Moyale

Yavello

Wendo

Shashemene

Nazret

Welkite

HosainaBonga

GimbiAwash

Dodola

Humera

Kebri Dehar

Gonder

Dese

DebreMarkos

Asela

Goba

Gore

Nekemte

Jima

HarerDire Dawa

Bahir Dar

Mekele

Gambela

Awasa

Asosa

Asayita

JijigaADDISABABA

SUDAN ERITREA

SOMALIA

UGANDA KENYA

DJIB

REP.OF

YEMEN

To Keren

To Gedaref

To Marsabit

To Wajir To

Mogadishu

To Mogadishu

To Hargeysa

WeldiyaDebraTabor

Axum

Adigrat

Sodo

Negele

Mega

Imi

DoloOdo

Degeh BurAware

Warder

Domo

Ferfer

Moyale

Yavello

Wendo

Shashemene

Nazret

Welkite

HosainaBonga

GimbiAwash

Dodola

Humera

Kebri Dehar

Gonder

Dese

DebreMarkos

Asela

Goba

Gore

Nekemte

Jima

HarerDire Dawa

Bahir Dar

Mekele

Gambela

Awasa

Asosa

Asayita

JijigaADDISABABA

T I G R AY

A FA RA M H A R A

S O M A L I

O R O M I YAG A M B E L A

DIRE DAWA

SOUTHERN NATIONS,NATIONALITESAND PEOPLES

ADDIS ABABA

BENSHANGUL

HARARI

SUDAN

SOUTHSUDAN

ERITREA

SOMALIA

UGANDA KENYA

DJIBOUTI

REP.OF

YEMEN

Dinder

Tekeze

Atbara

Blue Nile

Aw

ash Akobo

Genale

Dawa

Baro

Abay

Hang

er

Didesa

W

abe Shebele

Ramis

Wabe G

estro Wabe Shebele

INDIANOCEAN

LakeTana

LakeTurkana

R e d S e a

G u l f o f A d e n

To Keren

To Gedaref

To Marsabit

To Wajir To

Mogadishu

To Mogadishu

To Hargeysa

E t h i o p i a nP l a t e a u

De

na

ki l D

es

er

t

Gr

ea

t

R

if

t

V

al l

ey

O g a d e n

Ras DashenTerara (4620 m)

14°N

36°E 40°E 44°E

46°E 48°E

42°E32°E

34°E 36°E 38°E 40°E 44°E 46°E 48°E42°E32°E

12°N

14°N

12°N

10°N

8°N

6°N

4°N

10°N

8°N

6°N

4°N

ETHIOPIA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33405 R2

JULY 2011

ETHIOPIASELECTED CITIES AND TOWNS

REGION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

REGION BOUNDARIES

INTERNATIONAL BOUNDARIES