Document of The World Bank Report No: ICR2726 IMPLEMENTATION COMPLETION AND RESULTS REPORT (COFN-04530 IDA-39920) ON A CREDIT IN THE AMOUNT OF SDR 12.2 MILLION (US$18 MILLION EQUIVALENT) TO THE REPUBLIC OF KENYA FOR A FINANCIAL AND LEGAL SECTOR TECHNICAL ASSISTANCE PROJECT September 30, 2013 Finance and Private Sector Development Country Department AFCE1 Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2013) Currency Unit = Kenyan Shilling Ksh 85.3 = US$1.00 US$1.00 = 0.67 SDR FISCAL YEAR July 1 – June 30 ABBREVIATIONS AND ACRONYMS AG Attorney General’s Office (JPIP) project BCP Basel Core Principles JSAP Judicial Strategy Action Plan BRRP Bank Restructuring and Privatization KCB Kenya Commercial Bank Project KEPSS Kenya Electronic Payment and BSD Bank Supervision Department, Central Settlement System Bank of Kenya KPI Key Performance Indicators CAS Country Assistance Strategy KPOSB Kenya Post Office Savings Bank CBK Central Bank of Kenya KSh. Kenya Shillings CDS Central Depository System LRC Law Reform Commission CFSRD Comprehensive Financial Sector LSK Law Society of Kenya Reform and Development Strategy M&E Monitoring and Evaluation CMA Capital Markets Authority MFI Micro-Finance Institution CBK Central Bank of Kenya MICT Ministry of Information and DCA Development Credit Agreement Communication DFI Development Finance Institution MIS Management Information System DFID Department for International MoCD&M Ministry of Cooperatives Development Development (UK) and Marketing DMD Debt Management Office (of CBK) MoF Ministry of Finance DMO Debt Management Department in MOJCA Ministry of Justice and Constitutional MOF Affairs DPFB Deposit Protection Fund Board MSME Micro, Small and Medium Enterprises DTM Deposit-taking microfinance MTR Mid-term Review institutions NBK National Bank of Kenya EAD Economic Affairs Department (MOF) NESC National Economic and Social Council ERS Economic Recovery Strategy NPL Non-Performing Loan ERSWEC Economic Recovery Strategy for NSE Nairobi Stock Exchange Wealth & Employment Creation NSSF National Social Security Fund ESMID Efficient Securities Markets OTC Over-the-counter Institutional Development PAD Project Appraisal Document FATF Financial Action Task Force PDO Project Development Objectives FIRST Financial Sector Reform and PIP Project Implementation Plan Strengthening Initiative PIU Project Implementation Unit FLSTAC Financial and Legal Sector Technical PPF Project Preparation Facility Assistance Credit PPP Public-Private Partnership FLSTAP Financial and Legal Sector Technical PRGF Poverty Reduction and Growth Facility Assistance Project PRSP Poverty Reduction Strategy Paper FMR Financial Monitoring Reports PS Permanent Secretary FRC Financial Reporting Center PSC Project Steering Committee FSAC Financial Sector Adjustment Credit RBA Retirement Benefits Authority FSAP Financial Sector Assessment Program RG Registrar General, Office of the FSD Financial Sector Deepening Trust ROSC Reports on the Observance of Standards FY Fiscal Year and Codes GDP Gross Domestic Product RTGS Real Time Gross Settlement System GEMLOC Global Emerging Markets Local SACCO Savings and Credit Cooperative ii Currency Bond Program Organisation GJLOS Governance, Justice, and Law and SASRA SACCO Regulatory Authority Order Sector SDR Special Drawing Rights GOK Government of Kenya SLO State Law Office IA Implementing Agencies SME Small and Medium Enterprise IEG Internal Evaluation Group SOE Statement of Expenses ICT Information and Communications TOR Terms of Reference Technology TTL Task Team Leader IDA International Development WBG World Bank Group Association IMF International Monetary Fund IOSCO International Organization of Securities Commissions IRA Insurance Regulatory Authority ISR Implementation and Status Results Report JPIP Judicial Performance Improvement Vice President: Makhtar Diop Country Director: Diarietou Gaye Sector Manager: Irina Astrakhan Project Team Leader: Yira Mascaró ICR Team Leader: Michael Corlett iii REPUBLIC OF KENYA FINANCIAL AND LEGAL SECTOR TECHNICAL ASSISTANCE PROJECT CONTENTS A.  Basic Information..................................................................................................................... i  B.  Key Dates ................................................................................................................................. i  C.  Ratings Summary ..................................................................................................................... i  F.  Results Framework Analysis ................................................................................................. iii  G.  Ratings of Project Performance in ISRs .............................................................................. viii  H.  Restructuring .......................................................................................................................... ix  I.  Disbursement Profile .............................................................................................................. x  1.  Project Context, Development Objectives and Design ........................................................... 1  2.  Key Factors Affecting Implementation and Outcomes .......................................................... 8  3.  Assessment of Outcomes ...................................................................................................... 16  4.  Assessment of Risk to Development Outcome ..................................................................... 26  5.  Assessment of Bank and Borrower Performance ................................................................. 27  6.  Lessons Learned.................................................................................................................... 29  7.  Comments on Issues Raised by Borrower/Implementing Agencies/Partners....................... 31  Annex 1. Project Costs and Financing .......................................................................................... 32  Annex 2. Outputs by Component.................................................................................................. 33  Annex 3. Economic and Financial Analysis ................................................................................. 60  Annex 4. Bank Lending and Implementation Support/Supervision Processes............................. 61  Annex 5. Beneficiary Survey Results ........................................................................................... 63  Annex 6. Stakeholder Workshop Report and Results ................................................................... 64  Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................................... 65  Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................................... 66  Annex 9. List of Supporting Documents ...................................................................................... 67  MAP .............................................................................................................................................. 68  iv A. Basic Information Financial and Legal Country: Kenya Project Name: Sector Technical Assistance Project COFN-04530,IDA- Project ID: P083250 L/C/TF Number(s): 39920 ICR Date: 07/17/2013 ICR Type: Core ICR MINISTRY OF Lending Instrument: TAL Borrower: FINANCE AND PLANNING Original Total XDR 12.20M Disbursed Amount: XDR 11.39M Commitment: Revised Amount: XDR 12.20M Environmental Category: C Implementing Agencies: MoF Cofinanciers and Other External Partners: DFID (US$10 million); GoK (US$2 million) B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: Effectiveness: 06/30/2005 06/30/2005 3/26/2010 Appraisal: 03/24/2004 Restructuring(s): 9/28/2011 2/28/2013 Approval: 10/14/2004 Mid-term Review: 11/30/2007 February, 2009 Closing: 03/31/2010 03/31/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: MS Government: MS Implementing Quality of Supervision: MS MS Agency/Agencies: Overall Bank Overall Borrower MS MS Performance: Performance: i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Yes, 2007 Overall Problem Project at any time Quality of Supervision Yes Assessment of Proactivity (Yes/No): (QSA): rated Satisfactory DO rating before Satisfactory Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking 12 19 Capital markets 4 6 Central government administration 30 25 Law and justice 40 42 Payments, settlements, and remittance systems 14 8 Theme Code (as % of total Bank financing) Debt management and fiscal sustainability 13 5 Law reform 25 20 Legal institutions for a market economy 24 20 Regulation and competition policy 25 35 State-owned enterprise restructuring and privatization 13 20 E. Bank Staff Positions At ICR At Approval Vice President: Makhtar Diop Callisto E. Madavo Country Director: Diaretou Gaye Makhtar Diop Sector Manager: Irina Astrakhan Antony Thompson (Acting) Project Team Leader: Yira J. Mascaro Michael Fuchs ICR Team Leader: Michael Corlett ICR Primary Author: Michael Corlett ii F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The overall development objective of the project is to create a sound financial system and strengthened legal and judicial capacity that will ensure broad access to financial and related legal services. (From Development Credit Agreement) The objective of the Project is to support the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s Program. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years The rate(s) of case clearances by Milimani Commercial Courts, or in 1 respect of major types of commercial cases, improves significantly by at least 5 percent annually from 2011 35% (defined as Case clearance 2009=67% Annual % increases by 5 2010=107% Completed cases percent 2011=70% over all filed annually 2012=418% Cases) 2007 Date achieved (retroactively March 31, 2013 March 31, 2013 measured in 2013) Target considered achieved as case clearance rates showed an overall improvement. Baselines were determined by a report commissioned by FLSTAP (2013), which collected and analyzed historical case clearance data, enabled by reforms supported by the FLSTAP. Since the analysis of the case clearance was not possible at appraisal, introduced at restructuring after reforms had taken place, the team could not reformulate the indicator to be Comments more precise without a baseline and instead chose a relative measure to be calculated on the baseline, once estimated. FLSTAP made contributions to the improvement including training of Judges, Revision of Civil Procedures Act 2010, and equipment. These are reflected in clearance rates from 2009 onwards in which the average clearance rate was 166%. Further explanation is provided in Annex 2. At least 15 new or upgraded Commercial/ Financial and related laws and 2 subsidiary legislation developed, approved by Cabinet and published by the State Law Office (Attorney General’s Office) Percentage / Legislation not Not original; At least 15 23 iii Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years breakdown drafted indicator added Date achieved Mar. 31, 2013 Target exceeded. Revised indicator. Original indicator was as follows: Comments “Appropriate adoption of key commercial sector laws.” Non-Performing Loans (NPLs) drop to 8 percent of Total Loans (net of 3 interest in suspense) by end of project. NPLs drop to 10 NPLs drop to 8 Number (annual) 19.3 3.62 percent percent percent Date achieved Jun 30, 2005 9/28/2011 Dec. 31, 2012 Comments Target achieved. Interest rate spread between Average Deposit Rates and Lending Rates 4 falls below 8 percent by end of project Percentage 8.6 6 8 11.62 Date achieved 9/28/2011 Jan. 2013 Target not achieved, but difficult to attribute to project as it is largely affected Comments by macroeconomic, international financial crisis and other external factors. Credit extended to the private sector as a percentage of GDP increases to 5 at least 37 percent by end of project. Percentage 25.8 percent 30 percent 37 percent 33.5 percent Date achieved 31-dec-2005 9/28/2011 Dec. 31, 2012 Target substantially achieved. At June 2012, target had been achieved, but Comments indicator has declined since due to macro factors. 6 Percentage of population with access to formal rural financial services increases to at least 40 percent by end of project. 23.4 (Finaccess Percentage 40 59.8 2007 survey) Date achieved March 31, 2013 New indicator introduced at 2011 restructuring. Target exceeded. (Source: Comments FINACCESS 2013 survey) Percentage of population with access to formal financial services 7 increases to 50 percent by end of project. 26.4 Percentage / Access increases by (FINACCESS 50 66.9 breakdown 20 percent 2007 survey) Date achieved 9/28/2011 Mar. 31, 2013 Comments Target exceeded. (Source: FINACCESS 2013 survey). Number of accounts in the financial sector increases to 15 million 8 accounts by project end. Number 2.2 million 15 17.6 million Date achieved Jun 30, 2005 9/28/2011 Dec. 31, 2012 Comments New indicator. Target exceeded. iv Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Target Values documents) Years 1 CBK’s compliance (Compliant or Largely Compliant) with Basel Core Principles (BCP) rises to at least 18 principles. CBK compliant /largely compliant with 16 BCPs At least 18 At least 18. (source: 2003 FSAP) Date achieved 31-Dec-2005 9/28/2011 July 31, 2013 Target exceeded. A BCP assessment was carried out as part of the ICR. Though the assessment is ongoing, preliminary results indicate that the CBK Comments is compliant/largely compliant with at least 18 principles. Further, the assessment shows that Kenya has made substantial progress on most fronts since the 2009 FSAP. Relevant Laws of Kenya revised and online access provided/enhanced 2 with Judges Help Desk established and operational. Judges Help-Desk. Real time All Laws of All laws of Kenya information on Kenya revised, Revised, and available the and available in in hardcopy, CD-Rom, Text laws of Hardcopy, CD- Online (in acceptable Kenya not ROM, online formats). Help Desk is available (in acceptable established and online formats) operational. Date achieved 12/31/2005 March 14, 2013 Comments Target achieved 3 Civil procedure rules (CPR) reviewed and published Civil Existing Civil Procedure Rules procedure Percentage procedures (CPR) 2010 gazetted rules being outdated and in operation implemented Date achieved 12/31/2005 9/28/2011 March 31, 2013 Comments Target achieved 4 Time taken to register companies’ declines 8 days by project end. Number 47 (DB 2005) 39 31 Date achieved 12/31/2005 March 31, 2013 Comments Target achieved. 5 Private credit registries operational and sharing data. v Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Target Values documents) Years 2 private Credit Reference Private credit Bureaus (CRBs) registries Text zero operational. Avg operational and Number of credit sharing data reports accessed: 180,000 Date achieved June 30, 2005 Dec. 31, 2012 Target achieved. Revised Credit Reference Bureau Regulations have also Comments been approved which allow for sharing of positive information. % of clearing house transactions processed through RTGS rises to at 6 least 95% At least 95% 100% of all transactions by transactions in ACH Percentage 0 RTGS; RTGS processed through backup center KEPSS; backup center established established. Date achieved 12/31/2005 June 28, 2012 Target achieved. FLSTAP supported RTGS remote backup site, which is Comments operational, as well as related legal/regulatory changes for payments systems. Proportion of financial institutions in compliance with capital adequacy 7 ratios rises Percentage 93 96 100 Date achieved 31-dec-2005 9/28/2011 Dec. 31, 2012 Comments Target achieved 8 Financial Sector Regulators adopt Risk-Based Supervision. CBK, RBA, CMA, IRA and Regulators at SASRA CBK, RBA, CMA, various stages in value implementing IRA, and SASRA implementing RBS at implementing RBS RBS. different levels of progress. Date achieved 12/31/2005 March 14, 2013 Target achieved, although further work required as international standards Comments have evolved (Basel 3) Autonomy of Financial Sector Regulators (IRA, CMA, RBA, Saccos 9 Regulatory Authority and CBK-BSD) established. CMA, RBA CMA, RBA, IRA, CMA, RBA, IRA, partially CBK –BSD remain CBK –BSD remain Text autonomous; autonomous. autonomous, DPFB Commissioner of SASRA more autonomous (law vi Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Target Values documents) Years Insurance is a autonomous. passed).SASRA is dept. of MoF; autonomous. DPFB operated CBK though it has separate Board1 June 2005. Date achieved Dec. 31, 2012 Comments Target Achieved. 10 Judicial sector strategic plan adopted and being implemented Judiciary Strategic Plan No Background 2009 - 2013 JSP under value Strategic Plans at approved and implementation. Project Inception under implementatio n Date achieved Dec 31, 2012 Comments Target achieved, although further work required. Comprehensive Financial Sector Reform and Development (CFSRD) 11 strategies adopted by the Cabinet. CFSRD CFSRD Background approved by submitted to MOF studies for Text Cabinet, (Oct.2011) has strategies adopted for been adopted by completed. implementation MOF; Date achieved Mar. 31, 2013 Comments Target achieved. Mid-term plans under implementation. Automation of recording and transcription services in at least the 12 commercial and civil divisions of the High Court completed. Automation of recording and Automation of No automation of transcription recording and court processes Text services transcription services and completed in completed in both case management. both divisions. divisions. 1 GoK comment: “DPFB to gain full autonomy with operationalization of Kenya Deposit Insurance Corp which was enacted in 2012” vii Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Target Values documents) Years Date achieved July 31, 2013 Comments Target achieved Number of courses offered at the University of Nairobi School of Law and 13 the Kenya School of Law on commercial and financial law rises. 16 courses for the UON (20) 2004/05 academic Courses) UON (20 Courses) Number year KSL (10 KSL (10 Courses) None for KSL. Courses) Date achieved March 14, 2013 Target achieved, and extensive curriculum development supported by the Comments Project Submission to Parliament of the transaction to dispose of State-influenced 14 shares of National Bank of Kenya &Consolidated Bank. Plans for the NBK 22 percent privatization of GoK by GoK; 48 stakes in NBK and CB Text percent by NSSF; approved by Cabinet CB 100% GoK and submitted to Parliament. Date achieved 31-dec-2005 Dec. 31, 2012 Comments Target achieved 15 Integrated debt management system is in place No comprehensive Comprehensive Comprehensive Debt Text debt management debt management Management Strategy strategy strategy is in place in place. developed. Date achieved 6/30/2005 Dec. 31, 2012 Comments Target achieved. G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 12/09/2004 Satisfactory Satisfactory 0.00 2 06/28/2005 Satisfactory Moderately Satisfactory 0.00 3 12/29/2005 Moderately Satisfactory Moderately Satisfactory 1.08 Moderately 4 06/22/2006 Unsatisfactory 1.12 Unsatisfactory 5 12/29/2006 Moderately Unsatisfactory 1.79 viii Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Target Values documents) Years Unsatisfactory Moderately 6 06/18/2007 Unsatisfactory 1.79 Unsatisfactory 7 12/14/2007 Moderately Satisfactory Moderately Satisfactory 2.22 8 05/30/2008 Satisfactory Moderately Satisfactory 2.84 9 12/30/2008 Satisfactory Moderately Satisfactory 3.20 10 06/30/2009 Satisfactory Moderately Satisfactory 3.55 11 12/22/2009 Satisfactory Moderately Satisfactory 4.05 12 06/28/2010 Satisfactory Moderately Satisfactory 4.62 13 03/27/2011 Satisfactory Moderately Satisfactory 5.45 14 01/03/2012 Satisfactory Satisfactory 6.67 15 07/11/2012 Satisfactory Satisfactory 7.52 16 01/08/2013 Satisfactory Satisfactory 9.20 17 03/31/2013 Satisfactory Satisfactory 11.15 Post 07/31/2013 16.9 closure H. Restructuring ISR Ratings Board at Amount Disbursed at Restructuring Approved Reason for Restructuring Restructurin Restructuring (in USD Date(s) PDO & Key Changes Made g millions) Change DO IP Extend project closing date 18 months from March 31 03/26/2010 N/A S MS 4.05 2010 to September 30th 2011.2 Extend project closing date; modify PDO and intermediate outcome indicators; reallocate funds 9/28/2011 N/A S MS 6.4 within disbursement categories; Revisions upwards of the percentage of Expenditures to be financed by IDA 2 This restructuring was completed on an informal basis. ix Increase the special account ceiling from US$2 million to US$4 million; Re-allocate funds among expenditure categories; 02/28/2013 N/A S S 9.3 Upward revision of the percentage of expenditures to be financed by the IDA upon exhaustion of the DFID allocation. I. Disbursement Profile x 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. Country and Sector background: After a decade of weak economic performance, Kenya experienced a moderate rebound in economic activity in 2003/04 (July/June) and a drop in domestic debt. However, inflation was on the rise, reaching 19 per cent in September 2004 from eight percent a year earlier, and the shilling was depreciating, after the Central Bank of Kenya (CBK) had loosened monetary policy. 2. A new Government had taken office in December 2002, and had demonstrated its commitment to improving governance. It had prepared an Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) which aimed to restore the economy to a path of high growth. Within this framework, the government committed to maintaining a stable macroeconomic framework, reforming the financial sector, implementing mechanisms for private sector participation in the provision of infrastructure services, and establishing a competitive environment able to attract increased private investment in productive sectors such as tourism, trade and industry. The Government had entered into an agreement with the International Monetary Fund (IMF) for a Poverty Reduction and Growth Facility (PRGF) 3 arrangement, and the first review had shown authorities to be responsive to reform advice, which was not observed before 2003, where pervasive governance problems and weak political commitment to economic reforms did not provide a favourable environment for the implementation. 3. State of the financial and legal sectors: A joint Bank-Fund Financial Sector Assessment Program (FSAP) had been completed for Kenya in late-2003. It provided a broad overview of financial sector vulnerabilities and developmental needs. The Kenyan banking system was well- established in 2004, with 43 commercial banks, but with several constraints and vulnerabilities4 that prevented it from reaching its full potential in supporting the allocation of scarce economic resources and promoting strong growth, including: (i) High level of Non-performing loans (NPLs) threatening financial stability. Most of the high level of NPLs of public banks were on account of old government- intermediated credits, as well as from banks’ failure to enforce contracts under the old regime because of legal, political, and judicial hurdles. Policies needed to focus on the restructuring of public banks, including their privatization.5 (ii) Limited access to financial services by Kenyan households, notably in the rural areas, and by private enterprises, especially micro, small and medium enterprises (MSMEs). 3 Implementation of Fund policy in four areas: governance, fiscal sustainability, financial sector, and poverty reduction. Less successful in responding to the recommendations of the Fund and the Bank to reduce public sector ownership of banks. The government has indicated that the slow progress in this area reflects primarily fears that privatization may adversely affect financial intermediation in rural areas. 4 CAS 2004 and FSAP 2004 5 IMF, “Staff Report for the 2004 Article IV Consultation, First Review Under the Poverty Reduction and Growth Facility, and Requests for Augmentation of Access, Rephasing of the Arrangement, and Waiver of Performance Criteria”, December 6, 2004 1 (iii) Lack of competition with many weak banks unable to exert competitive pressure on the few strong banks. (iv) Structural problems in the non-bank sector, including weak supervisory capability of the insurance sector. (v) Limited coverage of the pension system, inadequate benefits, and high levels of unfunded liabilities. (vi) Limited capacity of the Capital Markets Authority with no operational independence. (vii) The legal framework for property rights, insolvency, and creditor rights was fragmented, outmoded, and incomplete, requiring comprehensive review of laws to make them more relevant to the needs of the Kenyan economy. 4. In addition, the following constraints were evident in the legal/judiciary sector: (i) Legal and judicial sector institutional issues, including weak capacity, corruption, and poor enforcement of laws. (ii) The court system was operating inefficiently, with most of its operations handled manually. Improving the efficiency and effectiveness of the court system was considered central to improving the functioning of the legal and judicial framework in general. (iii) System for legal education suffered from neglect and had become largely inadequate for the rapidly growing needs of the Kenyan economy. 