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Implementation Completion Report (ICR) Review - Payments & Banking System Modernization Project

1. Project Data:   
ICR Review Date Posted:
Kyrgyz Republic
Project Name:
Payments & Banking System Modernization Project
Project Costs(US $M)
 10.49  6.63
L/C Number:
Loan/Credit (US $M)
 9.0  6.49
Sector Board:
Cofinancing (US $M)
 0.0  0.0
Board Approval Date
Closing Date
10/31/2008 10/30/2012
Payments settlements and remittance systems (75%), Banking (25%)
International financial standards and systems (50% - P) Regulation and competition policy (25% - S) Legal institutions for a market economy (25% - S)
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Herminia Martinez
Clay Wescott Christopher D. Gerrard IEGPS2

2. Project Objectives and Components:

a. Objectives:

    The Project Development Objective (PDO) is to assist in the implementation of the Government’s national payments system modernization program and banking system reform (p.16 of the Development Credit Agreement, DCA). The objective in the Project Appraisal Document (PAD, p. 3) excluded the reference to “banking system reform.” A Project Paper submitted to the Board on February 17, 2009, clarified that the correct formulation of the project objective was that in the DCA, and that the discrepancy in the language of the documents was semantic in nature and did not a reflect a divergence in the intended objectives and scope of the Project. The project was restructured in 2012 and the objective relating to the banking system dropped. The revised objectives after restructuring "are to assist the Borrower in the implementation of the national payments system modernization project" (Letter amending the DCA of June 26, 2012).
    The PAD refers to the Payments System as the principal objective of the project. The Implementation Completion Report (ICR) makes a distinction between primary and secondary objectives which does not appear in the PAD.

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

If yes, did the Board approve the revised objectives/key associated outcome targets? Yes

Date of Board Approval: 06/20/2012

c. Components:

The project includes the following components:

I. Payments System Infrastructure (appraisal: US$7.2 million; actual: US$4.5 million) comprising of the following:

(a) Bulk-clearing system (BCS): establishment of a modern, fully automated bulk-clearing system which will enable commercial banks to process debit and credit orders for high volume/low-value transactions, including utility payments, salaries, pensions and other fiscal and quasi-fiscal payments more securely, reliably and efficiently.

(b) Inter-bank card system, supported by a Card Processing Center (CPC): establishment of a national inter-bank card arrangement supported by a shared processing center. This will coordinate commercial banks card activities, thus enabling bank customers to use any card accepted in the scheme in any ATM or merchant equipment. Given the social importance of establishing a network of this equipment outside the capital city, the project includes the supply of ATMs and Point of Sale (POS) equipment to allow reasonable access for the population. The project also includes establishment of an Inter-Bank Card Company, a joint stock company by the participating commercial banks.

(c) Real-time gross settlement system (RTGS): establishment of an RTGS to provide timely settlement of large-value or urgent inter-bank transactions.

(d) Project management support for the payments infrastructure modernization program.

II. General ledger of NBKR (appraisal: US$1.6 million; actual: US$2.05 million): enhance and strengthen NBKR’s General Ledger (GL) so that it is fully compatible and consistent with the requirements of the improved payments system, including automation and interface between the RTGS and all components of the payments system and NBKR. It will enable NBKR to integrate and adapt its accounting, treasury and financial information systems to accommodate the increased flows and volumes generated by the improved payments system infrastructure.

III. Banking sector reform (appraisal: US$1.6 million; actual: US$0.04): to help implement other areas of the Government's banking sector reform program, support the strengthening o f the Savings and Settlement Company (SSC) to improve its efficiency in delivering banking and payment services and thus better fulfill the banking needs of its customers, including advisory services and assistance to prepare and implement an IT program.

IV. Project implementation and administration (appraisal: US$ O.07 million; actual US$0.04): Support to the Project Implementation Unit in the NBKR.

Component II (banking sector reform) was revised in the Level Two restructuring approved by Bank Management in March 2009 and a Level One restructuring approved by the Board in June 2012. The March restructuring introduced project support for the privatization of Aiylbank and other activities in the banking sector reform program. The Level one restructuring cancelled funds (SDR 755,538.99) intended for the support of Banking Sector Reform (ICR, pp. 15-16).

