Wb-funded Financial Sector Modernisation Project in SL ends with bulk of funds unused, disappointing results

„US $ 75mn project aimed to boost financial access for MSMES „“Outcome was highly unsatisfactory, Bank performance was unsatisfactory”- WB

The World Bank (Wb)-funded US $ 75 million Sri Lanka Financial Sector Modernisation Project has largely ended up in failure, with a vast majority of funds remaining unutilised, a completion and results report revealed.

The project was aimed at enhancing financial market efficiency and use of financial services among micro, small and medium enterprises (MSMES) and individuals.

“… outcome was highly unsatisfactory, Bank performance was unsatisfactory and monitoring and evaluation (M and E) quality was modest,” the WB said in its report.

The project was approved in 2017 and was originally to be completed at the end of 2022. However, it went through several challenges, from the changes in political leadership, a pandemic, to economic crisis. It was restructured twice and the loan closing date was pushed forward to June 30, 2023. Despite these attempts, only US $ 8.95 million of funds got disbursed during this period, out of US $ 75 million. “The opportunity costs of unused funds under the project are high, particularly for a country that faces a macroeconomic crisis and that might have utilised the funds for other purposes,” it emphasised.

The Central Bank of Sri Lanka, Securities and Exchange Commission (SEC) of Sri Lanka and Sri Lanka Insurance Regulatory Commission acted as the key implementing agencies of the project.

The project aimed to boost financial access for MSMES through a market-enabling approach, rather than support direct interventions by the government, in line with the government’s policy statements in 2015 and 2016. It focused on modernising financial infrastructure, strengthening the regulator’s institutional capacity and upgrading the legal and regulatory framework to boost financial efficiency and inclusion.

However, it failed to achieve the key objectives of increasing financial efficiency and increasing the use of financial services among MSMES and individuals.

The project achieved some success in upgrading the legal and regulatory framework, including improvements in the SEC’S regulatory framework and supervisory practice.

According to the WB, the complexity of the project and lack of proactivity of the implementing agencies (IAS) as well as the WB staff was partially blamed for the failure. “The project design should be simple and focused on key reform priorities, particularly when the capacity of the IAS is weak.

Selecting the right financing instrument and project activities to support the financial sector reforms is critical. Proactivity, both from the client and the Bank, is needed to identify opportunities, due to a changing country context and government priorities,” the WB noted.

Meanwhile, it was noted that the low disbursement under the project and the failure to timely cancel the unallocated funds resulted in a payment of high commitment fees by the government.

On a positive note, the WB said that the lessons derived from this project were useful in the preparation of the Sri Lanka Financial Sector Safety Net Strengthening Project (FSSNSP), which was approved in November last year.