5. In view of the above constraints, the Government was developing a financial sector reform program to address policy, institutional and legal issues impeding the efficient operation of the sector. In the medium term, the Government had indicated its intention to draw up a financial sector development strategy that would provide the framework for measures necessary for achievement of policy objectives. The Government asked the Bank for a Technical Assistance Credit to assist in the implementation of its financial and legal sector reform program. 6. Rationale for Bank Assistance: The Bank had initiated a reengagement with Kenya, which was formalized by the presentation of the Country Assistance Strategy (CAS) to the Board in May 2004. The CAS was aligned with the country’s ERSWEC, and the Poverty Reduction Strategy Paper (PRSP), which was discussed at the Bank and IMF Boards in early May 2004. The Bank’s re-engagement followed two decades of economic mismanagement which had left much of Kenya’s infrastructure in shambles and its institutions weakened. The CAS noted that with the right investments and policy and institutional reforms, Kenya had significant potential for growth. The CAS also highlighted the urgent need to rebuild Kenya’s institutional capacity, and failure to do so would constitute a major area of risk. 7. The approval of FLSTAP (Sep. 2004) closely followed the Bank’s strategy of re- engagement with Kenya. FLSTAP aimed to provide technical expertise and capacity building in support of the Government’s financial sector reform program and governance, justice, and law and order sector program. The project was consistent with the second pillar of the CAS (Reducing the cost of doing business and improving the investment climate). 2 8. FLSTAP was the first financial sector loan in Kenya since 1994, and grew out of a renewed dialogue initiated in 2003 around the need for financial sector reform. At the same time, preparations also began for a joint Bank-Fund Financial Sector Assessment Program (FSAP) to conduct a comprehensive review of the financial system and identify weaknesses/vulnerabilities and develop additional medium term reforms needed to support the development of the financial sector. The FSAP was completed in late-2003. The Government requested Bank support to address FSAP recommendations. 9. In the legal sector, the Bank had been a leading donor and was at the time co-chairing the legal sector donor coordinating group. In 1999 the Bank provided assistance to the Government to develop a legal sector strategy. This strategy eventually became the Government’s medium term Governance, Justice, and Law and Order Sector (GJLOS) reform strategy. The Bank and the other members of the legal sector coordinating group had worked closely with the Government on the development of the GJLOS reform strategy. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 10. The overall development objective of the project, as stated in the original PAD, was to create a sound financial system and strengthened legal and judicial capacity that will ensure broad access to financial and related legal services. 11. However, the PDO in the DCA was as follows: “Support the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s Program.” According to IEG guidelines, in this case the evaluation will be based on the PDO in the DCA. Key Performance Indicators at project approval included:  Percentage of population with access to appropriate financial services increases by 20%.  Increase in private credit provision relative to the Gross Domestic Product (GDP) by 30%.  The ratio of non-performing loans to the total loan portfolio of the banking system is reduced to less than 10%.  Spread between average deposit rate and lending rate for prime customers decreased by 30%.  Reduction of backlog in commercial cases by 25%.  Appropriate adoption of key commercial sector laws.  Increase in measured satisfaction of the business community with the judiciary by 25%. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 12. The PDO was not revised during the implementation period, but the Key Indicators were revised during a Level Two restructuring on September 28, 2011. Though the restructuring did not change the PDO given the pace of ongoing reforms, outcome indicators were revised to increase their relevance and to ensure that they could be measured and monitored. For instance, the original indicator on reducing backlog of commercial cases, which was not measurable, was changed to reflect the rate of case clearance by the Milimani Commericial Courts, which became 3 measurable after reforms supported by the project had taken place. Hence, the revisions did not reflect changes in project scope. According to the ICR guidelines, this entails the necessity to conduct a split evaluation. The revised PDO indicators were as follows:  The rate(s) of case clearances by the Milimani Commercial Courts, or in respect of major types of commercial cases, improves significantly by at least 5 percent annually from 2011 (new)  At least 15 new or upgraded Commercial/ Financial and related laws and subsidiary legislation developed, approved by Cabinet and published by the State Law Office (Attorney General’s Office) (New)  Non-Performing Loans (NPLs) drop to eight percent of total loans (net of interest in suspense) by end of project. (Slightly revised)  Interest rate spread between average deposit rates and lending rates falls below eight percent by end of project (Slightly revised)  Credit extended to the private sector as a percentage of GDP increases to at least 37 percent by end of project. (Slightly revised)  Percentage of population with access to formal rural financial services increases to at least 40 percent by end of project (New)  Percentage of population with access to formal financial services increases to 50 percent by end of project. (Revised)  Number of accounts in the financial sector increases to 15 million accounts by project end. (New) 1.4 Main Beneficiaries A list of the 22 beneficiary agencies is as follows (17 separate institutions):  Component 1: Ministry of Finance – Economic Affairs Department (EAD), Kenya School of Monetary Studies, Central Bank of Kenya (CBK)  Component 2: Ministry of Finance – EAD Ministry of Finance  Component 3: CBK – Bank Supervision Department (BSD), Capital Markets Authority (CMA), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA), Deposit Protection Fund Board (DPFB), Ministry of Cooperative Development and Marketing (MoCD&M)/ Savings and Credit Cooperative Organization (SACCO) & SACCO Societies Regulatory Authority (SASRA)  Component 4: MOF – Debt Management Department (DMD), CBK Debt Department, PPP Secretariat (MOF)  Component 5: CBK – Payment Systems Department  Component 6: CBK – BSD, MOF –EAD, Ministry of Lands, Registrar General (RG), Kenya Law Reform Commission (KLRC), Judiciary  Component 7: State Law Office (SLO), Judiciary, KLRC, National Council for Law Reporting, Kenya School of Law, University of Nairobi 1.5 Original Components (as approved) The project consisted of eight components, including project management (US$4.0 million): 4 13. Component 1: Financial and Judicial Sector Strategy Development (US$0.8 million; IDA: US$0.36 million). The Project aimed to support the formulation of a financial sector strategy and the development of a strategy for the judiciary. The Project sought to support relevant agencies in developing a framework for monitoring and evaluating progress in financial sector development and judicial and legal reforms. 14. Component 2: Restructuring and Privatization of Financial Institutions (US$3.3 million; IDA: US$1.8 million). The banking system had at the time a very high level of non- performing loans concentrated in four commercial banks with state interests. Divesting the Government’s stake in these institutions was expected to help strengthen competition and improve stability, which could result in downward pressure on the high interest rate margins and increase the incentives to reach underserved markets. The Project planned to support the establishment of a specialist Bank Restructuring and Privatization Project (BRPP) within the Ministry of Finance to guide the privatization process from the identification of strategic options for divestiture. Areas of possible further support included the restructuring of: (i) the Development Finance Institutions (DFIs), in line with the DFI strategy currently being developed, and (ii) Kenya Post Office Savings Bank (KPOSB) and Co-operative Bank, two key institutions for improving access to financial services. 15. Component 3: Strengthening Financial Sector Regulators and the Deposit Protection Fund Board (US$3.9 million; IDA: US$2.2 million). The primary role of the Government in the financial sector is to provide the legal, regulatory, and supervisory framework that promotes soundness and competition in the sector. The Project was designed to provide support for the review, amendment and/or drafting of financial sector laws and regulations that govern all the regulators and the DPF, with the objective of strengthening their effectiveness. It would also support capacity building initiatives for these institutions, including needs assessment, training of staff, the resident advisors, and the establishment of capacity to regulate and supervise the microfinance and SACCOs sectors under the proposed new legislation. In addition, improvements were planned to be made to the Management Information Systems (MIS) of these institutions, including software upgrades and purchase of hardware. 16. Component 4: Strengthening Debt Management and Debt Markets (US$1.5 million; IDA: US$0.9 million). The updating of Government debt databases was being handled by individual entities in the Ministry of Finance and CBK responsible for parts of debt management with no coordination or consolidation of data. The Project intended to provide technical support for setting up a unified and sustainable Debt Management Office, including review of relevant legislation. The Project also was expected to support a number of technical improvements with a view to enhancing the operation of the primary and secondary government debt markets. 17. Component 5: Modernizing the National Payments System (US$3.1 million; IDA: US$1.8 million). The Kenyan authorities recognized the existing deficiencies in the clearing and settlement mechanisms and a task force produced a framework and strategy paper for the modernization of the national payments system, introducing a Real Time Gross Settlement System (RTGS). The Central Bank had already earmarked funds for the acquisition of a standalone RTGS. The Project aimed to provide appropriate technical assistance and funding to acquire a Scriptless Securities Settlement System/Central Depository System (CDS) to facilitate the safe, secure and efficient clearance and settlement of funds and securities transfers (both primary and secondary market transfers) in a manner consistent with best international practice. In addition, the project intended to support the establishment of an appropriate legal and 5 oversight framework, and provision of expert technical advice and training for staff of the Department of Payments System in the CBK. The Project would also fund a diagnostic study to identify the needs for improvements in the mechanisms for low value payments transfers. 18. Component 6: Improving the Lending Environment (US$2.3 million; IDA: US$1.4 million). One of the major impediments to growth in Kenya was insufficient access to credit for large segments of the population and enterprises, especially micro, small and medium sized ones. The Project sought to support: (i) improvements in the operation of the Department of the Registrar General which includes: a) assistance to the Companies Register to enable the Registry to clear the backlog in filing and allow for speedy and accurate information sharing of corporate information and data; and b) combining of the Charges Register and the Chattel Mortgage Register into one; moving the combined separate register (notification system) for charges/pledges over movable assets out of the Companies Register and developing a new Personal Property Securities Act (i.e., secured transactions framework) in line with international best practices; (ii) improvements in the land registration system through digitizing land records; (iii) establishment of a legal and regulatory framework for the operation of a credit reference bureau that would facilitate the much needed information flow among the credit granting institutions; and (iv) the review of impediments to the growth of the leasing industry, including tax laws on leasing. 19. Component 7: Legal and Judicial Reform (US$8.1 million; IDA: US$4.5 million). The legal system in Kenya was facing major challenges in supporting effective financial intermediation. Furthermore, the drafting, implementation and application of the legislative and regulatory reforms, as described in Components 3 and 6 would require strong capacity in the judiciary and in the legislative and executive offices charged with legislative drafting and law revision. An effective legal education would ensure that the legal and judicial professions are well placed to implement these reforms. This Component focused on the following three areas. 20. Judicial reform: Activities in this subcomponent were expected to focus on establishing the court and case management and records management systems and improving court registries. Activities aimed at reducing the backlog of cases would include supporting alternative dispute resolution (ADR) mechanisms for commercial law cases and introducing small claims court procedures. Summary court procedures for uncontested debt enforcement would be introduced to eliminate the frequent frustration of enforcement procedures. Support for a staff training program and more effective human resource administration and management was also envisioned. 21. Law reform: The Project sought to provide technical assistance to finalize the institutional review and capacity building of law reform bodies, including the Law Reform Commission, the Office of the Attorney General and the Parliamentary Service Commission. 22. Legal Education: In order to strengthen the capacity of the legal profession and the judiciary in the commercial and financial areas, it was considered necessary to enhance education of judges and lawyers. Following a review of the institutional arrangements for basic and continuing legal education, key legal education institutions would be provided with support to strengthen facilities, review and develop teaching curricula and educational materials, update libraries and research capabilities, and create new training and development opportunities for both students and faculty. 6 1.6 Revised Components 23. The original components were never revised during project implementation, though minor adjustments were made during implementation. The comparison of expected versus actual disbursements has a “crab’s claw” shape (see disbursement profile) which is rather typical of TA operations, as implementation time is usually underestimated, and disbursements over-estimated. 24. In terms of actual disbursements by component (Table 2), about one third of the funding went to each of components 3 (Strengthening Financial Sector Regulators and the DPFB) and 7 (Legal and Judicial Reform). All components experienced a major jump in the last year of the project, as per restructuring plan approved in 2011 because some procurement processes were expected to take 1-2 years to complete. Table 1: Disbursements by Component (US$ millions, and %) Component 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 Total % 1 0 0.16 0.12 0.1 0.06 0.2 0.83 0.85 2.32 8% 2 0.57 0.53 0.03 0 0 0 0 0 1.13 4% 3 0.1 0.12 0.17 0.57 0.65 0.71 1.19 5.88 9.39 32% 4 0.02 0.04 0.11 0.13 0.27 0.02 0.08 0.2 0.87 3% 5 0 0.01 0.02 0.02 0.09 0.54 0.04 0.36 1.08 4% 6 0 0.06 0.30 0.06 0.3 0.1 0.16 0.94 1.92 7% 7 0.02 0.11 0.25 0.29 0.11 0.76 1.74 6.46 9.74 33% PIU 0.6 0.06 0.40 0.4 0.26 0.34 0.36 0.27 2.69 9% Total US$ 1.31 1.09 1.40 1.57 1.74 2.67 4.4 14.96 29.14 100% Cumulative Total US$ 1.31 2.4 3.8 5.37 7.11 9.78 14.18 29.14 25. The project as a whole was divided in three phases: (i) Stagnation during the first two and a half years since effectiveness; (ii) an intermediate phase following the mid-term review in 2009 during which a lot of work went into preparation of work plan activities and procurement that would ultimately result in increased disbursement during 2011-13; and (iii) activity consolidation and rapid acceleration in the last two years, but particularly in the year before the project’s closing date when half of the loan was disbursed (2012/13) as procurement processes that had been started during the second phase and expected to take 1-2 years were completed. By component the concentration is particularly high for Components 3 and 7, for which more than two-thirds of the funds were disbursed in the last year. This reflected the larger share of equipment, as it entailed for component 3 setting up a number of supervisory agencies that had not existed (SASRA) or that were mere units at the Ministry of Finance (IRA) at the beginning of the project, plus courts covered under component 7. 1.7 Other significant changes 26. Significant changes included a change in implementation arrangements, one informal project extension and two Level II restructurings. 27. Change in Implementation arrangements. The initial Project Implementing Unit (PIU) in the Ministry of Finance, comprised of internationally recruited staff, was ineffective and replaced in late 2006. The Ministry of Finance transferred project management responsibility to 7 the Economic Affairs department (EAD). Staffing for the PIU was completed by late 2007, after two staff were seconded to the PIU by the Central Bank and State Law Office. 28. Following implementation of the Mid-Term Review (MTR) recommendations, a February 2010 informal restructuring extended the project’s closing date by 18 months to September 30 2011 in order to provide sufficient time to implement the revised work plan given the slow implementation. At the time the team proposed a revised work plan that would require three years to complete. However, given the history of low disbursement of the project, a two- stage approach was recommended to the team in which a second extension would be sought in September 2011, pending successful implementation. 29. As envisioned in the earlier restructuring, the project’s closing date was again extended for another 18 months from September 30, 2011 to March 31, 2013 in order to ensure completion of project activities, and to revise the Results Framework to improve attribution and measurability. This enabled the completion of the three year plan proposed in 2011, but at the cost of delays in some of the procurement processes that were carried over the initial extension period, losses in PIU staff that left due to employment uncertainty, and other related delays. 30. A final restructuring was approved in February 2013 in order to facilitate completion of project activities and substantial achievement of development objectives by removing constraints related to the project’s co-financing formula reflected in the legal agreement. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 31. The election of a new reform minded Government in December 2007, committed to improved governance, and to pursuing financial sector and judicial/legal reform, provided an opportunity and strong rationale for the Bank to re-engage. From this context emerged a complex technical assistance project based on a sound background analysis, but initially lacking an implementation arrangement equal to the project’s scope and complexity. This section summarizes the key factors during the preparation stage that affected implementation and outcomes. 32. Soundness of the background analysis. Though the Bank had been inactive in the financial sector for several years, its participation in the 2003 Financial Sector Assessment Program (FSAP) provided it with ample background analysis and recommendations of the policy and technical issues facing the financial sector. FSAP provided a broad overview of potential financial sector vulnerabilities and developmental needs, which were summarized in Section 1. Furthermore, the Bank also conducted an assessment of relevant standards and codes (ROSCs), including the Basel Core Principles for Effective Banking Supervision, the IOSCO Assessment for Securities Regulation and the assessment of the framework for Anti-Money Laundering and Combating the Financing of Terrorism, and the Insolvency and Creditors Rights ROSC. Following the FSAP a series of follow-up analytical work had been initiated to move the reform process closer to implementation, including a strategy paper for the reform of the banking sector, analytical work on access to finance, and seminars on pension reform. 33. Assessment of the project design. Based on the findings of the 2003 FSAP, the FLSTAP design was highly relevant. The FSAP had identified potential vulnerabilities and 8 developmental needs for the sector as well as the risks to macroeconomic stability from weaknesses and shortcomings in the financial sector. Further, the FSAP highlighted the constraints posed by these weaknesses to realizing the sector’s potential to deliver sufficient credit to businesses, including SMEs. Based on this strong analytical foundation, the design of FLSTAP appropriately intended to address these critical challenges. The Bank initially proposed to support i) a Financial Sector Adjustment Credit (FSAC), covering key policy and institutional reforms, including reducing the Government’s role in the financial sector; and ii) a Financial and Legal Sector Technical Assistance Credit (FLSTAP), providing support for the implementation of required reforms as well as other medium term upgrades in financial infrastructure. While this mix of instruments was appropriate, the budget support operation never materialized because of disagreement on the privatization of state-owned institutions. Without the anticipated policy support, FLSTAP, Component 2 (Restructuring and Privatization of Financial Institutions) became less viable in the early years of the project in terms of the end result (privatization), but later materialized in terms of material changes in the policy agenda with legislation passed for privatization and preparation for the privatization of three banks completed. Other components were largely unaffected. 34. Though the FSAP provided a clear diagnosis, it was not followed by a detailed, well- sequenced, action plan with strong Government ownership. Indeed some of this planning was envisioned to be supported by the project, including the development of the financial sector and judicial strategies, which were completed under the project. 35. At inception, the FLSTAP was an overly complex project with too many components (7) and too many implementing agencies (22). Given the depth of the financial and judiciary/legal reform agenda, the Bank could have taken a more cautious approach in designing a simpler project with the possibility for an add-on. However, project complexity was overcome through close supervision, and hands on support to the PIU to undertake stronger planning and monitoring, particularly from the MTR to closure. 36. Much of the complexity and scope of the project owed to management pressure at the time of approval to avoid fragmented, smaller, and multiple technical assistance (TA) loans. At the time of preparation, the Bank was considering a freestanding legal and judicial reform project, but management decided to prepare only one operation for the financial sector combining elements for legal and judicial reform related to the functioning of the financial sector. The combination had a detrimental impact on the judicial side, particularly in the early years, as legal resources in the PIU were insufficient while the project’s focus on the judicial/legal side did not coincide with Ministry of Justice’s priorities at the time. These problems were resolved with the appointment of a new PIU Project Manager, who having previously worked at the State Law Office was able to define an agenda for the legal and judicial reform aspects of the project and foster stronger Government ownership. 37. While the FLSTAP financing mix, consisting of IDA, DFID (grant) co-financing (US$10 million), and Government counterpart funding (US$2 million), provided an attractive mix of resources, the co-financing arrangement - instead of parallel financing – and the formula chosen for disbursements was cumbersome and would pose substantial implementation challenges (see next section). Each agency had different disbursement rules, different documentation, reporting and fiscal years. Funds flow was complex characterized by slow replenishments, including delays after the December 2007 election violence crisis that led to stalled disbursements for DFID for about 6 months. 9 38. Lessons learned, including the importance of a flexible design, were incorporated in design. Indeed, the project’s flexibility was critical to adapt to changing environment. 39. Implementation Arrangements: The complexity of FLSTAP posed implementation challenges, including the fact that MoF had never implemented a Bank project. Due to prevailing concerns over corruption, the PIU was initially staffed with external consultants as a means to mitigate risk, while an annual audit was subcontracted to a private firm of auditors. A Steering Committee Structure was established, chaired by a high level official of the Ministry of Finance and comprising of senior representatives of the CBK, Ministry of Justice and Constitutional Affairs, and the Association and DFID, as observers. This structure would turn out to face delays, particularly in the early years6, due to the seniority of participants, resulting in ad-hoc delegation, lack of continuity, and need for more consensus on decision-making across themes. Furthermore, initially it was difficult to engage with the Ministry of Justice, as it was too busy with a broader agenda and not focused on articulating needs to be financed under FLSTAP. 