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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 68550-MA

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF EURO 37.9 MILLION (US$50 MILLION EQUIVALENT)

TO THE

KINGDOM OF MOROCCO

FOR A

MICRO, SMALL AND MEDIUM ENTERPRISE DEVELOPMENT PROJECT (APL 2)

AS PART OF THE MICRO, SMALL AND MEDIUM ENTERPRISE FACILITY

FOR THE MIDDLE EAST AND NORTH AFRICA REGION ADAPTABLE PROGRAM LENDING (APL)

June 8, 2012

Finance and Private Sector Development Group Middle East and North 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.

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CURRENCY EQUIVALENTS (Exchange Rate Effective April 30, 2012)

Currency Unit = Moroccan Dirham (MAD) 1 Euro = US$ 1.321 1 US$ = EUR 0.76 1 US$ = MAD 11.14

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AfDB African Development Bank ANPME National Agency for the Promotion of SMEs APL Adaptable Program Loan AWB AttijariWafa Bank BAM Bank Al-Maghrib (Central Bank of Morocco) BCP Banque Centrale Populaire BMCE Banque Marocaine du Commerce Extérieur BMCI Banque Marocaine du Commerce et de l'Industrie CCG Caisse Centrale de Garantie CGEM General Confederation of Enterprises in Morocco CPM Credit Populaire du Maroc CPS Country Partnership Strategy DPL Development Policy Loan DSB Banking Supervision Department (Central Bank of Morocco) EFI Eligible Financial Institution ESMF Environmental and Social Management Framework ESSU Environmental and Social Screening Unit EUR Euro FM Financial Management FSD Financial Sector Development FY Fiscal Year GCC Gulf Cooperation Council GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment IFC International Finance Corporation IMF International Monetary Fund M&E Monitoring and Evaluation MAD Moroccan Dirham MENA Middle-East and North Africa MFI Microfinance Institution MIS Management Information System MoEF Ministry of Economy and Finance MSME Micro, Small and Medium Enterprise NBFI Non-Bank Financial Institution OM Operations Manual ORAF Operational Risk Assessment Framework PAD Project Appraisal Document

PCG Partial Credit Guarantee PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFI Participating Financial Institution PIE Project Implementing Entity PIU Project Implementing Unit SGMA Société Générale Maroc SME Small and Medium Enterprise SOE Statement of Eligible Expenditures TA Technical Assistance TOR Terms of Reference UAB Union of Arab Banks UIFR Unaudited Interim Financial Reports USD United States Dollar VSE Very Small Enterprise WB World Bank

Regional Vice President: Inger Andersen Country Director: Simon Gray

Regional Strategy and Programs Director: Jonathan Walters Sector Director: Loic Chiquier Sector Manager: Simon C. Bell

Task Team Leader: Teymour Abdel Aziz

KINGDOM OF MOROCCO MICRO, SMALL AND MEDIUM ENTERPRISE (MSME) DEVELOPMENT PROJECT

TABLE OF CONTENTS

Page

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

A. Country Context ........................................................................................................................ 1 B. Sectoral and Institutional Context ............................................................................................. 3 C. Higher Level Objectives to which the Project Contributes ....................................................... 6

II. PROJECT DEVELOPMENT OBJECTIVES ............................................................................ 7

A. PDO ........................................................................................................................................... 7 Project Beneficiaries .................................................................................................................. 8 PDO Level Results Indicators ................................................................................................... 8

III. PROJECT DESCRIPTION .......................................................................................................... 9

A. Project Component .................................................................................................................. 10 B. Project Financing ..................................................................................................................... 12

Lending Instrument ................................................................................................................. 12 Project Cost and Financing ...................................................................................................... 13

IV. IMPLEMENTATION ................................................................................................................. 13

A. Institutional and Implementation Arrangements ..................................................................... 13 B. Results Monitoring and Evaluation ......................................................................................... 14 C. Sustainability ........................................................................................................................... 14

V. KEY RISKS AND MITIGATION MEASURES ...................................................................... 14

A. Risk Ratings Summary Table .................................................................................................. 15 B. Overall Risk Rating Explanation ............................................................................................. 16

VI. APPRAISAL SUMMARY .......................................................................................................... 16

A. Economic and Financial Analyses........................................................................................... 16 B. Technical ................................................................................................................................. 16 C. Financial Management ............................................................................................................ 17 D. Procurement............................................................................................................................. 18 E. Social (including Safeguards).................................................................................................. 18 F. Environment (including Safeguards) ....................................................................................... 19 G. Other Safeguards Policies Triggered ....................................................................................... 20

ANNEXES

ANNEX 1: RESULTS FRAMEWORK AND MONITORING ................................................................................ 21 ANNEX 2: DETAILED PROJECT DESCRIPTION .............................................................................................. 22 ANNEX 3: IMPLEMENTATION ARRANGEMENTS .......................................................................................... 25 ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) ......................................................... 33 ANNEX 5: SME FINANCE IN MOROCCO ...................................................................................................... 36 ANNEX 6: CAISSE CENTRALE DE GARANTIE ............................................................................................... 42 ANNEX 7: IMPLEMENTATION SUPPORT PLAN ............................................................................................. 43 ANNEX 8: COUNTRY AT-A-GLANCE ........................................................................................................... 44

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.

PAD DATA SHEET

Kingdom of Morocco

Micro, Small and Medium Enterprise (MSME) Development Project (P129326)

PROJECT APPRAISAL DOCUMENT

.

MIDDLE EAST AND NORTH AFRICA

MNSF1

Basic Information

Date: 08-Jun-2012 Sectors: SME Finance (50%), Microfinance (50%)

Country Director: Regional Strategy and Programs Director:

Simon Gray Jonathan D. Walters

Themes: Micro, Small and Medium Enterprise support (100%)

Sector Manager/Director: Simon C. Bell/Loic Chiquier

Project ID: P129326 EA Category:

F - Financial Intermediary Assessment

Lending Instrument: Adaptable Program Loan

Team Leader(s): Teymour Abdel Aziz

Joint IFC: Yes

Borrower: Kingdom of Morocco

Responsible Agency: Caisse Centrale de Garantie

Contact: Centre d'Affaires, Boulevard Ar Ryad, Rabat Title: General Director

Telephone No.: +212-5 37 71 68 68 Email: [email protected]

Project Implementation Period: Start Date: 01-Jul-2012 End Date: 30-Jun-2017

Expected Effectiveness Date: 01-Oct-2012

Expected Closing Date: 31-Dec-2017

Project Financing Data(US$M)

[ X ] Loan [ ] Grant [ ] Other

[ ] Credit [ ] Guarantee

For Loans/Credits/Others

Total Project Cost (US$M): 50.00

Total Bank Financing (US$M): 50.00

Financing Source Amount(US$M)

Borrower 0.00

International Bank for Reconstruction and Development 50.00

Total

50.00

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Expected Disbursements (in USD Million)

Fiscal Year 2013 2014 2015 2016 2017 2018 0000 0000 0000

Annual 5.00 5.00 10.00 10.00 20.00 0.00 0.00 0.00 0.00

Cumulative 5.00 10.00 20.00 30.00 50.00 50.00 0.00 0.00 0.00

Project Development Objective(s)

To improve access to finance for MSMEs in Morocco

Components

Component Name Cost (USD Millions)

Support the provision of Partial Credit Guarantees 50.00

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

Institutional Arrangements X Monthly

Description of Covenant

Borrower to cause the Project Implementing Entity (PIE) to carry out the Project through the Project Implementing Unit (PIU) and Environmental and Social Screening Unit (ESSU) and in accordance with the Project Agreement, Operations Manual (OM), Environmental and Social Management Framework (ESMF) and not to amend the same, and to maintain the PIU and ESSU


Subsidiary Agreement 01-Oct-2012


Borrower to make loan proceeds available to PIE under Subsidiary Agreement under terms and conditions acceptable to the World Bank

iii


PCG Issuance X Monthly


Selection of Eligible Financial Institutions (EFIs), MSMEs, Sub-loans, and Sub-projects, and issuance of Partial Credit Guarantees (PCGs) in accordance with the ESMF, OM, Loan Agreement and Project Agreement


Safeguards X Monthly


Borrower and PIE to comply with ESMF and exclusions listed therein


Mid-term Review 31-Mar-2015


Carrying out of mid-term review and preparation of reports before and after such review


PCG Account X Monthly


Maintenance of the PCG Account and ensuring that loan proceeds are made in and out of said account


PCG Account 30-Jun-2017


Reaching agreement on the use of loan proceeds prior to the closing date for funds remaining in the PCG Account at closing

Conditions

Name Type

Subsidiary Agreement Effectiveness

Description of Condition

The Subsidiary Agreement has been executed on behalf of the Borrower and the PIE

Name Type

Operations Manual Effectiveness


The Project Operations Manual, satisfactory to the World Bank, has been finalized and adopted by the Borrower and the PIE

Name Type

Partial Credit Guarantee Account Effectiveness


The Borrower has provided satisfactory evidence that the PIE has established the PCG Account referred to in Section I.G. of Schedule 2 of the loan agreement, satisfactory to the World Bank

Name Type

Project Implementing Entity Effectiveness


The Project Implementing Entity has established the ESSU in a form and with functions, staffing, and resources satisfactory to the World Bank, and the ESSU is operational

iv

Name Type

Legal Opinions Effectiveness


Legal opinions regarding Loan Agreement, Project Agreement and Subsidiary Agreement

Team Composition

Bank Staff

Name Title Specialization Unit

Teymour Abdel Aziz Economist Team Lead MNSF1

Cedric Mousset Sr Financial Sector Spec. Sr Financial Sector Spec. MNSF1

Steve W. Wan Yan Lun Operations Analyst Operations Analyst MNSF1

Khalid Alouane Language Program Assistant Language Program Assistant MNSF1

Sara Al Rowais Private Sector Development Spec.

Private Sector Development Spec.

MNSF1

Julie Rieger Counsel Counsel LEGEM

Jean Charles de Daruvar Senior Counsel Counsel LEGEM

Eavan O’Halloran Senior Country Officer Country Management Unit MNC01

Khaleel Ahmed Chief Investment Officer Chief Investment Officer CFGME

Deepa Chakrapani Sr Financial Sector Spec. Sr Financial Sector Spec. FPDOK

Nicolas Kotschoubey Consultant Consultant MNSEN

Soukeyna Kane Sr Financial Management Specialist

Sr Financial Management Specialist

MNAFM

Lamyae Hanafi Benzakour Financial Management Specialist

Financial Management Specialist

MNAFM

Abdoulaye Keita Senior Procurement Specialist Senior Procurement Specialist MNAPC

Chaogang Wang Senior Social Development Specialist

Senior Social Development Specialist

SDV

Hassine Hedda Finance Officer Loan Accounting CTRLA

Non Bank Staff

Name Title Office Phone City

Locations

Country First Administrative Division

Location Planned Actual Comments

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I. STRATEGIC CONTEXT

1. This document outlines a proposal for an adaptable program loan to the Kingdom of Morocco for the “Micro, Small and Medium Enterprise (MSME) Development Project” in support of access to finance for MSMEs. This project is the second loan proposed under the MSME Facility for MENA Adaptable Program Loan (APL) structure, as part of the larger MSME Facility for the MENA Region, which aims to provide a comprehensive package of financing and technical assistance for MSMEs across the MENA Region, jointly with the IFC. The first APL under this regional program, a line of credit in the amount of USD 50 million in support of SME finance in Tunisia, was approved by the World Bank’s Board of Executive Directors on July 14, 2011.

2. In Morocco, the importance of access to finance – particularly for MSMEs – is both an economic and political priority. The “Arab Spring” has shown the powerful consequences of exclusion and high levels of youth unemployment in the MENA Region and this was also at the forefront of the street protests in Morocco during 2011. Jobs are at the forefront of attention and unemployment is the main political and economic issue facing the new government. Despite a relatively favorable socio-political situation compared to some other MENA countries, the Moroccan population has expressed their demands for improved governance, social inclusion, economic development and employment opportunities. Inadequate access to finance is frequently cited as one of the population’s main grievances and the private sector continues to claim it is one of the biggest obstacles to the development of business.

3. The Moroccan government has recognized the importance of financial inclusion for individuals and MSMEs. The new government has confirmed the reform program undertaken to date which is aimed at reaching segments of the population that remain excluded from finance. The cornerstone of this reform program is the improvement of the regulatory environment, financial infrastructure and support mechanisms for MSME finance. This project aims to support this ongoing reform program through a targeted intervention, aimed at assisting the financial institutions in their efforts to reach smaller firms. This financial support is set to be complemented with further policy reforms aimed at improving the enabling environment for MSME finance (see Box 3), and with the provision of technical assistance to improve the capacity of financial institutions to better serve this segment (see Box 4).

A. Country Context

4. Morocco has witnessed a period of strong economic growth over the past ten years, and made significant inroads in expanding access to finance for both households and MSMEs. Sound macroeconomic policies and sustained structural reforms have contributed to higher growth, averaging 4.9 percent over 2001-11, sharply surpassing the average growth rate of the 1990s (2.8 percent). Furthermore, sound fiscal policies led to the consolidation of public finances, allowing the budget to run surpluses in 2007 and 2008 (averaging 0.3 percent of GDP) and, in 2009 and 2010, to withstand well the impact of the global crisis and higher world prices of basic commodities, with manageable budget deficits of 2.2 and 4.7 percent of GDP, respectively. The government adopted a prudent debt strategy and debt of the Treasury steadily declined to 47.1 percent of GDP in 2009 from 62 percent in 2005, before jumping to 50.3 percent of GDP in 2010, reflecting the impact of the recent global economic turmoil.

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5. In the face of the global economic slowdown, the Moroccan economy has proved resilient in 2011. The economy grew at 4.8 percent, recovering from the lower 3.7 percent registered in 2010. In a context of economic slowdown in European countries, the main driver of Morocco’s growth has been domestic private consumption (up 6.5 percent) supported by public policies implemented in early 2011. In addition to the stimulus package implemented over the 2008-2010 period to support the income of the population and help the most affected sectors1, the government implemented a new set of measures in the spring of 2011. These additional economic and social measures were implemented to respond to demands for political and economic reforms. Thus, the government decided to increase salaries of public employees by MAD 600 net per month and the minimum wage by 15 percent in two steps (10 percent in July 2011 and 5 percent in January 2012). The government also decided to raise the minimum pension from 600 MAD to 1,000 MAD.

