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Implementation Completion Report (ICR) Review - Eg-Mortgage Finance


  
1. Project Data:   
ICR Review Date Posted:
06/12/2012   
Country:
Egypt
PROJ ID:
P093470
Appraisal
Actual
Project Name:
Eg-Mortgage Finance
Project Costs(US $M)
 209.40  79.50
L/C Number:
L7396
Loan/Credit (US $M)
 37.10  39.06
Sector Board:
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  07/06/2006
 
 
Closing Date
07/31/2011 07/31/2011
Sector(s):
Housing finance (100%)
Theme(s):
Other financial and private sector development (67% - P) Corporate governance (33% - S)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Mariluz Cortes-Gorman
Kris Hallberg Ismail Arslan IEGPS2

2. Project Objectives and Components:

a. Objectives:


    The project's development objective is to provide longer-term, market-based mortgage loan financing for residential housing for primary lenders in the financial market (both banks and non-bank lenders) (page 6 of the PAD). The statement of project objectives in the PAD and in the Loan Agreement are basically the same.

b. Were the project objectives/key associated outcome targets revised during implementation?
Yes

If yes, did the Board approve the revised objectives/key associated outcome targets? No

Date of Board Approval:

c. Components:

This project has only one component: a loan in local currency in the amount of LE 214.2 million (about US$37.1 million equivalent) for on-lending to the Egyptian Mortgage Refinance Company (EMRC) as a line of credit to provide medium and longer-term mortgage refinancing loans to Participating Mortgage Lenders (PMLs) on a market basis. The loan amount at appraisal was US$37.1 million equivalent, but the actual amount disbursed was US$39.06 million.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates

The estimated project cost at appraisal was US$209.4 million of which the Bank would contribute with a loan of US$37.1 million equivalent, the Borrower with US$29.1 million, sub-borrowers with US$38.5 million, and other local sources of finance with US$104.7 million. At loan closing, the Bank loan had disbursed US$39.06 million. The difference between expected and actual US$ Bank financing is due to the appreciation of the Egyptian pound during the project period which meant that in dollar terms more was disbursed than was planned.

The Borrower's contribution amounted to LE74 million in the form of shareholding stakes in the (EMRC). EMRC and private shareholders' contributions amounted to an additional LE167 million (equivalent to US$12.42 million and US$28.02 million respectively at the exchange rate effective as of June 30, 2011 used in the ICR). It is unclear from the ICR the contribution if any of the sub-borrowers.

    There were some initial delays that affected loan disbursement. While the Board approved the project in June of 2006, effectiveness was only declared in May 2007 because the Parliament was in recess. Furthermore, a number of unexpected changes in the legal and regulatory environment required two amendments to the project’s legal documents. As a result, the project only began actual implementation in November 2007 and disbursement in August 2008. However, the project managed to fully disburse ahead of its closing date.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:

The relevance of the project’s development objective is rated as high. The objective for primary lenders in the financial market (both banks and non-bank lenders) to provide longer-term, market-based mortgage loan financing for residential housing remains highly relevant for the country’s current and future economic conditions.

    It is estimated that around 175,000 to 200,000 new housing units are needed annually in Egypt to keep pace with household formation. However, at appraisal access to affordable housing and home ownership for most Egyptian households was greatly constrained by an undeveloped housing finance system. The banking sector offered very little formal housing finance to households due largely to lack of long-term funds available to primary lenders on favorable terms that could help them mitigate the associated business and lending risks. Other constraints such as lack of property rights and lack of enforcement of mortgage collateral contributed significantly to the low supply of mortgage financing. The project aimed at overcoming the financial obstacles through the provision of funds to EMCR to refinance, or purchase with recourse, longer-term mortgage loans originated by PMLs, allowing them to provide medium-and longer-term mortgage loans to their clients. Although the project did not have as an objective to strengthen the institutional and regulatory framework for mortgage lending, this was to be accomplished through other complementary operations, advisory services, and support from other donors (see below). Providing access to long-term finance to PMLs through a Government entity can be justified given the underdevelopment of mortgage finance in Egypt. However, as this market develops, a sustainable (private) source of mortgage finance will require the development of a secondary mortgage market and the phasing out of the role of the state in mortgage lending.