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


The project cost at appraisal was US$10.49 million. The actual project cost was US$6.63 million or 63 percent of the estimate at appraisal. The principal reason for the lower costs was the generally declining costs for the equipment/software purchased under the payments system component and to a lesser extent because the funds under the banking sector component were only used for financial audits. The distribution of costs changed somewhat during implementation. Costs of the payments system component, the largest, were US$4.5 million or 62 percent of the US$ 7.22 million appraisal estimate. Costs of the general ledger component were higher than estimated because the design of the system was upgraded to meet needs; actual cost was US$2.05 million or 125 percent of appraisal estimates. Only 3 percent of the banking sector component funds were used.


There was a US$9.0 million IDA credit. The IDA contribution after cancellations came to US$6.63 million. There was no co-financing for the project. In April 2007, the World Bank (the Bank) approved a Borrower-executed grant funded by Japan’s Population and Human Resources Development (PHRD) for US$330,000 to support project preparation, which financed mostly procurement preparatory work.

Borrower Contribution:

The borrower/NBKR contributed US$140,000 or 66 percent of appraisal estimates. The ICR does not discuss the reasons for the shortfall in government financing. The change in the disbursement percentages authorized in 2005 (Letter Amending the DCA of March 9, 2005) probably contributed to the lower contribution by the Government. The ICR does not show a contribution by local sources as contemplated at appraisal.


The Closing Date of the project was extended three times for a total of four years from October 31, 2008, to October 31, 2012:

- from October 31, 2008 to April 30, 2010, to allow time for the implementation of the General Ledger component and to enable identified cost savings to be used to increase the ATM and point of sale machines (approved by Bank management in March 2009).

- from April 30, 2010 to April 30, 2012 to allow time to: (i) re-tender the General Ledger system; (ii) carry out activities related to the SSC component; (iii) launch and monitor the privatization process of Aiylbank, through the recruitment of a qualified Privatization Transaction Advisor (approved by Bank management in January 30, 2010).

- from June 30, 2012 to October 31, 2012, to allow time for completion of the General Ledger component (approved by the Board in April 2012).


Some 98.5 percent of the IDA financing had been disbursed at the time of cancellation of the Banking Component (disbursements were US$ 6,395,101.47 as of June 30, 2012, and US$6,494,835.77 as of March 14, 2013, when disbursements were completed).

3. Relevance of Objectives & Design:

a. Relevance of Objectives:
The relevance of the original objectives is high.

The project supported Government priorities to increase financial intermediation and strengthen the banking sector, which is in line with the Bank and Government priorities. These are spelled out in the Bank’s Interim Strategy Note for fiscal years FY2012-FY2013 and the Country's Medium Term Development Strategy for 2012-2014 as well as in the National Poverty Reduction Strategy of 2007-2010. Payments systems and strengthening the Central Bank accounts are at the core of an economic modernization processes. The banking component aimed to continue work initiated by the Government and continues to be important

The relevance of the revised objectives following the 2012 restructuring remained high.

b. Relevance of Design:

The relevance of the initial design is substantial. The results chain linking the payments system activities to expected outputs and outcomes was logical and mainly clear. The PAD provides some outcomes for the General Ledger and Banking (SSC) components but these do not appear in the Results Framework. The results chain did not clearly spell out the approach for the banking sector reform component. The relative importance of the payments system vis a vis banking sector reform work is taken into account in determining the rating. The Project took into account exogenous factors and built in an extensive consultation process.

The relevance of the revised design following the 2012 restructuring is substantial; at this time the banking sector objective which had design problems was dropped.

4. Achievement of Objectives (Efficacy) :

The original project development objective is to assist in the implementation of the Government’s national payments system modernization program and banking system reform. The project was restructured in June 2012 four months before the Closing Date of the project, and the banking system reform objective was dropped. Some 98.46 percent of the IDA financing had been disbursed at the time of cancellation of the banking component (disbursements were US$ 6,395,101.47 as of June 30, 2012, and US$ 6,494,835.77 as of March 14, 2013 when disbursements were completed).

