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Proposal to National Multi-Donor Trust Fund: Sudan Micro-enterprise Development Government of National Unity: Central Bank of Sudan Ministry of Finance and National Economy Ministry of Investment August 2006 Strategic Objectives The strategic or development objective to promote broad-based, inclusive growth. This will be achieved through the sustainable growth of microenterprise in Sudan, including its profitability, asset growth, and formalization. The project has four supporting objectives: – – – – To alleviate policy impediments to formalization; To catalyze the provision of microfinance on a commercially sustainable basis, To increase transfer of skills to the small scale and informal private sector through business development services and linkages to larger firms To create a public-private partnership for low-income housing provision. Component 1: Policy Reducing Barriers to Formalization Source: Voices of the Poor, D. Narayanan, World Bank 2002 Business is the main way out of poverty. But informal sector is not registered, faces harassment, lacks access to finance and competes for low-wage temporary work. Asset of the informal sector not eligible for secured financing. Large and growing informal sector due to IDPs caught in a poverty trap. Informality is partially a result of excessive procedures A Larger Informal Sector More Corruption PAN ARE LBN GEO ECU PER MEX PAN THA ZWE GTM TZA UKR NGA BLR HND LVA KAZ PHL ARM COL TUNARE ITA HRV BEN MDANIC VEN GRC SEN BWA BGR BEL SVN KOR MEX TUR UGA MAR EGY MYS ROMCIV DZADOM ESP LTU ECU ISR BIH ARG SWE POL ALBPRT MLI NER ZAFGHA FIN PAKKGZ MDG MOZ CRI HUN HKG TWA NPLDEU MWI BFA BGD FRA CMR ETH UZB KEN SER SGP NLD JPN SAU GBR CHL CZE CHE USA AUT SVK ZMB LKA LBN JAM DNK CAN AUS NZL IRL NOR RUS BRA IRL NOR YEM JOR IRN IND SYR NPL CHE AUS SER TUR KAZ GTM CMR IRN AZE DZA SYR ZWEIDN UKR THAROM BOL COL KEN ALB HRV ITA BIH TWA HND BRA ARM KOR DOM BLR NGACIV GEO PHL LVA JAM PAK MDA NIC UGA CZE NER TZA MDG ZMB MYS PER VNM BGR GRC KGZ SVK JPN EGY BEL YEM BFA LTU UZB CHN BGD HKG FRAPOL JOR ZAF SEN ISR IND URY USA HUN DEU LKA SVN MNGAUTGHA PRT MLI AZE Corruption Informal Employment URY RUS ARG VEN SAU BOL CRI ESP MAR BWA GBR ETHTUN DNK CAN IDN SWE SGP NLD CHL MWI MOZ FIN MNG VNM CHN Procedures to Start a Business NZL Procedures to Start a Business Source: Doing Business 2004 Note: Partial scatterplots controlling for income per capita. Relationships are statistically significant at 5% level. Component 1 Will focus on removing Legal and Policy Impediments to Formalization Informal Economy Study – A need to better understand informal sector. What are the barriers to becoming formal? What are the sources of social capital and traditional legal systems? What economic activities undertaken? Which can become viable sources of growth? Sources of market information? Regulatory Streamlining – Building on FIAS and informal economy study, the component would finance legal and institutional reforms to reduce barriers to becoming formal. Asset registry – The design of a database, community interface systems, community outreach in order to begin to register the business assets of economically-active poor to be security for loans. Component 2: Microfinance Bank of Sudan has engineered recovery through FDI consolidation – Despite increasing deposit and credit growth, smaller firms still find it difficult to obtain credit, particularly medium term – But microfinance relatively under performing. Few banks able to achieve 10% microfinance policy target. Microfinance vision now drafted – to be presented September 25th 2006 Sudan Banking Sector Growth 1,200 14% 12% 10% 8% 6% 4% 2% 0% 1,000 800 600 400 200 2001 2002 2003 2004 2005 Bank Deposits - SDD Billion Credit to Private Sector - SDD Billion Capital Adequacy Component 2: Led by Central Bank of Sudan Will focus on establishment of sustainable microfinance Microfinance Policy Advisor – Financial