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· Review of Debate around FILs · Pre - EDP Zambian Landscape · Design & Implementation of EDP

· Review of Debate around FILs · Pre - EDP Zambian Landscape · Design & Implementation of EDP · Lessons from Zambian Experience. FILs are commonly used But Controversial & Problematic. Commonly Stated FIL Objectives: · Lack of Term Finance · Lack of Credit in Specific Sectors

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· Review of Debate around FILs · Pre - EDP Zambian Landscape · Design & Implementation of EDP

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  1. · Review of Debate around FILs · Pre - EDP Zambian Landscape · Design & Implementation of EDP · Lessons from Zambian Experience

  2. FILs are commonly used But Controversial & Problematic

  3. Commonly Stated FIL Objectives: · Lack of Term Finance · Lack of Credit in Specific Sectors · Stimulate investments, PSD and growth · Enhance Access to Credit by certain class of borrowers (SMEs, farmers, rural consumers)

  4. Two Sets of Arguments: • Spend your money somewhere else • Do it right

  5. How do you do it right ? · Do not distort · Confine to correcting a specific failure

  6. How do you not distort ? · Price neutrality · Sector neutrality

  7. Price Neutrality Assumes · existence of a set of market interest rates · existing set of rates efficient So that..... FIL can be a “price-taker” QUESTION : Why do you bother doing an insignificant FIL ?

  8. Market Failures · Financial markets related - macroeconomic conditions · Product & labor markets related - microeconomic conditions Seems FILs could be justified easily on these grounds BUT, Would FILs be appropriate instruments to deal with these conditions?

  9. PRE - FIL (pre ‘96-97) ZAMBIA QUICK FACTS 10 million people w/ $4 billion GDP Per Capita Income declined from $1100 to $400 Dependent on copper mining Experimented with very heavy dose of import substitution and state enterprises One of the most heavily indebted countries

  10. PRE-FIL ZAMBIA Started implementing an aggressive reform program in 1991 Four Adjustment Operations Liberalized prices, interest and exchange rates, trade regime opened capital account Started dismantling parastatal sector Launched comprehensive privatization program

  11. Pre-FIL Zambian Financial Sector · Small (10% GDP/M2) · Commercial Bank dominated - Domestic and Foreign · Volatile interest rates but stabilizing · Treasury bills constitute a large portion of bank assets

  12. Pre-FIL Zambian Financial Sector · A Number of insolvent public financial institutions including a DFI (DBZ) · Investment lending mainly financed by rolling over short term facilities · Anxious foreign exchange markets, large balances kept abroad

  13. WHY DID WE DO A FIL IN ZAMBIA To support a number of policy objectives: · Liquidation or restructuring of DBZ · Need for a second-tier FI · Need to improve prudential standards and compliance · Provide funding for investment and export finance

  14. STRUCTURE OF ZAMBIAN FIL · Disburse through an Apex · Long and short term (export preshipment) facilities · All sectors eligible except domestic trade, real estate, mergers MBOs, illicit activities · Banks and leasing companies in good standing vis a vis prudential rules · A sinking fund to pay off IDA loan

  15. TERMS · Banks assume commercial risk · Banks assume foreign exchange risk but can pay back in Kwacha · LIBOR plus 2% wholesale rate · Retail rate is freely negotiable between bank and the client · Grace period is allowed and also negotiable · minimum equity participation is 10% and up to 90% of contract value for exports

  16. Operational Characteristics: · PFIs apply with a waiver enabling Apex access to supervisory information · BOZ certifies prudential compliance and the level of 1st tier regulatory capital · Apex/IDA reserves the right to examine commercial practices of the Bank · PFIs do loan appraisal and approval · Apex only checks global limits for PFI and the customer and nature of the activity

  17. Implementation Problems Apex Problems Political & Macroeconomic Problems Competing Donor Facilities Disbursement Pressure J and MC Skeptics

  18. Apex problems · DBZ could not be restructured · A Temporary Apex Contractor hired · Temporary Apex later resented by PFIs

  19. Political Problems · Banks pressured by politicians · Politicians wanted direct control · Banks lobbied for government guarantees · DBZ kept lobbying for a take over

  20. Political Problems · Privatization of copper mines stalled · Domestic politics became turbulent · Donor relations deteriorated · Investments virtually stopped

  21. Disbursement Problems and WB Skeptics · CD is unhappy with lack of disbursement · Res Rep under significant pressure · TTL rates the project unsatisfactory and .............

  22. Some Revisions: · Transfer of Apex to BOZ · Introduction of Euro facility · Reduction of wholesale rate by one percent · Indicating to Government our firmness on fundamental principles · Threat of cancellation

  23. And Suddenly Progress · Number of PFIs increased · Disbursements accelerated · Became one of the best performing projects in Zambia portfolio · Became systematically important for Zambia

  24. Performance Highlights 193 sub-loans About $60 million in loan value 10 Actives PFIs - 3 Leasing companies, 4 locally owned, 3 International Banks Highly Cost Effective (about $300,000 in three years)

  25. Performance Highlights 193 loans in three years Vs. 91 loans by DBZ in 30 years Approximately 5400 directly related jobs Revenue Generated $52.1 million Tax Collected $9.1 million Exports made $13 million

  26. Performance Highlights No default and none expected in the foreseeable future DBZ lost all $100 mil it lent The sinking fund accumulated $1.5 million Av.. Loan size $250,000 (Av.. DBZ Loan was $910,00) One-third of loans below $100,000 Largest loan $750,000 (ceiling is $3mil)

  27. Qualitative Impact · provided a vehicle to continuously engage with the regulatory system · stimulated development of leasing and enhanced competition in the sector · exposed failures of politically influenced DF

  28. Qualitative Impact . set a benchmark and framework for future operations · leave behind a sustainable foundation for a 2nd-tier FI · influenced donor behavior · possible influence on sector/CD/TTL dynamics

  29. LESSONS A FIL could be very useful to: · address institutional and financial sector problems · support policy reforms · contribute economic growth

  30. But note · No qualified PFIs means no FILs · macroeconomic concerns · regulator should share risk and responsibility · simple design no micro-management by Apex or IDA · ample amount of political desire to capture FILs · prepare to stay firm against politically motivated demands · prepare to tolerate low disbursement ratios · monitor closely real sector developments · prepare to cancel

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