Document of

The World Bank

Report No: 24145-PAK

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 21.3 MILLION(US$26.5 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

BANKING SECTOR TECHNICAL ASSISTANCE

May 14, 2002

Finance and Private Sector Development UnitSouth Asia Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 2002)

Currency Unit = Pakistani Rupees (Rs)Rs 1.00 - US$0.0167

US$1.00 = Rs 60.00

FISCAL YEARJuly 1 -- June 30

ABBREVIATIONS AND ACRONYMS

ATM Automated Teller Machine HR Human ResourceBSAL Banking Services Corporation ICB International Competitive BiddingBSC Banking Services Corporation ISSP Information System Strategy PlanBSRPP Banking Sector Restructuring and IT Information Technology

Privatization ProjectCAL Consultancy Associates Ltd. KYC Know Your CustomerCAS Country Assistance Strategy NAB National Accountability BureauCIB Credit Information Bureau NBFI Non-Bank Financial InstitutionCNS Control of Narcotic Substance NCB National Competitive BiddingDFI Development Finance Institution NIBAF National Institute for Banking and FinanceECW Economic Crimes Wing NIFT National Institute of Financial TransactionsERP Enterprise Resource Package RTGS Real-Time Gross SettlementFATF Financial Action Task Force SBP State Bank of PakistanFIA Federal Investigation Authority SECP Securities &Exchange Commission of PakistanFSAP Financial Sector Assessment Program TABS Banking Sector Technical Assistance ProjectFSDIP Financial Sector Deepening and TOR Terms of Reference

Intermediation ProjectGOP Government of Pakistan UNDB United Nations Development Business

Vice President: Mieko NishimizuCountry Manager/Director: John W. Wall

Sector Manager/Director: Marilou Jane D. UyTask Team Leader/Task Manager: Mudassir Khan

PAKISTANBANKING SECTOR TECHNICAL ASSISTANCE

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Summary

1. Project components 72. Key policy and institutional reforms supported by the project 123. Benefits and target population 134. Institutional and implementation arrangements 13

D. Project Rationale

1. Project altematives considered and reasons for rejection 142. Major related projects financed by the Bank and other development agencies 143. Lessons learned and reflected in the project design 154. Indications of borrower commitment and ownership 155. Value added of Bank support in this project 15

E. Summary Project Analysis

1. Economic 162. Financial 163. Technical 164. Institutional 175. Environmnental 186. Social 187. Safeguard Policies 19

F. Sustainability and Risks

1. Sustainability 19

2. Critical risks 193. Possible controversial aspects 21

G. Main Credit Conditions

1. Effectiveness Condition 212. Other 21

H. Readiness for Implementation 21

1. Compliance with Bank Policies 22

Annexes

Annex 1: Project Design Summary 23Annex 2: Detailed Project Description 27Annex 3: Estimated Project Costs 38Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 39Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 40Annex 6: Procurement and Disbursement Arrangements 41Annex 7: Project Processing Schedule 53Annex 8: Documents in the Project File 54Annex 9: Statement of Loans and Credits 55Annex 10: Country at a Glance 58

MAP(S)IBRD 28419

PAKISTANBanking Sector Technical Assistance

Project Appraisal Document

South Asia Regional OfficeSASFP

Date: May 14, 2002 Team Leader: Mudassir KhanCountry Manager/Director: John W. Wall Sector Manager/Director: Marilou Jane I). UyProject ID: P074797 Sector(s): FS - Financial Sector DevelopmentLending Instrument: Technical Assistance Loan (TAL) Theme(s): Financial Sector

Poverty Targeted Intervention: N

Project Fifiancing,Data -[ ] Loan [XI Credit [ ] Grant [ ] Guarantee [ Other:

For Loans/Credits/Others:Amount (US$m): 26.5

Proposed Terms (IDA): Standard CreditGrace period (years): 15 Years to maturity: 30Commitment fee: 0.00-0.50%; effective rate 0.00% Service charge: 0.75%

Financing P,lan (US$m): i: . tSou j-,' t,ocal, Foreign TotalBORROWER 3.80 0.00 3.80IDA 0.00 26.50 26.50Total: 3.80 26.50 30.30

Borrower: ISLAMIC REPUBLIC OF PAKISTANResponsible agency: STATE BANK OF PAKISTANAddress: Central Directorate, I.I. Chundriyar Road, KarachiContact Person: Kazi Abdul MuktadirTel: 21-9217212 Fax: 21-9217222 Email: kazi.abdulnuktadir@sbp.org.pk

Estimated Disbursements ( Bank FY/U;S$m):FY' 2003, .- 2004 , 2005, ,,0i6 -

Annual 9.00 8.00 6.00 3.50Cumulative 9.00 17.00 l 23.00 26.50

Project implementation period: 4 yearsExpected effectiveness date: 07/01/2002 Expected closing date: 06/30/2006

MS PAD Fpm R - DadS 2W0

A. Project Development Objective

1. Project development objective: (see Annex 1)

The Banking Sector Technical Assistance Project (TABS) is a follow on of the ongoing FinancialSector Deepening and Intermediation Project (FSDIP), which will be closing in June 2002. TABSwould support completion of the restructuring measures already initiated under FSDIP as well ascomplement broader reforms in the financial sector supported by the Bank and other donors. Theproject will assist State Bank of Pakistan (SBP) in its restructuring program of transforming thecentral bank into a highly professional, efficient and modem institution. The primary objective beingthat the central bank of the country becomes fully equipped to play a meaningful role in the economicdevelopment of Pakistan. The restructuring measures supported under the project include:

(a) Improving the standards and quality of personnel, providing employees an opportunity to workwith modem techniques/tools through enhanced training and re-aligning the bank's training policieswith international best practices for staff development,(b) Modernizing the operations of the State Bank by automating processes through use of technology,networking and communication tools and establishing linkages with the banking sector and theMinistry of Finance for improved functioning,(c) Streamlining and strengthening the payments system for improved, safe, efficient and affordabledelivery of financial services across the country,(d) Carrying out a study and supporting further strengthening of the credit information system in thecountry in order to provide better quality and wider access to financial information to allstakeholders,(e) creating awareness and strengthening regulators and enforcers for prevention of money launderingand financial fraud,(f) strengthening and building capacity for banking sector regulation and policy making, and(g) supporting the privatization of the nationalized commercial banks, specifically, Habib Bank Ltd.

FSDIP has supported the State Bank of Pakistan over the last six years in improving its functioningas a regulator. The supervision of banks was considerably strengthened with development of newrules and procedures and the hiring and training of personnel in specialized areas. Manual functionswere automated and existing systems upgraded through state of the art technology. In addition, SBPtook a number of additional initiatives to further build its capability for effective regulation andmanagement of monetary policy (details of past and ongoing reforms are provided in Section B-2).

2. Key performance indicators: (see Annex 1)

* More qualified, competent and skilled staff at SBP.* Compensation, rewards and promotions at SBP based on performance evaluation and linked

to the market.* Improved systems, accessibility and flow of information within SBP and with the banking

sector.* Implementation of a special purpose Real-Time Gross Settlement (RTGS) system to process

large value and time critical transactions without risk and the extension of low valueelectronic clearing systems to cities other than Karachi.

* Comprehensive assessment of the existing credit information systems completed.* Enhanced capacity for supervision and enforcement of money laundering regulations.

Increased awareness in the financial sector on money laundering, its adverse impact and

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consequences.* Due diligence for Habib Bank privatization completed.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 22219-PAK; May 16, 2001 Date of latest CAS discussion: 06/12/2001

The overarching objective of the Pakistan program is to reduce poverty through investing in people,raising productivity, and promoting sustainable economic growth. This is to be attained by achievingmacro economic stability, improving resource allocation, enhancing human development, nurturing acompetitive environment for private investment and promoting better governance.

CAS recognizes the importance of a strong financial sector to support private sector developmentand economic growth. It indicates the need for further improving health of the financial sectorparticularly the country's commercial banks and development finance institutions. Moreover, furtherstrengthening of the supervision of banks and enhancing the institutional capacity of SBP will also beachieved. As the financial sector deepens with new and more complex products and processes by theadvancements in technology and seivice and intermediation capacity develops, it becomes critical tostrengthen the institutional infrastructure of the central bank and the broader financial sector. Theproposed project aims to reinforce the foundations of the financial sector by strengthening theregulator (both in terms of its humran resource skills as well as its technological base), enhancing therole of credit information, strengthening the national payments system and establishing deterrents tofinancial fraud and money laundering.

The Banking Sector Technical Assistance Project (TABS) is directly in accordance with CASobjectives to support a safe and sound financial sector, its rehabilitation and privatization as well ascontinued assistance for the strengthening of SBP. The project also reinforces broader reforms in thefinancial and banking sector and the recently prepared Banking Sector Restructuring andPrivatization Support Project.

2. Main sector issues and Governinent strategy:

The Government in the mid 1990's undertook the first wave of reforms to address vast governanceproblems of the financial sector, particularly in the state owned banking and development financeinstitutions (DFIs). This was done with objective of replacing the present system with one that is largely inprivate hands and one which operates in a strong regulatory environment. Since then, the Government hasbeen pursuing reforms in the financial sector with the support of the Bank and other donors. As a part ofthese reforms, parallel initiatives were taken to make the State Bank more independent and build itsregulatory and supervisory capacity.

Recent Initiatives for Change/Improv ments:

The Technical assistance provided to SBP under FSDIP in the last six years has been responsible forbringing about a considerable change at SBP. More importantly it has initiated a process of institutionbuilding hitherto ignored. A significant part of FSDIP project was accomplished through a long- tennconsultancy provided by Arthur Andersen. The project assisted SBP in: improving its managementstructure; strengthening banking supeivision through development and adoption of modem bankexamination techniques and training of existing and new qualified staff in this area; introducing computertechnology and preparing an Information System Strategy Plan (ISSP) for automation of SBP

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headquarters, regional and branch offices, and establishing linkages with the banking sector; and buildinggeneral staff capacity through training. The support has brought about radical changes in supervisorymethodology and a significant change in the quality of supervision. The process is now institutionalized andsupervision are carried out based on internationally recognized CAMELS framework for evaluation ofrisks inherent in banking activities. It involves conducting continuous off-site monitoring to identify thoseinstitutions which reflect high probability of financial difficulty for early detection leading to timelycorrective actions. Now, the State Bank's on-site inspection reports are far more specific and focused andfacilitate specific and targeted remedial actions. Institutions given adverse ratings are required to submittime bound action plans. Recent action on Indus and Prudential banks is an example of the bank's newenforcement policy. The qualitative improvements in the bank's inspections were confirmed in the feedbackreceived from the banking sector. This was reported in the Bank's financial sector update of May 2000.IMF - report of Monetary and Exchange Affairs Department, April 2001, also validated improvements inSBP's operations and governance related to autonomy, foreign exchange and monetary management, andcompliance with International Accounting Standards.

Human Resource Development Initiatives:

Although the State Bank has improved considerably, it is still a long way from becoming a modem and aneffective central bank. With a change in the management in January 2000, SBP initiated the second wave ofreforms. These included:

(i) Cabinet's approval of an ordinance to divide the State Bank's set-up into two - the core central bank with1,200 professionals focusing on the monetary policy, supervision and regulation of the financial sector,foreign exchange management and payments system and, an independent subsidiary, the Banking ServicesCorporation (BSC). The BSC consists of 6,500 staff, and is responsible for retail and treasury functions atthe 16 branch offices. Headed by a separate Managing Director, BSC has relieved the Governor and thesenior management to focus on core functions;

(ii) intiatives to improve the skill base of SBP personnel by further training and skill enhancement, for thoseuninterested or beyond training the early retirement scheme was offered twice. The first scheme for staff of25+ years service, achieved a take up of 338. The second for lower level employees with 20+ years serviceachieved further reduction in staff by 490. All subsequent vacancies in the non-clerical and clericalpositions were abolished (reducing the ratio between support and professional staff) and the anticipatedsubstitution of quality among the professionals;

(iii) SBP tapped the private sector and inducted more then 35 staff directly from the market at senior andmiddle management levels including: an Economic Adviser, an IT Project Manager, Chief Treasury Dealer,Director Exchange Policy, Director Accounts, and Director Audit. In addition, Additional Directors lookingafter the audit and accounts departments are experienced professionals recruited through a competitiveprocess. More than 30 Division Chiefs, i.e. middle level managers, in the 12 core departments wererecruited directly from the market, through a merit-based open process. The direct recruits now accountfor more than 60 percent of all officers in this category, as compared to about 20 to 30 percent, two yearsago. In September 2001, a very senior private sector banker was appointed as Deputy Govemor (banking);

(iv) the National Institute for Banking and Finance (NIBAF) has been restructured as an independentsubsidiary to focus on training and skill development of staff at SBP. Entry level banking officers aretrained at NIBAF and subsequently on the job before being assigned to various departments. A large scaleprofessional and managerial retraining program was initiated for all levels of staff and although promotionsare based on performance at work they are also explicitly linked with performance at training courses.

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Foreign training for skill up-gradation was intensified and twining arrangements were reached with BankNegara (central bank of Malaysia) and FSA, UK; and

(v) SBP contracted services of senior ex Bank staff and other professionals including a Human ResourceAdviser from Bank Negara to assist in restructuring, capacity building and business process re-engineeringof SBP.

Introducing information technologyL

In the area of IT, while some of the manual systems were earlier computerized, SBP's technological baseremained weak, making it difficult for the information to flow within and outside the organization. TheISSP study had recommended a complete automation of SBP functions to enhance the overall efficiency ofthe institution and to improve the control systems both internal and external, which are crucial for optimumfunctioning of cental banks. Implementation of ISSP is underway integrating a complete managementinformation system, and includes: (i) a Banking Solution, (ii) Enterprise Resource Package (ERP) foraccounting, human resources, payroll, procurement, inventory and asset management system, (iii) settingup a central Data Warehouse to provide a single source of organizational data, and (iv) networking of allSBP offices and the banking system. Without this level of automation the cental bank would not be in aposition to perform its role as a vi:gilant and effective regulator in this fast changing environmnent led byadvancements in technology.

Improving electronic clearing services:

Although electronic check clearing services were introduced by the private sector in 1996, by theestablishment of National Institute of Financial Transactions (NIFT). The banking sector, however, did notreadily exploit the advantages of these services. Consequently, these services remained limited to Karachi.It was only recently when all of the commercial banks adapted electronic clearing services, that the clearinghouse started its services in Lahore and is now planning to expand to all other major cities of the country.While these are positive developments, SBP and the commercial banks recognize that substantialweaknesses exist in the present system concerning both the design and availability of services andgeographical coverage. Weaknesses in the national payment system can be a source of substantial risk andlack of confidence in the banking system. SBP plans to counter this by introducing an appropriate largevalue real-time gross settlement syitem to mitigate risk and support private sector in extending low valueelectronic clearing services outside the main population centers.

Strenghening regulatory framework:

The State Bank undertook a review of the financial sector in/ over the past 18 months. The focus was onassessing market needs, regulatory constraints and institutional weaknesses in the system. The reviewshowed that, because of the regulatory constraints the sector was fragmented with a multitude of small andweak institutions thereby limiting the competition within the system. Consequently, SBP has taken severalmeasures: (i) increasing the minimlm capital requirement for banks and non-bank financial institutions(NBFIs), (ii) rationalizing the legal and regulatory framework for NBFIs, and (iii) restructuring of thedevelopment finance sector. SBP also intends to continue working for under-served sectors of the economy.

In May 2001, the State Bank requested a follow-on/continuation of the technical assistance project tosupport the ongoing institutional reiorms and other restructuring measures that are discussed in detail underSection-C.

