Jordan - Industrial Development Bank Project

FILE COPY Report No. 1018a-JO Jordan: Appraisal of Industrial Development Bank Including Its Small Scale Industry and Handicraft Program June 3, 1976 Industrial Credit and Development Finance Companies Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (The JD has been pegged to the SDR since February 1975 with JD = SDR 2.57895.) Currency = dinar (JD) = 1,000 fils JD1 = US$3.03 JD1,000 = US$3,030 JD1,O00,000 = US$3,030,300 GLOSSARY OF ABBREVIATIONS IDB - Industrial Development Bank of Jordan IERR - Internal Economic Rate of Return IFRR - Internal Financial Rate of Return KfW - Kreditanstalt fur Wiederaufbau SSI&HP - Small Scale Industry and Handicraft Program INDUSTRIAL DEVELOPMENT BANK of JORDAN FISCAL YEAR January 1 - December 31  PM OFFICAL u ONLY APPRAISAL OF INDUSTRIAL DEVELOPMENT BANK OF JORDAN INCLUDING ITS SMALL SCALE INDUSTRY AND HANDICRAFT PROGRAM Table of Contents Page No. SUMARY ........................... i-ii I. INTRODUCTION 1......................................... I II. THE ENVIRr_p.ENT ......... Economic Environment 1 The Industrial Sector 3 The Tourism Sector 6 The Financial Community 7 III. IDB's STRUCTURE ....................... ..*. ........... 10 Establishment and Legal Basis 10 Ownership and Control 10 Board and Committees. ....................... 11 Management and Staff 1l Objectives and Powers .... 12 Policies and Procedures . . .. . ........0.. .*... 13 IV. IDB's OPERATIONS .... - . ....... . ...... o............ 16 Characteristics ........................................ 16 The Small Scale Industry and Handicraft Program ..... 17 Economic Impact .. ..............*.00........0....... 21 V. IDB's FINANCIAL SITUATION .O .....000*0.00 22 Resource Position .. .....6......i.... .. 22 Quality of Portfolio ............................000 23 Financial Performance and Position .............0.... 24 Audit *. . . * -. ... . ..e* * 25 VI. PROSPECTS ....... **....**.....25 The Environment os* * *o* oo* eo* *** e.* *. ****....*... 25 Operations . .. .... .* .......... ... ...... 27 Resource Requirements ............g.....*....o... 28 Financial Prospects 28 VII. THE.CREDIT - ITS OBJECTIVES, JUSTIFICATION AND FEATURES. 29 VIII. RECOMMENDATION . ....... ......... o............. .... 31 This report was prepared by Messrs. Henry B. Thomas and Takashi Miyawaki with the assistance of Mr. J. Chanmugam on the basis of their two-week mission to Jordan in November 1975. This document has a restricted distibuton a may be usd by recipicnts only in the perfonuace of their official duties. Its contents may not otberwise be discosed without Wori Bank authoiration.  Table of Contents (continued) BASIC DATA ANNEXES 1. Industrial Production Index 2. Distribution of Establishments in the Industrial Sector by Principal Cities 3. Distribution of Establishments in the Industrial Sector by Size of Employment 4. Domestic Exports 5. Visitor Arrivals by Region 1966-1975 6. Specialized Credit Institutions 7. Interest Rates 8. Expected Real Financial Charges on Subloans 9. List of Shareholders 10. Board of Directors 11. Organization Chart 12. Investment Policy 13. Summary of Operations: 1965-75 14. Classification of Approved Loans: 1965-75 15. A. Resources and Resource Position B. Notes on Resources 16. Loan Portfolio 17. A. Income Statements: 1971-75 B. Balance Sheets: 1971-75 C. Indicators: 1972-75 18. Projections: 1976-80 A. Major Assumptions Underlying the Projections B. Projected Operations C. Projected Income Statements D. Projected Cash Flow Statements E. Projected Balance Sheets F. Projected Indicators 19. Strategy Statement: 1976-80 20. Estimated Schedule of Disbursements MAP  APPRAISAL OF INDUSTRIAL DEVELOPMENT BANK OF JORDAN INCLUDING ITS SMALL SCALE INDUSTRY AND HANDICRAFT PROGRAM SUMMARY i. The Industrial Development Bank of Jordan (IDB) was established in 1965 with the objective of providing term financing for industry and tourism. It is the only such institution in Jordan and plays a significant role in both sectors. While IDB has been in contact with the Bank Group over several years, the proposed IDA credit of $4.0 million would be the first Bank Group lending to IDB. ii. The economic development of Jordan has been seriously affected by the political situation in the region since the 1967 war. The return of in- ternal stability in 1971 permitted the Government to devote more attention to economic issues and a Three-Year Plan (1973-75) was published in 1972. It placed heavy emphasis on the development of productive sectors, including in- dustry. This Plan has been followed by a Five-Year Plan (1976-80) with the same emphasis. The Government has actively encouraged the private sector with generous incentives and liberal currency regulations. iii. Most of IDB's activities have been in the industrial sector. This sector consists of a few large enterprises which, being of national import- ance, enjoy strong Government support and in many cases Government participa- tion in ownership, several hundred medium scale enterprises mainly owned by private interests, and several thousand small scale enterprises. IDB's lend- ing, until recently, has been directed at the medium scale subsector. Early in 1975 it initiated an experimental program to provide financial and tech- nical assistance to the small scale subsector, the first such program in Jordan. By the end of 1975 IDB had made 43 loans to this subsector, averag- ing $4,100 equivalent each. It intends to expand this program in the coming years. iv. The tourism sector has received about 15% of IDB's lending. It has been especially sensitive to developments in the region but now shows signs of a strong revival. v. In the absence of a formally organized capital market the main sources of financing for industrial investment are the promoters themselves, IDB and the commercial banks. During the Three-Year Plan period projects financed by IDB, which are a representative sample of all projects in the medium scale industrial and tourism sectors, received half of their funding from the entrepreneurs' own resources, with IDB providing over 30% of which most was to finance imported capital equipment. The contribution of the com- mercial banks during this period was only 14%, and mostly on short-term. The Central Bank, which exercises the usual regulatory powers over the commercial banks, has recently taken several measures to improve the mobilization of  - ii - local financial resources, to absorb part of the excess liquidity of the bank- ing system and to redirect credit to the productive sectors. These measures include a restructuring of interest rates and the selective use of credit ceilings and reserve requirements. vi. IDB itself is a sound institution with experienced and capable man- agement and staff. Its procedures, especially its appraisal work, are good. It is widely respected within Jordan as a well-run institution. During the Three-Year Plan period it assisted projects accounting for about 75% of pri- vate investment in medium scale industry and perhaps 90% of investment in hotels and related tourism oriented enterprises. vii. IDB has prepared a strategy statement outlining the objectives it hopes to achieve during the Five-Year Plan period. These include three new initiatives: establishment of an industrial estate, promotion of new proj- ects and establishment of a management training center. It also intends to expand its experimental small scale industry and handicraft program (SSI&HP) as well as its normal lending. IDB and the Government have indicated that they would like Bank Group assistance and advice as IDB becomes active in these new areas. viii. The proposed project has three components. The first is the provi- sion of $3,675,000 million to fill the forecast gap in IDB's foreign exchange resources directed towards its normal lending activities during the two-year period July 1976 to June 1978. This would represent about 25% of IDB's for- eign exchange needs during this period. This portion of the credit will be lent by the Government to IDB on normal Bank terms. The second component is the provision of $300,000 to help finance IDB's SSI&HP over the same two-year period. An important objective here is to ensure the Bank Group's close asso- ciation with that program to maximize what it can learn from IDB's experience and to lay the basis for possible future Bank Group assistance to this sub- sector, both in Jordan and elsewhere. This portion will be provided by the Government to IDB as a grant. The third component will provide up to $25,000 to finance an interdisciplinary study of the small scale industry subsector. The objective of the study is to gain knowledge of the subsector which IDB's exposure is not likely to provide so that a more complete picture will emerge of the needs, prospects and constraints of the subsector. The Government will pay for the cost of the study out of this portion of the proposed credit. In addition to financial assistance the project will also include Bank Group technical assistance to IDB in such areas as improving its appraisal and supervision work as well as the new fields it plans to enter. ix. Agreement having been reached on the principal issues, the project is suitable for an IDA credit of $4.0 million on the usual terms, to be uti- lized as outlined above.  I. INTRODUCTION 1.01 The Industrial Development Bank of Jordan (IDB) was established in 1965 with the objective of providing term financing for industry and tourism in Jordan. It has developed into an efficient development financing institu- tion with a good record of performance. It recently has undertaken an experi- mental lending program aimed at snall scale industry and handicraft projects and intends in the next few years to undertake other new activities. Though IDB has been in contact with the Bank Group from time to time since its estab- lishment, the credit proposed in this report would be the first Bank Group lending to IDB. 1.02 An IDA credit of $4.0 million to the Government of Jordan is pro- posed. Of this, $3,675,000 will be lent to IDB by the Government on normal Bank terms for on-lending by IDB to its usual industrial and tourism clients. This amount will provide about 25% of IDB's foreign exchange resource needs during the two-year period beginning July 1976; the rest of its foreign exchange needs is expected to be filled by other foreign loans. A second portion of $300,000 will be provided by the Government to IDB as a grant for use by IDB in its small scale industry and handicraft program (SSI&HP). A third portion of up to $25,000 will be used to finance an interdisciplinary study of the small scale industry and handicraft subsector. While the Bank Group can expect to provide IDB with technical assistance relating to its usual activities as an adjunct to the $3,675,000 portion of the credit, the main objective in providing funds for the SSI&HP and the study is to ensure the Bank Group's close association with this subsector to maximize what it can learn from IDB's experience and to lay the basis for possible future Bank Group assistance to this subsector, both in Jordan and elsewhere. II. THE ENVIRONMENT Economic Environment 2.01 The most recent report on the economy of Jordan entitled "Special Economic Report, Jordan, Review of the Five-Year Plan (1976-80)" (Report No. 1144-JO, dated May 24, 1976) has been distributed to the Executive Directors. The report embodies the conclusions of an economic mission which visited Jordan in January/February 1976 to review the new Five-Year Development Plan (1976-80). 2.02 Since the 1967 war the economic development of Jordan has been seriously affected by the political situation in the region. The occupation of the West Bank with 30% of Jordan's 2.6 million population deprived the country of most of its agricultural and tourism resources and increased its dependence on external transfers. The East Bank mostly consists of arid land with only 5% of the total land area being cultivable. Other natural resources are also limited with the exception of abundant phosphate deposits. Reflect- ing the narrowness of Jordan's productive base, services (mainly public serv- ices and commerce) account for about two-thirds of domestic production. In 1975 Jordan's (East Bank) GNP per capita was estimated at $590.  -2- 2.03 The return of internal stability in 1971 permitted the Government to devote more attention to medium- and long-term economic issues. In 1972 the Government published a Three-Year Plan covering the 1973-75 period. The main targets of the Plan were to achieve an 8% p.a. growth of GDP at 1972 prices, to reduce the 8% unemployment rate and the serious underemployment in the East Bank, to phase out the economy's heavy dependence on foreign budget support by reducing the budget and trade deficits through increased domestic revenues and foreign exchange earnings and to foster a more equitable distri- bution of economic gains between the various income groups and geographical regions. To achieve these targets, the Plan envisaged a thorough restructur- ing of the economy by reducing its heavy reliance on services of which defense was a major part, and by developing agriculture, manufacturing and mining both through institutional and infrastructure support to private initiative and through public investment in productive enterprises. 2.04 Development performance during the Plan period was a mixed success. The real annual growth rate of GDP over the three-year period was of the order of 3% per year as a result of poor weather conditions and slow growth in com- merce and services following the October 1973 war. However, mining and manu- facturing grew at an annual rate of 10%. Rock phosphate accounted for much of this increase following a doubling of production coupled with a five-fold in- crease in the world price between July 1972 ($11.4/ton FOB Jordan Rock) and January 1975 ($56/ton). The real annual growth rate of the manufacturing sector taken alone was a little over 8% and capacity utilization improved dur- ing the three-year period to reach 95% in 1975. With a 6% p.a. growth rate, the construction sector also achieved a better than average performance, due mainly to increased remittances from Jordanians working abroad which fueled demand for investment in housing and for related industrial inputs. 