    Although the project is fully disbursed, the Bank remains fully engaged with EMRC through a US$300 million Affordable Mortgage Finance Program DPL (approved 09/2009) that targets low-income and middle-income households, where EMRC has a critical role in providing refinancing for government programs. Also, the Bank will look to support EMRC as it eventually goes to the bond market in pursuing of a sustainable funding base. If housing market conditions improve, a follow-up Bank operation, envisioned in the 2008 CAS Progress Report, would provide additional financing for mortgages amounting to US$50 million.

    Although economic and political uncertainties brought about by the 2011 revolution and impending elections may put a damp on housing financing for a while, this type of project is crucial for the new government to deliver tangible improvements to the quality of life of ordinary Egyptians. The Bank is preparing an Interim Strategy Note (ISN) based on the three pillars of economic management, jobs and inclusiveness. It will focus on actions that can be carried out within the 18-month period of the ISN and that are expected to lead to sustainable longer-term benefits. Among the measures to be implemented to foster inclusiveness are actions to broaden access to financial services, including housing financing, particularly for the poorer segments of the population.

b. Relevance of Design:

The relevance of the project's design is rated as substantial. The project was referred to as an example of innovative and good practice in the IBRD Strategy for Engagement with Middle Income Countries report, specifically for its innovative but simple design and integrated approach, and received the MENA VPU Team Awards for 2011 for being exemplary in bringing the World Bank Group together. This project followed an innovative approach in the structuring of the loan being in local currency using Egypt’s capital with the World Bank, allowing the authorities to hedge for foreign exchange risk.

The project design was appropriate to achieve its intended outcomes. By providing EMRC access to long-term financing, the project enabled it to refinance or purchase with recourse longer-term mortgage loans originated by PMLs, allowing them to provide medium-and longer-term mortgage loans to their clients. The Results Framework was clear, realistic and presented a logical sequence between project objectives, outputs and outcomes.

The project chose the right mortgage funding model for Egypt—a liquidity facility--given the level of development of Egypt’s financial sector. Lending through a government mortgage bank would have introduced inefficiencies in the financial sector and deterred the development of private mortgage lenders. Use of a securitization model, in which lenders sell mortgages to a secondary market entity, which sells mortgage-backed securities into the capital markets, requires the existence of a robust bond market, absent in Egypt. When banks are not able to access long-term funds on an unsecured basis, as in Egypt, a liquidity facility may be a superior means of using the loans as collateral, because it introduces a third party which can examine the collateral and minimize moral hazard. Also, as a centralized bond issuer, the facility can often obtain better access on more favorable terms than its owners/members.

The project design aimed at making mortgage finance "market-based". The PAD indicates that EMCR's rates to PMLs were based on its costs and risks, but without competing sources of long-term finance, it is hard to say if they were market determined. A more market-based approach would have been to charge the PMLs rates equivalent to those they have to pay in the market for short-term funds, but with the advantage of the long-term conditions. Neither the PAD nor the ICR mention if the spreads charged by PMLs were freely determined, whether the mortgage loans to low income groups had a subsidy component, or how this subsidy was determined. Also, there is no discussion of the project's compliance with Bank financial intermediation loans (FIL) guidelines.

The project did not include any component for regulatory reform, technical assistance or training to help strengthen the institutional and regulatory framework for mortgage lending in Egypt. However, the project was complemented by a series of Financial Sector DPLs supporting the financial sector reform program (2004−2012) which helped in laying a firm foundation and in strengthening the legal and institutional framework of the financial sector for the mortgage market. It was also complemented by a project of the United States Agency for International Development (USAID) and technical assistance from other donors.


4. Achievement of Objectives (Efficacy) :


The achievement of the project's objective is rated as substantial. There is a clear causal link between inputs and outputs, intermediate outcomes and outcomes. The project led to banks and mortgage companies to have access to longer term funding through EMRC. This contributed to the growth in the volume of mortgage loan portfolios. All this helped in improving access and costs of housing finance in Egypt, attaining a more inclusive system. The efficacy of the project is also rated based on the achievement the following performance indicators:

Project Outcome Indicators:
(1) An increase in volume of market-based mortgage loans extended by primary lenders (annually) from LE 300 million in 2006 to LE 4.5 billion in 2011, exceeding the initial target of LE 4 billion.
(2) An increase in the length of term to maturity structure of mortgages from 7 years in 2006 to 16 years in 2011, exceeding the target of 15 years.

