Document of The World Bank

Report No: 78624-YE

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR 13.4 MILLION (US$20 MILLION EQUIVALENT)

TO THE

REPUBLIC OF YEMEN

FOR A

FINANCIAL INFRASTRUCTURE DEVELOPMENT PROJECT

June 28, 2013 Finance and Private Sector Development Department Middle East and North Africa Region

This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.

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THE REPUBLIC OF YEMEN

Currency and Equivalent (As of April 24, 2013)

Unit of Currency = Yemeni Riyal US$1 = YR 214.87 SDR 0.667= US$ 1

Fiscal Year

January 1st – December 31st

ABBREVIATIONS AND ACRONYMS

ACH Automated Clearing House IFR Interim Financial Report ATS Automated Transfer System MAF Mutual Accountability Framework AMF Arab Monetary Fund MENA Middle East and North Africa AML Anti-Money Laundering MFI Microfinance Institution CAR Capital Adequacy Ratio MOU Memorandum of Understanding CBY Central Bank of Yemen MSME Micro, Small and Medium Enterprises CFT Combating Financing Terrorism MTR Midterm Review CGAP Consultative Group to Assist the Poor NBFI Non-bank Financial Institutions CPS Country Partnership Strategy NGO Non-Governmental Organization CSD Centralized Securities Depository NPL Non-Performing Loan CSR Corporate Social Responsibility NPS National Payments System DA Designated Account OM Operational Manual DPL Development Policy Loans OMO Open Market Operations FATF Financial Action Task Force ORAF Operational Risk Assessment Framework FDI Foreign Direct Investment PCR Public Credit Registry FM Financial Management PDO Project Development Objective FIRST Financial Sector Reform and Strengthening

Initiative PMU Project Management Unit

FSAP Financial Sector Assessment Program ROA Return on Assets GCC Gulf Cooperation Council RTGS Real Time Gross Settlement System GDP Gross Domestic Product STR Suspicious Transaction Reporting HATC High Authority for Tender Control TA Technical Assistance HTB High Tender Board TF Trust Fund ICT Information and Communication Technology TOR Terms of Reference IDA IEG

International Development Association Independent Evaluation Group

TPSD Transitional Program for Stabilization and Development

IFC International Finance Corporation YR Yemeni Riyal

Regional Vice President: Inger Andersen

Country Director: Hartwig Schafer

Sector Director: Loic Chiquier

Sector Manager: Simon C. Bell

Task Team Leader: Sahar Nasr

THE REPUBLIC OF YEMEN

FINANCIAL INFRASTRUCTURE DEVELOPMENT PROJECT

TABLE OF CONTENTS Page

I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context .............................................................................................................1 B. Sectoral and Institutional Context ..................................................................................3 C. Higher Level Objectives to which the Project Contributes ...........................................7

II. PROJECT DEVELOPMENT OBJECTIVES ................................................................9

A. Project Development Objectives (PDO) ........................................................................9 B. Project Beneficiaries ......................................................................................................9 C. PDO Level Results Indicators ........................................................................................9

III. PROJECT DESCRIPTION ............................................................................................10

A. Project Components .....................................................................................................10 B. Project Financing .........................................................................................................10 C. Analytical Underpinnings and Lessons Learned Reflected in the Project Design ....104 D. Links with other Related World Bank Group and Development Partners'Activities ..10 E. Stakeholder Consultation .............................................................................................10

IV. IMPLEMENTATION .....................................................................................................18

A. Institutional and Implementation Arrangements .........................................................17 B. Results Monitoring and Evaluation .............................................................................19 C. Sustainability ................................................................................................................19 D. Gender Mainstreaming .................................................................................................19

V. KEY RISKS AND MITIGATION MEASURES ..........................................................20

A. Risk Rating...................................................................................................................20 B. Overall Risk Rating Explanation .................................................................................20

VI. APPRAISAL SUMMARY ..............................................................................................21

A. Economic and Financial Analyses ...............................................................................21 B. Technical Analysis .......................................................................................................21 C. Financial Management and Disbursement Arrangements ...........................................21 D. Procurement .................................................................................................................22 E. Social and enviroment (including Safeguards) .............................................................23

ANNEXES

Annex 1: Results Framework and Monitoring...............................................................................24 Annex 2: Detailed Project Description ..........................................................................................26 Annex 3: Implementation Arrangements .......................................................................................29 Annex 4: Operational Risk Assessment Framework .....................................................................39 Annex 5: Implementation Support Plan .........................................................................................42 Annex 6: Indicators in Yemen .......................................................................................................43 Annex 7: Proposed Capacity Building Activities in the Field of AML-CFT ................................46 Annex 8: Map ................................................................................................................................49

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PAD DATA SHEET

REPUBLIC OF YEMEN

FINANCIAL INFRASTRUCTURE DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

Middle East and North Africa

Finance and Private Sector Development

.

Basic Information Date: 06/28/2013 Sectors: General finance sector (100%)

Country Director: Hartwig Schafer Themes: International financial standards and systems (40%), Infrastructure services for private sector development (20%), Anti-Money Laundering and Combating the Financing of Terrorism (20%), Other Financial Sector Development (20%)

Sector Manager: Simon C. Bell EA Category: Category C

Sector Director: Loic Chiquier

Project ID: P132311

Lending Instrument:: Investment Project Financing

Team Leader(s): Sahar Nasr

Joint IFC: Yes .

Recipient : The Republic of Yemen

Responsible Agency: Central Bank of Yemen

Contact: Mr. Ibrahim Al-Nahari Title: Deputy Governor

Telephone No.: 00967735855885 Email: ialnahari@gmail.com.

Project Implementation Period: Start Date: July 25, 2013 End Date: June 30, 2019

Expected Effectiveness Date: September 30, 2013

Expected Closing Date: December 31, 2019 .

Project Financing Data (US$M)[..] Loan [] Grant [ ] Other

[ ] Credit [ ] Guarantee

For Loans/Credits/Others

Total Project Cost : 20.00 Total Bank Financing : 20.00 Total Cofinancing : Financing Gap : .

Financing Source Amount(US$M)

BORROWER/RECIPIENT

IBRD

IDA: New 20.00

IDA: Recommitted

Others

Financing Gap

Total .

ii

Expected Disbursements (in USD Million)

Fiscal Year 2014 2015 2016 2017 2018 2019

Annual 0.4 3.0 4.5 5.0 5.0 2.1

Cumulative 0.4 3.4 7.9 12.9 17.9 20 .

Project Development Objective

To develop a financial institutional infrastructure that supports greater transparency and efficiency of financial transactions in the financial system. .

Components

Component Name Cost (USD Millions)

Developing CBY’s Core System 11.4

Developing Payments System Infrastructure 3.4

Establishing CBY’s Public Credit Registry 2.9

Setting up Data Centers ,Systems Integration Services and Capacity building of CBY 2.3 .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes [ ] No [] .

Does the project require any waivers of Bank policies? Yes [ ] No [ ]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ ]

Does the project meet the Regional criteria for readiness for implementation? Yes [] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 Natural Habitats OP/BP 4.04 Forests OP/BP 4.36 Pest Management OP 4.09 Physical Cultural Resources OP/BP 4.11 Indigenous Peoples OP/BP 4.10 Involuntary Resettlement OP/BP 4.12

Safety of Dams OP/BP 4.37 Projects on International Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP 7.60 .

.

Conditions

Name Type

None

Description of Condition

iii

Team Composition

Bank Staff

Name Title Specialization

Sahar Nasr Lead Financial Economist and Task Team Leader Financial Sector Development

Harish Natarajan Senior Financial Sector Specialist Financial Infrastructure

Jamal Abdulaziz Senior Procurement Specialist Procurement

Laila Abdelkader Financial Sector Specialist Financial Sector

Ghada Waheed Ismail Finance and Private Sector Development Analyst Financial Sector

Hassine Hedda Finance Officer Loan Operations

Laurent Gonnet Senior Financial Sector Specialist Financial Sector

Nikolai Soubbotin Senior Counsel Legal

Moad M. Alrubaidi Financial Management Specialist Financial Management

Amir Althibah Economist Economic Management

Steve Wan Operations Analyst Operations

Bassim Sharafeldin Operations Officer Financial Infrastructure

Oscar Madeddu Principal Financial Specialist Financial Infrastructure

Fredesvinda F. Montes Herraiz Financial Infrastructure Specialist Financial Infrastructure

Ana Nunez Sanchez Environmental Safeguards Specialist Environmental Safeguards

Chaogang Wang Senior Social Development Specialist Social Safeguards

Marwan Ezz Al Arab Banking Specialist Operations

Amira Fouad Zaky Program Assistance Administration

Ziad Bahaa El Din Senior Legal Advisor Legal Framework

Didier Debals Inspector General Banking Supervision

Fritz Konigshofer Senior ICT Procurement Advisor Procurement

Andrew McEwen Mason Core Banking System Expert IT systems .

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I. STRATEGIC CONTEXT

A. Country Context

1. Yemen is classified as the poorest country in the Middle East and North Africa Region (MENA). During the last few years, Yemen’s economy faced a range of successive crises and urgent challenges, which led to the aggravation of poverty and food insecurity. All this has brought to the forefront key demands, such as the need to create job opportunities as well as a fair and transparent political and economic environment.

2. In 2011, the Republic of Yemen experienced mass protests, violent clashes, and armed conflict that resulted in the election of a new President and the formation of a transitional Government. The weak performance of the Government’s development strategy in the past decades driven by weak institutions and poor governance, triggered increasing social and political tensions. Exacerbated by deteriorating economic conditions, these tensions culminated in 2011 with mass protests. The protestors demanded better governance, representation and economic opportunities, and the protests ended with the transition agreement brokered by the Gulf Cooperation Council (GCC). In early December 2011, a transitional Government was formed, which was mandated to stabilize the country’s political and economic situation. A national dialogue was launched on March 18, 2013 bringing together key representatives from the Yemeni society.

3. The transition is confronted with long-standing economic, political, and structural challenges. Currently, around 70 percent of the employed work in the informal sector with low productivity, and most of those formally employed work for the Government, or Government-dependent entities. Economic and fiscal opportunities are foregone because a large part of Yemen’s industrial assets or economic activities is partially or fully state owned, and subject to tribal control as part of a patronage system. Unless the transition can usher a change of direction, these underlying causes of instability and social strife are likely to resurface.

4. In June 2012, the Government of Yemen launched the Transitional Program for Stabilization and Development (TPSD) for 2012–2014. The TPSD outlines focus areas and actions to address immediate humanitarian and emergency needs, short-term political transition and economic stabilization, and medium-term socioeconomic development. The TPSD proposes a parallel implementation of an emergency response with short term priorities; and the initiation of a medium-term economic recovery program. Total investment needed for the program over the next two years is estimated at about US$ 11.9 billion, with US$ 4.3 billion for the short term pillar and around US$ 7.6 billion for the medium term economic recovery pillar.

5. The Government at the Yemen Donor conference that was held in Riyadh on September 4-5, 2012, endorsed a Mutual Accountability Framework (MAF) with the development partners, which was then approved by the Cabinet on September 18, 2012. Under the MAF, amongst other things, the Government has committed to creating employment opportunities, particularly for youth and women; adopting more conducive policies for micro, small and medium enterprise (MSMEs) development, establishing conducive environment for attracting Foreign Direct Investment (FDI) from the GCC and other countries; and increasing effectiveness of key service sectors, and partnering with the private sector in public private partnership (PPP).

6. Economic recovery has started, but remains weak. After contracting by more than 10 percent in 2011, Gross Domestic Product (GDP) is estimated to have registered a slight growth

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in 2012, inflation decelerated substantially from 23 percent in 2011 to 5.5 percent in 2012, and the current account deficit narrowed in 2012 to about 3 percent of GDP compared to 4 percent in 2011. The Yemeni Riyal (YR) exchange rate came under high pressures in 2011 leading Central Bank of Yemen (CBY) to adopt a number of policies and measures that included the reduction of its foreign reserves in response to the basic commodities imports bill. Despite the stabilization of the official exchange rate at about 213.85 YR/USD, the parallel market rate ranged between 235–240 YR/USD contributing to the rise of imports prices and higher inflation. However, since early 2012, the exchange rate has stabilized at around 214 YR/USD.

7. The financial sector was significantly affected by the uncertainties of the 2011 crisis. The banking system balance sheet contracted due to the large deposit withdrawals in both local and foreign currencies deposits. Overall, monetary growth was flat as the surge in domestic assets was mainly caused by the increased CBY overdraft to finance the budget deficit, coupled with the decline in net foreign assets. Credit to the private sector fell by 17 percent due to the weakened credit demand, as well as banks’ reluctance to lend during the crisis, but made a recovery by 9 percent in 2012. The scarcity of foreign reserves has curtailed trade financing, a primary banking service, and has put a dent in financial institution operations. Although the banking sector is small, (assets accounting for 40 percent of GDP), the near standstill afflicting the sector have hampered normal economic operations.

8. Another important development is that in June 22, 2012, the Financial Action Task Force (FATF), which is a global standard setting body for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), placed Yemen under the public statement countries list for weak compliance with the AML/CFT standards. As Yemen could not make sufficient progress in implementing the FATF action plan, certain strategic AML/CFT deficiencies remain.1 Yemen priorities in the field of AML/CFT are outlined in Box 1.

9. Overall, the macroeconomic outlook during the transitional period 2013–14 will depend on a number of factors. Economic growth is forecasted to be at around 4.4 percent for 2013,2 given the ongoing political and security uncertainties, economic growth slowdown; and the reluctance of banks to provide credit to the private sector (Annex 6). The fiscal outlook for 2013 remains weak as increasing revenue is dependent on the restoration sustainability of hydrocarbon production, and the implementation of various reforms such as the

1 FATF Public Statement (June 22, 2012). 2 The 2013 growth estimate is subject to the resumption of all oil revenues, (IMF, December 2012).

Box 1: Yemen Priorities in the Field of Anti-Money Laundering and Combating Terrorism Financing

It is critical that Yemen addresses the issues related to AML/CFT, and takes the required measures. Priority actions include:

Effective criminalization of money laundering and terrorist financing.

Effective investigation and prosecution of money laundering and terrorist financing cases.

Ensuring a fully operational and effectively functioning Financial Intelligence Unit (FIU) in the detection and analysis of potential AML/CFT cases.

Developing the capacity of financial sector supervisory authorities to ensure effective monitoring of compliance by financial institutions with “know your customer” and suspicious transaction reporting (STR) obligations.

Identifying and assessing money laundering and terrorist financing risks and applying a risk based approach to mitigate the risks.

Establishing and implementing adequate procedures to identify and freeze terrorist assets and implement UN resolutions 1267 and 1373.

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increase in the investment expenditures which is expected to be co-funded from the donor conference pledges.

B. Sectoral and Institutional Context

10. The financial sector in Yemen, which can play an important role in economic recovery and growth, is considered one of the weakest in the MENA region. The system is dominated by the banking sector, as is the case in most developing countries. There are currently 18 banks operating in Yemen,3 four of which are state-owned banks,4 four are Islamic banks,5 four are private conventional banks, two are specialized microfinance banks, and four foreign banks. State-owned banks account for 24 percent of the system’s assets as of January 2013 (Figure 1). Yemen is still a largely cash economy with local currency holdings nearly twice the average ratio for 17 comparator countries.