2.05 Although the Three-Year Plan aimed at reducing reliance on external sources to fill the country's chronic resource gap, the trade balance deficit actually increased from JD 81 million in 1973 to JD 115 million in 1974 and an estimated JD 147 million in 1975 as a result of sharp increases in the prices of Jordan's imports such as food and capital goods, only partially compensated for by the five-fold increase in phosphate prices. Fortunately this trade deficit was covered by significant increases in unrequited trans- fers (from JD 65 million in 1973 to JD 151 million in 1975) and in workers' remittances (from JD 15 million in 1973 to JD 53 million in 1975). However, the availability and adequacy of these resources in the coming years is un- certain, at a time when the need for external resources to carry out the in- vestment program contained in the country's new Five-Year Plan will be very high. Jordan will thus continue to need substantial external financial as- sistance. 2.06 Jordan experienced considerable price stability for many years until the early 1970's. Prior to 1967 the overall price level experienced an aver- age annual increase of only 2%; from 1967 to 1971 the increase was 4.6% p.a. However, the Amman cost of living index indicates that the general price level increased by 8.1% in 1972, 10.4% in 1973 and a record 20.0% in 1974, slightly below the international inflation rate estimated at 21.7% for that year. The  -3- increase in the index was about 12% in 1975. Depending on supply conditions, particularly in agriculture, and on aggregate demand levels, which will be largely influenced by the rate of implementation of Plan targets, inflation in Jordan is expected to continue at its current level of 12% per annum dur- ing the first two years of the Five-Year Plan period, and should drop during the latter years of the Plan and subsequently decline to about the interna- tional rate of inflation, which according to Bank projections should fall from 10.8% in 1975 to 7.0% in 1980 through 1985. To some extent, the higher rates expected in the initial years of the Five-Year Plan result from a bunching of planned investment expenditures during that period. However, there may occur substantial slippages in the actual timing of investments which would lower pressures on domestic resources, resulting in a lower rate of inflation. 2.07 It appears that unemployment is no longer a problem in Jordan. Emigration to the Gulf States and expanded employment opportunities in Jordan have created a labor shortage, in particular in the skilled and foreman classes, which might prove one of the most serious constraints in the imple- mentation of the Five-Year Plan. This shortage has led to increases in wages which now appear to reflect correctly the opportunity cost of labor. Jordan's high literacy rate (65% in 1974) and pool of entrepreneurial skills suggest that the country enjoys some comparative advantages over its neighbors for its industrial development. The Industrial Sector 2.08 Preliminary results from the 1975 industrial census 1/ indicate that there were 7,478 industrial enterprises (both mining and manufacturing) on the East Bank of Jordan in 1974, employing some 26,700 workers. Fixed assets at the end of 1974 were estimated at JD 69.0 million. The value added by this sector in 1975 was estimated at JD 45 million and represented about 15.6% of GDP at factor cost. By contrast, this sector contributed only JD 20 million or 11% to GDP in 1972. Using as weights 1970 prices, the industrial produc- tion index for about 15 major commodities also shows the steady growth of this sector, except during the 1967 war and the 1970 domestic disturbances (see Annex 1). The index increased by 9.9% in 1973, by 6.1% in 1974, and by 7.2% in 1975. 2.09 Existing industrial activities are heavily concentrated in the Amman- Zerka area. Of 606 firms covered in the 1974 employment survey 2/, as many as 559 were located in this area (see Annex 2). However strains are beginning to appear due to such a concentration, particularly with regard to the supply 1/ This census, the results of which are still being tabulated, covered the very smallest enterprises (1-4 employees) through the largest (over 200 employees). 2/ This survey did not cover the very smallest enterprises (1-4 employees).  - 4 - of power and water. The Three-Year Plan called for a better geographical dis- tribution of industry, but progress in this direction was and will continue to be slow because of the absence of both infrastructure and markets in the smaller population centers. 2.10 Industrial activity in Jordan can be conveniently separated into large scale enterprises which, being of national importance, enjoy strong Government support and in many cases Government participation in ownership, medium scale enterprises which, while encouraged by Government, are almost completely privately owned, and small scale enterprises which until recently were more or less neglected by Government. The 1974 employment survey indic- ated that among the 606 establishments covered, the 36 largest (employing 50 or more workers) accounted for 57% of total industrial employment (see Annex 3). Of even greater significance is the dominant role of the eight largest firms, each of which is the only one of its kind in Jordan and which together employ 38% of the total. In a 1971 survey they were estimated to account for over half of the fixed assets held by the sector and almost half of the in- dustrial sector's contribution to GDP. These firms are the phosphate mine, the cigarette factory, the tannery, the pharmaceuticals company, the oil re- finery, the cement mill, the rolling mill and the wet batteries factory. 2.11 Medium scale industry is mostly composed of enterprises producing consumer goods for export or import substitution. Major industries in this sub-sector are food processing (mostly flour milling, oil pressing and olive packaging), clothing, textiles and footwear, and the fabrication of metal products (hand tools, structural metal products and metal furniture). This subsector has played a growing role in the past few years. While its exports are small compared to those of the large scale enterprises (see Annex 4), they are increasing significantly. IDB estimates that about one-third of its recent projects, which are by and large all medium scale enterprises, are ex- port oriented. One result of the comparatively tight labor market is that Jordanian industry is tending to become relatively sophisticated and capital intensive, enabling it to become technologically advanced in relation to competing industry in neighboring countries. The resulting higher quality of its products has enhanced their acceptability in these markets. Ceramics, tiles, marble products, aluminum window and door frames, plastic products, and paints are some examples of products which are being successfully sold in these markets. Using the projects financed by IDB as a sample, profits made by medium scale industries are rather attractive: in 1975 the ratio of profit before interest to capital employed ranged from 16% (paints) to 58% (tiles) and as high as 77% in cosmestics and detergents. 2.12 The 1975 industrial census attempts to cover for the first time the small scale industry subsector (firms employing less than five workers) as well as the medium and large scale subsectors. Of the 7,478 firms covered, fully 6,887 were in this category. They employed about 10,800 workers versus the almost 16,000 employed by the larger firms. Clearly this is a substantial subsector, and one which until recently has almost totally lacked institutional support. This subsector is a mixture of very small scale industries, handi- crafts and household or "cottage" industries; almost without exception they  - 5 - all originated from some form of household industrial activity, the most suc- cessful ones emerging into small factories with some division of labor and an emerging need for planning and technical assistance. Stone cutting and carpentry are typical examples of small scale industry in Amman, tailoring and traditional embroidery are examples of Jordan's cottage industries while pottery and wood carving are among the most popular handicrafts. There are also some "mode-rn small industries" such as ready-made clothing produced by small factories for delivery to large stores. 2.13 Incentives. Under the Encouragement of Investment Law projects that are approved by a committee chaired by the Minister of Industry and Trade are granted exemptions from income and social services tax for six years (nine if they are outside the Amman-Zerka area), from custom duties and other charges on imported fixed assets during the period of project implemen- tation, and from building and land taxes for five years (seven if outside Amman-Zerka). Projects outside the Amman-Zerka area may be granted, free of charge, tracts of government land. Foreign capital invested in an approved project, whether in conjunction with local capital or not, is given the same treatment as local capital. In addition, the Law contains provisions facil- itating the transfer outside the country of profits and interest earned on foreign investment, the investment itself, and salaries earned by expatriate staff. To qualify for these benefits, however, a project must have fixed assets excluding land of at least JD 5,000 (JD 15,000 in the case of tourism projects). 2.14 The provisions of the Law are quite generous and in general well directed, although their selectivity might be improved as industrial activity grows. Most investment projects qualifying under this Law are submitted for approval. During 1972-75, the committee approved 105 projects involving cap- ital investments totalling JD 21 million. Besides the exemptions allowed in the Law, if a suitable case is presented custom duties on imported raw mat- erials and components may be waived or reduced, and protective duties on im- ports of competing products raised or imposed. Amendment of the present Law is under consideration to further enhance its incentives. 2.15 Licensing. Under the Licensing and Control of Industry Instruc- tions of 1973, no new industrial establishment may be set up and no existing industrial establishment may be modernized or expanded without having ob- tained a license from the Ministry of Industry and Trade. (Projects in the tourism sector must obtain a similar license from the Ministry of Tourism and Antiquities.) For a project costing less than JD 5,000, a license is rou- tinely issued without specific requirements. For a project which costs more than JD 5,000, the Ministry asks for a study of the project to check its eco- nomic and technical feasibility. 2.16 In the last few years, licenses have been issued rather liberally. This reflects a change in policy towards industrial development. Until about two years ago the Government sought to limit the number of establishments in each field to what it felt the limited domestic market could sustain. How- ever, because of this limited market, many enterprises successfully turned to  -6- foreign markets. Encouraged by this trend, the Government has adopted a new policy allowing "industrial duplication", i.e., the establishment of several enterprises in the same line of production. The underlying reasoning is that more competition will encourage industrial enterprises to break into foreign markets and bring about more growth. This liberal approach has enhanced the open atmosphere of Jordan's business climate without apparently leading to excess capacity. 2.17 Industrial establishments are also required to obtain a license to import machinery, equipment, spare parts, or raw materials. Reflecting the liberal project licensing, import licenses are also issued quite liberally, though the mechanism itself is intended to control allocation of foreign ex- change. Commercial banks, on the strength of this license, are authorized by the Central Bank within certain limits to issue a foreign exchange permit. Thus an industrialist, once his project has been licensed, and because of the present availability of foreign exchange, is able to obtain foreign exchange quite easily. 2.18 Tariff Protection. Industry enjDys varying degrees of tariff pro- tection from competing imports originating from outside the Arab countries. Tariffs on typical industrial products are in the 10-30% ad valorem range, although a few selected manufactured imports such as confectionery, shoes, furniture and tomato sauce carry tariffs of more than 50%. However, imports from the Arab Common Market (Egypt, Syria, Iraq and Jordan) as well as im- ports resulting from bilateral trade agreements with the countries of the Council of Arab Economic Unity do provide a considerable measure of competi- tion for Jordan's industrial firms. The Tourism Sector 2.19 An inevitable result of the 1967 war and the disturbances in Jordan in the following years was a precipitious drop in tourist traffic. As a re- sult of the occupation of the West Bank, Jordan was also deprived of her best known attractions and of 80% of her hotel capacity. Recently, though, a re- covery of the tourism sector has been felt. In 1975 the number of visitors reached an estimated 767,000, surpassing the 1966 peak of 619,000 visitors by a substantial margin (see Annex 5). Jordan is a gateway not only for Moslem pilgrims en route to Mecca but also for an increasing number of visitors to the West Bank from Western countries. Some of these visitors take advantage of their stopover in Jordan to visit historical sites on the East Bank. For example, there were about 41,000 foreign visitors to the archaeological site of Petra in 1975. 2.20 In general, the development of tourist facilities on the East Bank has lagged behind the growth of foreign visitor demand, especially for accom- modation of international standard. As a result of the recent shortage of hotel rooms, occupancy rates and financial returns for hotels are relative- ly high. In response to this situation, a number of hotels are either under construction or in the planning stage. In addition other tourist facilities such as shops, restaurants and transportation facilities are also being ex- panded.  -7- 2.21 Gross foreign exchange earnings from tourism have grown from JD 4.6 million in 1968 to JD 32.2 million in 1975, representing over 28% of total 1975 exports of goods and services. Net foreign exchange earnings from tour- ism, after deducting imported goods and services, are estimated to be about 70% of gross receipts. Direct employment in tourism facilities is presently estimated at 4,000. The Financial Community 2.22 The financial community in Jordan consists of the Central Bank, eleven commercial banks, six specialized credit institutions and several in- surance companies. The Post Office began a Savings Fund in September 1974. There is no organized capital market. 