Malawi - Smallholder Agricultural Credit Project

The World Bank FOR OFFICIAL USE ONLY Report No: 16212 IMPLEMENTATION COMPLETION REPORT AL4LA WI SMALLHOLDER AGRICULTURAL CREDIT PROJECT (CR. 1851-MAI) January 3, 1997 Agriculture Operations, Eastern and Southern Africa Agriculture and Environment Africa Region 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 1985 US$ 1.0 = MK 1.72 1986 US$ 1.0 = MK 1.86 1987 US$ 1.0 = MK 2.21 1988 US$ 1.0 = MK 2.56 1989 US$ 1.0 = MK 2.76 1990 US$ 1.0 = MK 2.73 1991 US$ 1.0 = MK 2.80 1992 US$ 1.0 = MK 3.60 1993 US$ 1.0 = MK 4.40 1994 US$ 1.0 = MK 7.90 1995 US$ 1.0 = MK 15.0 WEIGHTS AND MEASURES Metric System FISCAL YEAR OF BORROWER April 1 - March 31 LOAN FIGURES All loan figures reported in this document are loan values, which include both principal and interest (for the initial loan period). PROJECT-YEAR 1 The Smallholder Agriculture Credit Project became effective September 8, 1988 and the first year of operation for the Smallholder Agriculture Credit Administration (SACA) was 1988/89. The without project comparisons made in this document use 1987/88 as the base year. Vice President: Callisto E. Madavo Country Director: Barbara Kafka Technical Manager: Sushma Ganguly Staff Member: Steven Jaffee FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS ADD Agricultural Development Divisions CA Credit Assistance CSCF Consolidated Smallholder Credit Fund CSR Centre for Social Research DCA Development Credit Agreement FAs Field Assistants GB Grameen Bank GOM Government of Malawi IAP Integrated Agricultural Programmes IDA International Development Association IFAD International Fund for Agricultural Development LCB Local Competitive Bidding MFSP Mudzi Financial Services Project MMF Malawi Mudzi Fund MOALD Ministry of Agriculture and Livestock Development MOF Ministry of Finance MRFC Malawi Rural Finance Company NBM National Bank of Malawi NRDP National Rural Development Programme ODA Overseas Development Administration OPC Office of the President and Cabinet POSB Post Office Savings Bank PM Person Months PS Principal Secretary RBM Reserve Bank of Malawi RFSP Rural Financial Services Project SACA Smallholder Agricultural Credit Administration SAR Staff Appraisal Report 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 wiLhout World Bank authorization. IMPLEMENTATION COMPLETION REPORT MALA WI SMALLHOLDER AGRICULTURAL CREDIT PROJECT (CREDIT 1851-MAI) Contents P re fa c e .................................................................................................................................. i E valuation Sum m ary ........................................................................................................... ii PART 1: PROJECT IMPLEMENTATION ASSESSMENT............................................. A. STATEMENT/EVALUATION OF OBJECTIVES ..........................................1 B. ACHIEVEMENT OF OBJECTIVES ................................................................3 C. MAJOR FACTORS AFFECTING THE PROJECT........................................10 D. PROJECT SUSTAINABILITY .......................................................................12 E. BAN K PERFORM AN CE ................................................................................12 F. BORROWER'S PERFORMANCE .................................................................13 G. ASSESSM ENT OF OUTCOM E .....................................................................13 H . FU TU RE O PERA TION S ................................................................................14 I. K EY LESSON S LEA RN ED .............................................................................14 PA RT 2: STA TISTICA L TA BLES ................................................................................. 16 APPENDICES A. Mission's Aide-Memoire B. Borrower's Contribution to the ICR C. Appendix C-1: SACA Credit Operations Appendix C-2: Maize Budget (per ha) in Economic Terms Appendix C-3: Smallholder Crop Hectarage Estimates D. Map IMPLEMENTATION COMPLETION REPORT MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT (Cr. 1851-MAI) Preface This is the Implementation Completion Report (ICR) for the Smallholder Agricultural Credit Project (SACP) in Malawi, for which IDA Credit 185 1-MAI in the amount of SDR 4.6 million (US$ 6.4 million) was approved on December 22, 1987 and made effective on September 8, 1988. The credit was formally closed on June 30, 1995 and was fully disbursed, with the last disbursement taking place on July 28, 1994. The delay in closing the project was due to the transfer of the assets and liabilities from the Smallholder Agricultural Credit Administration (SACA) to its successor organization, the Malawi Rural Finance Company (MRFC). Cofinancing for the project, amounting to SDR 4.7 million (US$ 6.6 million), was provided by IFAD. This ICR is based primarily on a mission from the FAO/World Bank Cooperative Programme/ on behalf of the then Agriculture and Environment Division of the Southern Africa Department (AF 1 AE) of the World Bank. That mission took place in early 1995 and involved a review of material gathered from the project files, supervision reports, as well as on findings from field investigations and discussions with Bank and GOM staff associated with the project. Further processing of the ICR was delayed as a result of the incomplete nature of this review, an extended delay in the receipt of substantive comments from the borrower, and a one-year delay in the preparation of a final, incomplete audit for the project. To complete the review, further information was gathered during a mission--supervising a follow-on project--in November 1996. The report was finalized by S. Jaffee (TTL) and reviewed by S. Ganguly (TM, AFTAl). " Messrs. R. Suppa (Economist/Mission Leader) and P.V.A. Rama Rao (Credit Specialist/Consultant). -11- IMPLEMENTATION COMPLETION REPORT MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT (Cr. 1851-MAI) Evaluation Summary Introduction 1. Prior to the approval of the Smallholder Agricultural Credit Project (SACP), the Bank group had provided sixteen loans, totaling US$ 170 million, for agricultural development in Malawi. Of this total, some US$ 120 million had been provided in support of the smallholder sub-sector. At the time that the SACP was conceived in the mid-1980s, there was considerable concern about the pace of agricultural development. Both smallholder and overall agricultural growth had stagnated in the first half of the 1980s and national production of the staple food crop, maize, had declined. This, together with an influx of refugees from