6. Inflation continues to be low (0.9 percent in 2011). The Central Bank of Morocco - Bank Al-Maghrib (BAM) - had kept its policy rate unchanged since March 2009 at 3.25 until March 2012, when the policy rate was lowered to 3 percent. Credit to the economy from the banking sector grew by 10.3 percent in 2011 compared to 10.7 percent in 2010. With the exception of equipment credit, all other sectors have witnessed accelerated credit growth. This was the case for working capital loans (up 19.9 percent compared to 5.9 percent), housing loans (up 10.1 percent versus 8.7 percent), and consumer lending (up 10.5 percent versus 8.1 percent). Meanwhile, the share of non-performing loans in total loans increased marginally to 4.2 percent from 4.1 percent.

7. However, despite these important macroeconomic outcomes, the Moroccan economy continues to face significant challenges: (i) unemployment, especially among the youth, remains a critical concern (urban unemployment increased slightly to 13.4 percent in 2011 from 13.7 percent a year earlier, with a particularly sharp deterioration for young people), (ii) the budget deficit increased by around 6.8 percent of GDP in 2011 instead of the budgeted 3.5 percent of GDP, fueled by historically high subsidies. Substantial tax revenues and revenues from privatization operations helped finance the 2011 deficit. While Morocco’s indebtedness remains under control (the central government debt is projected to rise to around 52 percent of GDP in 2011 from 50.3 percent in 2010), the current universal subsidy system may threaten the medium term fiscal sustainability, (iii) the slowing growth of Morocco’s main trading partners is exacerbating the weaknesses of the balance of payments. The structurally high trade deficit is expected to deteriorate further to 23.1 percent of GDP in 2011 (from 19.5 percent in 2010) with the current account deficit also deteriorating to around 8 percent of GDP (from 4.5 percent in 2010). As a result, Morocco’s net international reserves decreased to USD 19.7 billion (end 2011), down from USD 23 billion in December 2010. They remain, however, at a comfortable level of 5.1 months of imports of goods and services versus 6.8 months the previous year.

8. Medium term macroeconomic prospects of Morocco will be partially affected by the developments in the global economy and particularly in Europe, Morocco’s main trade partner. The anticipated stagnation of economic activities in Europe in 2012 and its slow recovery 1 The income support package implemented over 2008-2010 was mostly benefiting low income employees. It included an increase in 2008 of 10 percent in the wages of civil servants at the lower end of the salary scale and the minimum wage for private sector employees. Furthermore, the marginal income tax rate was progressively cut from 42 percent to 38 percent. At the same time, the upper end of the exempt income bracket was extended. Measures were also implemented to ensure employment preservation and to support export oriented firms most affected by the international economic crisis (such as guarantees on loans; rescheduling of debt; and help with export insurance).

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thereafter will negatively impact Moroccan exports and thus growth. In addition, for 2012, current forecasts indicate that growth will be adversely affected by the agricultural sector which accounts on average for about 13 percent of GDP. However, to partially compensate the sluggish external demand, Morocco is expected to benefit from the effect on domestic demand of the fiscal stimulus programs implemented over the last few years. At the same time, Morocco is well positioned at the regional level to reap the fruits of its ongoing large reform programs, which the new government intends to continue, to improve economic productivity and consolidate public finances. Indeed, the outlook is predicated on the government sustaining the reform momentum of the last few years to achieve the ambitious public investment programs it devised and to continue implementing the main sector strategies, thus consolidating further economic diversification, growth potential, and domestic demand. Under these conditions, the growth rate is expected to slow to around 3 percent in 2012, before improving to around 5 percent in 20142.

B. Sectoral and Institutional Context

9. Morocco has made significant progress in developing its financial sector over the past ten years. The total assets of Moroccan financial institutions have grown significantly and exceed 200 per cent of GDP, a ratio that is well above the level predicted by Morocco’s per capita income. This progress in financial development has been the result of sound macroeconomic policies and important financial sector reforms earlier in the decade, which allowed Morocco to take advantage of favorable conditions (e.g. abundant liquidity and global economic growth). These financial reforms were supported by the World Bank through two Financial Sector Development Policy Loans in 2005 and 2009, and included the restructuring of state-owned financial institutions, the strengthening of the regulatory framework and the improvement of financial infrastructure.

10. Following a divesture by the Moroccan government, state-owned banks only play a limited role in the banking system. Today, they account for less than 10 percent of the market share, down from a 40 percent market share in 2002. The three largest banking groups (AttijariWafa, Credit Populaire du Maroc (CPM) and the Banque Marocaine du Commerce Extérieur (BMCE)), which control 65.5 percent of bank assets, are private. The Ministry of Economy and Finance completed in 2011 its strategy to strengthen the cooperative dimension of the CPM by selling a 20 percent stake in its apex, the Banque Centrale Populaire (BCP), to its regional mutual banks.

11. Morocco has made significant inroads in expanding access to financial services for both individuals and MSMEs. A recent World Bank survey has featured Morocco as a regional leader in providing SMEs with access to credit: the share of SME loans in total loans amounts to 24 percent, which is the highest ratio in the MENA Region (Table 4, Annex 5). Morocco has also been able to maintain the highest rates of microcredit access in the MENA Region, although the sector’s rapid expansion has slowed down after the global financial crisis in 2007. Morocco stands out in terms of Microfinance Institutions’ branch networks, comprising 83 percent of the MENA Region’s reported total. The leasing and factoring industry, two key sources of financing for MSMEs, are amongst the most developed in the MENA Region. The Moroccan post has been an important provider of savings and payment services for the low income population for many

2 Projections are based on the World Bank Global Economic Prospects 2011 key forecasts.

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years. The recent establishment of a fully fledged Postal Bank aims to provide a more comprehensive set of financial services, including credit, to reach individuals and MSMEs in underserved areas.

12. The country’s achievements in expanding financial inclusion for individuals and MSMEs were underpinned by important regulatory reforms and policies. The financial infrastructure was substantially strengthened through the establishment of a modern credit bureau, which provides detailed credit information on individuals and MSMEs to banks and Non-Bank Financial Institutions (NBFIs). The credit bureau also started to collect data from microcredit associations, covering at least 50 percent of loans granted by them. Morocco has also embarked on a far reaching reform of their partial credit guarantee scheme, the Caisse Centrale de Garantie (CCG), which is now the largest guarantee fund in the MENA Region (Box 1).

Box 1 : Caisse Centrale de Garantie - Morocco’s Partial Credit Guarantee Fund

The CCG, a licensed public financial institution, supervised by the Central Bank, is the main provider of partial credit guarantees in the Moroccan financial system. The agency was established in 1949 as a credit institution and one of three institutions providing partial credit guarantees to financial institutions for MSME loans. The CCG also provides guarantees for housing loans.

As part of its 2009-2012 development plan, the CCG underwent a complete overhaul of its product offering. It has introduced new guarantee products focused on SMEs (no guarantee can exceed 10 million MAD and combined guarantees on a single borrower cannot exceed 15 million MAD, which ensures that guarantees are used for SMEs). The guarantee products have been designed to better match SMEs’ financial needs according to their life cycle (investment loans, working capital, restructuring, and private equity). The parameters of the guarantees have also been revised in line with best international practices (equity allocations, fees, simplification and harmonization of eligibility criteria). This redesign helped to streamline and strenghten the national credit guarantee mechanism, which was previously considered too complex and fragmented. Further improvements were made in the claims payment process, reducing the administrative burden for client banks.

Since the introduction of the new product offering in 2009, the activity of the CCG has increased significantly. The launch of the new product offering coincided with the global economic crisis that resulted in a significant slowdown in economic activity. In this context, the government used the CCG guarantee products as a countercyclical instrument to enable SMEs, especially exporters, to overcome their financial difficulties. The amount of commitments of the CCG for companies almost doubled between 2008 and 2009, driven mainly by the guarantees for working capital loans.

While the new design of the guarantee system has had a significant impact on the volume of guarantees, it has not helped to broaden the base of the recipient firms. In fact, the number of guarantees issued annually has almost stagnated between 2008 and 2010, while the average size of guarantees has increased from 0.7 to 1.3 million dirhams. With this backdrop, the CCG is now developing a new partial credit guarantee product to accompany (and leverage on) banks’ strategies towards very small enterprises (VSEs3), which this project aims to support. This new product, Damane Express, will rely on simplified financial eligibility criteria for borrowers and introduce a new, innovative ‘delegated approach’ (i.e. individual applications will not be reviewed ex ante by the CCG) and will not differentiate among various types of credit (only requiring that they do not exceed one million MAD). Guarantees will be delivered rapidly by the CCG as soon as it receives electronically the information collected by the bank. This new product follows the directions set for the reform of the Partial Credit Guarantee (PCG) scheme in 2009 and intends to be simple and attractive for banks (which could then use it to more easily include credit products in the financial packages they offer to VSEs).

13. However, despite the significant progress reached, access to financing remains a challenge for certain populations. While Morocco has made significant process in expanding 3 VSEs are defined as enterprises with a turnover of less than less than 3 million MAD (0.4 million USD). VSEs are situated between microenterprises and SMEs.

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access to finance to SMEs, the largest part of bank financing goes to the larger enterprise part of the SME spectrum. Very small enterprises (VSEs) continue to face challenges in accessing credit. They tend to have less collateral, weaker management capabilities and are more vulnerable to information asymmetry, reducing the likelihood of receiving bank credit. They are underserved by the existing financial system, situated between SMEs, which are served by the commercial banking sector, and microenterprises, which have access to credit through an extensive network of microcredit providers.

14. Against this background, the Government requested World Bank support to its wider financial sector development program through an investment loan in support of access to finance for MSMEs by providing partial credit guarantees for MSME loans. The project scope targets segments which remain underserved by the Moroccan financial system, and complements other government initiatives aimed at promoting the development of MSMEs (Box 2). The proposed operation is also a timely intervention in a challenging market environment, which may lead to reduced bank lending to MSMEs, according to recent polls. This operation provides the Moroccan authorities with the resources needed to maintain and scale up the operations of the national SME PCG scheme, ensuring its sustained growth at a time where public funding is increasingly constrained. Furthermore, this instrument allows leveraging lending from banks to MSMEs by up to sixteen times the amounts committed by IBRD4. Well designed partial credit guarantee (PCG) schemes are considered one of the most market-friendly types of interventions, as they generate fewer distortions in the credit market and are more consistent with a well-functioning banking system. Through the provision of risk mitigation tools, PCGs provide a strong incentive for banks to get into the MSME market, while retaining sound incentives for loan origination and oversight.

15. Female entrepreneurs are amongst the key beneficiaries of PCG schemes, which are operated in a large number of countries around the world and have proven to be an effective vehicle for reaching groups which are underserved due to a lack of collateral. Preliminary findings of recent studies appear to confirm these impacts in the case of Morocco. A recently commissioned impact evaluation study has revealed that 72 percent of the loans guaranteed by the CCG would not have been financed by banks in the absence of a guarantee. The CCG also benefits many female entrepreneurs: The share of women-owned SMEs covered by guarantees of the CCG was at 30 percent in 2011, which was significantly higher than the national average of 12 percent5. In addition to guarantee coverage, women entrepreneurs could be supported further through training and capacity building programs tailored to their needs through the regional MSME TA facility. Although it is not part of the results framework, the project will monitor the share of women-owned SMEs covered by guarantees throughout the life of the project.

16. The proposed operation supports the Moroccan government’s increased efforts to support the development of MSMEs. The government has recently drafted a new strategy aimed at supporting the development of VSEs, with measures to enhance their job-creation potential, which include a simplified taxation system, adapted social charges, extended social security 4 The leverage effect depends on the multiplier of the respective guarantee products, which range between 5 to 10 times the reserves. 5 Source: CCG (2011), WB ICA survey (2008) – Note: The definition of a woman-owned SME is based on the CCG’s and WB’s enterprise survey definition which asks whether at least one of the owners is female, or whether any of the females are owners.

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coverage, and specific banking products backed by a guarantee fund, which are in the process of being developed (Box 2). Already the Budget Law 2011 had introduced major incentives for VSE, which include a reduction of the corporate profit tax from 30 percent to 15 percent, tax incentives for businesses that integrate into the formal sector, and tax incentives for individual VSEs opting to transform into a corporation.

Box 2: Government’s strategy to foster the development of very small enterprises

A new government strategy to foster the development of very small enterprises (VSEs) was drafted in September 2011, complementing existing efforts focused on SMEs or innovative companies in high potential sectors. VSEs are considered essential to implementing the government’s job creation. Both public and private stakeholders were consulted to inform the development of the strategy. The strategy is organized around three pillars (tax regime, access to finance, pension and healthcare benefits), which aim to encourage VSEs to become formal and facilitate their access to finance.

C. Higher Level Objectives to which the Project Contributes

17. The proposed operation contributes directly to the objectives of the Country Partnership Strategy (CPS) for Morocco (FY2010-2013) discussed by the World Bank’s

Box 3 : World Bank Support for the Moroccan Financial Sector Reform Program

The World Bank has supported the Moroccan financial sector reform program through a ‘Sustainable Access to Finance’ Development Policy Loan (DPL) in the amount of USD 200 million, which aimed at supporting the Government’s efforts to expand further households and small and small and medium enterprises’ access to finance, while ensuring the stability of the financial system. The DPL included the following four pillars: (i) Promoting Access to Finance for Households, including:

a) establishment of a full fledged postal bank b) an improved regulatory framework for microcredit associations c) the establishment of a new housing guarantee fund for low income individuals

(ii) Enhancing Access to Finance for SMEs, including:

a) the introduction of a modern credit bureau b) a comprehensive reform of the CCG’s partial credit guarantee scheme for SMEs

(iii) Strengthening the Resiliency of the Financial System through further Improvements in Financial Regulation and Supervision (iv) Further Strengthening the Development of Capital Markets Building on the achievements of the first DPL, the Moroccan authorities have requested the World Bank to support a new phase of financial modernization through a new DPL planned for FY 2013, to be organized around the same four pillars.

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Board of Executive Directors on January 26, 2010. The CPS proposes three thematic pillars6 aligned with the development priorities of the country. The first pillar states that the structural transformation of the Moroccan economy will require a comprehensive and coordinated set of policies in many areas, underpinned by a financial sector that better serves smaller firms. The proposed operation is targeting precisely the financial inclusion of this underserved segment of the Moroccan economy. The Morocco CPS Progress Report (May 15, 2012), further emphasizes this project’s contribution to Bank objectives of promoting job creation, competitiveness, inclusion and women’s economic participation. These objectives are also central to the MENA Regional Framework for Engagement, discussed by the Board in February 2012.

