Malawi - Industrial and Agricultural Credit Project

Document of The World Bank For OMCIAL USE ONLY Repwe No 5815-MAI STAFF APPRAISAL REPORT NALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT December 2, 1985 Eastern and Sothern Africa Projects Department Industrial Development and Finance Division TI& dcumt _ a refrldui db ibsirIud a _ " kmy be by aoe. only In th pifmumee of thed 1 Idhd. 1_ St euumb NW a* eheibe be dh.si withet Word BInk atihimU  CURRENCY EQUIVALENTS (August 1985) Currency Unit - Malawian Kwacha (NK) US$1 - MK 1.80 MK 1 = US$0.56 GLOSSARY OF ABBREVIATIONS ADB = African Development Bank ADMARC = Agricultural Development and Marketing Corporation CBM - Commercial Bank of Malawi CDC - Commonwealth Development Corporation DEG = Deutsche Entwicklungsgesellschaft (German Finance Company for Investments in Developing Countries EEC = European Economic Community EIB - European Investment Bank FMO = Nederlandse Financierings Maatschappi Voor - Outwickeling Sladen (Netherlands Finance Company for Developing Countries) IFC = International Finance Corporation INDEBANK - Investment and Development Bank of Malawi%Limited MDC = Malawi Development Corporation MEPC = Malawi Export Promotion Council MOA = Ministry of Agriculture NBM = National Bank of Malawi NBS = New Building Society PGL = Press Group Limited POSB = Postal Savings Bank SEDOM = Small Enterprise Development Organization of Malawi SSE = Small Scale Enterprises TRA = Tobacco Research Authority TRF = Tea Research Foundation FISCAL YEAR Government of Malawi: April 1 - March 31 INDEBANK: January 1 - December 31 National Bank of Malawi: January 1 - December 31 Commercial Bank of Malawi: July 1 - June 30  FOR OMCIAL USE ONLY MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT Table of contents Page No. Loan and Project Summary . . . . . . . . . . . . . . . . . . . . i - iii Basic Data . . . . . . . . . . . . . . . . . . . . . . . . a . . iv - ix Is SECTOKAL MACKGEUUNDD.. ... . . . . .*....... . . 1 A. The Manufacturing Sector .... .. . . .. 1 Background and Performance .............. 1 Structure . . . . . a . . . . . . . . . . . a . . . 2 Institutional and Policy Framework . . . . . . . . . . 3 Industrial Policies . . . . . . . . . . . ... 4 Development Constraints and Issues . . . . . . . . . . 5 Manufacturing Sector Prospects . . . . . . . . . . . . 6 Bank Group Experience and Strategy in the Sector . . . 6 B. The Agricultural Estate Subsector a . . . . . . . . . . 7 Background . . . . . . . . 7 . . . . . . . Estate SubsectorServices . .. . .. . . . . . e. . . 9 Agricultural Development Strategy and Constraints . . . 10 C. The Financial Sector . . . . . . . . . a . . w * . . . 11 Financial Institutions . a a ..a....... o ..... ..e.. 11 Credit Allocation . . . ............... 13 Inflation and Interest Rates. . . . . . . . . . . . . 13 II. THE FINANCIAL INTEMEDIARIES ...... . . . .6. 14 A. The National bank of Malawi . . . . ....... . . . 14 h. The Commercial bank of Malawi . .. . . . . . . . . . . 14 |Thisdxmmnxthasa rstriced dsbEtmtonad maybe usd by epients onlyi mtheperformaox#of gtbeiroflfsiduties. Its contents may to otherwiwbe discosed witut Word Bank audwdniot  Page No. C. The Investment and Development Bank of Malawi . . . . . 17 Experience with Past Bank Group Lending . . . . . . . . 17 Objectives and Role . . . . . . . . . . . . . . . . . . 18 OwnershipanBandBar.................. 18 Organization and Management . . . . . . . . . . . . . . 18 Staffing, Staff Development and Training . . . . . . . 19 Policies and Procedures. ..... ....... .... 20 Operations and Portfolio ......... .... .. 22 Resources . a a . . .... . . . ..*. . ... 25 Financial Performance and Condition . . . . . . . . . . 25 Prospects . . . . ... . . . . . . . . . . . .a . . .a . . . 26 Small/Medium-Scale Lending Activities . . . . . . . . . 29 III. THE PROJECT. . . . . . . . . . . . . . . . . . . . . . . . 29 Objectives and fescription . . . . . . . . . . . . . . 29 Terms and Conditions ...... ............ 30 Project Implementation ....... ........ 32 Disbursements . ... .... . . . . . . 33 Pilot Agricultural Credit Component Imp*lementation Review . . . .. .. . a.. . . .. .. . . a * * * o.. 33 Benefits and Risks . . . . . . . . . . . . . . . . . 