neighboring Mozambique, resulted in a large maize deficit in 1986/87. The slow pace of technological change and productivity growth within smallholder agriculture was attributed, in part, to limited access to institutional credit. During the 1970s and 1980s, credit was provided under a range of separate area-based rural development projects, having varied administrative and accounting procedures, and involving little scope to re-allocate credit resources to areas where they were needed. Only about 15- 20% of smallholder farmers had access to institutional credit, with the majority of beneficiaries located in two of the eight Agricultural Development Divisions (ADDs). Project Objectives 2. The SACP was conceived to support the country's efforts to promote food security and an expansion and diversification of smallholder production. A broad spectrum of smallholder farm families throughout the country were expected to benefit from the increased crop production resulting from the improved farm technology applied with the use of credit and extension. The SACP was to amalgamate the various location-specific credit programs into a national program. 3. The primary objective of the project was to transform Malawi's smallholder credit system into a better-managed, more efficient, lower cost and financially viable national credit delivery system. The main project components included: (i) the provision of funds for financing both on-farm requirements of inputs (seasonal or short-term credit) and viable on-farm and off-farm investments (medium-term credit); (ii) institutional support, including the establishment of a Smallholder Agricultural Credit Administration (SACA) and provision for technical assistance and training; and (iii) an IFAD-funded pilot credit and saving scheme for the rural poor. -111- Implementation Experience and Results 4. Implementation record. The major objective of increasing credit support to smallholder farmers was substantially achieved, yet due to declining loan repayment rates this credit expansion could not be sustained. The credit disbursed to smallholders by SACA grew in nominal terms from MK 43.5 million (U.S.$17 million equivalent) during its first year (1988/89) to MK 144.7 million (J.S.$33 million) in 1992/93. The number of participating farmer clubs (and club members) increased from the pre-SACA level of 9,072 (with 242,500 members) in 1987/88, to a peak level of 15,650 clubs (with 392,000 members) in 1992/93, in line with SAR estimates. However, lending declined thereafter and during the 1993/94 season, disbursements were made to only 4,155 clubs. 5. Although loan recoveries were initially satisfactory, by the end of the project the majority of clubs remained in default due to several factors, the most important being the 1991/92 drought, the relaxation of credit eligibility criteria, and widespread political interference in loan recovery and in the small farm credit system more generally. While seasonal lending met project targets, there was relatively little lending for medium-term investments (and poor loan recovery thereof) and virtually no progress on savings mobilization. The seasonal credit disbursed by SACA contributed to the increased adoption of hybrid maize technology during the late 1980s and early 1990s. Though not the intention of the project, the SACP also contributed to the expansion of small-scale estate production of tobacco, through the 'leakage' of credit and inputs from smallholder farmer clubs to the small estates. The Malawi Mudzi Finance (MMF) pilot scheme met its lending and beneficiary number targets. However, despite several important organizational and procedural changes, the scheme did not become cost-effective. 6. In 1988, the credit section within the Ministry of Agriculture was converted into the Smallholder Agricultural Credit Administration (SACA) with, ostensibly, an independent departmental status. In the course of the project SACA was strengthened through technical assistance, training, and the provision of office equipment and vehicles. Under the SACP, a national system for smallholder credit was indeed forged and progress was made in delinking credit from extension. Nevertheless, SACA remained institutionally weak with poor management information, loan supervision, and financial control systems and with little capacity to influence national credit policies. 7. Key factors affecting project achievement. Prior to the creation of SACA, smallholder credit in Malawi was strongly linked to the influence and administrative apparatus of the governing political party. Political officials played a strong hand in the selection of credit recipients, in the formation of credit groups, and in the recovery of loans. Over an extended period, loan recovery rates of 95% or more prevailed, as much a result of the threat or act of expropriating defaulter assets as due to either the effectiveness of the MOA's credit section or credit club solidarity and peer pressure. SACA's more 'independent' administration of smallholder credit put greater emphasis on farmer group training and joint liability. However, SACA's management decisions and loan recovery efforts also came to be strongly influenced by external political considerations which were contrary to sound banking principles. This applied to the setting of interest rates, the frequent changes in loan eligibility criteria, the blanket moratorium of loan repayments following the 1991/92 drought, and the strictures against SACA taking legal action against defaulters. While these weakened loan recovery discipline and the financial viability of SACA, the hijacking of credit by rival political parties in 1992/93 brought about the virtual collapse of the system. 8. Sustainability. SACA was conceived to emerge as a financially viable system to provide credit to smallholder farmers. In its initial years it was able to meet its operating costs from its income, yet with the steep increase in loan defaults from 1991/92 onward, its operations ended up with huge losses. At the -1v- end of September 1994, the accumulated loan defaults for SACA stood at MK 263 million. The above, coupled with the lack of professional expertise of SACA management, organizational and financial weaknesses, and external political influences, clearly indicate that the project was not sustainable. As regards the MMF, its organizational arrangements have suffered from high operating costs with prohibitive overheads, indicating the need for significant adjustments and an expanded outreach to achieve a measure of sustainability. 