11. Outside the banking sector, key supporting institutions and financial markets are either nonexistent or play a very limited role. Non-bank financial institutions (NBFIs), such as insurance companies, moneychangers and pension funds play a marginal role. Leasing is beginning, but needs appropriate tax treatment and a registry for leased properties. Yemen has some of the most advanced Micro Finance Institutions (MFI) laws and regulations in the MENA region. This has helped in widening credit and savings options for smaller enterprises as well as for lower income households, both in urban and rural areas, and in general, widen the market for financial services in Yemen

12. Financial intermediation in Yemen is very low. This is largely attributed to the weak legal and judicial environment, in which creditors’ rights are not enforced. Intermediation between depositors and private sector credits, an important factor in growth, is less than 10 percent of GDP, again much lower than comparators. The vast majority of Yemen’s population does not use formal financial services. With reference to bank deposits, only 800,000 people have an account with a formal financial institution. The number of deposits accounts per 1,000 people in Yemen is only about 35, the lowest country globally.6 Moreover, financial intermediation among women is quite low. In terms of SME finance, women in Yemen are confronted with various obstacles that constrain their economic activity including high collateral requirements that can reach up to 400 percent of the loan amount. However, in terms of microfinance, women in Yemen have relatively better access.

3 Management of Credit Agricole decided to close in Yemen, as well as in other countries in MENA region. 4 Cooperative and Agricultural Credit Bank, National Bank of Yemen, Yemen Bank for Reconstruction and Development, and Housing Bank. 5 Islamic Bank of Yemen, Saba Bank of Yemen, Tadhamon International Islamic Bank, and Shamil Bank of Yemen and Bahrain. 6 Finance for All, World Bank (2009).

Figure 1: Structure of Banking Sector (Percent of total banking system assets)

Source: Central Bank of Yemen (2012).

24%

46%

30%

Public Private Foreign

4

13. In response, the Government, specifically CBY, have been undertaking various legal reforms to enhance the performance of the financial system, and its role in intermediation (Box 2). The authorities have also recently responded well to the 2011 crisis through the provision of market interventions as needed, and the issuance of circulars that generally addressed specific, crisis-related issues and were time-bound. In an attempt to strengthen confidence in the system after the revolution started, CBY took the following measures: (i) imposed no limitations on withdrawals in any currency; (ii) streamlined the process of liquidity provision in the banking system to address the deposit-run rush immediately after the upheaval; (iii) prevented approvals for money exchangers to export cash in foreign currency out of the country, limiting this role to banks; (iv) enhanced communications with the banks and the financial community, as CBY held regular meetings at least once a week with banks to discuss latest developments; (v) forced all banks in January 2011 to issue emergency plans to guarantee business continuity; and (vi) reduced the legal reserve requirement in foreign currency from 20 percent to 10 percent in the first quarter of 2011, which freed US$ 300 million into the system, enhancing liquidity further. As a result, confidence in the banking system has been regained post-revolution, evident in the increase in banking system’s deposits reaching around YR 1,802 billion in 2012.7

14. Nevertheless, the financial system in Yemen faces various challenges. The system continues to suffer from an inadequate regulatory and supervisory framework as well as a weak financial institutional infrastructure. Banking supervision is characterized by regulatory forbearance that undermines the creation of a sound and sustainable banking system. The weak enforcement of prudential regulations, especially with respect to related party lending, concentration limits, and insufficiency of provisions, can only increase system risks. Progress has been made in the implementation of regulations on loan classification and provisioning, however, it is worth noting that not all banks operating in Yemen are in compliance with those regulations. Sizable progress for the enforcement of regulatory requirements for the establishment of comprehensive credit granting policies and procedures, and credit risk management systems has been slow, especially for the few banks that are running their business without the minimum capital adequacy requirement. However, CBY has committed to enforcing corrective actions for those banks in non- compliance.8

15. The financial institutions also lack competent and qualified staff that is familiar with the modern financial services and products. Although CBY has developed regulatory oversight of

7 In 2010, deposits of the banking system reached YR 1,521 billion and then it decreased after the political upheaval to YR 1,350 billion in 2011. 8 The financial soundness indicators require close monitoring on a monthly basis due to the current situation.

Box 2: Key Recent Legal Reforms

The Yemeni authorities have undertaken several legal reforms over the past period, including:

Issuance of Law 21 of 2006 for Electronic Payment

Transactions.

Issuance of Law 11 of 2007 for Financial Leasing.

Issuance of Law 21 of 2008 to Establish Yemen Deposit Insurance Corporation.

Issuance of Law 15 of 2009 for the Microfinance Banking and its By-law in 2010.

Establishing the Credit Registry in 2009.

Issuance of the CBY regulations No.3 of 2009 for the External Auditors Rotations.

Issuance of Law 1 of 2010 and By-law on the Anti-Money Laundering and Terrorism Financing.

Issuance of the CBY Regulations No. 1 of 2012 for the AML/CFT supervision standards, and No. 2 of 2012 on AML/CFT suspecting monitoring standards.

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banks, through such measures as the reserve requirement, the capital adequacy requirements, and the minimum capital requirement, no significant changes have been observed due to its weak implementation. A few local banks are still under-capitalized with non-performing loans (NPLs), and high related party lending.

16. The National Payment System (NPS) in Yemen is very weak, and lacks the core payment systems infrastructure. Manually processed cheques, and SWIFT based payment orders are the primary means for large value payments. Apart from cheques, non-cash payment instrument available for retail payments are payment cards.9 Though the payment cards infrastructure is growing rapidly, the usage levels at an overall level remain low (Figure 2). The banks in Yemen have introduced mobile banking and were exploring using it to expand their distribution reach and to enhance financial inclusion.

17. The main IT system used is the Modern Banking System (MBS) that was installed in 1998, which has not been updated since then, and hence is both technologically and functionality wise outdated. This system has a number of limitations, including: (i) does not provide ability to undertake data-driven analysis; (ii) inhibits straight-through-processing of key central bank activities; (iii) de-centralized with a separate instance running at each branch of CBY; and (iv) limits the nature of services the CBY is able to provide to the banking sector. Moreover, the current arrangements for securities settlement especially with the issuance of Sukuk would prove inadequate in the near term.

9 Comprise of both proprietary cards and those branded with international card payment brands.

Figure 2: Cheque Clearing House Statistics

Source: Central Bank of Yemen, Monthly Report, December 2012.

0

500000

1000000

1500000

2000000

2500000

0

100000

200000

300000

400000

500000

600000

700000

800000

2005 2006 2007 2008 2009 2010 2011 2012

Cheque Number Value of Cheques

Nu

mb

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f C

heq

ues

Mil

lion

s of

Yem

eni R

iyal

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Figure 3: Proposed Yemen National Payments System

18. The current credit reporting environment in Yemen requires significant improvement. From a systems perspective, CBY has a public credit registry (PCR) with regulated entities, mainly banks, as participants.10 The existing PCR is weak, outdated, and has many issues that prevent CBY and the banking sector from realizing the full benefit of a credit reporting system. For example, data submitted by the banking sector is limited (some demographic data, loan type, loan amount, current payment, and collateral) and is done in an inconsistent and incomplete manner. The data is supplied to the banking sector in an aggregate form with no payment history, arrears, installments, etc. Validation checks and search algorithms are weak and inefficient, in addition to the inexistence of a unique national ID number as a unique identifier, among other issues.

19. From a legal perspective, credit information sharing in Yemen is regulated through several laws, including Central Bank Law No. 14 of 2000, Banking Law No. 38 of 1998, Access to Information Law No. 13 of 2012, and regulations issued by CBY, that cover a number of credit information sharing aspects, including mandating banks to submit data, inquiring before granting credit, obtaining consumer consent to share data, consumers’ right to view their credit report, and data types to be submitted by banks. However, dispute resolution mechanisms are inexistent, PCR governance is weak, and CBY does not have a credit reporting oversight function. The poor credit registry system and its shortcomings in Yemen have not helped in addressing the weak financial intermediation in the country.

20. To strengthen the credit reporting environment in Yemen and to realize its full benefits, CBY needs to follow a phased approach to reform the credit reporting sector by first establishing a new PCR that is able to cater for CBY’s supervisory needs, as well as, the financial sector’s needs narrowing information asymmetry between lenders and borrowers. This effort should include developing a strong legal and regulatory framework, developing a

10 Non-regulated entities are not participants of the PCR, including MFIs.

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reliable technological platform for the PCR and collecting data from regulated and non-regulated entities (particularly MFIs), as well as from public sources such as commercial registries and courts, strengthening governance and oversight, and raising awareness and building capacity of the stakeholders involved. On the longer terms, and as the market matures, CBY should consider involving the private sector to provide credit reporting services to the market, while maintaining the PCR for CBY’s supervisory responsibilities.

21. Financial infrastructure is the underlying foundation of a country’s financial system. It is comprised of all institutions, information, technologies, rules and standards which enable financial intermediation. The quality of a country’s financial infrastructure determines the efficiency of intermediation, the ability of lenders to evaluate risk, and of borrowers to obtain credit, insurance and other financial products at competitive terms. A central bank core banking system, a sound credit information system and a modern NPS, are important pillars of the financial infrastructure in a country. The core banking system would improve the central bank capabilities in performing its core functions and enhance significantly the oversight of the banking sector. To operate properly, that core banking system should be embedded in a state of the art banking supervision framework and governance. The quality of NPS determines the stability of the overall economy, the efficiency and reliability of intermediation, and the potential for the private sector to innovate and provide new services to consumers. In the case of credit reporting, a robust information system, a public credit registry, reduces information asymmetries between lenders and borrowers permitting more efficient financial intermediation, and enhances central banks’ ability to supervise the banking sector through understanding the sector’s overall credit risk exposure; monitoring banks credit portfolio quality, and taking corrective actions if needed, such as imposing provisioning regulations.

C. Higher Level Objectives to which the Project Contributes

22. The World Bank Group is actively supporting Yemen’s post-crisis transition. It has developed an Interim Strategy Note (ISN) FY13–14 (Report No. 70943-YE), which was discussed by the Bank’s Board of Executive Directors on November 13, 2012, to accommodate the need of the current transition period and its aftermath. The overriding objective of the ISN is to help the Government produce tangible results that stabilize the country in the short term, while laying the groundwork for medium-term reforms and sustainable longer-term benefits. The proposed operation is consistent with the ISN. It supports achieving its strategic objective, and main pillars, namely through: (i) laying the groundwork for private sector-led growth and job creation through supporting MSMEs access to finance by providing efficient credit reporting systems that would help in better credit decision-making; (ii) supporting the national priority of developing an open, transparent, and competitive financial sector and strengthening public financial management; (iii) enhancing access to social safety nets and restoring basic services, by using the financial infrastructure to support migration of government payments to electronic means; and (iv) improving local service delivery through decentralization, local governance, and improved citizen engagement. As per ISN, the implementation will be guided by three principles that will be mainstreamed across the program; mainly: (i) intensifying participation and inclusion; (ii) strengthening institutional capacity, governance, transparency and accountability; and (iii) enhancing the operational flexibility of the Bank’s program.

23. As a result of Yemen’s limited resources and its expanding needs and challenges, the Government through its TPSD, has identified the top urgent priorities for the transitional phase. Immediate solutions for creating economic growth, reducing unemployment and poverty rates

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would however remain weak, requiring longer term policies and programs implementation. Therefore, the TPSD aims at bolstering the four immediate priorities by another six medium-term economic recovery priorities that rely mostly on private sector led growth. This proposed Financial Infrastructure Development Project would support the implementation of the TPSD medium-term priorities, and would contribute in achieving the priorities’ objectives especially for reviving economic growth (Priority I), improving human resources development and job creation (Priority IV), enhancing private sector development (Priority V), and improving governance and transparency (Priority VI).

24. The various reforms proposed to be taken under the project, namely the developing of a central bank core system, the introduction of an electronic payments system, the setting up of a credit registry, and the establishment of data centers will not only improve Yemen’s financial infrastructure, reduce risks and improve access to finance, but will also have other additional benefits to the country’s standing and adherence to international standards and norms, especially with respect to combating money laundering and the financing of terrorism.

25. At a higher level objective, this work will also address a critical issue related to the recent placement of Yemen under the FATF public statement list for weak compliance with the AML/CFT standards. Specifically, the setting of a comprehensive data warehouse would enable the Financial Intelligence Unit (FIU) to automate the collection of the Suspicious Transaction Reporting (STR) and Currency Transaction Reporting (CTR) processes and enable a better analysis of the reports and tracking of transactions. Banks are the gatekeepers of the financial system integrity. Suspicious transactions could also be tracked by appropriate automated systems at bank level. AML/CFT framework could be linked to the data warehouse system which enables enhanced banking operations monitoring. In that context, bank management can effectively control operational or transaction risk through a system of sound internal controls and information systems and by implementing policies that enhance employee integrity and effective operating processes.

26. Introduction of payments system would enable large scale shift of cash transactions to electronic means, which would enhance the ability of CBY to track transaction and ensure transparency. This would enable the FIU to better implement AML/CFT regulations and enhance the financial integrity in Yemen (for more details see Annex 7). The proposed payment systems components could also be linked with an AML/CFT monitoring system at the central bank, which can be used to scan all the payment instructions channeled through the national payments system against standard negative lists. This could provide the entire banking system with cost effective means of reviewing all the transactions being sent or received. Moreover, a robust credit reporting system can be beneficial in addressing AMF/CFT issues as it includes geographic and demographic data of the subjects of credit information which can prove to be useful to understand customer profiles if required in an AML/CFT context. In addition, credit reporting systems may include value added services such as alert services, among others, which could be useful in detecting suspicious patterns.

27. The core principles require a bank to have appropriate policies and processes in place. This includes strict ‘Know Your Customer’ rules that promote high ethical and professional standards in the financial sector and prevent the bank from being used for criminal activities. Strengthening the supervisory role of the CBY is a pre-requisite for the proper implementation of ‘Know Your Customer’ rules, and for monitoring reporting guidelines. An electronic payments system will greatly reduce the reliance of the economy on cash transactions and

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therefore allow formal monitoring on payments and transfers. Establishing a credit registry will be a first step towards enforcing ‘Know Your Customer’ rules and allowing financial institutions to properly assess their customers’ standing and needs. In this regard, international AML/CFT standards for customer identification and due diligence work to ensure that banks know and monitor their customers’ records, thus decrease the likelihood of criminal activities such as fraud.

28. Furthermore, developing financial infrastructure that promotes financial inclusion would aim at reducing the use of cash. The proposed project will also support the implementation of the MAF and the Government’s priority program to encourage sustainable expansion of access to finance for MSMEs. It aims to improve financial intermediation in Yemen that has historically been very weak. The project will support the authorities in attaining a more inclusive system able to cater to the less privileged segments in the society. It will also ensure equal access to finance for both women and men, through effective gender mainstreaming. This ultimately contributes to employment generation, poverty reduction, and shared economic prosperity In fact, the development of a sound financial sector in Yemen is a core requirement for any private sector development and key in addressing the challenge of job creation, a priority in fragile and conflict-affected contexts, in a private sector with limited capacity and competitiveness by providing facilitation and incentives to improve access to finance which would support SMEs to invest, hire, and grow.

II. PROJECT DEVELOPMENT OBJECTIVE

A. Project Development Objective

29. The objective of the project is to develop a financial institutional infrastructure that supports greater transparency and efficiency of financial transactions in the financial system.

B. Project Beneficiaries

30. The direct project beneficiary would primarily be the CBY in that the project will enable the central bank to: (i) conduct its internal functions efficiently and effectively; (ii) base its supervision activities on comprehensive data and analysis; and (iii) provide more efficient transactional services to the banks and the Government. The project will also benefit commercial banks and microfinance institutions as the improved credit reporting system would provide them with comprehensive information to base their credit decisions on while the payments system would enable the banks to develop more efficient payment products and services to meet the needs of their clients.

C. PDO Level Results Indicators

The PDO level results indicators under this operation are as follows (Annex 1 provides details): (i) number of dashboards shared with the Board of CBY, including CAMELS ratings, money market, reserve and treasury activities indicators; (ii) value of RTGS transactions as a percentage of GDP;(iii) number of inquiries received by the new PCR; and (iv) percentage of women borrowers in the new PCR.