2.23 The Central Bank. The Central Bank, established in 1964,. has the usual regulatory power over the commercial banks. It can establish interest rates and regulate credit as well as establish reserve requirements, liquid- ity requirements and the capital/deposit ratio (currently 10%). It makes a market in Government Treasury Bills (first issued in 1969) and Bonds (1971). It offers rediscount facilities to banks and specialized credit institutions at 5% p.a. 2.24 The Commercial Banks. There are eleven commercial banks operating in Jordan. Four are incorporated in Jordan, three in other Arab countries and four in other countries (a fifth is expected to open in 1976). These banks had 73 branches in Jordan at the end of 1975, 43 of which were in Amman. Credit facilities extended by the commercial banks have been growing steadily, more or less in line with growing deposits and total assets. Outstanding credit at the end of 1975 totalled JD 121.4 million, a 45% increase over the year before. However, this represented only 57% of the banks' total assets. The vast majority of these credits are bill discounting and short-term loans and advances, including overdraft facilities. While the banks are not yet prepared to lend substantial amounts on long-term, due mainly to their con- servative approach and to the still unsettled conditions in the area, they do roll over their short-term advances quite freely, particularly for their established clients. 2.25 Bank lending to industry accounted for only 12% of total bank lend- ing at the end of 1975. General commence and trade received the bulk of bank credit (42%) with construction and the purchase of land and buildings being the second largest category (22%). The banks rarely if ever lend to small scale industry, the main reason being the lack of sufficient security. They do hold a substantial amount of Treasury Bills and Government Bonds (11% of total assets) and maintain large deposits with the Central Bank (15% of total assets, or 21% of deposits versus the 12% reserve requirement). In view of this liquidity, the banks rarely use the Central Bank's rediscount facility. On the whole the structure of commercial bank assets reflects a traditional outlook which will have to give way to more dynamic banking policies if these banks are to play a more active role in Jordan's industrialization.  2.26 Until recently the Jordanian commercial banks have been ill-equip- ped to engage in sophisticated international banking activities, due in part to restrictions on foreign account operations. In a recent move that must be interpreted in the context of the virtual immobilisation of the Lebanese bank- ing system over the past few months, the Central Bank has authorized the com- mercial banks to exclude their non-resident deposits in foreign currencies, including deposits by Jordanians residing abroad, from the 12% legal reserve requirement, and to place these funds with their correspondents abroad in- stead of placing them with the Central Bank. This move should enable commer- cial banks to offer more competitive interest rates and to play a more active role on the Arab and international capital market. 2.27 The Specialized Credit Institutions. The six specialized credit in- stitutions, including IDB, are each incorporated under a special law and ex- tend medium- and long-term credit for specific purposes in different sectors. None compete with IDB. They are briefly described in Annex 6. 2.28 Other Financial Institutions. There are some 25 insurance com- panies and agencies or branches operating in Jordan, of which seven are Jordanian. Premium income is small (JD 2.7 million in 1973) and is invested in real estate, government securities and, to a small extent, in equities of large corporations. The amounts deposited with the Post Office Savings Fund are still quite small and this too is not a source of industrial finance. On the other hand, a pension fund recently established by the Government has the potential to become a source of funds for long-term investment. 2.29 Though there is no organized capital market, there are about ten private brokers who handle transactions in shares. The volume is small (there are no statistics available), if only because the number of companies with public ownership is small. Despite the narrowness of the market the Government is actively encouraging equity participation by the private sec- tor in several major industrial ventures (e.g. refinery, cement). The only debt instruments available for trade are Government Bonds which are mainly handled by the banks. The new Five-Year Plan foresees the issuance of deben- tures by large corporations. Following a request from the Government, IFC has been providing some technical assistance to the Government for the estab- lishment of a securities market in Jordan. IFC advice has been particularly sought for the drafting of a new Capital Market Bill. 2.30 Interest Rates. As noted in paragraph 2.06, Jordan experienced a low level of inflation up to the early 1970's. This was still reflected in the interest rate structure as of September 1975, given in Annex 7, which had essentially remained unchanged for many years. Whereas until the early 1970's the structure was positive in real terms, in 1975 it had become nega- tive and had fallen out of line with trends in the international capital market. To reverse this trend and encourage the channeling of private savings into the banking system, the Central Bank on January 1, 1976, raised the mini- mum interest rates payable by commercial banks on savings and time deposits. These rates now range from 5 to 5-1/2%, as opposed to the 2-1/2 to 3-1/2%  - 9 - minimum rates prevailing earlier. As a result of this increase in the cost of funds to the commercial banks, the minimum lending rate charged to prime borrowers has been increased from 6.5 to 7.5%. 2.31 The recent increase in the long-term lending rate of IDB from 8 to 9% has to be seen in the light of this general overhaul of the interest rate structure in Jordan. Although the increase in IDB's lending rate to 9% would not bring it up to the inflation rates expected for the next three or four years (see Annex 8), this increase does reflect the effort by the Government to rationalize the interest rate structure. Since there are clear signs that the inflation rate is slowly moving downward, the increase represents the maximum that can be expected from the Government at this time. The Govern- ment is indeed rightly concerned about the expectation effects of too large an upward adjustment in interest rates which would have the tendency to signal a continuation of high inflation rates to consumers and investors. Also the Government intends to maintain an incentive to investors in the form of an at- tractive long-term interest rate at a time when investment activity in Jordan is gaining momentum. 2.32 Other recent steps taken by the Central Bank to reduce excessive monetary and credit expansion of the commercial banking system while direct- ing more financial resources to the industrial sector include the following: (i) reducing from 80% to 75% the credit-deposit ratio for the commercial banks; the ratio is expected to be further re- duced to 70% in July 1976; (ii) limiting the expansion of credit by the commercial banks in the first six months of 1976 to not more than 10% above the level extended in the previous six months. Credit extended to joint-stock industrial companies is exempted from this ceiling; and (iii) imposing an additional 3% reserve requirement on commercial bank over-drafts for all purposes, except on loans to joint- stock industrial companies. This last measure became effec- tive on March 1, 1976. 2.33 Mobilization of Local Currency Resources. During the Three-Year Plan projects financed by IDB, which are a representative sample of all proj- ects in the medium scale industrial and tourism sectors, received half of their funding from the entrepreneurs' own resources. IDB provided over 30%, of which most was to finance imported capital equipment. The contribution of the commercial banks, the only other potential source of long-term funds in Jordan during this period, was small (14%), and then mostly on short-term. Thus, the main source for long-term local currency funds was the promoters themselves. While this pattern of financing may well continue in the future, the authorities are aware of the need to better mobilize local currency re- sources for productive investment in all sectors, not only those presently  - 10 - served by IDB. Recent Government actions, summarized in paragraphs 2.30-2.32 above, toward a restructuring of interest rates and reserve requirements should be seen as evidence of a serious commitment by the Government to im- prove the mobilization of local financial resources. III. IDB's STRUCTURE Establishment and Legal Basis 3.01 IDB was established in 1965 in accordance with a special Law which provides IDB with certain privileges and powers not available to companies established under the Companies Law. The most important of these are that preference shares issued to the private sector carry a minimum 6% tax free dividend guaranteed by the Government, IDB is exempt from all taxes, the nominal value of the preference shares is guaranteed by the Government in case of liquidation and, at IDB's option, its loans can be collected by the Government under the terms of the Law for the Collection of Government Funds. IDB has never had to call on the Government to meet the preference share dividend nor has it turned any loan over to the Government for collection. 3.02 The IDB Law provides that IDB has a prior charge over a borrower's assets. This provision created some difficulty in arranging the financing plan for one project which involved IFC (Jordan Ceramic Industries Company) and resulted in IDB's not lending to the company but instead making a standby equity investment commitment. IDB's management considers this an isolated incident not warranting a change in the provision. The Law is satisfactory and provides IDB with sufficient flexibility to carry out its objectives. Ownership and Control 3.03 IDB's authorized share capital is JD 3 million divided into or- dinary and preference shares with par values of JD 1. Ordinary shares can be owned only by the Government; preference shares, only by the Jordanian private sector or by foreign investors. With the exception of dividend and liquidation rights and the voting procedures for the Board of Directors, the two classes of shares are equal. Besides the minimum 6% dividend guaranteed to preference shareholders, these shareholders have the right to receive dividends of up to 10% before the ordinary shares attract any dividends. 3.04 Initially one million ordinary shares and two million preference shares were authorized. In 1971, however, the Government bought 110,000 shares previously held by a private bank. These shares were converted to or- dinary shares and the number of authorized ordinary shares was increased to 1.11 million with a similar decline in the number of authorized preference shares. 3.05 The Government has subscribed to and fully paid for all the author- ized ordinary shares. Some 840 individuals and institutions, including some non-Jordanians, have subscribed to 1.13 million of the preference shares (see  - 11 - Annex 9). The initial payment schedule for these shares called for periodic installments through December 1967. The 1967 war disrupted this timetable, however, with the result that investors from the West Bank were unable to make their final payments. These payments are being made from the dividends declared on these shares; only some JD 1,000 remains to be paid. 3.06 The preference shares are widely held with no one investor holding more than 5% of the total. The major shareholders are commercial banks oper- ating in Jordan. There is, however, no dominant group of private shareholders exercising effective control over IDB's activities. The Government, of course, is in a position to effectively control IDB but has refrained from doing so. In any case, the IDB Law prohibits IDB from adopting policies which conflict with those of the Government. IDB has established an effective working rela- tionship with the various Government departments while maintaining its auto- nomy in decision-making. Board and Committees 3.07 The IDB Law specifies that the Board of Directors shall have from nine to 15 members, as well as specifying who each member is to represent. Of the basic nine-man membership, three represent the Government and six the private sector; this reflects the division of the authorized (though not of the issued) capital between ordinary and preference shares. The remaining six seats are reserved for representatives of private shareholders holding 10% or more of the authorized capital; as there are no such shareholders, these seats are not filled. The present Board membership is given in Annex 10. 3.08 The three Government representatives are appointed by the Minister of Trade and Industry, the President of the National Planning Council and the Governor of the Central bank. The Chamber of Industries appoints one director. Two directors represent commercial banks, rotating each year. Three directors are elected by the preference shareholders, excluding the commercial banks. Directors serve for three years, excepting those representing the commercial banks. The General Manager attends meetings as a non-voting participant. 3.09 By tradition the Chairman is one of the Directors representing the preference shareholders. The IDB Law requires that the Board meet at least once a month; in fact it meets some 14 times a year. Attendance at meetings is excellent. Two-thirds of the members are required for a quorum and deci- sions are taken by a simple majority of those present. The Board determines general policy and approves all loans over JD 10,000 and all equity invest- ments. It has delegated approval of loans up to JD 10,000 to a Loan Commit- tee consisting of the General Manager, his Deputy, and the Division Heads. The Board does not concern itself with internal, day-to-day matters, leaving these to management. Management and Staff 3.10 IDB has operated in the past with a very small staff. From its founding in 1965 up to 1971 the number of staff remained fairly constant at about 18, including eight professionals. Since 1972, however, there has been  - 12 - a drive to recruit new staff members, especially professionals, in order to keep pace with IDB's expanding business. By the end of 1975 the total staff had expanded to 35, including 21 professionals. Members of the professional staff have attended a number of training courses, including those offered by EDI, and have spent time working in other mature DFCs. As a result they, and especially the senior staff, are quite familiar with current development bank- ing procedures. 