18. During the CPS period, the funding targeted at VSEs may be complemented at a later stage through technical assistance for participating financial institutions to help them improve the effectiveness of their MSME lending, under the framework of the regional TA window of the MENA MSME Facility, which has already been established. This targeted operation will be complemented by a broader set of policy reforms and actions aimed at improving the enabling environment for MSME finance through the financial sector DPL planned for FY 2013 (Box 3).

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

19. The Project Development Objectives (PDOs) are presented at three levels. The MSME Facility provides the framework for the regional APL which was reviewed by the Board of Executive Directors on July 14, 2011 jointly with the presentation of the first loan to Tunisia (MSME Development Project). As the second APL in the series of a three part MSME Development Program, the proposed Morocco loan (APL 2) will be submitted for the Regional Vice President’s approval and to the Board on an Absence of Objection basis:

• Micro, Small and Medium Enterprise (MSME) Facility: to catalyze financing, risk-sharing and technical assistance to address policy, legal, institutional, capacity, and informational constraints holding back MSME access to finance in the MENA Region, and thereby to support improvements in MSME employment, competitiveness, and incomes.

• Adaptable Program Loan (APL): to improve access to finance for micro, small and medium enterprises in the MENA Region. The APL is the IBRD financing mechanism for the MSME Facility.

• APL 2 (Morocco MSME Development Project): to improve access to finance for MSMEs

in Morocco.

6 The three pillars are: a) Enhance growth, competitiveness and employment, b) Improve service delivery to citizens and c) Ensure environmental sustainability in the context of a changing climate.

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Project Beneficiaries

20. The end beneficiaries of the MSME Facility will be micro, small and medium enterprises. A wider definition of beneficiaries would include governments, regulators, and financial institutions benefitting from financing, partial credit guarantee facilities and technical assistance. The end beneficiaries for the regional APL, including the APL 2 for Morocco, will be MSMEs.

PDO Level Results Indicators

21. The following results are expected in fulfillment of the PDO. The results framework has been defined for the APL at a regional level and will be applied to each borrowing country under the APL.

MSME Facility: • At least 4 MENA countries make policy, legal or financial infrastructure reforms to

promote access to finance for MSMEs, which are recommended by World Bank Group policy lending or technical assistance.

• Partnerships developed with at least 2 providers of business services and/or equity financing to high potential or start-up SMEs.

APL: • USD 50 million additional IBRD lending or guarantees for MSME Finance, within 5

years. • At least 2 MENA countries borrowing from the APL, within 3 years. • Participating financial institutions (PFIs) increase their MSME Finance portfolio and the

number of new Micro and SME borrowers during the APL period.

APL 2 (Morocco MSME Development Project): • Increase in total number of MSME loans of PFIs by at least 20 percent within 5 years,

and • Increase in the total volume of outstanding MSME portfolio of PFIs. (MAD million) by

at least 10 percent within 5 years. 22. This project is part of the larger MENA MSME Facility, which aims to provide a comprehensive package of financing and technical assistance for the MENA Region, jointly with the IFC. The APL is an IBRD regional financing mechanism that provides a structure for rolling out country level Adaptable Program Loans (APLs). Country level loans under the APL structure can include a line of credit component and a contingent credit (partial credit guarantee) component, or a combination of both, so that the most appropriate instrument can be applied in each market to support MSME Finance.

23. The first APL under this regional program, a loan in the amount of USD 50 million in support of SME finance in Tunisia, was approved by the World Bank’s Board of Executive Directors on July 14, 2011. The loan was designed as a line of credit to the government of Tunisia for on lending to finance SME loans of eligible financial institutions. The project became effective on April 5, 2012.

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III. PROJECT DESCRIPTION

24. The lending instrument proposed is an adaptable program loan (APL), financed by an IBRD loan of EUR 37.9 million (USD 50 million equivalent), within the framework of the regional APL program of the MENA MSME Facility. This would be the second loan in an anticipated series of APLs across eligible countries. The Kingdom of Morocco meets the borrowing country eligibility criteria for APLs, as outlined in Section III of the PAD for the Tunisia MSME Development Project as part of the MENA MSME facility (Report No. 62655-TN)7. This loan will be used to support the provision of partial credit guarantees by the CCG to Eligible Financial Institutions (EFIs) to enable loans by the EFIs to MSMEs for sub-projects. The Project will be financed under an IBRD loan disbursing over a period of five years, on standard IBRD terms for a Variable Spread Loan with 29 years maturity including a 6.5 year grace period.

25. The MSME APL structure would be applied to APL 2 for Morocco, as set out in the diagram below.

Figure 1. APL 2 (Morocco MSME Development Project)

7 Borrowing country eligibility criteria for APL loans include: i) IBRD borrowing country in the MENA region, ii) Government or Regulator commitment to improved MSME Access to Finance, demonstrated through specific policy measures, legal reforms, or other good practice public interventions as assessed by the World Bank in economic and sector work or mission reports, and iii) Government or Regulator commitment to environmental and social sustainability. Candidate countries under these criteria will include Egypt, Morocco, Tunisia, Jordan and Lebanon. These are net oil importers and face common challenges of growth, competitiveness, and employment. World Bank Preparation and Appraisal missions will respond to Government interest in borrowing from the APL, and would further assess country eligibility, financing needs, and the appropriate mix of the line of credit component, contingent credit component, technical assistance, and support to innovative and high potential SMEs.

Implementing Entity (CCG)

ELIGIBLE FINANCIAL

INSTITUTIONS MSMEs Loans

MSME FACILITY TECHNICAL ASSISTANCE - Risk Management and Debt Restructuring, Financial

Infrastructure, Advisory Services and Training to banks, and other priority TA. - WB, IFC, Donor Partners

POLICY LENDING, POLICY REFORMS World Bank Financial Sector DPL, etc

Loan Guarantees

IBRD APL $50m

Kingdom of

Morocco (Ministry

of Finance)

Endow-ment

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A. Project Component

26. Component 1 - Support for the Provision of Partial Credit Guarantees (USD 49.875). The project has only one component which will support the provision of Partial Credit Guarantees (PCGs) to participating financial institutions to mitigate their credit risks on loans to micro, small and medium enterprises (MSMEs). The project will finance the losses of the PCGs, the issuance of PCGs will enable loans by EFIs to MSMEs for sub-projects. The project will be implemented through the CCG. The funding from the loan for the PCGs will allow the CCG to scale up its existing MSME guarantee products, which cater to the needs of MSMEs at different stages of their development. There are dedicated guarantee products for loans to start-ups (Damane Crea), for expansion projects of existing SMEs (Damane Dev), for loans to SMEs undergoing a restructuring (Damane Istimrar), for loans to SMEs in the textile industry (Integra-Textile) and for working capital loans (Damane Exploitation) (Table 1). Further details on the characteristics and performance of the different guarantee products are provided in the detailed project description (Annex 2).

Table 1. Characteristics of CCG Guarantee Funds for SMEs

Type of Loan Guaranteed

Eligibility Criteria

Coverage Guarantee Fee (flat)

Guarantee Ceiling

Damane Créa Medium and long term bank loans greater than 1 million MAD

Start-ups (or less than 3 yrs operating)

70% 2% flat 10 million MAD

Damane Dev Medium and long term bank loans greater than 1 million MAD

Companies with more than 3 years of operation


Damane Exploitation

Working capital Companies with more than 3 years of operation

60% 0.5% 10 million MAD

Integra-Textile -Short-term loans to finance working capital in textile industry -medium/long term loans to finance inventory in textile industry

Companies benefiting from the Convention of support to the Textile sector

70% 1% flat for short term loan guarantee + 2% flat for medium/long-term

40 million MAD broken down as

follows: -20 million

MAD: short-term loan

-20 million MAD: long-term

loan Damane Istimrar

Bank investment/working capital loans except loans secured to public sector or those under litigation



Source: CCG 27. The project will also support PCGs for a new innovative guarantee product for VSEs, a segment of MSMEs which is particularly constrained from access to finance. This product will cover all loan types (working capital and investment loans) of up to 1 million MAD. The

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approval procedure for guarantees will be fully automated and standardized, following the mechanism adopted for the CCG’s housing credit guarantee product ‘Damane Assakane’.

28. The provision of partial credit guarantees will help increase lending to MSMEs by reducing banks’ lending risks to MSME borrowers. By backstopping financial institutions’ losses in the case of defaults by MSME borrowers, this project would provide an incentive for banks to engage in short and medium term lending to MSMEs. This instrument allows leveraging lending from banks to MSMEs by up to sixteen times the amounts committed by IBRD8.

29. Alongside covering PCG claims under guarantees issued under the project, the project will also cover PCG claims under existing guarantees, issued by the CCG prior to the project, provided they are eligible under the Project and comply with the criteria of the Operations Manual (OM) and Environmental and Social Management Framework (ESMF). This will free up funds for CCG to issue further new guarantees, thereby enabling more loans to MSMEs.

30. The project, which will be implemented by the CCG, will support the provision of partial credit guarantees to financial institutions. Eligible institutions will be financial institutions that meet the prudential standards defined by the Central Bank of Morocco (unless otherwise agreed with the World Bank), in line with the WB’s Operational Policy 8.30 (OP 8.30) on Financial Intermediary Lending and complying with eligibility criteria which will be set forth in the OM.

Activities that will complement the Project

31. The MSME Facility involves a close coordination and collaboration with the IFC, which, in the case of Morocco and independently of the proposed APL 2, aims to engage in a longer term partnership with the CCG in support of the SME sector in Morocco. In the first stage, the IFC-led MENA SME Facility proposes to cover mezzanine risk of specific CCG’s SME guarantee funds, taking excess risk coverage on a portfolio of loans. IFC also expects to strengthen the guarantee instruments / schemes offered in the country through CCG by working with CCG and strengthening CCG’s capacity as a guarantee agent, helping it to develop more commercially oriented and sustainable SME support instruments in the Moroccan market, deploying structured finance methodology consistent with best practices to establish loss levels and operational norms. This arrangement is expected ultimately to align the efforts of IBRD, IFC (and MENA SME Facility partners), CCG, and banks to utilize and enhance existing schemes in Morocco, without displacement of existing instruments, thereby also precluding duplication and overlaps between schemes in the market.

32. The operation will also benefit from the recently established regional WB/IFC MENA MSME Technical Assistance Facility (Box 4). The facility, which consists of two trust funds, each managed by the IFC and the WB in close co-ordination, provides a well coordinated and comprehensive technical assistance offering throughout the MENA Region aimed at improving access to finance for MSMEs.

8 The leverage effect depends on the multiplier of the respective guarantee products, which range between 5 to 10 times the reserves.

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33. Policy Lending to improve the enabling environment for MSME finance will complement this loan. The resulting policy and legal reforms will strengthen the impact of the financing provided by the APL, by enabling financial institutions to offer financial services to smaller and under-served MSMEs. A new Financial Sector Development Policy Loan building on successful reforms supported by previous DPLs is planned for FY 2013. The first pillar will contain measures that promote access to households while the second pillar will comprise measures to enhance access to finance for small and medium enterprises.

Box 4: The WB-IFC MENA MSME Technical Assistance Facility

The MENA MSME TA Facility aims to provide a well coordinated and comprehensive package of at least $30 million in technical assistance over 5 years, in order to improve access to finance for MSMEs. The proposal focuses on five priority countries: Morocco, Tunisia, Egypt, Jordan and Lebanon but the facility can be extended in a second stage to other MENA countries including Iraq, Libya, West Bank and Gaza.

The MENA MSME TA Facility will operate at 3 levels:

Enabling Environment: Support for policy reforms of the legal, regulatory and institutional framework for the financial and business sectors, to promote MSME finance. This could include: strengthening the regulatory and supervisory frameworks for microfinance; credit information; secured transactions and leasing; banking regulation; corporate governance; the commercial code; environmental and social compliance; and private equity. Support may also be provided for impact monitoring capacity; risk management training for supervisors; and developing an enabling environment for Shari’ah-compliant financing.

Advisory Services to Financial Institutions: Strengthening financial institutions to improve access to finance to MSMEs. This includes in-depth advisory services for SME banking with a focus on women entrepreneurs, strengthening risk management and corporate governance practices, and sharing knowledge and best practices through workshops, seminars and training events. It also includes providing microfinance institutions with TA in risk management, product development and responsible finance. The microfinance program is expected to have a broad impact on the sustainability and quality of microfinance institutions’ product offering.

Support and Training to MSMEs: Support for MSMEs through entrepreneur networks, mentoring, and business incubator-type services. This would include broadening the range of business development services in the region to facilitate linkages with investors, new markets and technologies; as well as scaling up incubator operations to reach a larger number of entrepreneurs. It would also link high potential entrepreneurs to mentoring, networks, and risk capital. Moreover, it would provide business training to small entrepreneurs using the IFC Business Edge product, and assist banks to reach out to their SME clients through the use of the web-based IFC SME Toolkit.

34. The team has concluded an assessment of the state of compliance of this project with the requirements of the WB’s Operational Policy 8.30 (OP 8.30) on Financial Intermediary Lending, and concluded that the project is in compliance with this policy. The compliance review was reviewed and cleared by the WB’s Financial Inclusion Practice on 4 May 2012 and is available in project files.

B. Project Financing

Lending Instrument 35. The lending instrument is an Adaptable Program Loan (APL) of Euro 37.9 (US$50 Million equivalent), provided on IBRD terms.

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Project Cost and Financing 36. The project costs are outlined below:

Project Components Project cost (USD mn)

IBRD Financing (USD mn)

% Financing (inclusive of taxes)

Support for the Provision of Partial Credit Guarantees Total Baseline Costs Physical contingencies Price contingencies

49.875

49.875

49.875

49.875

99.75 99.75

Total Project Costs Interest During Implementation

Front-End Fees Total Financing Required

0.125 50.00

0.125 50.00

0.25 100

37. Retroactive financing will be allowed for eligible expenditures (materialized losses) in order to facilitate the prompt execution of Bank-financed projects: Withdrawals up to an aggregate amount not to exceed Euro 7.58 million may be made for Partial Credit Guarantees (PCG) Claims under PCGs issued prior to the signing of the Loan Agreement but paid on or after July 1, 2011, for Eligible Expenditures under Category 1 of the withdrawal table of the Loan Agreement (PCG Claims under the Project).