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3. Sector issues to be addressed by the project and strategic choices:

TABS will support the continuation of the second phase of the financial sector reforms and thetechnical assistance provided to SBP under FSDIP. As a technical assistance project, TABS focuseson institutional infrastructure development to strengthen the following areas:

1. Improving Functioning of SBP: Recognizing that an independent and effective central bank isessential for an efficient financial system, SBP took the iniative to reform itself These efforts weresupported by the Government and the Bank. Both, FSDIP and the Banking Sector Adjustment Loan(BSAL) assisted in bringing autonomy to the central bank and improving its skill and technologicalbase. To assess the impact of implemented reforms, the Bank carried out a review in May 2000which indicated that while SBP had come a long way, it required further restructuring and change insystems to be truly effective.

Learning from the international experience, it was decided to split SBP into a main central bank,which would focus on core central banking and an independent subsidiary to deal with retail bankingfunctions. SBP management also took the route of gradually changing its skill base through earlyretirement schemes and direct induction from the private sector and revised its HR policies to attractand retain quality staff. Best practice information systems were selected and are being introduced tomodernize processes and weed out non trainable and unskilled staff. Unions were restricted in theiroperations through change in law, which has allowed the central bank to introduce, a broad based'Change' initiative and professionalism in the institution.

2. Improving Financial Services: For a long time, there was hardly any innovation in development offinancial products and services. Manually operated paper based systems were in use for processingof payments This was not only time-consuming but left room for errors. To satisfy the requirementsof speed and reliability, SBP, in conjunction with commercial banks, worked towards automation ofcheck processing. However, there remained substantial weaknesses in the system with regard toavailability of services and geographical coverage.

SBP has engaged the services of a recognized consulting firm to design and acquire a suitable-largevalue electronic payments system. In addition, SBP along with the private sector is developing astrategy for extending low value, clearing services to locations other than Karachi, Lahore, andIslamabad. These systems will address these issues and foster development of new financial servicesby reducing risk, eliminating delays in clearing, and improving use of available money stock.

3. Credit Information on Potential Borrowers: Lack of credit information on both the corporates andconsumers clients, has been a constraint for financial institutions in making informed lendingdecisions. To facilitate accurate assessment of repayment probability and better allocation of credit,. acredit information bureau was set up in the country in 1989. However, while the mechanisms for datacollection and retrieval and the scope of data collected was improved over time, the extent andaccessibility of credit information remains limited. Moreover, these services remained with the StateBank, no initiative was taken by the private sector to provide these services on an organized basisexcept for a few private firms which have recently shown an interest in consumer related creditservices. SBP has made a conscious decision to improve its corporate credit information services andwill review international best practices for expanding the scope and allowing the private sector toprovide such services.

4. Preventing Financial Fraud: Financial fraud had become a systemic problem that was affectingthe country's financial system, in particular, the banking system. The regulatory framework and

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enforcement mechanisms of financial institutions were weak partially because of insufficient capacityand partially due to ignorance of the consequences and impact of fraudulent practices.

The project will assist SBP and the Securities and Exchange Commission (SECP) in strengtheningtheir capacity to effectively detect financial fraud and build awareness in the financial community forits prevention. In addition, the project will assist in enhancing capacity of the Economic Crimes Wing(ECW) and the judiciary to invesi igate fraud and enforce the law.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The six components of the Projecl: are discussed below:

Human Resource Development: Human Resource (HR) reforms initiated by SBP were/have beensupported under FSDIP in/over the past few years. The program covered all HR related policies anddevelopment of an HR management system with the objectives of:(i) reviewing and re-aligning policies of recruitment, training, compensation, performance evaluation,promotion and separation;(ii) strengthening the human resource base of SBP by attracting, retaining and motivating professionalstaff; and(iii) carrying out a comprehensive HR audit to identify and fill the skill gaps in relation to the existing andemerging functional needs of SBP. To achieve the first two objectives, a HR adviser from Bank Negara(Malaysia) was engaged to advise and undertake restructuring. In addition, Sidat Hyder (local counterpartsof Arthur Anderson) were hired last year for carrying out the audit.

The HR Adviser has done considerable ground work and designed several key policies, however, muchremains to be done particularly on the implementation side. It is planned that the HR Audit Team wouldpick up the work at the time when the HR Adviser completes her assignment in June 2002. Although theinitial task of Sidat Hyder was to review positions, prepare job descriptions and conduct job, skills andtraining needs analyses, its responsibilities have now been increased. This additional scope would besupported by the project and inclucles: (i) reviewing policies developed by the HR Adviser; (ii) identifyingsuitable compensation strategies and design; (iii) providing training in key soft skill areas such asbehavioral skills; (iv) assessment cf leadership capabilities; and (v) preparing a report on possibleredundancies and potential areas of further restructuring.

Training is essential for sustaining the reform process and has been given particular attention by SBPmanagement. TABS would continue to support these initiatives in the areas of: (i) Peoples Management;(ii) Performance Management; (iii) Team work and leadership programs; (iv) Change Management; and (v)acquisition of HR tools. This support is to ensure that the HR department is committed to adopting bestpractices in its human resource management.

Technology Up-gradation: This component would support completion of the automation project asdesigned in the Information Systerrm Strategy Plan formulated under the FSDIP. Technology enhancementwill allow regular flow of consistent information for the central bank to play a pro-active role in bankingsupervision and take timely actions when needed. The base infrastructure has been successfully installedalready at the head office, and initial deployment of the banking solution (Globus), ERP package (OracleFinancials) and the data warehouse are being implemented. In each of these areas, TABS would assist in

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the following:

Banking Solution - GLOBUS: As the main banking system, Globus will help SBP achieve; compliancewith international banking standards, availability of reliable information, ease of introducing new productsinto the market, as well as efficiency and controls. Significant progress has been made according to theproject plan and the project supports implementation and branch roll out of Globus with the followingadditional modules:1. Custom-built systems for export refinance and integration of currency, housing refinance window,

depository functions (loan floated by the government and special government bonds), and to take careof impact of subsidiary.

2. Roll out of Globus to SBP branches including mapping of staff, training and WAN connectivity.3. Assessment of Globus functionality to identify new processes and practices that may be implemented in

ERP.

ERP Oracle: ERP will integrate departrnental functions related to financial accounting, human resources,budgeting, payroll, procurement, inventory and asset management. Implementation has progressed wellincluding, completion of definition, operations analysis and solution design phases. Under the project, thefollowing activities would be supported:1. ERP changes needed to cater for the SBP and subsidiary split, including consolidation of accounts and

custom-built packages such as Oracle Alter Manager, Self Service Web Applications and OracleWorkflow.

2. Implementation of a self-service HR kiosk for the bank's staff and personnel.3. Implementation of an OLAP financial analyzer for end user reporting.4. Oracle workflow implementation.

Data warehouse: Data Warehouse is a central repository of information that provides comprehensive andhigh integrity data in a form suitable for decision support to end-users and to the decision-makers. In thenew technologically advanced environment, it has become essential that systems and data structures beredesigned for sustainability and scalability. The project supports implementation of the followingactivities:1. Initiating Business Process Reengineering of routine processes alongwith additional subject areas

including access to organizational data, interactive query, analysis and presentation of data, modelingand forecasting and object and multi-dimensional data analysis.

2. Conversion and flow of data from different applications into the data warehouse.3. Introducing custom-built packages such as OLAP Financial Services, Oracle Express Analyzer, Oracle

9itAS Clickstream Intelligence and Business Intelligence Beans.

Hardware and Networking: Significant progress has been made with 584 PCs deployed and five servers arein operation. Additional 219 PCs are being installed. Networking in SBP Karachi offices is completed to agreat extent including LAN and radio linked WAN between three offices. Reassessment duringimplementation deternined a requirement of 2804 nodes. This revision of requirements has brought aboutsignificant design change resulting in the enhanced scope of work in networking. In addition, the projectwould support:1. The procurement of 925 desktop and 120 laptop computers.2. 200 Network, 25 Personal and 10 High End Printers.3. Completion of LAN setup including cabling at Karachi Office.4. Connecting regional offices through VSAT, digital cross connect and dial up link - WAN.5. To ensure quality power supply power generators, voltage stabilizers, UPS and related infrastructure

will also be included in this component.

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Completion of the automation project includes expansion of the systems to 15 branch offices beyond theCentral Directorate and Karachi Office including; entire roll out of Globus, ERP/Oracle financial andnetworking of the branch offices.

Training and Change Management: The project team has successfully trained staff in oracle, Globus andO/A. Under the current plans further training programs on Oracle, O/A, networking and systems will alsobe conducted. This is, however, arn ongoing exercise and is extremely critical for this entire effort. Theproject would support completion of these training programs in networking and O/A, as well as conductingsimilar programs during transition and before switch over. In addition, the project will support changemanagement initiatives so that SBiP is fully prepared to accept the new systems and processes.

Strengthening and Streamlining the National Payments System: The payment instruments used inPakistan can be broadly categorized into cash and paper-based instruments. Paper-based instrumentscomprise checks, drafts etc. Since -the data on the usage of these instruments in Pakistan is currently notavailable, it is not possible to give exact ratios of cash payments and non-cash payments. The use ofelectronic payments such as Automated Teller Machines (ATMs) and Credit Cards is very limited sincethese facilities have been introduced very recently in the country by the commercial banks and are availableonly in major cities. However, these modem facilities are becoming popular among the people and demandfor modem services is growing.

Steps have already been initiated to address the well-recognized risk and efficiency weaknesses. Toreplace the existing old and manually operated paper based payment system with a modem one, thecommercial banks have established an organization that will be responsible for the automatedprocessing of checks. This initiative is being undertaken in collaboration with private sector investorsthrough establishment of a company - NIFT, that was established in October, 1996 as a joint ventureof six large commercial banks and private investors.

In January 2001 the BIS CPSS published a major report containing the Core Principles for SystemicallyImportant Payment Systems which provide a framework for assessing the degree to which the nationalsystems satisfy the requirements for speed, certainty, reliability, etc. Despite the actions that have beentaken to date - automation of check processing in a few main population centres - the SBP and thecommercial banks recognize that substantial legal, risk and efficiency weaknesses are present in theexisting systems.

The State Bank team has made excellent progress in preparing for execution of the payments systemimprovement component. Organizational arrangements have been put in place to ensure that all SBP andcommercial bank stakeholders have an opportunity to actively participate in the conceptual design of theenvisaged RTGS system and in its detailed specification. Consultancy Associates Limited (CAL) havebeen appointed as project consultanls that are asssisting SBP in acquiring an understanding of the relevantpolicy, organizational, technical and operational issues that need to be addressed in design of the RTGSsystem and its interface with Globus banking package that is now nearing completion. RTGS and Globusintegration will provide an opportunity for SBP to provide a model I Delivery versus Payment (DvP)capability for secondary market trading in govemment securities as well as a robust vehicle to provide arepo based intra-day liquidity to RTGS participants. This integration will also provide an appropriateinfrastructure for use by the market in developing a robust and secure inter-bank money market.

The acquisition and implementation of the above mentioned system will cover: (a) acquisition andinstallation of a comprehensive and robust RTGS system; (b) all necessary training of SBP and commercialbanks' operations, IT and treasury personnel; (c) services of a dedicated project manager and other

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advisory assistance during system implementation; (d) educational visits by relevant SBP personnel tocentral banks that have already installed a RTGS system to enhance understanding and increase confidence;and (e) specialist legal advice in establishing an appropriate legal infrastructure for the new systemensuring provisioning of final and irrevocable immediate settlement of payment instructions on an intra-daybasis.

Strengthening and Extending the Scope of Credit Information Bureau (CIB): The State Bank's CIBwas established in 1989. The mechanisms for data collection and data retrieval as well as the scope of thedata collected and maintained in the system data bases has been enhancing progressively, with the mostrecent improvements made in May 2001. The C1IB provides valuable and much needed service in a low costmanner to the credit community i.e. to both the users and providers. The existing system is semi automatedand relies on paper based input-output processes. Nevertheless, the information contained in the systemdatabase as well as in the technical platform used by the system has been improved over time in keepingwith the evolving needs of the participants for a more comprehensive information database.

The State Bank personnel are aware that the issues of policy, legal framework and operations surroundingthe design of credit information services, have recently received considerable attention throughout theglobal financial community and could be used to assess current systems at the State Bank, with a view toidentifying worthwhile and cost effective enhancements. The project has three main objectives: (a)strengthening the existing system and extending its scope to ensure that optimum benefits are provided toparticipants consistent with best intemational practice; (b) improving the knowledge and skills of a smallgroup of SBP specialists; and (c) enhancing the technical platform to provide a basis for an on-line secureconnectivity with the system users. High quality systems facilitate better overall allocation of credit in theeconomy, more accurate prediction of repayment probability, more accurate pricing and targeting of credit,more consistent and efficient application of credit policy, improved borrower discipline, increasedincentives to repay, and reduction in the potential for moral hazard.

Building Awareness and Strengthening the Regulators/Examiners and Enforcers for Prevention ofMoney Laundering and Financial Fraud: The State Bank and the Securities and Exchange Commissionof Pakistan are the regulatory and supervisory authorities for banks, financial (non bank) markets includingstock market participants, NBFIs, and insurance. These two authorities have initiated measures tostrengthen their in-house capacity/ competencies to control and prevent money laundering activities. Thecentral bank is already focusing on formulating rules and regulations to ensure compliance. Measuresinitiated so far include issuance of Prudential Regulations to banks, NBFIs Rules of Business, freezing ofaccounts, educating supervisory staff, communicating with Ministry of Finance and Ministry of ForeignAffairs on relevant issues and ensuring that banks and NBFIs have 'know your customer' (KYC) ruleswhich are strictly adhered to. Moreover, banks are assessed by the State Bank's on-site examniners whoevaluate the KYC policies and procedures of banks during their inspections. Deviations/ violations fromPrudential Regulations and Rules of Business are reported for necessary action. Banks/ NBFIs found inviolation can be penalized and proceedings may be instigated against the responsible officials.

Pakistan is an active member of the Asia Pacific Group on Money Laundering. The Anti Narcotics Forceand the National Accountability Bureau (NAB), (including the Economic Crimes Wing of the FederalInvestigation Authority - FIA) are investigation authorities engaged in prosecution of money launderingactivities. On the State Bank's initiative, a Working Group headed by the Ministry of Finance andconsisting of representatives of Ministries of Law and justice, Interior, SBP, SECP, NAB and FIA, hasbeen constituted to draft an effective and comprehensive legislation to provide for an institutionalframework for monitoring and regulating money laundering transactions.

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SECP has also taken several initiatives to counter money laundering activities/ practices includingrequirement of KYC policies for securities' market brokers. Plans to strengthen the systems for monitoringand surveillance of securities markets, broker licensing and certification criteria are underway. The needvigilant systems for disclosure requirements and standards is being emphasized with the overarchingobjective of creating awareness in the investor community. Moreover, training sessions and seminars willbe held to create awareness among key stakeholders, such as creditors and institutional investors.Workshops will be arranged under the auspices of major academic institutions, which will focus onsignificant corporate governance issues. For the benefit of public at large, brochures and guidelines will bepublished to develop their knowledge and understanding of the main perspectives and framework ofcorporate govemance and help the public assimilate its various dimensions.

Recognizing that a change in culture and mindset is critical to effectively implement these policies, capacityof all institutions involved needs to be strengthened. The project supports training of the essential staff ofSBP, SECP, AML unit of Economic Crimes Wing (ECW) of the Federal Investigation Authority, and thejudiciary. Enhancements in the existing computer systems for monitoring and record keeping would also besupported to improve the capability of enforcing these new policies.

Strengthening and Building Capacity for Banking Sector Regulation and Policy Making: SBP has,over the past few years, strengthened its capacity for effective regulation and development of the financialmarkets. This was achieved largely through training of essential staff and consultant support. Variousstudies were conducted in the areas of under served markets, market structure (including Islamic banking)and regulation of deposit taking/ non-deposit taking institutions. The study on under served sectors, in fact,led to a paradigm shift in the strategy for development banking sector. In addition, SBP took an initiativefor developing the housing finance market. This initiative was also supported by the Bank under which areview was carried out covering the role of existing market players and future prospects for the housingsector. TABS would support further work in these areas including small and medium enterprises, housingand rural finance.

