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Egypt’s Minister of Investments Informal Briefing

Cairo, 30 March 2009Luigi Passamonti

Head, Convergence Program, World Bank

Public-Private Financial Sector Modernization

The World Bank’s Convergence Program SPI Platform

Launched in 2005 by the World Bank with support from Italy’s Ministry of Economyand Finance, the Convergence Program promotes financial sectormodernization in South-East Europe through public-private sector cooperation.

Under a “BOT” concept (Build-Operate-Transfer), the Convergence Program helpsauthorities and market participants set up and operate a partnership (SPIPlatform), whose governance, organization and “Better Regulation” analyticalmethods enable the pursuit of a broad-based modernization program largelyexecuted by local public-private teams.

It is intended that local stakeholders take operational and financial responsibility forthe SPI Platform after a two-year Convergence Program involvement.

The Convergence Program has been active in Albania, Bulgaria, Croatia andRomania. It has ongoing discussions in Moldova and Serbia. Its mandate, renewedin December 2007, ends in 2009.

The Convergence Program

Financial Modernization

“Financial modernization refers to the process of financial innovation and organizational improvements in the financial system that reduces asymmetric information, increases the completeness of markets, increases opportunities for agents to engage in financial transactions through contracts, reduces transaction costs and increases competition.”-Gertrude Gumpel-Gugerell, European Central Bank Executive Board Member.

A Financial Modernization Framework

ILLUSTRATIVEMARKET

SEGMENTS

SOURCES OF MARKET EFFICIENCY GAINSDecrease in asymmetric information

Completeness of the market

Increased opportunities to

engage in financial

transactions

Reduced transaction

costs

Increased competition

Corporate Lending

Retail Lending

Savings Products

Payment Services

Large Number of Regulatory Change

Opportunities

Source: Framework drawn from ECB, Financial Integration Report, 2008 and ECB official speeches.

INSTRUMENTS TO INCREASE FINANCIAL EFFICIENCY

Illustrative (better) market outcomes

• More lending to SMEs

• More mortgage lending • Enlargement of banks’ client base

• More customer oriented pricing policies

Sources of inefficiency

Lack of competition

Informational asymmetries

Incompleteness of markets

Lack of opportunities of engaging in fin. transactions

Transaction costs

Illustrative sources of efficiency gains

• Increase of firms’ financial statement transparency

• Increase of credit history disclosure

• Provision of collaterals

• Modernization of legal systems / procedures

• Improvement of financial market responsiveness to real economy needs

• Increase of market participants’ information

• Increase of the number of financial markets

• Increase of payment / settlement systems’ efficiency

• Increase of on-line banking services

• Reduction of administrative costs

• Moderniza-tion of antitrust regulation

• Antitrust supervision

• More financial products available to exporting firms

Illustrative instruments

• Financial statements’ certification

• International accounting standards

• Information sharing facilities

• Credit bureaus• Guarantees (public

and personal)

• Regulation• Courts / Judges / Judicial

procedures• Investors’ / creditors’

protection• Tailored financial

products / services• Simple standardized

financial contracts / operational procedures

• International core principles for payment / settlement systems

• Payment / Settlement infrastructures / procedures

• Compliance / Security / Transparency costs

• Stamp duties

• International antitrust criteria

• Antitrust legal procedures

• Antitrust authority

• Licensing procedures

• Market liberalization / transparency

• Modernization of financial markets’ regulation

• Supply of innovative financial products and services

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The Financial Modernization Challenge

Source: Marco Spallone, “Conceptual Framework to Assess Financial Modernization Needs”, Bari, 7 Nov 2008.

Financial Modernization Challenges Illustrative Comparative Dimensions

Financial Stability• Authority vested in a small number

of institutions• “Risk prevention” focus• Codified best practice

(international standards & codes)• “Super-equivalency” approach• Regulation and supervision

mutually reinforcing• Core sovereignty responsibility• “Better Regulation” creates more

accountability

Financial Modernization• Authority dispersed across

many institutions• “Enabling” focus • No established conceptual

framework• Close institutional coordination• Limited monitoring feedback• Users’ bottom-up advocacy

necessary• “Better Regulation” necessary

but not sufficient to capture available efficiency gains

How To Catalyze Modernization?