sector legislative specialist – To support enactment of key financial sector laws and the publication of new microfinance licensing procedures. Microfinance units of existing commercial banks (“Downscaling facility”) – Establishment of Office of Microfinance Policy in Bank of Sudan Technical assistance packages to existing, sufficiently capitalized commercial banks to help develop microfinance units. Training for loan officers, organizational and strategic support, assistance in product development, information systems design. MFI Institution building program (“greenfield”) – Subordinated debt up to $800,000 for new microfinance institutions wishing to locate in Sudan, meeting criteria of Office of Microfinance Policy. After establishment and successful operation, debt convertible to equity. Component 3 Led by Ministry of Investment will focus on SME Capacity and Linkages FDI has grown 223% since 2002. Banking, energy, retail, food sector But insufficiently linked to local economy and small investors Foreign Direct Investment in Sudan 8% USD Million Foreign Direct Investment as % of GDP SUDAN 7% 6% 2,500 2,000 1,500 1,000 500 - 5% 4% VIETNAM UGANDA 3% S.S. AFRICA 2% 2001 2002 2003 2004 2005 WORLD 1% ETHIOPIA KENYA 0% Source: BOS 2000 Source: WB Glo bal Develo pment Indicato rs 2005 2001 2002 2003 Component 3 subcomponents Entrepreneurship awareness building – SME investment capacity in Ministry of Investment – – Domestic investment facilitation program. Monitoring capacity to understand impact of investment on domestic sector. Administrative investment reforms – To allow rural and urban poor to become aware of microenterprise opportunities. Building on FIAS study, to build government capacity to serve domestic investors by reducing adminstrative barriers Linkage Development Fund – – Technical assistance facility to enable domestic firms to serve as suppliers to foreign invested firms (linkages) Improve cost, quality and delivery terms with techical help of foreign company’s purchasing department/supply chain manager. Component 4 – to be undertaken in Phase 2 - Self-Help Housing Pilot The lack of assets of poor contributes to poverty trap Economically active poor to be targeted for emergence from poverty Home ownership is one of the key ways to build assets, which may then be used as collateral for a business. Component 4: Self-Help Housing Pilot A public-private partnership to build housing assets of the poor, based on Botswana, Sri Lanka, Aceh and Mexican self-help housing. Land plots contributed by state government Project provides for a competitive process to provide packages of self-help materials that are provided to qualified families. Qualifications include 20% down payment on cost of materials. Materials, design, and supervision. Labor contributed by community, with small payments from family. Project may also provide a mortgage for 80% of cost of materials. Project management structure Policy Guidance PSD Steering Committee CBOS, Ministry of Finance + all relevant Min/Agencies Executing Agency Bank of Sudan Dr. Sabir Hassan, Governor Project Coordination Unit Project Mgmt Units Procurement Monitoring & Evaluation Min Finance Barriers To Formalization CBOS Microfinance Ministry of Investment Capacity Building MTDF Request Component Phase 1 Phase 2 Total 1 Microenterprise Policy 800,000 2,400,000 3,200,000 2 Microfinance 2,800,000 2,950,000 5,750,000 3 Capacity Building 2,000,000 3,000,000 5,000,000 4 Self-Help Housing 200,000 1,400,000 1,600,000 5 Management, Monitoring and Evaluation 168,000 400,000 568,000 5,968,000 10,150,000 16,118,000 Total Government Contribution Component Phase 1 Phase 2 Total 1 Microenterprise Policy 800,000 2,400,000 3,200,000 2 Microfinance 650,000 2,650,000 3,300,000 3 Capacity Building 2,060,000 3,290,000 5,150,000 4 Self-Help Housing 0 2,000,000 2,000,000 5 Management, Monitoring and Evaluation 0 0 600,000 2,000,000 300,000 5,510,000 10,640,000 Unallocated Total 16,150,000