The project would assist SBP and policy makers to keep pace with developments in global financialmarkets through participation in serminars and specialized training programs. It would support theprivatization of the nationalized conimercial banks. It would also assist in developing research capabilitieswithin the SBP and the Ministry of 'Finance (banking wing). Specifically, the project would finance: (i)provision of specialized training in "soft skills' areas, particularly management of change and culture; (ii)appointment of well-regarded senior level trainers from abroad to bring in new ideas to supplement intemalprograms and courses offered withiin Pakistan; (iii) taking part in intemational serninars and conferences;(iv) hiring consultants/ advisers to support training needs, IT and HR functions; (v) conducting studies fordevelopment of financial markets and services including a comprehensive diagnostic study on Habib BankLimited; and (vi) building capacity at the Ministry of Finance (banking wing) for strategy and policymaking to keep abreast of developments in the sector.

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The proposed project costs as well as proposed/indicative amounts of Bank financing for each component,are summarized below

.. ; -: n - - X a - Indicative' Bank- % of-Component Sector,- Costs . financing Bank-

,(US$M!l) Total - '(US$M): .financingHuman Resource Development Institutional 1.12 3.7 0.87 3.3

DevelopmentTechnology Up-gradation 16.63 54.9 14.78 55.8

System Reform &Capacity Building

Strengthening Payments System Financial Sector 5.00 16.5 4.50 17.0Development

Strengthening Credit Information Financial Sector 0.60 2.0 0.50 1.9Services DevelopmentAnti Money Laundering and Financial System Reform & 0.80 2.6 0.70 2.6Fraud Capacity BuildingStrengthening Banking Sector Capacity Institutional 4.65 15.3 3.65 13.8

DevelopmentContingency 1.50 5.0 1.50 5.7

Total Project Costs 30.30 100.0 26.50 100.0

Total Financing Required 30.30 100.0 26.50 100.0

2. Key policy and institutional reforms supported by the project:

The project primarily aims to transform the State Bank into a highly professional, efficient andmodem institution. This vision is to be translated into reality through a strategy of bringing aboutqualitative improvement in economic policy formulation, pro-active supervision and regulation of thefinancial institutions, prudent management of foreign exchange market and strengthening of thepayments system and associated oversight/supervisory/overseeing arrangements.

To date, sector policy reforms have been supported by projects such as BSAL, Banking SectorRestructuring and Privatization Project (BSRPP) and FSDIP. As FSDIP will be closing in June2002, a number of initiatives started under the project would continue beyond the closing of theproject. TABS is an effort to provide for completion of these initiatives and to strengthen institutionsto support the implementation of policies.

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3. Benefits and target population:

Benefits Target PopulationImproved human resource quality at SBP. Employees of the State Bank of Pakistan.

Modem technological base and sitnplified Employees of the State Bank, financial sectorbusiness processes for effective regulation. institutions and their customers.

Qualitative improvement in managing General public.monetary policy.

Pro-active supervision and regulatRon of the Financial institutions, corporate entities andfinancial markets. general public.

Improved payments systems for safe, secure Financial institutions and their customers.efficient and affordable delivery of financialservices.

Better quality and more comprehersive Financial institutions, consumer andinformation on consumer and corporate corporate entities, and the public.sector borrowing behaviors for improving theallocation of credit. A subsidiary additionalbenefit will be a more disciplined use ofcredit by private sector borrowers.

Heightened awareness of what constitutes Financial market players, corporate entitiesmoney laundering and associated penalties. and the public.

Increased capacity of regulators and SBP, SECP, ECW and judiciary.enforcers to prevent financial fraud andmoney laundering.

4. Institutional and implementation arrangements:

The Government of Pakistan will be the Borrower, which will pass-on proceeds of the loan to SBP,on grant basis. The State Bank will be the main implementing agency. The project will be managedby a Project Director, currently Director of Banking Inspection Department. However, three of themain components would have their owvn project managers due to the extended scope and complexityof the activities involved. These include: (a) the Human Resource Development component forimplementation of HR reforms in SB P, (b) the Technical Up-gradation component forimplementation of the IT project, and (c) the Payments Systems component.

The SBP project team would also be responsible for coordinating and managing utilization of fundsfor SECP, ECW, Ministry of Law and the Ministry of Finance under AML and capacity buildingcomponents.

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SBP would submit regular quarterly implementation progress reports for the project. It would alsocarry out a comprehensive staff survey after two years of project implementation. Results of thesurvey would be used for mid term review to assess impact of the project.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

The first alternative considered was to allow other donors (e.g. ADB, UNDP) to finance the proposedproject. This option was turned down as the Bank and ADB have in principal agreed to focus onseparate areas of work in Pakistan to avoid overlap. ADB covers the non banking sector while theBank has been supporting reforms in the banking sector including institutional strengthening of theregulator. UNDP did not have adequate funds to meet the funding requirements for the proposedreforms.

The other alternative of no further assistance was also considered. However, this was rejected notonly due to the importance of the institutional reforms being introduced but also to supportcompletion of the human resource restructuring as well as up-gradation of management informationsystems. Moreover, strengthening of the national payments system and credit information services -additional components of the TABS project, were regarded essential areas for improving the banking/business environment in Pakistan. Not supporting SBP at this critical juncture would jeopardizefuture reforms as well as undermine previous reforms introduced under the earlier projects.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Latest SupervisionSector Issue Project (PSR) Ratings

t(Bank-financed projects only)

Implementation Development

Bank-financed Progress (IP) Objective (DO)

Regulatory and market distortions and Banking Sector Restructuring HS HSweaknesses in the legal framework. and Privatization Project

Overall banking sector distress; weak Banking Sector Adjustment HS HSbanking regulation and supervision; Loanfinancial market segmentation;ineffective banking court system

Weak bank supervision department in Financial Sector Deepening and S Sthe central bank and lack of Intermediation Projectprivatization expertise in thePrivatization Commission _

Other development agenciesWeak institutional capacity. UNDP - Pakistan Action

Research and Development inGovernance and ManagementProject

Underdeveloped capital markets; weak ADB - Capital Marketsregulatory framework for capital Development Program Loan

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markets; poor performance ofstate-owned mutual funds.

Overall banking sector distress; weak OECF - Co-financing of BSALbanking regulation and supervision;financial market segmentation;ineffective banking court system..

1P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

1. Financial Sector Deepening and Intermediation Project - The project had two broad components:(i) a credit line for private financial institutions to meet foreign exchange requirements of project.financing; and (ii) technical assistance for the Central Bank, the Privatization Commission, theController of Insurance and the Securities and Exchange Commission (then Corporate LawAuthority) for capacity building and implementing policy reforms. The project design was complexand overly ambitious. The project had multiple objectives and did not have commensuratecommitment of the relevant stakeholders. As a result, the credit line remained un-utilized and theproject was restructured. The restructured technical assistance project was limited in scope to assistSBP in strengthening its regulatory and supervisory role, and the Privatization Commission inexecuting bank privatization. The component for Privatization Commission, however, did notproceed entirely satisfactorily due to external factors such as law and order and the investmentclimate in the country. The SBP component was successful in achieving its objectives.

2. TABS was designed based on the experience of FSDIP as a technical assistance project focusingon SBP. The design of the project is simple and there is demonstrated ownership and commitment ofSBP to implement (discussed in the following paragraph). The project will support implementation ofactivities started under FSDIP as well as a few other important initiatives. The project objective is toreform SBP and improve the environment of the financial sector.

4. Indications of borrower commsitment and ownership:

The State Bank of Pakistan (SBP) has already initiated the process to renew, build and strengthen itsinstitutional capacity. In February 2000, the Board of Directors approved a concept paper on futuredirections of SBP, which were formulated through a broad consultative process involving themanagement and staff, and was subsequently endorsed by top managers. The reform efforts have notonly continued over the last two years but their scope has been expanded to other important areas.The management team has been directly involved in the 'Change' process and meets every week toreview progress and resolve issues. It has taken the initiative to organize workshops at regularintervals on 'Change Management' to bring the staff on board for acceptability and successfulimplementation. The management has, in addition, openly communicated its intentions of improvingSBP and its commitment to complete the initiated reforms, to the public.

The Government has fully supported SBP in its efforts. The Cabinet approved the separation of SBPinto a core central bank and a banking service corporation. This is a major step forward indicatingthe resolve of the Government to continue reforms and improve the functioning of the Central Bank.The President in a recent address to the nation, recognized and appreciated the reforms undertaken bySBP and the role it has played in economic development.

5. Value added of Bank support in this project:

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SBP has made significant progress in initiating and implementing far reaching reforms to improve itscapacity as a regulator. Bank support under FSDIP has had a deep impact on SBP's supervisioncapacity through investment in its staff and information systems. This project would supportcompletion of the reforms initiated under FSDIP as well other initiatives for further strengthening thehuman resource base, streamlining and strengthening the national payments system and improvingthe quality and coverage of credit information services for a better banking/ business environment inthe country. In addition, the Bank has been involved in development of the banking sector in Pakistanfrom the beginning start of the liberalization and reform process and has supported similar initiativesin other developing countries. The Bank's extensive knowledge and experience in this area would behighly valuable in affecting change and facilitating implementation of SBP's reform program. Theproject would also complement broader sectoral reforms supported by the Government of Pakistanand other donors including the IMF and ADB.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):O Cost benefit NPV=US$ million; ERR = % (see Annex 4)O Cost effectiveness* Other (specify)There is no economic evaluation methodology for technical assistance projects. However, furtherstrengthening of SBP and enhancing the national payments system and credit information services in thecountry are likely to have a significant positive impact on financial sector stability, general businessenvironment and economic development.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)NPV=US$ million; FRR = %Investment in technology and people will result in effective functioning of the central bank and impactperformance of the financial sector. Although these gains are difficult to quantify, failure of financialinstitutions in the past and delays in recognition of these problems by the central bank have cost the countrybillions of Rupees. Strengthening and streamlining of the national payments system would result in reducedrisk, efficient use of the available money stock, improved confidence in the banking system anddevelopment of other financial services. In addition, strengthening the quality and extending coverage ofcredit information services in the country would facilitate better allocation of credit in the economy,improved borrower discipline, and reduction in the potential for moral hazard.

Fiscal Impact:

With enhanced capacity of SBP, the project is likely to result in fiscal space for the Government fromimproved monetary management and reduced risk of bank failure. Also, strengthening of the paymentssystem would result in better and more efficient use of available money stock.

3. Technical:The program would improve functioning of the central bank as a regulator of the banking system. Byenhancement in technology the program would also improve efficiency and monitoring skills. It willincrease the coverage of payment, clearing and settlement services and will assist in expanding therole of CIB.

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4. Institutional:The institutional arrangements for project implementation at SBP are organically grafted intoexisting line management for which there is strong management and institutional capacity enablingimplementation.

4.1 Executing agencies:

The State Bank of Pakistan will be the main executing agency for this project.

4.2 Project management:

A separate project management team has been setup within the State Bank to monitorimplementation. A Director of the State Bank who is also Director of Banking InspectionDepartment, will head the team. The project team will also submit regular quarterly progress reportsto the Bank.

4.3 Procurement issues:

Procurement arrangements are specified in Annex - 6. Procurement capacity of the State Bank willbe strengthened by the hiring of one individual procurement consultant for at least the first year ofthe project, and through training provided by IDA before and after the project's effectiveness.

4.4 Financial management issues:

The financial management system in place at the central bank is adequate and can generate requiredfinancial statements for the project. Hence, normal supervision by Bank missions is recommended. Theflows of funds and accounting process, which will be adopted for TABS, has been observed to beconsistent and accurate.

Accounts of the project would be rnaintained by the Intemational Organizations Accounts Section that isresponsible for accounting functions of projects financed by donors. The expenditure would be incurred byExpenditure and General Services Sections and SBP's Expenditure Regulations would be followed -jointsignatures are required for payments. All payments would be subject to pre-audit in the AccountsDepartment and post-audit by Intemnal Audit Department.

SBP Project Management tean is responsible for coordination between Project Managers of eachcomponent and SBP staff to facilitate the progress of the project.

Budgeting has been observed as a weak area in the overall financial management system. However, it hasbeen assured that arrangements would be put in place to produce and monitor detailed budget for theproject. Generally, the books of account are well kept and SBP's policies and working procedures foraccounting and financial reporting are adhered to. Internal control arrangements are by and large effective.

Disbursements: Reimbursement (of expenditure) against advance payments out of SBP's funds would bedone through Special Account to be maintained with National Bank of Pakistan, statements of which wouldbe regularly reconciled with the accounts. Disbursements would be made using transaction-basedprocedures.

Audit: SBP has been in compliance of the audit and financial covenants as far as the other projecl. it isimplementing - FSDIP. Audited financial statements have been received on time and auditors have givenunqualified opinion in respect of Project/SOE and Special Account for FSDIP. The auditors have given aqualified exception opinion on entily's accounts for FY'01 because of non-verification of assetsrecoverable from the Reserve Bank of India and accrual of profit on various facilities granted to the

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Agricultural Development Bank of Pakistan. However, this has no implications on the project. Anunqualified audit report has been received in respect of the Structural Adjustment Credit for which SBPwas the implementing agency.Projects financial statements and SOEs would be audited by a leading firm of Chartered Accountantsacceptable to the Bank.

5. Environmental: Environrnental Category: C (Not Required)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

There is no direct adverse-environmental impact of the project.

5.2 What are the main features of the ETP and are they adequate?

Not applicable

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

Not applicable5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

Not applicable

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

Not applicable

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The project is not expected to have any adverse social impact. The State Bank has already offeredvoluntary separation schemes (VSS) twice. The first offering was to staff with 25+ years service andthe second to staff with 20+ years service. The offerings were completely voluntary and the staffwere given additional incentives over and above their normal retirement benefits for separation/ earlyretirement. Any additional VSS schemes will also be on the same principle to minimize any hardshipfor staff choosing to leave.

6.2 Participatory Approach: How are key stakeholders participating in the project?

All policies of SBP are discussed with the stakeholders for their input, before implementation. Thisincludes financial sector institutions that fall under the regulation of SBP as well as SBP staff.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

This is a technical assistance project for institutional strengthening of the central bank and does not requireany consultations with civil society organizations.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

There are no social development outcomes expected from the project.

6.5 How will the project monitor performance in terms of social development outcomes?

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Same as above.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

Policy, ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes 0 NoCultural Property (OPN 11.03) 0 Yes 0 NoIndigenous Peoples (OD 4.20) 0 Yes 0 NoInvoluntary Resettlement (OP/]BP 4.12) 0 Yes * NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes 0 NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

It was determined that the project does not have a direct adverse environmental impact.

F. Sustainability and Risks

1. Sustainability:

Sustainability of reforms is assured by commitment of the top management at SBP and GOP as wellas by bringing about a fundamental change in the functioning of SBP. The way of doing business hasbeen changed and improved by modernizing systems and processes. This, augmented by a change inmind set which is being brought about through workshops, seminars and training, will ensurecontinuity and permanence of the reform process. SBP is striving for right skills and quality instaffing, state of the art information systems and best practice in HR policies and procedures to be amodem and effective central bank.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveSBP management and staff are not able to S Greater cormmitment at all levels andaffect 'Change'. dissemination of 'Change' initiative for better

understanding and acceptability.

Staff are not ready or willing to accept M Communicating the new vision for thenew assigned roles. organization and benefits of the improved

processes and systems. Training to develop staffcapability.

Business process re-engineering is not M SBP is already conducting regular workshopstimely or effective. End-users are not for acceptance to change and benefits of the newadequately trained and do not adopt new systems. Staff need to be directly involved inprocesses. redesigning of business processeses. Scope and

frequency of training enhanced for staff at all

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levels.

Compatibility, reporting and linkage N Organizational arrangements have been put inissues for RTGS implementation are not place to ensure that all SBP and commercialresolved. bank stakeholders actively participate in the

system's design and specification process.

SBP management does not implement N Changes to strengthen and enhance the role ofrecommendations for strengthening credit credit information services are already underinformation services. discussion both internally and externally with

the private sector. The scope likely to be takenover by the private sector over time.