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SPI Public-Private CommitteeMinistry of Investments - Central Bank – FSABanking Association - Consumer Protection

Public and Private Experts

Project Manager 1

Project Owner 1

Public and Private Experts

Project Owner 2

Project Manager 2

Public and Private Experts…

Project Manager N…

Project Owner N…

SOLUTION FINDING (Through RIA-based public-private consultations)

PROGRAM SETTING, SOLUTION ENDORSEMENT AND ENACTMENT MONITORING

Governance: The SPI Platform

SPI Secretariat

Project Working Group 1 Project Working Group 2 Project Working Group N

PROJECT MANAGEMENT AND CONSENSUS-BUILDING

2007 SPI Romania ActivityFinancial Impact of Finalized SPI Projects (€ Mln) – First Full Year

10

Volume Impact (% of 2007 target)

Additional Lending Volume

0

10

20

30

40

50

60

70

80

90

0 170 220 240

Debit InstrumentsAML

Rural Lending

IFRS

Law on Safety

Bank Ombudsman

Cos

t Sav

ings

Cost S

avings Impact (%

of 2007 target)

82%73

236

Databases

134

99%

Positive Information

Total number of projects: 14(updated October 2008)

Self regulatory actions completed1. Expansion of positive information

sharing2. Ombudsman3. Mortgage loan servicing and loss given

default databases4. Consumer financial education5. MiFID6. Credit exposures stress testing

techniquesRegulatory changes completed7. E-processing of debit instruments8. AML Law Amendments9. Rural Lending

Regulatory changes underway10. Law on goods safeguard, values and

persons protection 11. IFRS loan loss provisioning

Proposals to be completed in 200812. Law on bank letters of guarantee13. Roland Berger study

Abandoned14. Credit rating agencies

Source: SPI Romania 2007 Annual Report

SPI Romania Has Mobilized > 120 Experts• National Bank of Romania• National Authority for Consumers Protection • Ministry of Economy and Finance• Ministry of Agriculture and Rural Development• Ministry of Interior and Administration Reform• Anti-Money Laundering Office• TransFonD• Credit Bureau• National Authority for the Supervision of Personal

Data Processing • Rural Credit Guarantee Fund• Grading Commission for Comestible Seeds • Romanian Commodities Exchange• Romanian Stock Exchange• National Securities Comission• The National Association for Consumers’ Protection

and Promotion of Programs and Strategies from Romania

• Italian Banking Association• OECD• International Finance Corporation• World Bank

• Romanian Banking Association• Raiffeisen Bank • Raiffeisen Banca pentru Locuinţe• OTP Bank• Banc Post• CEC• BCR• Alpha Bank• BRD-GSG• UniCredit Ţiriac Bank• RIB Romanian International Bank• Credit Europe Bank• ING Romania• Citibank• ABN AMRO• ATE Bank Romania• Coface Romania• Cargill• KPMG • Deloitte• Clifford Chance• Algoritmics• Bearing Point• Financial Ombudsman Service, UK• Goodwood Financial Consulting

SPI Albania Project Working Group MembersN

oPROJECT Project Management Group Project Working Group

Project Owner Project Mgr Deputy PM

1. Improving auction procedures for immovable collaterals under foreclosure

Seyhan PencapligilBKT (G3)

Veronika Prifti

BKT (G3)

Rudina GorishtiBoA

Andin Jakova - ICB (G1); Arta Taipi – UBA (G1); Alban Mehmeti

-EB (G1); Erion Lena - AB (G2); Andon Daka - CB (G2); Ermal Dobi -TB (G3); Rudina Ziu - RB (G3); Dorina Mehmeti -

IFC;Petrit Qarri – MoJ; Mirela Behluli - Appraisers’ Association; Kimmo Vikman - EURALIUS

2. The impact of the banking regulations on the IFRS implementation.

Indrit BankaBoA

Miranda RamajBoA

Armand Muharremi

PB (G2)

Merita Musliu, Eralda Gurga -EB (G1); Zinaida Cako - ICB (G1);Florian dervishi – FIB (G1); Albana Hallvaxhiu - PB (G2);Ilda Markollari - AB (G2); Elvira Tartari, Adela Leka – PCB (G2);Rezarta Kocollari – NBG (G2); Julia Manushi - RB (G3); Skender Emini - BKT (G3); Adela Xhemali, Silvana Osmani -ISPB (G3);Ilir Pustina – BoA; Arben Zace – MoF; Kledi Kodra – PWC;Romira Hoxha – KPMG; Nuriona Sokoli – Deloitte; Lyela Rama – AMF; Lirola Keri – NAC; Teit Gjini – Ernst &Young