40. Adequacy of government’s commitment. FLSTAP emerged from the findings of the 2003 FSAP, and the GoK requested FLSTAP to support its reform agenda. However, the initial strong Government commitment did not carry through initial stages of project implementation, as policy differences emerged that directly impacted the course of the project on the main initial focal area, which was privatization of state-owned banks. Further, the MoF did not initially take leadership of the PIU, nor assume with vigour its important coordinating role. 41. Assessment of risks. The PAD identified risks as Substantial. Risks included failure to maintain a stable macroeconomic environment, and others related to lack of Government commitment and capacity to define and implement necessary policy reforms. Absent was the risk of political instability, which materialized after the December 2007 elections and resulted in further project delays. The PAD also identified project related risks including: limited technical and absorptive capacity of the various implementing agencies and lack of collaboration and coordination among government agencies, but the mitigating measures were insufficient or did not materialize as envisioned early on. In particular, the lack of capacity at some “young” implementing agencies was not adequately addressed, at least initially, in terms of providing extra support on how to access FLSTAP funds and follow Bank procedures. The Bank should have planned better for the complexity of the project to manage these risks better. In the end, these risks were overcome, but at the high price of a three year project extension. 6 The GoK made the following comment: “PSC was ineffective only during the early years. In the latter years, delegation, which came with decision making authority did not hamper continuity of the project. Despite, at times, the absence of key PSC members, meetings were held and decisions made without undue delay.” 10 2.2 Implementation 42. FLSTAP experienced three distinct project implementation phases during the project’s life. In the first phase, the project encountered several difficulties including a long delay in setting up the PIU, and weak performance of the first PIU, which eventually led to its dismissal, as well as election violence of December 2007 and ensuing delays. In the second phase, the Ministry of Finance took over implementation directly and set up a strengthened PIU staffed with Sr. personnel from the CBK, which laid the groundwork for future improved project performance. In the third phase, from the MTR to project closure, project implementation improved tremendously, through strong and effective project management, both from Government/PIU and enhanced Bank supervision with the TTL in the field. This section highlights the problems that emerged during these three phases and how they were resolved, as well as other important issues that affected project implementation. 43. Problems with the Project Implementation Unit. Project implementation was delayed due to difficulties in establishing an effective PIU. The difficulties in setting up the PIU were due to technical, procedural and managerial constraints. The initial PIU, comprised of external consultants, failed to launch the project in any meaningful way, hampered by internal conflict, but also by its inability to establish an effective relationship with the Implementing Agencies and the Ministry of Finance, whose coordinating role was greatly needed given the breadth of the project. A new PIU was not put in place until October 2007, partly due to the challenge of contractual obligations with the first team of consultants, as well as finding the necessary breadth of technical skills (financial to judiciary and legal) to manage this complex project. Then the crisis of December 2007 took place, which led to further implementation delays. Treasury took strong leadership of the process to restructure the project, starting with a decision to mainstream implementation responsibilities within the Economic Affairs Department (EAD). This was facilitated by the expansion of the Department to include two staff seconded from the Central Bank and State Law Office reporting to the Economic Secretary, who among their duties, assumed overall responsibility for the management of FLSTAP, reflecting increased Government ownership of the project that was absent in the initial implementation phase. 44. Though an effective PIU was eventually put in place, the project was hampered throughout implementation by insufficient project staffing, particularly in fiduciary positions and Monitoring & Evaluation. Bank management consistently raised staffing concerns to the Authorities, and while they generally improved following the mid-term review, they were nevertheless a constant challenge. Furthermore, low absorption rate of many of the implementing agencies was a constant source of delay, as TORs took a long time to be completed due to lack of capacity. Many of these institutions were quite young, such as SASRA, IRA, and RBA, and consequently required enhanced support by the PIU/Bank. PIUs reported that delays were the result of the Bank’s slow response on requests for no-objections, particularly in the early period through the MTR. Notwithstanding the lack of resources, PIU performance, particularly in the latter years and final year, where more than 50% of the credit was disbursed, was commendable. The PIU managed dozens of procurement processes, more than half of which were complex (ICT-related), while coordinating with 22 implementing agencies. The project completely disbursed the DFID funds, and almost 92% of IDA funds. 45. The project initially suffered from an insufficient strategic orientation of the PIU. Project should have identified “champions” in each implementing agency in advance and provided sufficient training/hand holding on WB project implementation and other related 11 aspects. This constraint was adequately addressed following the Mid-Term Review, described below, as the PIU management took a more active role in working with agencies to identify activities to support the reform process. 46. A QAG review of Proactivity in Supervision of Problem Projects rated the overall assessment of proactivity in supervision of this project as “Satisfactory.” The report agreed with management identification of lack of capacity for procurement and project management as the project’s major problem. Further, the assessment noted that management provided additional resources in FY07 to intensify supervision efforts considering its problem status. Faced with pressure to close the project due to weak implementation, the project undertook key actions to maintain relevancy and improve implementation. 47. The Mid-Term Review (MTR) was the critical turning point of the project. The MTR was conducted during the period February 2-13, 2009, delayed by almost two years and taking place 18 months following the restructuring of the PIU. At the time of the MTR, the project remained highly relevant, had shown concrete results towards achieving the project’s development objectives, but implementation continued to be weak. But most important, the MoF had taken strong ownership over the project and was working well with a strengthened PIU. In this context, the MTR recommended: (i) that a case be developed for the extension of the project; (ii) that project activities be restructured with a greater focus on key strategic outcomes and an overall simplification of the project, i.e. providing credible plans for the extension of projects; and (iii) to establish more efficient processes through the strengthening of the PIU and the drafting of a new procurement plan. 48. Extension of the Closing Date – February 2010. Following the MTR, and based on substantial progress in implementing MTR recommendations, management approved an 18 month extension of the closing date to September 30, 2011 in the context of a strategic plan of three years, which was also presented. The action plan 7 noted that key implementation challenges identified in the MTR (above) had since been addressed, and that the rationale for a project extension was strong based on the continued relevance of the project to the Government of Kenya and World Bank priorities, and the fact that project development objectives could be achieved with the extension. The action plan noted that a three year extension would be required for the project to complete the whole set of activities contained in the revised work plan - which was designed based on re-focused priorities identified during the MTR. A two-stage approach was recommended to the team, splitting the required extension into two blocks of one and a half years each. Due to the age of the project, and other issues, the Bank sought a two-stage approach, with the second extension contingent upon confirmation of significant implementation progress and a clearer indication of increased likelihood of achieving the PDOs. This led to important delays in procurement processes, but enabled the broader implementation to take place by allowing the extensions to take place. 49. Second extension of the closing date – September 2011. As envisioned in the previous restructuring, a second 18 month extension was sought in order to complete project activities. The restructuring included: 7 This was not a “formal” restructuring. 12  Extension of the project closing date for an additional 18 months from September 30, 2011 to March 31, 2013 to assure completion of a number of key activities;  Revisions to the Project’s Results Framework involving minor modifications of a number of outcome and intermediate-level indicators and targets, with a view to improving their attribution and measurability;  Re-allocation of funds between categories, particularly from unallocated, to assure availability of sufficient funding for planned expenditures and Revisions upwards of the percentage of Expenditures to be financed by IDA that had been defined somewhat arbitrarily at the beginning of the project (and led to substantial complications in implementation). 50. Despite the challenges posed by splitting the project extension, the project exhibited flexibility to accommodate emerging demands. In addition to the ICT infrastructure, the project was flexible to add new government priorities: AML/CFT, PPPs, and macro-financial analysis at central bank in the context of macroeconomic pressures that were affecting financial sector developments. 51. Lack of field presence and turnover of TTLs. During the ICR mission, these problems were cited by Project management and implementing agencies as a key challenge. The project had four (4) Bank task managers, three HQ based and one field based. The absence of key Government policy decisions should have been a signal to the Bank to enhance supervision to mitigate this risk. A fourth TTL, appointed in March 2009, was decentralized to the Nairobi office since October 2008, enabling a more hands-on follow-up of day- to-day project activities and constraints. This included not only technical aspects, but critically, pulling together the country teams on procurement, financial management, and disbursement into a more hands-on approach to support the last phase of the project. In addition, placing the TTL in the field helped intensify the complex dialogue between the Bank and implementing agencies so the project could provide them with support and speed up approvals. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 52. As stated in the PAD, the overall development objective of the project was “to create a sound financial system and strengthened legal framework and judicial capacity that will ensure broad access to financial and related legal services”. However, as noted earlier, the PDO in the DCA was stated differently: “The objective of the Project is to support the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s Program.” The PDO in the DCA was never formally adopted, nor reflected in ISRs. However, efforts were made during the 2011 restructuring to formulate a more appropriate PDO, but the team was unsuccessful, as the complexity of the project made it difficult to distil the projects’ seven components into one PDO. According to IEG guidelines, this evaluation will consider the PDO in the DCA. 53. As was common at the time, the PDO, as reflected in the PAD, was high-level, particularly related to the financial sector aspects, “to create a sound financial system”. The PDO should not state any higher-level objective beyond what can be actually expected from the project. However, the PDO in the DCA was more reasonable, since it emphasized supporting the Borrower in carrying out reforms to achieve these higher goals. However, a better PDO could have referred to enhancing the capacity of the financial, commercial and judicial institutions, and 13 providing support to reform within the financial and legal sectors. This alternative would have had a more direct causal link between FLSAP’s activities and the PDOs. 54. A full M&E framework was not completed until two years into implementation. As was common at the time of project preparation (2004), the PAD did not contain a comprehensive results framework. It was not introduced until late 20078, supported by the Bank which provided consultants to help design the M&E framework for results monitoring following baseline data collection and identification of performance indicators. As a result, there was an increase in the availability and quality of data on KPIs. However, gaps still remained on outcome indicators for the legal sector component. PDO outcome indicators were changed several times during project implementation, many in an ad-hoc fashion rather than through a formal restructuring process. According to IEG guidelines, the evaluation will only consider official revisions to Outcome Indicators. 55. Following Bank assisted revision of the M&E framework, M&E performance exhibited steady progress during the rest of project implementation. MTR recommended that the M&E framework be integrated more closely with project implementation and thereby be used as a tool of project management. This was generally carried out through updates of results framework at the September 2011 restructuring and regular reporting to the project steering committee. 2.4 Safeguard and Fiduciary Compliance 56. Financial Management: There were challenges to put in place an effective financial management system, robust enough to be able to meet high auditing standards. Only in the later phase of the project were unqualified audit statements delivered, which was however the norm of virtually the entire Kenya portfolio. 57. Procurement: Managing and supervising dozens of procurement processes and even larger number of live contracts, coordinating with 22 implementing agencies was a constant challenge. Implementing agencies almost unanimously criticized the Bank for slow turnaround of no-objections. The lack of experience (WB, Government, PIU and Implementing Agencies) in the acquisition of complex ICT systems (software and hardware) posed a huge challenge in later years, which was supported by the addition of an ICT expert to the WB team during the last three years of implementation. It took a long time to develop TORs and technical specifications to purchase complex ICT services and equipment. The lack of harmonization of GoK and WB procurement requirements was another challenge. Strong support to this function in later years with TTL in the field and timely mobilization of consultants helped overcome these challenges. 58. Safeguards: The Project did not require any safeguard screening. 8 But for purposes of this evaluation, the revised M&E framework was not formalized until the Sep. 28, 2011 restructuring. 14 2.5 Post-completion Operation/Next Phase 59. Despite important donor support in key areas, with no phase-II FLSTAP currently envisioned, the significant project achievements would be harder to leverage to further advance the remaining agenda. Going forward, the Government has identified an ambitious financial and related legal and judicial reform agenda for the next stage of development of these key sectors, as articulated in the Draft Medium Term Plan 2013-2017 for the Financial Services Sector. The vision for the sector is as follows: Create a vibrant and globally competitive financial sector that will promote high level of savings to finance Kenya’s overall investment needs. Indeed, the flagship project of the plan is to establish Nairobi as an International Financial Centre and help Kenya gain a stronger presence in sub-Saharan Africa’s growing financial services market. 60. Supporting the Government’s ambitious agenda, including areas covered by FLSTAP, are the following ongoing/potential donor supported activities:  A World Bank Infrastructure Finance and PPP project covers a number of capital markets/infrastructure finance and PPP related agendas;  Building on the Judiciary’s ICT and case management groundwork financed by the FLSTAP, the World Bank Judicial Performance Improvement (JPIP) project aims to improve the performance of the Judiciary to provide its services in the project areas in a more effective and accountable manner;  Efficient Securities Markets Institutional Development (ESMID)/ Global Emerging Markets Local Currency Bond Program (GEMLOC) is providing ongoing support on capital markets, including on treasury mobile direct and other related areas;  Ongoing support via Financial Sector Deepening Trust (FSD) on key financial inclusion aspects. 61. The Government has demonstrated commitment to ensuring completion and sustainability of FLSTAP supported outputs, and to deepening the financial and judicial sector reform agenda. Throughout the implementation period, GoK has provided financial resources to cover planned FLSTAP activities that did not materialize due to Government preference to use its own resources, failed or delayed procurements, and project closure. For example, due to the delay in effectiveness of the FLSTAP, the Government funded the establishment of the Real Time Gross Settlement System (RTGS), while the FLSTAP later funded the back-up system in a remote location. 62. However, and despite important efforts underway, this ambitious agenda lacks adequate support to carry it forward. Interviews during the ICR mission with agencies supported by FLSTAP and policy makers revealed a substantial unfinished agenda. While some will continue to receive support, including through new Bank operations, and others which will benefit from other donor projects, many agencies expressed concern about funding the remaining agenda of institutional development and capacity building, as well as preserving the gains already achieved. As the FLSTAP provided flexible and often timely responsive support to 22 agencies, its absence is likely to be felt. Among the critical needs identified during ICR mission are as follows:  Banking supervision capacity has been significantly strengthened, but challenges remain including the need to implement consolidated supervision, as cross-border banking becomes more important; 15  While the increasing formalization of deposit-taking microfinance institutions (DTMs) and SACCOs is contributing to a stronger financial sector, much work remains to be done on building supervisory capacity for MFIs and SACCOs so that these financial institutions can play the expected role in increasing access to finance for households and businesses.  Kenya’s capital markets have deepened substantially during the course of FLSTAP implementation, but much work remains to be done in order for the country to realize its ambitious goal to become a well-developed regional financial center for EAC.  Despite significant advances in AML, the country remains on the Financial Action Task Force (FATF) grey list and will require further support to enhance its AML/FT compliance framework.  While the insurance sector has seen strong growth, accompanied by a strengthened regulatory framework, the market remains thin and faces important challenges.  The regulatory agency for the pension sector, RBA, needs to continue evolving, since they are still too much into a compliance rather than RBS mode.  KDIC could benefit from further assistance to assess compliance with FSB’s “Key Attributes of effective Resolution Regimes” and further training of its staff, as well as a participation in a crisis simulation exercise to enhance coordination among the different agencies, particularly with CBK BSD.  Kenya Law Reform Commission (KLRC) has played a critical role in drafting legislation particularly enhanced following the adoption of Kenya’s new Constitution; the Constitution needs to be fully implemented. 63. The Bank’s dialogue going forward will be based on a financial sector strategy note, currently under preparation, which will provide a medium-term framework for the on-going and proposed policy dialogue and support for the Government of Kenya’s (GoK) financial sector development agenda, by setting priorities and sequencing interventions. Despite some uncertainty on the remaining agenda, the next section illustrates the significant institution building that has taken place in Kenya’s financial, legal and judicial sectors, and assesses the FLSTAPs contributions to it. 3. Assessment of Outcomes 64. The assessment of outcomes will be performed on the basis of a split evaluation, since key project outcome indicators were formally changed during the September 2011 Level 2 restructuring. The project outcomes will be assessed from project approval through September 2011, and then through project closure, weighted by disbursements. The first part of the split evaluation spans the first two phases of project implementation and part of the final phase. 16 3.1 Relevance of Objectives, Design and Implementation Rating: Substantial 65. The objectives and implementation of the FLSTAP were highly relevant at appraisal and throughout implementation, and consistent with the Government’s development priorities and the Bank’s Country Partnership Strategy. However, shortcomings in the project’s design contributed to difficult implementation. Relevance of Original Objectives: High Relevance of Revised Objectives: High 66. Objectives: The project was one of the main and only comprehensive facilities for addressing Kenya’s on-going financial and legal sector reforms, and continues to show relevance in addressing emerging reform issues. The FLSTAP continues to be relevant to the country’s long-term development plan, “Kenya Vision 2030”, which identified the financial sector as a priority sector, and the latest Medium Term Plan (MTP) (20013- 2017), which focuses on several areas covered by the FLSTAP including banking, payment systems, SACCOs, insurance, and retirement benefits. The FLSTAP is aligned to the MTP objective of achieving: “A vibrant and globally competitive financial sector driving high levels of savings and Kenya’s investment needs”. The MTP, in turn, was informed by the FLSTAP supported Comprehensive Financial Sector Reform & Development Strategy (CFSRD). On the legal and judiciary side, the project remains relevant, and in fact was instrumental to the development of the Government’s Judiciary Transformation Framework (2012-2016), an overarching blueprint for reforming and repositioning of the Judiciary. This was based on the FLSTAP supported Judiciary Strategic Plan 2009 – 2013. Its relevance is further highlighted by the follow on project, JPIP. The FLSTAP also continues to be relevant to the Bank’s program, as articulated in the Country Partnership Strategy (CPS, FY10-13), where it is aligned with the CPS’ Pillar 1: Kenya’s Growth Potential. Relevance of Original Design: Modest Relevance of Revised Design: High 67. Design: While the project design was well-aligned to project’s objectives to address critical challenges in the finance and judicial/legal areas, there were shortcomings due to complexity, implementing arrangements and weaker ownership in early stages. The FLSTAP design reflected a comprehensive diagnosis of development priorities related to the financial and judicial legal sectors. As noted, the initial project components were based on the findings of the 2003 FSAP and Governance Justice, and Law and Order Sector Reform program. As such, the FLSTAP design was highly relevant to important country priorities at the time of appraisal. The combination of Bank SIL, grant funding by DFID, and Government counterpart funding provided an attractive financing package for Government. 68. However, shortcomings in the design would hamper early implementation. The project was too ambitious, with too many components, and not realistic given implementation capacity of the Ministry of Finance, which had never implemented a Bank project, and the multiple implementing agencies, many of which had low absorptive capacity. These problems were compounded by the staffing of the PIU with external consultants, who were mistrusted by Government Authorities, and had performance issues, relatively low project readiness at approval (a procurement plan covered 18-month, as required, but many implementing agencies had challenges in preparing TORs and technical specifications for a number of activities). The 17 complexity of the project was exacerbated by the Bank’s management decision, at the last minute, to combine financial and judicial/legal elements in the same operation, which added 2.5 components and 9 additional implementing agencies. 