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III. PROJECT DESCRIPTION

A. Project Components

31. The project’s main components are: (i) developing CBY’s core system; (ii) developing payments system infrastructure; (iii) establishing CBY’s PCR; and (iv) setting up data centers, systems integration services and capacity building of the Central Bank of Yemen.

Component I: Developing CBY’s Core System (US$ 11.4 million)

32. This component would revamp the CBY’s internal systems and procedures in order to modernize the central bank with respect to addressing its core functions, specifically in the areas of banking supervision, statistics, treasury operations, foreign reserves management, and its internally-focused processes, including accounting and financial management, human resource management and payroll. This component of developing a central bank core system including data warehouse will enable the undertaking of data-driven analysis; and will allow for straight-through possessing of key central bank activities, connecting the different branches of CBY. It will also allow the CBY to provide further services to the banking sector while improving its supervision (with linkages to be established with component three).

33. Based on international comparisons, estimated cost for this component is around US$ 11.4 million. This component will be complemented by technical assistance proposed to be provided through the Financial Sector Reform and Strengthening (FIRST) Initiative (Section III-D provides details).

Component II: Developing Payments System Infrastructure (US$ 3.4 million)

34. This component would implement the core payments system infrastructure as one integrated system. It would be implemented in one central location and a business continuity center and all eligible participants would be connected to this system. This component would include the application software and hardware. The required networking components and systems integration with the other components in particular Component I would be covered as

Box 3 :Payment Systems Indicators Methodology

A set of six indicators* to measure countries NPS development has been developed by the Payment Systems Development Group (FFIFI), World Bank, listed in the working paper entitled “Measuring Payment System Development”. The below summarizes the methodology used for calculating these indicators and also the rating for Yemen in the working paper. The methodology is described in detail in the above mentioned working paper.

Legal and Regulatory: The specific provisions in the legal framework to cover a basic set of minimum requirements like legal protection for settlement finality, collateral and the coverage on oversight powers for the Central Bank. Yemen Rating: Medium/Low.

System design and policies for large value payments: The design aspects of the large-value payments systems in terms of risk management framework in particular for liquidity and credit risk, pricing policies, and governance arrangements. Yemen Rating: Low.

Usage of large value payment systems: The extent of usage of paper instruments for large value payments. Yemen Rating: Low.

Retail payments infrastructure and policies for retail payment systems: The infrastructure available for retail payments, their inter-operability, and inclusion of retail payments in the scope of payment systems oversight activities of the central bank. Yemen Rating: Low.

Efficiency of retail payment instruments and extensiveness of usage of non-cash payment instruments: Retail payments per-capita and percentage of non-cash retail payments that are made through cheques. Yemen Rating: Low.

Oversight functions: Organizational arrangements for payment systems oversight, the objectives of the oversight activities and the co-operation framework with other national and international public authorities. Yemen Rating: Low.

* The indicators are based on the responses provided by the central banks to a bi-annual Global Payments Systems Survey (GPSS) conducted by the World Bank. The working paper also used the responses to the Global Payment Systems survey of 2008, to measure these indicators for over 142 countries.

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part of Component IV. This system is called “Automated Transfer System” and combines the functionality of a real time gross settlement (RTGS) system and automated clearing house (ACH), and as a separate module, a centralized securities depository (CSD). The RTGS system would serve as the system for settlement of all large-value and systemically important payment transactions. The ACH would enable the banks and other eligible institutions to offer credit transfers and direct debits that can be used for a variety of retail payment needs, such as salary payments, bill payments and tax payments. It would also support the automation of cheque processing. The CSD would enable electronic recording of securities ownership and as the securities markets develop, enable smooth operation of securities transfers resulting from secondary market transactions. The recording of securities ownership in electronic form would also enable efficient usage of these securities as collateral for liquidity support in the RTGS system and also for repo and other Open Market Operations (OMO).

35. The CBY and the project team have held extensive consultations with commercial banks and confirm their readiness and eagerness to participate in the national payments system. This component is estimated to cost around US$ 3.4 million. The project would not fund the cost for system changes of the commercial banks and other participants. This would be handled by the commercial banks and other participants on their own. The ongoing operational costs would be funded by a combination of fees from the participants and the CBY’s own funds. The overall legal and regulatory framework, governance arrangements, operating rules and procedures and oversight arrangements for these systems would be developed as part of the proposed technical assistance for the payment systems, which is proposed to be provided by the FIRST initiative.

Component III: Establishing CBY’s Public Credit Registry (US$ 2.9 million)

36. This component aims at establishing a reliable and robust PCR hosted and operated by CBY and developing an effective credit reporting environment in Yemen. The new PCR will include credit related information from regulated financial institutions. As part of establishing a new PCR, and under a solid legal and regulatory framework, the participating entities will be required to contribute credit data in a complete, accurate, and consistent fashion both from individuals and firms, which will require working closely with CBY. The PCR is expected to produce the necessary information that would help CBY perform its role as supervisor of

Box 4: The General Principles of Credit Reporting

The General Principles aim at the following public policy objectives for credit reporting systems: Credit reporting systems should effectively support the sound and fair extension of credit in an economy as the foundation for robust and competitive credit markets. To this end, credit reporting systems should be safe and efficient, and fully supportive of data subjects and consumer rights. General Principle 1: Credit reporting systems should have accurate,

timely and sufficient data–including positive–collected on a systematic basis from all relevant and available sources, and should retain this information for a sufficient amount of time.

General Principle 2: Credit reporting systems should have rigorous standards of security and reliability, and be efficient.

General Principle 3: The governance arrangements of credit reporting service providers and data providers should ensure accountability, transparency and effectiveness in managing the risks associated with the business and fair access to the information by users.

General Principle 4: The overall legal and regulatory framework for credit reporting should be clear, predictable, non-discriminatory, proportionate and supportive of data subject and consumer rights. The legal and regulatory framework should include effective judicial or extrajudicial dispute resolution mechanisms.

General Principle 5: Cross-border credit data transfers should be facilitated where appropriate, provided that adequate requirements are in place.

Source: General Principles for Credit Reporting, Consultative Report, World Bank (March 2011).

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the banking sector and will also produce credit reports which include the necessary data for financial institutions to utilize before extending credit to their potential customers. This component will entail procuring a reputable international vendor in the credit reporting field, who will provide the PCR software solution with the required functionality and technical/security specifications, as well as the hardware required to operate the PCR. In addition, the vendor will be required to train CBY staff on operating the new system effectively, and will work with financial institutions, for them to submit their credit information in a complete and accurate format and at the same time are able to use the system. To ensure a holistic approach, this component will also tackle other areas, including strengthening the credit reporting legal and regulatory framework, improving governance and oversight, in addition to awareness raising, study visits to other PCRs/central banks in the MENA region11 and capacity building of relevant stakeholders.

37. CBY and the project team have held consultations with representatives from the banking sector and other stakeholders and they have confirmed the necessity of establishing a new PCR and their eagerness to participate in the process. As part of the project, a credit reporting working group will be formed and will consist of representatives from the banking sector and the microfinance sector and chaired by CBY, in order to take an active role in all credit reporting matters moving forward. Technical assistance, which will be performed by the World Bank and the Internal Finance Corporation (IFC), is necessary to complement the PCR system and ensure developing a strong credit reporting framework in Yemen. This will include reviewing and developing the legal and regulatory framework, operating rules and procedures, and oversight function for credit reporting in Yemen as well as capacity building and awareness activities for CBY and the Yemeni financial sector. The activities under this component should ensure adherence to the World Bank’s General Principles for Credit Reporting. This component does not include supporting any system upgrades/enhancements that may be required by some financial institutions, in which case should be handled directly by them. This component is estimated to cost around US$ 2.9 million.

Component IV: Setting up Data Centers, Systems Integration Services and capacity building of the CBY (US$ 2.3 million)

38. Sub-component 1: Establishment of Data Centers (US$ 600,000). This sub-component would finance the establishment of two data centers – main site and backup site, to house all the Information and Communication Technology (ICT) components mentioned in Components I to II and III and the required data networks for these systems. The systems being deployed are critical systems and require a very high degree of operational reliability. The space for the data center and other utilities like electricity and air-conditioning would be identified and provided by the CBY. A fully functional back-up site with all the required ICT components that can serve as a back-up to the main site would also be required. Each data center would include among others the following: (i) data center site in terms of preparing the physical location, flooring, air-conditioning and power circuitry; (ii) power back-ups; (iii) access control systems;

11 As part of TA support by IFC, specifically on capacity building activities, CBY representatives attended IFC's 4th credit reporting and risk management training that was held in Malaysia in November 2012. In addition, CBY representatives joined a study tour to Morocco in April 2013, which was organized by IFC and the Central Bank of Morocco (BAM), where they learned from BAM's experience in establishing and operating the credit registry and payment systems.

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and (iv) data networking and internal cabling; and (v) system management solutions, including system monitoring, system backups and network management systems. The CBY would fund activities (i) to (iii) and the project would fund the activities (iv) and (v). The cost of this sub-component is estimated to be around US$ 300,000 for each site, in total US$ 600,000.

39. Sub-component 2: Capacity Building for CBY (US$ 1.7million). This includes training and professional certification in ICT security and database administration and systems management, and provision of ICT hardware and software needed for the functioning of the Project Management Unit (PMU). This project brings together multiple ICT components and would hence require the support of consultants and entities that would assist the PMU in managing the implementation aspects of the ICT components and also assist in the preparation of the bidding documents, bid evaluations and also liaison with the chosen ICT vendors. It is expected that one entity focusing on IT aspects and a few functional/business consultants would be required for this. The entity with support of the consultants would be responsible for supporting the PMU in orchestrating the overall implementation. The key responsibilities for this entity would be: (i) working with the PMU in clearly defining the scope of the individual systems and a high level project plan and supporting the PMU in the IT project management; (ii) analyzing the hardware and network requirements and identifying opportunities for leveraging existing systems components and developing the overall IT System and network architecture; (iii) finalizing the bidding documents for the various components in co-ordination with the PMU and with support from additional consultants if required; (iv) supporting the PMU in the evaluation of the bids and selection of vendors, with support from additional consultants if required; (v) working with the chosen vendors and coordinating the implementation of the systems; (vi) supporting the PMU in conducting the user acceptance tests and operational acceptance tests; and (vii) enhancing the capacity of the PMU in the areas of IT management, IT governance and IT risk management through focused training to key CBY staff during the course of the project. This sub-component would also fund any post-implementation support and IT security assessments that would be required. It is expected that a firm would be selected for this activity; in addition, the CBY could also hire one to three specific consultants with deep experience in the implementation of such systems and the relevant functional and business knowledge of the underlying systems.

40. This sub-component is mainly focusing on the capacity building of the CBY staff in specific technical areas required for ongoing management of the systems, training and professional certification in IT security, database administration and systems management, and purchase and maintenance of miscellaneous IT hardware and software and training to support the ongoing effective functioning of the PMU.

B. Project Financing

41. Lending instrument. The proposed operation will be an investment project financing in the amount of SDR 13.4 million (US$ 20 million equivalent). The project cost and financing are outlined in Table 1.

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Table 1: Project Cost and Financing

42. The disbursement schedule has been projected in the data sheet based on the following assumptions: (i) implementation of the core banking component by Q4 2017; (ii) implementation of the payment systems and credit reporting component by Q2 2017; (iii) data center preparation, supply of hardware and the systems integration consultancy in line with the above implementation schedule; (iv) the payment schedule for the software components of the core banking systems, payment system components, and the credit reporting system would be 15 percent on contract, 25 percent on acceptance of design and project plan, 20 percent on completion of solution deployment for User Acceptance Test (UAT), 25 percent on successful completion of UAT, and final 15 percent on completion of full rollout of the systems; (v) the payment for the hardware components is based on 15 percent on contract, 70 percent on delivery, and 15 percent on completion of rollout; and (vi) the payment schedule for the systems integrator consultants is based on estimated quarter-wise effort based on the above mentioned implementation schedule.

C. Analytical Underpinnings and Lessons Learned Reflected in the Project Design

43. The design of the project has been underpinned by extensive analytical, advisory and diagnostic work and has taken stock of lessons learnt in other projects. Key analytical work that was tapped on include: Yemen Financial Sector Assessment Program (2001); the joint World Bank (WB)-IFC Yemen Financial Sector Review–Yemen Financial Sector Reform: A Proposed Action Plan (2008); the Arab Monetary Fund (AMF)-WB Assessment of the Payments System (2009); the AMF-IFC Yemen National Credit Reporting Country Assessment (2010) that was part of the Arab Credit Reporting Initiative (ACRI); the joint IFC-AMF Credit Reporting: Country Assessment (2009); the Yemen Financial Infrastructure Strategy (2012); the World Bank’s World Development Report on Conflict, Fragility and Development (2011); and the World Development Report, Gender Equality and Development (2012). These detailed assessments have put forward key recommendations and prioritized the reforms required which helped identify the key components of the project.

44. The project design fully reflects lessons learnt from recent financial infrastructure, operations, ongoing and completed World Bank Group activities and donor projects, as well as international best practice in this area. The proposed operation has specifically taken stock of lessons learnt throughout the project preparation, design, and implementation of: (i)

Project Components Project Cost (US$ millions)

IDA Financing (US$ millions)

Financing %

1. Developing CBY’s Core System 2. Developing Payment System Infrastructure 3. Establishing CBY’s Public Credit Registry 4. Setting up Data Centers, Systems Integration Services and Capacity Building of the CBY (a) Establishment of Data Centers (b) Capacity building for the CBY project management Total Baseline Costs Physical contingencies Price contingencies

11.4 3.4 2.9 2.3

0.6 1.7

20.0

11.4 3.4 2.9 2.3

20.0

57 17

14.5 11.5

100

Total Project Costs Interest During Implementation Front-End Fees Total Financing Required

20.0

20.0

20.0

20.0

100

100

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Afghanistan Financial Sector Rapid Response Project (Report 63549-AF, 2011); (ii) Vietnam Financial Sector Modernization and Information Management System Project (Report 45148-VN, 2008); (iii) Egypt three Financial Sector Development Policy Loans (DPLs) in (Report No. 36197-EG, 2006; Report No. 43362-EG, 2008; Report No. 53277-EG, 2010); and (iv) World Bank Assessment of Bank of Algeria (2008). Key lessons learnt that have been taken into account in the design of the project are as follows :

Financial infrastructure projects should not be viewed as IT and automation operations. The business aspects in these projects are determinant to be able to implement systems that are used effectively by the different stakeholders. Hence, it is important to ensure that such business aspects are integrated in the project design and are undertaken by resources with strong capacity are on the ground to help integrate both IT and business components.

Procurement of IT systems may become complicated and usually takes a long time to be completed, which should be factored in the project timeline. It is important to start as early as possible with the procurement process and bring in resources that are familiar with the World Bank bidding requirements to support the client throughout the bidding process. This project has taken that into account by preparing bidding documents.

Capacity Building of the client is a key factor for project success, on the project management side and on the technical aspects. This needs to be integrated in the project design throughout the various phases of the operation via different means, including training workshops, study tours, and on-site coaching.

Acquiring state-of-the-art IT systems is a very important part of the financial sector modernization. It cannot however lead to the desired results without changes to business models, new capacity and confidence to implement re-engineered processes. These changes would require a significant technical assistance package, including consultancy services from a set of experienced IT consultants and functional consultants

Enhancing ownership of the project, accelerating acceptance of the proposed changes and improving the effectiveness of the knowledge transfer is important. It is vital to involve the various internal and external stakeholders such as the relevant departments of the CBY, Ministry of Finance and commercial banks and other participants.

Effective donor coordination to ensure synergies in approach and guidelines to avoid any potential duplication of efforts by development partners.