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

38. The Project will be implemented by the CCG. The CCG is a specialized public credit institution dedicated to promoting the development of MSMEs by offering loans and guarantees to bank loans to this segment9. The CCG has been appraised and it has demonstrated adequate management and satisfactory institutional capacity according to an onsite inspection carried out by the Moroccan Central Bank in 2010. The MoEF and CCG have established a Project Implementing Unit (PIU), which is comprised of existing staff that are responsible for the implementation of the project. The PIU is headed by the MoEF and includes the following units within the CCG: Corporate lending division (issuance of guarantees for loans above MAD 1 million); Retail lending division (issuance of guarantees for loans below MAD 1 million); Financial and Judicial Division (financial management of the Project); Resources Division (administrative management of the Project); Audit and Internal Controls Division (preparation of project documentation) and the Environmental and Social Screening Unit (ESSU) (implementation of the ESMF). A more detailed description of the responsibilities will be included in the Operations Manual.

9 The CCG also provides guarantees for housing loans.

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39. The responsibilities of the CCG, as the project’s implementing entity, will be, among others, to: (i) review all relevant documentation of the loans and/or portfolios to be guaranteed; (ii) approve the granting of partial credit guarantees; (iii) collect fee payments from participating institutions; (iv) verify eligibility of loans, compliance with all the covenants of the guarantee, and payment of all guarantee fees up to date; and (v) verify that participating institutions maintain their eligibility status in time as outlined in the project’s Operations Manual.

40. The detailed implementation arrangements of this project will be defined in the Operations Manual, which will be subject to approval by the World Bank and framed in the agreement between the CCG and the Moroccan Ministry of Economy and Finance. The satisfactory adoption by the CCG of the Operations Manual will be a condition of effectiveness of the Loan Agreement.

B. Results Monitoring and Evaluation

41. The APL has a comprehensive framework for monitoring and evaluating project level outcomes, which has been applied and tailored for the APL 2 in Morocco. A standard set of the specific monitoring templates, which is part of the results framework listed in Annex 1, has been designed to ensure that the implementing agencies across all the APL borrowing countries use a similar approach in collecting and reporting the data. The overall Results Framework is provided in Annex 1.

C. Sustainability 42. Project sustainability will be facilitated by the Moroccan government’s strong commitment to increase access to finance to MSMEs and financial institutions’ increasing focus on the MSME segment. The government has recently adopted a national strategy to foster the development of very small enterprises, and embarked on an ambitious reform program since 2009 aimed at strengthening and enhancing the national credit guarantee system, designating the CCG as the main provider of guarantees to the commercial banking sector. These actions illustrate the government’s commitment to develop the MSME sector and indicate that increasing access to finance for MSMEs will remain at the center of the government’s agenda, as well as its commitment to continue strengthening the capacity of the CCG. This project aims to incentivize the banks to expand their engagement with MSMEs and to build a sustainable MSME banking capacity within the Moroccan banking system.

V. KEY RISKS AND MITIGATION MEASURES

43. The operation’s risks and specific measures identified to reduce them have been assessed throughout the project preparation, as specified in the attached Operational Risk Assessment Framework (ORAF) (Annex 4). The overall project risk has been rated as “High” in terms of risk due to the significant operating environment risks. The high potential impact and need for the proposed activities justify the project and its interventions.

44. Political: new government. Following the referendum that ratified a new constitution in July 2011, legislative elections took place in November 2011, with a new coalition government

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sworn-in in January 2012. The Government has confirmed that the project and its focus on MSME development and job creation remain a priority, and this risk is considered minimal. The World Bank team will continue to monitor the political evolution closely and will continuously assess any developments that might have a potential impact on this operation.

45. Economic Outlook: possible deterioration of macroeconomic stability, lower than expected economic growth and additional pressure in the labor market could lead to renewed social tensions and reinforce the sense of lack of economic opportunities, in turn slowing down demand and supply of MSME finance. The macroeconomic risk of deterioration of fiscal balance and current account in the medium term as a result of internal or external shocks, remain manageable. Inflation is expected to be contained at low levels. Government has taken measures to ensure fiscal sustainability and the fiscal stance is expected to remain sound over the medium term. Financing needs stemming from the higher budget deficit and the declining deficits over the medium term are expected to be met through the domestic market, as well as from increased drawdown on external loans.

46. Operational: high transaction costs through additional reporting and screening requirements may reduce attractiveness of guarantees for banks. There is a risk that additional reporting and screening requirements (safeguards, etc.) could reduce the attractiveness of the loan. Reporting and screening requirements associated with this project represent a transaction cost, which may prove a disincentive for banks to provide loans for small firms. The team has conducted consultations with banks and the CCG to develop an effective mechanism which addresses their concerns, while addressing the WB’s safeguards policies. The team will continue to work closely with banks, the CCG and safeguards experts to ensure that the implementation of the environmental and social management system minimizes banks’ transaction costs to the largest extent possible.

47. Donor coordination: The large number of donors and development agencies that are working on financial inclusion in Morocco could result in a lack of coordination. The World Bank has worked on the first APL loan for Tunisia in very close coordination with AfDB – which provided USD 50 million in parallel financing to Tunisia – and has been following the same approach in Morocco, where the AfDB might provide additional financing at a later stage. The WB has also been working in very close coordination with the IFC from the scoping stage and onwards in an effort to harmonize and streamline the efforts of both institutions. The World Bank has also set up a joint WB/IFC TA window for the regional MSME Facility, which is jointly managed by both organizations. The facility has already secured USD 10 million in donor funding and has a target size of USD 30 million.

A. Risk Ratings Summary Table

Risk Category Rating

Stakeholder Risk Medium

Implementing Agency Risk

- Capacity Medium

- Governance Low

Project Risk

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- Design High

- Social and Environmental Medium

- Program and Donor High

- Delivery Monitoring and Sustainability Low

Overall Implementation Risk High

B. Overall Risk Rating Explanation

48. The overall implementation risk has been assessed as 'high' in light of the significant operating environment risk. The WB has a long history of financial intermediary lending and partial credit guarantee facilities in support of MSMEs in a broad range of countries. The team has drawn from this rich experience and lessons learnt from OP 8.30 guidelines and has reflected them in the project design and implementation plan.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

49. The guarantee instrument is a market friendly and cost-effective mechanism to encourage financial institutions to increase lending to MSMEs in so far as it leverages resources: One dollar of funding can provide partial risk guarantee coverage of up to more than sixteen dollars of loans. Since each qualifying financial institution will make its own decisions on the purchase of guarantees, and since their decisions are based on commercial criteria, the use of guarantees will be consistent with positive rates of returns. Well designed PCG schemes can be an effective vehicle for reaching underserved groups such as start-ups and small firms and female entrepreneurs, and preliminary findings of a recently commissioned impact evaluation seem to indicate that the CCG provides such additionality10. PCGs can also generate positive externalities by encouraging banks to get into the SME market, and improve their lending technologies and risk management systems.

B. Technical

50. The CCG has been fully appraised and its capacity to implement the project was evaluated as satisfactory during project appraisal in April 2012. The CCG has undergone a complete overhaul of its product offering and introduced new guarantee products dedicated to SMEs, which have been designed to better match SMEs’ financial needs according to their life cycle (investment loans, working capital, restructuring, and private equity). The parameters of the guarantees have also been revised in line with best international practices (equity allocations, fees, simplification and harmonization of eligibility criteria), which helped to streamline and strengthen the national credit guarantee mechanism, previously considered too complex and fragmented. Further improvements were made in the claims payment process, reducing the administrative burden for client banks. The CCG continues to improve the efficiency of its

10 A recently commissioned impact evaluation study has revealed that 72% of the loans guaranteed by the CCG would not have been financed by banks in the absence of a guarantee.

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partial credit guarantee instruments and envisages moving towards a delegation/portfolio approach in the future.

C. Financial Management

51. The project is designed to finance the needs of MSMEs meeting the eligibility criteria, by providing partial credit guarantees to EFIs. The loan to the Kingdom of Morocco under the regional APL would consist of backing claims made by EFIs under partial credit guarantees granted by the CCG to EFIs. Selected EFIs will be financial institutions that meet the prudential standards defined by the Central Bank of Morocco, unless otherwise agreed with the World Bank, in line with OP 8.30 guidelines as well as eligibility criteria set forth in the OM. The CCG would be the implementing agency entity for the loan to the Kingdom of Morocco, which will provide guarantees to financial institutions.

52. The CCG’s financial management system was appraised to determine if it complies with the requirements of the World Bank in respect to OP/BP10.02. The financial management assessment of CCG covered the areas of accounting and financial management, as well as the reporting and auditing process of the Project. The financial management system, including necessary arrangements to respond to the needs of the financial monitoring of the Project, satisfies the minimum requirements of the World Bank.

53. The CCG will implement the Project. The CCG will maintain appropriate Project accounts, preparing annual financial statements, and periodic financial reports by component, category, and source of funding.

54. The CCG’s accounting system is compliant with the acceptable accounting rules applicable in Morocco. Its financial statements are submitted to an annual external audit. With reference to the Project, Interim Unaudited Financial Reports (IUFR) covering all activities and sources of funds of the Project will be prepared bi-annually by CCG and transmitted to the World Bank within 45 days after the end of each period. The external annual audit report of the Project accounts and the management letter covering recommendations to improve the internal controls and the accounting system (Financial Statements of the Project, FSP) and the implementing agency audit report will be transmitted by CCG to the World Bank within six months after the end of each exercise. The audit will be carried out in accordance with the World Bank guidelines by an acceptable auditor and according to terms of references acceptable to the World Bank. The CCG’s annual external audit report will be transmitted to the World Bank as well within six months after the end of each exercise.

55. The World Bank will disburse as advances the estimated losses of projected guarantees to be issued on an annual basis, subject to the conditions stated in the Loan Agreement. The flow of funds will be based on the World Bank's procedures and will flow from the World Bank to MoEF's Designated Account to be opened at Bank Al-Maghrib (BAM). BAM will transfer funds to CCG's bank account opened in a financial institution acceptable by the World Bank. Notwithstanding the implementation arrangements, MoEF will ensure that the World Bank's rules are complied with, including, inter alia (i) ensuring that the advanced funds provided to CCG are used for their intended purposes and the financing of eligible expenditures, or are

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returned to the World Bank, (ii) CCG maintains continuous and adequate record keeping and submits to the World Bank required financial reports.

D. Procurement

56. The funds provided by the loan will be used to support the provision of partial credit guarantees for loans to MSMEs through the CCG. Bank funds provided to the CCG will be used to cover losses of EFIs in cases of default of payment by the MSMEs of loans they receive from these financial institutions. The loan will be used to provide guarantees for a number of loan types (working capital, investment loans, etc.), and the final use cannot be determined in advance. Bank funds will not be used to provide any direct financing of goods, works, non consulting or consulting services by the MSME within the scope of the project. The EFIs will exercise their own due diligence with consideration to the principles of economy, efficiency and transparency to assess the creditworthiness and eligibility of the MSMEs applying for a loan under this operation. The overall financial assessment framework for EFIs’ due diligence has been considered as reasonably acceptable by the team. The eligibility criteria for financial institutions will be outlined in the operations manual for the project.

E. Social (including Safeguards)

57. The social impacts of the proposed Micro, Small and Medium Enterprise Development Project in Morocco would primarily be positive. The targeted beneficiaries will be micro, small and medium enterprises. Investment in these enterprises is expected to lead to the creation of job opportunities for local people, and eventually would help increase local people’s income, diversify livelihoods, and contribute to poverty reduction.

58. Adequate measures will be taken to avoid and/or mitigate negative social impacts. The potential negative social impacts that the proposed project might have would be related to unequal opportunities to women and poor people in access to financing, use of child labor, over indebtedness, labor health and safety, public health because of pollutant emissions. To avoid and/or mitigate the potential negative social impacts, a Master Environmental and Social Management Framework (ESMF) has been developed for the APL. An Operations Manual will be prepared, which will include the principles, criteria, procedures, and process of sub-project screening. Similar principles, which applied to APL1, Tunisia MSME Development Project, will be used in this project in the selection of subprojects. The ESMF will be an integral part the project Operations Manual, and a grievance redress mechanism will also be included in the Manual.

59. Consultations have been conducted with various stakeholders. The task team has had discussions on this project with the CCG and consulted with relevant government agencies. Consultations have been carried out with targeted beneficiaries and other relevant stakeholders, particularly on the institutional arrangements of project implementation, contents of the Operations Manual, and ESMF.

60. Social safeguards policies are not expected to be triggered. Any subproject which involves land acquisition or involuntary resettlement impacts will not be eligible for financing by this project. Therefore this project would not trigger the World Bank’s policy on Involuntary

19

Resettlement OP 4.12. In addition, the project will not cover any subproject which affects any indigenous people’s communities or groups.

F. Environment (including Safeguards)

61. This project is covered by the World Bank’s operational policies on Environmental Assessment (OP/BP 4.01). No major social and environmental issues are expected to arise as a result of the Project, since the vast majority of banking loans expected to be supported by this project are extended to the commercial and service sectors. However, there may be a small number of loans in certain sectors that apply for guarantees, which could potentially have some negative environmental and social impacts. For that reason, a framework has been developed to screen all loans for potential impacts and mitigate them, in compliance with the World Bank’s environmental and social safeguards.

62. The Morocco loan falls under the regional MSME Facility APL, for which a Master Environmental and Social Management Framework (ESMF) was prepared, which identifies, minimizes, avoids, screens out, mitigates and monitors potential social and environmental impacts. The Master ESMF was customized for the Morocco APL, to the satisfaction of the World Bank, and was disclosed in-country on May 4, 2012 and at infoshop on May 9, 2012. The ESMF would also be an integral part of the Operations Manual (OM); the latter is to be adopted by the CCG prior to effectiveness of the proposed IBRD loan. The proposed approach of the ESMF is described in the subsequent paragraphs.

63. The CCG will be required to implement the ESMF, with a screening mechanism for the loans to be covered by guarantees. The CCG will need to establish a properly staffed and trained Environmental and Social Screening Unit (ESSU), which will be part of the PIU, prior to project effectiveness. The ESSU will be required to screen projects based on their environmental impact into A (high impact), B (moderate impact, mitigateable) and C (insignificant or no impact). The detailed mechanism is outlined in Annex 3 (Implementation Arrangements). Category A projects, projects leading to involuntary resettlement, activities falling under the IFC’s exclusion list and additional selected activities that are expected to have a significant negative environmental and/or social impact11 will be excluded from this project. The WB will also conduct a review of the ESMF one year after project effectiveness and reserves the right to adjust the list of excluded activities based on the findings of the review, in consultation with the borrower.