69. The relevance of project design was further validated by the FSAP update in 2009. Among the FSAP’s key recommendations, most were receiving support by the FLSTAP, while others would receive support later in project implementation, as discussed in the next section. Relevance of Implementation against original PDO indicators: Substantial Relevance of Implementation against revised PDO indicators: High 70. Implementation: Following its rocky start that FLSTAP was able to achieve positive results documented in Section 3.2 is a testament to the Bank/Government’s ability to resolve key project constraints in order to get the project back on track. These adjustments included changing implementation arrangements and importantly the secondment of two CBD and SLO staff (with suitable replacements when each had to return to other duties) to bolster technical and managerial skills in the PIU, locating the TTL in the field for closer supervision support, a critical mid-term review and action plan followed by a September 2011 Level 2 restructuring and strengthened planning and monitoring capacity for the PIU with hands on support. A common theme through interviews was the huge importance of appointing project managers and locating TTL in the field. These key actions laid the foundation for a turnaround of the project which had begun before the MTR and accelerated notably after the September 2011 restructuring. 71. The project exhibited a flexible approach to emerging needs. Following the 2003 FSAP Update, the MOF indicated that the FLSTAP would be the main channel through which to support these reform actions, together with the Financial Sector Deepening Trust (FSD) which was created with DFID and IDA support (from another project) to focus more on direct market interventions on financial inclusion. Indeed the FLSTAP responded to key 2009 FSAP update recommendations by providing technical assistance in critical areas such as (i) crucial governance issues in Kenya’s capital markets that have hampered its further development (e.g. NSE demutualization), (ii) the strengthening of key regulators in the pension and insurance sectors, thereby addressing major risks to the stability of Kenya’s financial system, such as high contingent liabilities in the pensions sector and suspected major weaknesses in the insurance sector, and (iii) the strengthening of safety nets, which were very much needed in the wake of the financial crisis. Notably, the Bank was able to mobilize a wide range of expertise to support the Government, with some missions including up to a dozen experts and a cadre of at least 22 technical experts available on a regular basis to cover different technical areas, as needed, and some 15 operational experts providing hands on support. On the judicial and legal side, the passing of a new Constitution in 2010 created a need to adapt both the legal framework and law- related institutional settings, which was filled by FLSTAP support and helped set the basis for the new reform agenda being implemented (and new project approved). 3.2 Achievement of Project Development Objectives Rating of Efficacy - Original: Modest Rating of Efficacy - Revised: High 18 72. The project development objective, as stated in the DCA, was to support the Borrower in carrying out reforms to create a sound financial system and strengthened the legal framework necessary to implement the Borrower’s Program. This objective would be achieved through provision of technical expertise and building capacity to implement the Government’s financial sector reform program and to supporting implementation of the relevant key results areas of the GJLOS Reform Strategy. 73. As demonstrated in the Results Framework, almost all of the PDO (and intermediate) indicators have been achieved and in some cases even exceeded. According to the Results Framework, half of the population has access to formal financial services, with 40 percent of the rural population having access to formal financial services. In addition, more than 17 million accounts have been registered up from 2.2 million in 2005. This seven-fold increase in access (including accounts opened with DTMs) over seven years represents a transformational increase in access to basic bank accounts which has been realized mainly by enhanced access by the low income segment (previously unbanked and under-banked population). Private credit as a percentage of GDP has grown to 38 percent of GDP and NPLs as a percentage of total loans have fallen to 3.6 percent. The only indicator that remains to be achieved is the interest spread which currently stands at 11.6 percent, requiring further compression in the future, partly affected by macroeconomic pressures that took place since 2010 reverting the declining trend that had been evidenced until then. Institutional and operational reform has been remarkable, with all financial sector supervisors now independent, including a new supervisor for SACCOs, as well as new enterprise development systems at each of them and commitment to RBS being implemented by all at good pace with CBK at advanced stages. On the legal/judiary side, achievements have been equally impressive, including substantially increasing the rate clearance in the Millimani Commercial Courts and the extensive list of Regulations developed, amended or supported by the project. Because of the achievements to date, progress towards achievement of the PDO and overall implementation progress were rated at satisfactory in the last ISR. 74. The FLSTAP has been instrumental in helping lay the foundations for the safe take- off of the Kenyan financial sector. Indeed, according to the latest IMF report9 “the vibrant and rapidly expanding financial sector constitutes a major asset to support economic growth and reduce the vulnerabilities of low-income portions of the population”. FLSTAP was an important vehicle that created reform momentum, by tackling multiple big issues in the Kenyan financial system, a notable accomplishment for a TAL and one that is normally associated with a DPO. It has had a catalytic impact, contributing to the acceleration in the reform agenda since 2010, following the approval of the new Constitution and the development and approval of the CFSDS. Legal reforms related to the financial sector were a major accomplishment of the Project (23 major Acts drafted or amended, see Annex 2). Components 6 & 7 (legal and judicial) lagged until late in project implementation, but managed to achieve important milestones and the follow on the JPIP will help ensure that investments and reform momentum are sustained. 9 Kenya: Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility and Request for a Waiver and Modification of Performance Criteria—Staff Report No. IMF Country Report No. 13/107, April 2013. 19 75. Despite typical problems of attribution, the project achieved its PDO to support the Borrower in carrying out reforms to create a sound financial system and strengthened legal framework necessary to implement the Borrower’s Program. In some cases, (interest spreads) outcome indicators were dependent on macro factors and other sector developments (i.e. competition), while the dramatic increase in access came about largely due to developments supported by FLSTAP, but also important aspects not fully supported by the project, particularly the development of M-pesa. However, while FLSTAP support was not the only factor that led to reduced NPLs, it clearly contributed to the key elements that make up a sound financial system and strengthened legal framework, as described below. Improved access to financial services  At project inception, the 2003 FSAP had identified the weak supervision and the legal framework, lack of information on borrowers, and an inefficient judiciary as major obstacles to access to finance by small- and medium size enterprises. From this base, access to financial services exploded during project implementation, from 2.6 million accounts in 2005 to 17.6 million in 2012. Though this dramatic increase in access to financial services was largely driven by small depositors in Equity Bank, this growth coincided with significant project support for the financial sector and overall institutional strengthening and enhanced enabling environment, in addition to more specific measures including (to mention a few) better Microfinance laws and regulations, new Sacco law and regulations, improved regulation among all regulators, better legislation passed under various laws, increased independence of the regulators, introduction of agent banking, introduction and licensing of eight (8) Deposit taking MFIs (DTMs), licensing of two Credit Reference Bureaus; strengthened debt management and functioning of debt markets and payments systems, continued robust deposit protection and strengthening the capacity and framework of DPFB.  The project’s contributions to the modernization of commercial and financial legislation (the company and Partnership acts, and Insolvency Bill), have also contributed to improvement in the credit and legal environment. Improved efficiency of financial services  High interest rate spreads are a reflection of the structural problems in the financial sector10 as well as risks, costs, and macroeconomic factors. As such, the FLSTAP could reasonably only have an indirect impact on this outcome, which had materialized in the earlier part of the project implementation through reforms at state-owned banks. The gains were reversed when faced with macroeconomic pressures and changes in international markets, which were beyond the reach of the project. However the project had an important impact in improving the efficiency of financial services, beginning with its early work on preparing the privatization of state owned banks (see below), through payment systems and debt markets improvements, workflow and document imaging solutions at some regulatory agencies (reducing for instance, licensing time for CMA)11, 10 IMF (2005). Financial Sector Assessment: Kenya 11 As of 2011, there were 90 market intermediaries under the purview of CMA, growing more than 100 percent during the previous 4 years. 20 legal and judicial reforms setting the basis for faster case management, faster access to crucial legal information and broader increased operational efficiency. Improved stability of the financial system  According to the FSAP 2009 Update, Kenya had “made substantial progress in addressing the deficiencies highlighted in the 2003 FSAP”. Significant improvements have been seen in the stability of the banking system that have reduced NPLs over the project period to 3.6% (December 2012) from 25.5% (December 2005).  A draft BCP assessment for Kenya under the new methodology (2013), which reflects the banking supervision practices of the Kenyan authorities, has concluded that Kenya has made substantial progress on most fronts since 2009 (and 2003). The key areas of progress include Consolidated Supervision (BCP12), Home-Host Relationships (BCP13), Corporate Governance (BCP14), Country and Transfer Risk (BCP21) and Market risk (BCP22), which had been highlighted by the 2009 FSAP update as non-compliant.  Support to strengthen legal and regulatory frameworks in financial and related legal sector for its implementation;  Strengthen capacity of the regulators (EAD, CBK, CMA, IRA, RBA, SASRA) and introduction of risk-based supervision coupled with strong project support.  The introduction of a separate law and regulation for SACCOs has led to higher standards in the sector through clear guidelines regarding capital, liquidity, and provisioning, among others. This has been an important development for the stability of the Kenyan financial system, as some of the largest 20 SACCOs have reached the size of small banks and manage millions of uninsured deposit accounts of institutions without a lender of last resort in case of liquidity needs.  An important achievement was the establishment of new independent regulators which were before under a ministry (IRA and SASRA). Sacco Societies Regulatory Authority (SASRA), established in 2008, oversees a sector with membership that has increased from 1.0 million to 2.1 million, with an average NPL ratio of 5.9 percent as of September 2012 (down from 9.7 percent in 2011). Most likely SASRA could not have had a successful launch and the impressive progress achieved in the past three years without FLSTAP support. Support at the beginning of the FLSTAP to prepare the State- influenced banks for privatization and change the reform agenda in Kenya (including passing of Privatization Act with specific listing of the projects) and reports that set the basis for restructuring of these banks (and the consequential substantial steep reduction in NPLs) has been critical to the stability of the financial sector and it is a significant achievement.  The introduction of Credit Reference Bureaus (Jun 2010) and CRB regulations drafted with project support (Feb 2009) contributed to the steady reduction of credit risks and NPLs, as well as improving access to credit.  Financing of the remote back-up facility (hardware and software procurement) for the Real-Time Gross Settlement System (RTGS) and drafting and passage of a payment systems law played a very important enabling role for the payments revolution experienced by Kenya. 21  Support to develop an AML/CFT compliance framework and the drafting of a new AML Act, as well as to develop an AML/CFT supervisory framework, development of regulations and staff training at the newly created specialized finance intelligence unit (Financial Reporting Center, FRC). With support from the Bank’s AML team, since October 2012 all institutions under CBK supervision are sending Suspicious Transactions Reports (STRs) on a regular basis to the FRC, which received important, targeted, TA under the FLSTAP (see Annex 2). In 2012-2013 Kenya took actions, with strong support from the project, to avoid being downgraded internationally in terms of AML/CFT, which would have led to substantial increase in costs of intermediation and reduce depth with some international banks facing constraints to operate in Kenya. Commercial Justice is more efficient and effective  The improvement of the judicial system in Kenya was one of the cornerstones of the project. FLSTAP funds were used to improve the court’s case management system and alleviate the backlog of cases that burdened the entire legal system; capacity building, dissemination and legal reform were all strongly supported by the project; legal resources were systematized and made publicly accessible; and specialization in commercial and financial law was fostered at undergraduate and postgraduate university levels as well as with the judiciary and Government staff.  The most successful –and directly effective- part of this component of the project stemmed from the activity developed by the consultant specialist in legal drafting at the State Law Office. The consultant trained the staff and, more importantly, revised entirely the Company and Insolvency Bills. The final Bills were largely in accord with best international standards. They are bound to take Kenya’s commercial legal framework to the next level.  The creation of the Judicial Training Institute (JTI), supported by FLSTAP, has been a remarkable achievement.  The approval of new procedural rules and the training of the judiciary and court staff on the new legislation was also a very important part of the project’s input. The modernization of court rules is bound to have a big positive influence in the working of courts and in the enhancement of legal certainty.  FLSTAP funded the technical retreats that finalized the draft Partnership Bill and related regulations, as well as other meetings with identified stakeholders to build consensus on the legal solutions proposed. The Bills were sent to Parliament in 2010, ans subsequently approved and enacted.  The publication of all the laws of Kenya currently in force and its easy and inexpensive access by all stakeholders constitutes a great achievement. It is bound to increase transparency and legal certainty, improve the country’s body of jurisprudence and contribute to the general development of the system of justice in a country where lawyers and courts are poorly regarded by the population.  Design and purchase of audio-visual system and visual recording of court proceedings and production of associated transcripts and digital records, set up in several (commercial and financial) courts. These are expected to set the basis for the completion of the long overdue automation of courts and improving case and records management, which will eventually reduce time of proceedings and costs of legal services, as well as the 22 transparency of the processes. These reforms will continue to be supported with the JPIP project.  FLSTAP contributed significantly to the steady increase in the case clearance rate especially through the revision of Civil Procedures Act in 2010 and its implementation. The FLSTAP also had some individual and institutional capacity impacts which have directly or indirectly contributed to increased case clearance rate and reduced case backlog.  The longer-term impact of the project lies also in the curriculum reforms and better training of lawyers and judges. 3.3 Efficiency Rating of Efficiency - Original: Modest Rating of Efficiency - Revised: Substantial 76. As an economic analysis for FLSTAP was not included in PAD, we employ alternative methods to evaluate efficiency of the project. 77. Total funds disbursed was US$29.1 million, versus an estimate cost of US$30 million at appraisal (project achieved objectives at lower cost), which represents a cost savings considering that project objectives were achieved at a lower cost than envisioned (91.7% for IDA (US$ equivalent 16.875 million, DFID 100% US$10 million), but somewhat larger participation of the government (GOK 113.5% US$ equivalent 2.27 million) due to the early rules for government contribution that were latter addressed in project restructuring that changed financing parameters for each party and counterpart funding rules. 78. Project implementation lasted nine years instead of five as initially foreseen. This delay had a significant opportunity cost for Kenya and increased the Bank's operational costs. Total Bank administrative costs for project supervision were high, averaging over US$190,000 throughout project implementation, compared to the Africa regional average of US$112,000. While high, these high costs reflect the magnitude of the project, as demonstrated by the plethora of technical and operational experts mobilized (40 in the last 4.5 years), as well as extensions of the closing date. 79. While Bank administration costs were higher than planned, PIU costs were US$2.2 million less than the US$4 million envisaged in the PAD, notwithstanding that project implementation period was extended three years. This is due to the staffing of the PIU with Kenyans following dismissal of the first PIU that entailed very large costs. 80. The project effectively leveraged Bank and development partner resources, mainly a US$10 million grant from DFID, but also parallel support by the FSD, its partner for financial inclusion aspects. DFID also funded extra supervision budget in the latter years, particularly focused on hands-on advice for the PIU and implementing agencies on operational aspects and ICT thematic support, which allowed the project team to mobilize a broad team of experts, which would not have been possible under the constraints of bank budgets. 81. Despite the costs associated with the three year project extension, the project yielded important benefits beyond what is normally associated with a TAL. After the accompanying DPO operation failed to gain traction, the project became an important vehicle for policy 23 dialogue, and in this manner contributed to important policy reforms. The huge advance in policy reform during the project’s life is impressive, and was due in no small part to active engagement of the reformulated PIU and field-based TTL with policy-makers. These costs were borne by the project, not funded by DPO, and should be considered as added benefits. 82. Further, the project’s contributions in the area of PPPs and judicial reform opened the door for new operations, and in effect, partially funded project preparation for both. The benefits of which will be borne by the country and captured in the efficiency analysis of the new projects. 83. Finally, the project’s flexibility in responding to changing client priorities and conditions ensured effective use of resources. For example, FLSTAP was able to re-align activities to respond to the 2009 FSAP update recommendations, and support implementation of the new Constitution of 2010. 84. The rating for efficiency in the period before the 2011 restructuring is Modest, based on the unsatisfactory early years followed by a substantial improvement. The rating for the final period of project implementation is Substantial, with a generally satisfactory performance. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 85. According to the IMF, Kenya has achieved “a vibrant and rapidly expanding financial sector”, and the FLSTAP did provide substantial support to GOK to achieve this, including the strengthened legal and supervisory framework. As such, the project has substantially achieved its PDO to support the Government in carrying out reforms to create a sound financial system and strengthened the legal framework necessary The support was highly relevant at inception, based on the 2003 FSAP findings, and remained so throughout project implementation, as evidenced by the 2009 FSAP update, and was also aligned with three Bank CAS’. The FLSTAP provided critical inputs to the development of both the financial sector and judicial strategies, early support to the restructuring of banks and to their privatization process, supported development of legal and regulatory framework with 23 bills enacted, provided capacity building to multiple agencies in critical areas of need including staff training, equipment and RBS, which is under full implementation at all financial sector regulators. In later years, the FLSTAP provided critical ICT equipment to several agencies, (which typically take 1-3 years to procure), staff training, study tours and consulting services. 86. The project got off to a rocky start, owing to an overly complex design, and uncertain policy framework on some aspects, further handicapped in one to two crucial areas by the shelving of the DPL. Given this inauspicious beginning, difficulties in implementation were to be expected. But as the primary vehicle to implement financial sector and judicial reform, the Government and Bank made the necessary changes to ensure successful implementation. In the absence of policy based lending to accompany the FLSTAP, the project also provided an important platform to engage Government in policy areas, an area of support not necessarily envisioned for the FLSTAP, but nonetheless critical. Among them, one critical area supported indirectly by the project was related to possible restrictions on interest rates and spreads. Analytical support via FLSTAP supervision, activities supported for the CBK and policy dialogue helped avoid the introduction of these restrictions and provided options for alternative 24 measures to achieve the goal of broader and more affordable market-based access to finance (some of which had been supported by the project). 87. The overall rating for the project is Moderately Satisfactory. This reflects the achievement of PDO with moderate shortcomings, mostly related to design and efficiency. While the targets for most outcome indicators, and intermediate outcome indicators, were met, the causal link between these indicators and the FLSTAP activities was weak, necessitating alternative methods to demonstrate the FLSTAP contribution to these higher objectives. Breaking down the elements of a sound financial system and strengthened legal framework, as was done in Section 3.2, into the outcomes that contribute to these goals, the causal link between the FLSTAP activities and achievement of these outcomes is clearly evident. 88. The change in outcome indicators at the 2011 Level 2 restructuring necessitates a split evaluation, which entails evaluating project outcomes up to restructuring and at closure, weighted by disbursements. Project performance from approval to restructuring was mixed, with modest ratings on design, outcomes and efficiency. This performance is consistent with an MU rating for the period up to 2011 restructuring. The period after exhibited Satisfactory performance, with only minor shortcomings. The table below provides the weighted rating. Against Original Against Revised Overall PDO Indicators PDO Indicators Rating Moderately Satisfactory Unsatisfactory Rating Value 3 5 Weight (% disbursed 37% 63% before/after PDO change) Weighted valued 1.11 3.15 4.26 Final rating (rounded) Moderately Satisfactory * Only IDA funds used for weighting purposes. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development n/a (b) Institutional Change/Strengthening 89. Among FLSTAPs biggest achievements was its contribution to institutional strengthening, particularly smaller/supervisory/specialized agencies that have seen their autonomy and institutional and technical capacity raised dramatically by the FLSTAP. Twenty two agencies received support from FLSTAP, among which the following highlights can be noted:  CBKs Banking Supervision Department benefited from significant FLSTAP support in capacity building through staff training in areas such as risk management, supervision, prompt corrective actions, micro-finance and crisis resolution  At the Capital Markets Authority, enhanced supervisory capacity was seen thanks to FLSTAP which financed a resident advisor’, training and equipment. 25  IRA (insurance) and RBA (pension) Funding was used to migrate from a compliance- based supervisory framework to one risk-based, as well as to acquire ICT software and equipment  FLSTAP supported the establishment of an independent Kenya Deposit Insurance Corporation (KDIC), assisting with the drafting of a new law (Kenya Deposit Insurance Act) and financing workshops to sensitize members of parliament prior to the discussion of the draft law12, as well as training from external advisors, including bank resolution.  SASRA, new regulatory agency established in 2008, FLSTAP financed critical activities equipment (hardware and software), institutional strengthening and significant training and study tours abroad to its staff.  FLSTAP supported the creation of the Judicial Training Institute for continuing legal education, and training of legal drafters, which will have a long term impact. (c) Other Unintended Outcomes and Impacts (positive or negative) 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 4. Assessment of Risk to Development Outcome Rating: Moderate 90. The FLSTAP laid the groundwork for a sound financial system and judicial sector, the impact of which is likely to be sustained. The FLSTAP support to strengthen legal and regulatory frameworks in financial and related legal sector is likely to yield long-term benefits in addition to those already materialized, as is the substantial strengthening of the various agencies’ regulatory and supervisory capacity. 91. Though challenges remain for the broader agenda, Government has consistently prioritized the objectives underpinning the project. This is likely to be maintained through political cycles. It was instrumental in helping the Government formulate strategies for these sectors, which are currently under implementation. The Bank remains engaged in key areas through new projects (IFPPP and JPIP), and is actively designing a strategy for future engagement in the sectors in addition to targeted TA. A future FSAP Update in 2014/15 would be important to confirm progress and identify emerging vulnerabilities. 12 The KDIC has been established outside of the CBK, but only until the promulgation of the law it will become independent. 26 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance 92. Bank performance was initially weak due to the quality at entry problems, but exhibited marked improvement after 2007, and indeed was strong in the final years of the project. The overall rating is Moderately Satisfactory. (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 93. The design of the FLSTAP, based on the findings of the 2003 FSAP, reflected was highly relevant. However, project design was too complex and ambitious, particularly given the low implementation capacity of the MoF, which had never implemented a Bank project and the other 21 implementing agencies. The decision to include judicial and legal reform only added to the complexity. Selection of an externally-staffed PIU did not foster an effective working relationship with GoK. Finally, project readiness in terms of preparation of an 18 month procurement plan and staffing of PIU was weak early on. While the 18-month procurement plan was in line with standards implemented in the region, the complexity of the project may have granted extra efforts early on to do a more detailed plan, which was done at a later stage 94. There was no QAG review of Quality at Entry. (b) Quality of Supervision Rating: Moderately Satisfactory 95. Despite design shortcomings, Bank supervision was noteworthy for identification of problems and introduction of corrective measures to ensure improvement. Quicker resolution of these problems was often complicated by factors outside the Bank’s control, including contractual issues with the initial PIU, identifying adequate skill set within Government, and the post-election crisis in early 2008. QAG undertook a Review of Proactivity in Supervision of Problem Projects in FY2007 and found the quality of Bank supervision to be Satisfactory as supervision was intensified, and extra resources were provided by Bank management, when the project entered into problem status. Nonetheless, the ISR ratings for IP were probably too sanguine in the early phases of project implementation, as the project was rated Unsatisfactory only for about 12 months between mid-2006 and mid-2007. 96. Important adjustments made during and following the MTR, and with the September 2011 Level 2 restructuring, positioned the project to complete planned activities and achieve development goals. Critical to supporting implementation of these changes was the placing of the TTL in the field in late 2008 and providing a broader set of skills available to support both technical and operational hands on advice to the PIU and implementing agencies. Interviews with beneficiary agencies during the ICR mission highlighted the importance of this, as several agencies noted the substantial improvement in Bank supervision and timeliness of non- objections following this change. 27 97. Enhanced supervision, particularly in the last year of the project and post-closure, was instrumental in completing complex ICT-related procurement and ensuring achievement of remaining project objectives, including an ICT expert to help the implementing agencies with technical specifications and related aspects. The team also handled a claim raised to the Inspection Panel on one activity, which was eventually not supported as this emerged late in the process. The due process started, but there was no time to fully implement it and it was dropped. The CBK took over the procurement process with its own budget, but did not use earlier steps completed and restarted it to ensure claims were addressed, even if not fully confirmed at that period (nor rejected). (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 98. In line with other aspects of this evaluation, it is appropriate to assess Bank supervision according to the distinct phases of project preparation and implementation. Consistent with the findings in Section 3, there was a marked improvement in Bank supervision following the initial phase of weak implementation. In justification of the overall Moderately Satisfactory (MS) rating for Bank performance, less weight is given to the Quality of Entry and Supervision in early years, while greater weight is accorded to the period following the MTR and in particular, the period from the restructuring to project closure, where Bank supervision was Satisfactory. Based on this analysis, and overall rating is Moderately Satisfactory. 5.2 Borrower Performance 99. Like Bank performance, the Government’s performance was similarly weaker in initial years, but stronger in later years as changes made in implementation arrangements, staffing of PIU, and Ministerial oversight contributed substantially to the achievement of project objectives. (a) Government Performance Rating: Moderately Satisfactory 100. The initial phase of implementation was characterized by weak Government ownership of the project, which manifested itself in terms of weak oversight of the initial PIU and leadership of the reform process upon which the project depended. Government took important actions of seconding technical personnel from the CBK and the SLO to the new PIU, which also managed the project. Further, following the findings of the 2009 FSAP, the Government demonstrated heightened interest in the FLSTAP as the principal vehicle to implement Government policies in the financial sector. Government ownership also noticeably improved as key policy decisions were made on the role of the State in the financial sector. Counterpart funding, a practice which the Bank subsequently moved away from, was also satisfactory. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 101. Similar to the Government and Bank performance, the Implementing Agency got off to a poor start characterized by managerial problems and infighting within the first PIU (staffed with 28 external consultants). This translated into a very difficult relationship with the GOK and poor project performance. However, following this poor beginning the MoF took charge of the PIU, placing it in EAD, and eventually staffing it with adequate managerial, technical, procurement, and financial management skills. Notwithstanding this improvement, the project suffered from a persistent lack of adequate human resources throughout project implementation, particularly as related to the procurement and monitoring and evaluation function. This was partly due to high turnover in key support functions, but also in general to the challenge of allocating skilled personnel in a low, albeit relatively strong compared to South Sahara Africa, capacity environment. Also, the capacity of the many implementing agencies on these aspects was low in most cases. This hindered the capacity for them to develop TORs and technical specifications, as well as support in contract management 102. Following steady progress in implementation after building a new PIU, PIU performance was exemplary in the later stages of the project. Particularly commendable, and critical to the achievement of development objectives, was the PIU’s preparation period during the last three years of the project and the PIUs performance during the last 6 months of project implementation, where the PIU effectively finalized procurement of about 50 percent of the activities, building on procurement processes prepared one to three years earlier. Further, the PIU was very effective in promoting reforms, many which had lingered for years such as those in Ministry of Lands and Judiciary, which are now in place. Based on this performance, the PIU at the MOF, was selected to implement as well the new IFPPP project for the ministry and recognized as one of the strongest teams to ever have managed projects in Kenya. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 103. An overall Moderately Satisfactory rating for Borrower performance is based on the unsatisfactory performance through initial project implementation period, followed by satisfactory performance in later phases. Following the initial three year period of weak performance, the newly installed PIU made significant and successful strides in bringing the project back on track and steering it to a successful achievement of its development objectives. 6. Lessons Learned 104. Strong analytical foundations are necessary to build successful technical assistance operations. FLSTAP garnered strong Government support, with the exception of the politically sensitive issue of State owned banks early on (that was later addressed), largely due to the strength of the analytical foundation which underpinned it, the 2003 FSAP and the relevance of reforms. After a long absence of reform programs supported by donors in the financial sector, the operation provided a comprehensive vehicle through which to support the reform process as recognized by the Authorities, and engage them throughout critical years of deep reforms. The 2009 FSAP validated FLSTAP and ensured its relevancy through the second half of implementation, as the project showed flexibility to accommodate emerging issues, updating reform agenda being supported. 105. The project’s flexible design made it possible to accommodate changing priorities and to include new issues that were completely unforeseen at inception. A good example of the latter has been the inclusion of PPPs in the last phase of the project. 29 106. Complex technical assistance projects require extra resources. FLSTAP covered a broad range of financial, legal and judicial technical areas, which required the mobilization of numerous experts. Supervision budgets exceeded bank averages, and considerable additional funds were mobilized and expertise leveraged including EFOs from co-financier DFID, without which the project’s development objectives may not have been achieved and reform momentum could have been wasted. Similarly, implementation agencies require a high degree of technical expertise in order to drive implementation in a diverse and low capacity set of agencies, many new or young, but at the same time, these are the ones that need the most help. FLSTAP implementation stalled until highly qualified technical experts were seconded from CBK and SLO to manage the project and provide technical guidance. 107. Institutional development takes time and requires continuous support. FLSTAP provided critical support to many young, newly independent agencies that in some cases needed to be built from scratch (SASRA) or very early stages (IRA). While such institutions had limited capacity to tap project funds relative to other institutions, their institutional capacity building needs were large and they managed to obtain substantial support that helped them achieve a more advanced stage of development. The project resisted pressures to reduce scope at MTR at the strong request of the Authorities, by cutting funding to such agencies, and instead provided extra support to ensure that these institutions benefitted from FLSTAP given progress that had started to become evident. 108. The critical aspects of prioritization and sequencing of reforms is always very difficult, since legislation must be in place, as a critical foundation before new regulatory agencies and other institutions (i.e.; FRC) are launched, followed by capacity building (usually a longer-term endeavour), the drafting of secondary legislation and regulations, and the acquisition of equipment. In some activities an ideal sequence could not be achieved as drafting and passing of legislation, for example, took a longer time. 109. On the question of complexity and scope, it is not easy to speculate about a counterfactual design that could have settled, for example, with implementing two parallel projects (one financial reform and a separate legal reform project). Advantages of such approach could have been more focus and maybe stronger ownership by fewer implementing agencies. The risks would have included more difficult coordination and the risk of possible inconsistencies. In addition, the reform agenda may have benefitted from more a focused approach within each area, perhaps in a context of programmatic TA support. 110. Simplify financing arrangements. Percentages in financing formulas for each category of expenditures for each of the three project funding sources (IDA, DFID and Government) was impractical and at times inconsistent with targeted disbursement levels: allocating specific percentages for the four expenditure categories (goods and equipment, consulting services, training and workshops and operating costs) that varied across categories, added another level of complexity to the financial management of the project. Moreover, due to binding constraints in the use of the funds required by the formulas, during the two project extensions expenditure category percentages for the project were modified, but it was not possible to adapt exactly the percentages for each financier as it depended on the actual amount spent in each activities, only known after the fact. This is the main reason why there was lower than 100 percent absorption of IDA funds, but more importantly, it led to substantial delays during some periods because disbursement requests had to wait until previous requests at both IDA and DFID had been duly paid to proceed with the next, which sometimes took 3-4 months to complete, particularly at 30 DFID. In addition, it required the last restructuring to take place barely two months before closure once it became evident that DFID funds would run out and that pending activities being implemented could not be paid for because the formula required a portion of DFID to be included regardless of the fact that there were extra IDA funds. Changing the percentages towards the end allowed the Government to benefit from additional funds from IDA that would have otherwise have to come from their funds, given commitments. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners The Borrower provided comments to a draft version which have been incorporated and cited in the text. (a) Borrower/implementing agencies (b) Cofinanciers DFID did not provide any comments. (c) Other partners and stakeholders N/A 31 Annex 1. Project Costs and Financing a) Project Cost by Component (in USD Million equivalent) Actual/Latest Appraisal Estimate Percentage of Components Estimate (USD (USD millions) Appraisal millions) 1.Financial and Judicial Sector Strategy Development 0.8 2.3 286% 2.Restructuring and Privatization of Financial Institutions 3.3 1.1 34% 3.Strenthening Financial Sector Regulators and DPFB 3.9 9.4 241% 4.Strenthening Debt Management and Debt Markets 1.5 0.8 57% 5.Modernizing the National Payment System 3.1 1.1 35% 6.Improving the Lending Environment 2.3 1.9 84% 7.Legal and Judicial Reform 8.1 9.8 120% 8.Project Management and Coordination 4 2.7 67% Contingencies 3 Total Project Costs 30.00 29.10 b) Project Cost by Category of Expenditure (in SDM million equivalent) c) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower 2.00 2.27 114% UK: British Department for 10.00 10.00 100% International Development (DFID) International Development 18.00 16.9 91.7% Association (IDA) 32 Annex 2. Outputs by Component The overall development objective of the project is to create a sound financial system and strengthened legal and judicial capacity that will ensure broad access to financial and related legal services. In this Annex the activities and outcomes under the seven components will be discussed, with key features/conclusions reflected in the main body of the ICR. Component 1: Financial and Judicial Sector Strategy Development. 111. The Project supported the formulation of a financial sector strategy involving broad consultations among stakeholders and financed various studies on the financial sector. The project also supported the development of a Strategy for the Judiciary as provided in the GJLOS, which include the introduction of performance and service standards, a comprehensive training program, and the introduction of a credible system for the selection, appointment, and removal/discipline of judges and other judicial staff, and the strengthening the Judicial Service Commission. The Project supported relevant agencies in developing a framework for monitoring and evaluating progress in financial sector development and judicial and legal reforms. (i) Develop an overall financial sector strategy (Implementing Agency MOF-EAD) 112. The project supported the preparation of a Comprehensive Financial Sector Reform and Development Strategy (CFSRD) submitted to MOF (Oct.2011) , which was subsequently adopted by MOF; and has been instrumental in guiding the development of the Medium Term Plan 2013-2017 (MTP2) for the Financial Services Sector. The CFSRD is thus a critical Policy paper guiding development of the Financial Services Sector. 113. Other areas supported under this sub-component included: (a) Capacity building in financial sector analysis and reforms – a Comprehensive Report on the current Knowledge and Skills Gaps in the financial sector completed, Strategic Planning Workshops for senior Officials of DFIs was held; c) Promote efficiency and effectiveness of DFIs in Kenya – a draft Development Finance Institutions (DFIs) Policy and Bill completed (ii) Increase access to rural and term finance. In close collaboration with the FSD project and FinAccess, this component also financed various workshops to discuss the findings of FinAccess 2009 and preparatory costs for the preparation of FinAccess 2011. 1.2 CBK- Kenyan School of Monetary Studies (KSMS 114. Initially the KSMS, and its Management Development Centre (MDC), whose mandate is to provide training and related support services to fulfil the needs of the financial sector, were not directly covered under the project. However, given the prominent role human resource capacity-building and professional training the CBK in the Vision 2030, the authorities decided to provide financing for the School to contract two consulting assignments, which were finalized in June and August of 2012.  Capacity Building in Identification and Design of Value-Based Courses for the Financial Sector (June 2012): The TNA study aimed to identify gaps between current capacity and future needs. The report concluded that current training courses were too basic without sufficient available training to professional levels, too focused on CBK internal needs; 33 programs were weak on core programs such as ICT, business Intelligence and ethics. Recommendations included embedding certain courses in the career development paths of CBK staff; to initiate marketing of new programs to the various market segments (government ministries and agencies, insurance, pensions, etc.), by recruiting Academic Directors; to provide more sophisticated value-based courses and to operate distance and e-learning techniques; offer programs at the 
executive level. In order to expand its involvement to broader financial sector market, the report recommended setting up a marketing unit within MDC and an in-house ICT function.  Capacity Building in Identification and Design of Value-Based Courses for the Financial Sector August 2012: the consultants developed a Manual Course Design to serve the needs of structuring capacity building & training courses by KSMS/MDC for the financial sector. The goal of the manual was to provide the Management Development Centre (MDC) a comprehensive tool with the necessary information required to design, develop and conduct course program, followed by the Curriculum Booklet to finalize the project. MDCs goal is to position itself as a leading training institute in the financial sector in Kenya and the region. To reach that stage MDC is facing a strategic change management challenge. The application of the Manual Course Design provides the management tool to successfully face that challenge. Component 2: Restructuring and Privatization of Financial Institutions 115. The objective of this component was to strengthening the banking system, including: (a) carrying out of a bank restructuring and privatization project; (b) identification of strategic options for divestiture; and (c) restructuring of development finance institutions, all through the provision of legal and technical advisory services and audits. The banking system had at the time a very high level of non-performing loans concentrated in four commercial banks with state interests. Divesting the Government’s stake in these institutions was to help strengthen competition and improve stability, resulting in downward pressure on the currently high interest rate margins and increase the incentives to reach underserved markets. The Project supported the establishment of a specialist Bank Restructuring and Privatization Project (BRPP) within the Ministry of Finance to guide the privatization process for the identification of strategic options for divestiture. (i) Restructure and dispose of the Sate influenced share at the National Bank of Kenya  Diagnostic and analytical work completed under the project’s Bank Restructuring and Privatization Unit (BRPU). Privatization Commission was set up and transaction adviser to privatize NBK hired using GoK funds.  Privatization of at least two banks - transaction advisers were hired since 2008.  Identification of strategic options for divestiture - Cabinet Memorandum setting out approach to restructure and privatize National Bank of Kenya (NBK) prepared with support from the project’s BRPU and approved by Cabinet.  Restructuring of development finance institutions: Detailed analysis undertaken of each institution and draft DFI strategy prepared. DFIs have continued with efforts to adopt AADFI Standards in anticipation of the reforms recommended in the Draft Strategy.  Strengthening the role and effectiveness of Cooperative Bank as a key institution for improving access to financial services and Kenya Post Office Savings Bank as a safe depository for low income and rural savers through the provision of legal and technical 34 advisory services and audits - Shareholder strategy for reform of KPOSB prepared. Government gave the go ahead for the introduction of a new business model at KPOSB. 116. Component 3: Strengthening Financial Sector Regulators and the Deposit Protection Fund Board. The primary role of the Government in the financial sector is to provide a legal, regulatory, and supervisory framework that promotes soundness and competition in the sector. The Project provided support for the review, amendment and/or drafting of financial sector laws and regulations that govern all the regulators and the DPF, with the objective of strengthening their effectiveness. It also supported capacity building initiatives for these institutions, including training needs assessment, training of staff, resident advisors, and establishment of capacity to regulate and supervise the microfinance and SACCOs sectors under the proposed new legislation. In addition, improvements were made to the Management Information Systems (MIS) of these institutions, including software upgrades and purchase of hardware. 