Malawi - Smallholder Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6886-MAI STAFF APPRAISAL REPORT MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT (IDA/IFAD CREDIT) October 9, 1987 Southern Africa Department Agriculture Operations Division 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 Currency Unit = Malawian Kwacha (MK) US$ 1.00 = MK 2.30 MK 1.00 = US$ 0.43 SDR 1.00 = MK -- WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles I square kilometer (km2) = 0.39 square miles 1 hectare (ha) = 2.47 acres 1 metric ton (ton) 2,204 lb GOVERNMENT FISCAL YEAR April 1 - March 31 FOR OFFICIAL USE ONLY ACRONYMS ADD Agricultural Development Divis4,ns ADMARC Agricultural Development and Marketing Corporation AfDB African Development Bank CA Credit Assistant CAS-NRDP Controller of Agricultural Services - NRDP CBM Commercial Bank of Malawi DAH Department of Animal Health EDF European Development Fund EEC European Economic Community EPA Extension Planning Areas GB Grameen Bank GOM Government of Malawi IDA International Development Association IFAD International Fund for Agricultural Development IFC International Finance Corporation IMF International Monetary Fund INDEBANK Investment and Development Bank of Malawi INDEFUND Investment and Development Fund KFW Kreditanstalt Fuer Wiederaufbau KFTCA Kasungu Flue Cured Tobacco Authority KRADD Karonga Agricultural Development Division ODA Overseas Development Administration M&E Monitoring and Evaluation MDC Malawi Development Corporation MMF Malawi Mudzi Fund MOA Ministry of Agriculture MOF Ministry of Finance MUSCCO Malawi Union of Savings Credit-Cooperatives NADD Ngabu Agricultural Development Division NBM National Bank of Malawi NRDP National Rural Development Program OPC Office of the President and Cabinet PO Professional Officer POSB Post Office Savings Bank PS Principal Secretary RBM Reserve Bank of Malawi RDP Rural Development Projects SA Scheme Administration SACA Smallholder Agricultural Credit Administration SAL Structural Adjustment Loan SAO Senior Administrative Officer SCA Smallholder Coffee Authority SCF Smallholder Credit Fund SEDOM Small Enterprise Development Organization of Malawi SSF Settlement Scheme Fund STA Smallholder Tea Authority STO Senior Technical Officer TA Technical Assistant TO Technical Officer UNCDF United Nntion Capital Development Fund USAID United States Agency for International Development 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. MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Table of Contents Page No. Credit and Project Summary ............................... i 1. PROJECT AND SECTORAL BACKGROUND .......................... 1 A. Project Background ................................... 1 B. Sectoral Background ................................. 1 Economic Setting ................................... 1 The Agricultural Sector ............................ 3 Performance Trends .3.............................. 3 The Smallholder Subsector .......................... 3 Development Constraints in the Smallholder Subsector 4 Government Objectives and Strategy for Smallholder Agriculture .................... 5 Bank, IFAD, and Other Donors' Strategies and Assistance ....................................... 7 II. AGRICULTURAL CREDIT ....................... 9 A* General ............................................... 9 B. Smallholder Agricultural Credit ...................... 9 Flow of Credit Funds ............................... 10 Credit Disbursement and Repayment .................. 11 Institutional Framework ............................ 11 Performance of NRDP Credit ......................... 12 Constraints on the Credit System ................... 17 The Near-Landless and RUral Poor ................... 17 III. THE PROJECT ............................................. 18 A. Project Objectives and Design...................... 18 Project Objectives .................. ..... 18 Project Design ................................... 19 B. Project Summary and Description ...................... 19 C. Detailed Features .................................... 20 Agricultural Credit ................................ 20 Institutional Support ......................... 21 Pilot Credit and Savings Scheme for the Rural Pocr . 23 D. Credit Requirements ................................ 23 Seasonal Credit .................................... 23 Medium-term Credit ................................. 26 Total Lending and Net Credit Requirements .......... 27 E. Total Project Costs ........................... . 28 F. Project Financing ..... ....................... 30 G. Procurement ........................................ 31 H. Disbursement ....................................... 33 This report is based on the findings of an Appraisal Mission that visited Malawi in February 1987 and comprised Messrs. Y. Doka (IDA), J. Intrator, and Janakiram (consultants). -2- Page No. IV. PROJECT IMPLEMENTATION ..................... ............ 34 A. Organization and Management ........................ 34 General ........................................ 34 SACA . .. . .. . . .. . . . .. . . . . . . . .. 35 SCY ............... ..............** a........... 36 ' Pilot Credit and Savings Scheme ................... 37 Training ......................................... 37 B. Lending Policies and Procedures ..................... 38 Interest Rates ............................. ,... 38 C. Annual Lending Program ............................... 39 D. Credit Staff ....................... 40 E. Computerization of the Credit System ................. 40 F. Strengthening the Farmers' Club Movement ............. 40 G. Mobilization of Rural Savings ........................ 41 H. Reporting, Accounts, and Audit ....................... 41 I. Monitoring and Evaluation .......................... 42 J. Implementation Schedule ............................. 42 K. Environmental Impact ................................ 42 V. BENEFITS AND JUSTIFICATION ........................ .. 43 A. Main Benefits and Beneficiaries ...................... 43 B. Financial and Economic Benefits ..................... 44 C. Projected Financial Results of the SCF ............... 45 D. Direct Budgetary Impact ..................... 46 E. Project Risks ...................................... 46 VI, ASSURANCES AND RECOMMENDATIONS .......................... 47 Chart 1 - Department of Agriculture in MOA With Proptsed Smallholder Credit Administration (SACA) Chart 2 - Implementation Schedule Annex 1 - Table 1 Number of Smallholder Farms and Cultivated Area by Holding Size (1984/85) Annex 2 - Table 1 Status of ADD/RDP Credit Funds - September 30, 1986 Table 2 Status of ADD Credit Funds - September 30, 1986 - Unaudited Table 3 Average Subloan and Holding Sizes Table 4 Seasonal Credit - 1985/86 - 1986/87 Table 5 Credit and Credit Accounting Staff - October 1, 1986 - 3 - Annex 3 - Table 1 Incremental Smallholder Credit Table 2 Institutional Building Table 3 Pilot Credit Scheme for the Rural Poor I Table 4 Pilot Credit Scheme for the Rural Poor II Table 5 Disbursement by Financier by Semester Table 6 Financing Plan by Project Components Annex 4 - Financial Operations of the Central Credit Fund (SCF) Annex 5 - Table 1 Projectgd Annual Lending Program - Period October 1, 1987 - September 30, 1988 Annex 6 - Table 1 Crop Recommendations and Fertilizer Practices Table 2 Yields and Fertilizer Responses Table 3 Maire Crop Budget and Gross Margins - Constant 1987 MK - With and Without Fertilizer Table 4 Groundnuts and Cotton: Crop Budgets and Gross Margins - With and Without Fertilizer Table 5 Tobacco (NDDF): Crop Budgets and Gross Margins - With and Without Fertilizer Table 6 Traditional Dairy Cows Activity Budget Table 7 Improved Dairy Cows Activity Budget Table 8 Activity Budget - Poultry (100 bird deep litter system) Table 9 Activity Budget - Poultry (100 bird deep battery system) Annex 7 - Pilot Credit Scheme for the Landless Annex 8 - Agricultural Credit/Training Adviser - Terms of Reference Annex 9 - Table 1 Credit Demand Projections - Maize Self-sufficiency Table 2 Actual and Projected Annual Lending and Credit Coverage Table 3 Nu-ber of Borrowers, Fasrm Families, and Uptake of Seasonal Credit Table 4 Approximate Number of Meidum-term Loans Annex 10 An Overview of the Expected Investment Demand Annex 11 Recommended Chemical Inputs Used by Smallholders in Malawi IBRD Map No. 20152 IBRD Map No. 20608 -4- Other documentation and data available in the Project fila: 1. IFAD Reconnaissance Mission Report, April 1986. 2. Preparation Mission Working Papers: (a) Working Paper No. 1: The Smallholder Credit Administration and the Central Credit Fund; (b) Working Paper No. II: Impact of Agricultural Credit on the Smallholder Subsector; (c) Working Paper No. III: Estimation of Demand for Seasonal Credit; (d) Working Paper No. IV: Estimation of Demand for Medium-term and Non-seasonal Credit; (e) Working Paper No. V: Production and Markets; and (f) Working Paper No. VI: Identification of a Pilot Credit Scheme for the Landless. MALAWT SMALLHOLDER AGRICULTURAL CREDIT PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Malawi Executing Agencies: Ministry of Agriculture and the Office of the President and Cabinet. Amount: SDR 4.6 million (US$5.9 million equivalent) Terms: Standard IDA terms. Co-financier: International Pund for Agricultural Development (IFAD) Project Description: The primary aim of this Project is to transform Malawi's smallholder credit syqtem into a better- managed, more efficient, and financially viable national credit delivery system that would benefit a significantly greater number of smallholders than at present. The Project prov"des funds for seasonal and medium term credit. It also provides for additional staff, staff training, technical assistance, vehicles, equipment and other facilities to transform the existing credit unit of the Agricultural Department of Ministry of Agriculture into a Smallholder Credit Administration, with Departmental status. The new Credit Administration would have responsibility for management at a national level of smallholder credit funds. Moreover, the Project provides for a pilot credit scheme for rural poor, which would attempt to adapt to Malawian conditions, a system of group credit for non-land based economii activities similar to the successful IFAD-funded Grameen Bank project in Bangladesh. Benefits and Risks: The Project would assist in economic development of the smallholder subsector by providing seasonal and investment credit. A broad spectrum of farm families throughout the country would benefit from increased production resulting from the use of improved farm technologies applied with the use of credit and extension. The Project would create a basis for a viable and sustainable institutional framwork to - ii - better serve the smallholder subsector with credit. Possible risks include delayed implementation; inadequate producer prices; unstable marketing arrangements; and the inability of research and extension services to develop %nd disseminate suitable technologies. These risks would be minimized through technical assistance to strengthen project implementation capability; the on-going policy reform program on pricing, subsidy, and marketing issues; and assistance to strengthen research and extension through on-going IDA-financed prof acts. Estimated Cost Local Foreign Total ------------------------ (US$ '000) -------- Technical Assistance 52 468 520 Vehicles - 336 336 Office Supplies and Equipment 17 70 87 Overseas (Neighboring Countries) Training 280 280 Local Training 541 142 682 Pilot Credit and Savings Scheme 432 449 881 Seasonal Credit 2,091 6,273 8,364 Medium-Term Credit 377 1,508 1,885 Recurrent Costs 239 62 301 Total Baseline Costs 34749 9,588 13336 Physical Contingencies 49 140 189 Price Contingencies 254 624 877 Total Project Costs 4,052 10,351 14,402 Financing Plan Local Foreign Total % ------------- US$ Million ------------ IDA 0.9 5.0 5.9 41 IFAD 1.5 5.4 6.9 48 Beneficiaries 0.2 0 0.2 1 Government 1.4 0 1.4 10 Total 4.0 10.4 14.4 100 - 11 - Estimated Disbursements of IDA Credit and IFAD Loan/Grant FY88 FY89 FY90 FY91 FY92 FY93 FY94 ----------------------US$ Millio------------------- IDA credit During FY Cumulative 0.2 0.7 1.6 2.7 3.7 4.6 5.9 IFAD loan/grant 0.2 0.9 1.9 3.2 4.4 5.4 6.9 Rate of Return: Not applicable. Staff Appraisal Report No. 6886-MAI Mams IBRD No. 20152 IBRD No. 20608 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT I. PROJECT AND SECTORAL BACKGROUND A. Project Background 1.01 The Project, for which an IDA credit of US$5.9 million and an IPAD loan and grant of US$6.9 milli-n is proposed, aims at improving the efficiency of the credit system for smallholders and forms part of the continuing IDA/IFAD assistance to the National Rural Development Program (NRDP). The proposed Project was identified during the negotiations for the IDA financed Extension and Planning Support project (Cr. 1626-MAI). In parallel, because of an interest in providing further credit assistance to smallholders, IFAD fielded a reconnaissance mission to Malawi in 1985 to examine the possibilities for improving the orientation and efficiency of credit services in Malawi, in particular through support of the expansion of the farmers' club movement. On the basis of the IFAD's reconnaissance report, an agreement between IDA and IFAD to jointly finance the Project was reached in April, 1986. Following a request from the Ministry of Agriculture (MOA) for IDA/IFAD assistance, a joint IDA/IFAD mission visited Malawi in June 1986 zo initiate preparation. A second mission durxng September-October 1986 finalized the preparation. The Project was appraised by a joint IDA/IFAD mission in March 1987. B. Sectoral Background Economic Setting 1.02 Malawi's first decade and a half since independence in 1964 witnessed remarkable growth and structural transformation. Total GDP more than doubled, growing at an average rate of 6% or 3% in per capita terms. The source of most of this growth was in agriculture, however, the manufacturing sector also devcloped gradually based on agro-processing and import substitution of simple manufactures. Investment rose from 9% of GDP at independence to 27% in 1979, financed by increased domestic savings and rising foreign capital inflows. However in 1978, Malawi's economic picture began to cloud beginning with an acute balance of payments disequilibrium. The current account deficit rose from a level of 8% of GDP in the mid 1970s to 20% in 1978/79. This change was due to a combination of external shocks, delayed policy responses, and the intensification of internal structural imbalances. On the external front, the terms of trade deteriorated by 30% between 1978 and 1981, due to falling international prices for export commodities, soaring oil prices, and most of all, a gradual disruption of external transport routes through Mozambique. In addition, a drought in 1980/81 led to reduced agricultural exports and made it necessary to import maize. On the domestic front, these external shocks were perceived as transitory and as a result, there was a failure to curtail expenditures, and considerable external borrowing was undertaken, mostly on commercial terms. Thus, the public sector deficit reached 15% of GDP in 1980/81. These shocks exposed some underlying weaknesses in the structure of Malawi's economy -- lack of export diversification, slow growth in smallholder agriculture and import dependence in the industrial -2- and energy sectors. Shortcomings in economic management also emerged, including problems of agricultural pricing, reliance on industrial price controls, weaknesses in key parastatals and quasi-public institutions, and inadequate budgetary planning and implementation. As a result of all these factors, GDP contracted by 6% in 1980/81. 1.03 Starting in 1981, the Government launched a broad-based structural adjustment effort geared to restoring macro-economic stability and removing structural constraints. This program was supported by three GALs and successive stand-by operations with the IMP. Additionally, financial viability was achieved through external debt rescheduling in 1982/83. Key elements of this program are: (a) adequate agricultural producer prices to encourage agricultural production and diversification; (b) restructuring of certain parastatals; (c) flexible management of exchange and interest rates; (d) removal of price controls, subsidies, and other distortions; (e) improved resource mobilization and expenditure allocation in the public sector; and (f) introduction of a multi-channel marketing system for most agricultural commodities. In the period 1982-85, despite the progressive disruption and final closure of direct rail links to Mozambique ports, Malawi managed to achieve progress in reducing the domestic and external financial imbalances while resuming GDP growth at an annual rate of 3.8%. But this progress was short-lived. In 1986, the external political situation led to increased security related expenditures which contributed to a rise in the public sector deficit from 9% of GDP in 1982-85 to 13% in 1986. Moreover, debt service increased from 38% in 1985 to 49% in 1986 due to the expiration of the grace period on debt reacheduled in 1982/83. In addition, an expansive budgetary policy was pursued which led to the worst overall balance of payments deficit in the last four years. As a result, not only did Malawi exhaust its international reserves, but it also, for the first time, accumulated external arrears of 6% of GDP. 1.04 It is believed that the recent setbacks are temporary and that with the continued implementation of the Government's adjustment efforts, growth of per capita income can resume and financial equilibrium can be restored. Improvement in the future performance of the economy will be heavily dependent upon the elimination of excessive budgetary deficits and continued improvements in production incentives, especially for the industrial sector. The restoration of traditional rail links to the sea and the development of alternative low-cost routes are also important to hasten economic recovery. The capacity of the farming community to intensify and d'.versify its agricultural production is also a critical determinant of future economic performarsce. In many areas, little arable land remains uncultivated and thus productivity of both food and cash crops will have to be greatly improved. This increased productivity v.ll require the development and use of appropriate technology, the timely availability and an adequate supply of agricultural inputs, and credit to facilitate the adoption of improved technologies. The proposed Project would complement these efforts by improving smallholder credit services. -3- The Agricultural Sector 1.05 Malawi, a small landlocked country, is heavily dependent on agriculture. It has a total land area of approximately 94,300 km2, of which 36,200 km2 is generally defined as arable. The agricultural sector supports about 85% of the population (over 7 million people), and in 1986 accounted for 37% of total GDP and 91% of all exports. Major exports include tobacco (54% of total exports), tea (16%) and sugar (9%). Over the years, the country has managed to maintain self-sufficiency in food production largely through an expansion in the area cultivated. 1.06 Agriculture in Malawi is characterized by two distinct subsectors which are defined by the tenure system. Smallholders cultivate traditional tenured or customary lands while estate cultivation takes place on freehold or leasehold lands. The crops grown in each subsector are regulated, and the farmers in these two subsectors have different access to markets, inputs, credit facilities, and extension services. Smallholder cultivation is dominated by the subsistence production of low yielding varieties of maize, the major staple food crop. Other smallholder crops include hybrid maize, pulses, cassava, fire-cured and sun/air-cured tobacco, cotton, grotidnuts, and rice. Smallholder agriculture, as a whole, accounts for about 80% of total agricultural GDP. The main estate crops are burley tobacco, flue-cured tobacco, tea, and sugar. Performance Trends 1.07 Performance in the agricultural sector has been variable. In the 1970s, growth rates were impressive, particularly for the estate sector which achieved real rates of growth of about 10% p.a. The smallholder sector also grew at a respectable annual rate of 4%. These favorable rates of growth were due in part to the high commodity prices prevailing at the time of the Rhodesia tobacco embargo,. Growth rates have been more modest in the 1980s. Between 1982 and 1986, growth in the estate sector ran at only about 1.5% p.a., while the rate for the smallholder sector was about 2.9%. Growth rates for both sectors have been stagnant in the last two years. Worsening terms of trade for Malawi's major exports, sharply higher transport costs, and poor weather help explain agriculture's recent poor performance. The Smallholder Subsector 1.08 Over 80% of the land in Malawi is held under customary tenure by some 1.3 million smallholder farm families who produce about 85% of the country's food supply. The majority of these smallholders are subsistence cultivators with very low cash income levels. The average income of a smallholder farm family in 1984/85 was estimated at less than MK300 (US$130), of which about 80% was from crops and livestock and 20% from off-farm activity. 1.09 Maize is the dominant smallholder crop and is cultivated on three-fourths of the cropped land. However, mixed farming with an emphasis on crop production characterizes the subsector. The average farm size is about 1.1 ha; 55% of the farms are less than I ha each and 95% art less than 3 ha (Annex 1, Table 1). Farm families with the smallest average holdings produce maize and some roots; those with relatively larger holdings oroduce cereals, mainly maize, groundnuts, and roots, and produce for the market in addition to home consumption requirements. While soils are relatively fertile, erosion is becoming a serious problem in densely populated areas. 1.10 Smallholder production is derived almost entirely from family labor. Although labor is not a constraint for most farmers, labor shortages do occur during land preparation and harvesting periods on the relatively larger holdings. Technology is very rudimentary and land management is generally poor. Hand shelling and pounding of maize and groundnuts, which are very time-consuming, are the predominant methods of processing. Only 5% of the cultivated land is ploughed, using oxen and only 7% ridged. Ownership of farm equipment is limited to simple hand tools such as hoes, ploughn, ridgers, and ox carts. Very few farms have adequate storage facilities, and significant post-harvest losses occur. A majority of farm families rent transport; about one-fifth of them use their own oxen for transport. Development Constraints in the Smallholder Subsector 1.11 The performance of smallholder agriculture in Malawi has been affected by a variety of constraints. Limited land for expanding the area under cultivation and mounting population pressure are causing increased fragmentation of holdings and encroachment onto marginal or steeply sloped lands. The National Sample Surveys of Agriculture indicate that the average land holding in the smallholder subsector declined from 1.54 ha in 1968/69 to 1.1 ha in 1986. Given such land constraints, most future increases in the production of food and export crops will have to come from more intensive and productive use of existing land resources. Productivity in the smallholder subsector is well below its technical potential. Constraints to increase smallholder productivity over the past few years have included: (a) a policy which prohibits smallholder production of certain high-value export crops; (b) until 1984, poor price incentives for crops other than maize; (c) a general lack of appropriate technology for smallholders, including absence of locality-specific technical recommendations for crops; (d) inadequate and inflexible allocation of credit resources; and (e) the lack of effective links between research and extension. 1.12 Another serious constraint is the increased cost of cxternal transport. Being landlocked, Malawi is dependent upon neighboring countries for sea access and commerce with its trading partners. Traditionally, access was provided by road and rail links with Mozambican ports, but operational problems and insurgency have forced the use of longer and more costly routes through South Africa and Tanzania adding as much as 50% to external transport costs. 1.13 The Government's ability to stimulate increased agricultural productivity is severely constrained by major institutional weaknesses. Of particular concern are human resource constraints, especially with respect to mid-level professionals, an over-reliance and ineffective use of technical assistance, and rigid career structures. There is also inadequate reliance on the private sector to provide supporting services to agriculture because of a basic mistrust of the market mechanism and an over-emphasis on Government control and regulation. - 5 - Government Objectives and Strategy for Smallholder Agriculture 1.14 The Government is working to provide a growth climate for both estate and smallholder production in support of four basic objectives including: (a) maintenance of self-sufficiency in food staples; (b) diversification of production; (c) expansion of agricultural exports; and (d) improvements in rural incomes. The Government's strategy for achieving these objectives involves two basic elemente - direct investment and institutional strengthening in support of pr-ductivity enhancing activities in the smallholder subsector and creatiozi of a policy environment conducive to agricultural growth and development. The emphasis on stimulating a sustained rise in productivity stems from the lack of arable land available for expanded cultivation in the smallholder subsector and the need to compensate for the very high and increasing cost of external transport. 1.15 In formulating agricultural policy, the Government has placed a great deal of emphasis on agricultural pricing and 6ubsidies. Farmgate prices of smallholder crops are set annually by the Government, on recommendations of a representative committee, which takes into account border prices and returns to labor and land. In recent years, the official prices for export crops have moved towa:ds the appropriate export parity prices. The maize producer price has been set at tne level needed to assure self-sufficiency. Smallholders have been remarkably responsive to price changes, as was demonstrated by the sharp increase in maize production and resulting surplus in 1982/83 following an increase in the price for maize, and the recent switch back to groundnuts from maize, again in response to changing relative prices. The smallholders' main input, fertilier, has been subsidized with the main element of the subsidy (the increased cost of transport on non-Mozambican routes) now being absorbed by the Government. In 1986, the Government began a four-year program supported by USAID to phase out this subsidy and is encouragiag the increased use of high analysis fertilizers to contain nutrient cost increases. 