Intermediate Outcome Indicators:
(3) An increase in mortgage finance companies from 2 in 2006 to 12 in 2011, beyond the target of 6 companies.
(4) An increase in the volume of PML borrowings from EMRC from nil to LE 450 million in 2011. Although this volume of borrowings exceeds the revised target of LE 400 million, it is short of the initial target of LE 1,200 million. The comparison with the initial target is relevant because the target change was not approved by the Board.

Output Indicators:
(5) The launching of an EMRC bond did not materialize, despite the preparation work made, due to the effects of the global financial crisis and the revolution in 2011.

Other Outcomes. Although the project did not finance any technical assistance, advisory services provided in the context of project supervision helped to strengthen the institutional capacity of EMRC and of government agencies involved in regulation and supervision of mortgage finance: the Mortgage Finance Authority (MFA), the Egyptian Financial Supervisory Authority (EFSA), and the Central Bank of Egypt (CBE). The project facilitated the training of key government advisors and senior staff from several governmental institutions in housing finance and housing subsidy design.

5. Efficiency:

The efficiency of the project in achieving the project’s objective is rated as substantial. There is no cost effectiveness analysis to properly assess the efficiency of the project, and there is no information in the ICR to compare this project to similar projects in other countries. Nevertheless, the costs involved in achieving the project’s objectives were probably reasonable, given the streamlined design of the project and the specific supply-oriented objective. An argument in favor of a substantial rating is that despite a late start, the project was fully disbursed ahead of its closing date.

a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return at appraisal and the re-estimated value at evaluation:


Rate Available?
Point Value
Coverage/Scope*
Appraisal:
No
%
%
ICR estimate:
No
%
%

* Refers to percent of total project cost for which ERR/FRR was calculated

6. Outcome:

The project contributed to: (i) helping participating mortgage lenders to mitigate important lending risks associated with housing loans, (ii) facilitate an increase in the flow of private sector funding to the housing finance sector; and (iii) improve the affordability of housing finance through a lengthening of the term to maturity of mortgage loans.

More specifically, the term finance provided by EMRC to PMLs helped them to reduce the liquidity risk incurred in their provision of long term loans for housing (i.e., the risk that the money will be needed before it is available); which allowed them to increase housing finance. The PMLs were able to utilize EMRC financing to improve the efficiency of their portfolio and risk management activities, which helped to lower financial spreads in the market to the benefit of home-buyers. EMRC financing also helped to facilitate increased competition in the mortgage market by creating a funding source for non-depository lenders, promoting the development of safe and sound mortgage credit standards, and the development of fixed-income securities markets. The project is rated as satisfactory because the relevance of the objective and design, including the quality of the Results Framework, are rated respectively as high and substantial; and the efficacy in meeting the outcome indicators and the efficiency in meeting the project’s objective are both rated as substantial.

a. Outcome Rating: Satisfactory

7. Rationale for Risk to Development Outcome Rating:

As the ICR points out, there were two major unexpected developments during the time of project implementation: the global financial crisis in late 2008, and the Egyptian Revolution in January 2011, which generated substantial economic, financial and political risks to the sustainability of the project’s outcomes.

Economic risks. The faltering growth following the global crisis and the slowdown post-revolution will have implications on the mortgage market, and the project. The rise in unemployment, particularly in the most affected sectors such as tourism and construction, could lead to the rise in non-performing loans and the deterioration in the asset quality of banks involved in mortgage finance, as well as less appetite to take mortgage loans. In addition, the banks' purchase of bonds will crowd-out private sector lending, including that for housing loans. The high government deficit and the sell-off of its bonds indicate that there is a risk of public sector borrowing crowding-out banks’ lending to the private sector.

Financial risks. The full disbursement of the Bank loan means that EMRC is now fully reliant on its own fund raising capabilities to continue operations. This will take the form of a bond issue and a private placement to raise further capital. Both of these initiatives are likely to be delayed as financial markets remain disrupted. Egyptian sovereign ratings and banks’ ratings have been downgraded by three rating agencies. The government is currently issuing Treasury Bills with an interest rate as high as 14 percent, during the current transition phase in Egypt, which raises the cost issue for EMRC, and will not allow EMRC to issue a compatible bond, desirable to investors. In addition, constraints in Egypt’s investment climate might discourage private shareholders of EMRC to contribute in the proposed recapitalization. EMRC may not be in a position to offer refinancing until it has established an alternative source of funds.