117. The 2003 FSAP BCP assessment identified major flaws/gaps in CBK-BSD’s compliance with international regulatory and supervisory standards. The poor ratings prompted CBK-BSD to develop a regulatory reform strategy. With FLSTAP assistance a consultant was hired to assist in reviewing the Banking Act, but this effort stopped in view of lack of support from the Attorney General’s Office. The authorities decided from 2009 onwards to introduce piecemeal revisions to the Act in the annual Finance Laws in the following years. 118. A second major area of attention was the establishment of the legal framework for the operation of the Credit Bureaus. A consultant was identified and financed under the Project, but it was not a satisfactory match and the contract was terminated. The project assisted with a public education campaign to sensitize bank clients. (i) Effectiveness of financial sector regulators strengthened CBK- Banking Supervision Department (BSD) 119. The Project also funded significant capacity building through training of staff in Kenya and abroad, in areas like risk management, supervision, prompt corrective actions, micro-finance and crisis resolution. 120. The 2009 FSAP found new issues, although the overall BCP ratings improved. There were warning signals on key areas showing weaknesses, particularly AML/FT weaknesses, internal controls, consolidated and risk-based supervision, and capacity building in CBK’s BSD. 121. A 2013 BCP under new Basel framework found that Kenya did attain a Compliant or Largely Compliant rating on at least 18 of the BCPs. Kenya has made substantial progress on most fronts since 2009. The key areas of progress include Consolidated Supervision (BCP12), Home-Host Relationships (BCP13), Corporate Governance (BCP14), Country and Transfer Risk (BCP21) and Market risk (BCP22). (Though there has been progress in the area of AMLCFT (BCP29), it remains work in progress.) However, a number of important new enhancements and updates were implemented with effect from 1 January 2013 – consequently, it is still too early to determine the quality of implementation in these areas. 35 (ii) Establishment of an Anti-Money Laundering compliance framework AML/FT - Financial Reporting Center (FRC) 122. Kenya was under significant international pressure (FATF “grey list” and 2009 FSAP Recommendations) to enhance its AML/FT compliance framework. Responding to conform to higher international standards, Kenya passed a new AML/FT Law in 2009 (which became effective in June 2010). Secondary legislation and regulations were developed to put in place a stronger supervisory framework. Moreover, in 2012 Treasury decided to establish an independent FRC acting as a Financial Intelligence Unit, reporting to a high level AML Board, headed by a Sr. staff from the CBK. The FLSTAP financed a Board training workshop to assist them in defining the policy agenda of the institution, as well as some study tours abroad (South Africa, Qatar and Mauritius) for Board members and FRC staff. 123. The institutional strengthening provided by the Project was instrumental in assisting them to develop a Strategy Implementation Plan and a new web page. FRC indicated that the visits abroad were very effective, an “eye-opener” for Board members to understand what needed to be done and the Board’s role. The Project financed local staff was trained in AML supervision, as well as the drafting and dissemination by consultants of new AML regulations. Since October 2012 all institutions under CBK supervision are sending Suspicious Transactions Reports (STRs) on a regular basis to the FRC. From July 2013 institutions supervised by the IRA and CMA will also start reporting. Training was funded under the project for banks’ compliance officers and other stakeholders. The late creation of the FRC precluded the financing of equipment before the closing date of the loan. 124. The FRC analyses the STRs, which are filed in a database. Those requiring further action are reported to a special section of the law enforcement agencies, leading eventually to public prosecution and actions from the judicial system and the Asset Recovery Agency. 125. The FRC indicated five priority areas going forward: (i) Development of the asset freezing mechanism foreseen in the AML Law; (ii) development of a robust dissuasive and sanction regime; (iii) further institutional development of the FRC; (iv) development of delegated powers to the financial regulatory agencies; and (v) criminalization of FT financing which requires amendments to the AML Law. 126. Kenya has made significant progress in this area, as reported in the June 2013 FATF Report. (iii) Strengthen autonomy of Capital markets Authority Capital markets Authority (CMA) 127. CMA was a significant user of FLSTAP funds with about US$2.5 million in support of numerous activities in the following areas:  Drafting of Legislation, including the CMA Act of 2011 and the Securities Investment Act (2011). Workshops were organized to explain the laws to stakeholders, but the final versions have not yet been presented to Parliament, since, like in the case of the Banking Act the authorities decided to go for a piecemeal approach including amendments in the annual Budget Laws; 36 o Demutualization of the Nairobi Stock Exchange, supported by consulting services to split management from ownership. The CMA expects to complete by the end of 2013 the demutualization process. o Real Estate Investment Trusts, including consulting and training; o Training included 23 staff trained abroad in three different events.  Migrating to risk-based supervision (RBS), including the following activities: o Diagnosis of CMA supervisory process; o A quantitative impact study related to the adequacy of new capital requirements; o Drafting of RBS manuals; o Funding of a resident advisor for a 6 month period (2010-11); o Drafting of conduct of business rules; o Electronic financial reporting (pending); and o Drafting new governance rules to be followed by new enforcement rules and practices.  Document imaging system, including a digitized registry, security and disaster recovery, automated workflow.  Enterprise resources program (ERP) which included the acquisition of a system (software) and equipment (hardware), including finance, HR and procurement, as well as the automation of CMA core functions.  Acquisition of a RBS system to automate the market oversight function and the integration of CMA’s systems;  Procurement ERP/RBS hardware, to enhance CMA’s network and data centre.  Capacity building, which financed a number of study tours to Malaysia, Nigeria, South Africa China and Washington; as well as local training by the US SEC, an IOSCO self- assessment (2007) for Kenya and the EAC and the development of an action plan, assessment of the new eight IOSCO principles, and a CPSS-IOSCO self-assessment (on- going). 128. The CMA mentioned that following the closing of the FLSTAP they are getting financing from the project for Financial sector Deepening Trust (FSD) Insurance Regulatory Authority (IRA) 129. The IRA received significant support from the Project following the 2009 FSAP diagnostic of the issues in Kenya’s insurance sector. Funding was used to migrate from a compliance-based supervisory framework to one risk-based, as well as to acquire ICT software and equipment  Looking to reform of the Insurance Act, IRA hired in 2009 a consulting consortium to undertake a comprehensive review of the Insurance Act Draft insurance bill. However, the draft submitted in 2011 was unsatisfactory, particularly since it did not contemplate moving to a RBS system, nor addressed some of the 2009 FSAP recommendations. Furthermore, there was no buy-in from the insurance industry as a key stakeholder. As a result, the new draft Act did not move forward. In 2011 a new consultant was hired to review the draft Act and produce a new version. The latter came too late to be financed 37 under the Project. However, the work has continued and an RBS manual and guidelines have been drafted. Like in other cases, the Insurance Act has not been amended in full, but piecemeal reforms have been attached to the annual Budget Law. The IRA expects that a new Insurance Act might be finally approved during the first quarter of 2014.  The Project financed an earlier work by a consultant in 2010, which prepared a comprehensive diagnostic study of the sector and the IRA.  With Project assistance a consultant advised the IRA and drafted guidelines to reform Motor Insurance Financial reporting by insurance companies.  IRA has continued to enhance the regulatory and supervisory insurance framework. Several guidelines have been issued, including: market conduct for insurance investigators and motor assessors, new insurance products, insurance claims’ settlement, rating guidelines for group life listed risks, submission of unaudited quarterly returns and IRA Strategic Plan.  Offsite and onsite surveillance RBS compliant have been implemented.  An Insurance Fraud Investigation Unit was established (in partnership with the Commissioner of Police) to tackle issues of insurance fraud.  Further, standardization of policy contracts to deal with issues of “fine print” initiated and will roll over to the nest MTP period.  IRA has promoted other regulatory reforms, undertaking benchmarking studies and proposals made to Treasury on policy reforms on the sector, manual on public procurement of insurance services developed, draft micro insurance policy developed and the first insurance company was licensed;  The Project assisted IRA to improve staff skills, as well as to conduct workshops with the industry on a number of emerging issues, such as Micro-insurance, ALM/FT and Risk Based Supervision. Further, a scholarship program was launched to expand capacity of the actuarial profession and other workshops were held for all categories of regulated entities.  Efforts to improve consumer education and financial literacy of the general population.  IRA is aiming to rationalize the size and the structure of the sector by raising the minimum levels of capitalization, as well as issuing new measures to enhance corporate governance. (iv) Strengthen the Capacity of Retirement Benefits Authority (RBA) 130. Since the Authority came into full operation in 2000, the retirement benefits sector in Kenya has grown tremendously both in membership and assets. 131. The Kenyan pensions system manages assets of about 17 percent of GDP and is dominated by the National Social Security Fund (NSSF). The Retirement Benefits Authority (RBA) regulates and supervises about 1,262 retirement benefits schemes (occupational and individual), 16 fund managers, 12 custodians, and 26 registered external administrators in 2011. Total assets of the industry in 2011 amounted to KSh 432 billion, with the NSSF accounting for 23 percent. There are around 1.7 million active members in the various retirement benefit schemes, of whom 1.3 million are members of NSSF. 38 132. Government Securities constituted the largest share of industry assets with 34%, followed by Quoted Equities with 21%, Immovable Property with 20% and Guaranteed Fund investments with 11%. 133. The Retirement benefits industry in Kenya can be categorized into four distinct categories of schemes: i) National Social Security Fund (NSSF): this is a mandatory scheme where employers and employees are mandated to make joint monthly contributions with the employer and employee making flat contributions. The Fund is a funded provident fund. The benefits are locked/preserved until age 50 when workers can opt for early retirement. The contribution rates and coverage of workers in the informal sector. ii) Occupational Retirement Benefits Schemes: these are employment based and are voluntary basis established by employers. The schemes are funded through contributions from employers and employees. The contribution rates vary from one scheme to the other. Similarly the contributions from employer and employees also differ. The Design and type also varies from one scheme to another. However, majority of schemes are Defined Contribution Pension schemes. iii) Individual Retirement Benefits Scheme: The Individual Retirement Benefits Schemes though relatively new, has been one of the fastest growing components of the retirement benefits industry. Individual retirement benefit schemes are schemes operated by independent financial institutions, mostly insurance firms and membership is open to anyone who wants to save for retirement. This contrasts to the traditional Occupational Retirement Benefits Schemes whose membership is only open to employees of the company establishing the scheme. Currently there are around 19 registered Individual Retirement Benefits Scheme. iv) Civil Service Pension Scheme: the scheme is established under an act of Parliament to provide retirement benefits for all civil servants employed by the government. Currently, the scheme is a Pay as You Go non-funded and non- contributory scheme. The scheme is funded from Government revenue collections. The Schemes currently covers over 400,000 civil servants. FLSTAP contributions 134. The Pension’s regulator received assistance from the Project to: (i) improve financial literacy in Kenya; (ii) to enhance its supervisory functions, including moving to a risk-based supervision framework (with consulting services); (iii) funding of significant investments in software and hardware (ICT) to modernize its internal processes including finance, administration, HR and procurement, as well as data collection, management and analysis with new ICT equipment; and (iv) training of pension supervisors in Kenya and abroad (Australia, Armenia and Chile), as well as the ICT team. 135. Like other FLSTAP implementing agencies, RBA had difficulties in defining the technical specifications of the services and equipment required, as well as with the overall procurement process. It was also challenging to integrate the purchase of the software with the 39 hardware, as multiple companies were involved in the enterprise resources program (ERP) procurement process (3). Customization of both to meet RBA’s needs was also complex, as their tasks involve managing information from about 1,200 occupational retirement funds and 98 individual pension schemes, managed by 16 pension funds and two external scheme administrators (which handle about 85 percent of the funds, while the remainder is managed in- house by the pension funds), for a pension system that has already collected contributions in excess of US$6 billion (about 17 percent of GDP) in predominantly defined contribution schemes, out of which the National Social Security System represents about 30 percent and the remainder (70 percent) are long-term savings managed by private pension funds (excluding the civil service, which is managed separately). (v) Strengthen the autonomy and effectiveness of CBK- Deposit Protection Fund (DPFB) 136. Background: The DPFB did not exist as an independent entity, but it was a department within the CBK. The FLSTAP supported the establishment of an independent Kenya Deposit Insurance Corporation (KDIC), assisting with the drafting of a new law (Kenya Deposit Insurance Act) and financing workshops to sensitize members of parliament prior to the discussion of the draft law. The Act sets a minimum contribution to the insurance fund of no less than 0.15 percent of average total deposit liabilities, foreseeing additional risk-based charges according to the methodology developed by KDIC. The project financed the development of the latter. The KDIC has been established outside of the CBK, but only until the promulgation of the law it will become independent. FLSTAP Contributions 137. The Project assisted in launching KDIC, establishing the new regulatory framework and providing significant training and capacity building, IT systems, financing an assisted assessment of the IADI principles, and financed a specialized library. Critically, the project financed external consultant services to transform DPFB from a simple “pay box” into an active deposit insurance corporation with special examination powers and a bank resolution agency with receivership and liquidator functions, as defined in Parts IV and V of the new Act. In the event of notification of a bank’s non-viability, CBK will inform KDIC of the suspension of a bank’s activities, appointing it as receiver (with or without suspension of the bank’s activities). The Act authorizes KDIC to ask bank shareholders to provide sufficient resources to restore its financial condition within a stated period. Failing this, KDIC can initiate the transfer of all or part of the assets and deposits to another solvent bank via a special purpose vehicle, which will fill any gap between assets and deposits with a KDIC bond issued to the institution(s) receiving the deposits. Once the receivership is finalized, KDIC will start the liquidation process of the residual balance sheet of the bank. 138. Project support for one ICT activity was impacted by a claim raised to the Inspection Panel, which was eventually not supported as this emerged late in the process. The due process started, but there was no time to fully implement it and it was dropped. The CBK took over the procurement process with its own budget, but did not use earlier steps completed and restarted it to ensure claims were addressed, even if not fully confirmed at that period (nor rejected) 139. KDIC expressed great satisfaction with the work performed by project-financed consultants, particularly the training offered on bank resolution proceedings. 40 (vi) Introduce regulation of the SACCO sector : SASRA (Sacco Societies Regulatory Agency) 140. Background: The Savings and Credit Cooperative (SACCO) sector has become increasingly formalized, facilitated by the establishment of the Sacco Societies Regulatory Authority (SASRA) in 2008. Before that the sector was not supervised at all. As of January 2013, 123 out of 215 deposit-taking SACCOs had been licensed (130 licensed as of June, 2013). Membership of the licensed SACCOs has increased from 1.0 million to 2.1 million. As of September 2012, the NPL ratio was 5.9 percent (down from 9.7 percent in December 2011). The SACCOs have approximately 550 branches distributed across the country with 148 SACCOs linked through the Co-operative Bank’s Sacco Link network (which is itself connected to the Visa system). The introduction of a separate regulation for SACCOs has led to higher standards in the sector through clear guidelines regarding capital, liquidity, and provisioning, among others. This has been an important development for the stability of the Kenyan financial system, as some of the largest 20 SACCOs have reached the size of small banks and manage millions of uninsured deposit accounts of institutions without a lender of last resort in case of liquidity needs. The requirement to report regularly to SASRA has led to improvements in the IT infrastructure necessary for accurate reporting, therewith contributing to higher operational effectiveness as well. Licensed SACCOs report their monthly financial information to SASRA, on an excel basis, electronically, information which is analysed largely off-site by SASRA’s 55 staff (out of which 75% are professionals). SACCOs offer to their customers debit but not credit cards.13 141. In addition to the deposit-taking SACCOs, over 3,000 non deposit-taking SACCOs are operating in Kenya, accounting only for about 20 percent of total assets, loans, and deposits held in the system. 13 World Bank (2013). “ Financial Sector Development in Kenya: Setting Priorities for the Medium-Term”, Draft Note. 41 Table 1- A2: Institutional Overview Regulated Institutions Non-Regulated Institutions Commercia DTMs Deposit- Non- MFIs l Banks taking deposit (AMFI SACCOs taking member SACCOs s) Total Assets 2.3 trillion 30 billion 196 billion 51 billion (Ksh) Gross Loans 1.32 trillion 19.1 148 billion 41 billion 29 (Ksh) billion billion Total Deposits 1.72 trillion 13.8 141 billion 39 billion (Ksh) billion Total Deposit 15.1 million 1.7 million Accounts Loan/Deposit 76.7% 138.4% 105% 105% Ratio NPLs 4.6% Approx. 5.9% 5.9% Avg. CAR 20.5% Avg. Liquidity 41.7% Ratio No. Institutions 43 8 215 3,632 53 No. Branches 1,197 67 Approx. 550 Regulator CBK CBK SASRA Source: CBK, Mix Markets, SASRA, AMFI. Data for commercial banks and DTMs as of September 2012. Data for SACCOs as of end 2011. Data for MFIs is not widely available. FLSTAP contributions to SASRA 142. The FLSTAP financed a number of critical activities for SASRA, including: equipment (hardware and software), institutional strengthening and significant training and study tours abroad to its staff. Training was particularly important since SASRA is a new regulatory agency established three years ago, without any experience in prudential oversight of the sub-sector. SASRA considered the project support to have been invaluable. 143. The project funded the development of a SACCO strategy paper and a number of stakeholder workshops to sensitize participants on the new legal and regulatory mechanisms. These activities were complemented with training Board members and staff to discharge their functions and at the working level training on on-site and off-site supervisory tasks, as well as with the funding of a resident advisor to assist the staff in developing data bases, to assess the financial condition and risks of supervised institutions, develop supervisory methodologies and approaches, collect and analyse statistics and rate licensed SACCOs, using a CAMEL-type system. The project funded the IT needs assessment of the Agency and IT and MIS equipment and systems. A number of consulting services were financed to assist SASRA in formulating a supervisory plan and a medium-term strategic plan. 42 144. Most likely SASRA could not have had a successful launch and the impressive progress achieved in the past three years without FLSTAP support. This is openly recognized by the agency. 145. Component 4: Strengthening Debt Management and Debt Markets. At the time of project appraisal, the updating of Government debt databases was handled by individual entities in the Ministry of Finance and CBK responsible for parts of debt management and there was no coordination or consolidation of data. The Project sought to provide technical support for setting up a unified and sustainable Debt Management Office, including review of relevant legislation. The Project also intended to support a number of technical improvements with a view to enhancing the operation of the primary and secondary government debt markets. These include: (i) designing a benchmark issuance strategy; (ii) taking measures to improve transparency in funding operations; (iii) facilitating over-the-counter (OTC) trading in Government securities; and (iv) establishing a Repurchase Market in Government securities MOF- Debt Management Department (DMD) 146. FLSTAP supported capacity building and ICT equipment. 147. The Debt Management Office (DMO) of the MoF was supported for several activities, including ICT equipment, and later elected to fund training activities through the PFM project. CBK- Domestic Debt Markets (Financial Markets Department) 148. FLSTAP support to CBK’s Debt Management Department focused on strengthening the structure of debt markets in Kenya. The component involved three phases: 149. Phase I: Pre-procurement stage including a market survey to identify key players in the Kenyan financial market, investor base review, legal and operational frameworks, infrastructure systems, assessment of technical capacity needs of the staffs. The output was a Market Survey Report. This was contained in Report I dubbed: Revamping Kenya’s Government Bond Markets: Investor Survey General Findings and Recommendations submitted by Crown Agents in February 2009. 150. Phase II: Included review of current primary and secondary markets structures with a view of making appropriate recommendations for modernization using the Market Survey Report produced from Phase I. It provided proposals on Primary Dealership, Bond and Money Markets Indices, Benchmark Bonds Program, Yield Curve Estimation and Analyses, Over-the-Counter (OTC) trading platform, electronic trading platform, and modernization of auction processes as well as review of institutional arrangement. These were contained in Report II: (Framework to Establish a Robust Primary Market for Debt Securities in Kenya) and Report III (Proposed Framework for the Secondary Market & Review of Legal and Regulatory Framework) which were submitted in 2011. 151. Phase I and II were completed in 2009 and 2010 respectively. 152. Phase III: The third phase of the project covered the implementation of the recommendations made in Phase II. It also involves enhancement of technical capacity of staff as 43 well as provision of equipment. The following is the status of progress of activities under Phase III of the project:  In March 2009 consultants conducted a stakeholder induction workshop to appraise all stakeholders on the project and the consultancy.  In May 2009, the Project Consultants facilitated sensitization workshop for financial market stakeholders held at Kenya School of Monetary Studies (KSMS). The workshop focused on the taking stock of the project activities that had been carried out. The workshop discussed Report II findings and recommendations as well as capacity building initiatives. Participation was drawn from CBK, Treasury, CMA, NSE, CMA, RBA, CDSC and IRA.  