3.11 As can be seen from the organization chart (Annex 11), IDB is or- ganized along traditional lines. There are separate investment, technical and follow-up divisions as well as the usual support divisions. Very recently created is a separate division to handle IDB's SSI&HP. During 1976 IDB in- tends to recruit five more professionals for the existing divisions in anti- cipation of further growth in its business. It also intends to establish another new division during 1976, the Research and Project Identification Division, and to recruit at least two new staff members for it. This divi- sion will handle IDB's promotional work which is expected to be undertaken during the Five-Year Plan period. 3.12 Mr. Ziyad Annab has been the General Manager since joining IDB in June 1966 following a distinguished career with the Government. He is an ex- perienced, capable and articulate individual who has provided strong and ef- fective leadership. He is ably assisted by Mr. Rajab As-Saad, Deputy General Manager, who joined IDB in October 1965. The four Division Heads have been with IDB for between eight and ten years each. They are all well qualified for their positions. Mlorale among the staff is excellent, in part because working conditions and remuneration are well above average by Jordanian stand- ards but mainly because of the open and participatory style of management. Objectives and Powers 3.13 The IDB Law provides a broad mandate for IDB. It is to finance private industrial, tourism and mining projects registered in Jordan through loans, equity participations, underwriting and guarantees. It is also to assist in developing a stock market and in encouraging the private ownership of shares and bonds, to provide technical assistance, to promote new projects and to help small industries. It is prohibited from financing agricultural projects, public utilities or government or municipality projects. 3.14 To date it has concentrated its efforts on making loans to indus- trial and tourism projects, and on providing these clients with technical as- sistance. It has taken some equity participations but the scope for this activity in Jordan is small as most companies are organized as partnerships. The promotion of new projects, and the investment in their share capital, was expected to be the main activity of the Industrial Development Corporation, a government-owned entity that was established in mid-1973. As this company never became active and has since been dissolved, IDB is expected to become active in this area in the future.  - 13 - 3.15 In view of the large number of relatively small loans that IDB has made in the past, it can be inferred that IDB has provided some assistance to small industries. However, it has not directly assisted the very small entre- preneurs until very recently. This new activity is described in paragraphs 4.07-4.25. Policies and Procedures 3.16 Policy Statement. IDB's Board adopted an Investment Policy state- ment in 1965. It appears as Annex 12, as amended to the present. This state- ment contains most of the provisions relating to investment policy normally found in such statements. What is not covered in the statement is covered in the IDB Law. For example, the Law prohibits a Director from attending Board meetings at which matters in which he has a special interest (including finan- cial assistance to projects in which he holds more than 5% of the share cap- ital) are to be discussed. 3.17 Following discussions with the appraisal mission, IDB's management intends to suggest to its Board certain modifications in the statement. These would include a change in paragraph 3 to increase the amount of IDB's paid-in capital that could be invested in equity participations from the present 25% to perhaps 100%, an alteration in paragraph 5 to define the base for single exposures as paid-in capital and reserves and to increase the percentage of this base that may be lent or otherwise invested in a project from 10% to per- haps 20%, and a clarification in paragraph 6 to indicate that in the case of expansion projects IDB's total exposure would not exceed 50% of the total in- vestment in the existing as well as the expansion project. 3.18 With regard to IDB's reserve policy, the IDB Law requires that 25% of IDB's profit be allocated each year to a statutory reserve. In addition, IDB has followed the policy of allocating 10% of profits to the provision for losses. It has steadily increased the tax-free dividend paid on preference shares from the guaranteed minimum of 6% to 8% in 1975 and intends to con- tinue increasing this dividend to 10% (after which ordinary shares would be- gin to attract a dividend too). This policy is designed to enhance the at- tractiveness of IDB's preference shares relative to alternative investments (for example, Government development bonds which yield 8% tax-free) so that IDB will be able to increase its share capital when this becomes necessary. In the few transactions that take place IDB's preference shares now trade at par, though they were trading at below par a few years ago. 3.19 Foreign Exchange Risk. The foreign exchange risk on loans made by IDB from foreign lines of credit has been borne by the Government (all of IDB's loans are denominated in local currency). The Government has confirmed that it will continue to bear this risk since this is seen by the Government as a further incentive to industrial investment. At present, with foreign exchange apparently readily available from the Central Bank for any project that is licensed (see paragraph 2.17), an increase in IDB's lending rate for foreign exchange loans would make such loans uncompetitive with local cur- rency loans; under the existing regulations the proceeds of these loans can be easily converted into foreign exchange.  - 14 - 3.20 Project Appraisal. The Ministry of Trade and Industry and the Ministry of Tourism and Antiquities routinely send IDB a copy of each license when it is issued for an industrial or a tourism project. IDB in turn con- tacts each licensee to offer him technical assistance in carrying out his project and to indicate that it is prepared to consider providing financial assistance. About 70% of the licensees reply. This is the main source of IDB's present business, and allows IDB to become involved at an early stage in the formulation of most projects it finances. 3.21 Prospective clients meet initially with the Head of the Investment Division who determines whether the proposed project is suitable for IDB. If so, a team consisting of either a financial analyst or an economist and an engineer meet with the entrepreneur to discuss the project and IDB's require- ments in detail. The team will help the client prepare his project if neces- sary. Project preparation can often stretch over several years while the client searches for suitable land, locates partners, obtains building permits, etc. Once the project has been prepared and appraised, a report is prepared covering the financial, economic and technical aspects of the project. This report is considered by the Loan Committee and, if found satisfactory (and the loan amount is over JD 10,000), sent to the Board for its consideration. 3.22 IDB's appraisal work and its reports have undergone considerable im- provement and broadening in recent years. Earlier reports, for example, did not separate fixed assets into sub-categories such as land, buildings and ma- chinery, or forecast financial results; they now do. Recently IDB has begun to calculate the internal financial rate of return (IFRR) for most projects and is preparing to calculate the internal economic rate of return (IERR). On balance, IDB's appraisal work now is quite good. Further improvement can be made, however. While the appraisal reports cover the factual aspects of proj- ects quite completely, they often lack sufficient analysis of these facts. The assumptions underlying the conclusions in the reports are often not stated. IDB's management is aware of the deficiencies and is continually working to improve appraisal work. It anticipates that an association with the Bank Group will be helpful in this regard. 3.23 IDB has undertaken to calculate the IERR as well as the IFRR on all projects it submits to the Bank for financing under the proposed line of cred- it that are above the free limit. As there appear to be few systematic dis- tortions or subsidies within the Jordanian economy (other than tariff protec- tion in some cases), it seems likely that the IERR will often not be signif- icantly lower than the IFRR. In such cases IDB will not be required to make both calculations but instead will provide a statement explaining why the IERR would not be lower than the IFRR. 3.24 Project Supervision. The Follow-Up Division was established as a separate division in 1971. It is still in the process of developing and refining its procedures, though a fairly definite pattern has already evolved. It is clear that IDB recognizes the importance of closely following the pro- gress of its clients, not only to anticipate problems but also so that its  - 15 - appraisal techniques benefit from past experience, and continued emphasis on this aspect of its operation can be expected. 3.25 Supervision during the disbursement of IDB's loans is quite intense. Site inspections are frequently made. When IDB's loan is about half disbursed a progress report is prepared discussing, among other things, any delays the project is experiencing. When disbursements are completed a completion report is prepared which compares actual costs and timing with those forecast in the appraisal report. 3.26 Once a project has started operations IDB requests quarterly reports from its clients. However, IDB usually only receives annual reports, and then only from the, larger firms. IDB faces two general difficulties in obtaining better compliance with its reporting requirements. Its clients are often sus- picious of IDB's motives in requesting financial and operating details. IDB is making progress in gaining its clients' confidence in this area by demonstrat- ing the benefits its clients can gain by a continued close association with it. Secondly, the smaller firms usually do not have well enough developed account- ing procedures to enable them to produce the required reports. When reports are not received, IDB attempts to obtain the data through visits to the firms. 3.27 A report is usually prepared once a year on each firm in operation. This report compares actual results with those forecast and focuses on prob- lem areas. Clients that are experiencing little difficulty are visited once a year; those with problems, more often. As the vast majority of IDB's proj- ects are located in or near Amman, IDB is able in fact to adhere quite closely to this visitation schedule. As a result of these fairly frequent visits and because of IDB's widespread contacts within the relatively small industrial community, IDB is able to follow quite closely the progress of most of its clients. 3.28 Procurement. Most projects are too small to justify international competitive bidding. IDB does require that its clients provide quotes from at least two suppliers in all cases. The reasonableness of these quotes are reviewed by IDB. In some cases visits to the suppliers in Europe or else- where are made. In other cases the services of consulting engineers are used. IDB's procurement procedures are satisfactory. 3.29 Disbursements. Disbursements for machinery and equipment are made on the basis of invoices and, in the case of imported goods, bills of lading. Disbursements for construction are made on the basis of documents indicating the progress made, which are checked by site visits. Disbursements practices and procedures are satisfactory. 3.30 Internal Reports. IDB has instituted a comprehensive system of re- gular internal reports. Each month reports are prepared and circulated with- in the institution covering applications approved during the month and cur- rently under study, disbursements made during the month and expected to be made during the next three months, repayments due and received, arrears,  - 16 - IDB's financial position (trial balance sheet, rebouiae statement and proj- ected cash flow), etc. These reports, combined with IDB's small size and open atmosphere, allow management and senior staff to keep up to date on all of IDB's activities. IV. IDB's OPERATIONS Characteristics 4.01 A summary of IDB's operations since its establishment is contained in Annex 13. While it has approved several equity investments, most of its activity has been confined to the granting of loans. The year to year trend in loan approvals reflects the changing political situation in the Middle East. After a promising first full year of operation in 1966 (approvals to- talled JD 933,600), business dropped drastically in 1967 (approvals were only JD 472,800) and by 1969 had only recovered to about 80% of the 1966 level. The internal disturbances in 1970 and 1971 led to another slump in business. Since 1972, however, loan approvals have continually reached new yearly highs, reflecting the political stability within Jordan and the consequent improved investment climate. 4.02 Loans. Annex 14 classifies approved loans according to several criteria. Of the 285 loans approved through the end of 1975, 45 were for tourism projects (with only a few exceptions, hotels). The amount approved for these projects represents about 15% of total approvals. The largest single industrial category, food, beverage and tobacco, had received a total of 23% of IDB's loan financing, with the chemical, rubber and plastic pro- ducts category following with 19%. The remaining loan approvals are spread over a number of other categories, indicating that IDB has not unduly concen- trated its efforts on any one industrial branch but has tried to reach all medium scale industrial activities being pursued in Jordan. 4.03 Over half of the number of loans approved (though accounting for only about 10% of the amount approved) have been for amounts of less than JD 20,000 (about $61,000 equivalent). This is a reflection of the small size of the enterprises IDB caters to. The average size of IDB's loans, while steadily increasing each year, is still quite small; during 1975 it was JD 59,400 (about $180,000 equivalent) while the average size of all loans ap- proved since 1965 was JD 36,200 (about $110,000 equivalent). This again re- flects the size of the enterprises in the medium scale industrial sector. Not reflected in these figures is IDB's SSI&HP. 4.04 In recent years most of IDB's loans have had a repayment period of between five and seven years plus a grace period of about a year and a half. Most of the projects IDB has supported have been expansion projects, though new enterprises have been lent more money. IDB began granting loans for raw materials (working capital loans) following the 1967 war in an effort to as- sist firms to recover from the effects of the war; it ceased making such  - 17 - loans in 1973. During the last three years over half of IDB's loans were made to new clients, some 30% to repeat clients, with the remainder to enter- prises where some of the partners were new clients and others, repeat clients. The enterprises assisted by IDB have been heavily concentrated in the Amman- Zerka region, reflecting the general pattern in Jordan. 