9. Project Costs: The actual project cost was estimated at US$ 14.2 million. Final overall disbursement includes: IDA US$ 6.4 million, (SDR 4.6 million), IFAD US$ 6.6 million (SDR 4.7 million) and GOM US$ 1.2 million. The IDA credit has been fully utilized and final disbursement took place on July 28, 1994. IFAD loan 212-MW, under which some SDR 0.2 million were available, remained open until the Malawi Mudzi Fund (MMF) assets and liabilities were transferred to the Malawi Rural Finance Company (MRFC). All major legal covenants had been fulfilled by project closure. 10. Bank and borrower's performance. IDA performed satisfactorily throughout the project cycle. In all, 15 supervision missions visited the projects and at each stage task plans were drawn up to facilitate timely action on pending items. IDA continuously expressed its serious concern regarding the loan recovery performance and, at its insistence, the borrower had prepared an action plan for the recovery of the defaults. However, this plan could not be effectively implemented due to political interference. The borrower's performance was initially constructive, yet SACA's work was overtaken by the extraneous (political) influences. The borrower generally complied with the major covenants of the DCA, a major exception being that related to loan recovery discipline. 11. Overall project outcome. SACA, the agency specifically set up for credit delivery, could not become financially viable. Similarly, the MMF, which was set up to implement the pilot component of savings and credit, was also not cost-effective. For these reasons, the project sustainability has been rated unlikely and, therefore, the project's outcome is assessed as unsatisfactory. Summary ofFindings, Future Operations and Key Lessons Learned 12. While the project partly achieved its objectives of consolidating credit operations into a national system and increasing the number of smallholder farmers accessing institutional credit, SACA's operations proved to be unsustainable as a result of internal organizational weaknesses and external factors. The lessons from SACA's experience were built into the design of a follow-on IDA-financed Rural Financial Services Project (RFSP). Under the latter project, an autonomous Malawi Rural Finance Company (MRFC) was created, applying sound banking practices, developing a client-oriented organizational structure, (re-)instilling credit discipline, and deflecting attempted external efforts to influence client selection and loan supervision and recovery. Similarly, the MMF has been brought under the umbrella of MRFC as an IFAD-financed special facility to provide financial services to the rural poor. 13. Key lessons learned. These include: (i) to remain solvent, rural financial institutions need to be able to operate free of political interventions, both in the selection/screening of clients and in the supervision and recovery of loans; (ii) the prevailing policy environment has a crucial impact on the viability of smallholder lending. SACA operated within a conflicting policy environment, featuring periodic distribution of free inputs, shifting policies on input and commodity prices, and changing -v- policies on loan recoveries; (iii) the application of below market interest rates and subsidized inputs for selected target groups is inevitably accompanied by the leakage of such credit and inputs to non-targeted beneficiaries, (iv) beneficiary training in credit discipline is crucial; its virtual absence in this project provided no counterweight against political intrusions promising 'grants' in response to votes; (v) savings mobilization is a critical element in the development of sustainable rural financial services, (vi) in circumstances where farmer (credit) clubs are formed through political patronage or similar types of interventions, such clubs will remain vulnerable to external manipulation; (vii) input packages (and the loans supporting them) need to be flexible to meet the needs of clients operating in different agro- ecological areas; and (vii) initiatives to provide credit (and savings facilities) to the very poor through cohesive groups can achieve beneficial impact with high repayment rates, yet financial sustainability is a major challenge, given the initial high overhead and other costs associated with such activities. IMPLEMENTATION COMPLETION REPORT MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT (Cr. 1851-MAI) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. STATEMENT/EVALUATION OF OBJECTIVES 1. The primary aim of the project was to transform Malawi's smallholder credit system into a better-managed, more efficient, low-cost and financially viable national credit delivery system that would benefit a significantly large number of smallholders. The specific objectives of the project were to: (a) consolidate the present area or project based programs into a national smallholder credit system within the Ministry of Agriculture (MOA); (b) increase flexibility in the allocation of credit resources; (c) strengthen the organization of the credit system and improve the efficiency of policies and procedures for credit planning and administration; (d) 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), benefiting from institutional credit; (e) initiate measures to increase the mobilization of rural savings; and (f) initiate a pilot operation to provide credit to and foster savings by the rural poor to finance off-farm income-generating economic activities. 2. The project components as foreseen at appraisal comprised: (a) lines of credit: the provision of funds for financing both on-farm requirements of inputs (seasonal credit) and viable on-farm and off-farm investments (medium- term credit); (b) institutional support: including the establishment of a Smallholder Agricultural Credit Administration (SACA) as a Department within MOA, and the provision of technical assistance and training; and (c) a pilot scheme for the rural poor (Malawi Mudzi Fund): focused on credit and savings mobilization for income-generating activities. -2- The project cost was estimated at US$ 14.4 million, to be financed as follows: IDA credit US$ 5.9 million, IFAD US$ 6.9 million, project beneficiaries US$ 0.2 million and GOM US$ 1.4 million. 