In May 2010, a consultant conducted an in-house training on the construction of Bond Indices and the Yield Curve. Consultative meetings with Reuters, Nairobi Securities Exchange and National Debt Management were held to understand the structure and dynamics of the Kenyan market. A draft report was submitted on how to put in place accurate and reliable pricing tools for the bond market namely the yield curve and bond indices.  As part of the project recommendations, the Department has also received two printers, two laptops and five computers from FLSTAP.  Two staff members have been funded for overseas courses on developing debt markets, while another three were sent to the National Bank of Poland. 153. CBK has implemented and continues to put in place a number of recommendations outlined in Reports II & III as described in the matrix below: PROJECT/ACTIVITY IMPLEMENTATION STATUS IMPACT Financial Markets players are sensitized on Primary Dealership  Based on the Consultancy Report II primary dealership (PD)/ (2009) under FLSTAP, and with the Government Securities help of TA 14 from U.S. Treasury Market Makers domiciled at CBK, the MODM division (GSMMs) and an MLF subcommittee proposed Market-Makers Program as a first phase of PD System.  GSMMs Framework and Operational Guidelines are Complete.  Sensitization workshop and training of Fixed Income Dealers took place on November 3rd and 4th, 2010.  Consultations on the program held with Treasury in December 2010.  12th August 2011 –Meeting between CBK, NSE & CMA held to review licensing and Expression of Interest (EOI) requirements.  CBK and NSE currently harmonizing the code of conduct and operational 14  Technical Assistance  44 guidelines for GSMM.  A number of post implementation issues have been raised including access by non-trading GSMMs to ATS, Access to H-Repo and National payment Systems at CBK by non- banks, Mechanisms to mitigate settlement risks, Trading reporting rules and proposed regulation mechanisms. These are being addressed to improve the program. The YC IS posted on CBK website on Yield Curve Estimation  Following FLSTAP project, a weekly basis. and Bond Index Consultant trained some staff on Construction modern Yield Curve Estimation NELSON-SIEGAL yield curve estimation Methodologies and Bond Index Method is not yet in use Construction in May 2010.  The BI is also in use but not published. Information from the YC is used by the The official publisher of market MPC, for pricing new bonds/products as indicators is the NSE. well as to make auction decisions. Retail Market Initiatives: The CBK and World Bank - FCMSM 15 Financial Products o In line with recommendations of and AFTFP 16 initiated project named Diversification, the consultant Report and MLF, ‘Treasury Mobile Direct’ which aims to Supporting Benchmark the division rolled-out retail market distribute government securities to the Bonds Program and instruments beginning with a very retail market through mobile phones and Market Deepening successful debut 30-year savings provide an easier access mechanism to development bond (SDB) in investments in government securities. This February 2011 with two fold was not completed by time of closure of objectives; instil a savings culture the project in the populace and support implementation of Kenya’s 2010 constitution. o To attract more retail investors, Bonds buy back projects was not minimum investment in Treasury concluded by the time of closer of the bills was lowered to Kes 100,000 project. Department will be exploring bond from Kes 1,000,000 in January consolidation strategies particularly 2008. exchanges (switches/swaps) to support the  A sensitization workshop facilitated by benchmark program by smoothening GEMLOC bond program of WB, maturity profile of the domestic debt FLSTAP and CBK was held on April portfolio and building liquidity for 18-19th 2011 at the Hilton Hotel secondary trading. Nairobi. Other consolidation strategies like Buybacks, Conversions may also be considered at a later date. Although huge size benchmark tenor bonds have been issued  The MODM introduced benchmark And has been very successful in terms of bonds program in September 2007 supporting subscriptions of bonds, which has so far worked well. Big size minimization of cost of debt service to bonds of specific identified tenors of government, promoting price discovery for 2yr, 5yr, 10yr, 15yr and 20yr have been market development and as an indication successful receiving good market of market maturity 15  Capital Markets Global Practice   16  Africa Region Finance and Private Sector Departments 45 uptake. Reopening of benchmark bonds began in April 2009 and so far 16 bonds have been reopened in 22 auctions for a total value of Kes 146 billion. This has significantly supported government borrowing and increased liquidity at the secondary market for bonds. Bond size capping has not been dynamic to reflect changed price levels over the years  Cap amount per bond has been agreed at Kes 25bn to manage redemption profile. There has been impressive improvement in liquidity and activity levels at the secondary bond market as a result of the success of the program at the primary market.  Horizontal Repo (commonly known as HRT) platform established in September 2008 has improved liquidity distribution in the financial system with more than Ksh 105bn exchanging hands in 2010/11 compared to 41bn last year. There are however a few issues relating to the structuring of the product, raised by users (mainly banks) which are being addressed by CBK.  364-days Treasury bill introduced in August 2009 was initially issued bi- monthly, now monthly and has been There is need to venture into Islamic very instrumental in supporting Compliant (Sukuk) bonds to diversify government borrowing. It T-bill is open clientele base for OTC trading at CBK.  Infrastructure bonds (IFBs) were first issued in February 2009. This together with subsequent issues in 2010 and 2011 were very successful. In fact, a bullet IFB of Ksh 31.6b was oversubscribed in August 2010 and was a single issue in FY 2010/11. IFBs phenomenon has raised Kenyan financial markets profile in the region. Some corporate and state agencies have followed suit and tapped from the local markets to finance their development budgets.  The packaging of features of infrastructure bonds has been innovative accommodating amortization in place of bullet issues, issuance through tap window as well as inclusion of a diaspora component in the recent IFB issued in September 46 2011. Secondary Market  In line with recommendations of  ATS has revolutionized bonds trading Infrastructure/ Report III (2009) to put in place an activity at the NSE because of gains Platforms online trading platform, the Automated from efficiency achieved through Trading System (ATS) for Bonds was connectivity between CBK-CDS and implemented in November 2009. NSE trading floor.  Increased turnover from Ksh 108bn in  With both OTC and Market Makers 2009 to Ksh 466bn in 2010 and Kes platforms operational, we expect to 428bn in 2011 largely attributed to the see a more robust bond market as a efficiency of the ATS. result of faster trade execution and  Amendment of CMA Act in progress to efficiency in pricing. allow OTC trading as a supplement to  the exchange platform.  With adoption of electronic register, bonds trading in the secondary market increased significantly.  The Department is working with to  Primary Market has lagged behind in Primary Market develop an Online Bidding and Results terms of operational infrastructure Infrastructure/ Dissemination System through an development. Platforms interface between the CBK website and T24 system. This development will  More work and resources are required hopefully result in a wholesome in these areas automated auction system.  In terms of information dissemination through mobile phone, the IMS has already demonstrated to the department how auction results can be sent to investors’ mobile phones. If successful, this will be critical especially to the retail investor segment.  The Division has also considered engaging specific institutions as distribution agents for Government securities. In February 2011, 5 commercial banks were selected on a pilot basis to help in opening of CBK- CDS accounts and marketing of government securities as well. Information  The Division requires an elaborate Dissemination and webpage on securities markets updated Communication to the on a regular basis. market The department requires Display Screen (LCD) in the Banking Hall where investors get first-hand information on Government Securities. MOF- PPP Secretariat 154. The Office charged with developing within the Treasury the private-public partnerships program started in 2010 with the appointment of a Sr. and highly respected Treasury official. His office requested World Bank support and he was included as a user of the FLSTAP funds. With Project assistance a PPP Act was prepared and approved in 2012. At present the WB, outside of the Project, is working on the preparation of secondary legislation and regulations to implement the Act under the auspices of a new project. 47 155. With FLSTAP support a consulting company was hired to examine the pipeline of government investment projects to screen a subset of them that could be suitable for PPP financing. The consultant’s report was finalized in October 2012. The second phase of the consulting assignment included the preparation of pre-feasibility studies for five projects, including their technical and financial viability. In this sense the FLSTAP was instrumental in saving about one year of preparation time for the launching of the PPP project (US$40 million), assisting in a way similar to the Bank’s project preparation facilities. At present treasury is looking for a Transaction Advisor prior to going to the market to seek interested investors. A second advantage for the new WB project is that the already experienced and efficient PIU handling the FLSTAP will also be charged to manage the new project on behalf of Treasury. The PPP project will also benefit from advances in the local capital market and at the same time foster its further development as some of the PPP projects will seek at least partial local financing, including from the pension funds. These synergies are additional benefits derived from the FLSTAP. 156. The FLSTAP also financed a number of workshops to explain the new legislation and objectives of the PPP Secretariat. 157. Component 5: Modernizing the National Payments System. At appraisal, the Kenyan authorities recognized the existing deficiencies in the clearing and settlement mechanisms and a task force had produced a framework and strategy paper for the modernization of the national payments system which recommended, among other things, introduction of a Real Time Gross Settlement System (RTGS). The Central Bank had already earmarked funds for the acquisition of a stand-alone RTGS. The Project intended to provide appropriate technical assistance and funding to acquire a Scripless Securities Settlement System/Central Depository System (CDS) to facilitate the safe, secure and efficient clearance and settlement of funds and securities transfers (both primary and secondary market transfers) in a manner consistent with best international practice. In addition, the project intended to support the establishment of an appropriate legal and oversight framework, and provision of expert technical advice and training for staff of the Department of Payments System in the CBK. The Project also planned to fund a diagnostic study to identify the needs for improvements in the mechanisms for low value payments transfers. CBK- National Payment Systems (NPS) 158. Background: The CBK has been reforming and modernizing the country’s payment systems since the late 1990s, with the full automation of the Nairobi Clearing House in 1998. The following years saw progress in terms of adding a second clearing session in 1999, as well as the promulgation of new Acts to provide the legal basis for electronic payment instruments. In 2002-20003 the Clearing House moved to receive electronic data transmission from banks, CBK introduced the one-day high value clearing and the Kenswitch went live, as well as the direct debit system. Foreign exchange clearing went live only in 2004. In spite of all this progress, Kenya was falling behind with other countries in the region by not having an RTGS system. There was significant pressure on CBK to acquire an RTGS and CBK decided it could not wait for the lengthy and complex World Bank procurement process and decided to use its own funds hiring a US specialized provider (Montran) and implementing the system in July 2005, completing the installation in six months. 159. Since then, noticeable improvements have been achieved in the National Payments System, both at the wholesale and at the retail level. The National Payment System (NPS) 48 consists of the Kenya Electronic Payments and Settlement System (KEPSS), a multi-currency real time gross settlement system (RTGS) owned and operated by CBK, and the Nairobi Automatic Clearing House (ACH), which is owned and operated by the Kenya Bankers Association (KBA). The number of transactions handled by KEPSS has increased from 180,312 in 2007 to 1,406,886 as of June 2012. Total transactions amounted to Ksh 20,886 billion in the year to June 2012. A value cap was introduced requiring all large value payments (KSh 1 million and higher) to be cleared and settled through KEPPS, which has led to an increase in the number of transactions. The ACH handled 27.63 million transactions with a value of Ksh 2,497 billion. The efficiency of cheques as a payments instrument was improved through cheque truncation, allowing a reduction in the time to clear cheques from T+3 to T+2. Simultaneously, there has been a significant shift to the use of other electronic forms of retail payment. Electronic Funds Transfer (EFT) transactions stood at Ksh 363 billion as of June 2012 and the total number of cards in use increased from 8.6 million cards in June 2011 to 9.9 million cards in June 2012. Mobile phone based payments have dramatically changed the landscape of retail payments and transfers. Introduced by Safaricom’s M-Pesa, the customer base of mobile money transfer services stood at 19.8 million customers at end June 2012. The number of mobile money transactions amounted to 507.9 million at year-end June 2012 with a total volume of Ksh 1,375.83 billion. Correspondingly, the total number of agents increased to 61,313. FLSTAP Contributions 160. CBK indicated that time pressure and low internal absorption capacity were obstacles for an earlier use of the project funds to finance the RTGS. However, CBK made good use of the FLSTAP to finance a number of critical consulting services starting in mid-2009, to establish the legal basis and the regulatory and oversight functions for e-payment and m-payment systems, in support of the explosion of mobile payments (M-Pesa, Yu Cash, Zap (Airtel money), and others), as well as the increasing flow of international payments and remittances (M-Pesa and Western Union). Project funded consulting services were provided over an extended period (2009-2011), including a number of critical workshops for stakeholders. The Project also supported workshops to explain the National Payment System Act of 2011 and the following regulations, including Designation of Payment System, Designation of Payment Instruments, and ALM Regulations for Mobile Payment Providers. All these activities have played a very important enabling role for the payments revolution experienced by Kenya. The project also funded workshops and study tours of key CBK personnel abroad. 161. The project financed a critical missing piece of infrastructure (hardware, communication, and security requirements) for the RTGS in the form of a remote disaster recovery site, providing critical back up for the safe operation of the large value payment system in the country. 162. The project also funded a review of existing switching mechanisms to enhance the efficiency of the payment card infrastructure (Master Card Advisors). Consulting services for the design of an efficient paperless security settlement services came too late for the project to finance prior to its closing date. All the activities financed under the Project were deemed by CBK to have been of critical importance to enhance the efficiency and security of electronic payments in Kenya. Efficiency gains and security enhancements of the RTGS system were confirmed through interviews of payment system users (NBK). 163. Component 6: Improving the Lending Environment. The Project will support: (i) improvements in the operation of the Department of the Registrar General which includes: a) 49 assistance to the Companies Register to enable the Registry clear the backlog in filing and allow for speedy and accurate information sharing of corporate information and data; and b) combining of the Charges Register and the Chattel Mortgage Register into one; moving the combined separate register (notification system) for charges/pledges over movable assets out of the Companies Register and developing a new Personal Property Securities Act (i.e., secured transactions framework) in line with international best practices; (ii) improvements in the land registration system through digitizing land records; (iii) establishment of a legal and regulatory framework for the operation of a credit reference bureau that would facilitate the much needed information flow among the credit granting institutions; and (iv) the review of impediments to the growth of the leasing industry, including tax laws on leasing. CBK- Banking Supervision Department (BSD) 164. Credit reference bureaus licensed and operational (Implementing Agency: CBK-BSD): FLSTAP funded a consultancy to support BSD staff in licencing CRBs, workshops on CRBs, capacity building of BSD staff, and purchase of ICT office equipment. The introduction of two Credit Reference Bureaus (Jun 2010) and CRB regulations drafted with project support (Feb 2009) contributed to the steady reduction of credit risks and NPLs. 165. Comprehensive legal and regulatory framework. FLSTAP financed a consultant to assist EAD in preparing a draft policy paper and Consumer Protection Law 2012. The project also financed a market survey and preparation of proposals for increasing access to lease financing. to further enhance broader access to financial services Transform manual system of land records to a digitized recording and storage system (Implementing Agency: Ministry of Lands) 166. The ICR ROSC Update for Kenya found the land registry of Kenya to be inefficient, outdated and burdened with inadequate practices. The improvement of the situation in terms of organization, technical capacity, record keeping, access to information and general efficiency was regarded as key to increase confidence in the system of secured transactions. An improved system of land registration is bound to increase legal certainty, reduce risks in lending operations and, as a consequence, to allow for more and cheaper credit to flow. In order to move in this direction, the FLSTAP set clear, ambitious and important objectives to be achieved by the Ministry of Lands as implementing agency: (i) to transform the manual system of land records to a digitized recording and storage system; (ii) to build the necessary capacity to safeguard land records in appropriate archives and create digital archives to enable easy access to records in Mombasa; (iii) to carry out an appraisal of records due to be disposed of; and (iv) to conduct a review of the land laws that relate to land as collateral for financial transactions. 167. The project provided (financed) the following input: (a) in the context of building capacity to safeguard land records, the interaction and travel of MoL technical working group and officers from and to Mombasa; (b) storage materials were provided; (c) software and hardware were provided, including workstations, tables, trolleys, etc.; and (d) consultants were hired to carry out a review of the existing land laws and a workshop with stakeholders was held. With the exception of input (a), which was conducted in 2011, the rest of the inputs happened in 2013. 50 168. The input produced was minimal in comparison with the initial objectives (although not so given the difficulties posed by the context). The legal review (coupled with other previous analysis carried out by the WB and other donors) may provide a useful tool to base a future modernization of the legal framework. Both the staff at the PIU and the WB staff related to the project expressed the inadequate relationship with the Ministry of Lands, which showed lack of interest or, at least, the inability to identify the needs according to a sound strategy. Registrar General 169. An improvement of the functioning of the Office of the Registrar General (RG) would also be of the highest importance. As in the case of the MoL, the RG is in charge of a most relevant part of the realm of secured transactions. It hosts and manages the Registry of Chattels. But not only so, the RG is also in charge of the more general Registry of Companies, which, if working properly, constitutes one of the main sources of information to the market. Previous assessments of the RG found inefficiencies in its functioning as well as a need for capacity building and more funds and staff. The objectives of the FLSTAP concerning the RG was the general improvement of the registry of operations by means of (i) a modernization and improvement of the Chattels Transfer Registry, (ii) the decentralization of the services rendered by the Companies Registry to Mombasa and Kisumu, and (iii) the development of rules and regulations concerning Partnership Laws. 170. The project provided the following input: (a) a workshop was organized for staff of the RG and key stakeholders to review the registration requirements and its process; (b) computers, printers and other equipment was provided; (c) the staff of the Companies Registry were instructed on IT skills, data entry, etc.; and (d) a technical drafting retreat was organized. All of it was conducted between 2009 and 2013. 171. According to the implementing agency, the hardware and equipment received was in good shape and it is now fully operative and incorporated into the system. A server did not fit the system and was returned. They made other equipment requests that were not satisfied. Concerning capacity building, they were very appreciative of the training programmes received by their staff, which they considered highly beneficial and bespoke to their needs. With the provision of capacity building, the FLSTAP was filling the gap existing due to the Government’s alleged lack of support in this regard. Kenya Law Reform Commission 172. The objective set for the implementing agency was to review the commercial and financial legislation. Such a broad-encompassing and important task was divided into three different types of activities: (i) the review, development and publication of the legislation on companies and insolvency; (ii) the review, development and publication of the legislation concerning partnerships; and (iii) the review of a number of commercial and financial laws, which would comprise almost the entire private legal system (stemming from Sales of Goods Act and the Hire Purchase Act to Contract or Competition law). 173. The results achieved by the project can only be positively valued. The FLSTAP funded technical retreats to finalize the companies and insolvency drafts that were finished and sent to Parliament. Due to the need for further improvement, both drafts were withdrawn from Parliament for fine-tuning. Although the final draft (now again in Parliament) was done by the 51 Attorney General’s Office, the initial draft served well its purpose as initial text to build upon. The project also funded workshops with relevant stakeholders and technical retreats that helped refine the drafts. The FLSTAP also funded the technical retreats that finalized the draft Partnership Bill and related regulations, as well as other meetings with identified stakeholders to build consensus on the legal solutions proposed. The Bills were sent to Parliament in 2010 and were approved. They have been enacted. The project’s input included funding capacity building for members of the KLRC on legislative design of PPPs. Selected members of the KLRC also benefited from study trips to international legislations. 174. The importance of the modernization of company and partnership law cannot be overestimated. The Insolvency Bill is still in Parliament, but its final approval would constitute a fantastic achievement. Although the direct impact of these events in the improvement of credit and in the economy as a whole is difficult to quantify, their contribution to the improvement of the legal environment cannot be denied. As to the appraisal of the implementing agency’s activity, credit should be given to them once the bill is sent to Parliament, since its final enactment is out of their reach. The project’s support of this activity (and of this and other implementing agencies involved) has been most relevant and the results highly satisfactory. 175. The new Constitution of Kenya needs to be fully implemented. This implies a need to review and revise legislation to ensure consistency with the country’s Supreme norm. This will be a difficult task, and the KLRC will have to play a vital role. It can act as a focal point for legal reform that will be of much use in future efforts to continue to modernize Kenya’s commercial and financial legal frameworks. 