Political commitment and ownership of the project are critical, as stand-alone donor supported projects cannot accelerate the reforms without a demonstrable local buy-in.

45. In addition, the project design benefited from the numerous trust funds including several FIRST Initiatives that have contributed to improved financial infrastructure; addressing supervision and regulation, information systems, credit registry and payments system.

D. Links with other World Bank Group and Development Partners’ Activities

46. The proposed project complements on-going World Bank Group activities, ranging from IDA operations, to advisory services and technical assistance from the World Bank and IFC Advisory Services, the proposed Arab Payments Initiative to be managed by the World Bank and the AMF and other ongoing activities of the Consultative Group to Assist the Poor (CGAP).

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Box 5: IFC Engagements in Yemen

Previous IFC Engagements in Yemen are as follows: (i) Microfinance: Al Amal Microfinance Bank (2010 - 2011), enhancing bank's financial management framework and establishing a product development process; (ii) Banking: SABA Islamic Bank (2010 - 2011), strengthening bank's risk management practices including modules covering credit risk, operations risk, liquidity, finance, HR, corporate governance, MIS, etc.; (iii) Leasing: Leasing Law (2006 -2009), establishing a leasing legal framework through drafting and enacting a new leasing law in Yemen and suggesting amendments to the Tax Law; and (iv) Credit Reporting: as part of the Arab Credit Reporting Initiative, IFC and the AMF conducted a Credit Reporting Country Assessment in Yemen in 2009, where detailed findings and recommendations were presented. In addition, training was provided to CBY staff on IFC's credit reporting and risk management in Kuala Lumpur in 2012.

Current IFC Engagements include: (i) Leasing: Leased Asset Registry, technical assistance to the Ministry of Industry and Trade: establish a leased asset registry, and (ii) Microfinance: Al Kuraimi Islamic Microfinance Bank. Project which aims at strengthening bank capacity in product development, risk management, governance, HR, and MIS.

These activities are mutually reinforcing, and ensure more effective results on the ground. This includes proposed technical assistance to develop a national payment systems strategy, strengthen legal and regulatory framework, institute an appropriate collaborative framework amongst all stakeholders in the National Payments System and institute an appropriate payment systems oversight framework. In addition, AMF will be contributing to the Public Credit Registry component through the Arab Credit Reporting Initiative (ACRI) which is a joint on-going program managed by IFC and AMF. This will include capacity building initiatives in the area of credit reporting.

47. Complementary World Bank Group Technical Assistance. This operation will be complemented with technical assistance, advisory services and capacity building that will be provided through the following channels:

Capacity Building of CBY provided through FIRST Initiative, focusing on capacity building for banking supervision, payment systems and credit registry banking supervision and central bank functions, to ensure effective functioning and utilization of the system components being deployed. In the area of banking supervision the capacity building would involve strengthening the regulatory data reporting and analysis process and also identifying process and procedural changes required in CBY to fully leverage the core banking system to be implemented. In the area of the payment systems, the areas covered would aim at, as well as developing the other aspects of the NPS aiming at: (i) development of a NPS; (ii) proposing specific legal and regulatory measures for strengthening the legal and regulatory framework for the NPS; (iii) developing a payment systems oversight framework for the CBY; and, (iv) developing a collaborative framework in the form of a National Payments Council (NPC) for fostering co-operation and dialogue amongst all the stakeholders in the NPS and building awareness on the new range of payment products that can be created using the infrastructure that would be deployed as part of this project. In the area of credit registry, the areas covered would include legal and regulatory reforms to support the functioning of the credit registry and capacity building and raising awareness of all the stakeholders. The application to FIRST has been initiated and the process is likely to be concluded by end July 2013 and implementation is expected soon thereafter with a targeted completion date of June 2015.

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IFC providing advisory services focused on the credit registry component. Technical assistance is necessary to complement the PCR system and ensure developing a strong credit reporting framework in Yemen. This component is prepared jointly with the IFC due to its expertise in credit registry and strong familiarity with the financial sector landscape in Yemen.

Canadian Trust Fund. AML/CFT TA by the Financial Market Integrity Unit of the World Bank will be provided through the Canadian Trust Fund (see Annex 7 for further details).

48. Coordination with other Development Partners. The proposed operation complements well with other development partners activities. The priority of private sector development and job creation is also expressed in the MAF agreed to at the Yemen Donor Conference held in Riyadh on September 2012, which specifically refers to the Government’s and donor commitments to enhancing job creation, and enhancing the role of private sector and business climate. Moreover, in collaboration with the United Nations, the European Union (EU) and the Islamic Development Bank, the World Bank in 2012 prepared a Joint Social and Economic Assessment (JSEA) to evaluate the impact of the crisis and identify recovery measures. The JSEA was the basis for the discussions at the donors conference in Riyadh and thereafter. The project will be coordinated with development partners that are playing an active role in Yemen, such as the IMF, EU, AMF, and US Treasury. The Bank has been coordinating very actively with the donor community over the past year to prevent duplication of efforts and ensure synergy among the different donors.

E. Stakeholder Consultation.

49. The reforms by the proposed project were part of the Government’s preparation and consultations of the TPSD that were led by Ministry of Planning and International Cooperation, with the outcome of designing the transition plan and its main sectoral strategies and priorities, including that of the banking sector. A specialized stakeholder committee was formed to obtain input and hold discussion on the key reform priorities with government institutions, market players, and civil society. The consultative approach helped the finalization and approval of the plan by the Cabinet in June 2012, and the endorsement by the donors in the following Yemen and New York donor conferences.

50. Throughout the project preparation phase, CBY discussed with stakeholders in the banking and private sector, the design and details of the proposed project. The last meeting was organized jointly with the WB in March 2013 and attended by the Ministries of Planning, and Finance, Islamic and conventional banks, private sector representatives, including the Yemen Businessmen Club and the Federation of Chamber of Commerce. This led to the establishment of the technical Stakeholder Consultation Committee in March 2013 which will advise the CBY throughout the life span of the project to ensure ownership. The CBY has held consultations with commercial banks and confirms their readiness and eagerness to participate in the national payments system. The consultations with numerous stakeholders will continue throughout project implementation to ensure their buy-in, and ownership.

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IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

51. Institutional and implementation arrangements of the proposed project were discussed with the Yemeni authorities, specifically with regard to the Project Management Unit (PMU), the formation of the Oversight Committee, Executive Committee and Technical Stakeholders Consultation Committee, preparation of the Operational Manual (OM), and the capacity and readiness for implementation. All implementation arrangements have been agreed on and finalized.

52. Project Management Unit. The CBY established a PMU on March 6, 2013 by Decree No. 12 of 2013. The PMU has been adequately staffed selected from the best qualified CBY staff, headed by the Deputy Governor for Foreign Operations, as the Director of the PMU; and comprising of a PMU Coordinator, Financial Management Officer, Procurement Specialist, and Executive Assistant. The Terms of Reference (TOR) of the PMU have been reviewed and are acceptable to the Bank and documented in the Operational Manual (OM). The World Bank is providing training and capacity building for the PMU staff to ensure the knowledge of the World Bank procedures and guidelines.

53. Oversight Committee, Executive Committee and Stakeholders Consultation Committee. The CBY Governor has established three committees through Decree No. 11 of 2013 on March 6, 2013. The Oversight Committee, established to provide strategic guidance to the Project Management Unit and ensure fiduciary compliance of the project activities, comprises the Deputy Minister of Finance, Deputy Minister of Planning and International Cooperation for projects programming, two Deputy Governors of the CBY, and the Head of Banking Supervision of CBY, headed by the CBY Vice Governor. The Executive Committee, established to advise and monitor the Project related ICT policy framework and the overall project implementation, comprises the CBY Deputy Governors in charge of Foreign Operations, Banking Supervision, ICT and Accounting, Domestic Operations, and Financial and Administrative Affairs and headed by the CBY Vice Governor. The Stakeholders Consultation Committee, comprises users of the payment systems and credit registry systems and other stakeholders, such as banks, micro finance institutions, and chambers of commerce.

54. Operational Manual. The CBY has prepared an OM with guidance from the World Bank, which included a Financial Management (FM) Manual and described the roles and responsibilities for project implementation, the institutional and implementation arrangements, financial management, and safeguards, as well as disbursement and procurement procedures. The OM was endorsed by the CBY on April 17, 2013.

55. Assessment of implementing entity. The preliminary assessment of the implementing entity, CBY, showed commitment to strengthening the financial institutional infrastructure, knowledge and clear understanding of the sector issues, and overall technical readiness. CBY has already started preparatory work, specifically on system requirements, and works related to technical specifications of the payments system. In addition, the World Bank and the IFC have started the process of training the CBY staff specifically on issues related to the institutional infrastructure.

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Box 6: Improving Access to Finance Opportunities for Women in Yemen

Female participation in the economic activity in Yemen is quite low compared to the already low average of the MENA region. Women business owners in Yemen struggle to raise capital for their business due to the high collateral requirements which include including real estate and personal guarantees (may go up to 400 percent greater than the loan amount). According to the Yemen Gender Policy Note “Gender Equality in Yemen: From Aspirations to Opportunities”, only about 6.5 percent of firms have female owners and women make up only 5 percent of permanent full-time workers in enterprises in Yemen. However, women account for more than 87 percent of microfinance customers in Yemen, which is a very strategic intervention for women, especially given the difficult environment and preferences for working from home.

Enhancing the active participation of women in entrepreneurship activities and giving them access to markets, especially financial markets, is essential, as it leads to a rise in the number of economically active members in the society. Empirical evidence has shown that economic empowerment of women would generate benefits to the whole family, and improves the standard of living of their children. Enhancing women’s entrepreneurship opportunities, and giving them equal access to finance, will ultimately result in long-run economic prosperity.

One of the key challenges facing women is lack of credit information that reveals the borrower’s credit worthiness. Hence, establishing an effective credit reporting system in Yemen through the Public Credit Registry can advance the financial inclusion aspect for women. Particularly, the new Public Credit Registry will work to integrate the Yemeni microfinance sector which mostly constitutes women customers. It is established that credit reporting promotes transparency and objectivity in the credit granting process. It helps in building positive credit histories, reducing over-indebtedness and encourages financial institutions to decrease collateral requirements. This will allow women clients to benefit from the potential opportunities that will be presented by being integrated in the new credit reporting framework in Yemen.

B. Results Monitoring and Evaluation

56. A strong monitoring and evaluation (M&E) framework to track inputs, outputs, and outcomes in a systematic and timely fashion has been developed and agreed with CBY (Annex 1). Project outcomes and outputs will be monitored through periodic reporting by CBY, which has considerable capacity in monitoring given its role as a central bank, in addition to its experience in the of handling previous donor projects. The midterm review (MTR) of the project will entail an update of an institutional assessment of CBY.

C. Sustainability

57. Project sustainability will be facilitated by the Yemeni government’s strong commitment to strengthen the financial sector soundness. Strong partnership has been established between the World Bank and the Yemeni authorities over the past years through an integrated work program, reflected in an effective policy dialogue, analytical work, technical assistance, and key operations. The World Bank team had a strong and professional policy dialogue with CBY, as well as with the Ministry of Planning and International Cooperation, and the Ministry of Finance, where commitment to financial sector reform was evident.

D. Gender Mainstreaming

58. The project will indirectly entail gender mainstreaming. This will mainly be achieved through the establishment of the credit registry which will potentially help in addressing the gender aspect in financial inclusion. Women, who may have little access to property/collateral, will be able to build good credit histories thus building their reputational collateral and hence having better access to credit. Given that women constitute a considerable portion of microfinance clients, it will be important to ensure that the microfinance sector is integrated in the Public Credit Registry, and no minimum thresholds are required, which will give better chances for women to be included in the formal financial sector in Yemen (Box 6).

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V .Key Risks and Mitigation Measures

A. Risk Ratings

Table 2: Risk Ratings Summary Table

Stakeholder Risk Substantial Implementing Agency Risk

Capacity Moderate Governance Moderate

Project Risk Design High Social and Environmental Low Program and Donor Moderate Delivery Monitoring & Sustainability High Implementation Risk High

B. Overall Risk Rating Explanation

59. Given the country’s political and security situations, this is a high risk operation in a conflict-affected country. The volatility of the political, security, governance, and country environment pose risks both during preparation and implementation. Potential risks for the World Bank implementation support of the project are also high and require mitigation. There is also a risk of changes in the Cabinet as well as for heads of other government institutions. In addition, the success and sustainability of the financial sector policy reform hinges on a stable and predictable macroeconomic environment, which may be more difficult to sustain in light of the fragility of the transitional period. On another note, civil society might not perceive support and assistance to the financial sector as a key intervention at the moment. An issue that should be mitigated through extensive consultation and awareness on the benefits of the project for improving microfinance access and banking services on poverty reduction and improving equality which are key demands by the civil society. In that context, the team has acknowledged a number of key risks and mitigation measures that are outlined in detail in the Operational Risk Assessment Framework (Annex 4).

60. Although there is little that can be done to mitigate for the country and political risks, which entails changes in the Government, experience demonstrates that substantive reforms can still be achieved by technocrats in the midst of transition—which is the case with CBY (the main counterpart and implementing entity of this operation). Whereas the recent political development has resulted in a new Cabinet and changes in most government institutions, the management of CBY has not changed, and still proved its commitment to reforms and performance even post 2011 crisis. Thus, the risks can be mitigated by the stability of the CBY’s technical expertise and continued commitment to programs with international financial institutions.

61. On stakeholder risks, the Bank will also coordinate with donors to ensure harmonization and complementarity with other donor programs. The CBY has also established the technical Stakeholder Consultation Committee that will ensure the participation of the private and banking stakeholders. Project outreach during implementation will include extensive project information and promotion activities, which will include sessions with civil society organizations and financial sector stakeholders to clarify the significance of the project for the country’s economic growth and development, in addition to the project’s role in addressing the

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impact of the 2012 AML/CFT assessment. On governance risks, the management of the CBY will report on a quarterly basis to its board and provide an update on the progress made. Also, a director with IT skills will be appointed, and will sit at the board of the CBY. These measures will help in mitigating the expected risks.

VI. Appraisal Summary

A. Economic and Financial Analyses

62. Implementing the proposed systems, aiming at developing an institutional infrastructure, under this operation, would enhance the efficiency of the financial system. The proposed operation would assist Yemen to move forward in strengthening the enabling environment for financial intermediation, resource mobilization and risk management, and increasing the private sector's role in the provision of financial services. It is crucial for financial institutions to exercise more scrutiny on all financial transactions, and transfers going in and out of the country, such as remittances and other transfers. The urgency of the matter has escalated concerns of transfers taking place to finance terrorism in Yemen, in light of the political developments and security issues on the ground. In addition, Yemen’s WTO accession would add more pressure on the Government to further develop and strengthen its financial sector. Also, this is a bigger issue of concern as Yemen was placed under the FATF black-listed countries. These are all push factors for the central bank to take measures to strengthen their financial infrastructure, payments systems, and monitoring mechanisms. All economic and financial reports either from IMF or World Bank underscore the need for Yemen to undertake investments in financial infrastructure.

B. Technical Analysis

63. The proposed operation grant amount of SDR 13.4 million (US$ 20 million equivalent), will be channeled through the CBY. A series of technical assistance activities are currently taking place and will continue throughout the project life, to go in parallel and complement this project. Technical assistance is being provided by IFC and the World Bank (funded by the FIRST Initiative) as well as advisory services by the AMF, the Canadian Trust Fund, and the US Treasury.