4.05 Equity Investments. Since its establishment IDB has approved equity investments in six companies. One investment, JD 150,000 in the Jordan Ceramics Industries Company approved in 1973, was a standby commitment to cover cost overruns. It was not needed and was cancelled during 1975. An additional JD 150,000 investment in this company for an expansion project was approved late in 1975. An investment of JD 10,000 in the Jordan Paper Com- pany was written off; subsequently the company was reorganized as the Jordan Paper and Cardboard Factory Company and IDB has invested in its capital. Dur- ing 1974 IDB received dividends totalling JD 16,700 from three companies, re- presenting a return of almost 14% on its equity investment portfolio. 4.06 Managed Funds. IDB manages on behalf of the National Planning Council a portfolio of small loans made before IDB was established from the proceeds of a Kuwait loan to the Government. IDB's activities are limited to collecting amounts that are due, receiving for its efforts 1/4 of 1% of what it collects. The Small Scale Industry and Handicraft Program 4.07 The Three-Year Plan called for the establishment of a special fund to assist the very small entrepreneur. This fund never materialized and in its absence IDB established in March 1975 an experimental program to begin to try to provide financial and other assistance to entrepreneurs in the small scale industry and handicraft field. IDB defines these as enterprises that employ up to five people and that use manual production methods or simple ma- chines; small service establishments and traditional handicrafts are also in- cluded. No studies have been made of this subsector in the past. The re- sults of the 1975 industrial census will assist IDB and others in learning more about these entrepreneurs (see paragraph 2.12). Until IDB's entry into this field there was no institutional support for this subsector. Commercial banks by and large have not lent to these entrepreneurs. 4.08 The establishment of this program was announced in local newspaper advertisements and over the radio. Letters describing the program were sent to all municipalities, Chambers of Commerce and Industry, trade schools and other interested parties. Staff members from IDB visited different parts of the country to discuss the program. As a result of this publicity 129 loan applications were received by the end of 1975. A number of these had to be rejected as falling outside the scope of the program. Of the remainder, 52 loans were approved totalling JD 72,200. Nine were later cancelled, leaving a net total of 43 loans amounting to JD 57,700 or an average of JD 1,340 (about $4,100 equivalent) per loan. IDB estimates that these 43 projects will pro- vide 71 new job opportunities at an average cost of about $2,800 equivalent per job.  - 18 - 4.09 All of these loans were for existing projects. Over half are located in the Amman-Zerka area with the remainder scattered among other towns. Almost half have been for carpentry shops with garments being the next largest category. Other endeavors assisted include stone cutting, tile manufacturing, cement blocks and printing. IDB estimates that only six of the 43 enterprises will have assets exceeding JD 5,000 after the execution of their projects; none exceeded this level before IDB became involved (the aver- age size was JD 1,550 or $4,700 equivalent). 4.10 IDB has established some general criteria for this program, though at this initial stage flexibility is being stressed. The maximum size of loans granted under this program is JD 2,000. There is no minimum size; the smallest loan granted so far was for JD 360. The interest rate charged on these loans is 7% p.a. The term of the loans can be up to ten years; the average term is four to five. The proceeds of the loan can be used only to finance machinery and tools. In general, IDB will lend up to 80% of the cost of such machinery and tools, but no more than 75% of the total cost of the project. However, in some cases it has financed the total cost of expansion projects. As security IDB will take a mortgage on real estate if any is available; otherwise it will mortgage the machinery and accept personal guarantees. 4.11 The 7% interest rate is seen by both the Government and IDB as a necessary encouragement for these entrepreneurs to approach IDB for funds to improve their operations. It is not possible to assess the suitability of this relatively low rate before more is known about the cost of operating this program, the risks involved and the appropriate form and level of sub- sidy. These entrepreneurs, because they generally have assets of less than JD 5,000, do not qualify for the incentives under the Encouragement of In- vestment Law, and IDB and the Government point out that the lower interest rate can therefore be seen as a form of compensation for this exclusion. It is not clear why that Law establishes a minimum asset size for qualification. It is also unknown whether the incentives available under the Law for larger enterprises would be of significant benefit to these entrepreneurs or whether other incentives should be made available. Answers to these questions may emerge as IDB gains more experience with this subsector. 4.12 IDB is experimenting with a very simplified appraisal procedure for these loans. Basically it seeks to establish what assets the enterprise cur- rently has and what additional machinery is needed. As few of these clients keep records, financial statements are usually not available. IDB attempts to make simple financial projections on the basis of discussions with the client. 4.13 IDB is trying to determine what technical assistance these clients need and how IDB can best provide it. IDB does help these entrepreneurs to select appropriate machinery and to ensure that the price is competitive. It tries to visit each of them to see if there are difficulties in obtaining labor or raw materials. It has determined that financing raw materials is often a problem for these clients. While suppliers' credit is sometimes  - 19 - available, the only other sources of credit are family or friends or through advance payments from customers. Commercial bank financing is rarely avail- able as the clients are unknown and the amounts involved small. IDB has so far not provided raw material financing but has the matter under review. 4.14 IDB has established a separate division to handle this program. At the end of 1975 only one staff member was involved full time but IDB intends to recruit an engineer/technician to assist him. IDB is keeping the funding of this program separate from its regular activities. KfW has agreed that the interest differential fund established with its first loan will be used to help finance the program. Similarly, the Kuwait Fund has agreed that the interest differential fund to be established with its second loan will also be used for this purpose. The amounts to become available from these two sources are expected to be relatively small (about $100,000 equivalent per year over the next few years). In addition, the Government has made one small grant for the program and has indicated its intention to provide addi- tional yearly grants of JD 100,000 ($303,000 equivalent). The Central Bank recently announced its intention also to provide yearly grants of JD 100,000. Finally, if the above funds are inadequate, TDB can borrow funds from the Central Bank at a preferential rate of 4% against the promissory notes of its small scale clients. These funds are currently included in IDB's own balance sheet (grants as liabilities, offset by the small scale industry loans as as- sets). However, they will be accounted for independently of IDB's balance sheet as a managed fund in the future. 4.15 It is IDB's intention that the cost of operating this program should also be covered from these same sources, as it will not be self-sup- porting. However, it has not yet determined what this cost is and has there- fore not separated it from its regular operating budget. It will do so as it gains more experience with the program. 4.16 While all principal repayments and interest payments have so far been made on time, it should be recognized that the risk of unrecoverable loans is probably higher under this program than with IDB's normal lending as appraisals cannot be done with the same thoroughness and supervision of indi- vidual loans cannot be as intensive as for larger loans. Because the funding for this program is presently on a grant basis, though, each loan is effec- tively fully reserved against and any bad debts will not affect IDB's credit- worthiness. This is an appropriate approach until more experience has been gained with the debt service performance of these small scale entrepreneurs and, on this basis, adequate levels for bad debt provisions can be estimated. 1/ 4.17 IDB has not yet decided on the best way to institutionalize this effort. It may prove to be more appropriate to establish this progran as an affiliate or a subsidiary of IDB instead of as an internal division. Pos- sibly a separate institution altogether may be preferable. TDB has still to determine what role, if any, cooperative societies have to play in this ef- fort, or whether special industrial estates would be useful. 1/ Grant funds are also needed to cover the operating costs not covered by interest incone.  - 20 - 4.18 IDB anticipates that it will need at least a year and a half to two years of experience with this program before the needs, prospects and constraints are clear. By the end of 1976 it expects to have made some 200 loans and to be in a better position to see how best to proceed. In the meantime there is ample support for this pioneering effort within Government and elsewhere as it is recognized that it is needed to raise the skills, pro- ductivity and income levels of this group of entrepreneurs. 4.19 The Bank Group can become associated with IDB's initiative by pro- viding some of the resources to be lent to small scale entrepreneurs; this would ensure that the Bank Group becomes intimately involved with the program and gains, with IDB, the maximum possible knowledge of this subsector. This should provide a basis for future Bank Group assistance to this subsector, both in Jordan and elsewhere. 4.20 It is proposed that $300,000 of the proposed credit be earmarked for this program, to be committed over the two-year period July 1976 to June 1978. This amount represents one-half of the amount to be made available by the Government during this period and should be sufficient to provide the Bank Group with an opportunity to influence the direction of the program. It represents, however, only about 20% of the total amount to be made available to the program from all sources. These funds would be made available by the Government to the program as a grant in recognition of the higher cost and risk associated with these loans than with IDB's normal lending activity (see paragraph 4.16). Once experience has been gained with the debt service per- formance of these clients, consideration can be given to different methods of funding the program. 4.21 In view of the large number of small loans that will be made from this portion of the proposed credit, prior approval of each loan would be im- practical. Instead the program as a whole will be closely monitored. Dis- bursements will be made periodically on a reimbursement basis and will cover 20% of IDB's total disbursements, in line with the proportion of funds being provided by IDA. The IDA funds will be available only to cover part of the cost of machinery and tools, not to cover part of the administrative cost of the program which can be covered by the other available funds. Disbursements will be made against a certificate of expenditure provided by IDB. Support- ing documentation such as purchase invoices will not be submitted for review by the Association, but will be retained by IDB and be available for inspec- tion by the Association during the course of supervision missions. 4.22 So far most of the machinery and tools for this program have been imported by local agents specifically for the projects involved against im- port licences obtained by the entrepreneurs. As the program expands, however, these agents are likely to begin to stock the more standard items in anticipa- tion of demand. The foreign exchange component will, in any event, remain high, certainly well above the 20% to be financed from the proposed credit. 4.23 To place the Bank Group in a position to study the program and at the same time to help and advise IDB as appropriate, Bank Group supervision of this program will be especially intensive. This will take the form of  - 21 - more extensive reporting than normal as well as frequent visits to Jordan. A sample of appraisal reports (every tenth one) will be translated and for- warded to Washington. Quarterly summary reports covering such areas as ap- plications received, approved and rejected, amounts disbursed, repayment ex- perience, problems detected, technical assistance provided, operating costs, etc. will be prepared and sent to Washington. 4.24 The Government, IDB and the Chambers of Commerce have expressed an interest in having an interdisciplinary study of these entrepreneurs carried out to cover such topics as their existing markets and how market outlets might be improved, their impact on urban development, their need for services such as water and power, and appropriate tax and other incentives. Such a study would provide direction as to how IDB's program should evolve over the years to best meet the needs of this subsector. 4.25 IDB and the Faculty of Economics and Commerce at the University of Jordan have prepared a proposal for this study. It will be based on a struc- tured questionnaire and interviews with a random sample drawn from the almost 7,000 small scale enterprises. Students at the Faculty will carry out the field investigation under the supervision of faculty members and IDB. The sample will be selected with the assistance of the Government's Department of Statistics which carried cut the 1975 industrial census. The approach being taken is pragmatic and the results will be operationally oriented. As this study will also be of benefit to the Bank Group by increasing the available knowledge of this subsector, it is proposed that up to $25,000 of the pro- posed credit be earmarked to cover the cost of this study, both the local cur- rency and foreign exchange component. IDB's and the University's preliminary estimate is that this study should cost about $20,000. Economic Impact 4.26 The Government estimates that some JD 45 million was invested in the manufacturing and mining sectors during the Three-Year Plan period, sub- stantially exceeding the JD 26 million called for in the Plan. Part of this excess, of course, reflects the sharp increase in the price of imported cap- ital goods. More striking was the investment by the private sector in medium and small industrial enterprises, estimated at about JD 31 million or two- thirds of the total. This was well above the Plan target of JD 14 million. 