3. At the time that the SACP was conceived in the mid- 1980s, institutional credit for smallholder farmers was provided under a range of separate area-based rural development programs. These programs, financed by different international organizations, featured varied administrative and accounting systems. Credit funds could be re-allocated between the different areas only with considerable difficulty, resulting in a fragmented system in which credit rationing occurred in some areas while surplus funds remained elsewhere. The provision of credit was closely intertwined with agricultural extension, with no rural development project staff or assets specifically dedicated to credit matters. Smallbolder credit was also strongly influenced by the interventions and administrative procedures of the ruling political party. Smallholder loan repayments were exceptionally high--exceeding 97% in most years--in large part due to the (credible) threat of asset expropriation against defaulters. 4. The mid-1980s was also a period of considerable concern about and adjustment within Malawi's agriculturally-based economy. Both smallholder and overall agricultural growth had stagnated in the early to mid-80s. National production of local and especially hybrid maize was declining. This, together with the influx of refugees from Mozambique resulted in a large maize deficit in 1986/87, necessitating large-scale imports. The uneven sequencing of marketing and input and output price reforms had created marketing uncertainties, shortages of inputs, and enormous financial and logistical burdens on the dominant marketing agency, the parastatal ADMARC. 5. The SACP was designed to amalgamate all the existing credit operations under a Smallholder Agricultural Credit Administration (SACA), formally established as a Department within the MOA. The establishment of SACA provided clarification of responsibility for credit services within a single Department, instituted continuity of management, and provided the scope for developing standardized administrative and accounting procedures and applying credit policies on a national basis. A broad spectrum of farm families were expected to benefit from increased production resulting from the use of improved farm technologies applied with the use of credit and extension. It was foreseen that the SACP would help to accelerate food production and contribute also to a more diversified pattern of production. 6. The project was consistent with the World Bank's Country Assistance Strategy and in line with the development priorities of the borrower. To minimize possible risks, as identified at appraisal, technical assistance and training were envisaged to strengthen the project implementation capability of the borrower. Parallel IDA-financed projects were expected to address other possible risks related to crop pricing, input subsidy and marketing issues, and to provide assistance to strengthen research and extension activities. -3- B. ACHIEVEMENT OF OBJECTIVES Summary 7. The project partly achieved its development objective of consolidating credit operations into a national system, of increasing the flexibility of credit resource allocations, and of increasing the number of smallholder farmers accessing institutional credit. Progress was made in standardizing credit arrangements, strengthening the skills of SACA management and staff, delinking credit from extension, and broadening the range of smallholder farm and off-farm activities financed through credit. The credit disbursed by SACA contributed to the increased adoption of hybrid maize technology and to the initial take-off of smallholder (and small estate) burley tobacco production. It thus contributed to increased incomes and, at least in the case of the burley tobacco producers, an improved capacity to self-finance crop production. 8. Nevertheless, the SACA operation itself proved to be unsustainable, with a sharp drop in loan recovery rates and with a virtual collapse of the system by 1993. SACA's problems stemmed from a combination of internal weaknesses and adverse external factors, with the latter being most critical to the breakdown of operations. SACA's own weaknesses involved or stemmed from the lack of banking experience amongst its management and staff, its weak management information and financial control systems, its inability to mobilize savings as a source of funds, and its limited influence over national credit policies. Magnifying the impact of these weaknesses were several 'external' factors, including repeated shifts in government credit policies, a major drought (in 1991/92), and the inclusion of credit (and credit repayment) as a component in the campaigns of competing political parties (in 1992/93). 9. Lessons from SACA's experience were built into the design of a follow-on Rural Financial Services Project. The RFSP has involved the formation of an autonomous (though initially 100% government-owned) rural financial services company, upon the assets and liabilities of SACA. While primarily serving a smallholder and small estate clientele, this company has sought to apply commercial lending policies and proper financial management practices, mobilize rural savings, and re-establish strict credit repayment discipline. Two relatively successful years of lending operations have now occurred, with the follow-on project making an important contribution to the acceleration of smallholder burley tobacco production. Hence, while the institutional arrangements surrounding SACA's operations were unsustainable, adjustments made toward the end of the SACP, and refined in subsequent years, have resulted in a rural financial system which has good prospects for continued financial viability and growth. Credit Delivery and Savings Mobilization 10. General. The objective of increasing credit support to smallholders was substantially achieved, yet due to declining loan repayment rates this credit expansion could not be sustained. The level of achievement of the other related objectives of the project-- including loan diversification (particularly for investment purposes), improved access to loans by women beneficiaries and mobilization of rural savings-- was much less significant. The initiation of a pilot operation providing credit and fostering savings amongst a rural poor target group had positive impacts on its beneficiaries and provided some useful lessons, although its implementation of a relatively small loan portfolio was not cost-effective. The project had a negligible impact on savings mobilization. -4- 11. Seasonal credit. Under the project, funds were made available to provide seasonal credit to smallholder farmers to assist in their purchase of seeds, fertilizer, and other inputs. In the year prior to the start-up of SACA (1987/88) some 9,072 clubs and 242,500 beneficiaries were provided credit under the various rural development programs. During the course of the SACP, credit coverage increased to 15,650 clubs and 392,000 farmers in the peak 1992/93 lending season, this expansion being in line with SAR estimates. Due to poor loan recovery (and a lack of additional funds), only 4,155 clubs (and 78,405 farmers) received loans in 1993/94, the last year of SACA operations. 