64. The World Bank will assist the CCG to build up its capacity on the management of environmental and social risks, which includes the screening of projects and their classification into different risk types, as well as building up knowledge about Morocco’s environmental and social laws, and the WB's environmental and social norms. The CCG, supported by the WB, will also provide training for EFIs on environmental and social safeguards. The banks' completion of this training will be a pre-condition for the fast-track processing of category B projects of the CCG (payment of claims with no post facto review of compliance of defaulting loans with national environmental and social laws). Those banks that do not take advantage of the offered training, or do not otherwise incorporate environmental and social issues as part of their credit

11 The complete list will be included in the operations manual

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risk screening process will have any Category B claim reviewed by CCG for compliance with national environmental law and WB policies before the claim is paid.

Safeguard Policies

65. The project triggers the World Bank’s Environmental Assessment policy (OP/BP 4.01), and prepared a screening mechanism in compliance with that policy. The project is categorized “FI” (Financial Intermediary), according to the World Bank. In the event of sub-project uncovering physical cultural resources (OP/BP 4.11) for example historical ruins, which by their nature cannot be known in advance, national procedures for the preservation of archaeological relics would be applied. Moroccan law was reviewed by the World Bank’s safeguards team and found to be in line with OP/BP 4.11, as it protects, preserves and promotes the country’s historical heritage.

Safeguard Policies Triggered Yes No TBD 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 66. Sub-projects that trigger OP/BP 4.04, OP 4.10, OP 4.12, OP/BP 4.36, OP/BP 4.37, OP/BP 7.50 and OP 7.60 would not be eligible for financing by EFIs that receive guarantee coverage under the Bank loan.

G. Other Safeguards Policies Triggered

67. No other policies are triggered.

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ANNEX 1: RESULTS FRAMEWORK AND MONITORING

Morocco: Micro, Small and Medium Enterprise (MSME) Development Project

Project Development Objective (PDO): To improve access to finance for MSMEs in Morocco

PDO Level Results Indicators C

ore

Unit of Measure

Baseline Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data Collection

Other information

YR 1 YR 2 YR3 YR 4 YR5

Indicator 1: Increase in total nr of MSME loans of PFIs

% 18,911* 0% 2% 7% 12% 20% Annual BAM CCG

Indicator 2: Increase in the total volume of outstanding MSME portfolio of PFIs. (MAD million)

% 78,644 0% 1% 3% 6% 10%

INTERMEDIATE RESULTS

Enhanced Outreach to MSMEs: Supporting the Provision of Partial Credit Guarantees Intermediate Result indicator 1: Increase in nr of MSME loans covered by guarantees

% 673 0% 2% 7% 12% 20% Semi-

Annual CCG CCG

Intermediate Result indicator 2: Increase in volume of MSME portfolio covered by guarantees (MAD million)

% 1945 0% 1% 3% 6% 10%

Intermediate Result indicator 3: Increase in nr of loans for SME start-ups covered by guarantees

% 133 0% 2% 7% 12% 20% Semi-

Annual CCG CCG

Loans above 1 million MAD

Intermediate Result indicator 4: Increase in volume of loans for SME start-ups covered by guarantees (MAD million)

% 836 0% 1% 3% 6% 10% Semi-Annual

CCG CCG


Intermediate Result indicator 5: Increase in nr of investment loans for existing SMEs covered by guarantees

% 114 0% 2% 7% 12% 20% Semi-Annual

CCG CCG


Intermediate Result indicator 6: Increase in volume of investment loans for existing SMEs covered by guarantees (MAD million)

% 964 0% 1% 3% 6% 10% Semi-Annual

CCG CCG


Intermediate Result indicator 7: Increase in nr of loans for very small enterprises covered by guarantees

% 426 0% 2% 7% 12% 20% Semi-

Annual CCG CCG

Loans below 1 million MAD

Intermediate Result indicator 8: Increase in volume of loans for very small enterprises covered by guarantees (MAD million)

% 145 0% 1% 3% 6% 10% Semi-Annual

CCG CCG

Loans below 1 million MAD

Note: the baseline figures for all indicators will be as of 31 December 2011. *The number of MSME loans is based on a sample of banks

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ANNEX 2: DETAILED PROJECT DESCRIPTION

1. The lending instrument proposed is an Adaptable program loan (APL), financed by an IBRD loan of EUR 37.9 million (USD 50mn equivalent), within the framework of the regional APL program of the MENA MSME Facility. This would be the second loan in an anticipated series of APLs across eligible countries. The Kingdom of Morocco meets the borrowing country eligibility criteria for APL loans, as outlined in section III of the PAD for the regional MENA MSME facility12. This loan will support the provision of PCGs by the CCG to EFIs to enable sub-loans by EFIs to eligible MSMEs for the carrying out of sub-projects. The project will be financed under an IBRD loan disbursing over a period of five years, on standard IBRD terms.

2. The MSME APL structure would be applied to APL 2 for Morocco, as set out in the diagram below.

Figure 2. APL 2 (Morocco MSME Development Project)

12 Borrowing country eligibility criteria for APL loans will be: i) IBRD borrowing country in the MENA region, ii) Government or Regulator commitment to improved MSME Access to Finance, demonstrated through specific policy measures, legal reforms, or other good practice public interventions as assessed by the World Bank in economic and sector work or mission reports, and iii) Government or Regulator commitment to environmental and social sustainability. Candidate countries under these criteria will include Egypt, Morocco, Tunisia, Jordan and Lebanon. These are net oil importers and face common challenges of growth, competitiveness, and employment. World Bank Preparation and Appraisal missions will respond to Government interest in borrowing from the APL, and would further assess country eligibility, financing needs, and the appropriate mix of the line of credit component, contingent credit component, technical assistance, and support to innovative and high potential SMEs.

Implementing Entity (CCG)

ELIGIBLE FINANCIAL

INSTITUTIONS MSMEs

Loans

MSME FACILITY TECHNICAL ASSISTANCE - Risk Management and Debt Restructuring, Financial

Infrastructure, Advisory Services and Training to banks, and other priority TA. - WB, IFC, Donor Partners

POLICY LENDING, POLICY REFORMS World Bank Financial Sector DPL, etc

Loan Guarantees

IBRD APL $50m

Kingdom of

Morocco (Ministry

of Finance)

Endow-ment

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A. Project Components 3. This project has only one component which will support the provision of partial credit guarantees to participating financial institutions to mitigate their credit risks on loans to micro, small and medium enterprises (MSMEs). The provisions of PCGs will enable loans by the EFIs to MSMEs for subprojects. The project will be implemented through the CCG. The funding from the loan for PCGs will allow the CCG to scale up its existing MSME guarantee products, which cater to the needs of MSMEs at different stages of their development. The first guarantee product, Damane Crea, provides guarantees for medium- and long term bank loans to start up SMEs, with less than three years of existence. The second guarantee product, Damane Dev, covers medium- and longer term loans for expansion projects of existing SMEs (more than three years of existence). The third guarantee product, Damane Istimrar, provides guarantees for credit to SMEs undergoing a restructuring. The fourth guarantee product, Damane Exploitation, provides guarantees for working capital credit (loans with a maturity of less than one year). The newest guarantee product, Integra Textile, provides guarantees for SMEs in the textile industry. Further details on the characteristics and performance of the different guarantee funds are provided in Table 2.

Table 2. Performance of CCG Guarantee Funds for SMEs (Production and NPLs, 2009-2011)

Products

2009 2010 2011 Total

Guarantees (MAD mn)

NPLs (%)

Guarantees (MAD mn)

NPLs (%)

Guarantees (MAD mn)

NPLs (%)

Guarantees (MAD mn)

NPLs (%)

Damane Crea 435.00 0.39% 545.00 0.19% 536.00 0.00% 1,516.00 0.18% Damane Dev 238.00 0.03% 351.00 0.00% 488.00 0.00% 1,077.00 0.01% Damane Exploitation 393.00 0.71% 241.00 0.00% 0.00 --- 634.00 0.44% Damane Istimrar 56.00 4.69% 33.00 0.88% 18.00 0.00% 107.00 2.72%

Damane Capital Risque 0.00 --- 2.00 0.00% 9.00 0.00% 11.00 0.00%

TOTAL 1,122.00 0.64% 1,172.00 0.11% 1,051.00 0.00% 3,345.00 0.25%

Source: CCG *Note: Damane Exploitation was designed as a temporary guarantee fund for exporting firms during the period of economic slowdown for 2009-2010. The program will be re-introduced on a permanent basis in 2012 due to high demand. [Damane Capital Risque is not included for this loan]

Table 3. Characteristics of CCG Guarantee Funds for SMEs

Type of loan guaranteed

Eligibility Criteria*

Coverage Guarantee Fee (flat)

Guraantee Ceiling

Damane Créa Medium and long term bank loans greater than 1 million MAD

Start-ups (or less than 3 yrs operating)


Damane Dev Medium and long term bank loans greater than 1 million MAD



Damane Exploitation

Working capital Companies with more than 3

60% 0.5% 10 million MAD

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years of operation

Integra-Textile -Short-term loans to finance working capital in textile industry -medium/long term loans to finance inventory in textile industry

Companies benefiting from the Convention of support to the Textile sector

70% 1% flat for short term loan guarantee + 2% flat for medium/long-term

40 million MAD broken down as

follows: -20 million

MAD: short-term loan

-20 million MAD: long-term

loan Damane Istimrar

Bank investment/working capital loans except loans secured to public sector or those under litigation



Source: CCG 4. The project will also support PCGs for a new innovative guarantee product for very small enterprises (Damane express). This product will be based on a principle of delegation and will cover all loan types (working capital and investment loans) of up to 1 million MAD. The approval procedure for guarantees will the fully automated and standardized, following the mechanism adopted for the CCG’s housing credit guarantee product ‘Damane Assakane’

5. The provision of partial credit guarantees will help increase lending to MSMEs by reducing banks’ lending risks to MSME borrowers. By backstopping financial institutions’ losses in the case of defaults by MSME borrowers, this project would provide an incentive for banks to engage in short and medium term lending to MSMEs. This instrument allows leveraging lending from banks to MSMEs by up to sixteen times the amounts committed by IBRD.

6. Alongside covering PCG Claims under guarantees issued under the Project, the project will also cover PCG Claims under existing guarantees, issued by CCG prior to the project, provided they are eligible under the Project and comply with the criteria of the OM and ESMF. This will free up funds for CCG to issue further new guarantees, thereby enabling more EFI loans to MSMEs.

7. The project will be implemented by the CCG as an implementing agency, which will provide guarantees to financial institutions. Eligible institutions will be financial institutions that meet the prudential standards defined by the central bank of Morocco, unless otherwise agreed with the World Bank, in line with OP 8.30 guidelines. Eligible MSMEs are firms with a turnover of up to MAD 175 million.

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ANNEX 3: IMPLEMENTATION ARRANGEMENTS

Project Institutional and Implementation Arrangements

1. This project will be implemented through the Caisse Centrale de Garantie (CCG). The CCG is staffed with qualified personnel and capable of satisfactorily implementing all aspects of the project. Its responsibilities will include: (i) overseeing the provision of guarantees to PFIs (ii) Reviewing the eligibility of guarantee coverage for final borrowers through PFIs; (iii) on-going monitoring of the PFIs to ensure compliance with project criteria; (iv) responsibility for adherence to all fiduciary and safeguard requirements of the World Bank; and (v) monitoring and evaluation based on key project development indicators. A final Operations Manual is required prior to effectiveness and will include step by step processes and procedures to be followed, including on financial management, disbursement, safeguards arrangements, eligibility of PFIs and final borrowers, procedures for on-going monitoring of the PFIs and all other administrative processes for recording and reporting implementation, with adequate checks and balances. The MoEF and CCG have established a Project Implementing Unit (PIU), which is comprised of existing staff that are responsible for the implementation of the project.

Financial Management, Disbursements and Procurement

Financial Management

2. The project is designed to finance the needs of MSMEs meeting the eligibility criteria, by providing partial credit guarantees through EFIs. The loan to the Kingdom of Morocco under the regional APL would consist of backing claims made under partial credit guarantees granted by CCG to EFIs. EFIs will be financial institutions that meet the prudential standards defined by the Central Bank of Morocco, unless otherwise agreed with the World Bank, in line with OP 8.30 guidelines. The CCG would be the implementing entity for the loan to the Kingdom of Morocco, which will provide guarantees to financial institutions.

Country and Sector Context

3. The WB’s experience in Morocco and the main conclusion of 2009 Public Expenditure and Financial Accountability (PEFA) report confirm substantial progress in Public Finance Management (PFM) reforms in Morocco. Morocco has an overall credible, comprehensive, and transparent Public Finance Management system. According to the PEFA report, the monitoring by the Directorate of Public Enterprises and Privatization within the Finance Ministry has considerably improved methods of oversight and control for public sector entities including CCG. PEFA indicates that CCG produces very detailed annual reports presenting central government’s commitments through guarantees granted.

4. Moreover a Governance Report on Standards and Codes for Morocco (ROSC) was performed in 2011 and assessed positively the supervisory role of the Central Bank with respect to financial institutions. In Morocco, the entire process related to exercising and complying with the requirements of banking activities falls, under the general competence and control of the Central Bank. Bank Al-Maghrib is responsible, among others, for enacting regulatory and accounting standards, seeing to their respect by the relevant institutions, and punishing violation.

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All the above-mentioned authority of the central bank is entrusted to the Banking Supervision Department (DSB).

Accounting 5. The CCG’s financial statements are prepared in accordance with the Moroccan accounting banking standards, taking into account the specific nature of the CCG’s activities. CCG will maintain a financial management system and prepare financial statements in accordance with consistently applied accounting standards acceptable to the World Bank, to reflect the operations, resources and expenditures related to the Project. The CCG uses an Oracle application called EBS (E Business suite) to book the financial entries. Another Oracle application called Banking Reporting System (BRS) is used for reporting purposes. This application allows the CCG to prepare its quarterly reporting for Bank Al-Maghrib and the Ministry of Economy and Finance.

6. The CCG will produce annual Financial Statements which will include a detailed statement of commitments and disbursement by EFI. The CCG’s Finance Department will prepare consolidated Unaudited Interim Financial Reports (UIFR), which will be submitted to the World Bank (IBRD) within 45 days after the end of each semester. These UIFRs will be established in accordance with Bank’s guidelines.