1.16 The major institution in charge of the Government's agricultural strategy and policy formulation is the Ministry of Agriculture (MOA). MOA also oversees the provision of services to smallholders through the NRDP and provides general direction to the agricultural parastatals and crop authorities. MOA is headed by a Principal qecretary (PS), and is organized into five units, viz. the Departments of Agriculture, Agricultural Research, Animal Health and Industry, Planning, and General Administration. The managers of the agricultural development division report to the PS through the Controller of Agricultural Services (NRDP), one of three senior officials under the PS (Chart 1). Another institution concerned with agricultural policy is the Food Security Unit of the Office of the President and Cabinet which was recently established as part of the Government's structural adjustment effort. The Unit will be responsible for assessing the nutritional impact of the Government's economic and agricultural policies and formulating Government interventions designed to assure national food security, including the management of the Strategic Grain Reserve. - 6 - 1,17 National Rural Development Program (NRDP). Improvements in smallholder productivity are being sought through the National Rural Development Program. NRDP was formulated in 1978 to refocus the Government's rural development effort, which up to the mid-19708 was based on intensive and expensive multi-component rural development projects. The NRDP is intended to spread agricultural development over the entire country by less intensive and costly means. It is specifically designed to increase smallholder productivity through the provision of agricultural inputs, and to increase the scope and efficiency of extension, marketing and credit services. It also focuses on soil conservation, watershed management and afforestation. Under NRDP, Malawi is divided into eight ecologically similar Agricultural Development Divisions (ADDs), which provide management, technical support and credit facilities. The ADDs are further divided into 30 Rural Developmenc Projects (RDPs), of which 26 are donor funded. Finally, the RDPs are sub-divided into 173 ecological or extension planning areas (EPAs), each with 6,000 to 9,000 farm families. About 80% of all smallholder families now live in areas served by the NRDP. 1.18 The implementation record of the NRDP shows mixed results. NRDP targets for infrastructural development have usually been met and in some cases exceeded and many farm families have benefitted from improved roads, water supplies, market centers, and training facilities. However, the production record of NRDP is less encouraging w[th appraisal targets often not met. Where production data are available, they reveal that yields were satisfactory where farmers adopted the recommended packages. However, the uptake of input packages has been generally below that projected during appraisal. It appears that the problems of inappropriate technological packages, inadequate and inflexible allocation cf credit, and the lack of effective links between research and extension have blunted the impact of the NRDP. In view of these problems, the Government has placed increased emphasis on improving the national agricultural research, extension and credit systems that operate in conjunction with the NRDP. 1.19 The credit system is the focus of this project and is covered in detail in Chapter Two. Agricultural research is carried out by a department within the Ministry of Agriculture (MOA), by the University of Malawi and by two commodity-specific organizations for tea and tobacco. Research programs are organized on a crop or commodity basis. Over the years the results of these programs have often been less than satisfactory largely because of the lack of links between the commodity programs and extension staff. Thus the problems and concerns of the smallholder have not been adequately considered in developing new technological packages. In recognition of this problem the Government in 1985 launched a National Research Project with financing from the IDA and USAID. 1.20 Agricultural extension is carried out within NRDP and is under the overall guidance of the Department of Agriculture in MOA. It is decentralized at the field level under the eight ADDs. Extension is organized on a block extension basis, with a field extension worker in charge of five to eight blocks. Field extension workers are the key contacts with farmers. Apart from communicating extension messages, extension workers have also been involved in credit-related activities such as preparation of applications and collections. The extension service is adequately staffed, in numbers, with some 2,600 workers operating with an - 7 - average ratio of one extension worker to 750 farmers. The extension staff is supported by about 500 subject matter specialists. To become more effective, the extension services requires better technical packages including area-specific recommendations, improved extension methodology, and links with research services. In 1985, the Bank financed an Agricultural Extension and Planning Support project, with the objective of addressing the above deficiencies. 1.21 On agricultural marketing, the major buyer and seller of smallholder crops is the Government-owned Agricultural Development and Marketing Corporation (ADMARC), a statutory corporation which is also engaged in the distribution of production inputs, and farm implements. ADMARC has a legal monopoly to purchase smallholder tobacco (sun-air and fire-cured) and cotton but also a de fatto monopoly in the procurement and sale of maize. Until the 1980s, ADMARC was regarded as one of the few successful parastatals in the region. However, since 1980, ADMARC has faced increasing management, financing and marketing problems with continuing trade losses and generally poor liquidity and a consequent inability to purchase the major crops. These problems are due, in part, to the Government's panterritorial pricing policy, consumer subsidies, high transport costs, generally poor management and high operating expenses (including excessive expenditures on projects outside its primary marketing responsibility). 1.22 In view of ADMARC's growing difficulties, the Government, as part of itb structural adjustment program, has taken steps to improve ADMARC's operations and financial situation. These measures include curtailing ADMARC's non-marketing activities, closing unprofitable markets, changing the organization and management struccure, and reducing staff. The Government is also fostering the development of a multi-channel marketing system by allowing private sector entities to participate in smallholder crop marketing. The first steps in this direction have been taken by a recent Government announcement inviting applications for trade licenses. The initial response to the announcement has been encouraging with considerable private marketing taking place, particularly in the Southern Region. Private entry into the smallholder market could mean an eventual reduction in the marketing operations of ADMARC. However, despite the encouraging start, any significant participation of the private sector is likely to be a long-term process, mainly because of a lack of indigenous entrepreneurs in this field. Bank, IFAD, and Other Donors' Strategies and Assistance 1.23 The proposed Smallholder Agricultural Credit Project, besides providing institutional support for imprcving the efficiency of the credit system in Malawi, seeks to diversify and increase agricultural production by helping to meet the unsatisfied demand for credit. The Bank development strategy in Malawi has evolved over the years in support of the Government's efforts to stimulate increased productivity, develop a more diversified agricultural base, promote crop exports, and improve rural incomes. The Bank, through its lending and sector work, supports the Government's strategy of strengthening key national agricultural institutions, thereby improving its capability for agricultural planning, policy analysis, and program implementation. Better resource allocation - 8 - and human resource development are important ingredients in recent operations supported by the Bank. The proposed Project would be an essential complement to the on-going national projects and planned activities in the agricultural sector. 1.24 The Bank has provided 14 credits and 2 loans totalling US$173.95 million for agricultural development in Malawi. Of this amount, US$120.35 million (70%), have been exclusively in support of the smallholder sub- sector. The projects that were financed included eight integrated agricultural programs and three national rural development programs. The Bank has also provided for forestry development and for an Industrial and Agricultural Credit project which includes a line of credit of US$4.5 million to finance estate subsector diversification. Three IFC operations, involving a total of US$17.9 million, have assisted agriculture-related industries. In response to the Government's recent emphasis on strengthening the national institutions that provide services to small- holders through NRDP, the Bank has financed two national projects -- the National Research project (Cr. 1549-MAI) and the Agricultural Extension and Planning Support project (Cr. 1629-MAI). The proposed Project would support this national effort. The impact of the projects and reasons for the evolution of the lending strategy have already been discussed in para 1.18. 1.25 The Bank is also assisting the Government in improving agricultural policy formulation through a series of three structural adjustment credits to Malawi, in each of which agriculture has been a major focus. Policy improvements under the structural adjustment program include agreement on the importance of price as an incentive for smallholder production (a pricing methodology was adopted); actual increases in producer prices, as agreed; and the allocation of a larger share of the budget to MOA. Efforts under the current program focus on refining the pricing policy, reducing the fertilizer subsidy and improving the efficiency of crop marketing. 1.26 IFAD's strategy supports smallholder development both through NRDP and support to national level institutions and servict.s such as input supplies and credit. However, IFAD aims specifically to identify the groups most vulnerable to poverty, and malnutrition, and to orient its support increasingly towards their needs. IFAD has financed three projects: the two NRDP projects -- Dowa West Rural and Kasungu Agricultural Development Projects (Cr. 70-MW and Ln. 158-MW) -- and the Smallholder Fertilizer project (Ln. 120-MW, Grant 109-MW); loans extended for these projects total US$40.3 million. Each of these projects has made satisfactory progress with regard to most components. The Smallholder Fertilizer project, through which a national system of fertilizer procurement has been established, has been instrumental in providing an improved mechanism for timely supply of fertilizer better oriented towards the specific needs of smallholder3. 1.27 Other donors/bilaterals (ADB, CIDA, EDF, FRG, ODA, and SIDA), are also actively involved in the development of agriculture in Malawi both through NRDP and support to national level institutions and services, with heavy investment in the livestock subsector. USAID, which is co-financing the Research project with IDA, is also involved in policy dialogue with the - 9 - Government, with particular emphasis on the removal of fertilizer subsidies and support for the Government's agricultural mrarketing reform. The U.K., the FRG, and Japan have also provided co-financing for the Government's stiuctural adjustment program. II. AGRICULTURAL CREDIT A. General 2.01 There is no specialized agricultural credit institution in Malawi. The main financial institutions providing credit to commercial (estate) farmers are the two commercial banks, the NatIonal Bank of Malawi (NBM), and the Commercial Bank of Malawi (CBM). Although the ownership of both banks is indirectly controlled by Press Holdings and by GOM through ADMARC and the Malawi Development Corporation (MDC), each operates as an independent institution. A feasibility study concerning the establishment of a specialized financial institution to meet the medium- and long-term credit needs of the estate subsector was carried out by consultants, financed under the technical assistance component of SAL TI. It was concluded that because of the high cost of establishment and operation, creation of a new institution would not be justified. 2,02 The commercial banks lend primarily to tobacco estates and in recent years, their agricultural loan portfolio has ranged between 35 and 40% (MK80 to 90 million) of their total lending operations. The Investment and Development Bank of Malawi (INDEBANK) provides medium- and long-term loans to agricultural estates and agro-processing enterprises, which at the end of 1985 accounted for MK14 million, equivalent to 44% of INDEBANK's portfolio. INDEFUND, a subsidiary of INDEBANK, (p-oviding financing for projects of medium size, from MK25,000 to MK100,000), which started operations in 1982, also provides medium-term investment credit for agricultural production and agro-processing. This credit amounted to MK1 million, or 30% of its portfolio, in 1986. SEDOM, the Small Enterprise Development Organization of Malawi, was established in 1982 by GOM with the assistance of EEC to promote investments by small entrepreneurs who could not otherwise obtain financial assistance from commercial banks or other institutions. SEDOM finances investments in agriculture, livestock production, and small agro-industries. The credit extended for these investments accounted for about 50% of its portfolio at the end of 1986 (470 loans totalling MK1.5 million). The effective interest rates currently charged by the banks and other institutions mentioned above on agricultural credits range between 15 and 16.5% p.a. B. Smallholder Agricultural Credit 2.03 Malawi has one of the more successful formal smallholder agricultural (seasonal) credit systems among developing countries. This credit system is operated by MOA. Following the launching of agricultural development projects in the late 1960s and the subsequent adoption of the rural development programs (NRDP), NRDP has become the main vehicle for providing institutional credit to the smallholder subsector. Provision of credit is closely linked to agricultural extension. Donor-financed project resources allocated to credit operations and designated for specific RDP areas are channeled by MOF through MOA to credit funds managed by ADDs, which operate a decentralized credit system. Currently most of the credit resources (over 80%) are administered under NRDP. - 10 - 2.04 As of the end of September 1986, the consolidated balance of the separate credit funds was about MK20.2 million (Annex 2, Table 1), consisting of GOM capital contributions and accumulated net income. No interest is paid to GOM on the capital funds, and administrative expenditures of the credit delivery system are largely covered by funds provided under RDP projects for incremental operating expenses and by GOM recurrent budgetary allocations. The principal sources of existing NRDP credit funds are IDA (42%), IFAD (21%), and EDF (12%). Other donors include ODA, AFDB, and KFW. In addition to the area-specific credit funds, UNCDF provided about MK4.0 million which can be utilized for credit operations throughout the NRDP system. These funds are allocated annually by the credit section of MOA to unfunded or underfunded RDP areas. Currently, additional funds amounting to MK20.0 million allocated for incremental credit to smallholders under on-going rural development projects have still to be withdrawn. This amount includes about MK8.3 million financed by IDA under the Agricultural Extension and Planning Support project (Cr. 1626-MAI) for Mzuzu ADD and MK7.3 million from IFAD for Kasungu ADD. Thus, existing and i.stimated committed but undisbursed resources of ADD Credit Funds amounted to MK44.2 million as of September 30, 1986 (Annex 2, Table 2). 2.05 The NRDP funds account for over 90% of the credit channeled to smallholders. The balance is provided through commodity-specific development authorities, such as the Smallholders Coffee Authority (SCA) established in 1981, the Smallholders Tea Authority (STA), established in 1967, and the Kasungu Flue-Cured Tobacco Authority (KFCTA) established in 1968. These statutory crop authorities provide technical advice, credit for inputs and investments, and crop marketing services to their members. The Settlement Schemes Fund (SSF) set up by GOM was originally intended for Malawi Young Pioneer Settlement Sciemes to provide credit to smallholders. This activity has now been incorpo-ated into the NRDP system and in 1986/87, only Salima ADD disbursed SSF loans of about MK30,000 (US$13,000). 2.06 Smallholders do not receive credit from commercial banks and contact with the banking system is limited to savings accounts, mainly in thp Post Office Savings Bank and, to a lesser extent, through static and mobile agencies of commercial banks. Very few smallholders have received short-term loans from credit and savings cooperatives affiliated with MUSCCO (para 2.22). Some smallholder farmers have received credits from SEDOM for dairy and poultry production and for small food-processing enterprises. Flow of Credit Funds 2.07 Currently, funds under RDPs and UNCDF are accounted for in different ways. Following receipt from the donors, RDP funds are disbursed through MOA to the credit funds under the individual ADDs. The ADD credit account works as a revolving fund for payments made to ADMARC and other suppliers for inputs given to farmers on credit. Repayments from farmers are made directly to the account, with interest retained in the ADD account. UNCDF resources are allocated annually to the ADDs from a Central Credit Fund (Account 228 with the Reserve Bank of Malawi) by MOA. Credit allocation is based on requests submitted by ADDs for unfunded RDPs. Repayments are made directly by the ADDs or through ADMARC to the Central - 11 - Credit Fund. There is some flexibility in the use of UNCDF funds as these are allocated annually by MOA. The Central Credit Fund was established by MOA with the intention that all credit be operated on this basis. Donors, however, have preferred to keep their funds separate. In the case of RDP funds, which are area-specific, there is little flexibility, although some lending among ADDs has been recorded (a flat rate of 5% is charged for these funds). The system, however, is implemented only on an ad hoc basis among ADDs. Credit Disbursement and Repayment 2.08 The procedure for disbursing credit and collecting repayments within the existing NRDP program is given in the National Credit Manual. The main features for disbursement and repayment are: (a) Disbursements. Credit requests are prepared by the farmers' club with assistance from the credit and extension staff. Inputs and implements are procured by ADMARC and distributed through ADMARC's network of markets. Seasonal inputs are distributed to club chairmen and village headmen on behalf of the members. The borrowers' lists, which are prepared by EPA credit sta!f, are the basis for preparing the Repayment Ledger. (b) Subloan Repayments. The repayment of subloans is the responsibility of the club officials, with assistance from credit staff. Club members repay loans to credit assistants who record payments, issue receipts and deposit amounts recorded with ADMARC or with commercial bank branches. 2.09 Loan Default Policy. Clubs are required to repay their seasonal loans by December 1. A surc arge at a flat rate of 10% is applied to defaulters after the above date. If a club member fails to repay, the policy is to exclude all members of the club from credit the following year, unless there are mitigating circumstances (defined as agro-economic or environmental factors beyond the control of the farmers). In such cases, arrears on seasonal loans are rescheduled and clubs continue to be eligible for new borrowing. Institutional Framework 2.10 There are four main organizational units involved in the NRDP credit system: (a) The Ministry of Agriculture (MOA), through the credit section in the Department of Agriculture (Chart 1). The credit section is headed by a Senior Agricultural Officer (credit), who reports directly to the Principal Agricultural Officer in charge of extension and training. He is assisted by a Chief Technical Officer. This is a coordinating unit whose functions include: (i) issuing of operational guidelines and periodic updating of the MOA Credit Manual; (ii) consolidating estimates of input requirements prepared by ADDs and liaising with ADMARC and the Fertilizer - 12 - Revolving Fund; (iii) allocating UNCDF resources (para 2.04), to ADDS for unfunded areas: (iv) compiling periodic consolidated reports on ADDS' credit activities; and (v) participating in training activities for field credit staff. Because the credit section is staffed by only two officers, its present functions are rather limited. A National (Smallholder) Credit Committee consisting of senior officials of MOA headquarters and the ADD Program Managers advises the Principal Secretary of MOA on matters related to credit policies and procedures. To date, this committee has played a minor role in guiding and overseeing the NRDP credit system. (b) Agricultural Development Divisions (ADDs). Credit operations are fully decentralized and managed ty ADDs, which administer their credit funds, maintain separate non- interest bearing accounts in the Reserve Bank of Malawi (RBM) and in commercial banks, keep sub-loan accounts and prepare annual balance sheets and financial statements for each credit fund. Audits of ADD accounts are carried out by the Auditor General of GOM. Each ADD has a chief credit officer (PO) and credit accounting staff reporting to the ADD Program Manager, credit supervisors (TO) at the RDP level, and field credit assistants (CA) at the EPAs (para 1.17). Accounts are kept by the credit staff within the ADDs' accounting unit. Credit assistants at EPA are responsible for assisting clubs and individual borrowers in preparation of loan applications, processing of loans, distribution of credit inputs, supervision and loan collection. (c) ADMARC is responsible for the supply and distribution of inputs at market points and for the purchase of crops from smallholders (para 1.21). Fertilizer as the major input used by smallholders is centrally procured by the Fertilizer Revolving Fund unit and distributed through ADMARC which also does the invoicing for the Fertilizer Fund. (d) Farmers' Clubs (para 2.16) play an important role In the preparation of loan applications for seasonal credit, the distribution of inputs among their members, and the timely repayment of seasonal credits. Ferformance of NRDP Credit 2.11 ADD-managed seasonal credit operations started in 1968/69, lending MK80,000 to 650 smallholders. Ten years later in 1978/79, the volume of credit reached MK2.5 million, benefitting about 75,000 borrowers. The volume of seasonal credit has grown significantly since 1980/81, as substantial amounts of RDP donor funds have become available and lending to individual borrowers has been discouraged in favor of providing seasonal credits through farmers' clubs or credit groups. The following table shows the increase in volume of lending during the last four years: - 13 - Seasonal Credits - 1982/83 to 1985/86 Amount Growth No. of No. of Average Loan/ Year MK million Index Clubs Borrowers Borrower - MK 1982/83 7.8 100 6,654 156,700 50 1983/84 10.5 135 7,191 180,300 58 1984/85 14.5 186 8,148 211,700 68 1985/86 17.4 223 8,225 207,500 84 2.12 Despite the substantial rise in seasonal credit uptake, only about 16% of the smallholders had obtained credit as of the 1985/86 season. However, considerable differences exist among the ADDs both in regard to the amount of credit and the percentage of farmers reached (Annex 2, Table 3). In general, the southern ADDs ((Liwonde, Blantyre and Ngabu) reach a lower percentage of farmers (7% compared to 16% nationally). In addition, the average loan amount is smaller -- MK58 per beneficiary -- compared with the national average of MK84. The main reasons for these differences are attributed to lack of funds in some RDPs and poor management at certain ADDs. Other reasons are: (i) holding sizes: in Elantyre and Liwonde, average farm sizes are 0.88 and 0.93 ha respectively, compared to the national average of 1.14 ha; (ii) cropping patterns: in Ngabu ADD, maize is less important, being grown on 27% of the land (compared to 58% nationally), credit has not been made available for sorghum/millet (over 40% of the planted area), and cotton packages are smaller; (iii) alternative off-farm employment opportunities exist in this area, particularly in the Blantyre-Limbe area (tea estates) in Lake Chilwa and the Lower Shire (fisheries); and (iv) agriculture is considered a higher risk in Ngabu ADD where rainfall is low (Annex 2, Table 3). 2.13 Kasungu ADD registered significant increases during the last four years, both in the formation of clubs (from 700 to 2,050) and in the number of credit recipients (from 23,000 to 62,000). Higher performance is attributed not only to IFAD support but also to better ADD management and the relatively larger farm size compared to the national average. In the remaining ADDs, the number of credit recipients varied only slightly, although the amount of credit p%!r beneficiary increased, mainly as a result of price escalation. The main reasons for this are: (i) a decrease in the maize-to-fertilizer price ratio; (ii) a change in cropping patterns with a decrease in the area under maize and an increase in the groundnut areas, which require less purchased inputs; (iii) the inappropriateness of current package size to many farmers; (iv) the exclusion from clubs of smaller farmers, considered less likely to repay; and (v) the limited access of smaller farmers to extension and other services; only 15% of farmers with holdings of less than 1 ha had contact with the extension service in 1984/85, compared to 36% of farmers with over one ha. - 14 - 2.14 There has been a setback in smallholder credit uptake in the 1986/87 crop season (Annex 2, Table 4). While it was estimated that lending programs would total about MK25 million, data up to January 31, 1987 indicate that total credit disbursed amounted to only MK16.5 million (7,800 clubs comprising 203,000 borrowers). This shortfall in credit uptake is attributed to (i) temporary disruptions of the marketing system due to ADMARC's financial difficulties; this resulted in slower than anticipated repayments of the previus year's seasonal credits, and rendered many clubs ineligible to birrow in 1986/87; (ii) a decrease in area planted with hybrid maize because of low returns (producer prices for maize have not been increased for the last 4 years); and (iii) a reduction in fertilizer subsidy coupled with lower than expected uptake of high- analysis fertilizer. 2.15 Seasonal credit for farm inputs is provided in kind on the basis of packages recommended by the extension service for a particular crop. The credit was originally provided only for hybrid maize, but now the range of crops has widened and includes local and composite maize, groundnuts, tobacco, and cotton, as well as packages containing only fertilizer or agricultural chemicals. The size of packages is usually based on a land unit of 0.4 ha; however, in light of the high demand for smaller packages and the move towards using high-analysis fertilizer, efforts are currently underway to prepare smaller packages for smallholders. Up to 1985/86, fertilizer accounted for about 75% of total credit, seeds (hybrid maize, groundnuts, rice and wheat) for a further 15%, and agro-chemicals for the remaining 10%. 2.16 Farmers' Clubs. With the encouragement of MOA and donors under the NRDP, a vigorous farmers' club movement has developed mainly from grass roots initiatives, and this is now the main channel by which the extension effort and seasonal credit reach the smallholder sub-sector. Clubs are voluntary farmers' associations without legal status. They hold monthly meetings, and place great emphasis on communal activities; some have club houses, maize storage sheds built through self-help schemes, and gardens which generate some income for the club. MOA provides a limited amount of training for club officials in administration, basic accounting practices and procedures for obtaining credit. However, these training activities need to be considerably strengthened to ensure sustainability of the club movement as a vehicle for development of the smallholder sector. Between 1981 and 1986, the number of clubs has increased from 6,000 to 8,200 with about 210,000 borrowing members (16% are women). The average number of members is 24. Clubs play an important role in the preparation of seasonal credit applications, distribution of inputs and the timely repayment of credit. Seasonal credit is mutually guaranteet by borrowing members which has resulted in higher repayment rates than woulJ have existed through lending to individual farmers. Lending through clubs has also: (I) lowered administration costs; (ii) removed the need for collateral; and (iii) increased access of smallholders to credit. While the NRDP is now adopting a more widely used block extension system, the momentum of the club movement continues and offers a strong base for higher level development activities, including the promotion of rural savings. - 15 - 2.17 Medium-term Credit. In contrast to seasonal credit, the uptake of medium-term credit has been generally below expectation. The total number of individual beneficiaries of official medium-term loans through March 1986 was only 10,000 farmers with the total value of loans amounting to about MKl.5 million. Data for the 1986/87 season indicate that MKI.0 million was allocated for medium-term credit, of which only MKO.6 million was disbursed. Term-loans are given in kind to individual borrowers (not through groups or farmers' clubs) for periods ranging from 2 to 7 years. Balance of loans outstanding to-date is about MK500,000. On-farm investments financed include farm-carts, ridgers, ploughs, other farm implements, sprayers, work-oxen, dairy cows and small poultry units. In addition, some non-qeasonal credit for periods of 5-6 months is provided to farmers for the purchase of stallfeeders, largely supplied by the Department of Animal Health (DAH). Steers are fed on crop residues and concentrates and fattened cattle are sold to the Cold Storage Company. While there is a need for medium-term credit, limited supply of certain items and the high costs have reduced demand. In addition, credit staff have not put significant emphasis on medium-term credit. This reflects: (i) the uncertainty about the procedures; (ii) the high prominence given to seasonal credit by senior staff in the ADD and the MOA; (iii) the heavy demand for seasonal credit which limits the time available for processing medium-term credit; and (iv) given the limited financial resources, the senior staff avoid tying the resources to medium-term credit. The other reasons for the limited amount of term credit issued are: (i) holding sizes are generally too small to justify purchase of items such as farm carts and ploughs; and (ii) technology of some of the investment items available is inappropriate to smaller farmers. 