12. The exact size of SACA's seasonal loan portfolio cannot be determined since many medium-term loans were recorded as seasonal loans. Nevertheless, the medium term loan portfolio was relatively small, generally 5% or less of the total loan portfolio. SACA's total loan portfolio expanded from MK 43.5 million in its first year (1987/88) to a reach a peak of MK 144.7 million in 1992/93. Expressed in U.S.$ equivalents, the volume of loans disbursed nearly doubled from $17 million in 1987/88 to more than $33 million in 1991/92 and 1992/93.2 With poor loan recoveries in the latter two years, SACA disbursed only $6.1 million in loans in 1993/94, a figure some 40% below the pre-SACA level of smallholder credit. The growth in lending in real terms was significantly lower than that apparent from the nominal figures. After 1989/90, most of the increase in lending can be attributed to rising costs of inputs and progressively higher interest rates (the annual interest was credited to the loan accounts as up- front charges). While the average annual growth in credit disbursed was some 41% in nominal terms between 1987/88 and 1992/93, the annual growth in the quantity of fertilizer financed through these loans increased by less than 11% during this period with virtually no expansion recorded after the 1989/90 season (Appendix C-1, Table 3). 13. As in the pre-SACA credit programs, the bulk of SACA seasonal loans--estimated at 75%-- was to finance purchases of fertilizer and seeds for (hybrid) maize production. The adoption of hybrid maize became more attractive in the early 1990s due to the release of hard endosperm varieties with favorable processing and storage properties. SACA also financed input purchases for smallholder rice, cotton, dark-fire tobacco, and, after 1991, burley tobacco production. The average size of beneficiary sub-loans ( borrowed through farmers' clubs) nearly doubled in MK and US$ terms between 1988/89 and 1991/92. However, due to a shortage of funds, the input packages (and loan sizes) were reduced thereafter, indicating that loan package design was not especially demand-driven or need-based. (Appendix C- 1, Table 1) In this same regard, SACA came under criticism that the standard input packages provided were not flexible enough to cater to different agro-climatic conditions and local cultivation practices. 14. While the overall credit targets were reached, much of the benefit of institutional credit continued, as in the pre-SACA days, to be concentrated in Kasungu and Lilongwe ADDs. While these two ADDs together account for about one-third of smallholder households nation-wide, yet their combined share of SACA credit disbursed was some 60-65%. All other areas were proportionately underserved, with particularly low levels of SACA lending in Salima, Karonga, and Ngabu ADDs. (Appendix C-1, Table 2). The coverage of women beneficiaries increased 2 Between 1991 and 1994, the Kwacha was devalued from MK 2.8 = US$1 to MK 7.9 = US$1. Over the 1989/90 and 1992/93 period, the quantity of maize seed purchases financed with SACA loans increased by an average of 17% per year. -5- from 74,808 in 1988/89 to 112,300 in 1992/93, with women generally remaining about 29% of the total beneficiaries throughout the project period (Appendix C-1, Table 1). 15. A significant number of unintentional beneficiaries from the project were smallholder farmers who, in the late 1980s and early 1990s, formally registered their land as estates, thereby gaining access to a market quota for burley tobacco and direct access to the tobacco auctions. These farmers, referred to as "graduated smallholders", tended to have considerably larger communal landholdings than most smallholders, typically in the range of 5 to 15 hectares. An estate survey conducted in 1990 found that one-third of those with less than 15 hectares procured their fertilizer through farmers' clubs, thereby benefiting from the subsidies available to smallholders for fertilizer.4 Anecdotal stories abound regarding the sale and resale (to estates) of fertilizer originally provided under credit to smallholder farmers. 16. The loan recovery performance of SACA declined throughout the project. While in the pre-SACA days, loan recoveries were typically 95% or more, SACA achieved a recovery rate of 80% in 1988/89, increasing to 85% for the next two seasons. Loan recoveries then dropped sharply to 25% in 1991/92, and 20% and 15% respectively in the next two seasons. Several factors contributed to these results. First, in 1988 the GOM relaxed the 100% repayment requirement for eligibility for new loans.s This threshold was lowered to 80%, and farmers proceeded to repay only 80% of their loan balance to obtain a subsequent loan. Second, a drought in 1991/92 adversely affected production in many parts of the country. The GOM issued a blanket moratorium on loan repayments, rescheduling all unpaid loans over three years. It also undertook a drought recovery program involving the free distribution of seed and fertilizer with insufficient distinction being made between this and credit-based input distribution. Third, in that same year the GOM relaxed the policy regarding joint liability of club members for outstanding debts, thus allowing paid-up individuals or partial clubs to form other clubs for borrowing purposes. Fourth, in 1992 and 1993, smallholder credit became enmeshed in political referendum and election campaigns with rival parties promising or implying that loans would be converted to grants. 17. With the quick disbursement of seasonal credit, SACA exhausted the IDA credit allocation of SDR 3.0 million for this Category by the 1991/92 season. At the request of the GOM, the DCA was amended reallocating to seasonal credit a further SDR 0.95 million derived from Category 2 (SDR 0.6 million), Category 4 (SDR 0.1 million) and Category 7 (SDR 0.25 million). These extra funds were also fully utilized. As the poor loan recovery for 1991/92 left SACA with insufficient funds for subsequent lending, funds were reallocated from several other IDA-supported and other donor-supported projects, as part of drought recovery, to SACA. This money was disbursed for the 1992/93 season, with very poor loan recovery. 