7. The external annual audit report of the Project accounts and the management letter covering recommendations to improve the internal controls and the accounting system (Financial Statements of the Project, FSP) and the implementing agency audit report will be transmitted by CCG to the World Bank within six months after the end of each exercise. The audit will be carried out in accordance with the World Bank guidelines by an acceptable auditor and according to terms of references acceptable to the World Bank. The CCG’s external annual audit report will be transmitted to the World Bank as well within six months after the end of each exercise.

8. The CCG has qualified and experienced staff that are capable of executing the project and hence produce the requested financial reporting for the project.

9. The CCG’s staff doesn’t have previous experience in Bank projects. Hence, this risk will be mitigated by intensive training in the beginning of the project implementation. However, the CCG does have experience in working with other international donors which makes it familiar with the required reporting process.

Internal Control

10. The CCG follows the Moroccan financial regulation for Public Institutions, and is governed by (i) a Board of Directors and (ii) a General Manager. The CCG has 4 Departments including the Finance and Business Commitment Directorate. The Finance and Business Commitment Directorate will be directly involved in the implementation arrangements of the loan and will inform the EFIs on eligibility criteria, assess the EFIs compliance and monitor the reporting information. The segregation of duties between the Business Commitment and the Finance Directorate will be documented in the Operational Manual.

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11. The internal control system set within the CCG establishes the separation of functions through several levels of independent controls. Additional internal control procedures will be specified in the financial management manual13 to bridge any gaps and to promote outcome/output focused accountability.

Internal audit

12. The CCG has an internal audit department which ensures the compliance of the internal controls and the Operations Manual. The CCG has an audit committee with an acceptable capacity.

13. The Audit Committee's role is to assist the Board by providing an assurance about the quality of internal control system and the reliability of the information provided to directors. The Audit Committee also supports all work within its scope of activity which might be entrusted by the Board.

14. The audit committee of the CCG is composed of four members:

(a) A representative of the Treasury and External Finance Directorate of the Ministry of Economy and Finance, Chairman

(b) A representative of the Ministry of Economic and General Affairs

(c) A representative of the professional groups of Banks of Morocco

(d) The state comptroller

15. The audit committee reports to the management board of directors.

Disbursement and Flow of Funds

16. The CCG needs to have sufficient funds in its Bank account in order to be able to issue guarantees to financial institutions. Hence, the CCG is able to issue a guarantee only after it receives funds from the MoEF. These funds represent the PCG allowance and cover the CCG’s share on the expected losses. In this perspective, the World Bank will disburse on an annual basis an advance equal to the expected losses estimate based on the estimated number of guarantees. The MoEF advance request will be supported by the expected losses estimate of the estimated number of guarantees to be issued, which is calculated based on agreed ratios specified in the agreement between CCG and MoEF.

17. The advanced funds will flow from the World Bank to the MoEF designated bank account in Bank Al-Maghrib. The Ministry of Economy and Finance will submit the withdrawal application to the World Bank. The MoEF will then transfer to the CCG the funds received based on the yearly estimate of expected losses prepared by CCG and communicated to the MoEF. The MoEF will transfer the funds from its designated account in Bank Al-Maghrib to the Project

13 As part of the Operations Manual

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specific PCG Account managed by CCG in a financial institution on terms and conditions deemed acceptable to the World Bank. Additional advances can be disbursed in subsequent years, without previous advances being documented by realized PCG Claims paid. The Project Operations Manual will include amongst others: eligibility criteria for MSMEs and sub-projects, service standards, FM requirements for EFIs and MSMEs, roles and responsibilities, internal controls, disbursement procedures, conflict of interest, ongoing monitoring, risk assessment and management compliance with eligibility criteria for EFIs, streamlined processing payment to beneficiaries, reporting and auditing requirements. The Ministry of Economy and Finance will submit to the World Bank Withdrawal Applications for justifying the use of funds for financing of eligible expenditures for actual Partial Credit Guarantees Claims (PCG Claims).

18. EFIs will be responsible for approving the loans to MSMEs following their own loan screening procedures (including the loans backed by guarantees financed with the World Bank funds). The procedures for screening by the EFIs of loan applications from MSMEs are determined by EFIs’ policies and guidelines. However, the CCG ensures that the guarantee covering MSMEs loans financed with Bank funds will only be awarded if the eligibility criteria of the Project Operations Manual are respected. The decision to award the credit guarantee is made by the CCG if the loan equals or inferior to MAD10 million. The CCG is allowed to delegate such decision to EFIs as specified in the agreement between CCG and MoEF. When the amount of the loan is superior to MAD10 million, the decision to award a guarantee is made by the guarantee committee which comprises the CEO of the CCG, a representative of MoEF and a representative of CCG.

19. The CCG will process the eligible claims made by EFIs, The disbursement will be made based on the Statement of eligible expenditures (SOE). When an EFI submits a claim to CCG, it will perform due diligence in accordance with the Operations Manual to check the legitimacy before releasing funds.

20. The quarterly report prepared by the CCG and sent to MoEF will include the following:

• The total amount of guarantees issued • Outstanding guarantees • The guarantees used • Loss ratio

21. All relevant supporting documents for materialized losses will be retained at CCG and will be made readily accessible for review by the external auditor and periodic Bank supervision missions. All disbursements will be subject to the conditions of the Loan Agreement and disbursement procedures as defined in the Disbursement Letter.

22. The MoEF will then prepare and send the World Bank a withdrawal application supported by a statement of eligible expenditures (SOEs) that is prepared and signed by the CCG and acceptable to the World Bank in form and content justifying the use of funds for financing of eligible expenditures for actual Partial Credit Guarantee (PCG) Claims. The CCG retains the supporting documentation and makes it available for inspection and verification by independent auditors and Bank supervision missions. The World Bank will receive the withdrawal application and reviews them to ensure accuracy. Once deemed satisfactory to the World Bank, the

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withdrawals applications will be used to justify/document the loan amount advanced to the Designated Account at BAM.

23. Retroactive financing will be allowed for eligible expenditures (materialized losses) in order to facilitate the prompt execution of Bank-financed projects.Withdrawals up to an aggregate amount not to exceed Euro 7.58 million equivalent may be made for Partial Credit Guarantees (PCG) Claims under PCGs issued prior to the signing of the Loan Agreement but paid on or after July 1, 2011, for Eligible Expenditures under Category 1 of the withdrawal table of the Loan Agreement (PCG Claims under the Project).

24. If there are any balances of Bank financing advanced that have not been documented at the closing date, the World Bank and the Borrower shall agree in writing that such balance shall either, (a) be retained by CCG in the PCG account to continue covering guarantees subject to putting in place oversight arrangements including fiduciary oversight arrangement that would continue after the Closing Date, (b) restructure to reallocate the remaining funds to allow the Project Implementing Entity to use the funds for purposes agreed with the World Bank that meet the requirements of the Loan Agreement, and the Project Agreement (the decision will be made subject to Bank policy in effect at the time of Project closing and is expected to require the determination by the World Bank that: (A) the expenditure be productive (used for the objective of the Project); (B) the operation’s impact on the Project Implementing Entity’s fiscal sustainability is acceptable to the World Bank; and (C) oversight arrangements, including fiduciary oversight, remain acceptable to the World Bank or (D) extend the Closing Date. Discussions about the use of World Bank funds after the closing date shall be initiated at an early stage during mid-term review. The World Bank and the Borrower will need to reach a final agreement on the use of unused funds before the closing date, otherwise funds will need to be refunded at closing.

Budget

25. The CCG’s financial department will prepare an estimate of contingent losses based on the volume of guarantees to be provided and the corresponding risk assessment. The Finance Manager will use these forecasts to prepare the six months cash forecast stated in the UIFRs.

26. The agreement between the CCG and MoEF states the ratios to be used for the calculation of the contingent losses. The MoEF receives a report from CCG with the expected guarantees to be issued and the contingent losses. The MoEF reviews the estimate and transfer the funds to the CCG’s bank account. After receipt of the funds from the MoEF which cover the expected losses, the CCG issues the guarantees.

Financial Reporting 27. The CCG’s financial statements prepared at the end of each year include: a) balance sheet, b) statement of balance sheet commitments, c) income statement, and d) financial statements notes.

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External Auditing 28. The project’s audit will be conducted by an auditor acceptable to the World Bank, and based on acceptable terms of reference which will include providing assurance on the compliance with internal controls and the operations manual and review of eligibility criteria and assurance that funds have been used by CCG only to pay eligible claims requested by EFIs.

29. The Project financial statements will be audited annually by the auditor appointed by the CCG and acceptable to the World Bank. The auditor’s terms of reference should be acceptable to the World Bank. The auditors will audit the disbursements of the designated account maintained by the CCG. The project audited financial statements and management letter are due to the World Bank within six months from year-end. In addition, the CCG will submit the implementing agency annual audit report and management letter prepared by the external auditors to the IBRD within 6 months from the end of each fiscal year. The CCG is audited by the Supreme Audit Institution (Cour des Comptes) and by Bank Al-Maghrib. If available, those audit reports will be reviewed to check the extent to which the World Bank could rely on them.

30. All EFIs in Morocco are audited by external auditors, in a way that is acceptable to the World Bank. EFIs will submit their annual audit reports and the management letters on internal control procedures to CCG for review and submission to the IBRD within 6 months from the end of each fiscal year. The EFIs’ audited financial statements will include entities for which a call has been made on the guarantee. This requirement will be included in the agreement signed between EFIs and the CCG.

Procurement

31. The funds provided by the loan will be used by the CCG to cover losses of partial credit guarantees for MSME loans of EFIs. No procurement activity using Bank funds is involved in such a case under the project scope, and hence a procurement plan is not required under the project.

Environmental and Social (including safeguards)

32. This project is covered by the World Bank’s operational policies on Environmental Assessment (OP/BP 4.01). No major social and environmental issues are expected to arise as a result of the Project, since the vast majority of banking loans expected to be supported by this project are extended to the commercial and service sectors; however, there may be a small number of loans in certain sectors that apply for guarantees, which could potentially have some negative environmental and social impacts. For that reason, a framework has been developed to screen all loans for potential impacts and mitigate them, in compliance with the World Bank’s environmental and social safeguards.

33. The Morocco loan falls under a regional APL, for which a Master Environmental and Social Management Framework (ESMF) was prepared, which identifies, minimizes, avoids, screens out, mitigates and monitors potential social and environmental impacts. The Master ESMF was customized for the Morocco APL, to the satisfaction of the World Bank Group, and disclosed in–country on May 4, 2012, and at infoshop on May 9, 2012. The ESMF will be an

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integral part of the Operations Manual (OM) to be agreed on by the World Bank and the borrower prior to effectiveness of the World Bank’s loan. The proposed framework uses the following approach:

34. The CCG will be required to implement the ESMF, with a screening mechanism for the loans to be covered by guarantees. The CCG will need to establish a properly staffed and trained Environmental and Social Screening Unit (ESSU) prior to project effectiveness. The ESSU will be required to screen projects based on their environmental impact into A (high impact), B (moderate impact, mitigateable) and C (insignificant or no impact). Category A projects, projects leading to involuntary resettlement, activities falling under the IFC’s exclusion list and additional selected activities that are expected to have a significant negative environmental and/or social impact. The list will be included in the operations manual. The WB will also conduct a review of the ESMF one year after project effectiveness and reserves the right to adjust the list of excluded activities based on the findings of the review.

Category A: Excluded from coverage (including any project that involves acquisition of land and involuntary resettlement). Furthermore, the WB project will not finance any projects of the aforementioned exclusion lists (IFC exclusion list and selected sub-sectors). Category B: The project proposes a two track approach: A dedicated unit in CCG (ESSU) will be established to screen projects for environmental and social risk and impact. The unit will also be tasked with offering a tailored training module in environmental and social screening to the Credit Risk Officers/Department in each of the banks that wish to have their portfolio of loans to SMEs guaranteed by CCG. Those banks that accept and receive such training, whether from CCG or another acceptable source acceptable to the WB, will have subsequent claims paid swiftly with no post facto review of compliance of defaulting loans with national environmental and social laws. Those banks that do not take advantage of the offered training, or do not otherwise incorporate environmental and social issues as part of their Credit Risk screening process will have any Category B claim reviewed by the CCG for compliance with national environmental law and the WB policies before the claim is paid. The CCG can only rely on provisions of requirements of Moroccan law in its review to the extent it enables it to ascertain that the sub-project is in compliance with WB policies. Furthermore, for all pre-existing loans for which guarantees are issued, CCG will need to do a review of those sub-projects before it pays out on the claims. Category C: The exclusion list and requirement to comply with national laws will apply. No further screening and monitoring will be required.

35. The IBRD will assist the CCG to build up its capacity on the management of environmental and social risks, which includes the screening of projects and their classification into different risk types, as well as building up knowledge about the host country environmental and social laws, and the WB's environmental and social norms. The CCG, supported by the WB, will also provide training for the banks' credit risk managers on environmental and social safeguards. The banks' completion of this training will be a pre-condition for the fast-track processing of category B projects of the CCG (payment of claims with no post facto review of compliance of defaulting loans with national environmental and social laws). The WB will also

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conduct a review of the ESMF one year after project effectiveness and reserves the right to adjust the exclusion list based on the findings of the review.

Safeguard Policies 36. The project triggers the World Bank’s Environmental Assessment policy (OP/BP 4.01), and prepared a screening mechanism in compliance with that policy. The project is categorized “FI” (Financial Intermediary), according to the World Bank.

37. In the event of sub-project uncovering physical cultural resources (OP/BP 4.11) e.g. historical ruins, which by their nature cannot be known in advance, national procedures for the preservation of archaeological relics would be applied. Moroccan law was reviewed by the World Bank’s safeguards team and found to be in keeping with OP/BP 4.11 as it protects preserves and promotes the country’s historical heritage.

38. Sub-projects that trigger OP/BP 4.04, OP 4.10, OP 4.12, OP/BP 4.36, OP/BP 4.37, OP/BP 7.50 and OP 7.60 would not be eligible for financing.

Monitoring & Evaluation

39. The CCG will be the responsible entity for collecting, aggregating and submitting the project’s outcome and results indicators to the World Bank. The CCG has a strong capacity and track record of recording data from participating financial institutions for internal monitoring purposes, and has adequate systems in place to expand the scope of the data currently collected. No additional costs will be required to support M&E.

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ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)

Morocco: Micro, Small and Medium Enterprise (MSME) Development Project Stage: Board

Project Stakeholder Risks Rating: Medium Description : Stakeholder: Government (see ‘Implementing Agency Risks’) Stakeholder: Donors (see ‘Project Risk’s) Stakeholder: Financial Institutions: Limited uptake: There is a risk that some financial institutions refrain from using PCGs if they consider the guarantee fees charged by CCG to be high. Stakeholder: Wider public; There may be a misperception that this loan's primary beneficiaries are banks charging commercial interest rates, not MSMEs.