2.18 Interest Rates. A flat finance charge of 10% is levied on seasonal credits to farmers' clubs. As repayment periods average nine months, this flat charge is equivalent to an effective annual rate of 13.3% interest. Seasonal credits are repayable by September 30, and a surcharge of 10% is imposed on arrears as from December 1 each year. To discourage seasonal credits to individual borrowers, MOA recently raised the flat finance charge for such credits from 15% to 20%. Medium-term loans and non-seasonal credits, mentioned above, currently bear interest of 10% p.a. A flat charge of 10% is levied annually on installments of principal and interest in arrears, The rate of inflation in Malawi is currently estimated at 15% p.a. Interest rates chargeable to smallholders will be raised starting with the next lending season (October 1, 1987) from 13.3% to 16.5% p.a. for seasonal ctdit and from 10% to 15% p.,. for medium-term credit. 2.19 Loan Recovery. Recovery performance of seasonal credit has been excellent. From 1968/69 to 1984/85, the cumulative amount of seasonal credit including finance charges was MK63.4 of which 97.4% has been credit including finance charges was MK63.4 of which 97.4% has been had been recovered. Recovery of term-loans has been less satisfactory and because of deficient loan monitoring and reporting procedures, data are less readily available. It is estimated that 20% to 25% of the amounts due is in arrears. MOA is now taking measures to improve monitoring and accounting procedures for term-loans. - 16 - 2.20 Credit Staff. As of October 1, 1986, 439 credit staff were employed by the credit system (Annex 2, Table 5). About 300 credit assistants were at the operational (EPA) level, 56 credit officers In supervisory positions at RDPs and ADDs, and 83 accountants at ADDs and in some RDPs. In the past, positions for credit staff were usually created at the time of appraisal of RDP projects by various donors and these positions were filled and maintained irrespective of the actual volume of credit issued and the number of loans serviced. This approach has resulted in many of the ADDs being grossly overstaffed, particularly at the EPA level. Thus, in 1985/86, 4 ADDs handling 20% of the total volume of creG employed 45% of all credit staff. MOA headquarters has not to this point focussed on the establishment of policy guidelines regatding staffing norms for credit staff nor on the administrative costs of the credit delivery system. The extension staff also spend time in administering credit, as there is a close link between credit and extension. However, the extension staff's involvement in credit should be confined to encouraging the establishment of new clubs and advising on input packages. 2.21 Cost of the Credit System. The current administrative expenditures of the system at all levels -- MOA, ADD, RDP, and EPA -- have been estimated at MK1.4 million, equivalent to about 8.5% of the volume of credit in 1986/87. This estimate includes salaries and allowances of all credit staff, and other recurrent expenditures (excluding office accommodation and office support services provided by ADDs). As the present staffing positions are very uneven among the different ADDs (para 2.40), costs vary widely, ranging between 3% in Kasungu ADD and 30% in Ngabu ADD. The extension staff's time spent on credit matters has not been included in the cost of the credit system. 2.22 Savings Mobilization. Available literature does not provide infor7oation on the volume of savings by smallholders, the potential for savings, or the portion of savings which is not monetary. The two commercial banks, NBM and CSM, with 27 branches, 28 agencies, and 130 mobile branches locations, are the most popular savings institutions in the country. Time and savings deposits in the two banks amounted to about MK230 million in 1985. The Post Office Savings Bank (POSB) with 269 branches and agencies is the most accessible for the rural population and has over half a million savings accounts totalling MK65 million. In addition, a number of insurance companies and the New Building Society play some role in mobilizing savings, although not in the smallholder sector. Fifty-six Cooperative Savings and Credit Societies, which operate under the umbrella of the Malawi Union of Savings and Credit Cooperative (MUSCCO), play a minor role and have share deposits of only MKl.0 million in about 14,000 accounts. Many societies are faced with loan delinquency and management problems, and lack of adequate financial control. MUSCCO is currently being supported by USAID is currently trying to upgrade MUSCO's operations. 2.23 Interest rates on savings and time deposits are fixed by GOM through the Reserve Bank of Malawi. Savings account, in POSB and the commercial banks currently bear tax-exempt interest of 10.75% p a. Rates on time-deposits in commercial banks range between 9% (for 7-day call deposits) and 15.75% (for time-deposits exceeding 36 months). - 17 - Constraints on the Credit System 2.24 While Malawi has one of the more successful credit systems for smallholders, the absence of a national framework for systematic planning, coordination, and monitoring of credit operations has led to imbalances and inefficiencies in the use of scarce financial resources and in the deployment of staff. The fragmentation of credit resources through area-specific allocations, mainly through donor funding, has resulted in some areas being inadequately funded. This, in turn, has caused imposition of arbitrary credit ceilings and restrictions in the access of smallholders to institutional credit. The uptake of investment credit and its recovery have been unsatisfactory, partly due to administrative shortcomings. The lack of cost accounting for administrative expenditures has resulted in wide disparities among the ADDs in operational costs, and the need for increased budgetary support. The setting of interest rates has not been linked either to the cost of the credit delivery system or to the interest rate structure set by RBM. Although data processing equipment is available in most ADDs, only limited and unsuccessful attempts have been made by some ADDs to computerize their credit operations. 2.25 In light of the above, there is a need for consolidation and strengthening of the system, both financially and administratively, leading towards increased access of smallholders to institutional credit, efficient and flexible allocation and utilization of funds, accountability and cost- effectiveness. These and other related issues would be addressed through the Project. The Near-Landless Rural Poor 2.26 At preseat, there is a proportion of the rural population which, because of its near-landless condition, has remained outside the orbit of the NRDP, without access to formal sources of credit. National statistics in Malawi indicate that as of 1986 there were &bout 272,000 households with landholding sizes below 0.5 ha and some 180,000 estate workers, excluding unemployed persons with no land at all. The households with less than 0.5 ha can only produce 27% of their food requirement and the households with 0.5 ha to 0.99 ha (360,000) can only produce 75% of the family food requirement. Development constraints outlined in para 2.12 indicate reasons for limited access to land and the scope for off-farm employment and income generation for this group is also very limited. The poorest are faced with a shortage of capital and have no access to institutional finance. Existing financial institutions in Malawi do not cater to these groups for several reasons, including: (a) the lack of collateral; and (b) preference for handling sizeable loans rather than smaller loans. In addition, the procedures for for obtaining credit are too cumbersome for a largely illiterate rural poor. Without alternative opportunities brought about by specific development, it is unlikely that this target group's poverty will decrease. Using the successful IFAD-financed Grameen Bank xroject (GB) in Bangladesh as a model, the proposed Project would include a pilot operation to test opportunities of generating off-farm self- employment for this target group by extending group credit facilities to the target group. - 18 - 2.27 The Grameen Bank began as a project whose objective was to design dependable organizational structure through which the banking system could extend credit to the landless poor without collateral. The project aimed at testing the hypothesis that if finaiicial resources are made available to the poor on reasonable terms and conditions, the poor would then be able to generate productive self-employment. The pilot project, initiated in 1976, and consisting of a financial organization with two branches evolved into a formal project in November 1979. In 1982, with assistance from IFAD, the Grameen Bank expanded its operations to 30 new branches in three districts. Encouraged by its initial success, the Government transformed it into a specialized credit institution for the rural poor in September 1983. The Bank now has an authorized capital of Taka 80 million (US$2.6 million), with paid up capital of Taka 30 million (US$1.0 million). In 1986, the bank had nearly 250 branches with membership of about 200,000 households, almost all of which are from the poor target group* 2.28 The success of the GB in Bangladesh is attributed to many factors including: (a) group lending, where people of similar economic circumstances form themselves into groups with some guidance and observed by GB officials for discipline and sincerity; (b) borrower eligibility, where members are required to follow all rules regarding payments, savings deposits and attending weekly meetings; (c) provision for group loan serving assistance; (d) pragmatic training practices; (e) constant loan supervision; and (f) joint group ventures. Other equally important features which have contributed to GB success include the availability of college educated and highly motivated staff willing to take long term assignments in remote branch areas, the presence of an inspirational leadership provided by the University professor who developed the GB approach and the borrowers themselves who while uneducated have reflected many basic entrepreneural capabilities. The successful implementation of the GB approach in Malawi, would to some extent depend on whether some of the above features can be replicated. III. THE PROJECT A. Project Objectives and Design Project Objectives 3.01 The primary objective of the Project is to transform Malawi's smallholder credit system into a better-managed, more efficient, low-cost and financially viable national credit delivery system benefitting a significantly greater number of smallholders than at present. To this end, the Project's immediate goals are: (a) to consolidate the present area or project based programs into a national smallholder credit system in MOA; (b) to increase flexibility in allocation of credit resources; (c) to strengthen the organization of the credit system and improve the efficiency of policies and procedures for credit planning and administration; - 19 - (d) to diversify and increase agricultural production by helping to meet the unsatisfied demand for seasonal and medium-term credit, and by increasing the number of smallholders, especially women, benefitting from institutional credit; (e) to initiate measures to increase the mobilization of rural savings; and (f) Initiate a pilot operation to provide credit and foster savings to the rural poor to finance off-farm income-generating economic activities. Project Design 3.02 The Project design has taken into full account other on-going projects and programs bearing on credit and linkages between research, extension, credit services, veterinary, and marketing. It assumes that disbursed and committed credit funds provided by various donors would continue to be available and that all the contractual obligations relating to credit operations financed by international, bilateral, and donor agencies would be fully met. The design also reflects the need to make maximum use of the locally available manpower resources in operational functions, and to provide only as much technical assistance as needed in critical areas. While improving efficiency, the project would not only keep total costs within limits, but would lessen Government's recurrent budgetary allocations to the credit system* Furthermore, while consolidating credit funds into a Central Fund for a more efficient and equitable distribution of resources, the design has maintained the current decentralized credit operation which has been operating satisfactorily. 3.03 The plan to upgrade and strengthen the Credit Section of MOA is seen as a first step towards future establishment of an independent rural credit (financial) institution. For the present, because of the high cost of establishment and operation, creation of a new independent financial institution would not be justified. While the creation of a rural financial institution would have specific advantages, particularly in its scope for promoting and mobilizing savings with a wider capital base, an agriculturally-based smallholder bank would, face funding problems on account of cash flow; smallholder farmers seek funds at the same season, and surpluses to invest are all post-harvest. While savings may be expected to Increase generally in line with the growth of the sector GDP, analysis suggests relatively small amounts of savings can currently be generated from the smallholder subsector. Besides, these could be highly seasonal and would be largely obtained at the expense of present post- office savings. Other disadvantages of a smallhAder bank would include relatively low turnover, the small size of loans, and the need to maintain close contact between the credit recipients and the NRDP-controlled staff. The proposed system would have the capacity to extend credit services broadly within the smallholder iector, reaching the poorer strata of farmers, including women, as well as those who could benefit most from development assistance. B. Project Summary and Description 3.04 The Project, which would be implemented over a period of seven years, would comprise the following components: - 20 - (a) Provision of funds for financing: (i) on-farm requirements of inputs for a variety of crops and livestock, on an incremental basis as at present, but with a national coverage (i.e., without any geographical limitations); and (ii) financially and economically viable on-farm and off-farm investments, through medium-term loans to individuals as well as to groups. (b) Institutional support for the upgrading and strengthening of the Credit Section of the Agricultural Department of MOA into a Smallholder Agricultural Credit Administration (SACA), with departmental status. The newly created SACA would have responsibility for management at a national level of smallholder credit funds in the various projects. These funds would be consolidated into a Central Smallholder Credit Fund (SCF). The upgrading and strengthening would be brought about through technical assistance, training, and provision of the necessary equipment, office accommodations, supplies, and vehicles. (c) A pilot credit and savings scheme for rural poor on the lines of the IFAD-financed Grameen Bank project in Bangladesh. C. Detailed Features Agricultural Credit 3.05 In order to meet the unfulfilled demand for credit and increase the participation of smallholder farmers, particularly women and those in the lower strata of land holdings, the Project would finance subloans to farmer clubs and to individual farmers for both seasonal and medium-term credit. The subloans must be technically and financially sound and would cover a wide array of activities, including crops, livestock, fisheries and small on-farm processing. Any farm activity, including subsistence production of annual as well as perennial crops under rainfed or irrigated conditions, would be eligible for financing under the Project. Funds provided under the Project would be additional to credit funds now available within the system (para 2.04). 3.06 Seasonal Credit. Funds would be made available for the purchase of inputs (fertilizer, seed, pesticides, and herbicides) to increase the productivity of crops and livestock for both the domestic and export markets. In estimating seasonal credit demand for the Project, it has been assumed that the present restrictions on credit amounts would be removed, so that farmers would be able to obtain fertilizer and other inputs as required to meet demand (para 3.14), Institution of these measures would result in a more comprehensive response to the effective demand of the farming community. Subloans per beneficiary, borrowing through farmers' clubs, are expected to average MK150 (US$65), (Annex 9, Table 3), resulting from both the increased use of inputs and the higher - 21 - input <osts. Total incremental seasonal lending to be financed over the seven years of Project implementation has been estimated at MK20.5 million (US$.9 million). The basis for estimating seasonal credit requirement is discussed in pars 3.14 and Annex 9. In 1985/86, credit for seasonal inputs were made to about 200,000 smallholders or 16% of farm families. It is estimated that the number of borrowers would increase to about 400,000 farmers by 1993/94, equivalent to 26% of the total smallholder population. 3.07 Medium-term Credit. Funds would be provided under the Project to finance medium-term loans to individuals and groups in the various ADDs for types of Investment activities deemed to be financially viable (Annex 9, Tahe 4). Included as investment items would be ox-carts, ridgers, ploughs, sprayers and other farm tools and equipment, supplies for livestock, dairying, poultry and fisheries, as well as farm buildings. Smallhojder farmers and clubs would also be advised to borrow, if they so wish, for off-farm investments that are closely related to on-farm activities. Such items could include maize shellers, oilseed crushers and similar agricultural processing equipment. However, because of the constraints previously indicated (para 2.17), increasing the share of medium-term credit in total smallholders' portfolio could be slow. Medium-term credit, to be financed under the Project, is estimated at MK5.5 million (US$2.4 million), only 14% of the total incremental lending by Year 7 of the Project (para 3.19). 3.08 In order to facilitate on-farm investment to those qualified and interested, the Project would provide for the position of a supplies/ marketing officer within SACA, who would be responsible for identifying various sources of supply for implements and farm equipment, coordinating with the relevant agencies to assess the appropriateness and performance of equipment, and arranging demonstrations in rural areas to educate farmers and assist them in selecting appropriate equipment. In addition, funds would be provided for four man-months of local consultancy. This consultant, who would have broad comparative knowledge of appropriate on- farm technology, would carry out a study to: (i) critically assess the constraints affecting the uptake of investment items; (ii) identify constraints at the village level in the use and manufacturing of equipment; and (iii) recommend practical measures to remove the identified constraints. The study should identify investment opportunities to be pursued by smallholders and recommend terms and conditions which would encourage such investments. Assurances were obtained from the Government that the study on medium-term credit would be completed not later than June 30, 1988, and its recommendations implemented, taking IDA's comments into account. Institutional Support 3.09 Establishment of the Smallholder Agricultural Credit Administration (SACA). The existing credit unit within MOA would be upgradcd, strengthened, and converted into SACA, at the departmental level (Chapter 1). This expanded unit would be responsible for managing, at the national level, the smallholder agricultural credit system and the Central Smallholder Credit Fund (SCF). The establishment of SACA is intended as a first step towards the establishment of an independent viable and sustainable rural financial institution providing credit to smallholders and generally to the entire agricultural sector. - 22 - 3.10 To support the above objectives of enhancing the effectiveness of the smallholder credit system, the Project would finance the costs of incremental staff of SACA, technical assistance (para 3.11), training (para 3.12), vehicles, office accommodation, supplies and equipment. Specifically, funds would be provided for payment of salaries and allowances for a credit administrator, a financial controller, a supplies/ marketing officer, two accountants, and support staff constituting two clerk/typists and two drivers. Funds would also be provided for the purchase of two vehicles plus spare parts, office supplies, equipment, 350 bicycles for field credit staff, and rent for housing and office space for SACA. 3.11 Technical Assistance. An internationally recruited credit/ training advisor satisfactory to IDA would be recruited for the first two years of the Project. This individual would advise the Credit Administrator and other credit staff on, inter alia, organizing SACA and the credit system, specifically on staffing, financial management of SCF, the setting up of SACA's operating policies and procedures, as well as the establishment of an accounting and information system. The advisor would also assist in establishing a training program. Funds would be provided for an additional six months once the Government and IDA determine that there is a need to extend the advisor's contract. Guidelines for the terms of reference are given in Annex 8. During negotiations, assurances were obtained from the Government that the credit adviser would be in post not later than April 30, 1988. The Project would rely substantially on the existing M&E unit of MOA and on the System Analyst provided under the on- going National Extension and Planning Project to carry out credit-specific monitoring and evaluation and computerization of the credit system, respectively. It was agreed during negotiations that a review would be held by the Government and submitted to IDA not later than June 30, 1988 to determine whether there is a need for further assistance beyond what is already being provided by the M&E unit and by the computer programmer under the National Extension project. To this end, the Project would finance 18 man-months of consultancy time to be used for M&E and the setting up of the computerized information and accounting system for SACA and the ADDs, if needed. Part of this funding could be used to carry out ad hoc studies on the effectivenesse and impact of the credit system. About three man-months would be needed to undertake the Project's mid-term evaluation. The terms of reference and a short list for the credit/training advisor was agreed upon during negotiations. 3.12 Training. To strengthen the technical and managerial capabilities of the credit officers and technical staff at all levels to respond to the credit needs of farmers, training would be intensified under the Project. All the credit officers, credit supervisors, assistants, and accounting staff would participate in in-service and residential training, to be financed under the Project. It is envisaged that all credit staff (some 400 credit staff, 8 ADD credit officers, and 5 SACA staff) would undergo an annual one-week training seminar on loan evaluation and processing, new procedures introduced during the year, club administration, term lending techniques, loan supervision and collection. In addition, the credit staff would participate in monthly one-day training sessions at least eight times a year to discuss topical subjects and to review work programs and problems encountered. One-day courses would be provided for - 23 - officials of existing clubs and two days for new club officials (on the average, 3 officials per club) annually on club administration, including bookkeeping. The internationally-recruited credit/training adviser (para 3.11), would collaborate with MOA's training specialists in setting up credit-specific training programs and developing teaching material for credit staff at the existing residential training centers. The Project would finance both per diem expenses for the courses and seminars and preparation of training material. To supplement local training and to familiarize SACA's staff with operating an independe-t credit institution, the Project would finance short-term overseas courses (20 persons/month) and study tours (16 person/month) for SACA and ADD credit officers. The staff selected would visit credit institutions .n other developing countries and participate in selected training courses. In general, the short-term training would cover subjects such as credit management and agricultural project planning, appraisal, and management. Presentation of specific overseas training programs, courses, and selected candidates to IDA for review and comment and this would be a condition for disbursement of the IDA/IFAD funds for these purposes. Pilot Credit and Savings Scheme for the Rural Poor 3.13 The Project would provide funds for a pilot scheme which would attempt to replicate, under Malawian conditions, a system of group credit for non-land-based activities currently being implemented successfully under the IFAD-funded Grameen Bank (GB) project in Bangladesh (para 2.27). The objective of the pilot credit scheme for the rural poor -- to be known as the Malawi Mudzi (Village) Fund (MMF) -- would be to extend banking facilities for lending and savings to the target groups without collateral. The pilot scheme has been conceived in two overlapping phases; the first would involve the creation of a basic institutional framework and the initiation of the MMF in two selected locations. Given satisfactory performance, it would then be replicated at two other locations in the second phase. There would be a small management unit headed by a scheme administrator and support staff, and at each of the four selected locations, there would be an MMF Branch Unit with a contingent of staff and support facilities. There would be a training and induction program for the staff. The Project would finance consultancy assistance, operation and maintenance costs, overseas and local training, housing and office accommodations, and credit funds. Over the seven-year Project period, it is expected that about 4,000 target group families would participate in the pilot lending program (details are provided in Annex 7). D. Credit Requirements Seasonal Credit 3.14 A major objective of the Government's agricultural policy has been to sustain self-sufficiency in staple foods and at the same time encourage agricultural diversification, Because virtually all land is already cultivated, extra production must come from intensified cropping and the use of additional fertilizer. In light of this and given the prominence of maize in the smallholder subsector and feztilizer used on maize (currently 1.1 million ha (70%) of the total arable customary land area is under maize production), one approach to determining how much - 24 - seasonal credit demand exists is to estimate the amount of fertilizer required to maintain the maize self-sufficiency objective for the period 1987/88-1993/94. Faced with the transportation burden and the bulkiness of maize, which make imports expensive and exports unviable except to neighboring countries, the relevant clearing price for Malawi's maize is between the export and import parity prices. On this basis and given the importance of maize in the diet, Malawi is justified in following its stated objective of food self-sufficiency. With a population growth rate of about 3.2% per year, maize production would need to Increase by about 4% per year if the self-sufficiency objective is to be maintained. It is estimated that at Year 7 of Project implementation, the maize requirement would be about 1.7 million tons, an increase of about 265,000 tons above 1986/87 production levels which were considered by GOM as marginally below self-sufficiency. 