4.27 IDB's role in achieving this higher than expected industrial invest- ment was large. It is estimated that during the three years of the Plan IDB assisted projects accounting for some 75% of private investment in medium scale industry. Though its tourism activities are quite small compared to its industrial investment, IDB still plays an important role in this sector. It is estimated that IDB was associated with perhaps 90% of the investment in hotels and related tourism oriented enterprises during the Plan period. As discussed in paragraph 2.33 IDB provided on average about 30% of the funds required by the projects it assisted in the industrial and tourism sectors.  - 22 - 4.28 About a third of the industrial enterprises IDB assisted during the Plan period intend to export at least a part of their production. As al- ready noted, medium scale industry in Jordan is able to compete in neighbor- ing countries to a surprising degree. While IDB has not yet begun to calcu- late the IERR of its projects, it has calculated the IFRR on some. These rates of return have in general been more than satisfactory (see paragraph 2.11). As noted in paragraph 3.23, these calculations can be considered a reasonable approximation for the IERR. On this basis IDB's projects generally appear well justified. 4.29 Employment created by projects assisted by IDB was fairly substan- tial in relation to the size of employment in the industrial sector (see Annex 3). As an example, in 1974 the 28 industrial projects IDB assisted ac- counted for the creation of 691 new jobs and the nine tourism projects for the creation of 194. The average cost per job created was JD 8,800 ($26,700 equivalent) for new projects and JD 7,300 ($22,100 equivalent) for expansion projects, which is not excessive given the relative sophistication of the Jordanian industrial sector. 4.30 The economic impact of IDB's SSI&HP is difficult to measure at this early stage. One can anticipate, however, that it will be of significance in reducing the level of underemployment in urban and other areas and in raising the productivity and hence the earning oportunities of this group of entrepre- neurs. This experimental program, designed specifically to reach the long neglected informal sector and to reduce economic dualism, is also expected to generate intangible benefits in that experience gained from it can be drawn upon for a possible expansion of the program in Jordan as well as for similar efforts in other countries. V. IDB's FINANCIAL SITUATION Resource Position 5.01 Until 1974 IDB's resources were dominated by equity. It had re- ceived a small loan in 1970 from the Government and had borrowed small amounts from the Central Bank. It had also begun to draw down its first foreign line of credit, granted by the KfW in 1972. Nevertheless, its debt represented less than half of its equity at the end of 1973. During 1974, it began to draw more heavily from the Central Bank and, during 1975, also began to draw down two additional foreign lines of credit, a second KfW loan (granted in 1974) and a first loan from the Kuwait Fund (1974). As a result, its debt exceeded its equity during 1975, the ratio at the end of 1975 being 1.3. 5.02 IDB's present resource position is described in Annex 15. Though the amount currently available for commitment appears quite small, IDB has recently obtained a second loan from the Kuwait Fund amounting to JD 2.75 million equivalent and expects to negotiate a third loan from the KfW in the near future. It also is able to borrow from the Central Bank.  - 23 - 5.03 It is the Government's and IDB's stated policy that IDB should use its local currency resources only to finance local purchases and to draw on foreign lines of credit to finance foreign purchases. This is in order to preserve foreign exchange available to the country for expenditures not covered by specific foreign resources. Such expenditures on projects in- cluded in the Five-Year Plan are likely to absorb all the foreign exchange that becomes available for investment in the economy through unrequited trans- fers, workers' remittances, etc. IDB has not been able to adhere completely to this policy in the past as available foreign lines of credit were insuffi- cient to meet its clients' demand for foreign exchange. Instead it has had to use some of its local currency resources to cover foreign purchases. IDB intends to follow this policy as closely as possible in the future, however. 5.04 IDB has not attracted funds directly from the Jordanian public (ex- cept its preference share capital), though it is empowered by its Law to ac- cept deposits and to issue bonds. It has not accepted deposits as it has not wished to compete with the commercial banks, many of whom are important shareholders. It has not issued bonds as the cost would be higher than that of borrowing from the Central Bank. Quality of Portfolio 5.05 Details of IDB's loan portfolio are given in Annex 16. Over 40% of the principal outstanding is for loans which are still in their grace period. This reflects the upsurge in IDB's business in the past three years. Almost 40% of the amount outstanding is being repaid according to the originally agreed schedules and 6% according to revised schedules. 5.06 Some 9% of the outstanding portfolio represents loans made to proj- ects on the West Bank before the 1967 war that have since been frozen. In- terest receivable on these loans has been fully reserved against. None of the principal has been written off. Almost half of this amount was transfer- red to IDB as part of the Government's equity contribution when IDB was estab- lished; these were loans made by the old Industrial Development Fund. IDB is considering asking Government to reassume responsibility for these loans. Of the West Bank loans that IDB itself made, most are for hotels in Jerusalem. IDB considers these loans sound and collectable once a political settlement is reached. 5.07 Seven borrowers on the East Bank account for all of the arrears over three months. Two companies are in arrears for less than six months and are experiencing only temporary problems; the arrears are expected to be paid off shortly. The remaining five companies with loans representing 3.7% of the portfolio have been in arrears for over two years and are experiencing serious trouble. Two received small loans from IDB's predecessor; one of these will be written off while the other is being repaid slowly. A third company is suffering from over-indebtedness due to a period of poor manage- ment. IDB is applying pressure to this borrower and expects its loan to be fully repaid. A fourth company with two loans totalling JD 20,000 outstand- ing is experiencing severe managerial and marketing problems. It is likely that the company will be wholly or partly liquidated so that its creditors can be paid off; IDB anticipates no loss.  - 24 - 5.08 The fifth company, Aqaba Hotels Company, is IDB's main worry. It has received three loans, all of which are still outstanding, totalling JD 170,000 or 3.1% of the portfolio. The project is a tourist hotel at the port city of Aqaba. The 1967 war seriously delayed the completion of construction, and the 1970 disturbances as well as the general situation in the Middle East have had, until recently, an adverse affect on tourism. In addition, the hotel has suffered from such problems as a sporadic water supply, frequent loss of electric power and difficulties in retaining a good labor force. With the revival in tourism the hotel's occupany rate is improving and now averages 50-60%. However, a backlog of maintenance work still absorbs much of the com- pany's cash flow and it has been unable to make more than token payments to IDB. IDB has been in touch with the Government, which owns 49% of the paid-in share capital, to try to arrive at a solution. It is optimistic that one can be found. As IDB has a first mortgage on the company's water front property, the value of which greatly exceeds IDB's loans, no loss is anticipated. 5.09 On balance, IDB's East Bank portfolio can be considered sound and well secured. The soundness of the West Bank portfolio is more problematical, though it is steadily becoming less significant as IDB's East Bank lending grows. IDB's provision for losses totals JD 169,000 or 3% of its East and West Bank loan portfolio. If reserves are included, the percentage increases to 8%. This is a satisfactory position. Financial Performance and Position 5.10 IDB's financial statements for 1971-75 and relevant ratios are pre- sented in Annex 17. Net profit represented a return of only 5.3% on average shareholders' equity during 1975, an improvement over prior years but still low. This rather poor picture is the result of IDB's low leverage and the fact that IDB realizes no income from its West Bank portfolio. Were this in- come to have been available, net profit would have been 8.3% of average share- holders' equity. 5.11 Financial expenses are increasing as IDB is beginning to use loan resources more extensively. The total, though, at 2.5% of average total. as- sets, is still modest. Administrative expenses are also increasing, both ab- solutely and as a percentage of average total assets (1.7%). This reflects the increase in IDB's staff. The level of these expenses, however, is not out of line with other comparable DFCs. In spite of its low level of profit- ability IDB has still been able to pay a satisfactory dividend to its prefer- ence shareholders. 5.12 IDB's balance sheet indicates a healthy position. With a debt- equity ratio of only 1.3 IDB has the capacity to carry substantially larger amounts of debt. Its current ratio has been maintained at around 3:1. The overall picture reflects the rather conservative approach taken during IDB's formative years when a solid basis was being established for IDB's future growth. In view of its sound financial position, as well as its strong man- agement and staff and its good operating procedures, IDB is creditworthy for the proposed lending operation.  - 25 - Audit 5.13 IDB's accounts are audited by Saba & Company, a Jordanian account- ing firm associated with Arthur Anderson. This firm also audits the accounts of the Central Bank and a number of commercial banks, including the Arab Bank. Its opinion in IDB's published accounts has noted since the 1967 war that it has been unable to obtain confirmation from West Bank borrowers of the amounts that they owe IDB but that it has satisfied itself through other procedures that these amounts are fairly stated; otherwise its opinion has been unquali- fied. 5.14 The accounting standards followed in Jordan do not require the ex- tent of disclosure required in other countries. IDB's published accounts re- flect this; for example there are no explanatory notes to the financial state- ments. Saba & Company have indicated that it would prefer more disclosure in published accounts and is working to upgrade this and other accounting stand- ards in Jordan. IDB has also indicated that it would have no objection to more disclosure in its published accounts, provided that this does not con- flict with the secrecy stricture in its Law and that the West Bank situation is dealt with with sensitivity. 5.15 Saba & Company is familiar with the Bank Group's long form audit requirements for DFCs and has indicated that it could comply with these re- quirements with little additional work. IDB has undertaken to have a long form audit prepared in the future. VI. PROSPECTS The Environment 6.01 The prospects for continued economic development in Jordan are reasonably bright. The Government's "Five Year Plan for Economic and Social Development, 1976-1980" was published in December 1975. This Plan places high priority on the productive sectors of the economy and on such social changes as a more equitable distribution of income. It calls for increasing GDP by 12% annually, and commodity exports by 24% annually. Total investment envisaged by the Plan is JD 765 million (over $2.3 billion equivalent) over the five year period. This level of investment would represent 36.4% of ex- pected GDP, versus the 32% level attained during the Three-Year Plan. Al- though an investment program of this size may somewhat exceed the available physical, human, administrative and financial resources of Jordan, the rela- tive sectoral emphasis of the investment program seems well placed and the bulk of projects appears to be of high priority. 6.02 The Industrial Sector. The Plan calls for the industrial (includ- ing mining) sector's contribution to GDP to grow from the 1975 level of 15.6% to 28.3% in 1980. Income from this sector is expected to grow 26.2% annually.  - 26 - Though the demands on this sector are large, the dynamism it displayed during the Three-Year Plan suggest that it may well meet these targets. However the evolution of the price for rock phosphate, which decreased recently from its 1975 peak, will play a crucial role in the final outcome. 6.03 Investment in this sector is expected to total JD 229 million (al- most $700 million equivalent) during the Plan period or 30% of total invest- ment (22% for manufacturing industries and 8% for mining). The bulk of this investment is expected to be in a relatively few, large scale projects which have strong Government support. These include a phosphate fertilizer project (JD 61 million) 1/, expansion of the oil refinery (JD 39 million), additional phosphate production (JD 32 million) 1/, potash extraction (JD 25 million) 1/, and a new cement plant (JD 21 million). Implementation of several of these projects has already begun. IDB will have only a very limited role to play in financing these investments. 6.04 The private sector is expected to invest some JD 35 million in medium and small scale industries. Based on the performance during the Three- Year Plan and on existing license applications, this target appears realistic, if not conservative. It is in this area that IDB will play a very large role. The Plan anticipates that of this total JD 14 million will be invested to ex- pand existing medium scale industries, JD 12 million to establish new medium scale industries and JD 9 million to establish new and to expand existing small scale industries. 