Risk Management: Stakeholder: Financial Institutions: The design of this project has been conceptualized in close consultation with key stakeholders, including EFIs, to ensure that the pricing of the guarantee remains attractive. Stakeholder: Wider public: This loan will focus on priorities of public – finance to smaller enterprises, a segment which is currently underserved by financial institutions.

Resp: WB/Client Stage: Prep/Imp Due Date : recurring Status: ongoing Implementing Agency Risks (including fiduciary)

Capacity Rating: Medium Description : Institutional Capacity of PIE: There is a risk that the selected project implementing entity (PIE) lacks the capacity to implement this project. Institutional capacity of PFIs: There is a risk that PFIs lack the capacity to serve MSMEs properly. Some FIs do not have the proper tools and capacity to serve MSMEs in a cost effective and financially sustainable manner.

Risk Management : Institutional Capacity of PIE: The envisaged implementing agency, CCG, has a long track record of providing PCGs for MSME loans and a strong engagement with the Moroccan banking sector through their longstanding MSME credit guarantee program, and is now operating under the oversight of the central bank. The administration of this project will be supported by the Operations Manual, which will outline processes, roles and responsibilities between the CCG, PFIs and the World Bank, and will help reduce this aspect of institutional risk. Further training and TA could be considered, both for the CCG and PFIs, on managing project implementation including on verification of eligibility criteria, financial management, monitoring and environmental issues. Institutional capacity of PFIs: Many PFIs have started to develop tailored products catering to the

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MSMEs and established dedicated MSME finance units, indicating their commitment to tap into this market segment. The TA window of the regional MENA MSME Facility will support further improvements in financial institution capacity and products for MSME Finance. Resp: WB/Client Stage: Prep/Imp Due Date : recurring Status: ongoing

Governance Rating: Low Description : Political interference. There is a risk of political interference in the decision making of the implementing agency (CCG).

Risk Management : Political interference: Although the CCG is under the umbrella of the Ministry of Economy and Finance, it is estimated to be sufficiently independent to administer this loan in a professional manner. The CCG’s board of directors is comprised of representatives from the Ministry of Economy and Finance, representatives of the banking sector and the private sector. The CCG will also be bound to the operations manual, which will be elaborated under the supervision of the World Bank, and sets out the eligibility criteria for PFIs and MSMEs in a clear manner. The CCG has been instructed about the financial management requirements. Resp: WB/Client Stage: Imp Due Date : recurring Status: ongoing

Project Risks Design Rating: High

Description : Definition of beneficiaries: The definition of the project beneficiaries will have to ensure that the target group is reached. If the definition is too narrow, it could potentially slow down the utilization of the loan. Screening and reporting requirements: Extensive reporting and screening requirements (safeguards, etc.) could reduce the attractiveness of the loan for the PIE and banks.

Risk Management : Definition of beneficiaries: The definition of the project beneficiaries has been done in close consultations with key stakeholders, including the Ministry of Economy and Finance, the CCG, the Central Bank and financial institutions to ensure that the project development objectives are met. Screening and reporting requirements: The M&E and safeguards framework has been prepared in close consultation with the relevant stakeholders (Ministry of Economy and Finance, CCG, Central Bank, EFIs) to ensure that the operation will remain attractive to financial institutions. The WB will assist the CCG and EFIs on the implementation of the ESMF, and will aim to ensure that the additional costs associated with the implementation of the ESMF remain low. Resp: WB/Client Stage: Prep/Imp Due Date : recurring Status: ongoing

Social & Environmental Rating: Medium Description : Negative impacts on environment: While most sub-projects are expected to have limited environmental and social impact, some sub-projects to be covered under this project might engage in activities that are harmful to the environment, or to workers (unsanitary working conditions, underage labor). Furthermore, cumulatively, the overall APL may have negative impacts on the environment.

Risk Management : Negative impacts on environment: An Environmental and Social Management Framework (ESMF) was developed and disclosed to identify, avoid and screen out potential social and environmental impacts in compliance with World Bank policies and Morocco’s applicable laws and regulations. The ESMF will be an integral part of the Operations Manual. Training will be provided to the PIE and EFIs. Resp: WB/Client Stage: Prep/Imp Due Date : recurring Status: ongoing

Program & Donor Rating: High Description : Potential lack of donor coordination: The large number of donors and development agencies that are working on

Risk Management : Potential lack of donor coordination: The World Bank has been working on the first APL loan for Tunisia in very close coordination with the AfDB, and has been following

35

financial inclusion in Morocco could result in a lack of coordination.

the same approach in Morocco, working in very close coordination with the IFC from the scoping stage onwards in an effort to harmonize and streamline the efforts of both institutions. The World bank has set up a joint WB/IFC TA window for the regional MSME Facility, which is jointly managed by both organizations. Resp: WB/Client Stage: Imp Due Date : recurring Status: ongoing

Delivery Monitoring & Sustainability Rating: Low Description : Compliance with reporting requirements: There is a risk that the PIE or Banks may not want to fully comply with reporting requirements.

Risk Management : Compliance with reporting requirements: Many of the financial indicators on PFIs are expected to be tracked already by the CCG and/or BAM, which should reduce the compliance costs substantially. The CCG is considered to have significant capacity to ensure adequate consolidation of reporting, and it already consolidates data on the bank loans that are covered by a partial credit guarantee. The design of the reporting framework has been done through a consultative process with the main stakeholders and after the analysis of the current reporting by EFIs and the CCG. A standard template will be used to collect this information, including baseline and target data. Resp: WB/Client Stage: Imp Due Date : recurring Status: ongoing

Overall Risk Implementation Risk Rating: High Comments: The overall implementation risk has been assessed as 'high' in light of the significant operating environment risk.

36

ANNEX 5: SME FINANCE IN MOROCCO

I. Introduction

1. Micro, Small and Medium Enterprises represent an important pillar of the Moroccan economy. They account for more than 90 percent of all enterprises and contribute to 21.614 percent of total employment. These estimates only reflect the statistics of the formal economy: Their contribution to the real economy is significantly higher if the economic activity of the informal sector were to be included. Most MSMEs are in the services sector (44.5 percent), followed by manufacturing (37.2 percent) and trade (17.6 percent) (Figure 3).

Figure 3. Sector Distribution of SMEs in Morocco

Source: Haut Commissariat au Plan (2002)

2. The Moroccan government has acknowledged the importance of SMEs for the national economy and has developed a number of support mechanisms aimed at improving the enabling environment for SMEs. The government has set up the ‘Agence Nationale pour la Promotion des PMEs’ (ANPME), an agency dedicated to the promotion of SMEs, which manages financial support programs and provides business development services. Enhancing access to finance for SMEs is one of the core objectives of the CCG, a public institution providing guarantees to banks for loans to SMEs. Morocco has also adopted a new definition of SMEs, with the objective to replace a broad range of different definitions a simple and uniform definition across ministries and agencies (Box 5).

3. The government wishes to promote the growth of MSMEs and has elaborated a strategy aimed at promoting the development of very small enterprises (VSEs) in 2011, which includes a simplified taxation system, adapted social charges, extended social security coverage, and specific banking products backed by a guarantee fund, which are in the process of being developed. The Finance Act 2011 had introduced major incentives for VSE, which included a reduction of the corporate profit tax from 30 percent to 15 percent, tax incentives for businesses that integrate into the formal sector, and tax incentives for individual VSE opting to transform into a corporation.

14 Source: Haut Commissariat au Plan, 2002 Economic Census.

37.2%

17.6%

44.5%

0.7%

Manufacturing

Trade

Services

Agri/Other

37

Box 5: New definition of SMEs in Morocco

Morocco has recently adopted a new definition of SMEs. The objective of the new definition is to have a simple and uniform definition of SMEs (as opposed to the myriad of definitions existing today) and to define their eligibility for government support mechanisms (ANPME, CCG, etc.). The new definition will also help improve the data on SMEs and better inform policy makers about their characteristics and needs. The new definition of SMEs in Morocco has been developed in a consultative process under the leadership of the Ministry of Economy and Finance, in close coordination with the Ministry of Industry and Commerce, the National Agency for the Promotion of SMEs (ANPME) and the General Confederation of Enterprises in Morocco (CGEM).

The new definition of SME only retains the turnover as the sole defining criteria, and no longer considers the number of employees.

The final document defines the following three categories of enterprises (by turnover):

- Very small enterprise (less than 3 million MAD; 0.4 million USD) - Small enterprise (between 3 to 10 million MAD; 0.4 million to 1.2 million USD) - Medium enterprise (between 10 to 175 million MAD; 1.2 million USD to 20.8 million USD)

II. Supply of SME Finance

4. Morocco has a broad range of finance providers for MSMEs. Microenterprises have access to credit through a relatively well developed microcredit industry, while the large networks of the post and commercial banks are the main source of savings. The main source of external finance for SMEs is the commercial banking sector, which provides a high level of SME finance, both in a regional and international comparison. However, most lending is directed at the larger segment of the SME spectrum, while smaller enterprises remain underserved. The Moroccan leasing industry has witnessed a rapid growth over the past five years and is a key source of equipment financing for SMEs. Finally, a small, but rapidly growing factoring industry contributes to SMEs’ working capital financing. Equity financing remains a rather limited source of funding.

A. Bank Finance

5. The commercial banking sector is the main source of external finance for SMEs in Morocco. Bank lending to SMEs amounts to MAD 79 billion (USD 9 billion) as of December 2011, comprising about 20 percent15 of total credit to enterprises (MAD 393 billion). In a survey conducted by the World Bank in 2010, the SME lending ratio was even higher when the commercial banks’ SME definitions were used (Table 3). The survey concluded that Morocco has the highest ratio in the MENA Region. One of the challenges in measuring the extent of SME financing used to lie in different definitions of SMEs used by commercial banks. The central bank has, however, recently adopted uniform definition of SME for reporting purposes and has started to collect the data.

15 This share is calculated using the regulatory definition of SMEs adopted by BAM. If one were to take the commercial banks’ definition, the SME lending/ total enterprise lending ratio would be at 30% (June 2009, source BAM).

38

Table 4. SME Lending in MENA (in % of Total Lending) – Results from WB/UAB survey

Country

SME Lending Target

No. of Banks

Actual SME

Lending No. of Banks

Bahrain 5.88 3 1.14 6 Egypt 24.72 7 5.22 9 Jordan 29.7 12 10.8 13 Kuwait 9.22 6 2.45 4 Lebanon 30.64 8 16.14 8 Morocco 43.86 3 23.79 5 Oman 11.39 5 2.48 4 Palestine 27.84 4 6.2 4 Qatar 15.14 7 0.49 5 Saudi Arabia 8.9 9 1.7 7 Syria 13.9 9 4.12 10 Tunisia 15.66 4 15.34 4 United Arab Emirates 24.26 8 3.85 7 Yemen 22.71 4 20.25 2

GCC 12.47 38 2.02 33 Non-GCC 28.81 61 14.56 65 MENA 20.64 99 8.29 98

Source: WB- UAB survey – Comment: This data dates from June 2010. The SME ratio for Morocco has been updated in this note.

6. Lending to SMEs has witnessed strong growth over the past 5 years, with an observed slowdown in 2010 when credit to the private sector has slowed down due to the slowdown in economic growth (Figure 4). However, the share of SME credit to total credit has remained broadly constant over the same time period, indicating that the other asset classes have grown at a similar pace (Figure 5).

Figure 4. Development of SME lending (MAD million)

Source: BAM

51,146 54,597

71,906 70,211 76,133

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2007 2008 2009 2010 Jun-11

39

Figure 5. Development of Various Asset Classes (% of Total Credit)

Source: BAM Note: The figures on SME lending differ from the figures listed in the WB-UAB survey due to a different sample of banks.

7. The provision of credit to SMEs by the banking sector is relatively concentrated with a few key players providing most of the financing. The largest two banks, Banque Centrale Populaire (BCP) and AttijariWafa Bank (AWB), provide more than half of the banking sector’s credit to SMEs, while the largest five banks (BCP, AWB, BMCI, BMCE, SGMA) provide more than 80 percent of the sector’s SME credit16.

8. Moroccan banks have undertaken significant efforts to increase the volume of their business with SMEs. Most large banks have established dedicated SME units within their corporate divisions, and some banks have established units and tailored products for very small enterprises within their retail department. One such example is AttijariWafa Bank, which has adopted a comprehensive strategy to reach low income consumers and small enterprises (Box 6).

Box 6: Scaling Down: The new product offering of AttijariWafa Bank for small enterprises

A number of Moroccan banks have undertaken initiatives aimed at reaching small enterprises and lower income clients. One of the prominent examples is AttijariWafa bank, which has adopted a comprehensive strategy aimed at tapping into the low income and small enterprise segment. The bank has recently launched the "Pacte Rasmali", a new product offering designed specifically for small enterprises. The "Pacte Rasmali" consists of 4 products of mainly investment loans. The first is the "Credit Rasmali Express", an equipment credit which can reach up to 150,000 MAD, repayable over a period of 48 months. "Leasing Rasmali" is a leasing product aimed at financing investments in real estate or capital equipment. The third product is "Rasmali Istitmar", which aims to finance start up and expansion investments. With a maximum of 1 million MAD, the bank finances up to 70 percent of the investment program. The repayment period for this type of financing is of maximum 12 years with a grace period of 3 years. Finally, the fourth product of the "Pacte Rasmali" is a working capital loan. The “Decouvert Rasmali" is an overdraft facility tailored to the needs of very small enterprises. The size of the overdraft can vary from 10 percent of sales of the enterprises up to a ceiling of MAD 100,000.

16 Source: The Status of Bank Lending to SMEs in the Middle East and North Africa Region: The Results of a Joint Survey of the Union of Arab Banks and the World Bank”, by Roberto Rocha, Subika Farazi, Rania Khouri and Douglas Pearce (January 2011).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

2007 2008 2009 2010 Jun-11

SMEs

Large enterprises

Individuals

Other

40

B. Finance Companies

B.1. Leasing 9. The Moroccan leasing industry has witnessed very strong growth rates over the past five years, outpacing the growth rates of the conventional banking sector (Figure 6). Although these growth rates are partly due to the very low initial base, they do reveal a strong demand for the product and the potential for further growth. Leasing is a particularly attractive form of financing for SMEs that do not have a lengthy credit history or significant collateral, which is the case for many Moroccan firms. Since the lessor retains ownership of the good until all payments are made, it is a safer instrument for financial institutions even in the absence of strong creditors’ rights and collateral laws and registries.