Lack of cooperation by financial sector M Conducting workshops and seminars forinstitutions to effectively implement stakeholders to raise awareness on issues relatedpolicies for prevention of money to money laundering and financial fraud and itslaundering and financial fraud. consequences for the institutions and the

country.From Components to OutputsPolicies and training not effective in M New policies and procedures are already beingretaining and/or attracting quality staff. implemented and quality and skill mix isWeak capacity of HR department to undergoing change. Additional focus on skillimplement new policies and sustain development including 'soft skills', careerchange. progression policy and recruitment of qualified

professionals.

Delay in deployment of new systems. M SBP project team is working with the vendors toensure timely deployment and transfer ofknowledge.

Delay in appointrnent of fimn to M Consultant to assist SBP finalize design andimplement RTGS. specifications for the system already on board.

Consultants are also helping SBP preparebidding documents for hiring of firm toimplement RTGS.

Hiring of consultant to study credit N SBP is already preparing terms of reference andinforrnation services delayed. procurement of these services is being

advertised.

Inadequate response of stakeholders to M SBP/SECP are in the process of raisingparticipate and benefit from trainings on consciousness on the importance of preventingmoney laundering. money laundering and financial fraud through

discussions with financial sector institutions.

Trainings received by staff and N SBP has made NIBAF (the training center)management are not effective. independent under new management. A

comprehensive plan for training is underpreparation which includes participation oftrainers from abroad tb supplement local

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trainers/ training institutes as well as trainingthe trainers.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

None

G. Main Loan Conditions

1. Effectiveness Condition

1. The standard condition for credit effectiveness is the submission of a legal opinion confirming that theDevelopment Credit Agreement and the Project Agreement have been duly authorized or ratified by theBorrower and SBP, respectively, and are legally binding upon the Borrower and SBP, respectively.

2. The Government and SBP will enter into a Subsidiary Grant Agreement.

2. Other [classify according to covenant types used in the Legal Agreements.]

The FMRs requirement for TABS would include financial statements, physical progress reports andprocurement reports for project monitoring. SBP will provide the following quarterly financial statements:

1. Sources and Uses of Funds2. Uses of Funds by Project Activity3. Output Monitoring Report4. Procurement Monitoring Report

In addition, SBP will also prepare progress reports on a quarterly basis. These reports would reflect thelinkage of financial information with the progress of the project. The IOAS maintains expenditure ledgerand fixed asset ledger where expenditure is recorded under each component. The formats of the followingFinancial Monitoring Reports and annual audited financial statements have been discussed and agreed withthe International Organizations Accounts Section. Contents of the FMiRs would be agreed at negotiations.

H. Readiness for Implementation

O 1. a) The engineering design docurments for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

[1 4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

12 1. This project complies with all applicable Bank policies.D 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

uda 1han arilo ane D. Uy Jo W. Wa1Team Leader Sector Manager/Director Country Manager/Director

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Annex 1: Project Design SummaryPAKISTAN: Banking Sector Technical Assistance

, .Ke ' Pdrformance Data Collecti'onStrategyHierarchy of Objectives Indicators .. -Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Building an environment for Improved functioning of the Regular reports and feedback Commitment to continueprivate investment and State Bank of Pakistan, from SBP, the banking sector implementation of thesustainable growth through an increased efficiency of and private sector businesses. restructuring measures at allefficient financial sector and a financial transaction and levels and true autonomystrong and effective regulator. enhancing access to credit for granted to the DFIs.

the privatie sector.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Transform the State Bank of * Better quality and * Feedback from SBP staff * Commitment of seniorPakistan into an efficient qualified personnel hired (through survey), project management in affectingcentral bank by improving the on merit through a team and the banking change.standards, processes and transparent and community.quality of personnel. competitive process. * New policy, procedures

* Compensation, rewards and training manuals.and prDmotions based on * Quarterly progressthe performance reports.evaluation and linked tothe market.

* Trained and skilled staffon board.

To improve SBP's business * Better amd efficient * Quarterly reporting on * Business processprocesses by implementing an intemal functioning of project implementation re-engineering carried outeffective management SBP. by the project effectively and on timeinformation system and high * Improved accessibility management team. with full ownership ofend connectivity for internal and flow of information. management andand external linkages. feedback of end users.

* Adequate and timelytraining of end users.

Streamlining and * Extension of electronic * Reports from SBP and * Expansion of services bystrengthening the national clearing services to other NIFT. NIFT.payments system to reduce major cities by NIFT * Direct feedback from * SBP management'srisk, improve efficiency and * Implementation of special banking sector. commitment to improve.provide an affordable platform purpose large valuefor the delivery of enhanced RTGS system.financial services.

Strengthening and extending * Completing a * Consultant reports. * Recommendations of thethe scope of credit comprehensive study implemented.information services through assessment/ study of theenhanced quality, and wider existing creditaccess. information systems for

compliance with bestinternational practice.

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* Implementingrecommendations of thestudy for access to betterquality data.

Improving confidence in and * Improve legal and * Report on new * Commitment of thehealth of the financial system regulatory framework to regulations for banks, Govemment, regulatorsfor economic prosperity. prevent money NBFIs, securities market and financial institutions

laundering and financial and insurance to implement.fraud.

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:

* New job roles assigned to * HR audit completed with * Staff survey report. Bank * Commitment of SBPall staff and successful job profiling and new job supervision reports. management and Centraltransition to new roles. descriptions and roles. * New HR policy Board to adopt new

* Staff recruitment, * Revised HR policies, documents. policies.transfer, promotion and procedures and * Willingness of staff tocompensation policies performance management adopt to new assignedrevised. New evaluation system implemented. roles and their readinesssystem functioning. * HRMS implemented. to accept change.

* Design completed and * Training programs for alltested. categories of staff

* Training imparted to new developed and new staffand existing staff. Staff training and developmentcareer development policy implemented.programs commenced.

* All financial transactions * MIS including GLOBUS * SBP progress reports, * SBP management andconverted from manual to bankirrg solution, Oracle Bank supervision reports staff commitment toan electronic system and ERP, and Data Ware and user feedback. implement new systems.new work flows House successfully * Staff survey on new MIS. * Transition from legacy toestablished. Functioning implemented and fully * Feedback from banking new systems managedelectronic mail system in operational with complete sector and the successfully and staffplace. Data conversion LAN and WAN in place. Govemment. adapted to new systems.and migration * Staff trained on new * Banking sector alsosuccessfully completed. systems and modified completely automated

* Staff conversant with the business processes. with compatible systems.new technologies and * Connectivity establishedsuccessfully migrated between the SBP,from legacy systems to banking sector and MoF.the new businessprocesses.

* Flow of informationelectronically initiatedand functioning betweenSBP, banking sector andMoF.

* New processes introducedand effective.

* Implementation of an * Consultants engaged to * Request for Proposal * SBP management's

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appropriate RTGS system implement RTGS system. document. commitment.and liquidity * Newv procedures/rules * SBP progress reports. * Successful resolution ofmanagement tools. devised. * Bank supervision reports. linkage, compatibility,

* Feedback of banking and reporting issuessector. between the SBP and the

banking sector.

* Study for strengthening * Report submitted and * Reports of expert/ * SBP management'sof credit information discussed consultant. commitment to enhanceservices completed and the role of creditrecommendations information services inimplemented. the country.

* Improved systems and * Improved regulations to * Progress reports from * SBP, SECP and ECWcontrols for preventing control and prevent SBP, SECP and ECW. commitment tofinancial fraud. financial fraud and * Reports from trainers. implement and enforce.

* Enhanced capacity of money laundering. * Feedback from financial * Willingness andSBP and SECP to detect * Trained SBP and SECP institutions. ownership of financialmoney laundering and staffon detection sector institutions to buildfinancial fraud. techniques. awareness and comply.

* Improved capacity of * Trained ECW staff toECW and judiciary to investigate financialenforce. fraud and effective

* Increased awareness on banking court judges tofinancial fraud/ money proce3s cases.laundering and its * Seminars and workshopsconsequences. on mconey laundering.

* Enhanced capacity and 0 Staff trained on technical * Quarterly reports from * Management ownershipskills of SBP staff and skills. Management SBP. to organize regularmanagement. traine(d on 'soft skills' and * Staff survey. training and create an

* Increased information for leaders3hip. * Reports from trainers. atmosphere for personaldevelopment of financial * Studies and reports by * Reports from consultants. development in the staff.markets. consultants on best

* Improved functioning practice for developmentand increased research of financial markets.capacity of Ministry of * Research staff hired fromFinance, (Banking private sector. AdequateWing). tools provided to staff and

researchers for effectivefunctioning.

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)Human resource development US$1.12 mnillion * SBP Quarterly progress * HR department

reports strengthened and neweffective policiesimplemented.

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Technology up-gradation US$16.63 million * Reports from project * The vendor and themanagement team. project team successfully

* Bank supervision reports. deploy new systemsfollowing time lines ofproject plan.

Improving the national US$5.0 million * SBP progress report * Firm engaged topayments and settlement * Implementation reports of implement RTGS.systems. consulting engaged. * Commitment of SBP and

* Bank supervision reports banking sector managers.* Feedback from banking

sector.

Strengthening credit US$0.60 million * Reports of * Qualified expert/information services expert/consultant. consultant engaged to

* Feedback from financial carry out the studysector institutions. * Willingness of SBP

management to proceedwith recommendations.

Anti money laundering and US$0.80 million * SBP reports on progress * Seminars and training arefinancial fraud with regulations, training conducted with

and seminars. participation of all* Feedback from financial stakeholders.

sector institutions. * There is support frominternational agencies toprovide expertise.

Banking sector strengthening US$4.65 million * Quarterly reports. * SBP staff andand capacity building, * Consultant reports. management receiveincluding preparation for regular and effectiveHabib Bank privatization training.

* Due diligence for HabibBank privatizationcompleted.

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Annex 2: Detailed Project DescriptionPAKISTAN: Banking Sector Technical Assistance

By Component:

Project Component 1 - US$1.12 miillionHuman Resource Development: For years, the State Bank lagged behind in the development of its HumanResource. The outlook of the governments in power and the political economy perpetuated this despondentstate of affairs. Unions blindly supported the 'promotion on seniority' policy, as a result of which, meritand performance were overlooked. Many employees, however mediocre, rose to levels of seniority merelyby serving time in the organization. There were no incentives to excel, only to perform the assigned job andcarry out orders.

The World Bank has been assisting SBP transform into a modem, dynamic and effective central bank byproviding assistance in implementing Human Resource Development reforms and in changing its operatingenvironment. These reforms could only be undertaken in parallel with reforms in other areas, such as IT,initiatives of training/skill enhancement and Change Management 'Framework' for disseminating valuesand providing a platform for behavioral change. The human resource reforms were initiated under FSDIP.

To advise and undertake human resource restructuring and development, SBP engaged the services of aHuman Resource Adviser from Bank Negara (Central Bank of Malaysia) who was involved in similarinstitutional reforms in Malaysia's Central Bank. In addition, SBP appointed a firm to carryout a humanresource audit. Implementation of ihese activities is currently underway and includes:

HR Adviser: HR Adviser has designed several key HR interventions over the last year, including:1. Restructuring of the HR Department - some members of the HR Adviser's team have been placed in

key positions within the Departnent to build capacity and disseminate learning.2. Recruitment of 211 appropriately qualified officers in key operational areas has been undertaken,

significantly upgrading professionalism of the organization. Successful and comprehensive training atinduction has been delivered to all such new recruits, together with a mentoring program.

3. An early retirement scheme has been implemented in two phases. There has been significant take-up ofboth (338 for the scheme for those with 25+ years service, and 490 for the scheme covering lower levelemployees with 20+ years of service).

In addition to the work of the HR Aclviser, two Change Management Workshops have been conducted withfocus groups set up to follow through on key strategic areas of change.

HR Audit Consultants (Sidat Hvder): Sidat Hyder was amongst the firms who tendered for, and won, thecontract to carry out an 'HR Audit'. The initial ToR was to review each position in the State Bank, writejob descriptions for them, assess key skills and competencies, determine skills gaps, develop a performanceappraisal system, carry out a training needs analysis, and develop policies and best practices in recruitmentand career development.

These terns of reference were amended during the bidding stage to take account of work alreadycompleted, accelerated or underway by the HR Adviser, or which had been identified as priority areaswhich still needed attention. The ToR now reflect key gaps which still exist plus important levers to bringabout change and improved ways of working/an improved way of working. The ToR also include ananalysis of the impact of the work of Ihe Adviser to date (i.e. on the validity and viability of theCompetency Model, Career Development Policy, and Performance Appraisal System) together with

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particular emphasis on compensation, leadership assessment and review of other policies being designed bythe HR Adviser, but not yet implemented. The latter is to ensure continuity and to allow for firm proposalsfor implementation after the term of the Adviser has been completed.

The consultants have delivered their initial inception report and provided feedback to the State Bank SeniorManagement Team.

HR restructuring activities supported under the project: The HR Adviser is due to complete her-assignmentin June 2002, and has made considerable progress in designing key policies. However, much remains to bedone, particularly on implementation. Likewise, the HR Audit Team of Sidat Hyder is due to complete theirwork in the above areas by end 2002. The HR Audit team was specifically asked to focus on certain keyareas. Remaining gaps which primarily include development of a grievance system and further types oftraining which were not covered mainly due to availability of qualified trainers, are to be addressed at alater stage. Other areas that need to be addressed under the project include:

I. Recruitment of appropriately qualified HR staff to further build capacity, implement and fine tunepolicies, and sustained effort by senior staff to turn the HR Department's role into that of an adviser.

2. Training in 'soft skills', particularly around management of change and culture, including HR skills forline managers, giving feedback, managing performance, coaching etc.

3. Appointment of well-regarded senior level trainers from around the world to supplement intemalprograms.

Next steps with respect to implementation of HR Reforms that will be supported by the project include:

1. Work on areas outlined above by the HR Audit team, following agreement of revised Terms ofReference by SBP.

2. Amendments/ Adjustments to the newly designed HR policies brought out by HR Adviser will beamended or adjusted as required, following recommendations by consultants, particularly oncompensation framework and career development policy.

3. Training plans, recruitment plans and redundancy plans will be developed from the training needsanalysis, job analysis, and recruitmnent analysis prepared by the HR Audit team. This will pave the wayfor the introduction of individualized career and training plans to be prepared, later, also linked toperformance management system.

4. Managerial skills training will be stepped up (and may include use of assessment centers to assess anddevelop skills). Also there may be some HR management skills training provided for line managers(e.g. on behavioral interviewing).

5. Implementation of compensation system will be carried out based on analysis done by HR Audit team.6. Analysis of remaining gaps in HR policies and refinement of existing ones to make them more

sophisticated, or move ahead to next phase (e.g. revise HRMIS system completely around new policies,rather than existing ones as is currently the case). These changes require staff to adapt to new ways ofworking and their ownership and understanding of the new policies thus far.

Project Component 2 - US$16.63 millionTechnology Up-gradation: This component would support completion of the automation project asdesigned in the Inforrnation System Strategy Plan formulated under the Financial Sector Deepening andIntermediation Project. Technology enhancement will allow regular flow of consistent information for thecentral bank to play a pro-active role in banking supervision and take timely actions when needed. Already,the base infrastructure has been successfully installed at the head office and initial deployment of thebanking package (Globus), ERP package (Oracle Financials) and the data warehouse is being implemented.

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Completion of the automation project includes expansion of the systems to 15 branch offices beyond theCentral Directorate and Karachi Office including; entire roll out of Globus, ERP/Oracle financial andnetworking of the branch offices.