Political risks. The new Parliament, the change in government, and the election of the new president will all have implications for the economic orientation of the country, and the path the mortgage finance market will pursue. There could be changes in policies and strategies, as well as rules and regulations, which EMRC has to comply with. The revolution has brought tremendous political and economic uncertainty for investors, and a new government will need a clear, market-friendly strategy based on inclusive consultation to restore clarity and confidence, while enhancing opportunity for new investors.

a. Risk to Development Outcome Rating: Significant

8. Assessment of Bank Performance:

a. Quality at entry:

The Bank correctly identified the strategic importance of providing longer-term, market-based mortgage loan financing for residential housing in Egypt. The appraisal team ensured quality at entry through sound preparatory work and strong policy dialogue and good working relationships with government counterparts. The appraisal team also engaged in frequent consultations with market participants and stakeholders, all of which led to the design of a quality operation and ensured ownership and commitment of all participants. The Bank also maintained close coordination with the USAID, and other development partners as well as with IFC, which helped the government build the necessary capacity to implement the project. The project's M&E was well designed to assess the project's achievements, although a shortcoming is the absence of indicators to assess to what extent the lending mechanism was "market-based". Also, the targets of some indicators proved unrealistic in the face of Egypt's recent economic and financial developments.

Quality-at-Entry Rating: Satisfactory

b. Quality of supervision:

The supervision of this project has gone beyond the regular oversight of the project implementation and provided advisory services and guidance to the government on housing finance issues, including advice on new or reformed legislation (Tax Law, Real State Finance Law) that had implications for the project. The Bank conducted around two supervision missions every year—a total of 12 supervision missions. A mid-term review in July 2010 led to revision of three of the monitoring and outcome indicators in light of the changed economic environment. Regular monitoring of the operation was done from the field after the task management was moved from headquarters to the field in July 2006. Supervision missions equipped with high level international experts provided sound technical advice and cross-country experience to the authorities. The missions followed up on progress on the agreed indicators and discussed results with the different counterparts in the sector. Post-revolution, two emergency missions took place to guide authorities on means to mitigate unexpected risks associated with the revolution, and changes that emerged with the political and economic developments. The policy dialogue continued with official counterparts despite changes in management, government and regime.

Quality of Supervision Rating: Highly Satisfactory

Overall Bank Performance Rating: Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:

The government performance was satisfactory during project preparation and implementation. From the start, the government demonstrated clear ownership of the project. It sought advice from the Bank to implement its strategic financial sector reform agenda, of which the development of housing finance is a major objective. The government also took the initiative to seek support from other donors and ensured good coordination between the various partners, with the Bank playing a lead role. The donors coordinating committee, chaired by the Bank, helped the Government address key financial sector issues on a timely and priority basis.

Government Performance Rating: Satisfactory

b. Implementing Agency Performance:

The EMRC is the main agency responsible for the design and overall implementation of the operation with support provided by the CBE and the Ministry of Investment. These agencies remained strongly committed to the project and were instrumental to the success of this operation. The reporting and coordination of actions between these agencies was efficient and timely throughout the life of the project.

Implementing Agency Performance Rating: Satisfactory

Overall Borrower Performance Rating: Satisfactory

10. M&E Design, Implementation, & Utilization:

a. M&E Design:

The project was well designed to collect appropriate data on inputs, outputs, outcomes and impact, and conducive to appropriate evaluation given project objectives and available data. However, the targets of three of the monitoring and outcome indicators had to be revised during the mid-term review (July 2010) because they could not be met due to unexpected changes in the political and economic environment. The expected volume of PML borrowing from EMRC was revised due to the delay in project implementation until November 2007 and of actual disbursement until August 2008. The expected EMRC bond operation was dropped because of the changed economic conditions. As indicated above, a shortcoming in the M&E design is the absence of indicators to assess to what extent the lending mechanism was "market-based".

b. M&E Implementation:

All of the output indicators relate to EMRC activities and were tracked by the EMRC in the normal course of business. EMRC was in charge of tracking changes in the volume of market-based mortgage loans extended by primary lenders and in the loan terms and maturities offered by mortgage lenders, through regular surveys of lenders, reviews of annual audited accounts of lenders, and other market sources of information. Bank monitoring of project implementation was done regularly from the field after the task management was moved from headquarters to the field in July 2006. Progress in achieving the outcome indicators was periodically reported in the ISRs.

a. M&E Utilization:

The Bank team used the revised performance indicators regularly for project supervision purposes and to inform decision making and resource allocation. Bank missions discussed the results with the different counterparts in the sector. EMRC used the performance indicators to prepare monitoring and evaluation reports that were periodically sent to the Bank.