Subobjective 1: Modernizing Payment Infrastructure: Substantial


The principal project objective was to assist in the implementation of the Government's national payment system modernization. The payments system and general ledger components of the project support this objective. The national payments system infrastructure was modernized, and its performance and use improved substantially. The new systems allowed for the introduction of new payment mechanisms such as the payment of salaries through bank accounts and the introduction of payment cards which could be used for wire transfers of regular and budget payments. The World Bank assessment of the Kyrgyz system against the Core Principles for Systemically Important Payment Systems (CPSIPS) carried out in October 2012 judged that the systems put in place under the project (BCS and RTGS) complied (fully or in part) with all applicable Core Principles.

The PDO indicators exceeded the original and most of the revised targets of 2012:

    • The total value of transactions channeled through and processed by the national payments systems tripled during the project period, exceeding original targets, and reaching 84 percent of the revised target set in 2012, which the ICR notes could have been an overestimate at the time of restructuring.
    • The number of Bank accounts increased fivefold during the implementation of the project, exceeding both the original and revised targets.
    • The general ledger of the NBKR was automated which accommodated the needs of the new payments system.

Bulk Clearing System (BCS): The BCS is the only clearing system in the country, with the 22 commercial banks connected to the NBKR using the Inter-bank Communication Network. The system started operations in 2006, is owned and operated by the NBKR, and has operated without interruption since start-up, even during the period of political instability in 2010. Bank-to-bank transactions are cleared the day they are submitted for clearing. The original and revised intermediate indicators were met. The total number of transactions or batches (the measurement unit introduced in 2012) processed through the system increased 3.3 and 3.5 times the project’s original and revised targets, respectively, during project implementation. The World Bank 2012 CPSIPS analysis assessed that the BCS "fully observed" one principle out of ten; "broadly observed" eight principles out of ten, and partly observed one principle out of ten.

Card Processing Center (CPC): Out of the 22 banks in the country, 17 are issuing cards, and 21 have been connected to the CPC. The intermediate targets were decreased in 2012 to reflect the 2010 political problems when 28 bank buildings as well as ATM and payment machines were destroyed. The use of non-cash instruments increased substantially during project implementation and the two revised intermediate targets were met: some 369,278 cards were issued with average monthly value of transactions of SOM 568,087. These figures represent 93 percent of the original target for number of cards and some 28 percent in terms of value. New instruments, such as cash cards, have been introduced, which are facilitating the payment of salaries, taxes, and utility bills. The ICR notes that the value target was not met because of the continued low income levels in the country.

Real-Time Gross Settlement system (RTGS): The RTGS has been operational since 2008 with no significant operational failure. The establishment of an RTGS system has reduced the settlement and systemic risks on the interbank settlement process as individual transfers are settled continuously during the processing day. The World Bank assessment of the system’s compliance with the CPSIPS assessed that the RTGS system "observed" three principles out of ten, "broadly observed" five out of ten, and partly observed one out of ten (one principle is not applicable).

RTGS has exceeded the original intermediate targets: the annual value of individual transactions increased fourfold with respect to the original and revised targets. RTGS processes 88.8 percent of interbank transactions, at an average of 416 operations per day, representing an average daily amount of SOM 2.1 billion (US$0.45 million). The rapid transfer of funds between banks has improved the management of liquidity and reserves by the banking system and reduced systemic risks.

General Ledger: The full automation of the General Ledger of the NBKR (Component 2) was completed with some delay in January 2013 when the GL went live. The automated system provides an interface between the GL and the RTGS. Commercial banks’ opening and closing balances are now transferred to the RTGS at the beginning and at the end of the day, and closing balances are reflected in the daily balance sheet of the NBKR.