C. Financial Management and Disbursement Arrangements

64. Financial Management (FM). An assessment of the FM arrangements for the proposed project was undertaken to assess the capacity of CBY, and assist in determining the required FM and disbursement arrangements. The CBY has appointed qualified staff with good capacity and has procured and installed an automated accounting system for the project which is capable of recording and reporting on the project’s transactions. The CBY has also established an agreed upon the OM, including FM and disbursement arrangements. The CBY, through the PMU will manage all the FM aspects of the project (such as accounting recording and reporting through the use of an automated accounting system and based on an acceptable manual of procedures and management of the disbursement process). The PMU will be responsible for planning, budgeting, overall monitoring of the project activities, and reporting to the stakeholders. The financial management specialist assigned to the PMU is qualified with strong experience in internal controls and accounting and auditing, and the Bank has provided training in FM and disbursement issues in order to get more familiar with the Bank’s FM and disbursement procedures. An FM Manual has been prepared and included in the OM that was endorsed by the CBY on April 17, 2013.

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65. The PMU will follow cash basis of accounting to record the project’s transactions using the automated accounting system. Accounting records will be maintained within CBY using the accounting system, which will also generate the project accounts' quarterly Interim Financial Reports (IFRs). The CBY will submit to the Bank, the project’s quarterly unaudited IFRs not later than 45 days after each calendar quarter in the agreed upon formats, detailed in the OM. In addition, the CBY will submit to the Bank, project audited financial statements and CBY’s own audited financial statements, on an annual basis. Both reports will be submitted to the Bank within six months from calendar year end. The Bank team has reviewed the CBY’s audited financial statements for the last two years noting unqualified audit reports and a number of internal control comments which the CBY has started to address and expected to mitigate the remaining risks through the proposed project.

66. The PMU will maintain an acceptable fixed assets register for the assets financed by IDA. Reconciliation of assets registries and actual locations/usage of these assets will be conducted annually including spot checks, and accordingly an annual report is issued that provides the assets from various sources of financing. This will be subject to the external auditor’s verification. The CBY has an internal audit department which will carry out ex post review on the project’s implementation.

67. Disbursement and Flow of Funds. To ensure the project funds are readily available for project implementation, the CBY will open, maintain, and operate one USD Designated Account (DA) at the CBY. Deposits into, and payments from the DA will be made in accordance with the provisions which stated in the project’s Grant Agreement and in accordance with World Bank Disbursement Guidelines. An authorized allocation of up to 10 percent of the Grant would be used as the DA’s ceiling. The amount to be advanced under the first application would be determined based on initial project needs. The CBY would claim the remainder of the advance when the project has reached a more advanced stage of implementation. The DA would be replenished monthly based on withdrawal applications supported by appropriate documentation, or when half of the advance to the DA has been utilized, whichever occurs first. The DA will be audited annually by external auditors acceptable to the Bank as part of the overall project audit. Authorized signatories, names and corresponding specimens of their signatures will be submitted to the Bank prior to the receipt of the first Withdrawal Application.

68. Transaction based disbursement will be used under this project. Accordingly, requests for payments from the Grant account will be initiated through the use of Withdrawal Applications (WAs) either for Direct Payments, Reimbursements, and Replenishments to the Designated Account, or Issuance of Special Commitments. All WAs will include appropriate supporting documentation including detailed SOEs for reimbursements and replenishments to the DA.

69. Retroactive financing up to US$ 500,000 will be allowed for eligible expenditures made on or after April 1, 2013 and up to date of the Financing Agreement signing. Payments will only be made for items procured in accordance with applicable procurement procedures. Retroactive financing is expected to pay for the cost of the PMU’s accounting system, office equipment and furniture, and the initial advance of the system integrator, for a total amount of US$ 500,000.

D. Procurement

70. Procurement for the Project will be carried out in accordance with the World Bank’s Guidelines: Procurement of Goods, Works and non-consulting services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011 and Guidelines:

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Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers dated January 2011 and the provisions stipulated in the Grant Agreement.

71. A procurement capacity assessment for CBY was conducted during the pre-appraisal mission March 9–13, 2013. The main risks identified are: (i) CBY does not have experience in the Bank’s procurement procedures; (ii) complexity of the IT systems contracts that would need specialized skills in procurement of two stage bidding and the management of turnkey IT contracts; and (iii) delay due to overall lack of capacity in the country and the oversight entities, High Tender Board (HTB) and High Authority for Tender Control (HATC). The risk assessment rating is considered high. Risks mitigation measures have been discussed and included in the Procurement Plan (June 13, 2013). Training will be provided by the Bank’s staff. The recommendations of the assessments are included in Annex 3.

72. Considering that the project entails the delivery of sophisticated IT systems, a team of experts in core banking system and bank supervision joined the Bank’s team during the appraisal stage and reviewed the technical requirements and the functionality of the IT systems. The experts provided significant technical support to CBY team and worked very closely with them on adjusting the available bidding documents of other countries that purchased similar systems which was approved by the Bank before negotiation. In addition a consulting firm will be hired by the CBY to support the PMU in bids evaluation, contract execution, and would provide overall project management support (see Annex 3).

E. Social and Environment (including Safeguards)

73. The proposed project is a Category C. The social impacts overall are positive. The proposed project will help with enhancing the institutional capacity of the financial system in Yemen, and will contribute in the creation of job opportunities. In consideration of the majority of people currently using cash as a means of payment and only about 2.5 percent of the population has a bank account in the country, it may take time for people to adapt to a new payment system introduced by the project because of some social factors, such as culture and changing people’s behavior. It is suggested that these issues need to be further assessed and more consultations with the general public, civil society and non-governmental organizations (NGOs) may need to be carried out throughout the project implementation.

74. Project activities are mostly focused on capacity building. Thus, it is not envisaged that the project will have any significant environmental impacts. As mentioned above, the project is expected to procure ICT equipment (such as hardware and network components). However, it is not envisaged that the project would generate e-waste as it will not be substituting previous equipment but establishing it for the first time. Also, construction work is expected to be minor – for example, as part of Component IV, a data center will be conditioned (i.e. not newly built) to host ICT components. As a result, the proposed project would not trigger Bank safeguard policies. The project will monitor closely these aspects and if the generation of e-waste or the need of further construction work becomes significant as the project develops, the Bank will assess the need for further environmental assessments and/or the modification of the Project Category.

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ANNEX 1

RESULTS FRAMEWORK AND MONITORING

Republic of Yemen: Financial Infrastructure Development Project

PROJECT DEVELOPMENT OBJECTIVE (PDO): The objective of the project is to develop a financial institutional infrastructure that supports greater transparency and efficiency of financial transactions in the financial system.

PDO Level Results Indicators C

ore Unit of

Measure Baseline

Cumulative Target Values Frequency

Data Source/ Methodology

Responsibility for Data Collection YR 1 YR 2 YR3 YR 4 YR5 YR6

Number of dashboards shared with the Board of CBY, including CAMELS ratings, money market, reserve and treasury activities indicators

Number 0 0 0 0 3 5 10 Annual CBY CBY

Value of RTGS transactions as a percentage of GDP Number 0 0 0 0 10 35 85 Bi-annual

World Bank Global Payment Systems

Survey World Bank

Number of Inquiries received by the new Public Credit Registry

Number 0 0 0 0 100,000 150,000 200,000 Annual CBY CBY

Percentage of women borrowers in the new Public Credit Registry

Percent 0 0 0 0 10 15 20 Annual CBY CBY

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*Total Assets from the banks’ balance sheet

INTERMEDIATE RESULTS

Intermediate Result

Component I: Developing CBY’s Core System

C

ore Unit of

Measure Baseline

Cumulative Target Values Frequency Data Source

Responsibility for Data Collection YR 1 YR 2 YR3 YR 4 YR5 YR6

Number of banks reporting data online and feeding the data warehouse (banking supervision)

Number 0 0 0 0 3 5 10 Annual CBY CBY

Percentage of the banking assets* covered by the data warehouse system (banking supervision)

Percent 0 0 0 0 25 40 75 Annual CBY CBY

Component II: Developing Payments System Infrastructure

New issuance of T-Bills, T-Bonds, and Sukuk Bonds through online system and recording of securities ownership in book entry form

Number 0 0 0 0 8 45 45 Annual CBY CBY

Implementation of core components of payment systems infrastructure – RTGS, ACH and CSD- completed

Yes/ No No No No No Yes Yes Yes Annual CBY CBY

Component III: Establishing CBY’s Public Credit Registry

Establishment of the new PCR Yes/ No No No No No Yes Yes Yes Annual CBY CBY

Number of financial institutions participating in the new PCR

Number 0 0 0 0 18 20 25 Annual CBY CBY

Component IV: Setting up Data Centers, Systems Integration Services and capacity building of CBY

Establishing a data center Number 0 0 0 1 2 2 2 Annual CBY CBY

Number of CBY Staff trained on operating the system

Number 0 10 25 45 55 60 65 Annual CBY CBY

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ANNEX 2

DETAILED PROJECT DESCRIPTION

A. Component I: Developing CBY’s Core System (US$ 11.4 million)

1. This component would revamp the overall systems and procedures within CBY in order to modernize the central bank with respect to addressing its core functions, specifically in the areas of banking supervision, statistics, treasury operations, foreign reserves management, and its internally-focused processes, including accounting and financial management, human resource management and payroll. This component of developing a central bank core system including data warehouse will enable the undertaking of data-driven analysis; and will allow for straight-through possessing of key central bank activities, connecting the different branches of CBY. It will also allow the CBY to provide further services to the banking sector while improving its supervision (with linkages to be established with component three).

2. Based on international comparisons, estimated cost for this component is US$ 11.4 million. This component will be complemented by technical assistance proposed to be provided through FIRST Initiative.

B. Component II: Developing Payments System Infrastructure (US$ 3.4 million)

3. This component would implement the core payments system infrastructure as one integrated system. It would be implemented in one central location and a business continuity center and all eligible participants would be connected to this system. This component would include the application software and hardware. The required networking components and systems integration with the other components in particular Component I would be covered as part of Component IV. This system is called “Automated Transfer System” and combines the functionality of a real time gross settlement (RTGS) system and automated clearing house (ACH), and as a separate module, a centralized securities depository (CSD). The RTGS system would serve as the system for settlement of all large-value and systemically important payment transactions. The ACH would enable the banks and other eligible institutions to offer credit transfers and direct debits that can be used for a variety of retail payment needs, such as salary payments, bill payments and tax payments. It would also support the automation of cheque processing. The CSD would enable electronic recording of securities ownership and as the securities markets develop enable smooth operation of securities transfers resulting from secondary market transactions. The recording of securities ownership in electronic form would also enable efficient usage of these securities as collateral for liquidity support in the RTGS system and also for repo and other Open Market Operations (OMO).

4. The CBY and the project team have held extensive consultations with commercial banks and confirm their readiness and eagerness to participate in the national payments system. This component is estimated to cost around US$ 3.4 million. The project would not fund the cost for system changes of the commercial banks and other participants. This would be handled by the commercial banks and other participants on their own. The ongoing operational costs would be funded by a combination of fees from the participants and the CBY’s own funds. The overall legal and regulatory framework, governance arrangements, operating rules and procedures and oversight arrangements for these systems would be developed as part of the proposed technical assistance for the payment systems, which is proposed to be provided by the FIRST initiative.

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C. Component III: Establishing CBY’s Public Credit Registry (US$ 2.9 million)

5. This component aims at establishing a reliable and robust PCR hosted and operated by CBY and developing an effective credit reporting environment in Yemen. The new PCR will include credit related information from regulated financial institutions and possibly from select non-regulated entities (with a particular focus on the microfinance sector). As part of establishing a new PCR, and under a solid legal and regulatory framework, the participating entities will be required to contribute credit data in a complete, accurate, and consistent fashion both from individuals and firms, which will require working closely with CBY. The PCR is expected to produce the necessary information that would help CBY perform its role as a supervisor of the banking sector and will also produce comprehensive credit reports which include the necessary data for financial institutions to utilize before extending credit to their potential customers. This component will entail procuring a reputable international vendor in the credit reporting field, who will provide the PCR software solution with the required functionality and technical/security specifications, as well as the hardware required to operate the PCR. In addition, the vendor will be required to train CBY staff on operating the new system effectively, and will work with financial institutions, for them to submit their credit information in a complete and accurate format and at the same time to use the system. To ensure a holistic approach, this component will also tackle other areas, including strengthening the credit reporting legal and regulatory framework, improving governance and oversight, in addition to awareness raising and capacity building of relevant stakeholders.

6. CBY and the project team have held consultations with representatives from the banking sector and other stakeholders and they have confirmed the necessity of establishing a new PCR and their eagerness to participate in the process. As part of the project, a credit reporting working group will be formed and will consist of representatives from the banking sector and the microfinance sector and chaired by CBY, in order to take an active role in all credit reporting matters moving forward. Technical assistance, which will be performed by the World Bank and IFC, is necessary to complement the PCR system and ensure developing a strong credit reporting framework in Yemen. This will include reviewing and developing the legal and regulatory framework, operating rules and procedures, and oversight function for credit reporting in Yemen as well as capacity building and awareness activities for CBY and the Yemeni financial sector. The activities under this component should ensure adherence to the World Bank’s General Principles for Credit Reporting. This component does not include supporting any system upgrades/enhancements that may be required by some financial institutions, in which case should be handled directly by them. This component is estimated to cost around US$ 2.9 million.

D. Component IV: Setting up Data Centers, Systems Integration Services and capacity building of the CBY (US$ 2.3 million)

7. Sub-component 1: Establishment of Data Centers (US$ 600,000). This sub-component would finance the establishment of two data centers – main site and backup site, to house all the ICT components mentioned in Components I to II and III and the required data networks for these systems. The systems being deployed are critical systems and require a very high degree of operational reliability. The space for the data center and other utilities like electricity and air-conditioning would be identified and provided by the CBY. A fully functional back-up site with all the required ICT components that can serve as a back-up to the main site would also be required. Each data center would include among others the following: (i) data center site in terms of preparing the physical location, flooring, air-conditioning and power circuitry;

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(ii) power back-ups; (iii) access control systems; and (iv) data networking and internal cabling; and (v) system management solutions, including system monitoring, system backups and network management systems. The CBY would fund activities (i) to (iii) and the project would fund the activities (iv) and (v). The cost of this sub-component is estimated to be around US$ 300,000 for each site, in total US$ 600,000.

8. Sub-component 2: Capacity Building for CBY (US$ 1.7million). This includes training and professional certification in ICT security and database administration and systems management, and provision of ICT hardware and software needed for the functioning of the PMU. This project brings together multiple ICT components and would hence require the support of consultants and entities that would assist the PMU in managing the implementation aspects of the ICT components and also assist in the preparation of the bidding documents, bid evaluations and also liaison with the chosen ICT vendors. It is expected that one entity focusing on IT aspects and a few functional/business consultants would be required for this. The entity with support of the consultants would be responsible for supporting the PMU in orchestrating the overall implementation. The key responsibilities for this entity would be: (i) working with the PMU in clearly defining the scope of the individual systems and a high level project plan and supporting the PMU in the IT project management; (ii) analyzing the hardware and network requirements and identifying opportunities for leveraging existing systems components and developing the overall IT System and network architecture; (iii) finalizing the bidding documents for the various components in co-ordination with the PMU and with support from additional consultants if required; (iv) supporting the PMU in the evaluation of the bids and selection of vendors, with support from additional consultants if required; (v) working with the chosen vendors and coordinating the implementation of the systems; (vi) supporting the PMU in conducting the user acceptance tests and operational acceptance tests; and (vii) enhancing the capacity of the PMU in the areas of IT management, IT governance and IT risk management through focused training to key CBY staff during the course of the project. This sub-component would also fund any post-implementation support and IT security assessments that would be required. It is expected that a firm would be selected for this activity; in addition, the CBY could also hire one to three specific consultants with deep experience in the implementation of such systems and the relevant functional and business knowledge of the underlying systems.