52 List of Key Laws and Regulations developed, amended or Supported by Project 1. Insurance (Amendment) Act 2006 17. Capital Markets Authority Bill 2. Microfinance Act 2006 18. Securities Markets Bill 3. Sacco Societies Act 2008 19. Companies Bill 2012 4. Banking Act (Credit Reference Bureau 20. Insolvency Bill 2012 Regulations) 2008 5. Sacco Regulations 2010 21. Capital Markets Regulations REITS 6. Microfinance Regulations 2008 22. Small Claims Court Bill, 2011 7. Civil Procedure Rules (CPR) 2010 23. The Banking Bill 2006 8. Court of Appeal Rules 2010 9. Prevention of Terrorism Act 2012 (CFT Laws affecting financial sector with limited Law passed Oct.2012) Project Support 10. Proceeds of Crime and Anti Money 1 Unclaimed Financial Assets Act 2011 Laundering Act 2009 11. The Public Private Partnerships (PPP) 2. Competition Act No.12 of 2010 Act 2012 12. Consumer Protection Law 2012 13. The Partnerships Act, 2012 14. Limited Liability Partnership Act No 42 of 2011 15. Kenya Deposit Insurance Act 2011 16. National Payment System Act No 39 of 2011 COMPONENT 7. Legal and Judicial Reform. 176. The description of Component 7 states the following: a) Judicial Reform: activities in this subcomponent will focus on establishing the court and case management and records management systems and improving court registries. Activities aimed at reducing the backlog of cases will include supporting alternative dispute resolution (ADR) mechanisms for commercial law cases and introducing small claims court procedures. Summary court procedures for uncontested debt enforcement will be introduced to eliminate the frequent frustration of enforcement procedures. Support for a staff training program and more effective human resource administration and management will also be provided. b) Law reform: The Project will provide technical assistance to finalize the institutional review and capacity building of law reform bodies, including the Law Reform Commission, the Office of the Attorney General and the Parliamentary Service Commission. These institutions will also be supported in carrying out the review, harmonization and drafting of priority laws in the financial and commercial sectors in Kenya, having regard to the development of regional trade institutions and initiatives such as the East Africa Customs Union. c) Legal Education: In order to strengthen the capacity of the legal profession and the judiciary in the commercial and financial areas. It will be necessary to enhance education of judges and lawyers. Following a review of the institutional arrangements for basic and 53 continuing legal education, key legal education institutions will be provided with support to strengthen facilities, review and develop teaching curricula and educational materials, update libraries and research capabilities, and create new training and development opportunities for both students and faculty.” 177. The main elements of the description transcribed above were developed successfully by the project. FLSTAP funds were used to improve the case management system and alleviate the backlog of cases that burdened the entire legal system; capacity building, dissemination and legal reform were all strongly supported by the project; legal resources were systematized and made publicly accessible; and specialization in commercial and financial law was fostered at undergraduate and postgraduate university levels as well as with the judiciary and Government staff. The degree of implementation and the results achieved under Component 7 can only be valued as satisfactory. STATE LAW OFFICE 178. [Prev.: The State Law Office (SLO), also known as Office of the Attorney General, is the main Governmental institution in charge of legal affairs. As such, it is tasked with legal drafting matters as well as with the organization and management of Registries. As a consequence, the analysis and feedback included in this section is to be completed with the sections of the Registrar General and the Kenya Law Reform Commission included above under Component 6, and the section on the National Council for Law Reporting, under Component 7, below] 179. The FLSTAP included three objectives concerning the SLO: (i) the enhancement of the technical level of the staff and the efficiency of their performance by providing training in legal drafting, improving the funds of the library and acquiring new equipment; (ii) the provision of technical assistance to the Legislative Drafting Department; and (iii) reviewing the institutional structure of the SLP. 180. The main activities developed under the umbrella of the project were the following: (a) the provision of training on legislative drafting to the SLO’s staff, including funding a course overseas on PPPs; (b) the provision of books, periodicals and journals for the library; (c) the provision of equipment; (d) an specialized consultant on legal drafting was hired; and (e) a consultant was hired to undertake an institutional review, which produced a report identifying recommendations and key action areas. The actions were executed in the period 2007-2013, although the main activities (in terms of both importance and money spent) took place in 2012 and 2013. In general, the SLO (Parliamentary Counsel of the Attorney General’s Office) regards the assistance as very timely, because it coincided with the needs deriving from the implementation of the constitution. The implementing agency seemed content with the amount of support received concerning capacity building (courses, books and equipment), although, concerning equipment, they expressed discontent at the amount of computers and workstations provided, which did not meet the needs of the Office. The implementing agency had high regard for the work done by the PIU, and, especially, with the work done by C. Agimba. As other Agencies expressed, the appointment of SLO staff member to the PIU was the milestone of the project. Everything started to work once she was in office. Complaints about the procurement system and the slow response by the WB to issue “no-objections” also apply to the SLO. 181. The most successful –and directly effective- part of the project stemmed from the activity developed by the consultant specialist in legal drafting. The consultant trained the staff and, more 54 importantly, revised entirely the Company and Insolvency Bills. The final Bills were largely in accord with best international standards. They are bound to take Kenya’s commercial legal framework to the next level. The entity of this outcome alone would suffice to consider the FLSTAP’s implementation as satisfactory. Furthermore, the implementation of the recommendations included in the report on the institutional review of the SLO should streamline the functioning of the institution. The benefits of this consultancy may then be received in the future. THE JUDICIARY 182. The improvement of the judicial system in Kenya was one of the cornerstones of the project. The adequate functioning of the judiciary is a precondition for the implementation of the entire legal system. In the moment the project started, as is the case now, the Kenyan judicial system was in need of a major overhaul. In 2011, the ICR ROSC Update provided a bleak picture of the situation. It reported a clear market perception that the judicial system did not work properly. Claims took too long to be decided, and remained tangled in courts, often for years. The technical level of judgments was perceived as inadequate, and market participants complained about excessive judicial discretion. The system did not seem to possess enough material resources to handle the number of on-going cases. Judges and magistrates was that there was excessive political influence in the appointment of members of the judiciary that the mechanisms of selection were obscure and the result was an inadequate level of technical skills on the various benches. The FLSTAP faced the shortcomings in the judicial system by setting the following objectives: (i) to improve the case management system; (ii) to increase the technical level of the judiciary (judges, magistrates and staff) by providing a judicial education programme in commercial and financial law as well as by the provision of continuous legal education; (iii) and the revision and update of the rules on civil procedure, incorporating alternative dispute resolution mechanisms. The objectives were right on target, and addressed the main shortcomings of the Kenyan judiciary. 183. The achievement of objective (i) would reduce the backlog of cases and reduce the possibility of dishonest behaviour. It was worked through a number of measures: (a) a consultant was hired to develop the ICT policy and strategy, and technical retreats were held; (b) a consultant was hired to assess the rate of case clearance of the judiciary, another one was tasked with the revision of the Judiciary Policy and Strategy Plan 2011-2013, and a third one designed and helped implement the audio-recording systems; (c) state of the art audio-visual equipment was acquired and installed in courts. All of this was done through the period 2010-2013. 184. One of the most efficient ways to raise the level of the judiciary is through an intense, wide-ranging programme of capacity building. In order to achieve Objective (ii), the FLSTAP hired a consultant to design the curriculum for commercial and financial law for the judicial education programme. In line with this, training in specialized areas of commercial and financial law was provided by means of workshops and judges colloquia. The creation of the Judicial Training Institute (JTI) had been a remarkable achievement. This Institute had not been adequately funded and had to contend with insufficient personnel and material resources. In order to tackle this issue, the project funded the acquisition of equipment and books journals and periodicals for the JTI. Similarly, equipment and books were provided to the Commercial/Civil Division of the High Court. The approval of new procedural rules and the training of the judiciary and court staff on the new legislation was also a very important part of the project’s 55 input. The modernization of court rules is bound to have a big positive influence in the working of courts and in the enhancement of legal certainty. 185. The case clearance rates were calculated based on a study commissioned by FLSTAP, and are depicted in the graphs below. FLSTAP contributed to this improvement especially through the revision of Civil Procedures Act in 2010, but also through judicial training and equipment. In addition to the revision of the Civil Procedures Act in 2010 and its implementation, the causes for improvements in case clearance rates in 2012 (418% clearance rate), were reported to include; o Substantial Government resources were provided to the Division Commercial though the Rapid Results Initiative (RRI) in 2012 where many old cases were reviewed and determined. o Training of Judges and facilitation of study tours by the FLSTAP had positive effects due to possible increase in morale of Judges. o The number of Judges placed in Commercial Court was increased in Oct 2011 o When the Chief Justice picked judges in only picked those with commercial background and especially from 2011 to 2012. o The clear demarcation may have ensured new cases were filled correctly e.g. land cases were not placed in the Commercial Division as it would happen before o Strong/functional Bar-Bench committees that meet regularly. 1. Annual Case Clearance Ratio = 100 X All Cases Disposed in the Year divided by All Cases Filled in the Year Annual % Completed cases over all flled Cases (Commercial cases at Milimani) 450% 418% 400% 350% 300% 250% 200% 150% 107% 100% 59% 67% 70% 35% 50% 0% 2007 2008 2009 2010 2011 2012 56 Annual % Completed cases over all Filled Cases (Commercial Cases at Milimani) 180% 166% 160% 140% 120% 100% 80% 60% 47% 40% 20% 0% Pre‐project effects period 2007‐2008 During project effects period 2009‐12 186. And lastly, reference must be made to the project’s financing of a consultancy to carry out a forensic audit for the judicial financial systems. The forensic audit found a number of important problems in the management of funds and accountability. This report might be a key in the future implementation of WB projects. As an example, the new JT project will channel the funds through a fiduciary placed within the judiciary. 187. The overall valuation of the project is satisfactory. Despite the remaining problems in the judiciary, the improvements have been considerable: there is a new case management system in place; a modernization of the equipment has been achieved; a permanent institution for continuing legal education has been created and training has been provided to judges and court staff; specialization has increased; very relevant elements of a new legal framework have been enacted; and financial problems and malfunctions have been identified and remedied for future projects. 188. Problems have also arisen during the implementation of the project. Implementing agencies, donors and stakeholders have complained about the communication with the judiciary, not uncommonly difficult and slow. Although it is unclear, it does not seem to be a problem of the project, but rather of the idiosyncratic nature of the judiciary. For future projects, a champion should be identified and dialogue should be frequent in order to streamline procedures. Another shortcoming would seem to lie with sustainability (maintenance). An example could illustrate. A bench hotline was set up under the FLSTAP (2007 or 2008). It consisted of judges calling students to assist them with research, etc. It allegedly worked well, but it was stopped, although, as stated above, in 2011 the ICR ROSC found that judges needed assistance. KENYA LAW REFORM COMMISSION [See the Kenya Law Reform Commission above in Component 6] 57 NATIONAL COUNCIL OF LAW REPORTING 189. It is not uncommon in African jurisdictions to find a fragmented legal system, where the new laws coexist with old colonial legislation and with customary rules. This situation, a problem in Kenya for decades, generates severe legal uncertainty both in market players and those institutions tasked with the implementation of the law. In this context, the project’s support of The National Council of Law Reporting (NCLR), which is the institution placed in a better position to systematize and disseminate the legal framework in place, must be commended. The NCLR has received extensive financial support from the FLSTAP. The implementing agency has fully complied with the objectives foreseen and there seems to be consensus in considering it as one of the most successful components of the legal and judicial part of the FLSTAP. 190. The main objective set by the project was to increase accessibility of up to date legal information to the public and private sector. In order to achieve this aim, the FLSTAP has funded the provision of materials for the library used by judges and magistrates; the publication of the revised version of the Laws of Kenya in book volumes and CD ROM; and the creation and online publication of the Kenya Treatise Series. These activities have been backed up by new equipment, training and some specialized capacity building for relevant staff. All operations have been successfully completed, with special intensity in the years 2012 and 2013. 191. The publication of all the laws of Kenya currently in force and its easy and inexpensive access by all stakeholders constitutes a great achievement. It is bound to increase legal certainty, improve the country’s body of jurisprudence and contribute to the general development of the system of justice in a country where lawyers and courts are poorly regarded by the population. This component of the project must be valued as highly satisfactory. UNIVERSITY OF NAIROBI 192. Much like in the case of the Kenya School of Law, the University of Nairobi bears the social responsibility to educate legal professionals. A legal system is built from its foundations. The knowledge of commercial and financial matters has to be included in the curriculum from the university level. The more complete the education, the higher the technical level of lawyers and judges. In line with these ideas, the project focused on the review of the legal curriculum and the development of specialized education in financial and commercial matters as main objectives. 193. In order to achieve the objectives, the FLSTAP funded the celebration of workshops and retreats to redesign the curriculum, financed the acquisition of books and legal periodicals, provided equipment and organized specialized seminars and workshops on commercial and financial matters. According to the implementing agency, the key element of the project’s support was the review of the legal curriculum. The enactment of the Constitution in 2010 and the Government’s Vision 2030 created the need to adapt the legal studies to the new framework. The FLSTAP funds were geared towards commercial and financial laws, areas where the school had –admittedly- its weakest side. 194. The implementing agency had an overall positive impression of the project. They identified a number of areas where there remained room for improvement: there exist an excessive number of steps between the implementing agency and the PIU; agencies do not have enough control; the procurement process is slow and delays measures in an unjustified manner. Looking to future projects, the implementing agency mentioned the establishment of a 58 specialized commercial and financial law centre, which would be linked, inter alia, to the development of the capacity of lecturers. 195. Overall, given the importance of the result and the small amount of funds used, this component could be rated as satisfactory. KENYA SCHOOL OF LAW 196. The Kenya School of law is equivalent to the bar in other Common Law jurisdictions. Action taken at the University Level (above) had to be complemented with action at the postgraduate/professional level to be fully effective. 197. As a consequence, the objectives set by the FLSTAP, very much in line with those described above for the University of Nairobi, were (i) the implementation of a programme of continuing legal education in commercial and financial law, (ii) building capacity of the faculty to deliver the specialized courses of the said programme, and (iii) the enhancement of library facilities and research capabilities to support training in financial and commercial law. 198. The FLSTAP hired 2 consultants to design the CPD (continued legal and professional education) in the area of financial and commercial law, and sponsored a workshop on the matter (dissemination). Since 2009, the project supported the organization of courses on secured transactions, capital markets, treaty making and international state obligations, PPPs, etc. The FLSTAP also funded the use of resources of the KSL for the training of the State Law office. Support was also given in the form of TA/capacity building, equipment and the acquisition of about 250 books. 199. The implementing agency values positively the support given by the project. In their opinion, the support came in very timely and the programmes that were started with FLSTAP funds remain in place, so there is stability. Given the opinion of the implementing agency, the limited amount of funds spent and the importance of the task, this component could be valued as satisfactory. 59 Annex 3. Economic and Financial Analysis The project was a technical assistance project and the Project Appraisal Document did not include an economic analysis. Therefore, alternative considerations are used to substantiate the different aspects of project efficiency. This is discussed in Section 3.3 (Efficiency) of the ICR. 60 Annex 4. Bank Lending and Implementation Support/Supervision Processes a) Task Team members Responsibility/ Names Title Unit Specialty Lending Abayomi A. Alawode Practice Manager FFSDR Fatiha Amar Program Assistant MNSSD John P. Byamukama Financial Analyst AFTFP Roberto De Rezende Rocha Senior Adviser FFSDR Sumana Dhar Consultant WBIGC Pascale Helene Dubois Evaluation and Suspension Offi OES Michael J. Fuchs Adviser AFTFP TTL Dahir Elmi Warsame Senior Procurement Specialist AFTPE Supervision/ICR Fatiha Amar Program Assistant MNSSD Henry Amena Amuguni Sr. Financial Management Specia AFTME Wendy Schreiber Ayres E T Consultant AFTU1 Hyacinth D. Brown Division Manager CTRLA Yeshareg Dagne Program Assistant AFTFE Antonio C. David Economist AFTFE Clemente Luis Del Valle Lead Financial Specialist FCMSM Felicia P. Dlamini-Kunene Voice Secondee AFTFP Gisela Durand Consultant AFTFE Michael J. Fuchs Adviser AFTFP Guillemette Sidonie Jaffrin Sr. Private Sector Development SASFP Sidonie Jocktane Executive Assistant AFMGA Marie Constance Manuella Sr. Program Asst. GEFVP Koukoui Yira J. Mascaro Lead Financial Sector Specialist AFTFE TTL Stephen Mugendi Mukaindo Counsel LEGAM Joel Buku Munyori Sr. Procurement Specialist AFTPE Josphine Kabura Ngigi Financial Management Specialist AFTME Winrose Wanjiku Njuguna Temporary AFCE2 LEGAF- Christine Akinyi Onyango E T Consultant HIS Evans Makini Osano Sr. Securities Market Specialist FCMSM Beatrice Akoth Otieno- Team Assistant AFCE2 Abade Seda Pahlavooni e-Government Specialist TWICT Giulia Pellegrini Junior Professional Associate AFTFE John Randa Economist AFTP2 Nightingale Rukuba-Ngaiza Senior Counsel LEGAM Dahir Elmi Warsame Sr. Procurement Specialist AFTPE 61 Moses Sabuni Wasike Sr. Financial Management Spec OPSOR Mark Zeydler-Zborowski Consultant SASFP Fernando Montes-Negret Advisor - ICR AFTFE Jose Ignacio Tirado Consultant - ICR LEGPS Serap Gonulal Sr. Financial Sector Specialist FCMNB Carel Oosthuizen Sr. Financial Sector Specialist -BCP AFTFE b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY04 33.92 192.10 FY05 14.75 42.26 Total: 234.36 Supervision/ICR FY04 0.00 FY05 12.34 43.99 FY06 37.65 163.35 FY07 52.19 309.99 FY08 36.85 206.97 FY09 36.1 175.45 FY10 17.43 97.32 FY11 16.34 108.42 FY12 23.05 123.61 FY13 36.94 301.17 Total: 1526.28 62 Annex 5. Beneficiary Survey Results (if any) 63 Annex 6. Stakeholder Workshop Report and Results (if any) 64 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR The Borrower did not produce an ICR, but provided comments on the Bank ICR, which have been incorporated and cited. 65 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders 66 Annex 9. List of Supporting Documents Project File Project Appraisal Document; September 17, 2004 Development Credit Agreement; November 16, 2004 Aide Memoires, Implementation Status Reports, various correspondences; December 2005 – August 2013 Government of Kenya, Mid-term Review Action Plan February 2010 Project Restructuring Paper; September 28, 2011 Project Restructuring Paper; February 28, 2013 World Bank – Financial Sector Strategy, AFTFP, draft, May 2013 Other FSAP 2003 FSAP 2009 IMF, “Staff Report for the 2004 Article IV Consultation, First Review Under the Poverty Reduction and Growth Facility, and Requests for Augmentation of Access, Rephasing of the Arrangement, and Waiver of Performance Criteria”, December 6, 2004 World Bank; Country Assistance Strategy for the Period Country Partnership Strategy 2010- 2013 - World Bank; March 23, 2010 World Bank; Country Assistance Strategy for the Period Country Partnership Strategy 2010- 2013 - World Bank; May 19, 2004 67 IBRD 33426R2 K E N YA CITIES AND TOWNS MAIN ROADS DISTRICT CAPITALS* RAILROADS NATIONAL CAPITAL DISTRICT BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES *not all District Capitals are shown. 34°E 36°E 38°E 40°E 42°E SOUTH SUDAN To Murle ETHIOPIA To Karungu Juba Lotikipi Plain Lokichokio Chalbi To 4°N 4°N Desert To Ramu Mandera Imi Kakuma Dila lls Lake Hi Sololo Tu r k a n a North Horr Moyale Mandera sa Turkana is Lodwar an D Marsabit el Turkw Buna El Wak UGANDA Lokichar South Horr Marsabit Tarbaj . tns 2°N Kangatet M Wajir 2°N to West Pokot do Lo g N aB Wajir Che Samburu og al ran Lak Bor ga Isiolo SO M A L I A Milgis Hil ny ls ’iro To Trans Nzoia Elgeyo/ Maralal Ng Bilesha Plain Mbale Kitale Kapedo Marakwet Ewaso Mando Baringo Archer’s Gashi Bungoma Uasin Post Garba To Gishu Tula Kampala Busia Marigat Eldoret Kakamega Isiolo Mbalambala Kakamega Laikipia D e ra To Nandi Nyahururu Meru Lak Kismaayo Butere Nanyuki Vihiga Falls 0° Siaya Mt. Kenya 0° Kisumu Kisumu Nyandarua (5,199 m) Tana Kericho Tharaka-Nithi Nakuru Nyeri Kirinyaga Homa Bay Kericho Nakuru Garissa Garissa Nyeri Embu Nyamira Gilgil Karungu Embu Nguni Bomet Murang'a Lake Migori Kisii ra Thika Ma Kiambu Bura Victoria To Narok Narok Kolbio To Bur Gavo Musoma Lolgorien Ma NAIROBI Ngang u E Nairobi Machakos Kitui Kitui erab sc arp Tana River eli Machakos Thua Plain me nt Konza Magadi Makueni Bodhei 2°S Kajiado Ya t t Ikutha Lamu 2°S To a A th i Seronera Pla tea Garsen Kibwezi u Lamu Namanga To Arusha Tsavo Kilifi Galana Tsavo To Moshi Voi Malindi INDIA N KENYA TANZANIA Taita/Taveta Mackinnon Park OCEA N This map was produced by Mombasa the Map Design Unit of The 4°S Kwale Mombasa World Bank. The boundaries, Kwale colors, denominations and 0 40 80 120 160 200 Kilometers any other information shown on this map do not imply, on the part of The World Bank Shimoni Group, any judgment on the 0 40 80 120 Miles To Dar Es Salaam legal status of any territory, or any endorsement or acceptance of such 34°E 36°E 38°E 40°E boundaries. JULY 2011