18. Medium-term credit. With a view to improving the production and productivity of smallholder farmers, the project contained a specific component for providing medium-term credit to financially and economically viable on-farm and off-farm investments. Reliable data on SACA's medium-term loan portfolio are not available as many such loans were recorded within the seasonal loan portfolio. The main investments financed by SACA were ox-carts, work oxen, 4 "Beyond Dualism: The Changing Face of the Leasehold Estate Subsector in Malawi", by R. Mkandawire, S. Jaffee, and S. Bertoli. Institute for Development Anthropology, Binghamton, N.Y. This was a GOM directive overruling the recommendations of SACA management. -6- and cotton sprayers, although after 1992 several tobacco bale presses were also financed. Recovery rates on medium-term loans were generally poor (i.e. estimated at 43% in late 1991), although poor record-keeping prevents a definitive analysis of the true performance. The placement of a marketing officer within SACA does not seem to have made a significant contribution towards promoting the medium-term investment program. There was also no effective impact of a consultancy study completed in January 1990 examining measures to enhance the medium-term credit component. 19. Pilot credit and savings scheme. The pilot scheme envisaged a program to provide credit and savings services to the rural poor following certain aspects of the Bangladesh Grameen Bank approach. The Malawi Mudzi Fund (MMF) was established in 1989 as a financial trust for the implementation of the scheme. MMF operated as a separate legal entity from SACA and commenced its functions in June 1990, a year behind schedule due to delays in positioning its staff and lack of coordination between the Ministry of Finance and the Reserve Bank of Malawi regarding the opening of a special account. 19. The SAR lending targets of 1,000 beneficiaries and average loans of MK 200 per person were easily accomplished. By the end of 1994, MMF had formed and trained over 500 groups and issued loans totaling MK 683,000 to over 2,400 beneficiaries, with an average loan level of MK 280 (Appendix C-1, Tables 4 and 5). After the first two years of operations, virtually all the subsequent beneficiaries were women. An ex-post evaluation of the MMF scheme indicated that the program did not generally reach the intended target group--i.e. individuals/households were very small landholdings and at the stage of starting up non-farm income-generating activities. Most of the beneficiaries, though certainly not wealthy, did in fact have land and other assets and were already engaged in the business activity which was supported by the MMF loan. Compared with the regular SACA loan program, both loan appraisal and monitoring were far more rigorous under MMF. Although in its first year MMF loan recoveries were poor, at 52%, this was greatly improved over time to exceed 90% in both 1992/93 and 1993/94 (Appendix C-1, Table 6). The MMF did not become enbroiled in the political manipulation of credit which adversely affected SACA's regular lending in 1992 and 1993. The MMF pilot scheme illustrated that rural households can be good credit risks even if they can not provide acceptable collateral. Cohesive self-help groups and loans linked to savings provided an effective social contract for the loans. 20. The mobilization of group and individual savings envisaged under the scheme was only partially successful. As at the end of December 1994, total savings had reached a level of MK 48,000, constituting a little over 8% of the loans issued to the members (Appendix C-1, Table 7). These savings, however, were largely for collateral purposes and there was little 'voluntary' savings under the scheme. Beneficiaries preferred to deposit their savings outside of the scheme, since the interest on group savings was not fully passed on to members, confidentiality was not upheld, and members feared that their savings would be forfeited if loan repayments were not complete.7 6,"Evaluation of Malawi Mudzi Fund", Center for Social Research, 1995. As a government Department, SACA was not permitted to mobilize savings. However, when a new club was being formed, SACA encouraged it to open a savings account at either a commercial bank or the Post Office bank. -7- 21. Organizationally, MMF faced difficulties related to its status as a public institution managed mostly by Government officials. This gave wrong signals to the beneficiaries who perceived loans as grants. In its established form, the MMF was hindered by the diseconomies of scale of a small, autonomous institution with disproportionally high development costs and operational overheads. Up to the 1992/93 fiscal year, for every MK leit, about MK 6 were spent. The subsequent intensification of operations and transfer of certain credit administration responsibilities to the groups themselves resulted in a reduction of operating costs by some 50%.8 Institutional Development Objectives 21. As envisaged under the project, the credit section in the MOA was converted into the SACA in 1988, with an independent departmental status to provide credit support to smallholder farmers and to manage smallholder credit funds under various projects pooled into the Consolidated Smallholder Credit Fund (CSCF). Day-to-day management of SACA was carried out by the Administrator, assisted (during part of the project) by a Financial Controller, and other supporting staff. 9 While SACA management could provide recommendations, credit policies (i.e. interest rates, loan sizes, loan eligibility, recovery strategies) were set by a National Credit Committee, chaired by the Controller of Agricultural Services within MOA. 22. Specific MOA staff were allocated to SACA, although their costs were not directly attributed to SACA. By 1991, SACA staff numbered 433. Most of this staff operated at the ADD level. Throughout much of the project, however, most of the actual interface with borrowers was undertaken by extension Field Assistants (FAs) and Farm Home Assistants (FHAs) who are not SACA staff but work in liaison with and under the guidance of Credit and Marketing Assistants based at local offices. FAs and FHAs continued to play a central role in the formation and supervision of clubs until 1993 when SACA staff became more centrally involved in this function as part of an effort to delink credit and extension.'0 23. The funds provided under the project to meet the costs of incremental staff of SACA (particularly the Credit Administrator, Financial Controller, Supply and Marketing Officer and 2 accountants), technical assistance and training, vehicles, etc., were fully utilized. A total of forty-eight person months of Technical Assistance were provided by the project to develop credit policies and procedures, and to establish an accounting and information system and training programs. SACA officials indicated that the technical advice rendered by the expatriate 8 The socio-economic conditions of Malawi were found to differ significantly from those in Bangladesh for which the Grameen model was developed. Specifically, Malawi was characterized by lower concentrations of population, smaller markets, a smaller range of non-farm skills and products, and a more limited level of entrepreneurial experience among the rural poor. These conditions contributed to the initial difficulties of the MMF and forced it to restructure its operations, especially by increasing the size of its groups/centers, decentralizing management, and delegating administrative functions to Fund beneficiaries. The services of the Financial Controller were not available to SACA continuously. The position remained vacant for most of FY 1992. 