34 IV. AGREEMENTS TO BE REACHED AT NEGOTIATIONS o*.*.*.*. 35 ANNEXES 1. MALAWI: Structure of Interest Rates . . . . . . . . . . . . . 38 2. National Baklc of Malawi: Organization Chart . . . . . . . . . 39 3. Commercial Bank of Malawi: Organizational Chart . . . . . . . 40 4. INDEBANK: Organization Chart . . . . . . . . . . . . . . . . 41 5. Actual and Projected Operations . . . . . . . . . .. . .. . 42 6. Actual and Projected Income Statements . . . . . . . . . . . . 43 7. Actual and Projected Balance Sheets . . . . . . . . . . . . 44 R. Projected Sources and Application of Funds . . . . . . . . . . 45 9. Actual and Projected Financial Ratios . . . . . . . . . . . . 46 10. Estimated Disbursement Schedule . . . . . . . . . . . . . . . 47 11 Selected Documents and Data Available in the Project File . . 48 This report is based on findings of an appraisal mission to Malawi in February/March 1985, consisting of Messrs. Godfrey Tumuslime (mission leader), Asaf Malik, Vincent Rague, and Arturo Meyer and Jonathan Fodden (Consultants).  (i) MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT Loan and Project Summary Borrower: Republic of Malawi Beneficiaries: Investment and Development Bank of Malawi (INDEBANK), National Bank of Malawi (NEM) and the Commercial Bank of Malawi (CBM) Terms: Repayable in 15 years, including four years of grace, with a variable rate of interest. Amount: US$7.8 miUlion equivalent Relending Terms: INDEBANK Line of Credit. The Government would onlend us$3.0 million to INDEBANK to finance industrial and commercial projects at the variable interest rate to be paid by Government on the proposed loan. Repayment would be in accordance with the aggregate amortization schedule applicable to the subloans. The maximum repayment period is 15 years including 4 years of grace. INDEBANK would on lend the funds at a variable rate. INDEBANK's current lending rate for industrial credit is 13 percent p.a. Sub-borrowers would bear the exchange rate risk. Agieultural Credit. The Government, through the Reserve Bank of Malawi, would mnlend US$4.5 million to INDEBANK, the National Bank of Malawi and the Commercial Bank of Malawi at a rate initially set at 10.5% p.a. These institutions would onlend at rates ranging from 11.5% to 15Z p.a. The Government would bear the exchange rate and variable interest rate risks. Technical Assistance Component. US$.3 million would be a Government grant to INDEBANK. Objectives and Project Description: The project's objectives are to: (i) improve the efficiency and productivity of agricultural estates in Mhlawi and encourage the gradual diversification into  (ii) new crops; and (ii) builC upon and further strengthen INDEBARK's institutional capabilities, assist in diversification of its role in productive sectors, and expand its activities in the agricultural sector-the mainstay of Malawi's economy. The proposed project consists of: (1) a US$3.0 million credit line to finance viable industrial, conmercial, transport and tourism investments; (ii) a US$4.5 million agricultural credit component to provide investment credit to agricultural estates; and (iii) US$.3 million in technical assistance to INDEBANK to strengthen its capability to promote, appraise and monitor agricultural projects. Benefits and Risks: The proposed project would strengthen INDEBANK's capability to more effectively promote the efficient development of productive activities and thereby creating new investment and employment opportunities in Malawi. Benefits would accrue from the agricultural component by: i) satisfying existing unfulfilled demand for term financing for agricultural estates thus filling a void in the financial sector; and (ii) financing productivity improving investments which would free up land and thereby increase potential for diversification. The pilot nature of this compoent- partly to be channeled through the commercial banks- would permit evaluation of the suitability of these inrtitutions to effectively administer term credit to the estate subsector. The main project risk is that the estate crops are produced for export and a substantial drop in the international prices for these crops would result in liquidity problems for sub-borrowers and in defaults on loan repayments. Preliminary Bank forecasts indicate some stability in these commodity prices. Further, investments to be financed are expected to develop lower cost producers better able to withstand price falls. Gradual diversification would further reduce farmers' vulnerability to this risk. Finally, participating financial intermediaries' careful review procedures would screen out marginal investments.  (iii) Estimated Cost: US$ million Local Foreign Total (i) INDEBANK Line of Credit Component 3.42 6.13 9.55 Agricultural Credit Component 1.80 2.70 4.50 Technical Assistance Component .10 .20 .30 TOTAL 5.32 9.03 14.35 _ _m Financial Plan: / US million Local Foreign Total Internal cash generation 2.22 - 2.22 IBRD loan 1.90 5.90 7.80 Other borrowings (from ADB, 1.20 3.13 4.33 EIB, CDC and FMO) TOTAL 5.32 9.03 14.35 Estimated Disbursements: Bank FY 1986 1987 1988 1989 1990 1991 1992 1993 US$ '000 Annual 1.0 2.0 1.5 1.4 1.0 .3 .3 .3 Cumulative 1.0 3.0 4.5 5.9 6.9 7.2 7.5 7.8 Rate of Return: NA 1/ Commercial banks would provide short term financing to agricultural estates to supplement term credit provided under the proposed project.  (iv) MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT Investment and Development Bank (INDEBANK) Basic Data (As of January 31, 1985) 1. Date of Establishment: December 1972 2. Share Capital: Authorized, issued and fully paid K 4,500,000 ordinary shares of K 1 each. Ownership Paid-in Capital K1O00O Agricultural Development and Marketing Corporatioa (ADMARC) (100% Government oawed) 1,000 22.25 Commonwealth Development Corporation (CDC) 1,000 22.25 Deutsche Finanzierungsgesellschagtfiir Beteiligungen in Entweicklungsliuderm (DEG) 1,000 22.25 Nederlandse Financierings-Maatschappij Voor Outwikkelingsladen N.V. (FMO) 1,000 22.25 International Finance Corporation 500 11.0 r 5 0 060-0 3. Resource Position (as of January 31, 1985): (K'000) Foreiga Exchange Kwacha Total Sources Share Capital - 4,500 4,500 Retained Earnings - 520 520 Itnome Notes - 11,250 11,250 Loans EIB 7,870 - 7,870 CDC 570 - 570 IBRD 2,540 - 2,540 ADB 3,300 - 3,300 Total Sources 14,280 16,270 30,550 Uses Net Fixed Assets - 520 520 Portfolio Loans 9,280 7,070 16,350 Equity Investments - 4,660 4,660 Total Uses 9,280 12,250 21,530 Resources Available for Disbursements 5,000 4,020 9,020 Less Undisbursed Commitments 780 220 1,000 Resources Available for Commitments 4,220 3,800 8,020 Less Uncommitted Approvals 1,690 1,730 3,420 Resources Available for Approvals 2,530 2,070 4,600  (v) 4. Operations (KOOO) Year Ended December 31 1980 1981 1982 1983 1984 Approvals 1-wacha Loans 1,175 1,090 580 200 1,690 Foreign Currency Loans 2,555 1 791 1,050 330 1,790 Subtotal 2788 1,630 530 3,480 Equity Investments 1,284 540 - - 640 Total Approvals 5,014 3,421 1,630 530 4,120 Commitments &wacba Loans 1,290 350 1,860 710 560 Foreign Currency Loans 3,445 2,146 1,140 750 210 Subtotal 4,735 2,496 3,000 1,460 770 Equity Investments 966 933 - 140 _ Total Comlitments 5,701 3,429 3,000 1,600 770 Disbursements Kwacha loans 1,355 113 360 250 730 Foreign Currency Loans 1,999 2,373 2,060 1,020 - Subtotal 3,354 2,486 2,420 1,770 730 Eqtity Investments 486 1,360 50 140 - Total Disbursements 3,840 3,846 2,470 1,910 730 5. Financial Results & Position (K'000) Results Gross Income 1,888 2,219 2,746 3,216 3,763 Profit After Tax 283 340 117 219 490 Profit After Tax as % of Average Total Assets 1.7 1.7 0.7 0.9 1.9 Profit After Tax as 2 of Average Net Worth 5.8 6.8 3.3 4.6 8.1 Administrative Expenses as X of Average Total Assets 2.9 2.4 2.5 2.5 3.2 Position Net Worth 4,851 5,013 4,695/1 4,756 4,975 Total Assets 18,541 21,659 23,584 - 26,438 26,640 Long Term Debt/Equity Ratio 2.6 3.0 3.6 4.0 3.8 Provisions as Z of Year End Portfolio - 0.2 3.1 5.0 3.5 6. Interest Rates Foreign exchange loans: 13% p.a. Local currency loans: 14-16% p.a. Foreign exchange risk: Borne by sub-borrowers / The decline in net worth in FY82 was due to a dowaward adjustment in the value of reserves following a change in INDEBANK's accounting practices.  (vi) MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT Comercial Bank of Malawi Basic Data (As of June T985) 1. Share Capital Authorized: K 5.0 million divided into 2.5 million shares of K 2 each. Issued : K 3.45 m4A