Banking Systems - GLOBUS: As the main banking system, Globus will help SBP achieve; compliancewith intemational banking standards, availability of reliable information, ease of introducing new productsinto the market, as well as efficiency and controls. Significant progress has been made as per/according tothe project plan including the completion of UATs for 90% of the functionality (FOREX, Govt. Securities,Govt. banking). Simultaneously EIPR workshops are being conducted that include business staff,executives, auditors to review "A; Is" and design of "To Be" processes. UATs for the remaining 10%functions such as letter of credits, over draft, share transfer, IMF loans, Asian Clearing Union and ICU iscontinuing. Also re-testing of items identified from the UATs is underway. Mock banking exercisecommenced this month for all functions supported by GLOBUS. This combined with UATs will providesufficient coverage of all functions, so that SBP management could launch the system, likely by end April2002. Definition of mapping staff to roles and assignment of security profiles remains to be completed.BPR will identify redundant processes and assessment of staff that will be needed to run the new functions.This will enable the definition of rDles, mapping of staff to these roles and assignment of security profile.SBP's ability to operationalize GLOBUS has been strengthened with the training of 10 SBP staff and 4consultants in Globus technology .nd procedures. A Knowledge Transfer Plan is to be prepared to ensurethat all GLOBUS functions are covered and SBP staff are adequately trained. A contingency plan has beenprepared to mitigate risks. However, implementation risks are low since Globus is a commercial packagesoftware and should perform at SEP.

The project supports implementation and branch roll out of Globus with the following additional modules:1. Custom-built systems for export refinance and integration of currency, housing refinance window,

depository functions (loan floated by the government and special government bonds), and to take careof impact of subsidiary.

2. Roll out of Globus to SBP brarnches including mapping of staff, training and WAN connectivity.3. Assessment of Globus functionality to identify new processes and practices that may be implemented in

ERP.

ERP Oracle: ERP will integrate all departmental functions related to financial accounting, humanresources, budgeting, payroll, procurement, inventory and asset management. Implementation has madesignificant progress including the completion of definition, operations analysis and solution design phases.Currently the project is in the build phase and conference r-ooms pilots are being held so that the users cancomment on customized versions of their processes. The build phase will be followed by transition andproduction phases including UAT for a target 'go-live' date of May 2002 for Finance and Distribution, andfor HR and Payroll, of April 2002. 13PR for ERP processes is being undertaken. While, customization ofreports, preparation of UAT test packs, conversion strategy and responsibility definition and securityprofile assessment is to be completed. Under the project, following activities would be supported:1. ERP changes needed to cater for the SBP and subsidiary split, including consolidation of accoumts and

custom-built packages such as Oracle Alter Manager, Self Service Web Applications and OracleWorkflow.

2. Implementation of an HR self service kiosk.3. Implementation of an OLAP finmncial analyzer for end user reporting.4. Oracle workflow implementation.

Data warehouse: Data Warehouse is a central repository of information that provides comprehensive andhigh integrity data in a form suitable for decision support to end users and to the decision makers. In the

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changed environment, it has become essential that systems and data structures are redesigned forsustainability and scalability. Although this activity is currently behind schedule, progress has been made inthe area of EPD and Statistics and the rationalization of 45 reports into 4 database structures. A pilot dataacquisition process has been developed. The project supports implementation of the following activities:1. BPR and additional subject areas including access to organizational data, interactive query, analysis

and presentation of data, modeling and forecasting and object and multi-dimensional data analysis.2. Data conversion and data flow from different applications into the data warehouse.3. Custom-built packages such as OLAP Financial Services, Oracle Express Analyzer, Oracle 9i/AS

Clickstream Intelligence and Business Intelligence Beans.

Hardware and Networking: Significant progress has been made with 584 PCs deployed, 5 servers inoperation. Additional 219 PCs are being installed. Networking in SBP Karachi offices is substantiallycompleted including LAN and radio linked WAN between three offices. Reassessment duringimplementation ascertained a requirement of 2804 nodes. This revision has brought about significant designchange resulting in the enhanced scope of work in networking. Including the additional requirement, theproject would support:1. Procurement of 925 desktop and 120 laptop computers.2. 200 Network, 25 Personal and 10 High End Printers.3. Completion of LAN setup including cabling at Karachi Office.4. Connecting regional offices through VSAT, digital cross connect and dial up link - WAN.5. To ensure quality power supply power generators, voltage stabilizers, UPS and related infrastructure

shall also be included in this component.

SBP has planned to deploy an intemal ISP operation to handle internet connectivity, mail, web hosting andnationwide internet contact provision. This will provide a higher level of service to SBP and will easemanagement/ administration while making efficient use of free bandWidth on backup WAN links. Theproposed ISP setup will allow SBP to meet: (i) reduce internet connectivity costs for the entire network, (ii)reduce dependence on third party service providers, (iii) ease of deploying and updating the SBP website,(iv) guarantee security in hosting of website, and (v) secure e-mail connectivity.

Training and Change management: This is an extremely important element of this entire effort. The projectteam has successfully trained staff in oracle, Globus and O/A. Under the current plans further trainingprograms on oracle, O/A, networking and systems will also be conducted. This is, however, an ongoingexercise. The project would support completion of these training programs in networking and O/A, as wellas programs during transition and prior to switch over. In addition, the project will support changemanagement initiatives so that SBP is fully prepared to accept the new systems and processes.

Project Component 3 - US$ 5.00 millionStrengthening and Streamlining National Payments System: As part of SBP's reform program, aspecific component on payments system was developed to strengthen and streamline the national paymentssystem infrastructure, to ensure that appropriate services are available and satisfy the evolving needs of allsectors of the economy in a manner that balances operational cost, processing efficiency and credit,liquidity, and systemic risk. The payments system component will assist SBP acquire, test, and implement aReal-Time Gross Settlement (RTGS) capability to process large value and other time critical fundstransfers including its integration with the scripless government securities systems to provide model 1 DvP,and the automated general ledger and accounting system to provide on-line account balance monitoringcapabilities for commercial bank treasurers. The resulting system will also provide an appropriate set ofliquidity management tools to enable commercial bank treasurers to make optimum use of the liquidityavailable within the financial system and will provide the infrastructure necessary to support an active

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interbank money marketThe SBP recognizes that they have limited knowledge of RTGS systems and their operation. Therefore,they have acquired the services of an experienced consulting team - CAL - to assist in preparing acomprehensive set of Requirement Specifications to communicate SBP's current and future needs in anon-ambiguous manner to prospective suppliers of RTGS software and related implementation services.The consultants are already on site and, in conjunction with SBP officials, will ensure that the resultingsystem;

* is convenient and easy to use;* is flexible and modularlv expandable and thus will accommodate future changes in volumes

and financial sector services;* will allow for universality of access and thus make it possible for all potential direct

participants, when accepted, to connect to the system;* will have high levels of reliability with particular emphasis on data integrity and security thus

preventing unauthorized disclosure or change of inforrnation;* will have high levels of service availability utilizing appropriate back-up facilities and failure

recovery mechanisrris;* will allow for auditing and tracing of all transactions;* will have appropriate levels of operational performnance ensuring reasonable response times

and vendors share the responsibility of successful implementation;* will satisfy intemational best practice as described in the BIS CPSS Core Principles for

Systemically Important Payment Systems; and* is affordable to use.

SBP also recognizes that the success of the RTGS initiative will require active participation from all keystakeholders. A number of critical decisions relating to policy, organizational, technical, and operationalmatters will be required and will impact all participants. Organizational arrangements have beenestablished to ensure that all SBP and commercial bank stakeholders have an opportunity to activelyparticipate in the system's conceptual design and detailed specification process. The project consultantshave had a range of initial discussions with all stakeholders and NIFT, the provider of electronic low valuepayment services and have acquired an understanding of all substantial policy, organizational, technicaland operational issues that need to be addressed in the design of the Real-Time Gross Settlement (RTGS)system and its interface with the Globus general ledger system that is now nearing completion. Specificattention is being paid to the impact that the new RTGS system will have on the services being provided byNIFT. It is estimated that some 5% ol the current NIFT transactions representing about 60% of the valueof all NIFT transactions will be processed through the RTGS system and thus the impact on NIFT will besmall as the company generates its income from transaction volume and other specialized services to thecommercial banks.

All funds transfers will be settled on a real time basis using gross settlement mechanisms. The settlement ofgovenmuent securities transfers will be on a real-time Delivery versus Payment (DvP). The envisagedsystem architecture is depicted in the following diagram:

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tl.TGS ComponentsPaying Bank Payee bank

Browser-based

FW Workstations u FM MBT

nt instructionnd account \ Co nfi rmafio n

bank advice

ary and account

ent amounti7leference

Settlement

I FTP confirmation

SAP G1lous'Copy State Bank of Pakistan

0 'R

Core system functionality has already been the subject of discussions with SBP and financial institutionparticipants and prelimninary decisions have been made in regard to critical matters including: (a) systemmembership; (b) settlement accounting; (c) relationship with the mandatory reserve regime; (d) intra-dayliquidity provisioning; (e) queue management; (f) gridlock resolution; (g) account balance monitoring; (h)transaction monitoring and audit trails; (i) routine and special purpose reporting; (j) reconciliation; (k)interfaces with other systems; (1) system reliability and failure recovery including disaster recovery; and(m) data security.

To reduce project implementation risk and to take advantage of the fact that most commercial banks arealready members of SWIFT, the RTGS system will make appropriate use of the SWIFT financialmessaging system and will use either the Y-copy or V-shape topology.

Comprehensive bidding documents are expected to be available for issue to qualified RTGS softwaresuppliers by mid June 2002 and will require the successful vendor to supply a fully operational system. Thevendor will undertake all necessary unit, integration, operational readiness and user acceptance testing andwill be required to provide all necessary training of SBP and participant personnel. In addition, the vendorwill be required to operate the system for an initial period of not less than three month as an integralcomponent of a rigorous technology transfer process.

System acquisition and implementation costs have been estimated as not exceeding USD 4.5 million andwill cover the following: (a) acquisition and installation of a comprehensive and robust RTGS systemwithin a time period of about 16 calendar months for implementation after inception; (b) all necessarytraining of SBP and commercial bank operational, IT and treasury personnel; (c) services of a dedicatedproject manager and other advisory assistance during system implementation; (d) educational visits byrelevant SBP personnel to central banks that have already installed an RTGS system to enhanceunderstanding and increase confidence; and (e) specialist legal advice in establishing an appropriate legal

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infrastructure for the new system ensuring provisioing of final and irrevocable immediate settlement ofpayment instructions on an intra-day basis.

A realistic cost recovery and pricing policy will be designed and implemented to assure a fair mechanism isin place to recover all operating costs and an appropriate share of the investment costs. Project preparationis being undertaken in a robust manner and SBP is well prepared to realize the sought after benefits.

Project Component 4 - US$0.60 millionStrengthening Credit Information Services: The Credit Information Bureau (CEB) was established in1989. Comprehensive and well functioning credit information systems are recognized by SBP as beingcritical components of a robust financial sector infrastructure as such systems facilitate better allocation ofcredit in the economy, more accurate prediction of repayment probability, more accurate pricing andtargeting of credit, more efficient and consistent application of credit policy, improved borrower discipline,increased incentives to repay, more accurate assessment of overall credit risk, and reduction in the potentialfor moral hazard. The existing system is a semi automated system that relies on a paper based input-outputmechanisms. The information contained in the system database has been enhanced over time in line with theevolving needs of the participants for more comprehensive information. The technical platform used by thesystem has also been enhanced over time.

Current experience confirms that the CIB provides a valuable and required service to the credit community- both providers and users of credit - in a low cost manner. However, current system scope is limited andcaptures information relating only to relatively large corporate loans in excess of 500,000 rupees. There isa clear market need to extend the scope of the system to cover middle market borrowing, and smallenterprise and consumer borrowing. In addition, SBP personnel are aware that the policy, legal andoperational issues surrounding the design of credit information services have received substantial recentattention throughout the global financial community. Specifically, SBP wish to have access to bestinternational practice for use in assessing the current SBP mechanisms with a view to identifyingworthwhile and cost effective enhancements. The CIB component of the project will assist SBP realize thesought after benefits through three specific activities: (a) strengthening the existing system to ensure thatoptimum benefits are provided to participants consistent with best international practice; (b) developing acomprehensive SBP policy in regard to how system scope should be improved and the role that should beplayed by private sector credit infomiation providers including the role of rating agencies; (c) improving theknowledge and skills of a small group of SBP specialists; and (d) enhancing the current technical platformto provide a basis for on-line secure connectivity with users and thus enhance system efficiency andeffectiveness.

A core initial component of the project will be a comprehensive comparative analysis of the currentsituation in Pakistan against best international practice in regard to policy, legal & regulatory, systemdesign, operation, and technical factors. Outline Terms of Reference for this study have been agreed. Inaddition to identifying the specific strengthening needs of the CIB; the study will also focus on a number ofspecific matters including: (a) scope, accuracy, security and timeliness of data; (b) opportunity forborrowers to certify the accuracy of data maintained in the system (as well as the opportunity for the recordto contain a note of the borrowers viewv in cases where the lenders view is not complete); (c) the need tostrengthen regulations (for example the need for some form of Fair Credit Reporting mechanisms as thiswill be especially important should the. system be widened to cover small enterprise and consumerborrowing); (d) an assessment of the methodologies used by the two rating agencies now operating inKarachi; (e) recommendations relating to the policy to be adopted by SBP in regard to the creation of aseparate entity to provide small business and consumer credit information; and (f) a cost effective strategy

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for improving the technical information technology architectural arrangements to realize on-lineconnectivity with participants. This latter activity would also identify the factors that would be used todetermine the degree to which the CIB IT requirements might be satisfied through an appropriate form ofintegration with the central SBP IT capability that is now being created.

Next steps include the development of comprehensive TORs for the critical foundation study and theissuance of an appropriate Expressions of Interest notification to identify those organizations that haveappropriate knowledge and experience to undertake the work to a high level of quality. In addition, theproject team will provide SBP with material describing current best practice including the results of recentresearch undertaken by the Bankl This material will both assist SBP in understanding the ways in whichspecific public policy and legal issues are being resolved in other countries as well as upgrading theknowledge of relevant SBP personnel.

Project Component 5 - US$0.80 millionAnti Money Laundering and Financial Fraud: The State Bank of Pakistan and the Securities andExchange Commission, being the regulatory and supervisory authorities for banks, non bank financialinstitutions (NBFIs) and the capital markets have initiated measures to strengthen their institutions tocontrol and prevent of money laundering activities. The central bank is already focusing on formulatingrules and regulations to ensure compliance. Measures initiated so far include issuance of PrudentialRegulations to banks, NBFIs Rules of Business, freezing of accounts, educating the supervisory staff,communicating with Ministry of Finance and Ministry of Foreign Affairs on relevant issues and ensuringthat banks and NBFIs have 'know your customer' (KYC) rules which are strictly adhered. Moreoverbanks are assessed by the on-site examiners of the State Bank of Pakistan who evaluate the KYC policiesand procedures of banks during their inspections. Deviations/violations from Prudential Regulations andRules of Business are reported for necessary and bank/NBFI found in violation is penalized. Violation mayalso lead to calling explanation from Chief Executive/ President and proceedings by the concernedauthority against the responsible officials.

The Financial Action Task Force (FATF) has made 40 recommendations which provide the basis for antimoney laundering activities. SBP has done its own assessment based on FATF 40 recommendations andits status is provided in the following table.

FATF Recommendations Implementation Status and SBP Comments

Criminalizing laundering of proceeds of Under the Purview of Ministry of Interior andserious crimes (Recommendation 4) and Narcotic Control and National Accountability Bureau.enacting measure to seize and confiscate theproceeds of crime (Recommendation 7).

Requiring financial institutions to identify all The Recommendations 10-12 are covered under SBPclients, including any beneficial owner of Prudential Regulation No. XII and NBFIs Rule 22.property, and to keep appropriate records(Recommendations 10 to 12)

Requiring financial institutions to report Recomnmendation 15 covered under Chapter IX,suspicious transactions to the competent national Clause 67 of Control of Narcotic Substance Act,,authorities (Recommendations 15) and to 1997, and Clause 20 of National Accountabilityimplement a comprehensive range of internal Bureau Ordinance, 1999 in terms of which the banks

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control measures. (Recommendation 19) and financial institutions are required to reportsuspicious transactions to Director General ofAnti-Narcotics Force and to Chairman NABrespectively.