3.15 Total fertilizer sales to the smallholders have averaged 61,000 tons per year over the last 5 years and are currently around 65,000 tons (14,000 tons of nutrients). Sales have increased by about 6% per year between 1981/82 and 1984/85. During this period, the proportion of credit sales to total sales increased from 36% to 56%. Availability of credit per farmer has remained fairly constant at MK45 to MK50 per farmer. The volume of fertilizer per farmer has increased by 3 to 4% per year over the last 3 years. At present, about 23% of smallholders use fertilizer. Over 70% of smallholder fertilizer sales is used on maize production. Data from the National Sample Survey of Agriculture indicate that field application rates of fertilizer for major crops are well below the current recommendations. This is mainly due to the limited availability of fertilizer, poor dissemination of extension messages, restriction of credit packages 'to 0.4 ha, and overall lack of credit funds to certain ADDS. However, a review of 188 national fertilizer trials with local maize over the past 18 crop seasons showed that 55 to 60% of the trials had produced yield responses of 11 to 21 kilos of grain per kilo of nitrogen. A shorter run of data for the most favorable maize area of the Lilongwe Plain showed yield responses of 26 to 31 kilos grain/kg N for composite and hybrid varieties. The use of improved crop packages has been good, and if the increased extension capacity of the NRDP can be harnessed to improve husbandry practices, and the availability of credit and improved seed can be complemented by the increased availability of fertilizer, the output response should be significant. 3.16 The seasonal credit demand estimated for the Project assumes that: (a) changes in agricultural input distribution and marketing systems would not adversely affect input supply and output marketing to the smallholder subsector; (b) maize prices and gross margins would be maintained at a level which ensures that application of fertilizer and other improved inputs are profitable; (C) the country would gradually move towards high analysis fertilizer and at the same time gradually eliminate subsidies on fertilizer; - 25 - The estimate obtained indicates that about 26,000 tons of additional nitrogen (N) and 8,000 tons of phosphate (P) would be needed in Year 7 of Project implementation. Fertilizer requirements would increase from about 18,000 tons (of N and P) in 1987/88 to about 34,000 tons (of N and P) in 1993/94. These requirements are valued, in current terms, at about MK43 million (US$18.7 million) in 1987/88 and about MK98 million (US$42.6 million) in 1993/94 (Table 1). Table 1: Fertilizer and Credit Requirements for 1987/88 - 1993/94 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 Population (million) (3.2% p.a.) 7.67 7.91 8.17 8.43 8.70 8.96 9.26 Maize requiremert I/ (million tons) 1.42 1.47 1.52 1.57 1.62 1.67 1.72 Maize production (million mt) 1.48 1.53 1.58 1.63 1.69 1.74 1.78 Ferti. Requirement ('000 tons) Nitrogen 14.55 16.17 17.93 19.83 21.88 24.08 25.91 Phosphate 4.36 4.85 5.38 5.95 6.56 7.22 7.77 Value of fert. (mil. MK) 43.3 51.9 61.6 71.9 81.0 90.2 98.3 Credit Requirements Total Seasonal Credit requirement (mil. MK)2/ 24 30 39 46 54 59 67 1/ Assumes per capita consumption of 180 kg/year. 2/ Takes into consideration the gradual removal of subsidies and shift from low to high analysis fertilizer during the life of the Project. Also includes price contingencies and 25% allowances for other inputs. 3.17 The self-sufficiency approach only provides an approximate magnitude of credit demand. Under the Project, it is expected that inputs for a greater range of crops would be made available. There would be more flexible packages, allowing farmers to choose which inputs to use, for what area, and for what crops, which would increase demand. The provision of a range of input types and bag sizes, together with the strengthening of credit services under the Project, should further Increase credit demand. Including these additional credit needs, the estimated credit requirement (for maize) is increased by 25%. Up to 1985/86, about 75% of the total fertilizer used was mainly for maize production. 3.18 The demand for seasonal credit over the Project implementation period was also projected based on the ADDs' historical performance and taking into account: (i) farm population growth rates; (ii) number of beneficiaries; (iii) farm size; (iv) cropping patterns; and (v) average - 26 - loan per borrower. These estimates were adjusted for the expected increase in coverage, removal of resource constraints, and impact of availability of smaller fertilizer packages. On the basis of this approach (Annex 9, Tables 2-3), credit requirement is estimated to increase from MK27 million (US$11.7 million) in 1987/88 to MK58 million (US$25.2 million) in 1993/94 in current terms. Thus, both the ADDs and the self-sufficiency approach (including 25% allowance for other crops) demonstrate very similar requirements. However, the ADDs estimate should be taken in light of existing credit restrictions and resulting distortions. Under the ADDs approach, it has been estimated that the number of borrowers would increase from the current 200,000 to about 400,000 by 1993/94, equivalent to 26% of the total smallholder population; and the average loan per borrower would increase from the current MK90 (US$39) to about MK150 (US$165). The increase in total credit requirement would be achieved mainly through loan size. The uptake would vary by ADD; about 41% of the farm families are expected to be reached in Kasungu where uptake has been growing rapidly and 7% in Blantyre where uptake has been growing slowly (Annex 9, Table 3), The increase in the number of beneficiaries would require major efforts in extension, training, and credit delivery. However, this target level is achievable. Firstly, assuming an average of 20 members for each club, only 4-5 new clubs per EPA would need to be formed each year. Secondly, the experience in Kasungu ADD, where the average annual growth rate in the number of beneficiaries between 1982-86 was 39%, indicates that the target is achievable. Medium-term Credit 3.19 Estimation of medium-term credit has been more difficult to evaluate given the past poor performance and the fact that data are less readily available. Medium-term credit was estimated on the basis of the ADDs' experience to-date. The estimates have been adjusted for the expected changes in lending policies and procedures, and the likely removal of constraints in the supply of investment items (para 3.08). Ridgers, ploughs, farm carts, and sprayers have been the main items sold on medium- term credit. In 1986/87, a total of 220 ridgers, 281 ploughs, 233 farm carts, 307 sprayers, 103 work oxen, and 95 dairy cows were sold to farmers. The equipment sold was only half of the total programmed by the ADDs. Demand was limited due to the high cost of these implements. Under the Project, a modest increase in the supply of investment items is proposed (Table 2), mainly to farmers with over 1.5 ha of land. It is expected that the opening up of sources of supplies may reduce costs and more appropriate technologies may well become available if certain items (ox-carts), are purchased from rural artisans (para 3.08). In addition, the proposed expansion of the irrigation program and fisheries provides scope for increasing demand for investment items. A list of possible investment items is shown in Table 2 below, and an overview of the expected investment demand is presented in Annex 10. - 27 - Table 2: Estimates of the Number of Items for Medium-term Credit Items Total Units Projected Farm machinery & equipment (ploughs, ridgers, etc.) 8,000 - 9,000 Cotton sprayers 6,000 - 6,300 Ox-carts 2,500 - 2,900 Processing equipment 700 - 750 Stall feeding 2,000 - 2,500 Dairy animals 600 - 650 Poultry units 200 - 250 Fisheries (ponds) 200 - 300 Total Lending and Net Credit Requirements 3.20 The incremental lending requirement for the Project is presented in Table 3 below, taking into account available funds in the system. Total lending for seasonal and medium-term credit over the seven-year implementation period has been estimated at MK324 million (US$141 million). Available funding, including undisbursed funds from on-going projects, amounts to about MK299 million (US$130 million). The total incremental credit requirement which would be financed under the Project has thus been estimated at MK25 million (US$10.9 million). Table 3: Total Lending and Net Credit Requirements (MK '000) Total 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 (cumulative) A. Anual landing Program'1 Seasonal credit 24,108 30,710 38,632 45,912 53,568 59,342 66,%1 319,233 Mediunrterm loan 600 650 700 750 850 950 1,000 5,500 Total lenditg program 24,708 31,360 39,332 46,662 54,418 60,292 67,%1 324,733 B. Funds Available Collections 2/ - seasonal credit 16,200 24,108 30,710 38,632 45,912 53,568 59,342 268,472 - mediun-term loans 75 195 325 465 540 710 780 3,090 Unutilized funds 3/ 5,066 - - - - - - 5,066 Net lncae 4/ 500 258 318 382 433 494 559 2,44 Total funds available 21,841 24,561 31,353 39,479 46,885 54,772 60,681 279,572 C. Increwntal Funds Required (A - B) 2,867 6,799 7,978 7,184 7,533 5,519 7,280 45,161 D. Funds From Lnutilized Balances 5/ 3,413 5,228 4,059 2,542 2,426 1,150 1,250 20,068 E. Net Requirenants (C - D) -546 1,5/1 3,919 4,642 5,107 4,369 6,030 25,093 1/ Fran Table 1. 2/ Collections include provision for doubtful debts. 3/ Available funds not utilized for 1986/87 lending progran. T/ Net incane assumed at 1% of previous year's lending, except for 1987/88 as in 1986/87 adMinistrative expenditures were not paid out of income generated fran lenditg operations. 5/ Withdrawal of funds under arrgoing projects (Annex 2, Tables 1-2). - 28 - 3.21 One of the major objectives of this Project, as indicated earlier (para 3.01), is to bring in flexibility in the use of credit by the smallholders. The annual lending program in Table 3 is, therefore, an indication rather than a target for lending. The ADDs would determine their credit requirements based on effective demand as is the current practice and the Project would ensure that credit resources would be available as needed. E. Total Project Costs 3.22 Total cost of the Project, including physical contingencies, expected price increases and taxes and duties, is estimated at MK33.0 million (US$14.4 million), with a foreign exchange component of US$10.3 million, or 72%. The Project costs include recurrent expenses of MKO.74 million (US$ 0.32 million). Of the total Project cost, incremental credit amounts to MK25.4 million (US$ 11.0 million); the pilot credit scheme accounts for 7%; and institutional building accounts for 17%. Technical assistance accounts for 4%, training for 7%, and vehicles and equipment for 4%. The cost estimates are based on June 1987 prices and include taxes and duties estimated at MKO.09 million. Price contingency estimates assume, for both foreign and local currency costs, price escalation of 3% for 1987, 1% for the years 1988-1990, and 3.5% per year thereafter. Price contingencies have been calculated on the assumption that differences between domestic and international inflation rates would be offset by the exchange rate adjustments. Project costs by component are summarized in the following table (details are given in Annex 3, Tables 1-6). - 29 - Table 3.1A: Project Cost Sumary (KWACHA '000) (US$ '000) Z Total ........-------...- - .--- -- - ----------- Z Foreidn lase Local Foreign Total Local Foreign Total Exchaoe Costs =Za=sa ZZg= ==auna asazg: vzzzv 829=22a uaasacv agvzu A. INCREMENTAL SALLHOLDER CREDIT 5,677 17897 23573 2P468 7,781 10,249 76 77 9. INSTITUTIONAL BUILDING 1?952 3121 5,073 849 1,357 2t205 62 17 C. PILOT CREDIT SCHEME 993 1?034 2027 432 449 881 51 7 Total BASELINE COSTS 8621 22,051 30,672 3748 9,587 13336 72 100 Phvsical Contingencies 113 322 436 49 140 189 74 1 Price Contingencies 584 1,434 2018 254 624 877 71 7 Total PROJECT COSTS 9.318 23808 33126 4v052 10,351 14403 72 108 Table 3.1B: Project Cost Summary by Components MK '000 Physical INCREMENTAL PILOT Contingencies SMALLHOLDER INSTITUTIONAL CREDIT CREDIT BUILDING SCHEME Total I Amount I. INVESTMENT COSTS A. TECHNICAL ASSISTANCE - 1.196 - 1W196 5.0 60 B. VEHICLES - 772 - 772 5.0 39 C. OFFICE SUPPLIES I EQUIPMENT - 200 - 200 5.0 10 D. TRAINING OVERSEAS (NEIGHBORING COUNTRIES) TRAINING - 644 - 644 5.0 32 LOCAL TRAINING - 1,569 - 1,569 5.0 78 Sub-Total TRAINING - 2213 - 2P213 5.0 111 E. PILOT CREDIT SCHEME - 29027 2027 0.0 0 F. INCREMENTAL CREDIT SEASONAL CREDIT 19P238 - - 19P238 0.0 0 MEDIUM-TERM CREDIT 4335 - - 4335 5.0 211 Sub-Total INCREMENTAL CREDIT 23573 - - 23,573 0.9 217 ------------- ------ --- ---- -- Total INVESTMENT COSTS 23573 4.381 2.027 29p981 1.5 436 II. RECURRENT COSTS A. LOCAL SALARIES I UAGES - 370 - 370 0.0 0 8 VEHICLES ON- 140 - 140 0.0 0 C. OFFICE SUPPLIES & ADMINI. EXPENSES 182 - 182 0.0 0 ----------------- ------------- ------ ------- ----- ------- Total RECURRENT COSTS - 692 - 692 0.0 0 Total BASELINE COSTS 23.573 5.073 2027 30,672 1.4 436 Phusical Contingenc es 217 219 - 436 0.0 0 Price Contingencies 1.565 302 152 2.018 1.3 25 ----------------- ------------- ------ ------ ----- ----- Total PROJECT CLSTS 25,354 5,593 2r178 33t126 1.4 461 ----------------------------------zzzz= =Zzzn Taxes 20 - 20 0.0 0 Foreime Exchange 19.258 39439 1y111 23808 1.4 341 - 30 - F. Project Financing 3.23 The financing plan for the total Project would be as follows: --------------------------------- M- - --------------------- IM IFAD SWEFICIARIES 0. OF MAI Total Local (Excl hsui. AMount I Asount I Anount Z Acount 2 Asount I For, Exch. Taxes) Taes axas" Waft Saaa. 23103 San WaS=Iama X=XZx I 8=2 mammmUus st I. INVESTHENT COSTS A. TECHNICAL ASSISTANCE 23 50 28350 - - 0 0 565 4 509 57 - 9. VEHICLES 19050 1 0 -so 0 0 379 3 379 - * C, OFFICE SUPPLIES I EGUIPHENT 48 50 48 50 - * - - 97 1 7 19 D. TRAINING OVERSEAS (NEI0RINGI COUNTRIES) TRAINING 153 50 153 50 * - - - 305 2 305 - - LOCAL TRAINING 79 10 79 10 - * 605 79 763 5 158 605 * Sub-Total TRAINING 23' 22 232 22 - - 605 57 1,068 7 463 605 - E. PILOT CREDIT SCHENE - - 947 100 - - - - 947 7 483 464 - F. INCRENTAL CREDIT SEASONAL CREDIT 4,193 47 4,193 47 * * 535 6 8922 62 6,692 2231 * NEDIUR-TERN CREDIT 946 45 946 45 210 10 -0 -0 2,102 15 1,681 420 Sub-Total INCREENTAL CREDIT 5.139 47 5439 47 210 2 535 5 114024 77 8373 2651 * Total INUESTHENT COSTS 5#891 42 6,839 49 210 1 1t140 8 14,080 98 10#285 3.796 * II. RECURRENT COSTS A. LOCAL SALARIES I UAES - * - * - * 172 100 172 1 - 164 9 D. VEHICLES 0IN 23 35 2335 * * 20 30 65 0 46 20 * C. OFFICE SUPPIES I ADHINI, EXPENSES 10 12 10 12 - - 64 75 85 1 21 64 - Total RECURRENT COSTS 33 10 33 10 - - 256 79 322 2 67 247 9 Total Disbursesent 5'25 41 6,872 48 210 1 1#396 10 14,403 100 10.351 4043 9 U=M= .. a922S uasa.= amaxal Ss asm.a Ima. m =9=sa .a=a=. .at ssu 3.24 Total foreign financing, to be provided jointly by IDA and IFAD, would amount to US$12.8 million, which would cover 89% of incremental costs. The Project costs to be shared in proportion and amounts as summarized above, reflect the provision of a grant by IPAD for the pilot scheme and the need to minimize disbursement problems. Thus, the proposed IDA credit for US$5.9 million, on standard IDA terms, would finance 41% of the total Project cocts (47% of the foreign costs and 25% of the local costs). The portion of the IFAD loan/grant would amount to US$6.9 million (48% of total project costs), of which 53% would cover foreign costs and 36% the local costs. Local currency financing by IDA and IFAD would be justified for this type of project and would be in line with other- on-going Bank projects in Malawi. - 31 - 3.25 Project beneficiaries (participating farmers) would finance about 1% of the total Project cost (US$0.21 million); and an estimated US$1.4 million, equivalent to 10% of total Project cost, would be financed by the Government through budgetary allocations to MOAo The Project would increase the Government's budgetary allocation to MOA by about US$0.30 million (MKO.7 million) in seven years. To avoid requiring the Government to pre-finance local expenditures reimbursable by IDA and IFAD and to ensure that funds for the Project would be made available when needed,the Government would establish two special accounts in 6 commercial bank. One of these accounts would be funded by IDA for expenditures to be financed by IDA and the other by IFAD for program components to be supported by IFAD. IDA and IFAD would upon credit effectiveness and receipt of withdrawal application, make an advance deposit of US$300,000 each. The Account would serve as a revolving fund to finance Project expenditures. IDA would periodically replenish this account upon receipt and approval of the withdrawal applications, together with satisfactory evidence that the expenditures paid out of the special account were eligible for financing out of the Project. A separate special account would also be established for the pilot scheme and this would be a condition of disbursement of this component. IFAD would make an advance deposit of US$100,000 to this account. Assurances were obtained during negotiations that these special accounts would be established. 3.26 IFAD would finance 100% of the pilot credit scheme for an amount equivalent to US$0.95 million, of which US$0.5 million would be on grant basis. Funds for this component would be disbursed by IFAD to GOM. MOF would transfer the funds to MMF, through the Office of the President (OPC), as budgetary allocations in accordance with terms and conditions of a subsidiary financing agreement to be signed between MMF and MOF. IFAD would disburse funds from grant resources to the special account specifically for the scheme (para 3.25), to be established in a commercial bank and held in US dollars und.er%he jvint signatures of the Scheme Administrator (SA), and the designate of the PS of OPC. Once the grant resources (US$0.5 million) are nearly disbursed, replenishment of the special account would be made from the credit allocated for the scheme by IFAD. The execution of this financing agreement, satisfactory to IFAD and IDA, between MMF and MOF would be a condition of disbursement for this component. The signing of the financing agreement between IFAD and the Government would be a condition of credit effectiveness. 3.27 Funds allocated under the Project for incremental salaries, other administrative expenditures, technical assistance, incremental, seasonal and medium-term credit, the pilot credit scheme, and training would be transferred by MOF to MOA/SACA and OPC/MMF. Funds for the seasonal and medium-term credit would be disbursed by SACA. G. Procurement 3.28 Project procurement would be in accordance with IDA procurement guidelines. Contracts for US$100,000 equivalent or more would be awarded through international competitive bidding (ICB) in accordance with IDA guidelines. Contracts below US$100,000 equivalent would be awarded through local competitive bidding (LCB), according to local procedures which are acceptable to IDA, with contracts for less than US$50,000 equivalent being - 32 - awarded on the basis of quotations from at least three suppliers. Local procurement will also be open to Bank-member countries. Procurement arrangements are summarized below, with amounts to be financed by IDA credit in brackets and by IFAD in parenthesis. Procurement Method a/ Total ICB LCB Other NA Cost (US$ million) Vehicles and Equipment 0.4 0.1 0.5 (0.2) (0.05) (0.25) [0.2] [0.05] (0.251 Overseas Training 0.3 0.3 (0.15) (0.15) [0.151 [0.151 Local Training 0.8 0.8 (0.08) (0.08) [0.081 [0.08] Technical Assistance 0.6 0.6 (0.3) (0.3) (0.31 [0.31 Incremental Credit 11.0 11.0 (5.1) (5.1) [5.1] [5.1] Operating Costs 0.3 0.3 (0.03) (0.03) [0.03] [0.03] Pilot Credit and Savings Scheme 0.9 0.9 [0.9] [0.9] Total 0.4 0.1 13.6 0.3 14.4 (0.2) (0.05) (5.63) (0.03) (5.9) [0.2] [0.051 [6.631 [0.031 [6.91 / Figures include price contingencies, but excluded in figures in the DCA. 3.29 The Project would disburse for seasonal credit (i.e., it would finance credit rather than the inputs directly), and according to practice, on-going arrangements for procuring fertilizers and other inputs would continue. As at present, incremental requirements for fertilizer would be considered part of the overall national requirements and would be procured by the Fertilizer Fund through ICB. The investment items financed by medium-term loans such as farm tools, small equipment, ox-carts, and minor - 33 - on-farm works, would be unsuitable for procurement through local bidding because of their small value. Sub-borrowers would purchase their requirements of these items through ADMARC or local commercial channels. Increased participation of the private sector in the procurement of fertilizer and other inputs and investment items, should increase competition among suppliers, and thus be to the advantage of the sub- borrowers (para 1.22). The selection and employment of technical assistance personnel would be in accordance with IDA guidelines and opportunity for application would be given to local consultants. Assurances were obtained during negotiations that the procurement procedures outlined above would be followed, and that all technical assistance personnel would be employed under terms and conditions of employment satisfactory to IDA. H. Disbursenent 3.30 The total foreign financing (US$12.8 million) would be disbursed over a seven-year period. The rate of disbursement follows that of the Bank's standard disbursement profile related to Malawi area development projects which contain credit components. The proceeds of the IDA credit and the IFAD loan/grant would be disbursed as follows: Amount a/ Proposed ($ millionT Disbursement IDA IFAD Percentage b Seasonal Credit for Inputs 4.20 4.20 94% of expenditures Medium-term Loans 0.90 0.90 90% of expenditures' Training 0.23 0.23 100% of foreign expenditure for overseas training/tours Vehicles & Equipment 0.25 0.25 100% of expenditures Technical Assistance 0.30 0.30 100% of expenditures Pilot Credit and Savings Scheme - 0.95 100% of expenditures Operating Costs & Maintenance 0.03 0.03 100% of foreign expenditure a/ Amounts include prince contingencies but in DCA, price contingencies have been separated. b/ Of components co-financed by IDA, pari pasu, 50:50 with IFAD, with the exception of the pilot credit scheme which is 100% IFAD. 3.31 The proposed project would finance eligible incremental seasonal credit to be made by the ADDs. Incremental seasonal credit would be defined as the aggregate amount of credit for inputs provided or to be provided to farmers or farmers' clubs countrywide in a crop year, from October 1, 1987 through September 30, less the aggregate amount of such credit provided in the preceeding crop year. However, sAnce currently there are undisbursed funds available for seasonal lending for borrowers in - 34 - specific areas, from international and bilateral agencies (para 2.04), these funds would be drawn down prior to withdrawal of project funds (eligible credit). Initially, therefore, the project would finance farmers mainly in those areas which are not sufficiently funded under on-going area development projects. 3.32 Information on disbursement of seasonal credit by ADDs is available for the 1986/87 crop season. Prior to the commencement of each crop season, MOA/SACA would submit to IDA and IFAD estimates of such disbursement for that season, thus establishing the incremental for the season, together with estimates of available funds from on-going projects, as above. This information would be significant only for planning purposes. Actual withdrawals would be made by suitably operating the Special Account (para 3.25). Disbursements against contracts or purchase orders of less than US$20,000 equivalent and for expenditures for seasonal and medium-term credit and training would be supported by statements of expenditures (SOEs), signed by the SACA Administrator and the Financial Coordinator of NRDP in MOA* Full supporting documentation in respect of such SOEs would be retained by the borrower and made available for inspection by IDA and IFAD during normal Project supervision. All other disbursements would be made against full documentation. 3.33 The estimated disbursement schedules for the IDA and IFAD credits (Annex 3, Tables 5-6) are as follows: FY88 FY89 FY90 FY91 FY92 FY93 FY94 ------------------------US$ million----------------------- IDA credit During FY Cumulative 0.2 0.7 1.6 2.7 3.7 4.6 5.9 IFAD credit/grant During FY Cumulative 0.3 0.9 1.9 3.2 4.4 5.4 6.9 IV. PROJECT IMPLEMENTATION A. Organization and Management General 4.01 The Project, with the exception of the Pilot Scheme (para 4.07), would be implemented by MOA, through SACA, the credit sections in ADDs, MOA's training and personnel units, as well as by farmers' clubs and individual farmers. Overall responsibility for project implementation would be with the Principal Secretary (PS) of MOA. Day-to-day management of the Project would be the responsibility of the Credit Administrator, who - 35 - would be the chief executive of SACA and who would report to the PS through the Controller of Agricultural Services (CAS-NRDP). The existing National (Smallholder) Credit Committee, chaired by the CAS-NRDP, would continue to advise the PS on smallholder agricultural credit policies, procedures and use of financial resources. This Committee would be strengthened by additions to its membership of representatives from the Ministry of Finance (MOF), the Reserve Bank of Malawi (RBM) and the Office of the President and Cabinet (OPC) as was agreed during negotiations. Additional members to this committee subsequently have been appointed. SACA 4.02 The Credit Unit within MOA has been upgraded into SACA. SACA, as a separate management ane accounting unit with departmental status within MOA (Chart 1), would be responsible for managing, at the national level, the smallholder agricultural credit system and the Central Smallholder Credit Fund (SCF). SACA's major responsibilities would be to: (a) pool in the SCF all the assets and liabilities of the Credit Funds now existing in the ADDs and/or RDPs; (b) establish guidelines for preparation of annual lending programs by ADDs and recommend to MOA management for approval the proposed annual lending programs and allocation of funds; (c) establish operational guidelines, disbursement, accounting and reporting procedures, to be applied uniformly by all ADDs; supervise and monitor implementation of lending programs, operational and financial performance of ADDs, and operating results; (d) ensure that all contractual obligations relating to credit operations in the area-specific projects currently being financed by international and/or bi-lateral financial institutions and donor agencies are fully complied with; (e) establish staffing norms and coordinate training programs for ADDs' credit and credit accounting staff; (f) prepare action programs to: (i) increase access of smallholders to institutional credit; and (ii) promote savings by farmers' clubs and individual members in Post Office Savings or Commercial Banks and other financial institutions; (g) maintain close linkages with the agricultural research and extension services; and (h) explore possibilities for increasing and diversifying sources of supply for farm inputs and investments. An experienced and qualified person, acceptable to IDA, has been appointed to head SACA as the credit administrator. While SACA would have its own - 36- operational and accounting staff, it would utilize, to the extent possible, specialized staff in other MOA units in the areas of training, personnel management, computerization and impact evaluation. SACA staff would comprise a financial controller, two credit operations officers, one supply and marketing officer, two accountants, and office support staff. The financial controller and the supplies marketing officer have also been appointed, on terms and conditions satisfactory to IDA. SCF 4.03 At present, each ADD has its own credit fund invested in loans, sundry debtors, and stocks. The unused balance is kept in an account that each ADD maintains with RBM. These individual capital funds represent a liability to GOM which has made the funds available to each ADD. To overcome defects of the present system (para 2.07), the assets and liabilities of individual ADDs' credit funds would be merged and consolidated in the SCF to be administered by SACA. Thus, the assets and labilities of SCF would be consolidated assets and liabilities of the participating eight ADDs. SCF's capital fund (its equity) would consist of ADD capital funds transferred to SCF on October 1, 1987, any future withdrawal of credit funds under the area-specific projects, and the SCF net income accumulating as of October 1, 1987. The firancial operations of the SCF are detailed in Annex 4. The Government Order establishing SCF has been received and was found satisfactory by IDA. Resources of the SCF would be deposited in a current account with RBM. The interest-bearing current account for the SCF has been established with RBM. This account would 1har interest at the ruling bank rate (currently 11% p.a.). 