Figure 6. Growth of Leasing Assets (2005-2011, in MAD million)

Source: BAM

10. It is estimated that the majority of leasing assets are leased by SMEs, which account for more than 80 percent of total assets. This corresponds to about 40 percent of commercial bank lending to SMEs, and underscores the importance of the leasing sector for the financing of this segment. About 70 percent of leased assets are moveable assets, while 30 percent are immoveable assets, which have been growing above average over the past five years17. Most leasing firms in Morocco are affiliated to banks.

B.2. Factoring 11. Factoring companies, an important source of working capital finance for SMEs, have witnessed very strong growth rates over the past 5 years, although starting from a low base (Figure 7). Albeit in a nascent stage, Morocco has the largest factoring market of all non-GCC MENA countries18. There are two factoring companies (Attijari Factoring and Maroc Factoring), both of which are affiliates of commercial banks.

17 Source: APSF (Association Professionelle des Societes de Financement) 18 Source: Factors Chain International (http://www.fci.nl)

0 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

2005 2006 2007 2008 2009 2010 Jun-11

41

Figure 7. Growth of Factoring Turnover (2005-2010, in MAD million)

Source: APSF

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

10,000

2005 2006 2007 2008 2009 2010

42

ANNEX 6: CAISSE CENTRALE DE GARANTIE

1. The Caisse Centrale de Garantie (CCG), a licensed public financial institution, supervised by the Central Bank, is the main provider of partial credit guarantees in the Moroccan financial system. The agency was established in 1949 as a credit institution and one of three institutions providing partial credit guarantees to financial institutions for MSME loans. The CCG also provides guarantees for housing loans.

2. In 2009 the CCG underwent a complete overhaul of its product offering. Under its 2009-2012 strategy plan, the institution set up a unique fund designed for guarantees specifically for the SME segment. In addition, it also set up a new product line that is structured along the life-cycle of a company: creation, development, financial restructuring and equity finance. The parameters for issuing guarantees have also been revised and inspired by good international good practices (e.g. fee structure and eligibility criteria).

3. The CCG’s 2009-2012 strategy put a strong emphasis on improving its business model to streamline and further simplify its interactions with the commercial banks. In order to reduce delays associated with the review of guarantee applications, the eligibility criteria and the application process have been streamlined. The Management Information System (MIS) has been modernized and the CCG has put forth a strategy of proximity with commercial banks. In 2010, two regional centers were established in Tangier and Agadir. The pay-off system to the commercial banks has also been reviewed to guarantee payments to commercial banks in a predictable and transparent way: the bank receives a pre-payment, 50 percent of the guarantee amount, within 30 days of claiming the loss, while the remaining balance is released after the completion of judicial procedures, with a maximum delay of 3 years.

4. Since the establishment of the new products in 2009-10, the CCG has experienced significant growth in the volume of guarantees issued, but the number of beneficiaries remains limited. The launch of new products came at a time when the global economic crisis led to a significant slowdown of economic activity in Morocco. In this light, the Moroccan authorities promoted the use of the national guarantee scheme under the CCG as a tool to mitigate some of the effects of the downturn, particularly for exporting companies. Total outstanding guarantees nearly doubled between 2008 and 2009, mostly due to guarantees for loans supporting operations. With the economic situation improving in 2010, a growing number of guarantees were issued, many of which were to finance business start-ups (guarantees for business start-ups, Damane Créa, represented 49 percent of total guarantees issued in 2010). The challenge remains to expand the pool of beneficiaries.

5. The revamping of the CCG’s products, application processes and management process has received very favorable feedback from the Moroccan banking sector. Application process delays have been reduced and the quality of services has improved. A widespread communication campaign has also communicated the new offerings to financial institutions. This positive feedback has led Moroccan banks to strongly endorse greater collaboration with the CCG in expanding their reach to the MSME segment.

43

ANNEX 7: IMPLEMENTATION SUPPORT PLAN 1. The Implementation Support Plan proposed below describes how IBRD will support the implementation of the project and provide the technical advice necessary to facilitate the achieving of the PDO.

2. The implementing agency (CCG) doesn’t have experience with WB projects, but it has previous experiences with other international donors. The WB’s implementation support plan will focus on two main areas: Financial management (FM) and reporting and environmental and social safeguards.

3. The WB’s FM team will support the CCG to enhance their knowledge on FM Bank procedures and guidelines by providing workshops on FM and disbursement. The World Bank team will ensure that the client has an understanding of the financial information requested in the UIFR. Hence, assistance will be provided to ensure that the UIFR is complete and accurate.

4. Through the project duration, the World Bank team will closely monitor the project on semi-annual supervision missions. During the supervision mission, the World Bank will ensure that the financial arrangements agreed on are respected and will assess if any additional training or support is needed. The World Bank team will review and clear the audit TOR, review the audit reports and UIFR received and provide its feedback on a timely manner.

5. The WB will work with the IFC and consultants to build up the CCG’s capacity on environmental and social risk management. The team will ensure that the Environmental and Social Management Framework is acceptable to the IBRD and is included in the Operations Manual. The CCG will be responsible for implementing it.

6. The following table provides an overview of the activities and the timeline envisaged for the implementation support plan:

Time Focus Skills Needed Resource Estimate

Partner Role

First 12 months Enhancing the Project knowledge on Bank’s guidelines and procedures

Finance/Fiduciary 20,000 USD IBRD FM team

First 12-48 months

Semi- annual Project Supervision

Finance/fiduciary/ environmental and social risk management

120,000 USD IBRD team

First 12 months Implementation of ESMF, including the establishment of a dedicated unit for environmental and social risk screening

Environmental and social risk management

20,000 USD IBRD/IFC, in collaboration with consultants

First 12 months Processing of guarantee requests in accordance with the ESMF


10,500 USD IBRD/IFC, in collaboration with consultants

First 12-48 months

Training of participating banks on environmental and social risks


10,000 USD CCG/IBRD/IFC, in collaboration with consultants

44

ANNEX 8: COUNTRY AT-A-GLANCE

Morocco at a glance 4/5/12

M. East LowerKey Development Indicators & North middle

Morocco Africa income(2010)

Population, mid-year (millions) 32.0 331 2,519Surface area (thousand sq. km) 447 8,775 23,579Population growth (%) 1.0 1.7 1.5Urban population (% of total population) 57 58 39

GNI (Atlas method, US$ billions) 92.6 1,283 4,078GNI per capita (Atlas method, US$) 2,900 3,874 1,619GNI per capita (PPP, international $) 4,600 8,068 3,632

GDP growth (%) 3.7 4.3 6.9GDP per capita growth (%) 2.7 2.5 5.3

(most recent estimate, 2004–2010)

Poverty headcount ratio at $1.25 a day (PPP, %) 3 3 ..Poverty headcount ratio at $2.00 a day (PPP, %) 14 14 ..Life expectancy at birth (years) 72 72 65Infant mortality (per 1,000 live births) 30 27 50Child malnutrition (% of children under 5) 10 8 25

Adult literacy, male (% of ages 15 and older) 69 82 80Adult literacy, female (% of ages 15 and older) 44 66 62Gross primary enrollment, male (% of age group) 115 106 110Gross primary enrollment, female (% of age group) 108 98 104

Access to an improved water source (% of population) 83 89 87Access to improved sanitation facilities (% of population) 70 88 47

Net Aid Flows 1980 1990 2000 2010

(US$ millions)Net ODA and official aid 1,161 1,241 434 994Top 3 donors (in 2010): France 135 217 155 254 European Union Institutions 12 29 117 223 Japan 4 111 103 121

Aid (% of GNI) 6.3 5.0 1.2 1.1Aid per capita (US$) 59 50 15 31

Long-Term Economic Trends

Consumer prices (annual % change) 9.4 7.0 1.9 1.0GDP implicit deflator (annual % change) 15.2 5.5 -0.6 0.6

Exchange rate (annual average, local per US$) 3.9 8.2 10.6 8.4Terms of trade index (2000 = 100) 80 75 100 79

1980–90 1990–2000 2000–10

Population, mid-year (millions) 19.6 24.8 28.8 32.0 2.4 1.5 1.0GDP (US$ millions) 18,821 25,821 37,021 90,805 4.2 2.4 4.9

Agriculture 18.5 18.3 14.9 15.4 6.7 -0.4 5.9Industry 31.0 33.4 29.1 29.7 3.0 3.2 3.8 Manufacturing 16.9 19.0 17.5 15.3 4.1 2.6 3.0Services 50.5 48.3 56.0 55.0 4.0 3.1 4.9

Household final consumption expenditure 66.8 64.6 61.4 57.3 4.5 1.8 4.5General gov't final consumption expenditure 18.3 15.5 18.4 17.5 4.4 3.9 3.9Gross capital formation 24.2 25.3 25.5 35.1 1.6 2.5 8.3

Exports of goods and services 17.4 26.5 28.0 33.0 8.0 5.9 6.0Imports of goods and services 26.7 31.9 33.4 42.9 4.6 5.1 7.8Gross savings 18.6 25.1 24.3 33.4

Note: Figures in italics are for years other than those specified. .. indicates data are not available.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2010

Male Female

0

20

40

60

80

100

1990 1995 2000 2010

Morocco Middle East & North Africa

Under-5 mortality rate (per 1,000)

-10

-5

0

5

10

15

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

45

Morocco

Balance of Payments and Trade 2000 2010

(US$ millions)Total merchandise exports (fob) 7,419 17,577Total merchandise imports (cif) 11,531 35,296Net trade in goods and services -2,085 -9,953

Current account balance -475 -3,943 as a % of GDP -1.3 -4.3

Workers' remittances and compensation of employees (receipts) 2,161 6,423

Reserves, including gold 5,138 35,351

Central Government Finance

(% of GDP)Current revenue (including grants) 23.6 25.4 Tax revenue 21.7 23.2Current expenditure 23.4 23.7

Technology and Infrastructure 2000 2010Overall surplus/deficit -4.8 -4.6

Paved roads (% of total) 56.4 70.3Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. subscribers (per 100 people) 13 112 Corporate .. .. High technology exports

(% of manufactured exports) 11.3 7.7External Debt and Resource Flows

Environment(US$ millions)Total debt outstanding and disbursed 20,674 25,403 Agricultural land (% of land area) 69 67Total debt service 2,706 3,312 Forest area (% of land area) 11.2 11.5Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of land area) 1.5 1.5

Total debt (% of GDP) 55.8 28.0 Freshwater resources per capita (cu. meters) 985 917Total debt service (% of exports) 21.0 6.8 Freshwater withdrawal (% of internal resources) 43.4 43.4

Foreign direct investment (net inflows) 221 1,241 CO2 emissions per capita (mt) 1.2 1.5Portfolio equity (net inflows) 18 132

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 8.3 8.8

Energy use per capita (kg of oil equivalent) 356 477

World Bank Group portfolio 2000 2010

(US$ millions)

IBRD Total debt outstanding and disbursed 2,837 2,468 Disbursements 138 271 Principal repayments 307 202 Interest payments 190 52

IDA Total debt outstanding and disbursed 27 13 Disbursements 0 0

Private Sector Development 2000 2011 Total debt service 2 1

Time required to start a business (days) – 12 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 15.7 Total disbursed and outstanding portfolio 29 110Time required to register property (days) – 75 of which IFC own account 29 110

Disbursements for IFC own account 1 2Ranked as a major constraint to business 2000 2010 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 7 11 Access to/cost of financing .. 84.4 Tax rates .. 62.6 MIGA

Gross exposure – –Stock market capitalization (% of GDP) 29.4 76.2 New guarantees – –Bank capital to asset ratio (%) 9.8 8.4

Note: Figures in italics are for years other than those specified. 4/5/12.. indicates data are not available. – indicates observation is not applicable.


0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability and absence of violence

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2010

2000

Governance indicators, 2000 and 2010

Source: Worldwide Governance Indicators (www.govindicators.org)

IBRD, 2,468

IDA, 13

IMF, 0

Other multi-lateral, 7,668

Bilateral, 7,085

Private, 6,369

Short-term, 1,800

Composition of total external debt, 2010

US$ millions

46

Millennium Development Goals Morocco

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2010 Poverty headcount ratio at $1.25 a day (PPP, % of population) 2.5 .. 6.3 2.5 Poverty headcount ratio at national poverty line (% of population) .. .. 15.3 9.0 Share of income or consumption to the poorest qunitile (%) 6.6 .. 6.5 6.5 Prevalence of malnutrition (% of children under 5) 8.1 7.7 .. ..

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 56 63 76 94 Primary completion rate (% of relevant age group) 51 48 57 85 Secondary school enrollment (gross, %) 38 38 38 56 Youth literacy rate (% of people ages 15-24) .. 58 .. 79

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 69 74 83 89 Women employed in the nonagricultural sector (% of nonagricultural employment) .. 21 22 21 Proportion of seats held by women in national parliament (%) 0 1 1 11

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 86 69 55 36 Infant mortality rate (per 1,000 live births) 67 56 46 30 Measles immunization (proportion of one-year olds immunized, %) 79 88 93 98

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 270 220 160 110 Births attended by skilled health staff (% of total) 31 40 .. .. Contraceptive prevalence (% of women ages 15-49) 42 50 .. ..

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.1 0.1 0.1 0.1 Incidence of tuberculosis (per 100,000 people) 147 152 109 91 Tuberculosis case detection rate (%, all forms) 76 73 92 97

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 73 76 78 83 Access to improved sanitation facilities (% of population) 53 59 64 70 Forest area (% of total land area) 11.3 .. 11.2 11.5 Terrestrial protected areas (% of land area) 1.2 1.5 1.5 1.5 CO2 emissions (metric tons per capita) 1.0 1.1 1.2 1.5 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 9.7 8.2 8.3 8.8

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 1.6 4.2 4.9 11.7 Mobile phone subscribers (per 100 people) 0.0 0.1 8.1 100.1 Internet users (per 100 people) 0.0 0.0 0.7 49.0 Computer users (per 100 people) .. .. .. 50.9

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 4/5/12


Morocco

0

25

50

75

100

2000 2005 2010

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0

20

40

60

80

100

120

2000 2005 2010

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2010

Morocco Middle East & North Africa

Measles immunization (% of 1-year olds)

the world bank for official use only - all...

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