Appraisal stage

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September 23, 2013

Report No.: AB7395

Operation Name

Mozambique – First Programmatic Financial Sector Development Policy Operation






Credit Reporting and Secured Transactions (40%);SME Finance (40%);Telecommunications (20%)

Operation ID


Lending Instrument

Development Policy Lending



Implementing Agency

Ministry of Finance (MOF)

Banco de Moçambique (BdM)

Date PID Prepared

September 23, 2013

Estimated Date of Appraisal

October 2, 2013

Estimated Date of Board Approval

March 6, 2014

Corporate Review Decision

Following the corporate review, the decision was taken to proceed with the preparation of the operation.

  1. Key development issues and rationale for Bank involvement

Mozambique’s economic performance has been very strong since the end of the Civil War in 1992. The country’s GDP growth from 1993 to 2012 averaged 7.4 percent. Its strong performance was made possible by sound macroeconomic management, a number of large-scale foreign-investment projects (“megaprojects”), and significant donor support. These factors contributed to robust growth across most sectors of the economy, especially mining, electricity and services. Although the relative growth rates of different sectors were highly uneven, overall growth has been stable and consistent. Mozambique is also poised to receive massive FDI inflows, specifically from extractive industries. These FDI inflows, if well-managed and appropriately leveraged, can support the diversification of Mozambique’s sources of growth with the potential of lifting millions of Mozambicans out of poverty.

However, over the past decade rapid growth has not translated into significant poverty reduction, and the geographical distribution of poverty remains largely unchanged. Moderate and extreme poverty are concentrated most heavily in rural areas and in the country’s Central and Northern regions. With a population of 23.9 million, per capita income in 2011 was US$535. This is less than 40 percent of the average for Sub Saharan Africa. Poverty reduction has stagnated, with approximately 55 percent of the population deemed poor. As such, the benefits of FDI have yet to translate into broad development outcomes for most of the population (Mozambique ranks 185/187 in the 2012 Human Development Index and 197/210 in global GDP per capita rankings).
Financial sector development matters for both economic growth and poverty alleviation. Evidence strongly indicates that, when effectively regulated and supervised, financial development spurs economic growth, reduces income inequality, and helps to lift households out of poverty (World Bank 2008). Well-developed financial systems have a strong positive impact on economic growth over long-term periods (Demirguc-Kunt and Levine 2008). Moreover, financial sector development is also pro-poor (Beck, Demirguc-Kunt and Levine 2004) and is associated with a decline of extreme poverty (Beck, Kunt and Levine 2007). (Please see section “Poverty and Social Impacts” for more details).
In order for Mozambique to achieve broad based growth and for the private sector to generate the needed jobs, it is imperative to deal with the ongoing challenges of access to finance for firms and households. Access to finance remains one of the defining challenges for the domestic private sector in Mozambique. Indeed, the 2013-2014 Global Competitiveness Report, which ranked Mozambique 137 out of 148 countries, found that access to financing was the top one constraint for doing business in Mozambique. The 2009 Finscope Household survey for Mozambique found that only 12.7 percent of the population had access to formal financial services. The problems of access to finance are most severe in rural areas where, according to the 2009 Finscope Household Survey, only 5 percent had access to formal financial services.
Further financial development in Mozambique also implies continuing reforms to promote financial sector stability (crucial to promote access). In the last ten years Mozambique has implemented notable reforms to promote financial sector stability (please see Financial Sector Section for details). These reforms enabled substantial progress in the strengthening and development of the financial sector, as highlighted in the 2009 FSAP Update. Nevertheless, there still are important pending reforms to promote financial sector stability, including in the areas of banking regulation and supervision and the banking safety net and crisis management frameworks. These include weaknesses in loan classification and risk management, the need to strengthen the bank resolution framework and emergency liquidity assistance, and introduction of deposit insurance.
The Government has recognized the importance of Financial Sector Development as part of its Action Plan for Poverty Reduction and its broader reform agenda for improving the business environment. Towards that end, a number of reforms have been initiated recently that seek to maintain financial sector stability, improve financial sector regulation, strengthen financial sector infrastructure, introduce new non-bank financial institutions, and promote access to financial services by businesses and households. Most importantly, the Government adopted Mozambique’ Financial Sector Development Strategy 2013-2022 (MFSDS) in April 2013, which provides an overall vision and a comprehensive and detailed roadmap for reforms in the financial sector.

  1. Proposed Objective(s)

The development objective of the Proposed Financial Sector Development Policy Operation (FSDPO) Series is to reinforce financial stability, increase access to finance by households and firms, and enhance the development of long-term financial markets. This DPO directly contributes to the realization of the Government’s financial sector Strategy for promoting a stable and inclusive financial system.