Subobjective 2: Assist the Borrower with implementation of the banking sector reform (improve the operational efficiency of the SSC) Modest

This objective was dropped from the project four months before the Closing Date. The discussion in the PAD and the activities associated with this objective focused exclusively on the operational improvement of SSC. Work in this area was used as a vehicle for discussion with Government of problem institutions in the banking sector; the ICR indicates that in view of the cancelation of the Banking Sector Reform Component and the political and banking crisis that affected the country in 2010, the need for technical assistance increased. The Bank responded by approving a Financial Sector Reform and Strengthening Initiative funded technical assistance grant (Section 2.5 of the ICR)

The ICR reports that SSC made progress in institutional strengthening; the original target for operational efficiency was narrowly defined in the text of the PAD as the percentage of total operating expenses to total deposits; this target was exceeded and the ratio decreased from 28 percent in 2003 to 8.6 percent in 2012. The ICR notes that the planned advisory services were not needed and that SSC improved operational efficiency on its own, but it does not discuss the reforms or improvements introduced. The SSC was given a universal banking license in 2007. It increased lending substantially during the last two years, expanding its asset base three-fold. The ICR notes that SSC’s indicators have not been adversely affected as of now; IEG notes that rapid increases in lending generally affect bank portfolio performance adversely. In 2012, the Government developed a sales strategy for SSC with the assistance of the IMF so that the majority of SSC’s shares are privatized over the medium-term. The authorities have committed to limit capital injections into SSC in order to contain its growth.

The two year extension of the closing date approved in 2010 was to allow time to carry out the procurement of a custom-tailored Core Banking System for SSC. Procurement of the systems was underway for several years because of the need for rebids. The Task Team Leader informed IEG that procurement was done with support from Bank staff. Because of the closing of the credit, the custom core banking system was financed by SSC and procured using documentation prepared under the project. SSC used bank financing for the financial audits

Support for the privatization of Aiylbank, was included in the project in 2009. The privatization was first postponed during project implementation due to the political turmoil in the country and eventually cancelled after the project closure.

In addition to World Bank support, activities under the payments system component were facilitated by the preparatory work on procurement done under the PHRD.

5. Efficiency:

The PAD did not include a quantitative analysis of cost effectiveness, and discusses benefits to the economy of the installation of payments systems which are reflected in the outcomes of the project and which were higher than projected at appraisal (discussed in the outcome section above). The PAD also indicates that commercial banks will cover the operating costs of the card system. Efficiency is not discussed in the ICR. Project costs for the payments systems and IT packages were lower than estimated because of the general reduction in costs for this equipment and materials, and the IT systems for the General Ledger were upgraded, thus increasing cost effectiveness. All this suggests that efficiency was substantial.

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
ICR estimate:

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

6. Outcome:

The project objectives were highly relevant and in line with Government priorities. The design relevance before restructuring is rated substantial before and after restructuring. Efficacy is rated satisfactory for the sub-objective of implementing national payments system modernization program, and modest for the sub-objective of banking system reform. Since the former sub-objective was considered the principal one in the PAD, with most of the project resources programmed to address it, IEG weights its efficacy more highly than that of the latter sub-objective, which was dropped at restructuring. Efficiency is rated substantial considering the reductions in cost in the payments system component and increased complexity of the General Ledger that was installed. Since 98.46 percent of IDA financing had been disbursed at the time of restructuring, the overall rating was not affected by the change in objectives after restructuring.

a. Outcome Rating: Satisfactory

7. Rationale for Risk to Development Outcome Rating:

The BCS, RTGS and General Ledger have become part of the NBKR’s functions and oversight. The NBKR has demonstrated ownership and leadership and been able to process all payment transactions in a secured way even under difficult political conditions. The need for continuous upgrading of the NBKR and commercial bank IT systems, with the development of new technology, poses a risk of sustainability to the overall system, but it is mitigated by the fact that all banks have included IT upgrades in their operational strategies. The project also helped introduce a national inter-bank card system with international standards which did not previously exist in the country; the card system is serving an important function and is likely to be maintained. 17 out of 22 banks are participating in the CPC and the remaining four banks, mostly large international banks, have been accepting national system cards in their peripheral devices. The assessment of the BCS and the RTGS against the CPSS Core Principles for Systemically Important Payment Systems concluded that there is still room for improvements in some areas and in the operations of the ATM and Point of Sale networks. The sustainability of the system is likely to hinge on the commitment of the NBKR and the commercial banks. Given the resulting improvements in efficiency in the banking system and the usefulness to stakeholders, it is likely that the commitment will be sustained. However, the ICR notes that there are uncertainties related to maintaining the outcomes related to SSC largely for the political reasons such as those that stymied privatization of Aiylbank.

