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p. 9 of 18 BACK | NEXT Executive Summary I. Introduction II. Long-Term Vision and Strategy for ADF III. Operational Priorites IV. Use of ADF VII Resources to Date A. Bangladesh: Sundarbans Biodiversity Conservation B. Bhutan: Financial Sector Intermediation C. Nepal: Rural Microfinance D. Lao PDR: Basic Education for Girls E. Kyrgyz Republic: Flood Emergency Rehabilitation F. Pacific DMCs: Partnerships with the Bank V. Financial Management VI. Conclusions

Asian Development Fund VII: Progress Report (1999) : IV. Use of ADF VII Resources to Date

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B. Bhutan: Financial Sector Intermediation

39. The second project demonstrates how ADF resources are used, even at a small scale, to create effective mechanisms for resource mobilization in DMCs. Sustained economic growth in Bhutan will require greater participation of the private sector. Moreover, expanding the private sector is necessary if future inflows of better-educated workers are to contribute fully to their country’s development. An efficient and competitive financial sector will be needed to mobilize savings and channel long-term capital to meet the demand of private entrepreneurs. The Bank’s Financial Sector Intermediation Facility (FISIF) is designed to ensure that an adequate policy and institutional framework are in place to promote private sector development and investment.¹⁵

40. The FISIF consists of four components:

1. a program loan of $3.9 million in ADF funds;
2. a development finance loan of $4.0 million in ADF funds;
3. a TA grant; and
4. a small equity investment to privatize the Bhutan National Bank.

The objectives of the policy loan are to improve the efficiency and competitiveness of the financial sector and to assist the government in developing policies conducive to private sector development. The development finance loan provides an umbrella credit line for private financial institutions to provide funds for industrial and commercial agriculture projects in the private sector. Key policy reforms will rationalize government controls on business activities, liberalize the interest rate structure and improve its management, rationalize controls on foreign exchange transactions, strengthen the legal framework for financial system and private business operations, and raise the human resource abilities of the financial and private sectors.

41. The primary beneficiaries of the FISIF are private sector entrepreneurs because the increased competition and improved efficiency in the financial market will provide them with easier access to credit facilities. Policy reforms will create an environment more conducive to market-based industrial development. The project will also provide workers with broader opportunities in the nontraditional sectors and widen the base for resource mobilization.

42. To date, progress has been made on many fronts. Interest rates have been liberalized and the Bank has finalized its equity participation–along with Citibank–in the Bhutan National Bank. This should help to improve services in the financial sector through increased competition and to move lenders away from collateral-based lending toward project finance based on cash flow. The Cabinet is currently drafting resolutions concerning real and personal property, negotiable instruments, bankruptcy, and foreign direct investment. These policy changes will provide a transparent legal framework for the interaction between the financial sector and private entrepreneurs.

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