9. This subcomponent is mainly focusing on the capacity building of the CBY staff in specific technical areas required for ongoing management of the systems, training and professional certification in IT security, database administration and systems management, and purchase and maintenance of miscellaneous IT hardware and software and training to support the ongoing effective functioning of the PMU.

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ANNEX 3

IMPLEMENTATION ARRANGEMENTS

1. Institutional and implementation arrangements of the proposed project were discussed with the Yemeni authorities, specifically with regard to the Project Management Unit (PMU), the formation of the Oversight Committee, Executive Committee and Technical Stakeholders Consultation Committee, preparation of the Operational Manual (OM), and the capacity and readiness for implementation. All implementation arrangements have been agreed to and finalized.

2. The CBY Governor has established three committees through Decree No. 11 of 2013 on March 6, 2013. The Oversight Committee, established to provide strategic guidance to the Project Management Unit and ensure fiduciary compliance of the project activities, comprises the Deputy Minister of Finance, Deputy Minister of Planning and International Cooperation for projects programming, two Deputy Governors of the CBY, and the Head of Banking Supervision of CBY, headed by the CBY Vice Governor. The Executive Committee, established to advise and monitor the Project related ICT policy framework and the overall project implementation, comprises the CBY Deputy Governors in charge of Foreign Operations, Banking Supervision, ICT and Accounting, Domestic Operations, and Financial and Administrative Affairs and headed by the CBY Vice Governor. The Stakeholders Consultation Committee, comprises users of the payment systems and credit registry systems and other stakeholders, such as banks, micro finance institutions, and chambers of commerce.

3. The preliminary assessment of the implementing entity, CBY, showed commitment to strengthening the financial institutional infrastructure, knowledge and clear understanding of the sector issues, and overall technical readiness. CBY explained that they have already started preparatory work, specifically on system requirements, and works related to technical specifications of the payments system, and has re-confirmed the need for core banking system to support development of banking supervision and financial infrastructure in its discussions with the IMF and other international organizations.

A. Proposed Procurement Arrangements

4. The project would be implemented by the PMU that has been established in the CBY with qualified staff which includes the PMU coordinator, FM and procurement specialists. The PMU staff has been selected from the CBY staff on TORs in agreement with the Bank. Procurement activities under this project will be implemented following the Bank’s procurement guidelines dated January 2011 for Procurement of Goods Works and None- consulting Services and the guidelines for Selection and Employment of Consultants dated January 2011. A procurement capacity assessment for CBY was conducted during the pre-appraisal mission, March 9-13 2013. The CBY is autonomy in managing its own resources and following the Government’s existing procurement practice, the Procurement law of 2007 and its Executive Regulations which is almost in line with the international practice with minor deviations. However, the Government of Yemen is doing very good progress in reforming its procurement practice including development of new Standard Bidding Documents (SBDs), establishment of procurement oversight and Anti-Corruption entities, High Authority for Tender

30

Control (HATC), High Tender Board (HTB) and the Supreme National Anti-Corruption Committee (SNACC). The reform process is ongoing, and a consultant has been hired by the HTB with the Bank’s support under IDF-Grant to prepare complaints mechanism and propose an amendment of the Procurement Law and its executive regulations to make it fully in line with the international practice. The main risks identified are: (i) the CBY does not have experience in the Bank’s procurement procedures, (ii) the complexity of the IT systems contracts which needs specialized skills in procurement of two stage bidding and management of turnkey IT contracts, and (iii) risk of delay due to overall lack of capacity in the Country and the oversight entities, HTB and HATC. Therefore, the risk assessment rating is considered High. Risks mitigation measures have been discussed including preparation of a procurement manual and training to be provided by the Bank’s staff. To mitigate the risks indicated above and ensure the project readiness for implementation, the capacity assessment recommended the following list of actions that should be implemented immediately:

a) Appointment of the PMU Coordinator and the Procurement Specialist: The CBY has appointed the PMU Coordinator and the Procurement Specialist who have very good background in IT.

b) On- the -job training: The PMU Coordinator and the PS joined the Public Works Project to get on-the -job training in Bank’s procurement procedures and will continue doing that as needed. In addition, the Bank has provided the PMU staff with handholding support during the pre and appraisal missions and will continue doing that as needed.

c) Capacity Building in Two Stage Bidding Procurement Producers: The Regional Procurement Manager in MNA delivered a full day workshop in two stage bidding procurement process in Sana’a on March 7, 2013. The workshop was attended by all CBY staff who will be involved in the procurement process including the technical committee. The workshop was followed by two days discussion in which the Bank’s team has provided the CBY staff with direct handholding support.

d) Procurement Manual, The CBY has prepared an OM for the project with direct support from the Bank’s team. The procurement section of the OM was discussed and approved by the Bank. All procurement methods and thresholds for procurement of works, goods and consulting services, ICB, NCB, shopping, and QCBS are explained in the procurement section including the steps to be followed for each method.

e) External Technical Support: The CBY has initiated the hiring process of the consultant firm which will provide overall technical support to the PMU, including a final review of the technical specifications and the bidding documents. The TOR has been finalized and cleared by the Bank. The consultant firm will be in place before the project becomes effective. The CBY will sign the contract with the selected firm as soon as the selection process has been completed and the necessary Bank’s no objection has been obtained.

f) Risk of delay: The PMU staff has been provided with the necessary handholding support by the Bank’s team in preparing the RFP for hiring the consultant firm,

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system integrator, and the bidding documents for the payments system and credit registry components. The bidding documents of the core banking system have been revised and will be finalized based on the assessment of the current system. The Expression of Interest for the consultancy services for systems integration and IT project management support was issued on March 28, 2013. In addition, the CBY will follow up with the Minister of Planning and the High Authority of Tender Control (HATC) on the implementation of the action plan which resulted from the roundtable discussion that was held on March 6, 2013 with the support of the Bank’s Regional Procurement Manager in MENA. The action plan has proposed increasing of the current prior review thresholds of the HTB for all PMUs financed by Donors from US$ 1.2 million for works and goods and US$0.3 million for consulting services to US$ 10Million for works, US$5 million for goods, and US$1 million for consulting services. The Minister of Planning has already signed a formal request addressed to the Chairman of HATC who will draft the decree to be issued by the Cabinet. This will speed up the implementation of contracts below the new ceiling and reduce the number of contracts subject to prior review by the HTB.

5. The main procurement activities that would be implemented under this project are: (i) the core banking system with estimated cost of US$ 11.4 million including software and hardware and implementation; (ii) payment system with estimated cost of US$ 3.4 million for both software and hardware and implementation; and (iii) credit registry with estimated cost of US$ 2.9 million for both software and hardware; and (iv) data centers and capacity building of CBY, with an estimated cost of US$ 2.3 million. Hence, the total cost for all procurement activities amounts to US$ 20 million.

6. Consulting Services: A consulting firm and additional individual functional experts will be hired by the CBY to support the PMU in bid development, bids evaluation, contract execution, and would provide overall project management and guidance on policies and functional requirements. The initial estimated cost of this contract is US$ 1.3 million. The consulting firm will continue to provide technical and procurement support to the PMU during the implementation of all project components throughout the project life. The CBY has already initiated the hiring process. The consultant firm will be hired using quality and cost based selection (QCBS). The individual consultants where necessary will be hired by comparison of resumes of at least 3 potential individual consultants. The draft TOR and the RFP have been prepared by the CBY and will be submitted to the Bank together with shortlist.

7. Procurement Plan: The CBY prepared a draft Procurement Plan as of June 13, 2013 (listed below) which includes all activities that started before project negotiation and will continue during the life of the project. The procurement methods and prior review thresholds are indicated in the procurement plan.

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Procurement Plan12

I. GENERAL

1. Project information: Republic of Yemen, Central Bank of Yemen, Financial

Infrastructure Development Project, Project Implementing Agency (PIA) : Central Bank of Yemen.

2. Bank’s approval Date of the procurement Plan 13 June 2013 3. Date of General Procurement Notice: 28 March 2013 4. Period covered by this procurement plan: 2014- 2018

II. Goods and Works and non-consulting services. 1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as

stated in Appendix 1 to the Guidelines for Procurement: [Thresholds for applicable procurement methods (not limited to the list below) will be determined by the Procurement Specialist /Procurement Accredited Staff based on the assessment of the implementing agency’s capacity.]

Procurement Method Prior Review Threshold(USD)

Comments

1. ICB and LIB (Goods) <500,000 2. NCB (Goods) First contract regardless of its

value

3. ICB (Works) <5,000,000 4. NCB (Works) First contract regardless of its

value

5. ICB (Non-Consultant Services) All contracts 6 Shopping <50,000

Pre-qualification. Bidders for ____NA_________ shall be prequalified in accordance with the

provisions of paragraphs 2.9 and 2.10 of the Guidelines.

3. Proposed Procedures for CDD Components (as per paragraph. 3.17 of the Guidelines: [NA

4. Reference to (if any) Project Operational/Procurement Manual: 5. Any Other Special Procurement Arrangements: [including advance procurement and

retroactive financing, if applicable]

6. Procurement Packages with Methods and Time Schedule [List the Packages which require Bank’s prior review first and then the other packages]

12 This is procurement plan with the minimum content that is required for disclosure on the Bank’s website in accordance with the guidelines. The Project Team will agree with the Client on a procurement plan which may contain additional information and may be prepared in a different format as desired by the recipient. The initial procurement plan will cover the project implementation period and then updated annually or earlier as necessary

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1 2 3 4 5 6 7 8 9

Ref.

No.

Contract

(Description)

Estimated

Cost

(US$)

Procurement

Method

Prequalificatio

n (yes/no)

Domestic Preferen

ce (yes/no)

Review by Bank (Prior / Post)

Expected

Bid-Opening

Date

Comments

Developing a Central Bank Core System

11.35 million

ICB No No Prior 16 Sep, 2014

Developing the Payments System Infrastructure

3.425 million

ICB No No Prior 20 Mar., 2014

Establishing a Public Credit Registry

2.925 million

ICB No No Prior 13 Mar., 2014

Establishing Data Centers,:

ICB No No Prior

System Management 150,000 NCB No No Prior 08 Oct, 2014

Data Networks 450,000 ICB/NCB No No Prior 08 Oct, 2014

PMU: Accounting system

(Software) 15,000 NS No No 4Apr,

2013

Office Furniture 21,000 NS No No Prior 25Jun,2013

Office Equipment (Copier, FAX, Paper Shredder, Paper cutter & Spiral binding)

14,000 NS No No Prior 24 Jun,2013

Computer & Accessories (Laptop, PCs, Laser Printer, Scanner, Switch, Modem, Access point, UPS, Data Show)

12,500 NS No No Post 30 Jun,2013

Others (Refrigerator, Water cooler, Water boiler, Telephones)

2,500 NS No No Post 23 Jun ,2013

Capacity Building Training

300,000 NA

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III. Selection of Consultants

1. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment of Consultants:

Selection Method Prior Review Threshold Comment 1. Competitive Methods (Firms) 2. Single Source (Firms) [Add specific methods if necessary]

2. Short list comprising entirely of national consultants: Short list of consultants for

services, estimated to cost less than $_______equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

3. Any Other Special Selection Arrangements: [including advance procurement and retroactive financing, if applicable]

4. Consultancy Assignments with Selection Methods and Time Schedule

1 2 3 4 5 6 7 Ref. No.

Description of Assignment

Estimated

Cost

Selection Method

Review by Bank (Prior / Post)

Expected Proposals Submission Date

Comments

Consultancy Services for Systems Integration and IT Project Management

1.3 million

QCBS Yes 13 Sep, 2013

Auditor 35,000 SS IV. Implementing Agency Capacity Building Activities with Time Schedule

1. In this section the agreed Capacity Building Activities (some items could be from CPAR recommendation) are listed with time schedule No.

Expected outcome / Activity Description

Estimated Cost

Estimated Duration

Start Date

Comments

8. Bank’s supervision: Considering the capacity of CBY and the complexity of the required IT systems, all contracts will follow the Bank’s International Competitive Bidding procedures

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(ICB) and will be subject to prior review. Other contracts following NCB and shopping method will be procured following the procedures explained in the OM.

B. Financial Management and Disbursement Arrangements

1. An assessment of the financial management (FM) arrangements for the proposed project was undertaken to assess the capacity of CBY, and assist in determining the required FM and disbursement arrangements. The CBY has appointed qualified staff with good capacity and has procured and installed an automated accounting system for the project which is capable of recording and reporting on the project’s transactions. The CBY has also prepared an agreed upon an OM, including FM and disbursement arrangements. The CBY, through the PMU will manage all the FM aspects of the project (such as accounting recording and reporting through the use of an automated accounting system and based on an acceptable manual of procedures and management of the disbursement process). An FM Manual has been prepared and included in the OM that was endorsed by the CBY on April 17, 2013.

Implementation Entities, Staffing, Internal Controls, Accounting and Financial Reporting:

2. The PMU will be responsible for planning, budgeting, overall monitoring of the project activities, and reporting to the stakeholders. The Financial Management Specialist assigned to the PMU is qualified with strong experience in internal controls and accounting and auditing, and the Bank has provided training in FM and disbursement issues in order to familiarize the FM Specialist with the Bank’s FM and disbursement procedures.

3. The PMU will follow cash basis of accounting to record the project’s transactions using the automated accounting system. Accounting records will be maintained within CBY using the accounting system, which will also generate the project accounts' quarterly IFRs. The CBY will submit to the Bank, the project’s quarterly unaudited IFRs not later than 45 days after each calendar quarter in the agreed upon formats, detailed in the OM. In addition, the CBY will submit to the Bank, project audited financial statements and CBY’s own audited financial statements, on an annual basis. Both reports will be submitted to the Bank within six months from calendar year end. The Bank team has reviewed the CBY’s audited financial statements for the last two years noting unqualified audit reports a number of internal control comments which the CBY has started to address and expected to mitigate the remaining risks through the proposed project.

4. The PMU will maintain an acceptable fixed assets register for the assets financed by IDA. Reconciliation of assets registries and actual locations/usage of these assets will be conducted annually including spot checks, and accordingly an annual report is issued that provides the assets from various sources of financing. This will be subject to the external auditor’s verification. The CBY has an internal audit department which will carry out ex post review on the project’s implementation.

5. The project’s funds will mainly finance the cost of large consultancy contracts to finance IT systems. The project funds will not finance the salaries of the PMU as they are CBY’s own staff. The CBY has provided a space for the PMU’s work and will also finance the PMU’s operating cost. The project funds may be used to finance office equipment including office furniture, computers, copier, printer, etc. As the PMU is already established, they are in urgent

36

need for the equipment of their office. The Bank agreed to finance eligible expenditure for such equipment on a retroactive basis. The project’s funds will finance goods for the IT systems which will be maintained through a fixed assets registry using Excel. Reconciliation of assets registries and actual locations/usage of these assets will be conducted annually including spot checks. This will be subject to the external auditor’s verification.

6. Disbursement and Flow of Funds: the proceeds of the Grant would be disbursed in accordance with the traditional disbursement procedures of the Bank and will be used to finance project activities through the disbursement procedures currently used: i.e. Direct Payment, Advances, Reimbursement and Special Commitment. Replenishment and Reimbursement Withdrawal Applications will be accompanied by Statement of Expenditures (SOEs) in accordance with the procedures described in the Disbursement Letter and the Bank's "Disbursement Guidelines". Interim Unaudited Financial Reports and Annual Financial Statements will be used as a financial reporting mechanism and not for disbursement purposes. The minimum application size for direct payment and reimbursement will be the equivalent of 20 percent of the Advance ceiling amount. The Bank will honor eligible expenditures completed, services rendered and delivered by the Project closing date. A four months' grace period will be granted to allow for the payment of any eligible expenditure incurred before the Grant Closing Date.