6.05 As noted earlier, the industrial sector is operating at close to capacity. New investment to expand capacity will be needed to meet the grow- ing demands for construction materials and consumer goods in neighboring Arab countries, as well as in the smaller domestic market. The Jordanian indus- trialist has demonstrated his ability to identify export opportunities and to exploit them. The smaller enterprises have been especially successful in this regard as they have the flexibility to give personal attention to cus- tomers' orders and to provide quick delivery. With the strengthening of Jordan's links with its partners in the Arab Common Market, and with other Arab countries through bilateral trade agreements, export opportunities will grow. The Five-Year Plan envisages a target of JD 71 million in 1980 for manufacturing exports, including JD 40 million from fertilizer and JD 31 mil- lion from other manufactured goods. Compared to the 1975 figures of JD 16 million and given Jordan's expanding share in the Arab Common Market, this target for other manufactured exports could well be exceeded. 6.06 One of the specifically identified projects in the Plan is the es- tablishment of several industrial estates. While much of the cost would be met by the Government, IDB is expected to develop and manage these estates. Their creation is seen as one way to encourage the geographical dispersion of 1/ These projects are being reviewed for possible Bank Group assistance.  - 27 - industrial development away from the Amman-Zerka area. Plans for an estate south of Amman are well advanced and the Plan mentions Zerka, Irbed, Salt and Aqaba as other potential sites. IDB intents to embark on this activity cau- tiously, beginning with the estate south of Amman (see paragraph 7.01). 6.07 The Plan also envisages simplifying the industrial licensing proce- dure to make it easier to establish a new business and improving the Encour- agement of Investment Law to provide more incentives to industrialists, espe- cially exporters (though still not to the smallest entrepreneurs). A new draft of the Custom Tariffs Law, presently under discussion between various government agencies, would fully exempt from import duty all machinery and raw materials. This would enable Jordan's manufactured products to compete under fairer conditions with Arab countries' goods made from tax exempted raw materials and then imported duty-free to Jordan under either bilateral agree- ments or the provisions of the Arab Common Market. Improvements in these areas can only add to the already positive business climate in Jordan. 6.08 The Tourism Sector. Given its growing importance to the economy, tourism has been given high priority in the Five-Year Plan. Investments in the sector are high, projected at roughly JD 18 million for the Plan period. Of this about one-third is to be invested in a number of specific projects supported by the Government with the private sector being expected to invest the remaining two-thirds in unspecified projects. With the recent resurgance in tourism, coupled with the planned development of the two historic sites at Petra and Jerash, to the financing of which a proposed IDA credit of $6 mil- lion would contribute, and the further development of Aqaba as a tourist re- sort, these targets appear feasible. IDB can be expected to be associated with a good part of the expected private sector investment, though its finan- cial involvement in tourism projects will probably remain a small fraction of its total business. Operations 6.09 Annex 18 presents IDB's operational and financial projections for the five-year period 1976-80, as well as the major assumptions underlying the projections. The forecast of loan approvals for 1976 is based on IDB's pipe- line of projects and on IDB's capacity to process projects (basically a man- power constraint). Loan approvals forecast for future years assume an aver- age growth in current prices of about 19% p.a., less than the growth exper- ienced in recent years but reasonable in light of the Five-Year Plan and IDB's future staffing forecast. The forecast assumes that 80% of loan ap- provals will be for foreign purchases, thus requiring foreign exchange re- sources; this is based on past experience. As in the past, loans are ex- pected to have terms ranging between five and ten years, with an average life of about seven. 6.10 The forecast of equity investments is at a notional level of JD 100,000 a year. This might be substantially higher if IDB gets heavily in- volved in promoting new projects. The projected operations in Annex 18 do not include small scale industry and handicraft loans as these will be fi- nanced from separate resources.  - 28 - 6.11 IDB has not attempted to separate its forecast operations into in- dustrial and tourism projects. It anticipates that, as in the recent past, some 10% of its financing will be directed to the tourism sector. Total dis- bursements during the five years are forecast at JD 17.1 million. This re- presents about one-third of the investment expected in the Plan to be made by the private sector and is similar to IDB's experience during the Three-Year Plan. Resource Requirements 6.12 IDB expects to be able to continue to rely on borrowing all of its local currency requirements from the Central Bank. As noted in paragraph 5.03, it is the Government's and IDB's policy to have IDB cover foreign pur- chases with foreign lines of credit. IDB's present foreign lines of credit will be fully committed by mid-1976. It has recently received a second loan from the Kuwait Fund amounting to about $8.3 million equivalent. With this new loan its foreign exchange requirements through June 1976 are covered. 6.13 During the two-year period July 1976 to June 1978 IDB forecasts that its commitments for foreign currency loans will total about $14.4 mil- lion equivalent. For the purpose of these projections it has been assumed that IDB will receive a third loan from the KfW toward the end of 1976 equi- valent to about $4 million (twice the amount of the second loan). With most of the second Kuwait Fund loan still available for commitment, the gap in for- eign exchange resources for this two-year period is about $3.7 million, the size of this component of the proposed IDA credit. This would represent about 25% of IDB's foreign exchange commitments during this period. Financial Prospects 6.14 Projected financial statements for the five years 1976-80 are given in Annex 18. Interest income is expected to grow rapidly, reflecting the growth in the outstanding loan portfolio. It is also expected to grow as a percentage of the portfolio as IDB's lending rate has recently been increased to 9% p.a. from the earlier 8% p.a. Interest expense will also grow rapidly as IDB relies more and more on borrowed funds. As the average cost of these borrowed funds is assumed to be only 6.5% p.a., reflecting a mix between rela- tively expensive money such as the proposed Bank Group loan and more conces- sionary funds such as the KfW and Kuwait Fund loans, the return on equity is forecast to improve. 6.15 IDB intends to continue increasing the dividend paid on preference shares until it reaches 10% (in 1977). The payout ratio, however, will drop steadily and the build up in reserves is forecast to be at a satisfactory rate. No dividend is forecast to be paid on ordinary shares, which is accept- able to the Government. 6.16 The debt/equity ratio is forecast to grow steadily, but not to ex- ceed 4 to 1 during the five years. No share capital increase is assumed in the projections. Interest coverage is expected to average about to 1.5 times  - 29 - during the period. Total debt service coverage during the five-year period is forecast to be satisfactory with loan collections exceeding by a substan- tial margin repayments on borrowings. VII. THE CREDIT - ITS OBJECTIVES, JUSTIFICATION AND FEATURES 7.01 IDB has prepared a strategy statement outlining the objectives it hopes to achieve during the Five-Year Plan period; it is attached as Annex 19. These objectives are in line with the overall objectives of the Five-Year Plan. There are six main ones: (a) To continue to meet the growing demands for finance from its traditional customers. In doing so, IDB will try to encourage more coordination and linkage between industries within the sector and between the industrial sector and other sectors in the economy. (b) To put more stress on export oriented industries. (c) To attempt to bring about a better geographical distribution of industry. Specifically, IDB will, in cooperation with the Government, establish an industrial estate 25 km south of Amman (outside of the heavily industrialized Amman-Zerka area). From the experience gained with this project IDB will consider estab- lishing additional industrial estates in other parts of Jordan. (d) To expand the SSI&HP, including the provision of technical assistance. (e) To become active in identifying and promoting projects, leading to an expansion of its equity participation activities. (f) To establish a management training center to improve the managerial capabilities of Jordanian entrepreneurs. 7.02 These are important objectives and worthy of Bank Group support. With regard to the first two, IDB has proven itself an effective institu- tional source of financial and technical assistance for medium scale industry in Jordan. This subsector has demonstrated its export earning and import substitution ability and potential. Similarly, the tourism sector is begin- ning again to become an important foreign exchange earner. Both have pro- vided the people involved with opportunities to upgrade their entrepreneural skills and incomes, thereby reducing the incentive to emigrate. 7.03 The objectives of establishing an industrial estate, promoting new projects and establishing a management training center represent new activi- ties for IDB. By becoming associated with IDB at this time through a lending  - 30 - operation the Bank Group will have an opportunity to assist IDB in these en- deavors. Both IDB and the Government have expressed a desire for this assist- ance. 7.04 The most challenging objective may well be the expansion of the SSI&HP, still very much in the experimental stage. While IDB has learned a good deal already, much more experience is needed to understand how best to assist these entrepreneurs, both financially and, more importantly, tech- nically. 7.05 The support that the Bank Group can provide IDB in meeting these several objectives is, on the one hand, by helping to meet IDB's foreign ex- change resource needs and, on the other, by providing technical assistance to IDB. During the two-year period July 1976 to June 1978 IDB will have a for- eign exchange resource gap relating to its medium scale industrial lending of about $3.7 million equivalent which the proposed credit will fill. On the technical assistance side IDB is aware that its appraisal work, while on the whole quite good, can still be improved, and that its supervision work needs strengthening. It looks to the Bank Group for help in achieving these im- provements. Equally important, IDB wants to be able to draw on the Bank Group's experience as it embarks on the new activities of promoting projects and establishing an industrial estate and a management training center. 7.06 The SSI&HP presents a different opportunity to the Bank Group. Here the objective is not so much to provide financial assistance (the needs are still small) or technical assistance. Rather, as the Bank Group itself is only beginning to gain exposure to and experience with this type of entre- preneur and project, an association with IDB's program should provide the Bank Group with excellent first hand knowledge of what the needs of these entrepreneurs are, and how best to meet them. The proposed study of this subsector should provide a wider and fuller context in which to view and understand the results of IDB's program. This experience, in turn, will provide insights which could be helpful for future Bank Group assistance to this subsector, both in Jordan and elsewhere. 7.07 The proceeds of that part of the proposed credit earmarked for IDB's normal medium scale industrial and tourism lending ($3,675,000) will be lent to IDB by the Government on normal Bank terms and will be utilized by IDB to meet the foreign exchange cost of directly imported goods and services. IDB will relend these proceeds at an interest rate of at least 9% p.a. and for a period of no longer than fifteen years. The amount relent to an indi- vidual project will be limited to a maximum of $500,000. The free limit will be $150,000 and the aggregate free limit, S1.8 million; this should result in between ten and twelve projects being submitted to the Bank Group for review and approval, an appropriate number. As the foreign exchange risk will be borne by ,he Government and as IDB's management has indicated its ability to handle funds well, this part of the credit will be repaid to the Government in accordance with a f-xed amortization schedule.  - 31 - 7.08 The proceeds of that part of the proposed credit earmarked for IDB's SSI&HP ($300,000) will be made available to IDB by the Government as a grant and will be utilized by IDB to cover 20% of the loans it makes to these clients. It will not be utilized to cover any part of the operating cost of this program. IDB will relend these proceeds on its usual terms for loans of this type; no prior approval by the Bank Group will be needed for their com- mitment. 7.09 The proc,eds of that part of the proposed credit earmarked for the study of the small scale industry subsector (up to $25,000) will be used by the Government to cover the cost, both local and foreign, of the study. 7.10 The estimated disbursement schedule for each of the three compo- nents of the credit is shown in Annex 20. Amounts earmarked for one compo- nent will be reallocatable to another component if, after consultation with IDB and the Government, this should prove desirable. Given IDB's strong financial position and debt carrying capacity, IDB's debt-equity ratio limit will be set at 4 to 1. The usual definitions of debt and equity will apply. Other terms of the credit will be those normally applied to DFC borrowers. VIII. RECOMMENDATION 8.01 The project is suitable for an IDA credit of $4.0 million on the usual terms, to be utilized as outlined in paragraphs 7.07-7.10.   