  1. Preliminary Description

The DPO seeks to catalyze the reform process envisaged in the Government’s strategy and is being accompanied by technical assistance to be provided by the Bank and donor partners in a coordinated fashion. The DPO is structured around three pillars: (i) Financial Stability; (ii) Financial Inclusion; (iii) and Long Term Financial Markets. Actions to promote financial stability focus on improvements in banks’ risk management and asset soundness, safety net and crisis management resiliency frameworks, and protecting the integrity of the financial system. Actions to promote financial inclusion focus on strengthening the insolvency and creditor rights frameworks; credit reporting system; promoting new financial services and channels (such as electronic, mobile, and agency banking) that can reach under-served segments of the population; enhancing the safety and efficiency of payment systems and; strengthening consumer protection and improving financial literacy. The long term financial markets policy area promotes the development of money, debt, and capital markets and the insurance and pension sub-sectors. The proposed DPO will contribute to the Country Partnership Strategy’s (CPS) goal of broad-based inclusive and pro-poor growth by enhancing financial inclusion and promoting stable financial markets.

  1. Poverty and Social Impacts and Environment Aspects

Poverty and Social Impacts
The proposed operation is expected to have positive social and poverty impacts by promoting financial sector development. Evidence strongly indicates that, when effectively regulated and supervised, financial development spurs economic growth, reduces income inequality and helps to lift households out of poverty (World Bank 2008).
Well developed financial systems have a strong positive impact on economic growth over long-term periods (Levine 2005; Demirguc-Kunt and Levine 2008). A growing body of empirical research shows that the services provided by the financial system exert a first order impact on long-run economic growth. Both, the level of banking development and stock market liquidity exert an independent positive influence in economic growth. On the other hand, cross country evidence has shown that the poor gain as much from economic growth than the remainder of the population (Dollar and Kraay 2000).
Financial sector development is also pro-poor (Beck, Demirguc-Kunt and Levine 2004). While not conclusive, an accumulative body of empirical evidence suggests that there is a strong beneficial effect of financial development on the poor and that poor households and smaller firms benefit more from financial development than rich individuals and larger firms. For households, evidence suggests that financial development facilitates consumption smoothing and investment in human capital. For firms, increased access to finance is associated with higher returns and better performance. Similarly, theory provides sound reasons for believing that the poor disproportionately benefit from financial development (even when not unambiguous). Financial development facilitates entrepreneurship by people with promising ideas but little collateral and income, provides access to risk management and insurance and boosts economic activity that stimulates the demand for labor among others (Demirguc-Kunt and Levine 2009).
Financial sector development is also associated with a decline of extreme poverty (Beck, Kunt and Levine 2007). Countries with higher levels of financial development have experienced swifter reductions of the population living on less that $1 per day during the 1980s and 1990s. The magnitude of the impact is also large, with almost 30 percent of the variation across countries in rates of poverty being attributed to cross-country variation in financial development.
Financial sector development reduces income inequality by disproportionately boosting the income of the poor (Beck, Demirguc-Kunt and Levine 2004). Improvements of the formal financial sector (including banks, securities markets and the full range of financial institutions) exert a particularly beneficial impact on the economic opportunities of the poor (Demirguc-Kunt and Levine 2008). Furthermore, evidence suggests that the indirect effects of finance on inequality are substantial (Demirguc-Kunt and Levine 2009). Financial development exerts a disproportionately large effect on the poor by expanding labor market opportunities. For micro and small firms, the indirect effects of financial development are significant as small firms benefit more from access to finance and increased growth opportunities than larger firms.
Prior actions under Pillar 1 of this DPO will contribute to a stable financial system, thereby benefiting the poor to a greater extent. First, financial sector stability is a pre-condition for financial sector development and increased access to financial service by the poor. Second, financial crisis harm the poor disproportionately, affecting poverty and income distribution through a variety of channels (Baldacci, de Mello and Inchauste 2002). Financial crisis typically lead to a slowdown in economic activity and, consequently, rises in unemployment and/or falls in real wages. If there is also fiscal retrenchment due to the crisis, this often leads to cuts in public outlays on social programs, transfers to households, wages and salaries among others. In this context, financial crisis are associated with deterioration in poverty indicators. Macro and microeconomic data show an increase in poverty due to financial crisis, with transmission channels such as inflation, unemployment, government spending and lower growth. On the other hand, financial crisis can be costly and the direct costs of banking collapses have largely been shouldered by governments (and, ultimately tax payers). In Mozambique, during the late 1990s and early 2000s, the failure of two state-owned banks (Banco Poupular de Desenvolvimento and Banco Comercial de Moçambique) imposed significant costs on taxpayers and diverted scarce public resources that could have been used to deliver poverty reduction programs.
Under Pillar 2, better financial inclusion will benefit the poor. Modern development theory sees the lack of access to finance as a critical mechanism for generating persistent income inequality and slower growth (Demirguc-Kunt and Levine 2008). Small enterprises and poor households face much greater obstacles in their ability to access finance all around the world but more so in developing countries. Women and youth are often not given sufficient consideration in accessing formal financial services, because of the rules in accessing certain services, but also because of the socio-cultural environment (co-sponsor of the parents/partners, guarantee conditions, affordability, distance, etc.). Hence, pillar 2 (Financial Inclusion)is expected to lift such sociocultural barrier by lessening accessibility conditions while broadening/diversifying (i.e. pillar 3 below) the spectrum of banking services. Overall, the proposed DPO will bring more positive social impacts among the beneficiaries by allowing easier and more affordable accessibility to banking and financial services.
Developing long-term financial markets (Pillar 3) will contribute to the diversification of funding sources for business, thereby stimulating private investment, economic growth, and poverty reduction. Actions to strengthen government debt markets are critical for reducing costs and increasing efficiency in the banking sector. For instance, regular supply of government bonds will improve predictability and transparency in the financial sector; auctions of the government securities and the announcement of auctions results will improve price discovery and efficient pricing of financial instruments; and announcements of the purpose of each issuance of TBs will reduce fragmentation of government securities.
In sum, the specific prior actions supported by this DPO series are expected to be particularly beneficial for the poor, small enterprises and rural areas:

  • Credit bureaus will allow individuals and firms to build credit history while helping banks to better assess risks. This should contribute to increased access and affordability of financial services. Better credit information is particularly beneficial for individuals and enterprises with little or no collateral (i.e. smaller enterprises). Moreover, better credit information is associated with higher levels of bank credit and lower financing obstacles for firms.

  • Similarly, the secured transactions law and movable collateral registry will increase the efficiency of collateral (including movable) and are expected to be particularly beneficial to lower income individuals and smaller enterprises, which have less collateral to offer to access credit. Movable collateral represents an especially large share of the capital stock of micro, small and medium enterprises and recent research shows that the introduction of movable collateral registries increases firms’ access to bank finance, with some evidence pointing out that the effect is larger on smaller firms (Love, Martinez Peria and Singh 2013).

  • Reforms to expand mobile banking and e-money will also have a positive impact on vulnerable groups. For example, the increased use of electronic systems to process social security and pension benefits will reduce the transactions costs (e.g., travel costs) currently imposed on social security and pension recipients.

  • Both mobile banking and agency banking will facilitate the expansion of financial services (including payments and deposits) to rural areas, where access to finance is more limited. Kenya and Colombia are good examples of how successful mobile banking and agency banking (respectively) can be in promoting the rapid expansion of financial services to previously excluded areas and individuals.

  • Even when the reforms on consumer protection and transparency of financial information included in this DPO will benefit all consumers of financial services, they will be particularly helpful for less sophisticated consumers.

  • The establishment of a deposit insurance fund is expected to minimize the fiscal costs associated with the resolution of financial institutions and protect the savings of smaller depositors.

  • The development of a robust AML/CFT framework has the potential to reduce poverty by increasing transparency and reducing corruption.

  • Finally, the insolvency reform will contribute to an efficient resolution of failing firms, which should protect jobs and increase economic efficiency.

Environment Aspects
The detailed description of this operation suggests that no negative environmental impacts are foreseen. This project is mainly tailored towards building the technical capacity of the various stakeholders nationwide to access to affordable banking and financial services; as such, is possible yields could generate the creation of many localized and easy to implement businesses (small scale income generating activities, such as flower growing, horticulture, agriculture, etc.). These efforts will be easily accompanied by Government, particularly the Ministry of Agriculture (MINAG) or that of the Coordination of Environmental Affairs (MICOA). MICOA has both a set of environmental and social regulation, as well as sufficient technical capacity to accompany such micro-projects likely to be funded by the Banking/financing services.
This operation is not expected to have any negative environmental and social impacts. The team will seek guidance from the World Bank social safeguards specialist to ensure other non-safeguards related social development actions (i.e. social inclusion: ensuring that the capacity building activities are considerate of gender, youth, handicapped and vulnerable groups, such as widows, landless people, socio-cultural issues) are taken into consideration to make the project socially and environmentally sound. The World Bank Social Development Specialist will work collaboratively with MICOA counterparts to ensure that due attention is been given to these environmental and social development issues during supervision missions and throughout project implementation timeframe.

  1. Tentative financing





International Development Association (IDA)




Others (specify)



  1. Contact point

World Bank

Contact: Mazen Bouri

Title: Senior Private Sector Development Specialist

Tel: 5333+2319 / 258-21-482-319


Location: Maputo, Mozambique (IBRD)


Contact: Ministry of Planning and Development

Title: Director of Investment Cooperation

Tel: +25821492268


  1. For more information contact:

The InfoShop

The World Bank

1818 H Street, NW

Washington, D.C. 20433

Telephone: (202) 458-4500

Fax: (202) 522-1500


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