7. To ensure the project funds are readily available for project implementation, the CBY will open, maintain, and operate one USD Designated Account (DA) at the CBY. Deposits into, and payments from the DA will be made in accordance with the provisions which will be stated in the project’s Grant Agreement and in accordance with World Bank Disbursement Guidelines. Eligible expenditures will be financed out of the Grant proceeds including Goods, Non-Consulting Services, Consulting Services, and Training.

8. Designated account (DA): The PMU will open a segregated Designated Account at the Central Bank of Yemen (CBY) in US Dollars to cover Grant's shares of eligible project expenditures. The Ceiling of the DA would be 10 percent of the Grant's amount. The amount to be advanced under the first application would be determined based on initial project needs. The CBY would claim the remainder of the advance when the project has reached a more advanced stage of implementation. The PMU will be responsible for submitting monthly replenishment applications with appropriate supporting documentation. Authorized signatories, names, and corresponding specimens of their signatures will be submitted to the Bank prior to the receipt of the first Withdrawal Application. The flow of funds arrangements in charts A apply to PMU. Chart A below summarizes the flow of funds from IDA to the Designated Account through Withdrawal Applications, to finance the proposed project’s eligible expenditures. Payment requests from the DA for eligible expenditures will be approved by the PMU Director and the Finance Manager, and then the payment requests will be sent to MOF for approval of payment from the DA at CBY through the use of the MOF’s Loans and Grants Management Information System (LGMIS) which is an e-disbursement mechanism

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Chart A: Flow of Funds

The following table specifies the categories of eligible expenditures that will be financed out of the Grant proceeds

Category Amount of the Grant

Allocated (expressed in USD)

Percentage of Expenditures to be Financed (inclusive of

Taxes)

(1) Goods, Works, Consultants’ services, non-consultant services and Training

20,000,000

100%

9. Statement Of Expenditures (SOEs): Necessary supporting documents will be sent to the World Bank in connection with contacts that are above the SOE thresholds, except for expenditures under Contracts with an estimated value of: (a) US$ 200,000 or less for goods; (c) US$ 100,000 or less for Consulting Firms; (d) US$ 50,000 or less for Individual Consultants, as well as incremental operating costs, which will be claimed on the basis of SOEs. The documentation supporting expenditures will be retained at the Project Management Unit and will be readily accessible for review by the external auditors and periods Bank supervision missions.

10. E–Disbursement: The World Bank has introduced the e-Disbursement for all its supported projects. Under e-Disbursement, all transactions will be conducted and associated

USD DA – CBY

FM & Director

Payment Request for

Eligible

Grant Funds

MOF Approval

Payment to beneficiaries

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supporting documents scanned and transmitted on line through the Bank’s Client Connection system. E-Disbursement will considerably speed up disbursements and facilitate project implementation. It is for mandatory application for all World Bank financed projects starting January, 2013. The e-Disbursement functionality would (i) expedite World Bank processing of disbursement requests; (i) prevent common mistakes in filling out Withdrawal Applications - WAs (Form 2380); and (iii) reduce the time and cost of sending paper WAs and supporting documentation to the Bank. The e-Disbursement would not require any changes to the Project current internal procedures and controls for preparing and submitting WAs.

11. Retroactive financing up to US$ 500,000 of the Financing amount will be allowed for eligible expenditures made on or after April 1, 2013 and up to date of the Financing Agreement signing. Payments will only be made for items procured in accordance with applicable procurement procedures. Retroactive financing is expected to pay for the cost of the PMU’s accounting system, office equipment and furniture, and the initial advance of the system integrator, for a total amount of US$ 500,000.

12. Auditing: The proposed project’s financial statements will be audited by an independent private–sector external auditor and audited financial statements will be submitted to the Bank within 6 months after each year. The external auditor should be acceptable to the Bank with coordination with the Central Organization for Controlling and Auditing (COCA). The external auditor report (in English and Arabic) shall encompass all the project components and activities under the Financing Agreement and shall be in accordance with internationally accepted auditing standards, e.g., International Standards on Auditing (ISA). The audit report and opinion will cover the proposed project’s financial statements, reconciliation and use of the Designated Account (DA), and use of direct payments. In addition, the auditor is required to prepare a “management letter” identifying any observations, comments and deficiencies in the system and controls that the auditor considers pertinent, and shall provide recommendations for their improvements.

13. Governance: weak governance may affect the proposed project resources. The above fiduciary arrangements including ring-fencing combined with the strengthening of the capacity of the CBY, external audit arrangements are designed to mitigate these risks.

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ANNEX 4

OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF)

Republic of Yemen: Financial Infrastructure Development Project Project Stakeholder Risks Rating Substantial Description: (i) Donors: A number of donors operating in the financial sector and private sector development space are currently launching or preparing new projects, potential conflicts and overlaps could develop.

Risk Management: The Bank will coordinate with other development partners working in the financial sector to collect information on other donor ongoing and planned interventions to ensure work is harmonized and complementaryin this regard, a quarterly video meeting will be held by the task team to brief donors on the progress of the project, in addition to the quarterly donor PSD group meeting. Donor consultations and information exchanges have already begun and will continue to guide the project during implementation.

Resp: Bank Stage: Implementation Due Date :December 31, 2019

Status: Not yet due

Description :(ii) Civil society and the general public may not perceive assistance to the financial sector as a priority.

Risk Management: Project outreach during implementation will include extensive project information and promotion activities, which will include sessions with civil society organizations that will be designed to clarify that the project is critical at this time for Yemen, especially in light of the most recent 2012 AML/CFT assessment. The project’s mission will brief CSOs on a regular basis and closely coordinate and reach-out to NGOs and institutions such as Yemen Microfinance Network and Social development fund. Resp: Client Bank

Stage: Implementation Due Date :December 31, 2019

StatusNot yet due

Implementing Agency Risks (including fiduciary) Capacity Rating: Moderate

Description: While the CBY, the implementing agency, has shown strong capacity in implementing other donor projects, this project involves implementation of complex IT systems. For these systems to help in achieving the desired development objective it needs to be accompanied by significant internal re-engineering, and technical assistance. The CBY does not have prior experience with the Bank’s FM, procurement and Disbursement Guidelines.

Risk Management: There is strong partnership between the World Bank Group and Yemeni authorities, especially CBY. Although the recent political developments has resulted in changes in management and ministries, the management of CBY has not changed, and continued to prove its commitment to reforms post-revolution. The capacity of the CBY to implement this project would be strengthened with the help of the specialist firm, the System Integrator and set of consultants and technical experts who would be engaged to provide support to the CBY. In addition, a comprehensive technical assistance program (FIRST Initiative, IFC Advisory Services, and Canadian TF) would be initiated in parallel.

The CBY has made the following key actions: (i) established a PMU comprised of qualified staff appointed from within the CBY, based on TORs acceptable to the Bank; (ii) endorsed an Operations Manual that describes the project’s implementation arrangements, including financial management, disbursement and procurement procedures. The Bank FM team has provided the PMU with training on the Bank’s FM & Disbursement Guidelines. In addition, the CBY has procured an accounting system for the purpose of recording and reporting on the project’s sources and uses of funds; and will prepare quarterly financial reports and annual audited financial statements with formats acceptable to the Bank.

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Resp: Client Stage: Prep and Imp Due Date :December 31, 2019

Status: Not yet due

Description: Currently the capacity of the CBY to manage sophisticated IT systems post completion of project and ensuring continued adherence to international best practices in IT management and in particular IT security, is limited. Their capacity in this regard needs to be substantially strengthened in the course of the project.

Risk Management: There would be a strong emphasis on the CBY developing the required IT systems and IT Risk management. The project Executive Committee would deliberate on this, and prepare a plan for this. In addition to the consulting company, the System Integrator hired as part of Component (IV) would also provide extensive training to the identified CBY staff in these areas in the course of the project and also assist with a post implementation security review of the systems, as well as in reviewing the bidding documents during implementation.

Governance Rating: Moderate Description: As with any implementing agency, there is a potential risk of fraud and corruption.

The role of the CBY is central at this project given the institutional nature of reforms proposed under this operation. Therefore the management of the CBY will quarterly report to the Board and update it on the progress made. Also, a director with IT skills will be appointed, and will sit at the Board of the CBY. The CBY is informed of the financial management requirements. At the same time, the World Bank will monitor project implementation, procurement procedures, and financial management arrangements on a regular basis during supervision missions and beyond. As mentioned under Country Risk, the INT team will provide support and guidance to mitigate any potential fraud and corruption risks.

Project Risks Design Rating: High

Description: Weak capacity in managing complex IT based projects, lack of expertise on relevant technical subjects and time needed to digest new concepts, manage the migration process to the new systems and reach consensus of changes may significantly delay the project implementation and thus weakening the effectiveness of the PDO.

Risk Mitigation: Engagement of a system integrator financed as part of this project to support the IT

implementation aspect and provide project management support, would provide a strong technical and project management support to the CBY.

Sequencing of project implementation to execute TA activities for developing a conceptual framework for the new processes and technologies

Participatory approach to enhance learning and knowledge transfer and ownership Longer term consultants to provide support from the onset for the integration of different system

development components as well as that of user needs and IT development

Resp: Client Stage: Prep and Imp Due Date :December 31, 2019

Status: Not yet due

The banks and other institutions like MFIs and the MOF would be the users of the payments system, the PCR and the core banking systems and they will also need to integrate their internal systems like the AFMIS in the case of the MOF and their respective core banking and payment systems in the case of banks. The capacity of these institutions to manage this would need to be strengthened.

Risk Mitigation: The Technical Committee described in the implementation arrangements section is tasked with this and it would be establishing various working groups to deal with specific issues. The issue of capacity building would be dealt with from the very inception. The broader stakeholder community would be fully kept engaged through the course of this project. A beginning has already been made during the pre-appraisal mission when the CBY and the project team met the various stakeholders. Resp: CBY

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Inability to attract qualified bidders in view of potential adverse concerns of the bidders related to safety of their onsite personnel and capacity of counterparts.

Risk Mitigation: Organizing pre-bid conference calls to reassure bidders about the situation in Yemen and notably in Sana’a. The WB project team would also encourage the CBY to publicize the bidding documents extensively in the right media/forums to attract qualified bidders. The above mechanisms have helped in successful implementation of projects in fragile and conflict affected countries like in the case of Iraq and also in receipt of adequate level of bidder interest in the recently concluded bidding for national payments system in Afghanistan.

Resp: Client Stage: During preparation of bidding documents and conduct of bidding and ongoing from thereon.

Due Date :December 31, 2019

Status: Not yet due

Social and Environment Rating: Low

Description: There are no major social or environmental concerns, because the proposed project activities are mostly policy-oriented, as it will introduce software and ICT equipment but it will not involve any civil works or the acquisition of new land. In addition, it is not envisaged that the project will have any significant environmental impacts; neither will it generate e-waste as it will not be substituting previous equipment but establishing it for the first time.

Risk Mitigation: The project team will monitor closely these aspects during implementation, and if the generation of e-waste or the need of further construction work becomes significant as the project develops, the team will assess the need for further environmental assessments and/or the modification of the project category. Also, more consultations will be held with general public, civil society and Non-governmental Organizations (NGOs) along with the project preparation.

Program & Donor Rating: Moderate Description: There are a large number of donors and development agencies that are working on financial inclusion in Yemen which could result in a lack of coordination.

Risk Mitigation: The World Bank will work closely and liaise with the donors active in the financial sector, such as US Treasury, GIZ, EU, and AMF, as well as IFC from the scoping stage onwards in an effort to harmonize and streamline the efforts of all institutions. A donor coordination meeting was also suggested to be held once every two months via Skype to ensure that each donor agency is aware of the efforts of other donors. In addition, the project and its progress since January 2013 have been represented and discussed in the quarterly donor private-sector development group meetings that are organized by the GIZ in Sana’a to ensure effective and timely coordination.

Delivery Monitoring & Sustainability Rating: High Ability to exercise adequate level of project supervision in view of potential security related concerns

Risk mitigation: Staff from the local country office and located in the region would be actively involved in the project ongoing supervision and remote missions leveraging VC facilities would be conducted if required.

Resp: Bank Stage: Due Date: December 31, 2019

Status: Not yet due

Overall Risk Implementation Risk Rating: High

Comments: Given the country’s volatile political and security situations, this is a high risk operation in a conflict affected country.

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ANNEX 5

IMPLEMENTATION SUPPORT PLAN

A. Strategy and Approach for Implementation Support

1. The Implementation Support Plan (ISP) proposed below describes how the World Bank will support the implementation of the project and provide the technical advice necessary to facilitate the achievement in the PDO.

It is worth nothing that the ISP will be reviewed at least once a year to ensure that it continues to meet the implementation support needs of the project.

2. The World Bank’s procurement team will support the CBY to enhance their knowledge on Bank procurement procedures and guidelines by providing workshops on procurement and contract management

3. The World Bank’s FM team will support the CBY to enhance their knowledge on FM Bank procedures and guidelines by providing workshops on FM and disbursement.

4. Throughout the project duration, the World Bank team will closely monitor the project on semi-annual implementation support missions. During the missions, the World Bank will ensure that the financial arrangements agreed on are respected and will assess if any additional training or support is needed. The World Bank team will review and clear the audit TOR, review the audit reforms and IFRs received and provide its feedback on a timely manner. The project team will also be responsible for reviewing all potential contracts with participating banks and providing the Bank’s No Objection prior to signing.

5. In addition to the regular missions, there will be a core team member located in the country office to actively maintain a dialogue between the Bank and the various counterparts. Reverse missions have also taken place and will continue. Also, counterparts benefited from study tours where central banks have launched similar programs. Furthermore, periodic video conferences and audio conferences have been taking place which include meetings with CBY, stakeholders (private and state-owned banks), and donors.

B. Implementation Support Plan

6. The following table provides an overview of the activities and the timeline envisages for the Implementation support plan:

Table A5.1: Overview of the Activities and the Timeline for the Implementation Support Plan

Time Focus Skills Needed Resource Estimate (US $)

Partner Role

First twelve months

Enhancing the PMU;s knowledge of Bank guidelines and procedures

Finance/Fiduciary 30,000 World Bank FM and procurement Team

First 12-48 months

Semi-annual project supervision

Finance/Fiduciary 120,000 World Bank Team

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ANNEX 6

INDICATORS IN YEMEN

Table A6.1: Selected Macroeconomic Indicators (2008–2013)

Selected Macroeconomic Indicators 2008 2009 2010 2011 2012* 2013** Real GDP growth (% p.s.) 3.6 3.9 7.7 -10.5 0.1 4.4

Growth of non-hydrocarbon sector 4.8 4.1 4.4 -10.0 1.0 3.0 Growth of hydrocarbon sector -8.1 1.6 46.9 -14.5 -7.5 17.9

Inflation (% annual average) 19.0 3.7 11.2 19.5 11.0 7.5 Fiscal Balance (% GDP) – incl. grants -4.5 -10.2 -4.0 -4.3 -5.5 -5.7 Fiscal Balance (%GDP) – excl. grants -4.8 -10.6 -5.2 -5.5 -11.2 -7.8 Current account balance (% GDP) -4.6 -10.2 -3.7 -4.0 -2.7 -3.3 CBY gross official reserves (US$ million) 8,157.4 6,213.0 5,081.0 3,973.5 5,387.0 5,092.0 (in months of imports) 9.5 7.2 5.8 3.8 5.3 4.6 Nominal exchange rate (LC/US$) 199.8 207.4 213.8 227.5 214.9 - Source: Government of Yemen and staff calculations. * Preliminary. ** Projected.