3. Reducing cash transactions Oliver WhittleRB (G3)

Robert Wright

RB (G3)

Elivar GolemiBoA

Jonida Vaso – UB (G1); Elird Qendro, Mirela Pekmezi – BIS (G1);

Griselda Cela – CB (G2); Liliana Nanaj, Suela Totokoci – ISPB (G3) ;

Amalia Zerri, Kamelia Paskali – AMC ; Anila Celiku –Vodafone;

Arben Zace – Ministry of Finance

4. Reviewing the Capital Adequacy Regulation

Indrit BankaBoA

Miranda RamajBoA

Adela XhemaliISPB (G3)

Admir Ramadani - FIB (G1); Adela Leka - Pro Credit (G2); Brunilda Jacovi - NBG (G2); Entela GJyzari - Banka Popullore (G2); Jola Dima - ISPB (G3); Altin Koci – ICB (G1); Plator Ulqinaku – UB (G1); Majlinda Gjata – RB (G3); Elsa Peca, Persefoni Pepa – PCB (G2)Merita Musliu – EB (G1); Dimitrios Kakaunis, Artiola Agalliu –AB (G2); Sokol Pellumbi – BKT (G3); Rajmond Povaci, Aleko P l TB (G3) E i C i (B A)

European Central Bank CRITERIAAsymmetric information

Completeness of the market

Increased opportunities to engage in financial

transactions

Reduced transaction costs Increased competitionItalian

Banking Association CRITERIA

Business development

1.Corporate /consumer lending2. Scoring card system for individuals

3. Stock exchange4. Leasing transactions5. Securitization6. AAB Strengthening 27. Consumer credit

7.Agricultural lending8. Lending to tourism9. Lending to municipalities10. Mortgage loans11. Structural lending12. Lending environment13. Lending to PPPs 29. FX open positions

14. Strengthening bank staff

Industry competitiven

ess

15. Credit risk in consumer lending16. Better credit risk management17. KYC policies

28. Corporate governance and requirements for their administrators

18. Expansion of banks activities30. Revising capital adequacy regulation

19. Reducing cash transactions20. Improving auction procedures for immovable collateral under foreclosure21. AML reporting22. Write-off of bad debts23. Account stopping31. Reviewing guidelines on banks’ liquidation32. The impact of IFRS Implementation on the Banking Regulations 33. Harmonizing accounting policies

Industry reputation

34. Improving access to basic banking products

24. Financial ombudsman

25. “Effective” interest rate (EIR) 26. Consumer financial education35. Enhancing financial consumer’s protection

Projects Undertaken: BOA Proposals; AAB Proposals; Possible Future Projects

SPI Albania 2008 Modernization Program

January 2008 Bank of Albania and Association of Albanian Banks send Joint Commitment Letter to Convergence Program

January SPI Seminar with banking community Jan-Mar Regulatory Impact Assessment ProgramFeb-Mar Consultations to build Activity Program

SPI Secretariat recruitment and training15 May SPI Secretariat starts working10 June First SPI Committee meeting

Approved SPI Albania 2008 Activity Program (6 projects)Approved SPI Committee Operating Guidelines

19 June 4 Project Owners appointed25 June More than 50 Project Managers and

Project Working Group members appointedOctober 2008 Three regulatory proposals completedDecember 2008 Parliament enacts two laws

Launch Steps: The SPI Albania Example

SPI Platform Benefits• Public-private governance and “Better Regulation”

tools significantly extend country’s reform capacity– SPI Committee becomes country’s reform “champion”

• Inter-agency coordination with intermediaries and users– Market participants feedback on efficiency opportunities

• Subject to authorities’ non-objection – A “Better Regulation” Technical Secretariat

• Valuable project management expertise• Focus: Extract value from domestic public-private expertise

– Best use of international experts– Reform teams strengthened with industry expertise

• Authorities participate in analytical process• Efficient processing of large modernization program

– 10-15 key projects/year (€20k/project)– Operating costs: 0.5% of annual gains for banking sector

• SPI Platform domestic sustainability is possible