Banks and Financial Institutions are also required toproperly investigate the suspicious transactions. UnderPrudential Regulation XII and NBFIs Rule 22

Recommendation 19 covered under PrudentialRegulation No. XII, and NBFIs Rule 22 in terms ofwhich banks and financial institutions are required tomake arrangements for setting up an Internal AuditSystem in order to establish an effective means oftesting/checking and compliance with bank and NBFIpolicies and procedures.

Ensuring adequate system for the control and SBP Prudential Regulation No. XII, and NBFIs Rulesupervision of financial institutions 22 cover this Recommnendation by and large as the(Recommendations 26-29) Banks and Financial Institutions are instructed to

impart suitable training to members and staff and tosetup an internal Audit system in order to establish aneffective means of checking/testing and compliancewith the bank policy and procedure. SBP alsoco-operate and lend expertise to other domesticjudicial or law enforcement authorities like NAB

As far as Recommendation 27 is concerned thePrudential Regulation XII and NBFIs Rule 22instructs the banks and financial Institutions toproperly investigate the suspicious transaction.Moreover in terms of Chapter IX, Clause 67 ofControl of Narcotic Substance Act, 1997 and in terrnsof clause 20 of National Accountability BureauOrdinance, 1999 banks and financial institutions arerequired to report suspicious transactions to DirectorGeneral of Anti-Narcotics Force and to ChairmanNAB respectively.

As far as Recommendation 28 is concerned these sortsof guidelines are not present in existinglaws/regulations. However, may be incorporated.

Establishing international treaties or agreements Steps taken to formulate money laundering legislationand to pass national legislation that will allow by setting u.p a working group on Ministry level,countries to provide prompt and effective headed by Ministry of Finance and consisting ofinternational cooperation at all levels representatives of Ministries of Law and Justice,(Recommendations 32-40) Interior, State Bank of Pakistan, National

.____________ _ Accountability Bureau, and FIA to draft an effective

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and comprehensive legislation to provide for aninstitutional framework for monitoring and regulatingmoney laundering transactions. This working groupwill provide a platform for thecooperation/coordination of different agencies engagedto combat money laundering and related activities. Itwill also facilitate international cooperation.

Pakistan is also a member of Asia Pacific Group on Money Laundering and is actively engaged in theirmeetings/workshops. In addition, the Anti Narcotic Force and National Accountability Bureau (includingthe Economic Crimes Wing of the Federal Investigation Authority) are investigation authorities and areengaged in prosecution of money laundering activities. On SBP's initiative a Working Group headed byMinistry of Finance, and consisting of representatives of Ministries of Law and Justice, Interior, SBP,SECP, NAB and FIA has been- constituted to draft an effective and comprehensive legislation to provide foran institutional framework for monitoring and regulating money laundering transactions.

The Control of Narcotic Substance (CNS) Act, 1997 and National Accountability Bureau (NAB)Ordinance 1999 already have provisions for curbing money laundering activities. Clause (67) of ChapterIX of CNS Act, 1997 and clause 20 of NAB Ordinance, 1999 banks and financial institutions are requiredto report suspicious transactions to Director General of Anti-Narcotics Force and Chairman NABrespectively. Failure to supply such information in accordance with the provisions of CNS Act and NABOrdinance, is punishable with rigorous imprisonment, which may extend to 3 years or with fine, or withboth under CNS Act and 5 years or with fine, or with both under NAB Ordinance.

SECP has also taken several initiatives to counter money laundering including requirement of KYC policiesfor securities' market brokers. Plans are under preparation which include strengthening of systems formonitoring and surveillance of securities markets, broker licensing and certification criteria, disclosurerequirements and standards, and creating awareness in the investor community. Training sessions andseminars will be held to create awareness among key stakeholders, such as creditors and institutionalinvestors. In addition, workshops will be arranged under the auspices of major academic institutions, whichwill focus on significant corporate governance issues. For the benefit of public at large, brochures andguidelines will be published to develop their knowledge and understanding of the main perspectives andframework of corporate govemance and help them integrate its various dimensions.

A Financial Sector Assessment Program (FSAP) by the IMF/Bank team is expected to take place duringthe current year. The program covers an assessment of systems in place for monitoring and enforcement ofsuspicious transactions and money laundering. SBP/ SECP would utilize results of FSAP that are identifiedfor compliance under the Financial Action Task Force (FATF) principals. It is, however, recognized thatwhile compliance with principals is important, bringing necessary change in culture and mindset is critical.For this reason, capacity of all the institutions involved needs to be strengthened to make a real difference.Training of key staff is essential for SBP - to regulate the banking sector; SECP - to regulate thesecurities markets, NBFIs and insurance sector; AML unit of Economic Crimes Wing (ECW) of theFederal Investigation Authority - for enforcement; and the judiciary - for execution. Specifically, theproject includes: (i) seminars/ workshops for the financial sector to create awareness; will include a broadbased campaign to increase awareness of commercial banks and other financial sector institutionsconducting seminar in main business centers of the country as well as publications on the subject; (ii)training and capacity building of the two regulators, enforcement agency and judiciary through SBP; will

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include foreign and local training in coordination with FATF, Asian Pacific Group on money laundering,IMF and the Bank. To enhance sharing of information the component would finance participation ofrelevant agencies and officials in international conferences and working groups; and (iii) enhancements inthe existing computer systems for monitoring and record keeping; to enhance enforcement initially theproject would support a pilot to slrengthen the Karachi AML unit of the Economic Crimes Wing of theFederal Investigation Authority.

Project Component 6- US$4.65 millionBanking Sector Capacity Building: SBP has, over the past few years, strengthened its capacity foreffective regulation and development of the financial markets. This was achieved largely through trainingof key staff and consultant suppolt. Various studies were conducted in the areas of under- served markets,market structure (including Islamic banking) and regulation of deposit taking/ non-deposit takinginstitutions. The study on under-served sectors, in fact, led to a paradigm shift in the strategy fordevelopment banking sector. In addition, SBP took an initiative for developing the housing finance market.This initiative was also supported by the Bank under which a review was carried out covering the role ofexisting market players and future prospects for the sector. TABS would support further work in theseareas including small and medium enterprises, housing and rural finance.

The project would assist SBP and policy makers keep pace with developments in global financial marketsthrough participation in seminars End specialized training programs. It would support the privatization ofthe nationalized commercial banks. It would also assist in developing research capabilities within the SBPand the Ministry of Finance (banking wing). Specifically, the project would finance: (i) provision ofspecialized training in 'soft skills' areas, particularly management of change and culture; (ii) appointmentof well-regarded senior level trainers from abroad to bring in new ideas to supplement internal programsand courses offered within Pakistan; (iii) taking part in international seminars and conferences; (iv) hiringconsultants/ advisers to support training needs, IT and HR functions; (v) conducting studies fordevelopment of financial markets and services including a comprehensive diagnostic study of the operationsand on-going restructuring of Habib Bank Limited. The results of this exercise will be the made availableby the SBP to pre qualified potential parties interested in acquisition of Habib Bank; and (vi) buildingcapacity at the Ministry of Finance (banking wing) for strategy and policy making to keep abreast ofdevelopments in the sector.

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Annex 3: Estimated Project CostsPAKISTAN: Banking Sector Technical Assistance

-Local Foreign Total.Proj|ect Cost By Component, : ., US:$miilion US $million, US $million

Human Resource Development 0.25 0.87 1.12Infornation Technology 1.85 14.78 16.63Payment Systems 0.50 4.50 5.00Strengthening Credit Information System 0.10 0.50 0.60Anti Money Laundering/Financial Fraud 0.10 0.70 0.80Banking Sector Strengtheing & Capacity Building 1.00 3.65 4.65Total Baseline Cost 3.80 25.00 28.80

Physical Contingencies 0.00 1.50 1.50Price Contingencies 0.00 0.00 0.00

Total Project Costs' 3.80 26.50 30.30Total Financing Required 3.80 26.50 30.30

,; ., -,, ,- ,-Local Foreign TotalProject Cost By,Category US $million US $million US $million

Goods 2.40 19.63 22.03Works 0.00 0.00 0.00Services 1.40 3.90 5.30Training 0.00 1.47 1.47Unallocated 0.00 1.50 1.50

Total Project Costs 3.80 26.50 30.30TtlPoect CostsTotal Financing Required 3.80 26.50 30.30

Identifiable taxes and duties are 0 (US$m) and the total project cost, net of taxes, is 30.3 (US$m). Therefore, the project cost sharing ratio is 87.46% of totalproject cost net of taxes.

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Annex 4: Cost Benefit Analysis SummaryPAKISTAN: Banking Sector Technical Assistance

As a technical assistance credit, project benefits cannot be measured in monetary terms. Strengthening andenhancing institutional capacity oPf SBP is likely to have significant gains with stability of the financialsector and its contribution to economic development

Summary of Benefits and Costs:

Main Assumptions:

Sensitivity analysis / Switching values of critical items:

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Annex 5: Financial SummaryPAKISTAN: Banking Sector Technical Assistance

Years Ending

Y Year 1 | Year 2 | Year 3 Year 4 | Year 5 Year 6 Year 7Total FinancingRequiredProject Costs

Investment Costs 10.2 9.0 5.6 4.1 0.0 0.0 0.0Recurrent Costs 0.0 0.0 1.2 0.0 0.0 0.0 0.0

Total Project Costs 10.2 9.0 6.8 4.1 0.0 0.0 0.0Total Financing 10.2 9.0 6.8 4.1 0.0 0.0 0.0

FinancingIBRD/IDA 9.0 8.0 6.0 3.5 0.0 0.0 0.0Govemment 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 1.2 1.0 0.8 0.6 0.0 0.0 0.0Total Project Financing 10.2 9.0 6.8 4.1 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Main assumptions:

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Annex 6: Procurement and Disbursement Arrangements

PAKISTAN: Banking Sector Technical Assistance

Procurement

Procurement Capacity

6.01 An assessment of the Implementing Agency's procurement capacity was carried out by aProcurement Accredited Staff (PAS) during the appraisal mission and was discussed with the implementingagency. The main findings are as follows:

Organization

6.02 The existing procurement capacity of the implementing agency i.e. the State Bank of Pakistan,requires strengthening to be able to effectively carry out the expected project procurement in accordancewith agreed procedures. The existing staff have little knowledge and experience of IDA's procurementprocedures. Procurement support inder the previous FSDIP project (Ln. 3808-Pak) was providedprimarily by consultants who are no longer available.

6.03 The procurement capacity of the State Bank will be strengthened through engagement ofconsultants and training to enable the implementing agency to effectively carry out procurement under theproject. The State Bank will engage a qualified individual procurement consultant for at least the first yearof the project. The procurement consultant will serve as the focal point for all procurement matters underthe project, and will provide comprehensive procurement support including procurement planning andmonitoring, preparation of bidding documents, evaluation of bids, and contracts, and overall guidance incomplying with agreed procurement procedures. The State Bank will engage the procurement consultantunder the Project by September 30, 2002 after the Project has become effective.

6.04 IDA will assist in capacity building by conducting procurement training workshops for keyprocurement staff of the State Bank, before the start and during implementation of the project, in order toimprove and update their knowledge of IDA's procurement procedures. The dates for these workshops willbe mutually agreed.

Procurement Procedures

6.05 The procurement procedures of the State Bank were reviewed. Procurement procedures were foundto be broadly based on competitive methods of selection. There is also a system for internalreview/clearances through established committees. It was however noted that there are some differencesbetween the procurement procedures of the State Bank and IDA, such as in the use ofpre-qualification/post-qualification procedures, IDA's open eligibility requirements vs the State Bank'sstated practice of excluding foreign firms, which is unacceptable under IDA procedures. Such differenceswill be removed through application of IDA's Procurement Guidelines which will govern all procurementof Goods financed under the Project. Consultants' services will be procured in accordance with IDA'sConsultant Guidelines. The specific procurement arrangements described below are designed to ensureconformrity with the Bank's procurement procedures.

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Procurement Methods (Table A)

6.06 Goods to be financed under the project shall be procured in accordance with the Guidelines forProcurement under IBRD Loans and IDA Credits, January 1995, revised January 1999. ConsultantsServices financed under the project shall be procured in accordance with the Guidelines for Selection andEmployment of Consultants by World Bank Borrowers, January 1997, revised January 1999. In case ofconflict between IDA's procurement procedures and any national rules and regulations, IDA's procurementprocedures would take precedence.

6.07 The Bank's Standard Bidding Documents and bid evaluation forms for procurement underIntemational Competitive Bidding (ICB), and sample bidding documents and bid evaluation forms forprocurement under National Competitive Bidding (NCB) which are already in use on other IDA financedprojects in Pakistan, will be used for procurement of Goods. IDA's Standard Request for Proposaldocument and evaluation form will be used in the selection of Consulting firms.

6.08 All expected procurement of goods and consultants' services will be listed in the project's GeneralProcurement Notice (GPN) to be published in the United Nations Development Business (UNDB). Aconsolidated GPN for the whole project has been published in the UNDB and will be updated annually.

Goods (US$22.03 million)

6.09 Goods under the Project would generally include:

Computer hardware and software* Power Equipment including generators, stabilizers, UPS etc.

Communication equipmentHardware and software for the Real Time Gross Settlement system

6.10 International Competitive Bidding (ICB) procedures will be followed for each contract for goodsestimated to cost more than US$200,000 equivalent. Most of the procurement of goods under the project isexpected to be procured through ICB procedures. Domestic Preference will be allowed to local bidders onICB contracts. The Project will also finance part of the incomplete activities under the on-going IT systemscontract which was awarded by the State Bank following ICB procedures under FSDIP (Ln. 3808-Pak).

6.11 Contracts for goods estimated to cost between US$50,000 equivalent and US$200,000 per contractup to an aggregate amount not to exceed US$1,000,000 are expected to be procured through NationalCompetitive Bidding (NCB) procedures acceptable to IDA. Small value off-the-shelf goods estimated tocost US$50,000 equivalent or less per contract and up to an aggregate ceiling not to exceed US$700,000are expected to be procured following National Shopping procedures in accordance with the ProcurementGuidelines.

Improvement of Bidding Procedures under National Competitive Bidding

6.12 The following improvements in bidding procedures will apply to all procurement of Goods underNational Competitive Bidding, in order to ensure economy, efficiency, transparency and broad consistencywith the provisions of Section 1 of the Guidelines:

* Invitation to bid shall be advertised in at least one national newspaper with a wide circulation, at

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least 30 days prior to the Jeadline for the submission of bids;* bid documents shall be made available, by mail or in person, to all who are willing to pay the

required fee;* foreign bidders shall not be precluded from bidding and no preference of any kind shall be given

to national bidders in the bidding process;* bidding shall not be restricted to pre-registered firms;* qualification criteria shall be stated in the bidding documents;* bids shall be opened in public, immediately after the deadline for submission of bids;* bids shall not be rejected merely on the basis of a comparison with an official estimate without

the prior concurrence of the Association;* before rejecting all bids and soliciting new bids, the Association's prior concurrence shall be

obtained;* bids shall be solicited and contracts shall be awarded on the basis of unit prices and not on the

basis of a composite schedule of rates;* contracts shall not be awarded on the basis of nationally negotiated rates;* contracts shall be awarded to the lowest evaluated and qualified bidder; and* post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders.

Consultants' Services (US$3.55 million)

6.13 Contracts with consulting lirmns estimated to cost more than $100,000 per contract will beprocured in accordance with Quality and Cost Based Selection procedures. Contracts estimated to cost lessthan $100,000 per contract may be procured through the method of Selection Based on Consultants'Qualifications. Contracts with individual consultants will be procured in accordance with the provisions ofSection V of the Consultants Guidelines.

Procurement Planning

6.14 Preliminary procurement plans for goods and consultants' services have been provided to IDA andour available in IDA's files. Prior to issuing the first invitation for bids in the case of goods and request forproposals in the case of consultants services, the State Bank will prepare and provide for IDA's review,updated annual procurement plans for Goods and Consultants' Services. Procurement under the projectwill be carried out in accordance with the agreed procurement plan. Procurement plans will be closelymonitored and updated on a quarterly basis.