Table A6.2: Banking Sector Structure in Yemen (YR million, 2012)

Bank Established Ownership Capital (YR Mill) No. of Branches Type Percentage 1994 2012 1994 2012 CBY 1971 Public 100 150 6,000 16 22

YBRD 1962 Public 51

100 12,000 34 43 Private 49

National Bank of Yemen 1969 Public 100 130 10,000 31 29 United Bank 1972 Foreign 100 50 6,016 2 3 Arab Bank 1972 Foreign 100 176 6,000 4 10 Calyon Bank 1975 Foreign 100 127 0 4 0

Yemen Commercial Bank 1993 Private 90

125 7,300 3 14 Public 10

Yemen Kuwait Bank 1979 Private 100 98 6,000 3 10 International Bank of Yemen

1979 Private 85

96 11,000 4 18 Foreign 15

Rafidain Bank 1982 Foreign 100 27 6,268 1 1

CACB 1982 Public 99

241 11,000 25 48 Private 1

Yemen Gulf Bank 2001 Public 1

- 1,250 - 2 Private 77 Foreign 22

TIIB 1996 Private 97

- 20,000 - 22 Foreign 3

Islamic Bank of Yemen 1995 Public 5

- 4,394 - 5 Private 74 Foreign 21

Saba’ Islamic Bank 1997 Private 85

- 8,923 - 14 Foreign 15

Yemen Bahrain Bank 2002 Private 47

- 6,000 - 10 Foreign 53

National Bank of Qatar 2007 Foreign 100 - 6,000 - 1

Al-Amal Bank 2010 Public 45

- 1,890 - 17 Private 20 Foreign 35

Al-Karaumie Bank 2010 Private 100 - 6,000 - 87 Total - - - 1,320 136,042 127 356

Growth Percentage - - - - 9,752 - 163 Exchange Rate (ep) - - - 66 215 - -

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Table A6.3 Establishment Date, Assets, Net Loans, Deposits and Equity of Commercial Banks in Yemen

(YR million, 2012)

Bank Date of

Establishment Assets (1) Gross Loans (1)

Customer Deposits (1)

Equity (2)

State-controlled banks

YBRD 1962 195,058 23,290 169,396 16,857

National Bank of Yemen 1969 129,572 13,095 106,293 17,419

CACB 1982 308,017 44,680 265,093 12,357

Sub-total 632,647 81,065 540,783 46,633

Islamic banks

Islamic Bank of Yemen 1995 19,110 9,746 13,161 4,596

TIIB 1996 440,606 63,759 359,979 52,530

Saba' Islamic Bank 1997 183,031 45,282 121,189 10,119

SBYB 2002 47,734 13,630 39,173 6,361

Sub-total 690,480 132,415 533,502 73,605

Private domestic banks

International Bank of Yemen 1979 293,039 69,609 252,317 13,415

Yemen Kuwait Bank 1979 66,145 14,409 54,036 6,790

Yemen Commercial Bank 1993 106,334 12,220 90,242 9,632

Yemen Gulf Bank 2001 10,995 15,534 5,872 -4,082

Sub-total 476,513 111,771 402,467 25,755

Foreign banks' branches

Arab Bank 1972 251,816 21,836 231,374 11,511

United Bank 1972 79,765 24,918 62,619 10,465

Calyon Bank 1975 0 0 0 0

Rafidain Bank 1982 16,931 115 3,563 10,467

Qatar Bank 2007 24,677 2,935 16,198 6,336

Sub-total 373,190 49,804 313,753 38,779

Micro-Finance Banks

Al-Korimy Bank 2010 23,621 658 10,381 6,499

Al-Amal Bank 2010 6,459 956 1,149 2,838

Sub-total 30,080 1,614 11,530 9,336

Banking system 2,202,911 376,669 1,802,034 194,109

In million US$ 10,246 1,752 8,382 903 (1) Extracted from unaudited returns to the Central Bank of Yemen. Source: Central Bank of Yemen (2013).

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Table A6.4: Loan Portfolio Quality (YR million)

Classification 2004 2005 2006 2007 2008 2009 2010 2011 2012

Performing 151,680 186,073 217,546 309,857 359,198 354,436 367,386 296,870 164,163

Substandard 4,030 3,502 6,541 15,276 6,787 7,447 18,849 10,209 7,400

Doubtful 3,539 3,678 7,314 6,900 6,068 6,019 9,219 11,193 10,079 Loss 24,362 29,439 31,603 27,661 46,363 43,551 50,827 58,233 78,605 Gross loans & advances

183,611 222,691 263,002 359,695 418,416 411,454 446,281 376,758 376,699

Nonperforming loans

31,931 36,618 45,457 49,837 59,218 57,017 78,895 79,635 78,477

Specific provisions

26,900 30,226 34,161 29,672 34,122 40,105 44,987 56,427 61,534

Equity 37,251 48,924 71,211 86,470 118,972 143,341 176,477 181,590 194,109 Source: Central Bank of Yemen (2013).

Table A6.5: Getting Credit of Selected MENA Countries

Economy Getting

Credit Rank (2013)

Strength of legal rights index (0-10)

Depth of credit information index

(0-6)

Public registry coverage (% of

adults)

Private bureau

coverage (% of adults)

Egypt, Arab Rep. 83 3 6 4.3 16.4 Saudi Arabia 53 5 6 0 33.3 Oman 83 4 5 37.3 0 Tunisia 104 3 5 27.8 0 Iran, Islamic Rep. 83 4 5 25.9 31.9 Lebanon 104 3 5 18.6 0 United Arab Emirates 83 4 5 5.9 31.7 Morocco 104 3 5 0 17.2 Qatar 104 4 4 25.2 0 West Bank and Gaza 159 1 4 8.1 0 Algeria 129 3 4 2.3 0 Kuwait 104 4 4 0 31 Bahrain 129 4 3 0 23.5 Syrian Arab Republic 176 1 2 4.9 0 Jordan 167 2 2 1.9 0 Yemen, Rep. 167 2 2 0.9 0 Djibouti 180 1 1 0.2 0 Malta 176 3 0 0 0 Iraq 176 3 0 0 0 Source: Doing Business Report (2013).

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ANNEX 7

PROPOSED CAPACITY BUILDING ACTIVITIES IN THE FIELD OF ANTI-MONEY LAUNDERING AND

TERRORISM FINANCING

A. Background and Priorities

1. Money laundering and terrorist financing activities generate or use financial flows that involve the diversion of resources away from economically- and socially-productive uses - and these diversions can have negative impacts on the financial sector, real economy, good governance and stability of states. They also have a corrosive, corrupting effect on society and the economic system as a whole13.

2. Due to its geographical setting in the Gulf Region, the weakness of its institutions, the lack of resources and low level of development, Yemen is continuously threatened and subject to money laundering and terrorist activities threats. Combating financial crimes and illicit flows is critical to ensuring basic security and stability in Yemen, while laying the basis for development in this country.

3. The Middle East and North Africa Financial Action Task Force (MENAFATF) assessed Yemen’s AML/CFT regime and identified key weaknesses in the level of compliance of both AML and CFT regimes with respect to the international standards. In June 2012, the FATF placed Yemen under the public statement countries list for the weak compliance with FATF standards. To be removed from the black list, Yemen has to improve its framework and practices. Priorities are mentioned earlier in Box 1.

B. Targets and Goals for Capacity Building Programs

4. Based on these priorities, the World Bank has identified targets and goals for technical assistance and capacity building program that will ensure improved compliance with international standards. Targets and goals for the TA program are summarized below:

Yemeni authorities will draft, amend and enact AML/CFT laws and regulations that are compliant with the international standards, including laws and regulations necessary for the implementation of U.N. Security Council lists S/RES/1267(1999) and S/RES/1373(2001);

Yemeni authorities are able to identify, assess and understand the money laundering and terrorist financing risks for their country, and apply a risk based approach to ensure that measures to prevent or mitigate ML and TF are commensurate with the risks identified;

Financial supervisors will be better equipped to conduct off-site and on-site inspections to monitor compliance of financial institutions with AML/CFT obligations. Authorities will be able to decide on and apply sanctions and follow-ups on specific financial institutions;

13 In the Criminal Justice and Legal Note from February 2012 there is mention of the economic damage resulting from money laundering and terrorist financing in diverting financial and other resources away from pro-development activities, distorting economic development and having a negative impact on the economic prospects of member countries and on the poor in particular. Furthermore, the World Bank’s Updated Strategy and Implementation Plan on Strengthening Governance and Tackling Corruption, from March 2012 clearly highlights the negative impact of money laundering on the financial sector, the economy, good governance and external stability of member states, which generates financial flows that divert resources away from economically and socially productive activities.

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Yemeni investigators and prosecutors deal successfully with the legal, investigative and practical challenges of AML/CFT cases;

Yemeni investigators and prosecutors will understand and apply effective methods to use financial documentation. They will be better equipped to analyze bank documents and present the findings of the analysis;

FIU financial analysts will understand and apply effective methods to detect and develop preliminary financial investigations leading to effective prosecution. They will be better trained on how to “enrich” the reports and disseminate added-value information to relevant Law Enforcement Authorities;

The Republic of Yemen will be better equipped and prepared to exit FATF public statement list.

C. Proposed Capacity Building Programs in the Field of Anti-money Laundering and Terrorism Financing

5. To reach these targets, a proposed capacity building program to increase the effectiveness of the AML/CFT system could be summarized as follows:

Awareness raising workshop for parliament members and high level policy makers; Financial sector legislative and regulatory drafting assistance to ensure compliance of

AML/CFT laws and regulations with FATF standards, and full implementation of United Nations Security Council Resolutions S/RES/1267(1999) and S/RES/1373(2001);

National money laundering and terrorist financing risk assessment, and preparation of a risk based approach plan to mitigate the risks;

Enhancing institutional and operational capacity of the financial intelligence unit (FIU) and financial intelligence analysts to conduct strategic and tactical analysis;

Enhancing institutional and operational capacity of prosecuting authorities to investigate, prosecute and adjudicate money laundering cases;

Enhancing institutional and operational capacity of investigative authorities in tracing, seizing, freezing, confiscating and recovering stolen assets;

Enhancing institutional and operational capacity of supervisory authorities for banking and non-banking financial institutions, to design an effective AML/CFT supervisory framework, and to conduct effective AML/CFT supervision of the financial sector;

Considering placing a resident AML/CFT expert/advisor in Yemen to ensure initiation and development of the training plan.

D. Indicators of Increased Capacity and Effectiveness of Yemeni AML/CFT Framework and Practices

6. Indicators to measure the success of the AML/CFT technical assistance program and the increase in the effectiveness of relevant Yemeni authorities are mentioned below in Box 7.1.

7. In addition, some of these indicators are linked to the main components of the financial infrastructure project as follows:

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8. Indicators 1, 4 and 6 on AML/CFT laws and regulations, the reporting of suspicious transactions and risk assessment can be linked to all three projects, namely the development of the central bank core system, payment systems and credit registry.

9. All those systems need to be established in a manner that ensures that suspicious transactions and red flags are effectively detected by operators and reported when they occur. They also should be established and monitored in a manner ensuring an assessment of risks related to the misuse of payment systems or credit transactions, as well as the weaknesses of central bank overall supervision.

10. Indicator 5 relating to supervisory authorities, inspections and sanctions is linked to the central bank core system and the credit registry system, as they cover among others, detection by the Central Bank of insufficient reporting, establishment of beneficial ownership, or identification of politically exposed persons (PEPs) by financial institutions.

11. Indicators 2, 3, and 7 relating to the number of investigations, convictions, and amount of asset confiscated, are more overall indicators for the effectiveness of the AML/CFT regime, as well as exit of the blacklisting.

Box 7.1: Indicators of an Effective Anti-Money Laundering and Terrorism Financing System

AML/CFT laws and regulations passed by the Yemeni parliament; Number of investigations and prosecution cases; Number of convictions and amount of asset confiscated; Number of suspicious transaction reports disseminated by financial institutions to the FIU, and

number of FIU reports disseminated to law enforcement authorities; Inspections of financial institutions by supervisory authorities, and sanctions against delinquent

financial institutions; Risk assessment completed by Yemeni authorities and a risk based approach plan is prepared and

implemented; The Republic of Yemen is better equipped and prepared to exit FATF blacklist

A L -A L -M A H R ATM A H R ATH A D R A M O U TH A D R A M O U T

S H A B WAS H A B WA

A B YA NA B YA N

TA I ZTA I Z

DHAMARDHAMAR

AL-AL-DHALE'EDHALE'E

M A R I BM A R I B

A L - J O W FA L - J O W F

SANA'ASANA'A

AMRANAMRAN

DAHDAH

S A A D A HS A A D A H

HAJJAHHAJJAH

AL-BEIDAAL-BEIDA

LAHEJLAHEJ

I B BI B B

(3227 m)(3227 m)

(3199 m)(3199 m)

M a h r a t M t n s .

Rammlatt aas Saabb''ataayn DDeesseer t

Ha d r a m a u t

Wadi Jawf

Wadi Zabid

Wadi Bana

Wadi M

ak

hun

Wadi Hadramout

Wadi Al Jiz HuthHuth-¸

RidaRida

At TurbahAt Turbah

HaribHaribNuqubNuqub

NisabNisab

Al HuwaymiAl Huwaymi

Al GhurafAl Ghuraf

HawraHawra

ThamudThamud

ZamakhZamakh

ShabwahShabwah

SanawSanaw

HabarutHabarut

Mar’aytMar’ayt

IbbIbb

LahejLahej

AtaqAtaq

MaribMarib

Al HazmAl Hazm

AmranAmran

TaizTaiz

DhamarDhamar

HajjahHajjah

Al BeidaAl Beida

Al Dhale'eAl Dhale'e

SaadahSaadah

Al MahwitAl Mahwit SANAASANAA

RAIMHRAIMH

Huth - ¸ Maydi

Al Luhayyah

Rida

At Turbah Mocha

At Turbah

Harib Nuqub

Shaqra

Nisab

Al Huwaymi

Al Ghuraf

Hawra

Qalansiyah Qadub

Nishtun

Thamud

Zamakh

Shabwah

Damqawt

Ahwar

Sanaw

Bir Ali

Salif

Shihr

Qishn

Sayhut

Habarut

Mar’ayt

Ibb

Aden

Lahej

Ataq

Marib

Al Hazm

Amran

Taiz

Dhamar

Hajjah

Al Beida

Al Dhale'e

Al Hodeidah

Saadah

Al Mahwit

Zinjibar

Al Mukalla

Al Ghaydah

Al Gabain

SANAA

A L -M A H R ATH A D R A M O U T

S H A B WA

A B YA N

ADEN

TA I Z

DHAMAR

AL-DHALE'E

M A R I B

A L - J O W F

SANA'A

AMRAN

HODEIDAH

S A A D A H

HAJJAH

AL-BEIDA

LAHEJ

AL- MAHWIT

I B B

RAIMH

( H A D R A M O U T G O V E R N O R AT E )

ERITREA

DJIBOUTI

ETH.

S A U D I A R A B I A

O M A N

SOMALIA

Wadi Jawf

Wadi Zabid

Wadi Bana

Wadi M

ak

hun

Wadi Hadramout

Wadi Al Jiz

Gul f of Aden

R e d S e a

To Abha

To Mirbat

To Thamarit

Socotra

The BrothersDarsaSamha'Abd al Kuri

M a h r a t M t n s .

Ramlat as Sab'atayn Deser t

Ha d r a m o u t

(3227 m)

(3199 m)

42ºE 44ºE

42ºE 44ºE

20ºN20ºN

18ºN

16ºN

14ºN

12ºN

16ºN

14ºN

12ºN

46ºE 48ºE 50ºE 52ºE 54ºE

46ºE 48ºE 50ºE 52ºE 54ºE

REP. OFYEMEN

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

0 50 100

0 50 100 Miles

150 Kilometers

IBRD 33513R

MAY 2009

REPUBLIC OF YEMEN

SELECTED CITIES AND TOWNS

GOVERNORATE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

GOVERNORATE BOUNDARIES

INTERNATIONAL BOUNDARIES