4.04 As the credit system would remain decentralized, ADDs would continue maintaining separate bank accounts in the Reserve Bank of Malawi (RBM) and in branches of commercial banks for their credit operations. SACA would maintain for each ADD a "capital fund account" and a "currert ,_ loan account". The capital fund account would show the amount of capital and accumulated profits which was transferred to the SCF on October 1, 1987; any future withdrawals of resources from various donors under on- going area-specific projects (allocated to credit operations) would be ,recorded in the respective ADD capital fund account. These sub-accounts would provide a continuous and permanent record on the contribution of each ADD to the SCF Capital Fund, and would serve as a source of information for preparing periodic reports and/or withdrawal applications to donor agencies for area-specific projects. 4.05 Credit funds eligible for withdrawal under on-going area-specific development projects would be withdrawn, in accordance with terms and conditions stipulated in the respective credit agreements, before withdrawals of funds under the Project. However, during project implementation, SACA would determine on a project by project basis, the pooling of committed but still undisbursed resources under on-going area-specific projects into the SCF. SACA would take into consideration the Government's concern for continued flow of credit funds from other donors, and also donors' specific interest. The donors have expressed a general support for the Project. - 37 - 4.06 With the overall objective of transforming Malawi's smallholder credit system into a more efficient system, the project is also designed to minimize Government budgetary support. In this regard, income generated by SCF would be utilized for: (a) reimbursing MOA for the amount of salaries, allowances, and other related expenditures paid to the credit staff of SACA and the ADDs; (b) creating provision for bad and doubtful loans made out of resources of SCF; and (c) pay MOF, an amount equivalent to interest at tLe rate of 2% per year on the resources transferred by the Government to the SCF out of the proceeds of the Credit and the Fund Loan. Any remaining balance of income would be transferred annually to the "General Reserve" of the SCF. Assurances to the above arrangements were obtained during negotiations. Pilot Credit and Savings Scheme 4.07 Implementation of the pilot scheme would not be linked to SACA and SCF, The scheme would be implemented by a separate legal entity to be established specifically for this purpose and to be known as the Malawi Mudzi Fund (MMF). Assurances were obtained during negotiations that the Borrower would establish MMF not later than December 31, 1988. The establishment of MMF, satisfactory to IDA and ITAD, would be a condition of disbursement for this component. The initiative for introducing the pilot scheme was taken by GOM through the Office of the President and Cabinet (OPC), and OPC would maintain overall supervision and control over its Implementation. For this purpose, a committee, to be chaired by a senior official from OPC, and comprising representatives from the Ministries of Community Services and Agriculture and other interested Government departments and agencies, would be appointed by GOM and act as a supervisory/advisory body in all matters relating to implementation of the scheme and its financing. An assurance was obtained during negotiations that the supervisory/advisory committee, would be appointed with terms of reference satisfactory to IDA/IF#D. and would be a condition of disbursement for this component. The scheme administrator (SA), would be the chIef executive of the MMF and would be responsible for the day-to-day implementation of the pilot scheme. This person would report to the committee mentioned above through its chairman. The SA would also establish effective reporting and management information systems as agreed during negotiations. The appointment of a suitably qualified scheme administrator, satisfactory to IDA and IFAD, would be a condition of disbursement of this component. Training 4.08 The training program would be organized by the Training Unit now existing within MOA. This Unit has been established under the on-going Agricultural Extension and Planning Support project and is responsible f3r consolidating the on-going training activities, organizing, and implementing a long-term training program. SACA would determine priority training needs of the credit staff, suggest candidates for overseas and local training, and prepare preliminary training programs which would be submitted to the Training Unit for review and implementation. A special effort would be made to include women in the training program. An assurance was obtained from the Government that SACA would take appropriate measures to ensure that participation of women in the farmer training - 38 - program is to the extent of their representation among smallholders. The credit advisor would assist SACA and the Training Unit in: (i) establishing procedures and criteria for determining overall training needs; (ii) preparing criteria for selecting training programs and candidates; and (iii) setting up credit-specific training programs and teaching material. Assurances were obtained during negotiations that SACA would submit its annual training programs to IDA for review and comment by June 30 of each year. IDA has reviewed the first year's training program and found it satisfactory. B. Lending Policies and Procedures 4.09 The Project would channel seasonal and medium-term credit resources to smallholders, and sub-loans would be made for any technically and financially sound farming activities. Seasonal loans would finance up to 100% of the total value of purchased inputs. Medium-term loans would finance up to 90% of investment costs, and borrowers would be required to contribute in cash or in kind not less than 10% of the cost of the investment. Repayment terms for medium-term sub-loans would be based on the capability of sub-borrowers to repay and would not exceed the useful life of thr investment financed. The current loan default policy (para 2.09) woulo be maintained. 4.10 Lending procedures for seasonal credit would be closely in line with current procedures applied by the NRDP system. These procedures are detailed in the MOA Credit Manual (revised in 1986) and are considered adequate. However, policies and procedures for mediut,-term loans would be further reviewed and improved by SACA. These changes would allow for: (i) the projacted increased volume of lending; (ii) strengthening of appraisal, loan servicing a.id reporting procedures; and (iii) establishment of procedures for lending to farmers' clubs for on and off-farm investments. During negotiations, assurances were obtained that a draft of the revised Credit Manual, incorporating the above subjects, the new procedures relating to the operations of the SCF, and the formation and administration of farmers' clubs would be submitted to IDA for review not later than June 30, 1988 and adopted taking IDA's comments into account. It was also agreed during negotiations that for the pilot and savings scheme, beneficiaries would receive credit without collateral and the loans would be repayable in weekly installments over 50 weeks, or as otherwise agreed between the Government and IDA and IFAD. Interest Rates 4.11 Currently, commercial banks and other financial institutions charge interest rates ranging between 15% and 16.5% on agricultural loans (para 2.18). Interest rates in Malawi are regulated by RBM whose overall policy is to maintain interest rates at a level conducive to the growth of savings while fostering the efficient use of resources. Accordingly, interest rates have been revised fairly regularly in the past to take into account trends in the rate of inflation and to regulate credit. The rate of inflation in Malawi averaged 12% p.a. between 1982 and 1985, accelerated somewhat to 13% in 1986 and is currently estimated to be 15%. It is anticipated that inflation will decline to 12% in 1988, 9% in 1989 and 7% in 1990. - 39 - 4.12 The NRDP credit system's actual charge for seasonal credit in 1986/87 crop season was 10% calculated on a fixed financial charge basis, equivalent to 13.3% on an annual basis with current average repayment in 9 months. The interest rate on medium-term loans to individual borrowers was 10% p.a., for investments (para 2.18). At start-up of operations of the SCF (1987/88 crop season), interest rates for the smallholder credit system has been raised to 12% (fixed finance charge, equivalent to an annualized rate of 15 to 16%) on seasonal credits and to 15% p.a., on medium-term loans. During negotiations, assurances were obtained from the Government that the interest rate structure would be reviewed periodically and suitably revised by the Government to ensure that rates charged on smallholder credits are maintained positive in real terms and are in line with the overall interest rate structure in the country. It was also agreed during negotiations that to the extent that during any review, the interest rate charged to smallholders are not positive, the Borrower would take prompt measures to ensure that the rates become positive in real terms. 4.13 The present procedure of charging a flat finance charge for seasonal credit is undesirable because it acts as a disincentive for early repayment and penalizes clubs that borrow for short periods only. However, simple procedures need to be maintained; a change in customary banking practices of calculating and charging interest due in place of a fixed charge cannot be considered at this stage. To test the possibility of introducing a more equitable finance charge and providing incentives for early repayment, a rebate of 4% (reducing the finance charge form 12% to 8%), would be granted to farmers' groups and clubs which fully repay their seasonal loans within six months form the date of receipt of inputs. These rebates would be deposited by the credit administration in clubs' savings accounts with POSB or commercial banks and utilized by clubs at their discretion. C. Annual Lending Program 4.14 SACA would establish guidelines for preparation of annual lending programs. As is the practice at present, ADDs would continue to submit to MOA, one year in advance, their estimates of farm input requirements (both for cash and credit sales). By the end of December of every year, MOA, through SACA, would advise ADD Program Managers on Government production policies and priorities and on the projected availability of farm inputs. This information would constitute the basis for preparation of lending programs by ADDs. By the end of March, the ADDs would submit to SACA their projected annual lending program, in the format shown in Annex 5, which would be accompanied by a detailed table listing the inputs to be financed on credit and a table showing projected acreage by crops. SACA would prepare the consolidated annual lending program, which would then be presented to the National (Smallholder) Credit Committee for consideration, before submission to MOA for approval. Processing of the annual lending program and allocation of funds should be completed by the end of June. The ADDs would be authorized to prepare programs for RDPs - EPAs, and to reallocate resources within the ADDs during implementation, as considered appropriate. Funds required for implementation would be withdrawn by ADDs from the SCF without further intervention by SACA (Annex 4). - 40 - D. Credit Staff 4.15 MOA has completed a survey of existing credit and accounting staff employed at all levels of the system (para 2.20). During appraisal, understandings were reached on general criteria for setting up staffing norms, although these cannot be expected to be uniformly applied throughout the system. 4.16 During negotiations, assurances were obtained that SACA would carry out i %- cpth review of all recurrent administrative expenditures relating t riedit system and submit a plan (including a staffing plan) to IDA by June 30, 1988, accompanied by financial projections, for the phasing out (in two years) of GOM budgetary support to cover the cost of credit administration. E. Computerization of the Credit System 4.17 SACA is expected to plan and implement computerization of loan accounting, reporting and management information, and to establish procedures and prepare programs which would be applied uniformly throughout the credit system. SACA would utilize and share the EDP equipment now existing in ADDs and MOA headquarters. Systems analysts/computer programmers financed under the Extension and Planning Support project (Cr. 1626-MAI), would assist SACA in computerizing the credit system; however, resources have also been provided under the Project to finance short-term specialized technical assistance, if required, for setting up the computerized accounting and information system. F. Strengthening the Farmers' Club Movement 4.18 Given the average landholding size of the target population, extension and credit assistance have beer,csd can only be provided through group organizations such as farmers' groups and clubs. Over the years, the club movement has grown rapidly and has demonstrated impressive results in facilitating access of smallholders to extension and institutional credit. However, the formation of clubs, with the exception of Kasungu ADD, has slowed considerably since 1983. 4.19 Under the Project, appropriate measures would be implemented to ensure continued growth and sustainability of the club movement. Such measures would include: (i) involvement of field credit staff in providing guidance and assistance to club officials in club management, administra- tion, record-keeping, loan servicing, and marketing; (ii) involvement of extension staff in promoting formation of new clubs, and widening the range of technical advice focusing on the needs of the lower strata of small- holders and women; (iii) preparation, printing, and distribution by SACA of documents and books to facilitate administration, and record keeping; (iv) training of club officials, with emphasis on administration and record keeping; (v) assistance to farmers' clubs in developing into multi-service organizations, providing not only seasonal credit but other services as well to their members. In this context, clubs would be advised to purchase farm implements for use by members and other farmers against payment of rental charges, and to invest in off-farm activities benefitting their members; and (vi) encouragement of depositing of funds in savings accounts in either POSB or commercial banks. Assistance to farmers' clubs for training, credit needs, and savings would be on a voluntary basis. - 41 - G. Mobilization of Rural Savings 4.20 SACA, the field credit staff and club officials are expected to play important roles in savings promotion schemes to be carried out during Project implementation. In this context, assurances were obtained during negotiations that SACA would establish, by April 30, 1988, a Savings Coordination and Promotion Committee, chaired by the Credit Administrator, comprising representatives from RBM, the two commercial banks, POSB, MUSCCO and the ADD Program Managers. The Committee would review all aspects of savings mobilization in the rural areas, assess its potential, examine the constraints, and draw up coordinated action programs for promoting and fostering savings by smallholders. These action programs would be carried out by local working groups comprising field credit staff, representatives of the financial institutions, club officials and local leaders. Promotion of rural. savings would also be included by SACA in training programs for field credit staff and club officials. SACA, in cooperation with the financial institutions, would monitor the implementation of savings promotion schemes and report periodically to IDA on the progress and results. H1. Reporting, Accounts, and Audit 4.21 SACA would be required, as agreed during negotiations, to submit to IDA semi-annual progress reports which would include a summary of operations by ADDs, a resource position, and a statement showing arrears and loan collection ratios. Assurances were obtained at negotiations that SACA would also submit to IDA by July 31 of each year copies of the annual lending program (para 4.10) together with the individual programs for ADDs in the format shown in Annex 5. 4.22 The ADDs would continue to maintain accounts of credit operations and prepare internal annual financial statements (balance sheet and profit and loss statements). Based on agreed policies, SACA would provide guidelines to the ADDs in regard to projecting and accounting for administrative expenses and making provisions for bad and doubtful debts. SACA would be responsible for preparing consolidated financial statements for the ADDs, incorporating the financial results of its own operations. 4.23 SACA would also be responsible for preparing financial statements relating to Project funds. Assurances were obtained at negotiations that consolidated financial statements and those relating to Project funds would be audited by the Auditor General of GOM or by qualified auditors acceptable to IDA, and would be submitted (together with a special report on withdrawals from the IDA Credit and the IFAD Loan/Grant based on statement of expenditure and such other information as IDA may reasonably request) with the auditors' report to IDA not later than six months from the end of SACA's financial year (i.e. September 30). Similarly, MMF would also be required to separately prepare its financial statements and accounts and submit them not later than six months from the end of its financial year (i.e. March 31). Assurances to carry out the above was obtained during negotiations. - 42 - I. Monitoring and Evaluation 4.24 SACA would be responsible for establishing and maintaining procedures to monitor progress in Project implementation and would provide information and prepare periodic reports on the operation of the SCF and the smallholders' credit system. The M&E Unit within MOA's Planning Department would coordinate and direct the evaluation of the Project and generation of data required to assess its impact and results. SACA would liaise and cooperate with MOA's M&E Unit in the design phase of the evaluation studies and ensure that information pertinent to SACA is incorporated in the data analyzed. The Project, in addition, would provide resources to finance short-term technical assistance, if and when required, for studies on the effectiveness and impact of the credit system at the smallholder farmer level and for a mid-term evaluation of the Project to be carried out during 1990/91, and completed not later than December 31, 1991. A joint review by the borrower, IDA, and IFAD would be carried out following the review. SACA would prepare the Project Completion Report within six months after completion of the Project. Similarly, during the third year of implementation, MMF would carry out a full mid-term evaluation which would be completed not later than December 31, 1990. During negotiations, assurances were obtained from the Government that the mid-term reviews and the completion reports would be prepared as specified above. J. Implementation Schedule 4.25 The Project execution period would be January 1988 to August 1994 (Chart 2). It is expected that local staff recruitment would occur by November 1987, and technical assistance recruitment would occur mainl, during the first year of the Project. Also, the procurement of vehicles and equipment would be comapleted during the first two years of the Project's implementation. K. Environmental Impact 4.26 Environmental considerations are being addressed through MOA's extension, research and training programs, and this Project would benefit indirectly from these efforts. It is anticipated that the research- extension programs would generate extension recommendations relating to soil management, water conservation and agroforestry for improved conservation and environmental protection. Therefore, the extension, research and credit projects taken together are anticipated to have a beneficial environmental impact. The relatively small quantities of fertilizer to be used, which would also be influenced by the "inputs package" recommendations, are unlikely to cause soil or environmental problems. Pesticides to be used are expected to be limited to small amounts of insecticides for crops such as tobacco and cotton and are in compliance with the Bank's guidelines. The recommended chemicals and pesticides mainly used by smallholders are shown in Annex 11. As a result of the Government's effort to increase agricultural production, the use of different types of pesticides may also increase. However, the Government is concerned about the negative effect of certain chemicals. Thus, to protect the environment and smallholders, assurances were obtained during negotiations that the Borrower would ensure that appropriate pesticide control practices are followed. - 43 - V. BENEFITS AND JUSTIFICATION A. Main Benefits and Beneficiaries 5.01 The proposed Project would assist in the economic development of the smallholder subsector through the provision of seasonal and investment credit which, in turn, would strengthen and expand the production base and contribute to increased agricultural production, employment, and income generation. 5.02 Agriculture is the leading growth sector in the Malawian economy. Constraints discussed above (paras 1.11-1.13) indicate that increased productivity of both food and cash crops would have to be the major source of Increased production in the future. While factors such as adequate incentives, development and use of appropriate technology, and support services such as extension and marketing are important prerequisites, the availability of efficient credit services is crucially important for assisting future production increases. To address this need, the establishment of a strong and efficient credit system is essential. The Project would direct its attention to the basic institutional weaknesses of the smallholder credit system and would attempt to develop more efficient utilization of financial and human resources through consolidation of credit funds, rationalization of policies and procedures, and better coordination of donor assistance. 5.03 The Project, through the creation of SACA, would establish an institutional mechanism to develop a financially sound rural credit system, thereby improving credit delivery at the national and the ADD levels. Credit deficit areas would receive greater attention, and a mechanism for allocating credit to meet fluctuating demand in the various ADDs would be provided. The institutional improvements would ensure greater financial discipline in the Government's credit programs. Project-related training and technical assistance, through SACA, would improve staff capability to efficiently channel and broaden the base for credit to the smallholder sector. 5.04 By increasing credit coverage, the Project would benefit a wide spectrum of farmers, the main potential beneficiaries being smallholder farm families. Considering that almost 85% of the rural population falls under the poverty level and that nearly 30% of the families are female-headed, the Project would have a significant impact on the poor and women members of the population. Some 400,000 farm families are expected to be reached by the end of the Project period (para 5.05). 5.05 Under the Project, seasonal credit would be made available for a greater range of agricultural enterprises, more in line with smallholder needs. In 1986/87, credit for seasonal inputs was made to about 200,000 smallholders, or 16% of farm families. It is estimated that the number of borrowers would increase to about 400,000 farmers, or 26% of total farm families. As indicated in Annex 6, Tables 10-11, the uptake would vary by ADD: about 41% of farm families are expected to be reached in Kasungu; 30% in Karonga; 4% in Ngabu; 7% in Blantyre; 33% in Lilongwe; 9% in Liwonde; 29% in Salima; and 30% in Mzuzu, - 44 - B. Financial and Economic Benefits 5.06 Available data indicate that crop yields obtained by smallholders in Malawi can be increased from about 9% for groundnuts to 40% for maize through the adoption of improved practices already being followed by commercial farmers (see table below). Additional technology packages are expected to be developed through the on-going research project financed by IDA. The dissemination of this improved technology is being carried out by the extension service, which is supported by an extension project in progress. The availability of credit resources under the Project would thus complement both the research and extension efforts. An increase in yields would raise rural incomes and employment and contribute toward the national objectives of achieving agricultural diversification and increased production of both import-substituting and export commodities. 