Review of Procurement by the Bank (Table B)

6.15 Prior Review: The following contracts will be subject to IDA's prior review:

* All ICB contracts for Good ;.* The first NCB contract for Goods, irrespective of value, and thereafter each contract for Goods

estimated to cost US$ 100,000 equivalent or more.* The first Consultants' Services contract with consulting firms, irrespective of value, and thereafter

each contract with firmns estimated to cost US$100,000 or more.* The first consulting services contract with individual consultants, irrespective of value, and

thereafter each contract with individuals estimated to cost US$ 50,000 equivalent or more.

6.16 All other contracts will be subject to Post-Review by IDA. The State Bank will send to the Bankon a quarterly basis, a list of all contracts subject to post-review.

Procurement Information and documentation

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6.17 Procurement information will be recorded and reported as follows:

(a) Complete procurement documentation for each contract, including bidding documents,advertisements, bids received, bid evaluations, letters of acceptance, contract agreements, securities, relatedcorrespondence etc., will be maintained by the implementing agency in an orderly manner so as to readilyavailable for audit.

(b) Contract award information will be promptly recorded and contract rosters, in IDA's sampleformat, maintained by the implementing agency.

(c) Comprehensive quarterly reports by the implementing agency indicating:(i) revised cost estimates, where applicable, for each contract;(ii) status of on-going procurement, including a comparison of originally planned and

actual dates of the procurement actions, including preparation of bidding documents,advertising, bidding, evaluation, contract award and completion time for each contract;and

(iii) updated procurement plans, including revised dates, where applicable, for theprocurement actions.

Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other N.B.F. Total

Cost1. Goods 20.33 1.00 0.70 0.00 22.03

(18.29) (0.85) (0.49) (19.63)2. Consultants' Services 0.00 0.00 5.30 0.00 5.30

(3.90) (3.90)3. TrainingfWorkshops 0.00 0.00 1.47 0.00 1.47

(1.47) (1.47)4. Unallocated 0.00 0.00 1.50 0.00 1.50

(1.50) (1.50)Total 20.33 1.00 7.22 0.00 30.30

(18.29) (0.85) (5.86) (26.50)

1/ Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs includecontingencies.

2/ Includes goods and civil works to be procured through national shopping, consultants' services, andtraining

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Table Al: C:onsultant Selection Arrangements (optional)(US$ million equivalent)

.l Selection -Method-Consuliant Services

Expenditure Category -QCBS QBS SFB LCS CQ Other N:B.F. Total CostA. Firms 2.85 0.00 0.00 0.00 0.23 0.00 0.00 3.08

(2.24) (0.00) (0.00) (0.00) (0.16) (0.00) (0.00) (2.40)B. Individuals 0.00 0.00 0.00 0.00 0.00 2.22 0.00 2.22

(0.00) (0.00) (0.00) (0.00) (0.00) (1.50) (0.00) (1.50)

Total 2.85 0.00 0.00 0.00 0.23 2.22 0.00 5,30

(2.24) (0.00) (0.00) (0.00) (0.16) (1.50) (0.00) (3.90)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection cf individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.N.B.F. = Not Bank-FinancedFigures in parenthesis are the amounts to be financed by the Bank Credit.

Prior review thresholds (Table B)Table B: Threshold for Procurement Methods and Prior Review

Sr. No. Expenditure Category Contract Value Procurement Contracts Subject toThreshold Method Prior Review

__ __ __ __ _ _ _ (US$) (US$)1. Goods 21.5 million

> 200,000 ICB All100,000-200,000 NCB All50,000-100,000 NCB First contract<50,000 NS None

2. Consulting Services 3.25 millionFirms > 100,000 QCBS All

< 100,000 SBCQ First contract> 50,000 Section V- CG All

Individuals < 50,000 -do- First contract

Total estimated value of contracts subject to prior review: US$24.75 million

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Overall Procurement Risk Assessment - Average

Frequency of procurement supervision missions proposed: One every six months (includes specialprocurement supervision for post-review/audits)

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Disbursement

Allocation of credit proceeds (Table C)6.18 Reimbursement (of expenditures) against advance payments out of SBP's funds would be donethrough Special Account to be maintained with National Bank of Pakistan, statements of which would beregularly reconciled with the accounts. Disbursements would be made using transaction-based procedures.

6.19 The proposed IDA Credit of SDR21.30 million (US$26.5 million equivalent) would be disbursedover a period of four years and would finance about 87.5% percent of the cost of the project. The proceedsof the Credit would be disbursed against eligible expenditures, net of taxes and duties indicated in Table Cbelow. The final disbursement is anticipated to be made by December31, 2006, about six months after theend of project implementation. (Allocation of Credit proceeds by disbursement category and percentage tobe financed are shown in Table C. )

Table C: Allocation of Credit Proceeds

Expenditure Category - : . Amount in US$million. Financing PercentageGoods 19.63 100% of foreign expenditures

100% of local expenditures [ex factorycost] and

80% of local expenditures for other itemsprocured locally

Consultants' Services 3.90 98% of expenditures for nationalconsultants

85% of expenditures for foreignconsultants

TrainingtWorkshops 1.47 100%Unallocated 1.50

Total Project Costs 26.50

Total 26.50

Use of statements of expenditures (SOEs):

6.20 Disbursements would be fidly documented except for those expenditures: (a) under contracts notexceeding the equivalent of: (i) US'$100,000 each for goods, (ii) US$100,000 for the services of consultingfirms, (iii) US$50,000 for services of individual consultants; and (iv) for training of the SBP staff. Suchdisbursement would be made against Statement of Expenditures (SOEs), the documentation for whichwould not be submitted to IDA but retained by the project implementation agency at a central place andmade available during the course of project supervision. It is estimated that about US$2 million equivalentwould be disbursed through SOEs. Individual small contracts for works, goods, services and training canbe claimed through submission of Statement of Expenditures. The project implementation agency would berequired to keep all documentation relating to these activities for review by the IDA and for audit. Theestimated disbursement schedule is shown in Annex '5'.

Special account:6.21 To facilitate disbursement, a Special Account would be opened by the SBP, with an amount ofupto US$1.50 million in the National Bank of Pakistan on terms and conditions acceptable to IDA. This

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would be used for IDA's share of financing of the project expenditures( equivalent to requirement for about4 months estimated expenditures). The Special Account would be opened and maintained by SBP andwould be used for payments of all eligible foreign and local expenditures. The Special Account would bereplenished on a monthly basis or whenever 20% of the account has been utilized, whichever occurs first.

Financial Management Arrangements

6.22 State Bank of Pakistan (SBP) is the implementing agency for this project. The financialmanagement system in place at the central bank is adequate and can provide financial statements for theproject. Hence, normal supervision by Bank missions is recommended. The flows of funds and accountingprocess to be followed for TABS have been observed to be consistent and accurate. However, significantlevel of coordination is required for formulation of budgets and communication of the same, under eachcomponent. It was assured that this will be done.

6.23 Accounts of the project would be maintained by the International Organizations Accounts Sectionthat is responsible for accounting functions of projects financed by donors. The expenditure would beincurred by Expenditure and General Services Sections and SBP's Expenditure Regulations would befollowed, joint signatures are required for all payments. All payments would be subject to pre-audit in theAccounts Department and post-audit by Internal Audit Department.

6.24 SBP Project Management team is responsible for coordination between Project Managers of eachcomponent and SBP staff to facilitate the progress of the project.

6.25 Budgeting has been observed as a weak area in the overall financial management system. However,it has been assured that arrangements would be put in place to produce and monitor detailed budget for theproject. Generally, the books of account are well kept and SBP's policies and working procedures foraccounting and financial reporting are adhered to. Internal control arrangements are by and large effective.

6.26 Disbursements: Reimbursement (of expenditure) against advance payments out of SBP's fundswould be done through Special Account to be maintained with National Bank of Pakistan, statements ofwhich would be regularly reconciled with the accounts. Disbursements would be made usingtransaction-based procedures.

6.27 Audit: SBP has been in compliance of the audit and financial covenants as far as the other projectit is implementing - FSDIP. Audited financial statements have been received on time and auditors havegiven unqualified opinion in respect of ProjectlSOE and Special Account for FSDIP. The auditors havegiven a qualified exception opinion on entity's accounts for FY'01 because of non-verification of assetsrecoverable from the Reserve Bank of India and accrual of profit on various facilities granted to theAgricultural Development Bank of Pakistan. However, this has no implications on the project. Anunqualified audit report has been received in respect of the Structural Adjustment Credit for which SBPwas the implementing agency. Projects financial statements and SOEs would be audited by a leading firmof Chartered Accountants acceptable to the Bank.

6.28 Country issues relevant to the project and financial management of a public sector entity:

(a) Inadequate budget management and control has resulted in weak financial management andaccountability. This limits the internal control and financial monitoring to routine and procedural practicerather than risk-based activity. Realizing this SBP has stressed the need for strong budgeting system andeffective implementation of the same, a Joint Director in Accounts Department has been assigned with the

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responsibility to oversee the budgeting process and system in place at the central bank and rationalize it.

(b) The financial rules applied are old and need to be streamlined. Most of the internal workingprocedures/manuals of different departments are outdated including the Banking Department manual,which is the main manual. The Banking Department Manual is in the process of updating.

6.29 Risk Analysis: There are no material risks that may affect the project.

6.30 Strengths and Weaknesses:

* Strengths: The project has the following strengths in the area of financial management: (i) allpayments are subjected to double audit i.e. pre-audit in the Accounts Department and postaudit by the Internal Audit Department, unresolved observations are reported to the Governoron a monthly basis; (ii) payments are authorized by the General Services Section afterpre-audit, recording and processing of the transaction is carried out at Accounts Main Sectionand custody of assets rests with the respective departments, effective segregation of duties is inplace; (iii) as agreed in the last review of FSDIP details of all expenditure incurred under eachcomponent of the project are recorded separately in the expenditure register; (iv) fixed assetregister maintained to record all procurements under the project; (v) joint signatures required tooperate Special Account; (vi) payments are made against original sanctions; (vii) details ofexpenditure limits against positions in Expenditure Manual; and (viii) written policies andprocedures of key departments are communicated to the relevant staff and are followed, theinternal working procedures manuals are being updated.

* Significant weaknesses: There are no significant weaknesses in financial management.

6.31 Implementing Entitv: The implementing agency for the project is the State Bank of Pakistin, thecentral bank of the country, which is an autonomous legal entity. Previously there were 16 field officesand a central directorate, which acted as head office. Consolidation of accounts was done at centraldirectorate. Now the operations have been divided into two areas: (i) Central Directorate, which acts as acentral bank, and (ii) a new subsidiary, SBP Banking Services Corporation that supervises 16 field offices.

6.32 Funds Flow: Flow of funds would be on the lines of the existing system followed for the Bank'sfunded projects.

6.33 Flow offunds from the Wo-Id Bank to SBP: A Special Account would be opened by the SBP, withthe National Bank of Pakistan on teirms and conditions acceptable to IDA. This would be used for IDA'sshare of financing of the project expenditures (equivalent to requirement for about 4 months estimatedexpenditures). The Special Account would be opened and maintained by SBP and would be used forpayments of all eligible foreign and local expenditures. The Special Account would be replenished on amonthly basis or whenever 20% of the account has been utilized, whichever occurs first.

6.34 Existing system for flow ofjunds within SBP: A cheque is prepared in favor of the supplier, whichis jointly signed by Accounts Officer and Assistant Director, General Services Section. The cheque issuedto the supplier is drawn on SBP account. NBP Special Account is maintained for reimbursement ofexpenditure incurred. Documents and bills are sent to IOAS section for reimbursement, which sendswithdrawal applications to the World Bank. A cheque drawn on NBP special account is prepared by IOASin favor of the director of the department incurring expenditure. Joint Director and Jr. Joint Director jointlysign the cheque. Upon realization of funds, Karachi Office intimates and respective account is reimbursed

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with the amount.

6.35 Staffinm: Generally, the departments carrying out accounting and financial reporting function underBank's projects are adequately staffed except that some staff would be required for detailed budgeting andmonitoring. This would be done by transferring staff from one of the accounting departments of SBP.

6.36 Accounting Policies and Procedures: SBP uses accrual basis of accounting. Expenditure isincurred out of SBP's funds and charged to a control account maintained in SBP's main accountingsystem. Subsidiary accounts in respect of project expenditure are maintained by the IOAS.

6.37 Salaries are processed by Expenditure Department, which follows SBP Expenditure RegulationsManual. Payment authority rests with the Joint Director and above, no payment is accepted if authorizedby lower than a Joint Director.

6.38 The books of account are generally well kept and working procedures of the bank are adhered towhile processing a particular transaction.

6.39 Internal Audit: There is an effective internal audit system in SBP. All payments at SBP are subjectto double audit i.e. pre-audit at Audit Division of Accounts Department and post-audit, which is carriedout by Internal Audit Department. This strengthens the internal control over the flow of funds acrossdifferent departments. However, during the review it was noted that the internal control and audit functionis limited to routine and procedural monitoring and is not a risk based activity. The expenditures incurredare not compared to the budgets related to specific activities at the time of pre-audit as a result of which thecontrol over expenditure against budgeted allocations is not what may be required by an efficient financialmanagement system. However, the rationalization of budgeting activity is under process and has beenincorporated in the new computerized financial and accounting system to be implemented this year. Thebudgeting mechanism at SBP is discussed in detail in Reporting and Monitoring Section

6.40 In pre-audit, documentation, proper verification through invoices is checked, approval is granted ifauthorized official has initiated the payment according to the expenditure manual. Payments are madeagainst original sanctions to prevent double payment. However, budgets are not taken pre-audit sectionwhich is maintained for each department. Monthly reports are sent to internal audit department for followup. An appraisal report is prepared in respect of unresolved observations for the Governor. The InternalAudit Department comprises of professionals headed by an experienced chartered accountant.

6.41 Internal audit of all activities is carried out once a year and is a continuous process. There are threeteams who carry out internal audit function all year round. Each team consists of 5-6 members. A JointDirector or a Junior Joint Director heads each team. All accounting standards mandated by the Securities &Exchange Commission of Pakistan and the Institute of Chartered Accountants of Pakistan are followed.The audit manual has been formulated by a local firm of chartered accountants on risk-based activities.

6.42 External Audit: External audit of SBP is carried out jointly by two local Chartered Accountantsfirms of which one is representing one of the intemational finms. The accounts are co-audited by A.F.Ferguson & Co. (representing one of the big five firmns) and Hussain Shah Rehman. There have not beenany delays last year and the audit reports were issued within two months of year end for FSDIP. Therewere no audit issues.

6.43 The external audit of TABS would be carried out by auditors acceptable to the Bank and as perTORs approved by the Bank. This would be confirmed in the minutes of negotiation.

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6.44 The following audit reports would be required on Bank's formats that have been discussed with theimplementing agency:

Type of report Due byEntity (SBP) 31 DecemberProject/SOE 31 DecemberSpecial Account 31 December

6.45 Reporting and Monitoring:Existing Arrangements of accounting for the World Bank's projects: Accounts are being

maintained manually. However, accounts would be computerized by end May, 2002 using OracleFinancials. The General Ledger will have separate modules for fixed assets, inventory, accounts payable,purchases, HR, payroll etc and provisions for sub classifications under each module.

6.46 Budgeting: Department wise budgets are given to the General Services Section by all departments.The budgets are consolidated under various heads of expenditure. Actual expenditure is compared with theaverage monthly budget for expenciture The budget is approved by the accounts departmnent. It was agreedthat detailed budgeting of each com.ponent would be devised covering all significant activities and providedto IOAS.