a. Risk to Development Outcome Rating: Moderate

8. Assessment of Bank Performance:

a. Quality at entry:

The project addressed priorities spelled out in Government and Bank strategies. Substantial work was carried out in preparation of the technical aspects of the payments system component. The implementation arrangements were clearly defined and included considerable support for the NBKR in implementation, especially for the payments system component. Stakeholders were actively involved in the payments system component. Drawing from lessons learned from other payments operations, the appraisal team sought to keep the project simple because the payments systems are technically complex.

Monitoring and evaluation design, implementation and utilization had minor shortcomings due to the weakness of the banking sector reform arrangements. The PAD indicated that flexibility was built into the design of the project “to allow: (a) funds to be targeted to alternative project-related activities, if donor funding becomes available for any subcomponent; and (b) currently excluded activities could be included (PAD, pp. 6 and 7). Also, the PAD called for cancellation of the SSC component in the event that technical assistance required to implement the component was not obtained. The flexibility of design and the possible cancellation of the SSC component are not explicit in the DCA.

Most major risks were identified

Quality-at-Entry Rating: Satisfactory

b. Quality of supervision:

The project was intensely supervised within the scope of the regular supervision budget. The team was pro-active and responsive to client needs in what appears to have been a volatile period and this resulted in staff intensive work. As an example, the Aiylbank privatization was included in the project in 2009 and dropped in 2012. The TTL indicated that cancellation of the banking sector component was not contemplated earlier because SSC expressed interest in using the funds for improvements and subsequently a portion of the funds were allocated to Aiylbank activities. There was a large team involved in supervision including a locally based financial sector specialist that provided continuity between missions (since 2007). The ICR indicates that there was insufficient supervision on IT procurement. IEG concurs with the ICR authors (section on "lessons learned") that IT procurement was a critical element in the implementation of the project and that insufficient supervision probably contributed to the implementation delays.

Quality of Supervision Rating: Moderately Satisfactory

Overall Bank Performance Rating: Moderately Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:

The ICR does not rate borrower performance but discusses it in the sections on "adequacy of government commitments" and "factors under the government’s control". The TTL sent additional information on Government actions. The Government included aspects financial sector reform in the 2003-05 and 2007-10 National Poverty Reduction Strategies. Despite the political unrest during the project period, the Government introduced legislative changes to facilitate the use of non-cash payments instruments which supported the modernized payments system. The Government amended the Civil Code in 2006 to allow non-cash payments (credit and debit orders) for individual bank accounts and took measures to facilitate the transfer of budgetary, and other payments on a non-cash basis; the measures were completed in 2008. They promoted the increase in non-cash payments through the transfer of civil servants' salaries to bank accounts, and the payment of customs duties and VAT via terminals in border crossing points. The TTL informed IEG that as one of the main motivations to keep doing business in cash was to remain informal and circumvent tax obligations, the sales tax was lowered from 4 percent to 2 percent. The Government also requested that utility service companies and other state-owned enterprises rendering services close their cash desks and accept only non-cash payments.

Concerning banking sector reform, the Government through NBKR granted a banking license to SSC. SSC embarked in an expansion in lending over the past two years which led to portfolio problems, and the Government is now committed to reducing its capital contributions to the Bank. The privatization of SSC is now included in the Government program with the IMF. The privatization of Aiylbank was not carried out because of political problems.

Government Performance Rating: Moderately Satisfactory

b. Implementing Agency Performance:

The NBKR demonstrated commitment to the project. It was involved in the working groups during project design and implementation and provided additional financing for the GL when needed. Except for a period in 2005-2006 when political difficulties created a leadership vacuum, NBKR carried out its project implementation functions effectively. NBKR established a project implementation unit in the Directorate on Investments and Technical Assistance Coordination which was charged with day-to-day project implementation, including financial management, procurement and disbursement. The project implementation unit complied with fiduciary requirements. The ICR notes that procurement staff performance was particularly good considering the complexity of procurement. Yearly financial management supervision reports confirmed satisfactory financial management arrangements.