10 A survey in 1992 found that Fas spent 40% of their time working on credit processing, supervision, and recovery activities over the course of the year, with this proportion being 75% or more in several months. -8- consultants lacked a full appreciation of the problems and practices of the smallholder sector. At appraisal, the total TA requirement was estimated at 52 person-months; the financial savings made under this category were used to carry out studies related to the promotion of medium-term credit, the delinkage of extension and credit, and patterns of credit default in Kasungu ADD (Part II, Table 7). Final reports were considered satisfactory by both SACA and IDA and provided useful recommendations for future loan policy and recovery. 24. During the course of the project, SACA made a major investment in staff training. Management and supervisory level staff participated in some nine overseas short-term courses and four study tours. Given the fact that SACA operated as a GOM department with all policy and operational procedures determined externally (by the National Credit Committee), it is not clear whether the international training brought practical results during the course of SACP.11 In contrast, SACA's internal training program for middle and junior level staff appears to have been both cost effective and accurately targeted at the real needs of the institution. Through workshops/seminars some 400 field staff received training on various aspects of credit, club formation and administration and computer application. Finally, under the project, some 9,000 club officials attended training courses on club management, accounting and record keeping. Other guided credit courses, followed by courses for training of trainers, were given to 30 SACA staff. 25. While vehicles, office furniture and equipment were procured under the project, SACA continued to make ample use of more general MOA facilities and equipment. For example, while two saloon cars, three four-wheeled vehicles and one pick-up was procured under the project, SACA in fact operated eleven vehicles. As foreseen at appraisal, a total of 1,000 bicycles were to be provided to the field staff. With a view to improving staff mobility, SACA requested that motorcycles be procured instead. A compromise was accepted to purchase 100 bicycles and 200 motorcycles. The first lot of 100 motorcycles was registered as GOM vehicles while the rest were allowed to be registered in the names of individual staff concerned for operational convenience and economy of maintenance. Furthermore, at the request of GOM, IDA approved the purchase of the second lot of 100 motorcycles through the UNDP Inter Agency Procurement Office instead of through Local Competitive Bidding (LCB) to cut delays and make the vehicles available for field work as soon as possible. Economic and Financial Objectives 26. Actual project cost was estimated to be US$ 14.2 million. Final overall disbursement includes: IDA US$ 6.4 million (SDR 4.6 million), IFAD US$ 6.6 million (SDR 4.7 million) and GOM US$ 1.2 million. The IDA credit was fully utilized and final disbursement took place on July 28, 1994. The IFAD loan 212-MW, under which some SDR 0.2 million was still available, remained open until MMF assets and liabilities were transferred to MRFC. 27. The main economic benefit from the project stems from the increased income and purchasing power made available to large numbers of smallholder farmers through access to credit. This was an important factor in the rapid and steady expansion of plantings of hybrid However, the SACA Administrator and several other senior staff have assumed managerial positions within the Malawi Rural Finance Company, where they have been able to put to use their overseas training and exposure to different rural financial systems. -9- maize during the period of the SACP.12 The initial growth in hybrid maize plantings appears to have come at the expense of groundnut production, yet in the early 1990s it replaced some plantings of local and composite maize. The release of improved varieties, extension advice, and relatively favorable producer prices also induced the increase adoption of hybrid maize technology. Still, credit was an important factor, since some two-thirds of smallholder fertilizer purchases were through credit. While maize production was uneven throughout this period, the output obtained in 1992/93 was nearly 70% above that in the mid-1980s, with the provision of smallholder credit being a contributing factor. 28. For individual farmers, analysis in the early 1990s pointed to a doubling or even tripling of gross margins when shifting from local to hybrid maize technologies.'3 The analysis undertaken for this ICR, taking into account 1994/95 prices, shows a less dramatic yet still significant improvement in gross margins and returns to labor as a result of this shift, aided by access to credit. The analysis shows an estimated return to labor of MK 13.2/day for unfertilized local maize compared with MK 18.0/day for hybrid maize (Appendix C-1, Table 2). 29. The second and perhaps unintended important economic impact of the SACP was its contribution to the expansion of smallholder and small estate burley tobacco production in the late 1980s and early 1990s. Between 1990/91 and 1992/93, smallholder burley production increased from only 1,600 to 17,900 tons, generating an aggregate net income over that period of some MK 25 million. A similar level of expansion was recorded amongst small estates, many of whom continued to be farmers' club members and borrowed money from SACA. This was especially the case in Lilongwe and Kasungu ADDs. Nevertheless, the total number of tobacco- producing smallholders and small estates who borrowed directly from SACA or who obtained SACA-financed (GOM subsidized) fertilizer through various channels probably did not exceed 40,000 (i.e. about 10-15% of total SACA beneficiaries). 