M&E Quality Rating: Substantial

11. Other Issues:

a. Safeguards:

The project did not trigger safeguards review.

b. Fiduciary Compliance:

The project's financial management arrangements (FM) were consistently found to be satisfactory. The establishment and maintenance of the FM arrangements were assigned to EMRC Finance Department which employs well trained staff with sound banking background. Recording and reporting was executed through sound automated accounting capable of generating the quarterly Interim Financial Reports (IFRs) and annual Financial Statements required under the loan umbrella. All of the IFRs and audit reports were timely received, reviewed and found acceptable by the Bank. All of the audit reports were unqualified.

c. Unintended Impacts (positive or negative):

An unintended benefit of the project has been the high percentage of its loans going to low-income groups. More than 98 percent of the refinanced loans and 78 percent in terms of volume were allocated to low-income households. Also, the project has indirectly promoted employment in the construction industry.

    The project also had unintended benefits for Sub-Saharan Africa. It has been used as the template for a similar operation, the Tanzania Housing Finance Project, which is the first such project in sub-Saharan Africa. The experience and knowledge gained in Egypt has been invaluable in setting up the Tanzania Mortgage Refinance Company and getting it operational with a minimum delay. In addition, other projects are currently under preparation in Nigeria and the West Africa Economic and Monetary Union, which draw heavily on the lessons and experience of this project in Egypt. Other unintended positive impacts of the project are the streamlining of property registration; empowerment of titling and land registration in new communities, and the strengthening of collateral enforcement and foreclosure procedures in Egypt.

d. Other:

The project is having an indirect poverty impact through the Affordable Mortgage Finance Program supported by a US$300 million DPL, which moved the housing subsidies from supply-side to a more efficient and well targeted demand-side subsidy to the beneficiaries. This program will have refinancing needs which would be met on a commercial basis with EMRC taking a spread over its cost of funds.



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Satisfactory
Satisfactory
 
Risk to Development Outcome:
Negligible to Low
Significant
The economic, financial and political risks generated by the 2011 revolution, the upcoming elections and international financial uncertainties are likely to delay EMRC needed recapitalization and bond issue, and hinder the interest of financial institutions to engage in mortgage lending for some time. 
Bank Performance:
Satisfactory
Satisfactory
 
Borrower Performance:
Satisfactory
Satisfactory
 
Quality of ICR:
 
Satisfactory
 
NOTES:
- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

13. Lessons:
    IEG concurs with the ICR that the project demonstrates the importance of the following factors to the success of the operation: prior analytical work; strong policy dialogue with the authorities; prompt response to client’s needs and the changing environment; provision of technical assistance; conducive legal and regulatory framework; innovative and creative approaches; consultations with the different stake-holders; close coordination with IFC; effective cooperation with development partners; and overall flexibility in implementation of the reforms.
    Another lesson is the importance of the synergy generated by the Bank's engagement on a country's financial sector through multiple approaches. The success of the Egypt Mortgage Finance project owes much to the 2002 FSAP, which identified the challenges in the financial sector and provided policy recommendations to address them, as well as to the series of Financial Sector DPLs supporting the financial sector reform program (2004−2012), which helped in strengthening the legal and institutional framework of the financial sector for the mortgage market.

14. Assessment Recommended?

No

15. Comments on Quality of ICR:

The ICR presents most of the information and analysis needed for a thorough evaluation of the project implementation and achievement of objectives. However, there are several shortcomings: the project cost and financial table (Annex 1) is incomplete; there is absolutely no efficiency analysis; the efficacy analysis should have used the original, rather than the revised targets because the revisions were not approved by the Board; and there is no discussion of "market-based" lending and the role of subsidies (along with a discussion of the project's compliance with Bank FIL guidelines). Also, the presentation is somewhat disorganized and the document is exceedingly long. The document would have benefitted from some editing efforts and from sending the most descriptive sections to annexes, leaving only the important points and conclusions in the main text.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6INV-Jun-2011)
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