5.07 Using prevailing input and output prices, crop budgets and activity budgets were analyzed to assess the impact on farmers' production and income (Annex 6, Tables 1-6). Returns on improved inputs have been found to provide adequate cash flow to farmers to service loan repayments. Through the use of seasonal inputs, it is expected that farmers would increase their gross margins and net returns per manday as indicated below. For example, increased fertilizer use and the adoption of improved cultural practices would result in incremental increases in gross margins ranging from 12% for pure stand local maize to over 40'/ for hybrid maize using current prices. The net return per manday would similarly increase, ranging from 7% for pure stand local maize to about 45% for hybrid maize. Increases are also expected to occur in tobacco, cotton, and groundnuts. Project Increases in Crop Incomes and Returns 1/ Constant 1987 MK Gross Margins /ha Net Returns Per Manday/ha Incrm. Incrm. Unfert. Fert. % Incr. Unfet. Fert. % Incr. Local Maize Pure stand 104 116 12 0.92 0.98 7 Intercropped 154 185 19 1.12 1.28 14 Composite maize 128 196 53 0.99 1.38 39 Hybrid maize 128 211 64 0.95 1.38 45 Tobacco 340 391 15 1.29 1.47 13 Cotton 255 521 104 1.06 1.83 72 Groundnuts Chalimbana 265 293 10 1.29 1.47 10 Manipintar 307 337 9 1.76 1.93 9 1/ See Annex 6, Tables 1-6 for detailed calculations. - 45 - 5.08 As an indication for medium-term investment, representative models for dairy and poultry activities have been analyzed which indicate hig' profitability (Annex 6, Tables 6-9), with financial rates of return rai.ging from about 20% for poultry enterprises to over 25% for dairy cows. 5.09 As the investments under the Project would take place over a large geographical area, involving different agro-ecological zones, types of farmers, farm sizes, and a wide range of cropping patterns, the budgets only provide order of magnitude. Furthermore, because improved inputs (adoption rates) are linked to a variety of factors (such as prices, research and extension efforts, and transport) whose influence is difficult to separate from that of the credit system, it is difficult to make an ex ante quantification of the likely benefits of the Project. No attempt has, therefore, been made to compute overall financial and economic rates of return for the Project. C. Projected Financial Results of the SCF 5.10 Assuming a minimum annual volume of lending of MK25.0 million (subject to efficient financial management at all levels of the system and effective cost control, and generation of interest income on utilized resources accumulating between seasons), it is projected that the SCF would achieve a net return of 2% p.a., on its resources out of a gross income of about 14%. A small portion of the projected net income would be utilized by SACA for the payment of interest to GOM/MOF on the incremental funds provided under the Project (para 3.20), and the remaining balance would increase the SCF Capital Fund. Projected Income and Expenditure Statement of SCF (MK25.0 Volume of Lending) MK - '000 % Income Interest on seasonal and medium-term credits 3,000 86.0 Interest on deposits with RBM and commercial banks 500 14.0 Total Income 3,500 100.0 Expenditures Administration 1,600 46.0 Provisions for bad and doubtful debts - 5% 1,400 40.0 Total Expenditure 3,000 86.0 500 14.0 Net Income 3,500 100.0 - 46 - 5.11 Income projections are based on the new interest rates to be introduced under the Project (para 4.11) and it is anticipated that the cost structure and the percentage of net income, as shown in the above table, would not materially change with the increased volume of lending operations resulting from the Project. D. Direct Budgetary Impact 5.12 The Project impact on the budgetary resources would be negligible. Overall budgetary contributions are projected to increase by MKO.1 million (US$0.05 million) annually. However, it is expected that SACA would reimburse the Treasury for its staff salaries and auministrative expenses (para 4.06). At an estimated volume of lending of MK25 million (projected for 1987/88) and redeployment of staff, Government would be reimbursed by SACA for about MKI.5 million annually. This amount is equivalent to about two and a half times the amount of interest to be paid by RBM on SCF's unutilized funds, which in the past were not deposited in an interest bearing account. Apart from indirect taxes and duties amounting to about US$0.63 million in year seven, the Project could generate additional fiscal revenue on taxes levied on incremental export production. E. Project Risks 5.13 There is every reason to believe that the proposed Project, if implemented, would result in substantial returns in terms of increased agricultural production in Malawi. There are some risks, however, that may affect project Implementation. One of the risks invrlves delayed implementation -- the establishment of SCF and the ftaffing posts may not be created and filled in a timely manner. The Project has tried to take account of this by seeking assurances that the Government Order establishing SC? be a condition of negotiations and that, prior to negotiations, MOA provide IDA/IFAD with the applications to the Public Service Commission on creation of SACA and the position of Credit Administrator. 5.14 Another risk would be that producer prices might not generate sufficient incentives to the farmer. Because of the need to eliminate fertilizer subsidies, coupled with high inland transportation costs, the price of fertilizer (representing about 70% of credit granted to smallholders) has been increasing by about 15% p.a., and is likely to continue to increase in the near future. The increased demand for credit would depend on whether producer prices provide sufficient incentives to take up improved packages. It is expected that, through the adoption of competitive marketing arrangements starting this season (1987/88), the forces of supply and demand would set appropriate producer prices. In addition, the Government-set floor prices do incorporate farmers' gross margins. The Government has also decided on a policy of changeover from low analysis (high volume) to high analysis fertilizer which should lower transportation costs and help to maintain incentives to producers. - 47 - 5.15 Yet another risk would involve the instability of the current marketing arrangements. The Government has instituted a policy that allows private sector entities to participate in smallholder crop marketing (para 1.22) beginning with this crop season (1987/88). This policy, which changes ADMARC's function, could result in temporary disruption of the marketing system affecting farmers' incentives and credit demand. In projecting credit demand, the Project took into consideration that the uptake of credit would initially be adversely affected, not only by the marketing disruption, but also by the slow uptake of high-analysis fertilizer. It has been argued that changes in ADMARC's function would result in a lower credit recovery. However, since sub-loan repayment is the responsibility of club officials (para 2.08), the change is not expected to significantly affect this aspect of credit recovery. 5.16 A further risk would be that the research and extension services might not be able to develop and disseminate suitable technologies effectively enough to stimulate future production increases. Both services are being strengthened through on-going IDA financed projects -- the Research project (Cr. 1549-MAI) and the Extension and Planning Support project (Cr. 1626-MAI) -- and the generation and distribution of new technologies resulting from the Project efforts should stimulate increased farmer demand for credit and, as a consequence, increase agricultural productivity. 5.17 There was some feeling among ADD managers that the establishment of SACA would diminish their responsibility, thus resulting in a disincentive for them to work effectively. At appraisal, the managers were reassured that the day-to-day operations of the credit system would still remain decentralized under the overall responsibility of the ADD management. 5.18 The principal risks involved in the pilot scheme include: (i) the ability to locate a coordinator with the interest and capability to motivate and inspire staff and borrowers; (ii) the level of entrepreneurship emerging from within the group; and (iii) whether the concept can be successfully implemented within the Malawi context. These risks would be minimized by the relatively small size of the pilot scheme as well as by the phased approach following the mid-term evaluation. VI. ASSURANCES AND RECOMMENDATIONS 6.01 During negotiations, the following assurances were obtained from the Government: (a) not later than June 30, 1988, a study on medium-term credit would be completed, and to implement its recommendations after IDA review and comment (para 3.08); (b) the internationally-recruited credit/training specialist would be recruited not later than April 30, 1988, according to IDA guidelines with qualification and experience acceptable to IDA (para 3.11); - 48 - (c) review would be carried out by the Government and submitted to IDA by June 30, 1988, to determine the need for recruitment of M&E and computer programmer, and for the Government to execute the decision (para 3.11); (d) income generated by SCF would be utilized as indicated in para 4.06 and SACA would pay to MOF an amount aquivalent to an interest at the rate of 2% per year on resources transferred by the Government to SCF (para 4.06); (e) to prepare and submit to IDA for reviel, A comments not later than June 30 of every year, the anial training programs for credit staff (para 4.08); (f) to revise and submit to IDA for review and comments not later than June 30, 1988, the cre0it manual, new procedures relating to operations of the SCF, and plans for strengthening the formation and administration of farmers' clubs (para 4.10); (g) lending terms for the pilot credit and savings scheme as specified in para 4.10 would be followed (para 4.10); (h) the interest rate structure of smallholder credit would be reviewed periodically and revised to ensure that rates charged on smallholder credits are maintained positive in real terms and are in line with overall interest rate structure in the country (para 4.12); (i) SACA would carry-out an in-depth review of all recurrent administrative expenditures relating to the credit system and submit a plan to IDA for review and comments, not later than June 30, 1988, accompanied by financial projections for the gradual phasing-out by September 30, 1989 of GOM budgetary support covering the cost of credit administration (para 4.16); (j) SACA to establish by April 30, 1988 a savings coordination and promotion Committee, chaired by the Credit Administrator (para 4.20); (k) SACA to prepare and submit to IDA for review and comments, annual lending program and semi-annual progress reports which would include a summary of operations by ADDs, resource position and statement showing arrears and loan collection ratios (para 4.21); (1) SACA would prepare consolidated financial statements and those relating to Project funds audited by the Auditor General of GOM or by qualified auditors acceptable to IDA, and submit the audited statements (together with such other information as IDA may reasonably request) and the auditors' reports with specific comments on disbursements made against - 49 - SOEs and from the Special Account to IDA not later than six months from the end of SACA financial year, i.e. September 30 (para 4.23); (m) MMF would observe the reporting, accounting, and auditing requirements as stated in (1) above and submit the reports within six months of MMF's financial year (i.e. March 31), (para 4.23); (n) SACA, with assistance from MOA's M&E unit, to carry out the mid-term review during 1989/90 and completed not later than December 31, 1991 (para 4.24); (o) MMF would carry out a full mid-term evaluation during the third year of implementation which would be completed by December 31, 1990 (para 4.24); (p) SACA to submit a Project Completion Report within six months after Project completion (para 4.24); and (q) the Borrower would ensure that appropriate pesticide control practices are followed (para 4.26). 6.02 A condition of disbursement for the training component under the IDA credit would be that the study tours and the candidates for those tours are satisfactory to IDA (para 3.12). 6.03 Conditions of disbursement for the pilot credit scheme under the IFAD credit would be: (a) establishment of a separate special account for the pilot credit scheme for the rural poor (pars 3.25); (b) execution of the financing agreement between the MOF and MMF satisfactory to IDA (para 3.26); (c) establishment of separate legal entity (MMF), satisfactory to IDA (para 4.07); (d) appointment of a supervisory/advisory committee for the pilot credit scheme, with terms and reference satisfactory to IDA (para 4.07); and (e) appointment of the pilot credit scheme administrator satisfactory to IDA (pars 4.07); 6.04 A condition of effectiveness would be the signing of an agreement with IFAD (para 3.26). 6.05 Subject to the above assurances and conditions, the Project is suitable for IDA credit of US$5.9 million and IFAD credit/grant of US$6.9 million to the Government of Malawi. - 50 - Chart 1 SMALL HOLDER AGRICULTURAL CREDIT PROJECT Department of Agriculture In MOA With Proposed Small Holder Credit Administration (SACA) MOA HQ PS CAS (1) CAS (NRP) D.S -cTr. UnitPeen -ADMARCFiac e nEsotes ASSCA -KFCTA -STA Rsurce.Pdnin g aneac Peron El RemonSnsig n Marketing & Pricing Prolect Prep. Tech. Adminst Plann & Monrt Data Processing DCAO ACAO - Survey Ext & Train. CROPS Land Husb. Ext. Aids Branch ACAO ACAO ACAO ACAO Extension _cereais - Land Use and Publication - Training - Legumes & Oil Soil Conservation Audio Visual -Tobacco Medio Eval. Crdt- Cotton - Resource Planning Mointenance - Horticulture & Form Management -Women Progr. rCrop Protect. -Form Mech. - Fertilizers -L.H. Train and Environ. Education oRemote Sensing and Imagery Processing 8 x Agric. Dev. Division Programme manogers ~30 x Rural Dev. Project Existing Credit Section Project Offecers 1SACA New (-redit Administration L--- -473 x E.P A.s Dev. Officers SECTION BLOCK x 5H blocks/A/Section World Bonk-3M,142 - 51 - Oart 2 MALAWM smAlkLUER AG!ICULTURAL CEDIT PRDJECT Iipleentation Schedule Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6/7 1 2 34 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 Early Actions Establisament of SACA X Creation of SCF x Staff recruitment Xx XX Lnding program (credit) XXXX XXXX X XXX XXXX XXXX Local xxxx xxxx xxxx xxxx xxxx xxxx Overseas X X X X Consultants Credit Specialist X X X X X System Analyst X X Pilot Credit Scheme Mid-term Phase I XXXX XXXX XXXX XXXX XXXX XXXX Phase II review XXXX XXXX XXX K Studies Medium-term study X X Ad-hoe study XX Mid-term review XX - 52 - AltEK 1 Table1 RMMUJ R AGRIa RAL CREDIT PM ECt Number of SmallhDlder Farm and Cultivated Area by Holdity Size (1984/85) Karoga Itm KauWg Sallm L oge Lne Blantyre Ngbu Size Rarge (ha) malami 10RDD 1€ADD KADD SIADD LID IWADD BUD NAW Nmer of Farms less than 0.99 718,103 22,157 51,065 53,528 44,214 111,976 183,871 203,106 48,186 1.00 - 1.49 258,236 5,897 20,663 32,295 15,716 57,729 64,289 47,169 14,478 1.50 - 2.99 268,638 6,698 46,118 83,381 15,590 61,322 54,031 40,778 15,609 Greater than 3.00 54,889 537 11,948 18,227 3,5b2 71,421 5,612 5,074 2,458 Total 1,299,866 35,339 129,794 187,431 79,082 238,448 307,803 296,127 80,731 Cultivated Area (ha) less then 0.99 403,023 11,336 25,756 31,97 24,429 68,949 107,418 109,017 24,582 1.00 - 1.49 317,630 7,194 25,622 39,723 19,016 71,584 78,433 57,546 17,518 1.50 - 2.99 547,328 12,721 72,079 134,214 25,513 111,061 93,150 70,640 28,107 Greater than 3.00 219,556 1,873 51,137 75,278 14,569 20,259 21,606 17,860 9,734 Total 1,487,537 33,125 174,594 281,182 83,526 271,853 300,607 255,064 79,941 Avera holding alze (ha) 1.14 0.95 1.48 1.66 1.10 1.21 1.00 0.88 1.02 Source: ASA 1984/85. - 53 - ANNEX 2 Table 1 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Status of ADD/RDP Credit Funds - September 30, 1986 ADD RDP Amount - MK If Karonga 910,000 Mzuzu (a) Henga-Lower Kasitu 630,884 (b) Mzimba-Rukuru-Upper Kasitu 1,087,957 Kasungu (a) Dowa East 907,808 (b) Mchinji 1,031,669 (c) Dowa West 1,696,029 (d) Kasungu 1,165,952 (e) Ntchisi 830,000 Lilongwe 6,202,444 Salima 1,570,000 Liwonde (a) Mangochi/Namwera 810,000 (b) Kawinga 600,000 Blantyre (a) Phalombe 378,475 (b) Shire Highlands 837,307 Ngabu 1,562,954 Subtotal 20,221,479 UNCDF 23920,000 Total 24,141,479 1/ Unaudited. 2/ UNCDF resources are not earmarked for specific ADD/RDPs and are allocated annually by MOA according to credit demand to supplement ADD credit funds. Source: MOA and mission estimates - 54 - ANNEX 2 Table 2 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Status of ADD Credit Funds - September 30, 1986 (Unaudited) (MK '000) Funds not yet Disbursed ADD Capital Fund 1/ as per Credit Agreements Total Karonga 910.0 500.0 2/ 1,410.0 Mzuzu 1,718.8 8,251.9 "S/ 9,970.7 Kasungu 5,631.5 7,265.3 T/ 12,896.8 Lilongwe 6,202.4 1,550.7 3 7,753.1 Salima 1,570.0 1,570.0 Liwonde 1,410.0 675.0 5/ 2,085.0 Blantyre 1,215.8 1,825.1 T/ 3,040.9 Ngabu 1,563.0 1,563.0 Subtotal 20,221.5 20,068.0 40,289.5 UNCDF 3,920.0 3,920.0 Total 24,141.5 20,068.0 44,209.5 1/ Capital fund includes accumulated net income. 2/ EEC. T/ IDA. 4/ IFAD & GOM. 5/ AFDB & GOM. - 55 - ANNEX 2 Table 3 MALAWI SMALLROLDER AGRICULTURAL CREDIT PROJECT Average Subloan and Holding Sizes Average Loan per Participant Average 1982/83 1983/84 1984/85 1985/86 Holding KRADD 30 37 54 69 0.96 MZADD 82 85 92 154 1.24 KADD 54 70 91 84 1.76 LADD 56 76 90 102 1.34 SLADD 75 59 70 99 1.15 LWADD 47 38 42 56 0.93 BLADD 37 51 56 68 0.88 NADD 28 42 31 67 1.24 Malawi 51 57 66 87 1.16 Source: Ministry of Agriculture, ASA 1983/84 and NSSA 1980/81. - 56 - ANNEX 2 Table 4 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Seasonal Credit - 1985/86 - 1986/87 (MK '000) 1985/86 1986/87 2/ No. of No. of No. of No. of ADD Amount 1/ Clubs Members Amount 1/ Clubs Members Karonga 725.3 537 9,177 428.9 504 8,824 Mzuzu 2,824.6 654 18,283 1,812.9 487 13,952 Kasungu 5,219.6 2,055 62,178 5,824.9 1,910 60,566 Lilongwe 6,453.8 2,280 63,893 6,329.3 2,314 66,234 Salima 1,449. 872 14,768 968.2 613 10,531 Liwonde 1,084.8 902 19,295 1,032.4 871 18,706 Blantyre 975.3 574 14,314 1,084.3 681 18,522 Ngabu 408.8 385 6,088 400.0 401 6,119 Total 19,141.2 8,259 207,996 17,898.8 7,781 203,454 1/ Amounts shown include principal and 10% fixed finance charge. 2/ Credit disbursements up to January 31, 1987. Total for 1986/87 is estimated at K18.2 million. Source: MOA - 57 - ANNEX 2 Table 5 MALAWI SMALLHOLDER AGRICULTURE CREDIT PROJECT Credit and Credit Accounting Staff October 1, 1986 ADD Credit Staff Accounting Staff (Credit) PO/CTO STO TO STA TA CEO SEO EO SCO CO Lilongwe 1 3 8 - 107 1 - 2 - 6 Kasungu 1 1 2 3 28 - - 1 1 3 Blantyre 1 1 4 1 27 - - 8 Liwonde 1 1 2 2 23 - 1 - - 8 Ngabu 1 1 - 1 56 1 - 1 1 12 Karonga I - 1 2 12 - - 1 - 15 Salima 1! 1 - 3 10 23 - - 1 1 5 Mzuzu 1 1 4 2 19 - 1 - 1 11 Total 8 8 24 21 295 2 3 6 4 68 1/ Additionally some 56 credit collectors are posted at ADMARC markets for three to four months during the crop season. Source: Reports CFA 131 prepared by the ADDs for the mission. 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S3MES 321å0 I~ 0 z z 5311015 3311-C - - - - - --------- 11031,111153 1 53114a 33100 a 9 9 t 0 tt tf it tt t t tt 2 t t 1 0 £1 40 01 z; t i it 99INKM t#141-9n I t - - - - - - - 9MIVILL TM *z C K Ii ix z£ a t tt 02 01 0; 11C omtnint STrAw MOL-of 9 a t$ 19 a iz t 01 01 0£ it T i ow SM SKIKIWII MNI¥4L az - - - S3121NM 1*101-44 9,0 0 - - - - - - om SMÅ214 tt - - - 011 t . . . t - - om S312130M 01 oz 91, . . . . . . 61 n, - - - - - - tt p t - - - - - - t om SJIMIX39 91 - - - - - - 91 4£ 4t st - - - - - - st t£ - - - - - - 91 AWIMd~ ts 6t 6t kriet-on 8 8 be tt - - - - 61 61 u et - - - - 0 0 rz a - - - - it £1 4£ 1,41 t WW 34M - MNI 431:0 031-106 ..... ...... -------- 3301315SV 103190331 SISOJ 103WISY01 . .... .... .... .... .. . ... .... .... .... .. .... .... . .. .... ... ... . .... .... . t11191 £66t utz TMI 0641 6u% 9861 4961 teloj M .1661 441 Oml 6m1 1661 lem £669 W u61 06&r 6m1 *61 tu; telet £642 ~ Z661 4661 461 861 Loör ffl teloi t661 e661 1661 0661 6841 8861 4861 1,41 ;tun --- - -------- - ------- MpntM Melot t ut $1"2 ^9111 t11,03 093~ 9101 1"3 polteln l EN ~ 3"1 loj ~15 114343 10114 11 atWI. 11030 IMLIMION 0~11M "KAII SMLLNOLDER AGRIULTmML C8EDIT P8841CT Table 3. oILO7 CREDIT SCNE F8R TE KUML 9OO 11 Detasled cost fateø <lCNA '0a00 oatitl $* Cests $"t9 Csti t. t otals jftl.hn~ Contetsenrie _7' 0) Unmt 1987 I98 I989 9088 1991 992 1993 Total Ces, 187 19 8 989 1990 1991 1992 1993 Total ?87 188 989 900M I 991 1942 1993 Total 1987 198 90 1%9 9 9 °gg 2 1 3 T tl 190' 2W 00 1909 d42 I 9l r,2 Z993 toøtl .... .... . .... .... .... w .. .. . ... -..... .. .. .... .... .... .... a ..e .. .... . .s .... ee ... ......-an - e an oe - - en - n 1. 11Mis&183 CDST5 a. TECHMICAL ASSTSTNCE SWRT-TERM AISOR [NOTE M.TE 31 KM - - - 1 4 17,3 - - - 17 7 17 17 69 - -1-988 3 3 - - - 2 2C21 8C - - - 9 39 9 S-Total TECHWCAL ASSISTAE - - -1177 17176 - - -8 8 830 - - 9 2 20 210 - - -89 3 Ø. STtIPAAravS E- - - - - - - 30 - 6 - - 6 - 13 - 13 - - 26 - - 33 - 34 - - 67 - -2 4 - - - 29 C. WHICLES /a 424 UD - · - 1 43 - 43 - 43 - - 19 19- - - 2^ - 2 fiCl0TCTLES 6 - --2- - - 2 3.8 - - - --- 8 - --3 - - - 3 - - -8- - - 8 - 4--- 4 ICTCLES No - - -4 4 4 - 12 0.6 - - 22 2 - 7 - - - 1 33 - 3 - -3 13 - 8 -. - - 1-1 - 4 STtac UEN9CLES /a - -10245-58 -1-4-4 2 25 - - -SØ 3 53 - 6 - - - 5 1 2 29 . RA1M11 . nUESEAg RA0Nø4 -U-SS T- - ---- 2- - --- 2-10 ------2- - - - 20----- - --- -- -- 2 --- - --0 ----- 10 Su>9Total 0ERSE TRAINN-G- 20 - - - 20 - - - 0 - - - 9 - - - 22 - - - - 0 - 10 2.---- L--L T G - -. .- - - -- - - - - - - - - 3 - - - 0-0-0 ---- -- 3 - - - 0 1 - Sb-lTotal TR0212 - - - 21 1 I - 23 - - - 9 0 0 - l0 - - -23 I 2 - 26 - - -38 0 2 - 1 F(MITUR- - - - - 10 - - . 10 - - - 4 - - - 4 - - -t1 - . - 11 - - - - - - CALCl.ATM- -- -- - -- 0- 0- 0 - - -- 0 -80- 8 - - - 0 -20- 0 - - - 0 -30- 8 OFFICE SRPLRS -- -1 1 4 ---0 0 00 2 -1--3222 ---30 21 2 F.CØE1T FM KLOT - - -20 40 80 10 300 --- 9 17 35 70 130 - - - 2245 4 94 35 - - -41 5 Tota IUESNEI COSTS 0- - e3081 92 145 173 S 13 35 40 63 78 229 - - 330 04 170 217 614 - - 14 39 r 74 94 267 .: .-..... n. .. .... . . . .. . ....n .. . ... .... .... .... . 83. RECURRENT C3STS A.48A1IES I UAGES PR8ACT2JimaSERC0nT I0---- ---- No 2 9.1 - -- - 9028 - - - -44 - il- -- -- 10 13 21-- - -45 0 VwllK NA0SERS ~8 - - - 2 2 4 4 12 4.3 -9 9 17 17 52 - 4 4 7 7 2 - 09 9 23 57 - 4 4 8 9 25 q~l80ES 80 -w-~- 2 2 6 8 U 32 2.2 -- 4 13 8 35 70 2 6 8 15 31 5 14 20 41 79 2 2 18 34 ~CC iMrTS - i-- -- 1 1 2 2.2- -- - -- 2 2 4 -t- --- - 1 2 --- -2 3 5 -1-- ---13 2 LEMli/I1fIST N"0 ---- - 1 12 2 2-2 2 4- -- -- - 1 1 2- ----- 2 2 5- ---- 1 1 2 PSRES §o i-- - --18 2 2.2 -- --2 2 4- •---- - 1 1 2 -- --2 3 5- -- -- 1 1 2 3080E WO8 - - - 2 2 2 4 10 2.2 - - - 4 4 4 9 22 - - - 2 2 2 4 10 - -- 3 5 5 1 24 2 2 4 11 ESS ES E8 - -- 2 2 2 2 8 1 - - - 2 2 2 2 8 - - - i 1 1 1 3 - - - 2 2 2 2 9 - - 2 2 3 4 s7ta1 tRES S ---985779 183 - - - 8 :2 25 34 80 - - -2303 91 205 - - - 9 3214 8 l. UEICLE 013 434 mb 9-0 - --- -- -- 2 10- ----- 10 10 20-- - - - 4 4 0--- --- 1232 24- --- - 5 S 10 8DTORUCLES "0 - - - 2 4 4 4 142 --- 488 8 28 - - - 2 3 3 7 -- - 4 9 10 33 -4 4 4 14 S,k-Taøt 9ENICLE 01. - - 4 8 18 tø 4 2 3 8 8 21 -- - 4 9 21 22 56 2 4 9 1 25 C. OFFICE OM Ni> 5.03985382: Cm^ UOK? nWA1. smaE -- - - - - - - - - - - - - 12 12 24 - - -s- 5 1-- - - 14 i5 29 - - - - - 4 612 CI.2 W~aC IT AL SP~ - - - - ..- - - - - - 12 12 t2 12 4 - - - S 5 5 5 n - - - 13 14 14 is 56 - - - 6 6 6 6 24 tr STAT1 0 1S1 s• - - - - - - - - - - t 1 4 - - - 0 0 0 0 2 1 1 1 1 5 - 0 1 2 (D R- - - - -- - - 2 2 2 8 - - - - 3 - 3 ---2222 --- 2 1 4 Sa»4* biICE e*0 -- 3 15 27 2 7 84 --- 7 7 12 12 37 - - - 17 )? 32 3 8 --- 7 7 14 14 43 Tot1 EC CSTS - - - $U 12 124 315 - - - 17 22 44 54 137 - - - 42 57 116 146 3 - - - 18 25 51 63 4 ea. asn .. .a s .*. .e. .se eas e... s e. e... ..s . ••• .... .... .." •a• ø... n. an a... fa... ..*a em~ asa a••n . as . . .e.. S U Total - -3 2 432730284 - 13 52 62 107 131 36 33 132 140 286 362 974 - - 457 70 124 57 45 . . . ... . ana ..* . . ... ... .. a sa ø... ø..... .... . a . .. . a . ... ....for ~. im.. tot wa.. la test tor vøhis 6801a>ll 25 0 otafts. - 62 - ANNEX 3 Table 5 HALAUI SHALUOLDER AGRICULTURAL CREDIT PROJECT Disbursement Be Financier B Semester (USS '000) 809. Of IDA IFAD BENEFICIARIES NALAUI Total Amount Amount Amount Amount Amount Semester 1 101 169 - 60 330 2 101 169 - 60 330 3 240 276 14 73 603 4 240 276 14 73 603 5 464 518 15 107 1,104 6 464 518 15 107 1,104 7 b. 625 16 116 1129. 8 539 625 16 116 1,296 9 524 613 18 122 1,278 10 524 613 1 122 1,278 11 454 517 20 113 1105 12 454 517 20 113 1.105 13 639 718 21 107 1,485 14 639 718 21 107 1.485 Total 5v925 64S72 210 1396 14Y403 MALAUI SALLHOLDER AGRICULTURAL CREDIT PROJECT Financing Plan bv Project Coaonents (US$ '000) IDA IFAD BENEFICIARIES 609. OF A1AUI Total Local (Excl. Duties I Amount % Amount I Amount I Aount % Amount % For, Exch. Taxes) Taxes A. INCRENENTAL SNALLHOLDER CREDIT 59139 47 5P139 47 210 2 535 5 11Y024 77 8t373 2r651 - D# INSTITUTIONAL BUILDING 786 32 786 32 - - 861 35 2,432 17 1495 928 9 C. PILOT CREDIT SCHENE - - 947 100 - - 947 7 483 464 - Total Disbursement 5v925 41 69872 48 210 1 19396 11 14Y403 100 10,351 4,043 9 - 64 - ANNEX 4 Page 1 of 3 MALAWI SMAJLiOLDER AGRICULTURAL CREDIT PROJECT Financial Operations of the Central Credit Fund (SCF)l/ 1. Start-up. The Central Credit Fund would commence operations on October 1, 1987, concurring with the beginning of its financial year. 2. Pooling of Resources. On October 1, 1987 all assets and liabilities of the now existing ADD/RDP credit funds would be transferred to and taken over by the SCF. Before closing the accounts for the year ending September 30, 1987, ADDs would create provisions to adequately cover bad and doubtful debts, in accordance with guidelines to be issued by SACA. This would ensure that reasonably sound and collectible loan portfolios and other assets are taken over by the SCF. 3. Audit. Financial Statements (Balance Sheets and Profit and Loss Accounts) of existing ADD credit funds for the year ending September 30, 1987 would be audited by the Auditor-General of GOM. 4. ADD Bank Accounts. As the credit system would remain decentralized, ADDs would continue maintaining separate bank accounts in the Reserve Bank of Malawi (RBM) and in branches of commercial banks for their credit operations. 5. Transfer of Funds with RBM. On October 1, 1987, ADDs would transfer from their respective accounts with RBM all monies exceeding MK1O,000 in each account ("the maximum balance") to account No. 228 of SCF (or to any other account designated by SCF). 6. SCF Accounts. SCF would maintain for each ADD a "capital fund account" and a "current loan account". The capital fund account would show the amount of capital and accumulated profits which was transferred to the SCF on October 1, 1987; any future withdrawals of resources from various donors under on-going area-specific projects (allocated to credit operations) would be recorded in the respective ADD capital fund account. These sub-accounts would provide a continuous and permanent record on the contribution of each ADD to the SCF Capital Fund, and would serve as a source of information for preparing periodic reports and/or withdrawal applications to donor agencies for area-specific projects. 1/ Detailed operational guidelines are described in Working Paper No. 1. - 65 - ANNEX 4 Page 2 of 3 7. SCF Capital Fund. SCF Capital Fund (SCF's equity) would consist of ADDS' capital funds (para 6) transferred to the SCF on October 1, 1987, any future withdrawals of credit funds under area-specific projects and the SCF net income accumulating as from October 1, 1987. 8. ADD Current Loan Account. As from October 1, 1987, ADDs would "borrow" funds from the SCF to finance their assets relating to credit operations (loan portfolio, stocks and other assets). These borrowings would be recorded by SCF in the current loan account of each ADD. Current loan accounts would bear interest of 3% p.a. calculated on daily balances. This interest charge would not affect SCF's gross or net income and is done for cost-accounting purposes only, to monitor in a consistent manner the financial performance and results of each ADD's credit operations and to provide an indicator for calculating the average loan repayment periods and the resulting effective interest rate charged by each ADD on its lending. The balance outstanding in each ADD's current loan account, at any time, would be equivalent to the amount of total assets (loan portfolio, cash balances in bank accounts, stocks, etc.) less liabilities (ADMARC, fertilizer fund and other sundry liabilities). 9. ADD Balance Sheets. ADD would prepare internal balance sheets and profit and loss accounts for their credit operations, which would be crnsolidated by SACA to reflect the financial position and results of the SCF and the national smallholder credit system. 10. ADD Lending Operations. ADDs would operate according to lending programs approved annually by MOA. Approval of a lending program would also constitute the authorization to withdraw from the SCF (Account No. 228) all the funds required for its implementation. Loan collections would be deposited by ADDs in their respective accounts with commercial banks (and/or Post Office Savings Bank) and transferred expeditiously to the ADD accounts with RBM. RBM would automatically transfer funds from ADD accounts to Account No. 228 of SCF, in multiples of M1KO,000 (the "maximum balance" - see para 5). Similarly, RBM would automatically transfer funds from Account No. 228 to ADDs' accounts to cover amounts withdrawn by ADDs for loan disbursements. Accounts for ADD credit operations would be maintained by ADDs. 11. Withdrawal of Funds from Donors. Credit funds eligible for withdrawal under on-going area-specific development projects would be withdrawn, in accordance with terms and conditions stipulated in the respective credit agreements, before withdrawals of funds under the Project (also para 6). 