Implementing Agency Performance Rating: Satisfactory

Overall Borrower Performance Rating: Moderately Satisfactory

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

a. M&E Design:

The PAD included outcome indicators for the payments system infrastructure component as well as intermediate output indicators for the three subcomponents of the payment systems infrastructure component which were adequate to permit the measurement of progress. The appraisal document also included an indicator which would have shown progress in achieving SCC operational improvements. A minor shortcoming was the lack of a measure to measure the overall outcome of the banking system reform sub-objective. The PAD indicated that a Steering Committee within the NBKR would be responsible for monitoring progress towards meeting targets.

b. M&E Implementation:

The ICR notes that significant efforts were made during supervision to ensure that data collection mechanisms were put in place to gather the relevant information and ensure data quality although it does not discuss what was done. In practice, data were collected and reported quarterly by the Project Steering Committee, chaired by the NBKR. The last restructuring changed the targets to reflect changed circumstances (the interbank card system was negatively affected by political instability), added an indicator for the General Ledger component and revised the unit of measurement for two payments systems components. The changes in the indicators in the last year of the project made the ex-post evaluation easier but did not contribute to ongoing monitoring of project implementation.

a. M&E Utilization:

The ICR notes that M&E indicators were important in monitoring the progress and reach of the payments system and to decision making in particular when the project was restructured although it is not clear how. IEG notes that the Implementation Status Reports covered payment system indicator progress.

M&E Quality Rating: Substantial

11. Other Issues:

a. Safeguards:

The project was classified as Environmental Category C. No safeguard issues were triggered.

b. Fiduciary Compliance:

NBKR provided timely and reliable information required for monitoring project implementation in line with World Bank requirements. Quarterly financial monitoring reports, annual financial management, supervision reports and annual audit reports were sent in a timely manner in a format and with content acceptable to the Bank.

c. Unintended Impacts (positive or negative):

No unintended impacts identified in the ICR.

d. Other:

12. Ratings:

IEG Review
Reason for Disagreement/Comments
Risk to Development Outcome:
Bank Performance:
Moderately Satisfactory
Moderately Satisfactory
Borrower Performance:
Moderately Satisfactory
The ICR rating only relates to the performance of NBKR, the implementing agency. Government introduced legislative reforms which assisted the establishment of the payments system, but no progress was made in the privatization of one bank included in the project. The Government contributed to the expansion of lending in the second bank, the privatization of which is now in the IMF agenda.  
Quality of ICR:
- 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:

The main lessons are drawn from the ICR with changes in language.

The appraisal of payments systems projects should take into account that these are technically complex, and that the time required to implement them is difficult to estimate especially in low capacity and politically and economically unstable environments. The appraisal team should take into account the capacities in the country and ensure that sufficient time is allowed for implementation of the full scope of payments system reforms.

The capacity in technical areas such as payments systems and IT/systems procurement should be in place before the start of the project as the selection of a reputable vendor and proven systems are crucial. In the event that the Bank lacks the expertise in one area, consultants should be identified and hired to assist with supervision. The executing agencies should have in place similar expertise prior to project start up.

The restructuring of projects should help resolve issues and address needs; a major restructuring should not be carried out in the last year of the project. The 2009 restructuring, which added Aiylbank and provided time for procurement of SSC systems gave momentum to the project to get back on track while the 2012 restructuring had limited impact on outcomes.

14. Assessment Recommended?


15. Comments on Quality of ICR:

The quality of the ICR is satisfactory. The report is well written, includes considerable information and provides an adequate analysis of the context and narrative for the project. The evaluation of project outcomes for the payments system (including the general ledger), which is the core of the project, is evidence based. The report attempts to explain the story of SSC, and some aspects such as the improved performance of SSC without any external technical assistance would have merited more discussion. The report would have benefitted from some information on the contribution of Commercial Banks to the card system. The section on Government performance focuses on NBKR, but government performance is discussed in other sections in the report.

a. Quality of ICR Rating: Satisfactory

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