BASIC DATA ON INDUSTRIAL DEVELOPMENT BANK of JORDAN Year of Establishment: 1965 Ownership (as of December 31, 1975) JDs Percent Jordanian Government 1,110,000 49.5 Jordanian commercial banks 209,000 9.3 Other Jordanian shareholders 454,217 20.3 Total Jordanian 1,773,217 79.1 Foreign shareholders 468,500 20.9 Total 2,241,717 100.0 Resource Position (as of December 31, 1975) (in JD 000's) Equity 2,496.3 Government loan 112.5 Central Bank loan 1,992.9 Foreign loans 2,096.1 Total Resources 6,697.8 Outstanding loans 5,232.8 Outstanding investments 295.2 Total Portfolio 5,528.0 Resources Available for Disbursement 1,169.8 Commitments of Loans and Investments 1973 1974 1975 (in JD 000's) Loans for domestic purchases 121.5 303.5 413.0 Loans for foreign purchases 1,344.8 1,533.7 1,688.6 Equity investments 237.5 - 58.8 Totals 1,703.8 1,837.2 2,160.4 Loans and Investments Disbursed 849.7 1,324.9 2,230.7  -2 Earnings Record (percentages) 1973 1974 1975 Profit before tax and provisions to average total assets 5.6 5.2 4.3 Profit before tax and provisions to average equity 7.2 8.1 8.9 Net profit to year-end share capital 4.6 5.2 5.9 Dividends paid to preference shares 7.0 7.5 8.0 Dividends paid to ordinary shares 0 0 0 Financial Position (as of December 31, 1975) Total debt/equity ratio 1.4:1 Long-term debt/equity ratio 1.3:1 Reserves and provisions to loan and investment portfolio 7.5% Interest Rates and Charges (as of December 31, 1975) Interest rate on loans 8.0% 1/ Commitment charge 0.5 - 1.0% Interest rate on small scale industry and handicraft loans 7.0% 1/ Since raised to 9.0%,  ANNEX1 INDUSTRIAL DEVELOPMENT BANK of JORDAN Industrial Production Index (East Bank Only) Year Index 1966 Base 100 1967 91.1 1968 92.7 1969 110.8 1970 95.9 1971 113.7 1972 139.1 1973 152.9 1974 162.3 1975 173.9 Source: Department of Statistics, GOJ April 1976  ANNEX 2 INDUSTRIAL DEVELOPMENT BANK of JORDAN Distribution of Establishments in the Industrial Sector By Principal Cities Mining Manufacturing Cities No. Est. No. Emp. No. Est. No. Emp. Amman 72 2341 450 9534 Zarqa 11 90 26 1110 Irbid 24 196 12 98 Salt 3 22 3 179 Karak 4 51 1 17 Ma'an 0 0 0 0 Aqaba 0 0 0 0 Total 114 2700 492 10938 Source: Department of Statistics, "Employment Survey for Establishments engaging five persons or more," April 1974. December 1975  ANNEX 3 INDUSTRIAL DEVELOPMENT BANK of JORDAN Distribution of Establishments in the Industrial Sector By Size of Employment Mining Manufacturing Size of No. No. No. No. Employment Estab. Employ. Estab. Employ. 5-9 65 388 231 1,243 10-24 47 519 185 2,379 25-49 0 0 42 1,392 50-99 1 86 17 1,065 100-199 0 0 10 1,359 200 or more 1 1,707 7 3,500 TOTAL 114 2,700 492 10,938 Source: Department of Statistics, "Employment Survey for Establishments Engaging Five Persons or More," April 1974. December 1975  ANNEX 4 INDUSTRIAL DEVELOPMENT BANK of JORDAN Domestic Exports (in JD 000's) 10 months 1970 1971 1972 1973 1974 1975 Phosphate 2,237 2,238 3,497 4,020 19,531 15,048 Cement 320 471 1,922 1,296 4,078 1,650 Cigarettes 519 368 398 546 711 555 Wet Batteries 304 335 433 409 495 87 Textiles 128 319 143 429 990 n.a. Leather & Products 169 238 383 260 272 n.a. Paper-board 241 227 227 327 436 n.a. Medical and Pharmaeutical Products - - 255 549 901 n.a. Sub-total 3,918 4,196 7,258 7,836 27,414 n.a. Agricultural Exports 2,939 2,173 2,218 2,727 6,080 n.a. Other Exports 2,463 2,448 3,130 3,447 5,943 n.a. Total 9,320 8,817 12,606 14,010 39,437 32,198 Source: Department of Statistics, GOJ April 1976  ANNEX 5 INDUSTRIAL DEVELOPMENT BANK of JORDAN Visitors Arrivals by Region 1966-1975 (thousands) Arab Other M.E./Asian European American Other TOTAL Year Visitors (Non-Arab) Visitors Visitors Visitors Visitors Visitors 1966 366.6 75.2 100.9 63.7 10.4 616.8 1967 262.9 79.1 53.5 24.0 6.1 425.6 1968 279.4 75.6 15.0 3.6 1.8 375.4 1969 271.5 44.4 15.9 5.8 2.2 339.8 1970 223.4 77.0 14.5 4.6 2.2 321.7 1971 223.1 14.6 12.2 4.7 2.1 256.8 1972 244.0 17.4 19.4 8.4 3.0 292.0 1973 258.6 17.0 19.1 9.8 3.3 307.8 1974 350.0 149.1 29.5 21.0 5.3 554.9 1975 427.0 3740.0 767.0 .1/ Estimates for the full vear based on arrivals for the first ten months. Sourcet fepartaent of Statistics, GOJ ADril 1976  ANNEX 6 INDUSTRIAL DEVELOPMENT BANK of JORDAN Specialized Credit Institutions 1. Municipal and Village Loans Fund Established in 1966. It extends loans at 4-5.5 percent to road, electricity and water projects financed by municipal councils. It is totally owned by the government. 2. The Industrial Development Bank Established in 1965. It extends medium and long-term loans to private sector industrial enterprises at 8 percent interest. Owned by the government and the private sector. 3. Housing Agency Established in 1965. It builds housing units for sale to individuals who receive long-term credits from the Agency at 5% interest rate. Owned by the government. 4. Agricultural Credit Corporation Established in 1960. It extends medium and long-term credits for agricultural development projects including agricultural industries at 8% interest for short-term loans and at 6% interest for long-term loans (5-10 years). It has received two IDA credits in 1963 and 1967 totalling $6 million. It is totally owned by the government. 5. Jordan Co-operative Organization Established in 1968. There are about 750 co-operative societies in Jordan, each of which is a member of the Jordan Co-operative Organization. About a third of the co-operative societies are agricultural and the rest are in marketing and housing. It lends money to co-operatives at 6% interest, which in turn extend short-term credit to individual members at 8%. 6. Housing Bank Established in 1973. It extends credit to individuals, housing corporations, co-operative housing societies and construction companies for 1-15 years at 7-1/2-8-1/2 percent interest. Shares are held by the government and the private sector. EMENA/IC&DFC December 1975  AINNX 7 INDUSTRIAL DEVELOPMENT BANK OF JORDAN Interest Rates As of As of September 30, 1975 January 1, 1976 Central Bank: Rediscount Rate 5.0% n.c. 1/ Three Month Time Deposits 4.0% n.c. Deposits Subject to Notice 3.0% n.c. Commercial Banks: Overdrafts 7.0% - 9.0% 2/ 7.5% - 9.0% 2/ Bills Discounted 6.5% - 9.0% 2/ 7.5% - 9.0% 2/ Sight Deposits 4.0% - 6.0% 5.0% - 6.5% Savings & Time Deposits 4.0% - 6.0% 5.25% - 7.0% Post Office Savings Fund 5.0% 3/ n.c. Industrial Development Medium scale Enterprises 8.0% 4/ n.c. Bank: Small scale Enterprises 7.0% n.c. Agricultural Credit Short Term 8.0% 4/ n.c. Corporation: Medium & Long Term 6.0% n.c. Jordan Cooperative To Cooperatives 6.0% n.c. Organization: To Individuals 8.0% n.c. Municipal & Village To Municipals for 10 years 5.5% n.c. Loan Fund: To Villages for 15 years 4.0% 4.5% Jordan Housing 5.0% n.c. Corporation Housing Bank 7.5% - 9.0% n.c. Government Instruments : Treasury Bills (3 months) 4.9T 3/ n.c. 4 year Construction Bonds due 1975 7.0% 3/ n.c. (issued 1971) 5 & 6 year Construction Bonds due 6.07 3/ n.c. 1977 & 1978 (issued 1972) 6 & 7 year Development Bonds due 7.5% 3/ 5/ n.c. 1979, 1980 & 1982 (issued 1973-1975) 8 year Development Bonds due 1983 (issued 1975): for subscription by individuals 8.0% 3/ n.c. for subscription by commercial banks 6.25% 3/ n.c. 1/ n.c.= no change by January 1, 1976 2/ The addition of service and other charges often results in an effective rate above 9.0% p.a. 3/ Tax exempt. 4/ Includes 1% service charge; since raised to 9% p.a. 5/ Plus a lottery every 6 months with cash prizes which adds about 0.5% p.a. to cost. Available for subscription by individuals only. Source: IDB April 1976  ANNEX 8 INDUSTRIAL DEVELOPMENT BANK of JORDAN Expected Real Financial Charges on Subloans To determ!ine the likely real cost of loans to IDB's medium scale borrowers, real financial charges were calculated under three different projections of inflation rates in Jordan. Loan terms were taken as 9.0% p.a. interest and thirteen equal semi-annual payments of principal and interest beginning at the end of the second year. Interest is paid during the grace period. Disbursements are assumed to be 75% at the beginning of 1976 and 25% at the beginning of 1977. The assumptions on inflation and the consequent real cost of loans to the borrowers are as follows: Assumed Inflation Low Middle High ( % change per year) 1976 9 12 15 1977 9 12 15 1978 8 11 14 1979 7 10 13 1980 6 9 12 1981 5 8 11 1982 4 7 10 1983 4 7 10 Real Cost (% p.a.) 1.2 -2.0 -5.1 Loans made in 1977 and later years would carry a larger real cost as the rate of inflation is expected to decrease. EMENA/IC & DFC April 1976  ANNEX 9 INDUSTRIAL DEVELOPMENT BANK of JORDAN List of Shareholders (as of December 31, 1975) No. of Shares Percent of Ordinary Shares Subscribed 1/ Total Jordan Government 1,110,000 49.52 Preference Shares Arab Bank 109,000 4.86 * Arab African Bank 100,000 4.46 * British Bank of the Middle East 100,000 4.46 * Grindlays Bank 100,000 4.46 Abdul Majid Shouman 2/ 90,200 4.02 * Arab Land Bank 50,000 2.23 Bank of Jordan 50,000 2.23 * Government of Qatar 50,000 2.23 Jordan National Bank 50,000 2.23 Jordan Petroleum Company 50,000 2.23 * Al-Shark Insurance Agency 25,500 1.14 * Irving International Finance Corp. 25,000 1.11 Jordan Cement Factories Co. Employee Provident Fund 25,000 1.11 Jordan Petroleum Co. Employee Provident Fund 20,000 0.89 Jerusalem Electric Co. 15,000 0.67 Arab Hotels Co. 10,000 0.45 Jordan Insurance Co. 10,000 0.45 Jordan Press & Covering Co. 10,000 0.45 Jordan Worsted Mills Co. 10,000 0.45 Shihadeh Twall 10,000 0.45 * Syrian Insurance Co. 10,000 0.45 Industrial Development Bank Employees Provident Fund 8,501 0.38 * Arabian Insurance Co. 8,000 0.36 Taher Shihabi 6,340 0.28 18 Shareholders each holding between 1,001 and 5,000 shares 46,268 2.06 47 Shareholders each holding between 501 and 1,000 shares 42,499 1.89 96 Shareholders each holding between 251 and 500 shares 40,091 1.79 137 Shareholders each holding between 101 and 250 shares 26,023 1.16 518 Shareholders each holding between 1 and 100 shares 34,295 1.53 Total Preference shares 1,131,717 50.48 Total Shares Subscribed 2,241,717 100.00 1/ Each Share has a par value of JD 1 2/ Chairman of Arab Bank * Non-Jordanian shareholders Source: IDB February 1976.  ANNEX 10 INDUSTRIAL DEVELOPMENT BANK of JORDAN Board of Directors (as of December .31, 1975) Represents Mr. Rouhi El-Khatib Chairman Preference Shareholders (Chairman, Arab Hotels Co. and ex-Mayor of Jerusalem) Mr. Hussein El-Kasem Vice-Chairman Central Bank of Jordan (Deputy Governor) Mr. Walid Asfour Chamber of Industry, Amman (President) Mr. Mohammed Bani Hani National Planning Council (Head, Financing Department) Mr. Mohammad Abdullat Ministry of Trade & Industry (Head, Insurance Division) Mr. Sa'ad Tell Preference Shareholders (General Manager, Jordan Petroleum Co.) Mr. Yousef Sindaha British Bank of the Middle East (Manager) Mr. Mahmoud Ala-Eddin Arab Land Bank (Manager) (vacant) 1/ Preference Shareholders 1/ Temporarily, due to death of previous incumbent. A new member will be elected at the Annual Meeting which will probably be held in May 1976. Source: IDB February 1976.  INDUSTRIAL DEVELOPMENT BANK OF JORDAN ORGANIZATION CHART (December 31, 1975) SHAREHOLDERS Staff: Professional BOARD OF Management = 2 DIRECTORS Division Heads = 4 Professionals (P) = 15 AUDITORS Total: = 21 S Others (0) MANAGER Secretary/Typists = 4 Ziyad Annab Accountants = 2 Administration = 3 General Services = 5 DEiPJTY Total: = 14 GENERAL MANAGER Rajab As-Saad LEGAL ADVISOR REAL ESTATE (part time) ASSESSORS ^ (part tzme) l | {~~~~~~~~part time) l ADMINISTRATIVE ACCOUNTING INVESTMENT TECHNICAL FOLLOW UP SMALL SCALE DIVISION DIVISION DIVISION DIVISION DIVISION INDUSTRY & Rajab As-Saad Farid Theodossy Ahmad El-Eid Tayseer Wahbeh S.K. Suleiman HANDICRAFT P=O 0=12 P=2 0=2 P=5 0=0 P=3 0=0 P=4 0-0 P-1 0-0 World Bank-1 5459   ANNEX 12 Page 1 INDUSTRIAL DEVELOPMENT BANK of JORDAN Investment Policy (Approved by the Board of Directors on October 11, 1965 as amended through August 10, 1974) 1. The amount of any loan granted to any industrial or tourist project shall not be less than JD l000.* 2. The Bank. shall not have a controlling interest in any project it finances or assume the responsibility of its management except when such control would secure IDB's investment in the project. 3. The Bank may not invest more than 25% of its paid in capital in equity participations. 4. The Bank may not extend loans to a project in which its equity subs- cription is equal to 50% of the total cost of the project. 5. The amount of loans, guarantees orequity participation in any project shall not exceed 10% of the paid in capital of the Bank plus its reserves and loans it obtained. 6. The amount of loans, guarantees or equity participation in any new project shall not exceed 50% of its total cost. In cases of expansion of existing projects each case would be considered on its own merits. 7. Loan applications to finance working capital will not be considered except in special cases. 8. Loans may not be sanctioned to any project unless it provides IDB with a detailed economical, financial and technical feasibility acceptable to the Bank. 9. Loans to any project may not be sanctioned except after investigating their books, accounts and records by a chartered accountant or by the Bank's accountants. 10. Loans to any project may not be sanctioned unless their capital structure is sound. Loans are granted against one or more of the following securities: a. An acceptable local or foreign bank guarantee covering the amount of loan and its interest valid until the date of final repayment of the loan & its interest. b. First mortgage on land or buildings provided that 75% of its estimated market value is accepted as security for the loan. In exceptional cases a second mortgage is acceptable.  ANNEX 12 Page 2 c. First charge on shares of local or foreign public share holding companies acceptable to the Bank. 70% of its nominal or market value which ever is lower is taken as security for the loan. d. First charge on governmental bonds issued by the government of the Hashemite Kingdom of Jordan on condition that its maturity date is not more than the maturity date of the loan. 70% of its nominal or market value which ever is lower is taken as security for the loan. e. Life insurance policies issued in Jordan or outside from insurance companies acceptable to the Bank on condition that their maturity date is not more than the maturity date of the loan. 70% of its paid premiums is taken as security for the loan. f. Promissory notes guaranteed by two persons acceptable to the Bank and according to the limits set up by the Board of Directors from time to time. * On January 30, 1975 a decision was taken by the Board of Directors to grant loans of less than JD 1000 and up to JD 2000 to small and handicraft industries. Source: IDB December 1975  ANN 13 INDUSTRIAL DEVELOPMENT BANK of JORDAN Summary of Operations: 1965 - 75 (JD 000's) 1965- 1965- 1970 1971 1972 1973 1974 1975 1975 Approvals Loans: For domestic purchases n.a. 1/ 46.0 360.5 121.5 307.6 461.0 n.a. For foreign purchases n.a. 234.5 580.0 1 345.8 1,627.4 1,975.6 n.a. Total loans 3,269.7 280.5 940.5 1,467,3 1.935.0 2,436.6 10,329.6 Equity investments 47.5 - 2.6 237.5 - 208.8 496.4 Total approvals 3,317.2 280.5 943.1 1,704.8 1,935.0 _