12. Payment of Administrative Expenditures. MOA/SACA would approve, annually, administrative budgets for ADDs' credit operations. All credit staff would remain on the payroll of MOA and ADDs/MOA would continue paying salaries and allowances in accordance with current GOM procedures. ADDs and MOA would maintain separate records showing the gross amounts paid to credit staff. SACA would make lump-sum reimbursements to MOA, in two annual installments, payable by March 31, before the close of GOM fiscal year and September 30, before closing SCF annual accounts. Other credit-related administrative expenditures would either be paid directly by ADDs/SACA or reimbursed to MOA in accordance with above procedures. - 66 - ANNEX 4 Page 3 of 3 13. SCF Financial Statements. SCF income statements would comprise all interest, finance and other charges earned by ADDs and additional income generated by SCF (interest paid by RBM on Account No. 228 and on time-deposits in commercial banks, etc.). Expenditures would include interest paid to MOF on credit funds provided under the Project, cost of administration of the credit system - provisions, depreciation, training expenditures, etc. SCF Financial Statements would be audited annually by the Auditor General of GOM, or by other qualified auditors acceptable to IDA/IFAD. - 67 - AlNE 5 Table I MALAWI SMALUUER AGRI(1LIURAL CREDIT P1JECT Prc jected Annual Leit Program ADD: DATE: March 31, 1987 Period October 1, 1987 - Septenber 30, 1988 Actual Provisional Increase Projected Increase 1985/86 1986/87 (2):(1) 1987/88 (4):(2) (1) (2) (3) (4) (5) A. Seasonal Credit 1. Total loans a/ No. 2. Total disbuments b MK 3. Clubs financed No, (3a + 3b) 3a = existing dubs b. 3b - new clubs No. 4. Borrwotg mnbers No. 5. Average uembers/club No. (4:3) 6. Average loan/club MK (1:3) 7. Average loan/nanber MK (1:4) 8. Collection rate C/ 8a = as at 9-30-86 % 8b = as at 3-31-87 % Actual Estimated % Actual Plan 10-1-86 - 04-1-87 - Total Projected Increase 1985/86 1986/87 03-1-86 9-30-87 (3)+(4) 1987/88 (6):(5) (1) (2) (3) (4) (5) (6) (7) B. Medium-Term Credit 9. Total investnent costs MK 10. Total loan d/ K 11. Number of borrowers (lla+ Ilb) 11a = indivlduals No. llb - clubs e/ No. 12. Average lom/borrower (10:11) C 13. Collection rate f/ % (B:A) i/ Including interest/service charge. 6/ Value of inputs paid/payable. c/ For 1985/86 loans only. d/ Total loans equal investment costs (9) less borrWrs' own contribution (principal only). e/ Clubs have been included, as it is proposed that, Ut the future loans for on-farm investments be also amade to clubs purchasirg equipment, tools, etc., for comunmal use by its nembers. f/ To be calcuated as follows: A = overdues (principal ard interest) as of October 1, 1985 plus installnents fallen due between October 1, 1985 and September 30, 1986. B = anount collected durirg October 1, 1985 - Septenber 30, 1986 (principal and interest). SMALHR= AGIL1URAL CEDIT PRECT Crop Recamendations and Fertilizer Practices loc Maize Composite Rybrid Tobacco Cotton Rice Rice G'nuts G'nuts Sorghum/ Beans Other Total Pure St I crop Maize Maize NDDF B'bonnet Fava Ch'bana M'pintar Millet Pulses Pure St Pure St rotal Cultivated Area 1,488 833 171 30 89 45 45 15 7 60 15 60 30 89 Percent (1986) 100 56 11 2 6 3 3 1 1 4 1 4 2 6 eomedtons Seed (kg) 25a/ 25b/ 25 CC C/ 70 63 90 65 Fertilizer (kg) N 39 82 92 92 83 62 40 P205 30 40 40 20 20 4A/ 40 Plant Protection Storage Actallic 40g/90 kg grain Actellic 40g/90 kg grain 00 Pests/Dieases Sevin (Army wotm 85g in 14 1 water) Seen ard Daconil 4 tines 120-160 and Dipterex (Stalborer 8kg/ha) as required Dimethoate e/ in 10-15 litres water Field Practices f/ Fertilizer (kg) N 22 27 37 40 41 60 n/a n/a n/a P205 5 6 12 15 17 % Area Fertilized 23 22 22 55 85 77 n/a % Area Using Inputs Obtained on Credit 8/ 22 18 18 44 68 62 57 16 8 20 4 5 1 a/ Own seed. b/ Every third year 4 Free seed provided by MA l/ Improed varieties for breu&X only. e/ Rates re 124 (65g) sachets Sevin, 62 (92g) wr and 13 (34g) Dimethoate 1/ Average of 1983/84 and 1984/85 ASk figures. Assumptions for minor crops. Other crops fran ASA or credit data 184/85. Figure for groundats in 1985/86 figure. - 69 - AlEKX 6 Table 2 MAIAWI SMLDER AMI(1URAL CREDIT PRlTJECT Yields and Fertilizer Responses Best Estimate Increase Due to ASA a/ lDA Wri Figures Fert. Improved Unfert. Fert. Average Unfert. Fert. Unfer. Fert. and IP b/ Fert. c/ practices d Incal maize Pure stand 900 1,385 1,075 850 1,250 900 1,252 1,500 352 248 Intercropped (all) 765 1,450 963 - - 765 1,305 1,450 540 145 Intercropped (pulses) - - 1,080 - - 860 1,400 1,600 540 200 Hybrid maize 979 2,695 2,545 - 3,000 1,000 2,260 2,800 1,260 540 Composite 1,244 1,870 1,680 - 1,800 1,000 1,834 2,200 814 386 Ibbacco (NDDF) - - 475 - 420 300 423 525 123 102 Groundnuts (pre stand) (halimbana 628* - 628k 450 - 450 - - - - Manipintar 599* - 599* 600 - 600 - - - - Rice Blue bonnet - 1,891* - 2,500 1,000 - 2,500 - 1,500 Faya - - 1,810k - 1,750 n.a. - n.a. - n.a. Cotton 806* - 806* 650 - 650 - Source: ASA 1983/84 and MIA 1984/85. a/ Average 1983/84 - 1984/84. b/ Improved practices (early planting, weedirg twice, once fertilized except for hybrid maize twice fertilized). c/ See next section. / Early planting, weedit, etc. * Wide variation. MiU MR AGIQLUML CRETr PpäEC Maize rop Budget anid Gross Margins - Constant 1987 1 With and Without Fertilizer ocal Mize Pure Stand Local Maize (Intercropped) Caposite Mize UCA Hybrid Maize - 1ff 12 Unfert. Iertilized Unfert. Fertl~ Under-Fert. Fertilized Under-Fert. Fert~ized plevenue Yield (kg/ba) 900.00 1,500.00 765.00 1,450.00 1,750.00 3,000.00 2,000.00 3,500.00 Price (t/kg) 12.00 12.22 12.22 12.22 12.22 12.22 12.22 12.22 Pulses yeld (kg/ha) 190.00 210.00 Pulses - Price (t/kg) 40.00 40.00 Total 109.98 183.30 169.48 261.19 213.85 366.60 244.40 427.70 Seed 4.19 4.19 13.35 13.35 12.50 12.50 31.50 31.50 Fertilizer - N 0.00 56.94 0.00 56.94 58.40 119.72 65.70 134.32 FertiUer - P 0.00 0.00 0.00 0.00 9.00 18.00 12.00 24.00 Sprayers 0.00 0.00 0.00 0.00 0.00 8.51 0.00 12.04 Transport 1.35 2.25 1.15 2.18 1.50 3.30 1.50 4.20 e (5%) 0.28 3.17 0.73 3.62 4.07 8.10 5.54 10.30 Total 5.82 66.55 15.23 76.09 85.47 170.13 116.24 216.36 Gross Magin 104.16 116.75 154.26 185.10 128.38 196.47 128.17 211.34 No. of ~nays 113.00 119.00 138.00 145.00 130.00 142.00 135.00 153.00 Return per m ay 0.92 0.98 1.12 1.28 0.99 1.38 0.95 1.38 - 71 - ANNEX 6 Table 4 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Groundnuts and Cotton: Crop Budgets and Gross Margins - With and Without Fertilizer Chalimbana Manipintar Cotton Unfert. Fert. Unfert. Fert. Unfert. Fert. Income Yield kg/ha a/ 450 473 600 630 650 1,293 Price t/kg f7 75.00 75.00 58.00 58.00 65.00 65.00 Total MK 337.50 354.38 348.00 365.40 422.50 840.45 Costs MK Seed 67.50 67.50 38.50 38.50 - - Sprayer c/ - - - - 156.00 297.00 Trasnpor7 1.13 1.18 0.15 0.15 3.25 6.47 Miscellaneous (5%) 3.43 3.43 1.93 1.93 7.96 15.17 Total Cost 72.06 72.12 40.58 40.58 167.21 318.64 Number of mandays 206 206 175 175 240 285 Return Gross margin 265.44 282.26 307.42 324.82 255.29 521.81 Return per manday 1.29 1.37 1.76 1.86 1.06 1.83 a/ Assumes that improved seed results in a 5% increae in groundnut yields. 9/ Weighted by grades. cI Includes sprayer cost. It is assumed that 67% of the recomemnded pest control treatment is applied compared to 50% at present. - 72 - ANNEX 6 Table 5 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Tobacco (NDDF): Crop Budgets and Gross Margins With and Without Fertilizer Unfertilized a/ Fertilized Revenue Yield kg/ha 300 525 Price t/kg 137.10 107.10 Gross revenue (MK) 321.30 562.28 Costs (MK) Seed - - Nursery costs 17.50 17.50 Fertilizer - 129.39 Spray - - Transport 9.00 15.75 Miscellaneous at 5% 1.33 8.13 Total Cost 27.83 170.77 Number of mandays 325 425 Return Gross margin 293.48 391.50 Return per manday 0.90 0.92 a/ Unfertilized yield and no improved practices. - 73 - ANNEX 6 Table 6 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Traditional Dairy Cows Activity Budget Year 1 Year 2 Year 3 Year 4 Year 5 Capital Costs Cows a/ 250 - - - - Khola 50 Dairy equipment b/ 30 - - - - Other at 5% 17 - - - - Total 347 - - - Operating Costs Madea c/ 30 30 30 30 30 Salt 10 10 10 10 10 Other at 5% 2 2 2 2 2 Total 42 42 42 42 42 Revenue Milk d/ 125 125 125 125 125 Net Income -264 83 83 83 83 IRR >50% NPV at 12% 473 a/ Sale value of Zebu. b/ Bucket. T/ 300 kg at 10t/kg. d/ 500 litres per cow per year at 25t/litre. Assumed young stock sales replacement of dairy cows. - 74 - ANNEX 6 Table 7 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Improved Dairy Cows Activity Budget Residual Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Value Capital Costs Crossbred cows 8/ 350 - - - - - -125 Hand sprayer 80 - - - - - - Khola 125 - - - - - - Dairy equipment b/ 70 - - - - - - Pastures C/ 60 - - - - - - Fencing 250 - - - - - -100 Other at 5% 47 - - - - - - Total 982 - - - - - -225 Operating Costs Madea d/ 87.5 87.5 87.5 87.5 87.5 87.5 - Salt e/ 15 15 15 15 15 15 - Vet., supplies, sprays 30 30 30 30 30 30 - Insurance 70 70 70 70 70 70 - Fertilizer 40 40 40 40 40 40 - Other at 10% 33 33 33 33 33 33 - Total 275.5 275.5 275.75 275.5 275.5 275.5 - Revenue Milk f/ 560 560 560 560 560 560 - Net Income -697.5 284.5 284.5 284.5 284.5 284.5 284.5 IRR 50% N'" at 12% 2,520 Fianncing of capital farmers contribution 82 Loan receipt gl 990 Repayment " / 268 268 268 268 268 - Net income after financing 675 489 489 489 489 489 - a/ Friesian x Zebu. b/ Bucket (MK20) and milk churn (MK50). c/ Two bags 20:20:0, 3 kg seed and labor. d/ 1,750 kg per cow p.a. at 10Lt/kg. e/ 35 kg per cow p.a. T/ 2,000 litres per year per cow at about 28t per litre. Assuied young stock sales cover replacement costs. g/ Two cows, handsprayer, equipment, fencing, pasture costs, and sprays less 10% farmer contribution repaid over four years. h/ Over 5 years at 15%. - ANNEX 6 Table 8 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Activity Budget - Poultry (100 bird deep litter system) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 + Capital Costs Shed a/ 80 - - - - - - Feeders, waterers b/ 123 - - - - - - Pullets C/ 220 - - - - - - Tools, utensils 20 - - - - - - Deep litter 10 - - - - - - Feed d/ 397 - - - - - - Other at 5% 42 - - - - - - Total 892 - - - - - - Operating Costs Feed "/ 959 1,647 1,647 1,647 1,647 1,647 1,647 Vet., and medicines 15 15 15 15 15 15 15 Pullet repacement f/ - 150 150 150 150 150 150 Maintenance 22 22 22 22 22 22 22 Other at 10% 100 183 183 183 183 183 183 Total 1,095 2,018 2,018 2,018 2,018 2,018 2,018 Revenue Eggs / h 1,268 2,145 2,145 2,145 2,145 2,145 2,145 Cull birds / 235 235 235 235 235 235 235 Total 1,502 2,380 2,380 2,380 2,380 2,380 2,380 Net Income -485 362 362 362 362 362 362 IRR 30% NPV at 12% 1,453 Financing Farmers contribution 1/ 110 - - - - - Loan receipt 782 - - - - - Repayment at 15% 233 233 233 233 233 - Net income after financing 297 129 129 129 129 129 362 a/ Traditional shed with netting posts. h/ Eight food troughs at M12.50 and 3 drinkers at MK7.50. c/ 110 at Mk2. d/ Growers mash (8-20 weeks) 700 kg at 37.2t/kg and layers mash (1 month) 384 kg at 35.5t for 90 birds. e/ Year 1, 8 months layers mash (30 kg/bird) for 90 birds at 35.5t/kg. Years 2 + 3 months growers mash (7.1 kg/bird) at 37.2t/kg for 67 birds and 46 kg layers mash/bird at 35.5t/kg. f/ Every 18 months g/ Ninety birds, 220 eggs per bird at MKI.30 per dazen. h/ K3.50 each. 1/ Shed, deep litter, tools, and utensils. 76 - ANNEX 6 Table 9 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Activity Budget - Poultry (100 bird battery system) Year I Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 + Capital Costs Cage 600 - - - - - - Chicken wire a/ 51 - - - - - - Feeders, waterers b/ 53 - - - - - Pullets C/ 220 - - - - - - Tools utensis1 20 - - - - - - Feed / 397 - - - - - - Other at 5% 67 - - - - - - Total 1,407 - - - - - - Operating Costs Feed e/ 959 1,647 1,647 1,647 1,647 1,647 1,647 Vet., and medicine 20 20 20 20 20 20 20 Pullet repacement f/ - 150 150 150 150 150 150 Maintenance 67 67 67 67 67 67 67 Other at 10% 105 188 188 188 188 188 188 Total .,150 2,073 2,073 2,073 2,073 2,073 2,073 Revenue Eggs g/ 1,463 2,438 2,438 2,438 2,438 2,438 2,438 Cull birds / 235 235 235 235 235 235 235 Total 1,697 2,672 2,672 2,672 2,672 2,672 2,672 Net Income -861 599 599 599 599 599 549 IRR 50% NPV at 12% 2,355 Financing Farmers contribution / 211 - - - - - Loan receipt 1 196 - - - -- Repayment at 15% 357 357 357 357 357 - Net Income after financing 336 242 242 242 242 242 599 a/ 20m chicken wire for rearing and laying hosue at HK2.55/m. b/ Three food troughs at M1l2.50 and 2 drinkers at MK7.50. c/ 110 at K2. d/ Growers mash (8-20 weeks) 700 kg at 37.2t/kg and layers mash (1 month) 384 kg at 35.5t for 90 birds. e/ Year 1, 8 months layers mash (30 kg/bird) for 90 birds at 35.5t/kg. Years 2 + 3 months growers mash (7.1 kg/bird) at 37.2t/kg for 67 birds and 46 kg layers mash/bird at 35.5t/kg. f/ Every 18 months g/ Ninety birds, 250 eggs per bird at M111.30 per dozen. h/ MK3.50 each. i/ Fifteen percent of capital costs. - 77- ANNEX 7 Page 1 of 9 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Pilot Credit Scheme for the Landless 1. The IFAD-financed Grameen Bank project in Bangladesh (GB) has demonstrated that credit for income-generating economic activities can be successfully channelled to rural poor and improve the economic base of this target group. Inquiries were made during project preparation and appraisal regarding the economic and social characteristics of the rural population. 'he objective was to identify the size and nature of the landless group, what potential economic activities might exist for them, and what the prospects might be for their successful participation. Furthermore, an assessment was made as to the possibility of replicating GB model in the Malawian context, and whether existing institutional arrangements could be used or a new ones created to operationalize the scheme. Preliminary results indicated that there is a specific target group which needs credit to engage in off-farm activities, on a self- employment basis, and that there is scope for testing the GB approach in Malawi. In light of the above, a pilot credit/savings scheme for the rural landless and near-landless population, operating on the lines of GB, would be included in the Project and would be implemented in two phases over a seven-year period. The scheme would be financed by IFAD, partially on a grant and credit basis. Objectives and Rationale 2. The objective of the Pilot Credit Scheme for the Rural Poor (PCSP), to be known as the Malawi Mudzi Fund (MMF), would be to extend banking facilities for lending and savings to the rural poor (men and women) without collateral. Its aim would be to organize them through the credit program so that they could become self-employed in activities of their choice. Through an organizational structure, they would be exposed to development opportunities which would lead to a higher standard of living for themselves and their families. 3. The rationale of the scheme rests on the fact that the rural poor, being land poor in particular, and resource poor in general, do not have adequate opportunities for employment and income. Their land does not provide employment throughout the year and only generates one-third of food requirements. They do attempt to use farming skills to increase incomes when the opportunity arises, often in seasonal work, however, the scope for their participation in land and non-land based activities is limited because of the lack access to financial resources. Provided that the poor have access to financial resources, they can create their own employment opportunities to raise their living standard. The proposed scheme would create facilities providing the poor with access to institution&l credit. The beneficiaries would thus have the opportunity to ANNEX 7 - 78 - Page 2 of 9 demonstrate that they are able to receive and pay back credit and in the process create self-employment as a means to earning, spending, and saving more. The farmers' club movement, under the NRDP, provides an encouraging precedent and demonstrates the potential that exists in Malawi for group activity, albeit generally among larger farmers than the pilot scheme would serve. The scheme would aim at developing an organization among the rural poor which, by the end of the scheme's period, would become a viable and self-sustaining concern, setting an example for replication in other areas. General Description 4. The scheme would comprise the following components for which financing would be provided under the Project. (a) Establishment and staffing of a small Scheme Management Unit; (b) A study and preparatory surveys to determine the locations of the branch units; (c) Establishment and staffing of two branch units (Phase I) and two additional branch units in Phase II; (d) Staff training programs including overseas training for senior level staff, and local training for all staff and scheme beneficiaries; (e) Establishment of a revolving credit fund to finance lending operations for the target beneficiaries; (f) Technical assistance, including expatriate consultants, to assist in implementation of the scheme, training, and in monitoring and evaluation, including a mid-term review and evaluation of the pilot scheme. Detailed Features 5. (a) Management Unit. The management unit would comprise the Scheme Administrator (SA), an accountant, secretary and service staff (driver and messenger). One 4-WD vehicle would be provided for the SA. (b) Preparatory Surveys. Surveys, funded by the Project, would be undertaken to determine the locations of the branch units and the socio-economic characteristics of the target beneficiaries. The initial survey would be conducted in the Southern Region where population density is high and the per capita availability of arable land is the lowest. This region is also considered the most suitable for Phase I because of its proximity to the urban center of Blantyre and the associated diversity of economic activities. This survey would be carried cut by the Bunda College of Agriculture (Center of Social Studies) or another suitable organization, assisted by a qualified consultant familiar with GB operations. - 79 - ANNEX 7 Page 3 of 9 (c) Branch Un'ts. Each branch unit to be established would be staffed with a branch manager, a bookkeeper, four bank workers and a messenger/guard. Motorcycles would be provided for branch managers and bicycles for branch staff. Each branch is expected to serve 1,000 borrowers, organized in about 200 groups (following the GB concept). Branches would provide credit to group members and also engage in linked schemes for group savings and risk insurance. (d) Training and Staff Development. The Scheme Administrator and the managers of the first two branches would be sent to Bangladesh to familiarize themselves with GB operating systems and procedures and to participate in induction courses conducted by GB. The SA and the two branch managers would form the core staff for Phase I of the pilot scheme and carry out local training programs for other staff and beneficiariese Local training would also be supplemented by expatriate consultants from time to time. (e) Credit Fund. The lending targets for each of the four branch units to be established is 1,000 borrowers with loans averaging MK200 per beneficiary. The Project would provide financing for the creation of a revolving credit fund, up to MK800,000. Costs 6. Total cost of the Pilot Credit Scheme, including physical and price contingencies, taxes and duties, is estimated at MK2.2 million (US$0.9 willion), with a foreign exchange component of US$1.1 million or 51%. Technical assistance accounts for 11%, training for 4%, vehicles and equipment 8%, preparatory study/survey 2%, recurrent costs 41% and Credit Funds 34%. The cost estimates are based on June, 1987 prices and include taxes and duties computed at MKO.034 million. Price increases for the foreign cost components are assumed to be 3% for 1987, 1% for the years 1988-1990, and 3.5% per year thereafter. Local costs are expected to increase at the rate of 15% in 1987, 12% in 1988, 9% in 1989, 7% in 1990 and 6% per year thereafter. Detailed Project costs are given in Annex 3. Financing 7. The financing for the Pilot Scheme components of the Project would be as follows: Procurement 8. Procurement would be in accordance with IDA/IFAD procurement guidelines as summarized in para 3.26. Overseas training would be arranged in consultation and agreement with IFAD. ANNEX 7 Page 4 of 9 Disbursement of Project Funds 9. Project funds would be disbursed by IFAD to GOM. MOF would transfer Project funds to MF through OPC, as budgetary allocations, in accordance with terms and conditions of a subsidiary financing agreement to be signed between MOF and MMF. The execution of a subsidiary financing agreement, satisfactory to IDA/IFAD between MOF and MMF, would be a condition of disbursement of this component and an assurance of this would be sought during negotiations. A special account for the sche,me in foreign exchange would be established with the Reserve Bank of Malawi (or a commercial bank as shall be agreed upon with IFAD). Funds would be paid to that special account in advance by IFAD for purposes of the scheme, according to terms to be agreed upon with IFAD, with respect either to grant or loan resources. Reimbursement by IFAD to the special account would be on presentation of statements of account of expenditure from earlier advances and budget estimates. In that case, documentation would be held available for IFAD's examination upon request. Any reimbursement to the Government for direct expenditure would be against full documentation. Disbursements of the proposed grant would be against budgetted Phase I expenditure until such time as Phase II becomes effective when it would be disbursed against both Phase T and Phase II expenditures. Loan funds would be approved once the grant resources are fully disbursed. Organization and Management 10. Implementation of the pilot scheme would not be linked to SACA and the SCF. The scheme would be implemented by a separate legal entity (not a parastatal ) established specifically for this purpose to be known as the Malawi Mudzi Fund (MMF). The MMF would be constituted independent of the Government, except insofar as determined by a subsidiary agreement with the Government. The establishment of MMF, satisfactory to IDA/IFAD, would be a condition 'of disbursement for this component. An assurance on this would be sought during negotiations. The initiative for introducing the pilot scheme was taken by GOM through the Office of the President and Cabinet (OPC) and OPC would maintain overall supervision and control over its implementation. For this purpose, a committee, to be chaired by a senior official from OPC, and comprising representatives from the Ministries of Community Services and Agriculture and other interested Government departments and agencies, would be appointed by COM and act as a supervisory/advisory body in all matters relating to implementation of the scheme and its financing. The appointment of the supervisory/advisory committee, with terms of reference satisfactory to IDA/IFAD, would be a condition of disbursement for this component. 11. The Scheme Administrator (para 6.04 (a)) would be the chief executive of the MMF and would be responsible for the day-to-day implementation of the pilot scheme, and report to the committee mentioned above, through its chairman. The SA would prepare detailed operational guidelines for lending and savings activities, accounting and general administration to be applied by MMF and its branches. The SA would also establish effective reporting and management information systems. The appointment of a suitably qualified scheme administrator, satisfactory to IDA/IFAD, would be a condition of disbursement of this component. - 81 - ANNEX 7 Page 5 of 9 Lending Policies 12. Credit would be provided from the revolving fund (para 6.04 (e)) to the target beneficiaries, without collateral, for any income-generating economic activity. Loans would be repayable in weekly installments over 50 weeks and would bear interest of not less than 15% p.a. or such other interest rates as would be established from time to time for credits for on-farm investments (para 4.07). Over and above the interest charges, levies would be made to cover linked group savings and risk insurance schemes. Assurances on the lending policies would be sought during negotiations. Staffing and Office Accommodations 13. For the period of implementation of the pilot scheme, all staff appointments would be on a temporary and fixed-term basis. Offices of MMF and branch units would be located in rented premises. Accounts and Audit 14. The MMF would maintain separate accounts for the management unit and its branches, including balance sheets and profit and loss account and would be responsible for preparing consolidated annual financial statements for the MMF. MMF would have its annual financial statements and those relating to Project funds audited by independent qualified auditors, acceptable to IDA/IFAD and submit the audited statements (together with such other information as IDA/IFAD may reasonably request) and the auditor's report, not later than six months from the end of the MMF financial year. An assurance on the above would be sought during negotiations. GOM's Budgetary Support 15. Finarcing required for implementation of the pilot scheme, inexcess of funds allocated under the Project (para 6.08), would be provided by GOM and transferred to MMF as budgetary allocations. Interest income from lending operations generated by MMF would accumulate in the revolving credit fund to preserve the value of the fund. An assurance on the above would be sought during negotiations. Monitoring and Evaluation 16. The Scheme Administrator would be responsible for monitoring implementation of the pilot scheme and for regular reporting to the chairman of the supervisory committee and to IDA/IFAD. Baseline data would be collected in the initial survey and a data base would be built up during implementation which would provide detailed information required for evaluating performance, results and impact. A full mid-term evaluation would be carried out during the third year of implementation and would be completed not later than December 31, 1990. An assurrace would be sought during negotiations that the mid-term review would be completed by the above date. Decision on initiating Phase II would be based on the results of this mid-term evaluation. In Year 6 of the scheme, it would be further evaluated as a means of determining its future and initiating plans for its - 82 - ANNEX 7 Page 6 of 9 continuation beyond the Project term or otherwise taking action as shall be decided. The principal issues that would be addressed in the evaluation process are: (i) the performance of borrowers' groups and credit beneficiaries; (ii) the impact of credit on employment and income of beneficiaries; and (iii) the cost of the credit delivery system and whether the MMF has the potential of becoming financially viable an4 self-sustaining. Risks 17. Principle risks involved in undertaking this experimental pilot scheme are considered to be as follows: (a) Ability to locate a coordinator with the interest and the capability to motivate and inspire both the staff and the borrower. (b) Willingness and ability of field staff to organize and supervise the groups. (c) Level of entrepreneurship emerging within the groups. There obviously are entrepreneurs in Malawi's rural communities; the question is how many there are and how to identify them. (d) Replication of the approach in a sufficiently integrated fori without excessively compromising the original concept. (e) Giving the pilot scheme a proper priority to assure a thorough and objective test. These risks would be minimized by the relatively small size of the proposed pilot scheme and by phased approach in implementation. IFAD would finance 100% of the budgetted scheme Phase I costs (Table 1) on grant terms and 100% of Phase II costs on loan terms. The funding would be according to a financing agreement between the Government and the MMF satisfactory to IFAD. The funds would be passed to the MMF on grant terms on conditions that shall be defined in the financing agreement. Agreements to be Reached and Recommendation on the Pilot Credit Scheme for the Rural Poor 18. Financing of the Pilot Scheme would be subject to separate grant and credit agreement between GOM and IFAD. Assurances would be sought during negotiations on the following: During Project Implementation (a) lending terms and conditions as specified in para 4.07 would be followed; (b) the commercial interest rate structure as described in pars 4.09 would be followed; -83- ANNEX 7 Page 7 of 9 (c) reporting, accounting, and auditing requirements would be observed (para 4.20); and (d) a full mid-term evaluation would be carried out during the third year of implementation and would be completed by December 31, 1990 (para 4.21). 