6.47 Financial Monitoring Reportsfor TABS: The FMRs requirement for TABS would includefinancial statements, physical progress reports and procurement reports for project monitoring. SBP willprovide the following quarterly financial statements:

1. Sources and Uses of Funds2. Uses of Funds by Projeci. Activity3. Output Monitoring Report4. Procurement Monitoring Report

6.48 In addition, SBP will also prepare progress reports on a quarterly basis. These reports wouldreflect the linkage of financial inforTnation with the progress of the project. The IOAS maintainsexpenditure ledger and fixed asset ledger where expenditure is recorded under each component. Theformats of the following Financial MIonitoring Reports and annual audited financial statements have beendiscussed and agreed with the International Organizations Accounts Section. Contents of the FMRs wouldbe agreed at negotiations.

6.49 Information Systems: Although manual accounting system is adequate, SBP is in the process ofcomputerizing it. The automation of accounting, and other systems is expected to be completed by May2002. The software would include 3 modules: (i) Banling Applications - Globus; (ii) Oracle Financials -ERP - Enterprise Resource Planning applications, includes sub, modules for inventory, budgeting, generalledger, accounts payable, accounts receivable and other Balance Sheet items; and (iii) Data Warehouse.

The first two are for intemal operations of the bank and the last one for extemal monitoring.

The system would be adequate for effective financial management reporting under TABS as thereis provision of sub-heads to account for project's accounting requirements under the newcomputerized accounting system.

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6.50 Supervision Plan: Since the financial management arrangements to be used for the project areadequate, Bank's normal supervision plan i.e. six monthly missions may be carried out. However, specialattention would need to be paid to budgetary control over expenditure.

6.51 Action Plan

Actions for enhancement offinancial Responsible Person Completion Datemanagement systemComputerization of accounting process Project Incharge, IT End of Nov'02

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Annex 7: Project Processing Schedule

PAKISTAN: Banking Sector Technical Assistance

Project Schedule Planned ActualTime taken to prepare the project Imonths)First Bank mission (identification) 10/01/2001Appraisal mission departure 10/01/2001 01/10/2002Negotiations 11/15/2001 04/22/2002Planned Date of Effectiveness 12/24/2001 I

Prepared by:

Mudassir Khan

Preparation assistance:

Ann Rennie, Robert Keppler, Rake;h Asthana, Amir Munir

Bank staff who worked on the project included:

Name SpecialityMudassir Khan Financial Sector Specialist

Ann Rennie Human Resource/ Institutional Development

Robert Keppler Payment Systems, Credit Information

Rakesh Asthana Information Systems

Akhtar Hamid Legal Counsel

Amir Munir Information Systems

Hasan Saqib Financial Management

Ahsan Ali Procurement

Anwar A. Bhatti DisbursementMary Agnes Evidente Program Assistant

Farah Imran Team AssistantRaana Osman Consultant

Ali Awais Legal Consultant

Saima Sherazi Consultant (editor)Desiree Charles-Baveghems Staff Assistant

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Annex 8: Documents in the Project File*

PAKISTAN: Banking Sector Technical Assistance

A. Project Implementation Plan

Borrower Project Implementation Plan

B. Bank Staff Assessments

Technical Assistance for Banking Sector, Aide Memoire, February, 2002Financial Sector Deepening and Intermediation Project Supervision Mission Report, May, 2001Financial Sector Deepening and Intermediation Project -South Africa Mission, Back to Office Report,

December, 2001

C. Other

Capacity Building at State Bank of Pakistan, Second Progress Report, November 26, 2001IMF - Assessment of the Standby Program Report, 2000IMF - Report of Monitoring and Exchange Affairs Department, April, 2001IMF - Bank Reform and Bank Efficiency in Pakistan, September, 2001ADB - SME Sector Development Program, Aide-Memoire, December, 2001ADB - Capital Market Development Program, October 1997ADB - Technical Assistance to Pakistan for the Rural Microfinance Project, December, 1997ADB - Technical Assistance to Pakistan for the Restructuring of Public Sector Mutual Funds,

September, 1997

*Including electronic files

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Annex 9: Statement of Loans and Credits

PAKISTAN: Banking Sector Technical Assistance02-May-2002

Difference between expectedand actual

Original Amount in USS Millions disbursements

Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'dP055292 2002 BSRPP 0.00 300 00 0.00 207 57 -95.46 0.00

P056213 2001 TRADE & TRANSPORT 0.00 3.00 0.00 1 87 0.33 0.00

P071092 2001 NWFP ON-FARM WATER MANAGEMENT PROJECT 0.00 21.35 0.00 20.23 -0 47 0.00

P049791 1999 POVERTYALLEVIATION FUND 0.00 90.00 0.00 57.58 -4.50 0.00

P037834 1998 NORTHERN EDUCATION o.oo 22.80 0 09 14.33 15 63 0 00

P037835 1998 SOCIAL ACTION PRG II 0.00 250,00 0.00 18.40 -103 0.00

P010500 1998 NATIONAL DRAINAGE PR 0.00 285.00 0.24 144 41 107.01 0 00

P036015 1997 IMPR FIN REP & AUDIT 0.00 28.80 0.00 18.48 20.54 000

P039281 1996 GHAZa BAROTHA HYDROP 350.00 0.00 0.00 61.04 59.97 37 35

P010478 1996 NWFPCOMMUNITYINFRA 0.00 21.50 0.00 858 10.09 1.12

P010482 1996 BALOCHISTAN COMMUNITY IRRIGATION &AGRI. 0.00 2670 000 311 540 5.50

P034101 1996 PK-TELECOM REG & PRIVAT 35 00 0.00 13.15 4.93 18.08 8 08

P010470 1995 FIN SECTOR DEEPENING & INTERMEDIATION 216.00 0.00 188.03 11.41 199.24 11 24

Total: 601.00 1049.15 201.51 569.94 334.84 63.29

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PAKISTANSTATEMENT OF IFC's

Held and Disbursed PortfolioJan - 2002

In Millions US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Paric Loan Equity Quasi Partic1995 AES Lal Pir 30.82 9.50 0.00 0.00 30.82 9.50 0.00 0.001996 AESPakGen 16.22 9.50 0.00 29.52 16.22 9.50 0.00 29.521995 Abamco Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.001996 Atlas Inv Bank 2.81 0.00 0.00 0.00 2.81 0.00 0.00 0.001994 Atlas Lease 2.40 0.36 0.00 0.00 2.40 0.36 0.00 0.000 BRRIL 0.00 0 24 0.00 0.00 0.00 0.24 0.00 0.001991/94/95 BRRIM 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.001995 BSJS Fund 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.001993 CDCPL 0.00 0.16 0.00 0.00 0.00 0.16 0.00 0.001993/97/01 Crescent Greenwd 3.20 0.00 0.00 0.80 0.00 0.00 0.00 0 001996 Crescent IBank 6 75 0.00 0.00 0.00 6.75 0.00 0.00 0.000/94/95/96 D.G. Khan 0.00 0.51 0.00 0.00 0.00 0 51 0.00 0.001998 Engro Asahi 6.86 0.00 0.00 0.00 6.86 0.00 0.00 0.001991/95/97 Engro Chemical 5.14 0.00 0.00 3.75 5.14 0.00 0 00 3.751996 Engro Vopak 7.51 0.00 0.00 3.13 7.51 0.00 0 00 3.131990/91/96 FIB 1.54 0.00 0.00 0.00 1.54 0.00 0 00 0.001993 Fauji Cement 22.40 5.00 0.00 0,00 22.40 5.00 0.00 0.001995 First Crescent 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.001994/96 First Leasing 0.00 0.69 0.00 0.00 0.00 0.69 0.00 0.001995 First UDL 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.001996 Gul Ahmed 20.25 4.10 0.00 22.53 20.25 4.10 0.00 22.531988 Hala Spinning 3.25 0.00 0.00 0.00 3.25 0.00 0.00 0.001991/95 IHFL 0.00 0.40 0.00 0.00 0.00 0.40 0 00 0.001992/96 JSCL 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.001995 Kohinoor 17.50 6.30 0.00 20.33 17.50 6.30 0.00 20.331994/95/97 Maple Leaf 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.000/93 Muslim Comm Bank 1.41 0.00 0.00 0.00 1.41 0.00 0.00 0.001984/94 NDLC 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.001994 Orix Finance 0.00 0.58 0.00 0.00 0.00 0.58 0.00 0.001994 OrixLeasing 2.81 1.25 000 0.00 2.81 1.25 0.00 0.001994 PACRA 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.001994 PI&CL 1.25 0.00 0.00 0.00 1.25 0 00 0.00 0.001991/94/95 PILCO 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.001983/84/94 PPL 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001965/80/82/87/91/94/9 Packages 2.25 2.50 0.00 0.00 2.25 2.50 0.00 0.005 Pakistan Service 2.00 3.00 0.00 0.00 2.00 3.00 0.00 0.001993 Pakistan Unit Tr 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.001995 Prudential 0.00 0.40 0.00 0.00 0 00 0.40 0.00 0.001991 Regent Knitwear 5.90 0.00 0.00 2 80 5.90 0.00 0.00 2.801994 Rupafab 3.67 0.00 0.00 0.00 3.67 0.00 0.00 0.001995 Sarah Textiles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.000/93/96 Uch Power 38.05 0.00 0.00 71.24 33.09 0.00 0.00 56.201996

Total Portfolio: 206.80 49.44 20.00 154.10 198.64 49.44 20.00 138.26

Approvals Pending Commitment

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FY Approval Company Loan Equity Quasi Partic2001 Lasmo Pakistau 10.00 0.00 0.00 0.002000 Maple Leaf Reatr 15.00 0.00 0.00 0.002002 Microbank 0.00 0.00 1.64 0.00

Total Pending Commitment: 25.00 0.00 1.64 0.00

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Annex 10: Country at a GlancePAKISTAN: Banking Sector Technical Assistance

POVERTY and SOCIAL South Low-Pakistan Asia Income Development diamond'

2000Population. mid-year (millions) 138.1 1,355 2.459 Life expectancyGNI per capita (Atlas method. US$) 440 460 420GNI (Atlas method, USS billions) 61.0 617 1,030

Average annual growth, 1994-00

Population (%) 2.4 1 9 1.9Labor force (X) 3.0 2.4 2.4 GNI Gross

per primaryMoat racent estimate (latest year avallable, 1994-00) capita enrollment

Poverty (% of population below national poverty line) 33Urban Populaton (X of total population) 37 28 32Life expectancv at birth (Years) 63 63 59Infant mortality (per 1,000 live births) 90 74 77Child malnutrition (% of children under 5) 38 47 .. Access to improved water sourceAccess to an Improved water source (X of population) 68 87 76Illiteracy (X of population ege 15+) 54 45 38Gross primary enrollment (X of school-age popuiation) 89 100 96 Pakislan

Male 77 110 102 Low-income groupFemale 60 90 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratioi-

GDP (USS billions) 23.7 40.0 58.6 61.6Gross domestic Investment/GDP 18.5 18.9 15.6 15.6 TradeExports of aoods and services/GDP 12.5 15.5 15.1 15.5GrossdomesticsavingslGDP 6.9 11.1 10.6 12.1Gross national savinaslGOP 13.7 14.2 11.0 12.0

Current account balance/GDP -4.8 -4.7 -4.6 -3.6 Domestic Investmentinterest payments/GDP 1.0 1.3 1.6 1.4 savingsTotal debt/GDP 41.9 51.6 57.8 52.1 sTotal debt serviceexports 18.3 23.0 29.4 26.1Present value of debtVGDP .. .. .. 43.2Present value of debtlexports .. .. .. 249.3

Indebtedness1980-90 1990-00 1999 2000 2000-04

(average annual growth)GDP 6.3 3.7 3.7 4.4 .. PakistanGDP per capita 3.5 1.2 1.2 1.9 .. Low-income groupExports of goods and services 8.4. 1.7 -2.9 16.0

STRUCTURE of the ECONOMY

1980 1990 1999 2000 Growth of Investment and GDP 1%)(X of GDP) toAariculture 29.5 26.0 27.0 26.3 iS

Industry 24.9 25.2 23.7 22.8Manufacturing 15.9 17.4 15.5 15.1

Services 45.6 48.6 49.2 50.9 4 5 9s as \; o o

Private consumptlon 83.1 73.8 79.0 76.9 -*

General government consumption 10.0 15.1 10.4 11.0 -GDI _ GDPImports of goods and services 24.1 23.4 20.0 19.1

1980-90 1990-00 1999 2000 Growth of exports and Imports (%)(average annual growth)Agriculture 4.3 4.4 1.9 6.1 20

Industry 7.3 3.9 49 -0.1 iso.Manufacturing 77 3.5 4.1 1.4

Services 6.8 4.4 5.0 4.8 1Private consumption 4.3 4.9 7.5 0.9General govemment consumption 10.3 0.7 -6.9 7.0 -20Gross domestic Investment 5.8 1.8 -9.2 4.1 -Exports C ImportsImports of goods and services 2.1 2.5 -5.4 -2.3

Note: 2000 data are preliminary estimates.

The diamonds show tour kev Indicators In the countrv (in bold) compared with Its Income-group averags. If data are missina, the diamond willbe incomplete.

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Pakistan

PRICES and GOVERNMENT FINANCE1980 1990 1999 2000 Inflation (%)

Domestic prices(% change) 5

Consumer prices 5 7 3.6 o'Implicit GDP deflator 9 1 6.5 5.9 3.7

Government finance(% of GDP, includes current grants) 0

Current revenue 18.0 16.2 16 6 95 99 97 9O 99 90Current budget balance -1.0 -3.0 -35 - GDP deflator _ CI'IOverall surplus/deficit -6.6 -6.0 -6 3

TRADE

(US$ millions) 1980 1990 1999 2000 Export and import levels (US$ mill.)

Total exports (fob) 2,365 4,954 7,779 8.569 t5.00oCotton 443 2 73Rice 239 533 540 10oo0*Manufactures 1,371 2,489 7,199 7.874 *0* * * *

Total imports (cif) 8,054 10,457 10,404 J JFood 1,066 1,496 896 so **Fuel and energy 1.163 1,477 2,793Capital goods 1,788 2,921 2.705 o

94 95 99 97 09 119 50Export once index 11995=100) . 103 87 84Imort orice index (1995=100) 87 93 MExports *Imports

Terms of trade (1995=100) .. .. 100 91

BALANCE of PAYMENTS

(UJS$ millions) 1980 1990 1999 2000 Current account balance to GDP (%)

Exports of goods and services 2,958 6,217 8,842 9,575Imports of goods and services 5,709 9,351 11,737 11,762Resource balance -2,751 -3,134 -2,895 -2,187 *2

Net income -281 -966 -1,808 -2,018Net current transfers 1,895 2,210 2.005 1,997 J4

Current account balance -1,137 -1,890 -2,698 -2,208 _i

Financing items (net) 1,416 1.890 3,952 2,000Changes in net reserves -279 0 -1,254 208

Memo:Reserves including gold (US$ millions) 0 1,311 2,228 1.606Conversion rate (DEC, local/USS) 9.9 21.4 50.1 51.7

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(US$ millions) Composition of 2000 debt (US$ mill.)Total debt outstanding and disbursed 9.931 20,663 33,899 32.091

BlRD 330 1,816 3.315 3,093 G 1.519 A 3.093IDA 821 2,106 3.905 3.828

F 3,557Total debt service 869 1.902 2.935 2,786 .3,828

IBRD 58 199 429 409IDA 9. 34 86 93 ic

% ~~~C 1,529Composition of net resource flows

Official grants 268 538 573 926Official creditors 539 904 873 454Private creditors 166 -63 -478 -361 E. 11,555_Foreign direct investment 68! 200 478 467 00Portfolio equity 0 87 28 74

World Bank programCommitments 185 972 440 A -IBRD E -BilateralDisbursements 90 491 628 301 B- IDA D- Other multilateral F -PrivatePrincipal repayments 29 . 92 283 291 C- IMF G -Short-termNet flows 61 399 345 10Interest,payments 39 141 232 211Net transfers 22 258 113 -201

Development Economics 2/8/02

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MAP SECTION

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IMAGING

Report No.: 24145 PAKType: PAD