19. The following would be condition of disbursements: (a) establishment of a special account (para 3.28); (b) establishment of separate legal entity (MMF), satisfactory to IDA/IFAD (para 4.04); (c) appointment of a supervisory/advisory committee, with terms and refernece satisfactory to IDA/IFAD (para 4.04); (d) appointment of the scheme administrator satisfactory to IDA/IFAD (para 4.04); and (e) the extension of a subsidi;ry financing agreement between MOF and OPC/MMF satisfactory to IDA/IFAD (para 4.04). 20. Subject to agremeent reached on the above, the Pilot Scheme is suitable for IFAD credit/grant of US$ (SDR million), on IFAD standard termA to the Government of Malawi. - 84 - ANNEX 7 Page 8 of 9 MALAUI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Sumaarv Accounts bv Year (KVACHA '000) Base Costs Foreign Exchange 1987 1988 1989 1990 1991 1992 1993 Total Z Amount I. INVESTMENT COSTS A, TECHNICAL ASSISTANCE 276 483 345 92 - - - 1,196 90.0 1076 8. VEHICLES 266 - - 210 - 86 210 772 100.0 772 C. OFFICE SUPPLIES & EQUIPHENT 100 - - 50 - - 50 200 80.0 160 D. TRAINING OVERSEAS (NEIGHBORING COUNTRIES) TRAINING 161 161 161 161 - - - 644 100.0 644 LOCAL TRAINING 237 237 247 247 247 247 107 1,569 20.8 326 Sub-Total TRAINING 398 398 408 408 247 247 107 2,213 43.8 970 E. PILOT CREDIT S0ENE 305 160 239 373 377 258 315 2,027 51.0 1Y034 F. INCREMENTAL CREDIT SEASONAL CREDIT - 894 3,095 3,707 4,016 39114 4,412 19,238 75.0 14,429 MEDIUM-TERM CREDIT - 600 639 679 762 822 833 4335 80.0 3t468 Sub-Total INCREMENTAL CREDIT - 1,494 3734 4,386 4,778 3t936 5,245 23,573 75.9 17,897 Total INVESTMENT COSTS 1345 2,535 4,726 5519 5,402 4,527 5,927 29,981 73.1 21,908 II RECURRENT COSTS A. LOCAL SALARIES I UAGES 53 53 53 53 53 53 53 370 0.0 0 D. VEHICLES 0IN 20 20 20 20 20 20 20 140 70.0 9u C. OFFICE SUPPLIES I ADMINI, EXPENSES 26 26 26 26 26 26 26 182 24.6 45 Total RECURRENT COSTS 99 99 99 99 99 99 99 692 20.6 143 Total BASELINE COSTS 19443 2t634 4#825 5618 5,500 4,626 6,026 30Y672 71.9 22,051 Phvsical Contingencies 52 74 70 72 50 58 60 436 74.0 32N Price Contingencies 22 64 184 272 328 400 747 2,018 71.1 1,434 Total PROJECT COSTS 1,518 2,72 5P078 5w962 5,879 5,084 6P833 33.126 71.9 23r808 Taxes 3 3 3 3 3 3 3 20 0.0 0 Foreign Exchange 1040 2003 3,679 4t328 4,142- 3596 5,019 23Y808 0.0 0 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Summarv Accounts by Year Totals Including Contingencies Totals Including Contingencies (KACHA '000) (US$ '000) 1987 1988 1989 1990 1991 1992 1993 Total 1987 1988 1989 1990 1991 1992 1993 Total I. INVESTMENT COSTS A. TECHNICAL ASSISTANCE 294 525 379 102 - - - 1,300 128 228 165 44 - - - 565 B. VEHICLES 283 - - 233 - 101 255 872 123 - - 101 - 44 111 379 C. OFFICE SUPPLIES 8 EQUIPMENT 107 - - 55 - - 61 223 46 - - 24 - - 26 97 D. TRAINING OVERSEAS (NEIGHBORING COUNTRIES) TRAINING 172 175 177 179 - - - 702 75 76 77 78 - - - 305 LOCAL TRAINING 253 258 271 274 280 290 130 1,755 110 112 118 119 122 126 57 763 Sub-Total TRAINING 424 433 448 452 280 290 130 2,457 184 188 195 197 122 126 57 1s068 E. PILOT CREDIT SCHEME 3(-9 165 250 394 407 289 365 2r178 134 72 109 171 177 125 159 947 F. INCREMENTAL CREDIT SEASONAL CREDIT - 907 3,204 3,876 4,241 3t362 4,931 20,521 - 395 1t393 1v685 1,844 1,462 2Y144 8,922 MEDIUM-TERM CREDIT - 639 695 745 845 932 977 4,834 - 278 302 324 367 405 425 2p102 Sub-Total INCREMENTAL CREDIT - 1,547 3,898 4,621 5,086 4,294 5,908 25,354 - 673 1,695 29009 2,211 1,867 2569 11,024 Total INVESTMENT COSTS 1P417 2,670 4p975 5P858 5,772 4974 6,719 32,385 616 1,161 29163 2,547 2,510 2,162 2,921 14,030 1I. RECURP*NT COSTS A. LOCAL SALARIES I WAGES 54 55 55 56 57 59 61 396 23 24 24 24 25 26 27 172 B. VEHICLES 03 20 21 21 21 22 22 23 150 9 9 9 9 9 10 10 65 C. OFFICE SUPPLIES I ADMINI. EXPENSES 26 27 27 27 28 29 30 195 11 12 12 12 12 13 13 35 Total RECURRENT COSTS 100 102 103 104 107 110 114 742 44 44 45 45 46 49 50 322 otal FROJECT COSTS 1,518 2,772 5,078 5,962 5,879 5,084 6r833 33,126 660 1,205 2,208 2,592 2,556 2,210 2,971 14,4 .0 --------------------------======--======--======-======--======-======--======-====--==-====-======--======--======-======-- ======-======-- ======= o - 86 - ANNEX 8 Page 1 of 2 MALAWI SMALLHOLDER AGARICULTUREL CREDIT PROEJCT Agricultural Credit/Training Adviser Terms of Reference Qualifications 1. The consultant should have a university degree and be a qualified credit specialist/banker. He/she should have considerable experience in appraisal and supervision of medium/long term agricultural lending, and in training of agricultural credit staff, particularly in project preparation, appraisal, supervision, and evaluation. Experience in cooperative banking and with cooperative institutions would be an advantage. Duties 2. The main duties that the consultant would be expected to perform would include: (a) assisting SACA in: (i) review and revision of guidelines and methodology for appraisal of loans to individual farmers and farmer groups; (ii) review and revision of guidelines for follow-up studies and in drawing up appropriate format for that purpose; (iii) review and improving loan manual that specifies in detail, among other things, the application, appraisal, approval, rescheduling of debt, supervision, and collection procedures; (iv) review and improving monitoring and management information systems; (v) preparation of annual lending program and cash flow projections; and (vi) establishing structured work programs for field credit staff and coordination with extension staff. (b) identification of training needs of SACA and ADDs' credit staff; - 87 - ANNRX 8 Page 2 of 2 (c) desigring cirrcula and syllabi for various courses; (d) selecting training methods and assisting SACA and MOA in producing training material; (e) training trainers; (f) annual training plan formulation and program scheduling; (g) assisting SACA in identification of trainees for fellowships abroad and identifying appropriate courses; and (h) assisting in conducting the courses and teaching some of the subjects. - 88 - 0µ_t ANNEX 9 sm4A.11OLD R AGtICOTUL . Casr T PRJICT Table 1 Credt D mabd Projectcos - !MIS Uf-oufficionc? 1914105 i98m06 l1il7 [9g7llm 09it0 I99ie9l Iftilf 199023 1913/94 190949 191171914 tmoiaten 491tih00 #tra 3.21 .. 7.200 7.400 7.640 7.14 e.167 1.4n .60 .9, 9.263 O.MO Ceuftettiim • Fatte t 001 19141 t.t ^m9.0o i33.m7 im8.vi mmad.,4 ivm.0å nom.6 islå.to9 lj.ili7.1117.lje Letal fultet Pre $13x0 rli 000 fol 833.001 005.206 707.571 ?0$?57 162.103 74.429 726.714 709.000 69.26 67,57i ,lit# tst w 4r a.075 1.006 .097 .00 1.119 1.130 1.141 1.152 1.163 61.74 Ptadottie i0 et ] 015.473 685.400 874.936 64.02 852.839 641.9 029.181 f06.168 0.965 701.773 Proftittlos a 1o0 total onlsotin 69.0 66.00 43.309 4.641 .015 5.450 52.62 10.52 48.216 43.45 mötl bett* . latrted e 000## im 4h1.0 167.19 (64,429 161.13 057.057 j 4,57 1 1.16 .000 144.714 141.429 tel lat wr 3 0.kil 0.90 0.99g 0.96 1.001 006 1.012 1.017 .02 l.00 Pro la 00 st 6.0 065.15 -62.674 060.472 00.033 0.160 0o3.050 016.109 47.930 45.119 pe0lhicfl at 14 tsit clnstti 12.131 12.715 11.9000 1026 0.750 10.,14 9.776 9.7o2 l.672 .44e pelttot uti94 61400 0414 err1011t1Pcc 15.227 15.340 14.64 14.33M 14.49 13.799 13.3 13.2 6 12.400 02.10 ¢oiel ete #lg*it free l 000 641 30.00 30.364 48.729 5.013 67.41i 4.o %.007 ".55ä 04.916 114.200 field det Wr be3 l667 0715 1.161 hd7 0.961 0.lM 2 2.06 2.048 2.495 protlef t 000 t, 1.010 .493 8.067 10.132 125.2m7 14.2 0å0.273 191.10 214.0 2.433 h~zoetl 4e 1 f# total tm~s.0tlu .M 5.04 6.220 7.4 0. 3 9.644 10.740 11.020 12.00 13.914 feroat örté a4r milsits mitt 2.601 3.000 4,132 5.16 6.01 6,11 7.707 .114 9.413 00.374 Iti Rötte Are M0 Ni 00.00 56.30 005.000 124.770 134.0 144. 7 16.116 163.00 113.472 077.00 field 'st * 6rbes 2.1 2.647 2.744 2.41 2.918 3.01 3.032 1.2M 3.32 .42 prolect 34000 f t' ni.0 049,l32 301.460 3154.07 91.12l M1.042 82140,6% .21117.66 60, pr dt 0 144006 total tofsti tion 17.812 11.150 22.062 24.507 26.093 28,74 30.031 32.14 34.643 .211 tercet area d at6tila0 msit# 7.025 5.223 10.216 11.103 10.93 12.00 13.781 14.604 13.02 16.000 1«tel Ibst# Oofistits 1å-#1t 4 *rJ ~~rJare • 000 bi3 123.00 1070.70 025.720 1023.077 0in.00å 010.09 111.342 000ö.4 1114.90 114.240 total m4ig# M=tlisan 000 Ott 340,015 1267,271 143.239 1404.1 0 1530.490 0 1581.141 012. 167.394 1744.36 0701.43 letal mit sftrid s 6 t 0 ttotal tt~tsto 03,1% 04.350 114,27 104.104 100.181 000.22 104.317 104.440 184.413 103.55 00hitteerpe mil# i000 at 44.013 •70.201 91.960 59.743 61.410 64.010 7.07 7.006 7.45 640.662 lirrtliller ms dee tetiget Lotstmi -6: Par* OHmm L....ae......r....tad rertiligtr miltcatio rat t 0 r I w l 3 25.810 26.40 27.0 27.04 204 20.03 N.401 3.000 74.00 30017 percoaxt oem ottltlit 1 22.0 22,516 23.111 23.447 24.225 2".77n at.=31 O.0 M.444 27.000 fortil:et m e 000 at 4 1) t.730 4,6 .49% 5.6.1 1.7 .13 1 .413 1.a7 1.194 5.674 fertilrt sellcatten ratet 1 0 r W w 30.632 31.39 31.166 31103 1.699 314,66 7.233 11.00 2.767 19.134 piefttt 4res fertilitet tl 2I.000 22.037 23.704 24.571 2.429 26.206 27.143 20.000 20.867 20.714 letlnrt m ima1000t.b i b' 1.% h114h 1.0 'ffi t?22 1.234 1.24t 0.243 0.243 0.241 cacmitt Hlt4 fertillier ialtaitip rstt 49 6 w hal 4.6 44.631 44.66 47.221 8.0416 44.00 30.05 52.000 57.1% 54.1m percftt vfä frtillsm0 't 15.000 7.4» O.M 6.0 64.704 67.002 0.070 7.0 74.429 76.857 F tl litetu0t H do eto 0.*10 013 1.342 1.709 2.114 2.f 3.044 5.11 4. 34 4.77? Ovitid #eite rertliller ödmilcitte pt#e itt w 6 a tl 4.921 10.401 54.276 7.911 61.626 65.7401 0.070 1.6 76.35 I.000 artcet arts femtslållm l3 i.000 06.714 0.429 00.143 91.87 03.701 91.2e6 07.000 90.704 100.429 geffitrer s 00ra 0 et w 940 3.10 2.02 1.510 6.51 lml 1.019 00.0w 0.1$ 13. 00.20t tteal fertilitet n* No at 0 4 4 1 10.100 9.14 13.40 14.30 16.70 17.020 19.30 21.877 20.076 5.913 v144, 4 total fertibrt ti 1 000 0 06.704 J3.710 26.92 35.649 43.254 51.015 61.0516 64.77 77.33t 00.64 4tal furtiliter mo Noteate 3 000 st 3,057 2.64 7.017 4.344 4.051 1.37 .90 6.53 7.22 .776 witt4 et fertilitet o4q6te 000 R 4.091 4.582 6.67 7.07 4.650 9.781 00.680 11.044 12.507 13.40 letal vate 4f fortlåter 21.195 .332 33.594 43.206 10.04 0.603 71.45 fl.0M 90.25 00.254 cmtil? $110 c44 . 1014o total furtilitet e . a Jfälftil kmseal 0f Sektiov fertilitet mil0 titT UOR 3 000cd i 0 e .600 4 .771 6.520 7.273 8.0 0.114 0.915 10.034 12.038 12.007 cco7e0t Fertilitet 10vm ta m at .00 1.66 2.042 2.452 2.671 2.04 .00 3.00 3.102 3.247 Falmq#to otit #llröadl p 0recva mihtioy .200 0.234 061 1.04 2.401 ,7% 3,0" 3.12 3.212 7.5a7 ¥&Ila bo lortlktur a trit 0 000003 6,724 1oIx6 00.76 1 05.150 194,64 24.412 30,1n 74.50 53 .06 42.322 201.20 301 0f etal fort0040 Ie s . Ph~ tts tertålltrr c45tit a teecdit r 00 et 04 1 1.129 1.43n 1609 2.002 ,425 2.640 .974 3.202 3.L00 3.07 tmesl fertilter vitt in w t tP,' 0600 1.00 1.705 0.739 1.713 0.820 030 1.020 .l. 1.71% tarmidetts vite dotm soti ta et e i 1.200 1.215 1.211 0200 1.357 1.36 t1.3 016% U.39 0.101 Val0 of fOrtilt0 r m Kredit talet 000 1.34 1.118 2.545 2.005 3.244 3.617 4.004 4.474 4.033 5.10 20.260 l 41 0es 4 4 0 frtilitet 0 tr ,t ales 0.54 '.621 13.271 1.004 22.760 N.2 M 4.el3 30Kl .011 41.0 7.426 233.*5 eter 56.s01l CUt110 110 rsotl 3.092 5.401 6.12 .405 0.613 9.74 .700 9,lm letal sRagu:4 trefit t t onots 0.354 1.625 17.21 23,4% 29.120 36.767 43.264 0.70 32.20 16.911 20.041 pritt Contoddety L,v 0,01 0 0.0 0 0.0 0 7.05 .035 0.035 0.035 l0t4 leitnum treolt ~roamt0st; with 'it tohtielenties :.255 24.100 30.110 3.632 41.012 57.56d 59.342 66.61 10.23 ... ..................I................. ......... . ...I.......... . ...... ..... .........I - 89 - ANNEX 9 amn mo amm !WE Table 2 end 48~ ~ i and dtt 7 ---.......... .- -..-... . ..-- -.... ...-... .....-...--.. .. ...6./19.....9 9 . . M E 1902193 ~ ~ ~ ~ ~ Im imigo1 mö40 450 960 90/0111911/119/TI 1991112 199233 I93mm 190-4 ......- . . ... .... ....... -- --- ----- - l ¢usdit ('000 01 218.4 290.62 a26.61 659.39 M9.89 021.00 932.60 1043.54 1105.31 1161,08 1220.6 1290.63 1596.11 Pruc ctatneocy 0.00 0.00 0.00 0.00 0.00 0.00 7.00 15.73 25.12 50.09 95.56 137.75 339.25 M-total 000 NK 218.42 29.62 526.61 60.39 må9.9 021.00 939.68 1059.27 1:30.43 1225.17 1324.42 1429.3e 7935.35 ilU2U 00 C4 Elt <'000 a) 127996 161.00 1918.60 267.02 164.14 2700.00 3760.92 4671.84 ufa.76 ^405.68 7404.60 e315.52 3929.31 Prlce cootigocy 0.00 0.00 0.00 0.00 0.00 0.00 28.21 70.43 26.97 323.20 575.0 #7.56 2012.07 S2totul <000 I) 1279.96 1661.0 1918.60 1567.82 1640.14 2700.00 m79.13 4142.27 5709.63 6816.0 7910.40 9203.07 #941.30 #950 86 oa O dit 1'000 NI) 1144.55 1967.19 3320.00 4745.12 5295.40 94^.00 1099.47 13916.24 1409.36 162.49 16035.61 1700.73 99661.90 price coattagsty 0.00 0.00 5.00 0.00 0.00 0.00 01.75 209.79 330.37 79.49 1309.19 1900,81 429.40 Wtotal ('000 N) 1144.55 1967.19 3320.08 4745.12 5295.40 9450. 10901.22 14126.03 15227.74 16651.90 10144.0 19709.54 104291.30 VLtFA 080 c tredit <'0000E) 600.74 119.68 109.77 1317.24 P9.57 120.00 2157.78 2495.57 2033.35 3171.13 3501.92 =.70 19033.45 Pritt cotfigoncy 0.00 0.00 0.00 0.00 0.00 0.00 16.18 17.62 64.39 157.83 272M 410.9 959.47 "-total ~ 6) 600.74 719.60 109.77 1317.24 896.57 1020.00 2173.97 2533.19 2097.74 336.% 3781.78 47.2 20792.91 80~ Crdit < '000e) 3165.21 4259.03 ~#4.40 07.07 5153.91 9160.00 11075.14 13543.66 14535.49 127.32 16519.15 17510.W %71.74 Fricf cmtinqb ,y 0.00 0.00 0.00 0.00 0.00 0.M $3.06 204.17 330.33 m .1 12M4.5e 19.03 4543.99 Mb•tettal CM '001) 3165.21 425.03 554.68 5906.07 572.91 9160.00 1115.21 13747.83 14965.82 16300.13 1703.73 193.01 101415.73 k croftt <M000 ) 649.4 705.8 1016.4 996.17 930.52 1544.0 2018.5 2300.17 2501.75 2063.33 3 T.91 3421.50 1779.24 Prc tutig~ocy 0.00 0.00 0.00 0.00 0.00 0.00 15.14 34.67 9.47 142.51 244.56 365.73 61.20 M-ttal ('0000M 649 7.88 1016.4 906.17 930.52 154.00 2033.72 2334.04 2640.42 3005.4 3m9.7 392.22 17 .52 ks~nal cdit i'00e) 570.77 610.16 729.93 896.65 105.74 1520.00 1608.91 1697.82 1786.73 175.64 1964.55 2053.46 12507.11 Price t~gecy 0.00 0.00 0.00 0.00 0.00 0.00 12.07 25.9 40.60 93.35 112.77 219.18 543.% SHtetal l'000 1) 570.77 610.16 729.93 816.65 905.74 1520.00 1620.% 1723.41 107.34 160.99 2117.32 2272.64 13050.0 k ~ cofdit <'0l00a) 142.97 239.44 341.01 371.59 363.64 50.00 606,1 815.76 94.64 1873.53 1202.41 1331.29 6612.51 Pritce catingooty 0.00 0.00 0.0 0.00 0.00 0.00 5.15 12.30 21.47 53.43 93. 10.09 327.95 W8b•total 1000 ) 142.97 239.4 341.01 371.59 363.64 550.00 692.03 93.06 %6.11 1126.4 1295.91 1473.30 6940.45 1nål Pack9ge kcob 11 Packag crodit M '0000) 13.50 327.60 546.00 92.20 1310.40 1692.M 2047.0 69~.80 Price tutin cy 0.0 29.40 90.42 213.0: 3.02 93.73 03.46 2150.3: M-total '0000) 36.50 357.08 636.42 1141.40 1649.7 2M6.33 2900.4 9147.11 total l creit '000 ) 777207 10531.99 14527.15 17401.05 16271.80 26716.50 3347.97 41030.60 45187.60 I9344.60 S3501.60 370.30 30600.17 Price cwt c 0.00 0.0 0.00 0.00 0.00 0.00 M.04 700.72 1219.03 279.73 4622M. 61%.19 16375.27 1ö-total <'0000 ) 7772.07 10531.99 1427.15 17401.05 16271.80 26714.50 3374.01 413.2 46406.63 52113.33 50124.16 64417.4 3235.« md1tter ¢rodit Idi-torg crodit '000 l 571.43 596.67 622.09 649.77 76.44 757.32 764.55 469.07 ftnical cotingmncy <OV0 20.57 29.93 31.14 32.49 35.32 37.97 30.23 233.45 Price tosttag~ocy 0.00 23.49 45.96 67.74 100.24 154.02. 197.22 597.48 crwdit ('00000) 6E) 00.00 0.0. 0.60 000 50.01 950.40 1000.00 00.01 total Lontg Program ('000 EK) 27316.50 343.01 42431.32 47156.63 23.34 9074.1665417.49 3755.44 t,sdit u~oragp IM. of ~erreoors - ~0as0a1 trdit 156703 100256 211710 20799 203454 203700 23330 26 2 7615 312254 336892 31531 U. of htoa s - ml) Oattagf 5000 12000 20000 4 600 75000 total f*. of hrioers 156703 10256 211770 20796 203454 218700 25033 202977 321615 360254 390M 4 1530 er. of fre falhtus 122M911 1264202 129906 1337163 137552 141566 145738 1497602 154094 i55052 1630713 177716 Coa - end. mal 0eckage (1) 12.75 14.26 16.29 13.56 14.79 15.10 16.37 17.5 18.67 19.70 20.6 21.5 Cowrag - Ouc. mll pfctage (1) 12.75 14.26 16.29 15.56 14.79 1.46 17.20 18.9 20.97 22.73 24.46 26.02 - 90 - m~ ANNEX 9 Wyai a NIara AL. ar A lcr Table 3 56r of 8=rror, Farm hm .es, and upte~ of soal Crdit -..-------.....- AcU. ------------..--.--- -.-.----.------------..- POCD -------------------..----- VL. 7 1987/83 1983/24 I984/85 I985/86 I986/87 987/88 5988/89 989/90 1990/91 991/92 1992/93 1993/94 (1987-94) o. 04 horrmt 8003 8581 10642 9177 8824 9200 9819 1043! 11053 95671 12289 129% 77372 0. of faro fan%Ites 33702 34511 34752 35586 36440 37315 38210 39127 40066 41028 42013 43021 43021 covfrage 11i 23.75 24.18 30.62 25.79 24.22 24.66 25.69 26.67 27.59 29.45 29.25 30.00 AvI. lom per borroer (80 27,29 33.84 49.48 71.85 44.18 90.00 95.00 100.00 100.00 100.00 100.00 100.00 97.86 Samnal tredit 000 m) 210.42 290.62 526.61 659.39 389.89 928.00 932.68 1043.54 1105.31 1167.08 122.86 1290.63 7596.11 m. 0 loroars 17251 21519 23035 1293 13952 15000 19794 24*89 29383 34177 38972 4766 20561 bo. of fare fuslt# 112387 115084 117846 120674 123570 126536 129573 132683 135867 139128 142467 14886 145886 CtovWragt 15.35 18.70 19,55 15.15 11.29 11.85 15.28 19.53 21.63 24.51 27.35 30.00 Avg. loao per brrorer (NK) 74.20 77.19 93.29 140.45 118.13 100.00 190.00 190.00 190.00 190.00 190,00 190.00 188.51 keasotal credit (000 MI 279.96 1661.00 1918.60 2567.82 1648.14 270.00 3760.92 4671.84 5582.76 6493.68 7404.60 8315.52 3929.31 b. of lor a& 23213 30963 4039 62178 60566 63000 68122 73243 735 83487 08608 93730 548556 Ilo. of fara faali§ 158259 563640 169204 174951 80905 1070% 193416 199992 206792 213823 221093 228610 22861 Cora (Il 14.67 18.92 23.66 35.54 33.48 33.68 35.22 36.62 37.90 39.04 40.08 41.00 AvI. lom. per borroer (08> 49.31 63.53 92.92 76.32 87.43 150.00 160.00 190.00 190.00 190.00 190.00 190.00 180.00 Ieasonal crodit 1'0008> 1144.55 1967.19 3320,08 4745.12 5295.40 9450.00 10899.47 13916.24 14889.36 15862.49 16835.61 17908.73 9966.90 8ALIU1 *00 M. of orrowrs 8824 13314 11384 14768 10531 14000 16599 19197 21795 24393 26992 2990 1525 No. of fars faajuis 70635 73037 75520 78088 80743 83488 86327 9262 9226 95435 98679 102034 102034 Coverage tij 12,49 18.?1 23.02 18.91 13.04 16.77 19.23 21.51 23.61 25.56 27.35 29.00 Al. loa par borroer 0) 69,08 54.05 62.69 89.20 85.14 130.00 130.00 130.00 130.00 130.00 130.00 130.00 130.00 Saasnal credit C000 K) 600. 74 719.68 5089.77 1317.24 896.57 1020.00 2157.78 2495.57 2833.35 3171.53 3508.92 3846.70 19833.45 LIL uE m ko. of horreors 61663 61422 68311 63893 M234 68000 73834 79669 85503 91337 97171 103006 58520 06. of fare famlift 216084 223430 231027 238882 247004 255402 264086 27303 282349 291949 301875 312139 312139 Cowerag (1) 28.54 27.49 29.57 26.75 26.81 26.62 27.% 29.18 30.29 31.29 32.19 33.00 AvI. lma par borro~ar (HK) 51.33 69.32 81.75 91.83 86.87 120.00 150.00 170.00 170.00 170.00 170.00 170.00 160.00 Staioal credit ('000 8) 3165.21 4258.03 5584.68 5867.07 5753.95 8560.00 11075.14 13543.66 14535.49 15527.32 16519,15 17510.99 96871.74 LIUNIWE A0 NO. of börroffrf 15293 22630 26381 '9295 18706 19300 22429 25557 28686 31815 34943 38072 200803 k. of fara fasfia s 287069 294533 302191 310048 318109 326380 334866 343572 352505 361670 371074 380722 380722 Coveragm, ) 5.33 7.68 8.13 6.22 5.88 5.91 6.70 7.44 8.14 8.80 9.42 10 AvI. 1oaa par orrowr (Hkl 42.47 34.73 38.53 51.11 50.17 80.00 90.00 90.00 90.00 90.00 90.00 90.00 88.57 Sasoal credit l 000N) 649.46 785.88 1016.48 986.37 938.52 1544.00 2018.58 2300.17 2581.75 2163.33 3144.91 3426.50 17879.24 BLtME ADD MO. of borras 16936 13193 14297 14314 18522 19000 20111 21223 22334 23446 24557 2568 156339 de. o4 fara facilis 276489 283677 291053 299620 306385 314351 322524 330909 339513 348340 357397 36689 366689 Coverage (v) 6.3 4.65 1.9 4.79 6.05 6.04 6.24 6.41 6.58 6.73 6.87 7.00 AvI. loa per borroer (0) 33.70 46.25 51.05 61.94 53.22 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 sasonal cradit < 000 P6 570.77 610.16 729.93 886.65 985.14 1520.00 1608.91 1697.82 1786.73 1875.64 1964.55 2053.46 12507.11 mo. of horresmrs 5520 8628 55685 6088 6119 6200 7632 904 10496 11928 13360 14792 73472 lo. of fare fasllan 743% 76289 78273 80308 823% 84538 86736 88992 91305 93679 96115 98614 98614 Covarate (2) 7.42 11.31 14.92 7.58 7.43 7.33 8.80 10.19 11.50 12.73 13.90 15.00 Av;. ]o per borro~r (R? 25.90 27.75 29.19 61.04 59.43 90.00 94.00 90.0D 1l.0 0 .00 90.00 90.00 90.00 $tasoal credit U000 86 142.97 239.44 341.01 371.59 363.64 558.00 686.88 815.76 944.64 1073.53 1202.41 1331.29 6612.51 IIALA01 . of orror 556703 180256 211770 207996 203454 213700 238339 262977 287615 312254 336892 361531 2013307 ko. of fara faasls 1228981 1264202 129%986 1337163 1375552 1415066 t455738 1497602 1540694 1585052 1630713 1677716 1677716 covmrag, ti1 12.75 14.24 16.29 15.56 14.79 15.10 16.37 17.56 18.67 19.70 20.66 22 ive. lo par borroser (HR) 49.60 58.43 68,60 83.66 79.98 124.38 139.05 153,95 153.88 153,83 153.79 153.75 147.52 easoal cradt <000 H 7772.07 10531.99 14527.15 11401.05 16271.80 26580.00 33140.37 40484.60 44259.40 48034.20 51809.00 55583.80 299891.37 17M P0JEVITM AM lo 1987 KUAil - 91- ANNEX 9 Table 4 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJT Approximate Number of Medium-teru Loans Project Years 1 2 3 4 5 6 7 Total Stallfeeding 50 100 400 450 460 480 490 2,430 Dairy 10 60 80 100 120 130 140 640 Poultry units (100 birds) 10 20 25 30 40 50 60 235 Fish farms 10 20 30 40 60 65 75 300 ?loughs/ridgers 100 500 1,200 1,300 1,600 1,700 1,900 8,300 Sprayers 150 800 900 1,000 1,100 1,130 1,150' 6,230 Ox-carats 20 200 300 400 600 650 700 2,870 Processing equipment 0 100 110 120 130 140 150 750 - 92 - ANNEX 10 Page 1 of 2 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT An Overview of the Expected Investment Demand 1. Farm Machinery and Equipment. Given that investments are potentially profitable and sufficient cash flow is generated to repay loans, a modest increase in the supply of implements co farmers with 1.50 ha and above has been assumed. Currently some 20% of this group are estimated to own one or more implements. It is estimated that over the seven-year Project period, between 8,000-9,000 units of ploughs, ridgers, and ox-chains, would be issued on credit (about 1,200 units per year). Sprayers for cotton have been a major component of medium-term credit with some 6,000 issued. However, since the use of sprayers is limited mainly to the cotton growing areas of Salima and Ngabu, it is not expected that the demand for sprayers would increase substantially. It is estimated that, on the average, about 1,500 sprayers a year would be purchased through the credit. In addition to the above individual purchases, there is scope for club purchases. Therefore, a provision has been included for an additional 500 loans for ploughs and ridgers and 150 for sprayers. 2. While there is considerable need for ox-carts, the current high cost (MK900-1,300), has limited their use. In the future, there could be a greater demand for ox-carts if supply sources increased and more appropriate equipment becomes available. It is estimated that some 2,500- 2,900 carts would be issued either to individuals or groups. Allowances have also been made for items such as groundnut lifters, wheelbarrows and cultivators. 3. Storage and Processing Equipment. As a time-saving device for farmers, in particular women farmers, and as a means of increasing returns for smallholders, the Project would fund individual loans for processing equipment (maize and groundnut shellers, small oil presses, etc). 4. Stallfeeding is the traditional method of producing beef. Typically, two steers are fattened over a 150 day period, mainly on crop residues and "madea" (maize bran). At the national level, there is scope for increasing the supply of all meats, including beef. A comprehensive est1mate of supply and demand carried out in 1983 indicates that urban demand is increasing by 9 to 11% per year. Supply on the other hand, was projected to increase by less than 4% per year. The suppLy of steers for fattening, however, is the major constraint. Most of the steers are currently procured through the Department of Animal Health and Industry (DAHI). Scope for expanding the stallfeeding program depends on the supply of steers from DARI, and its capacity to do so is currently limited to only 4,150 head per year. Under the project, credit would be granted to farmers to purchase steers from any bona fide supplier, including DAHI. It is considered that there is scope for expanding the stallfeeding program by 3,000-3,500 by Year 7 or an average of 430 cattle per year. - 93 -ANNEX 10 Page 2 of 2 5. Dairy. Loans are normally made for an average of two dairy cows (friesian X zebu cross), and for the establishment of grass/fodder and equipment. Currently, dairy loans are limited to three milkshed areas. While there is demand for fresh milk, as in the case of stallfeeding, the supply of livestock - in this case dairy cows - is a major constraint for expanding milk production. Potential supply from DAHI is estimated at about 900 cows p.a. However, this overestimates the credit sales of dairy cows, since about 60% of the supply is purchased on a cash basis. There is also limited demand for investments in six of the milk-cooling centers within the milk-bulking groups organized by the Malawi Milk Marketing (MMM). To alleviate these constraints, it is expected that the potential for increasing the number of dairy loans by Year 7 would be 1,600 to 2,000 dairy cows. 6. Poultry. Loans are normally made for 200-250 bird units for sales of eggs to the Malawi Egg and Marketing Board (MEM). Pullets are either locally supplied by Mikolongwe or imported. In addition, some chicks are supplied by private hatcheries. One major constraint to the expansion of commercial, small-scale poultry production is the availability and quality of feed. Furthermore, the size of the production units currently being established requires relatively larger markets than those available in the rural areas. The development of poultry production is thus limited to the larger rural centers (the average smallholder has 6-8 hens for domestic consumption). Expansion of the existing scheme outside the major centers is not considered feasible, and smaller units (100 birds) should be encouraged. Smaller production units would reduce the risk for smallholders and, given the lower capital cost, would require less rigorous management and feed supply conditions. The Project has thus projected a modest increase of about 230 units. 7. Fisheries. There is demand for the establishment of fish farms, the purchase of nets and boats used by traditional fishermen, and fish processing equipment, including drying racks and smoking kilns. The development of fish farming has been accorded high priority by the Fisheries Department. The Domasi Fish Farm is currently the center for fish farming in Malawi, and work has begun to establish six similar centers; the first of these (Kasinthula in Chikwawa) is already operational. These stations would provide administration, extension and research services to beneficiaries. In addition, they would support a network of sub-stations which would be a part of the RDP system. It is expected that about 300 small ponds would be developed on credit over the seven-year period in the areas where the substations are to be established - Mwanza (LWADD), Ntcheu (LADD), Dowa (KADD), Mzuzu (MZADD) and Chipata (KRADD). Funds would be provided to farmers for the construction of 0.05 ha or 0.10 ha ponds, and also for initial purchase of feed and manure. The ponds would be stocked with tilapia and carp. The Fisheries Department's substations would supply fingerlings and would also serve as demonstration ponds and provide extension services to beneficiaries. Resources would also be made available for the purchase of nets, boats and engines, fish drying racks, and smoking kilns. - 94 - ANNEX 11 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT Recommended Chemical Inputs Used by Smallholders in Malawi A. Fertilizer Calcium Ammonium Nitrate (CAN) Diammonium Phosphate (DAP) Sulphate of Ammonia (SA) 20:20:0 Urea B. Pesticides Dipterex (2.5%) granules Sumithion (Fenitrothion) 50% Sumicidin (Fenvalerate) 20% Sevin (carbaryl 85% WP) Laconil 2787W-75 Orthene (Acephate) 75% S.F. Actellic (Pirimiphos-methyl) 2% ■■口■•戶，→→，•，→．→～→～唱一 ：一一’ IBRD 20608 M A L A W l SMÅLLHOLDER AGRICULTURAL. Ko~ CREDIT PROJECT BOUNDARIES Of AGRICULTURAI. OEVELOPMEN1 DIVISIONS A00 HEADOUARTERS LXISTING MAJOR AOII[CULTU!4-"OJfCT AREAS IDA ' FAD FINANCIAL ASSISTANCE OTHER AGENCIES FINANCIAL 'SSISTANCE MAIN ROAO RAII WAYS R vi RS H£ VA ä 11 Rbu EDF I.TIERNATIONAL 80UNDAR:ES pob, Nikhofo Boy Z A M, B l A 12' ir. tj Cla~tu IstÄl0 M 0 M, B I Q U E V-loco"l mpo a Down mchnl. 111ONGWE by Dedzo Nc to %Å,.ý9 11 no W~ 8~ Ift 0.0~ Boloko ~af~ve~wom F- C.~ r. vpe 0 Z A M S Q E BLANTYRE t-b. id. chikö~ Thy~ le- b K) L Nson zas..) SOUTH 0 20 4? 6ý0 lp 100 AFRICA L£s 40 60 80 0,111TER17, 3e MAY 19V