30. The impact of beneficiary access to MMF financial services was not directly measured. However, an evaluation study suggested that there occurred little incremental employment, yet beneficiaries were generally in a better position to purchase additional food, pay school fees, or increase consumption in some other way. The study found no evidence that loans provided under the scheme had resulted in an significant change in the socio-economic status of participants. 31. It is not possible to analyze the financial performance of SACA given the non- segregation of SACA and associated credit activities and costs from MOA accounts and overall activities. 14 The MOA absorbed a large part of the credit activity-related costs, leaving SACA to post a sizable, yet essentially false recorded profit in most years. The only costs separately recorded for SACA related to equipment/vehicle maintenance, selected staff salaries, consultancy fees, training, and fuel, stationary and other consumables. One study which attempted to estimate the full cost of SACA operations, estimated that SACA incurred a net loss of MK 4.6 million in 1990/91, its last year of acceptable loan recoveries. Given the poor loan 12 Smallholder plantings of hybrid maize increased from some 59,000 ha. in 1987/88 to 326,000 ha. in 1992/93. "Malawi: Agricultural Sector Memorandum", World Bank, 1995. 14 Given the overlap of extension and credit, it is also not possible to analyze standard measures of credit staff efficiency. -10- repayments between 1991/92 and 1993/94 and the outstanding arrears in 1994 of over MK 260 million, it is clear that SACA operations were costly indeed for the GOM. C. MAJOR FACTORS AFFECTING THE PROJECT 32. Credit and Institutional Policies: During the late 1980s and early 1990s the GOM instituted a series of monetary policy and financial market reforms geared toward increasing financial market competition and efficiency and increasing savings mobilization. For example, in 1988, interest rates were deregulated, credit ceilings discontinued, and preferential rates for specific sectors (including agriculture) were abolished. In subsequent years, revisions were made to the Reserve Bank of Malawi Act, the Banking Act, and the Capital Market Development Act, paving the way for the entry of new financial intermediaries and an improved policy framework placing emphasis on indirect rather than direct monetary instruments and mechanisms. 33. Unfortunately, these reforms had little impact on rural finance and virtually no impact on the operations of SACA which, as a Department of MOA, was a non-financial institution. Policies pertaining to smallholder credit continued to be set by a National Credit Committee (and sometimes amended or reversed by either the Permanent Secretary or the Minister of Agriculture), with political and other criteria frequently being more important than financial and credit operation sustainability concerns. The SACA Administrator was a member of the Committee and SACA management could recommend certain policies, yet, in practice, credit- related policies were driven by other concerns. 34. This was reflected in the setting of interest rates. SACA was required to charge market rates of interests on its loans, keeping in view the rates of inflation and the basic rates fixed by the RBM, with some concession as regards the special position of its clientele. However, in practice it was unable to adjust the interest rates in relation to inflation and prevailing commercial bank rates. Thus, while the inflation rate was accelerating to 31.5% in 1988, SACA was permitted to raise its interest rate only from 12% to 18% for the 1988/89 season. Similar adjustment lags and gaps occurred in subsequent years. Hence, while inflation accelerated sharply in 1994 to 60%, SACA was able to charge interest rates of only 30%. Such below market interest rates contributed to the 'leakage' of inputs into the estate subsector which, otherwise, borrowed from commercial banks at market rates. Such interest rates also fostered other improprieties (i.e. staff and civil servants taking loans), contributing to the reduced recoveries. 35. This was also reflected in shifted policies with regard to beneficiary eligibility. For example, for 19988/89 to 1990/9 1, the 100% recovery rule (for eligibility for subsequent loans) was reduced to 80%, contrary to the covenant of the DCA, and the recommendations of SACA management. In the following year, the joint liability requirement was also (temporarily) waived, allowing individual club members of defaulted clubs to attain new loans. When Malawi experienced a severe drought in 1991/92, all (new) loans were rescheduled, regardless of the extent of crop failure in particular areas. Due to political interventions, SACA was prevented from taking legal action against defaulters. Credit was further politicized in 1992/93 as rival political parties implied or explicitly promised to convert loans into grants should they be elected. -11- 36. The GOM could also not provide the proper environment for the healthy growth of the farmers' clubs. This was partly due to the historical origins of many such clubs, being tied to the political apparatus of the (former) ruling party and sometimes being subjected to rather Draconian methods of loan recovery. As early as in 1991, a study of the repayment performance of Kasungu ADD had highlighted the malpractices in club formation and leadership as reasons for loan delinquency. This was also true of the other ADDs, as observed by SACA and endorsed by the CSR study carried out in 1993. The CSR study revealed that the 100% recovery secured with coercive means (i.e. expropriation of assets) had alienated the beneficiaries and seriously undermined the "joint and several liability" principle. No efforts were made by GOM/SACA to infuse group harmony and repayment ethics in the farmers' clubs. 37. Drought Relief and Recovery: A serious drought in 1991/92 drought adversely affected large parts of Malawi. National maize production declined by some 60%. While SACA expected that it would be able to recovery 50% of the disbursed loans, recoveries were halted at some 25% when a GOM decision was made to offer a blanket moratorium on loan recoveries and the rescheduling of all loans over a three year period. In the next year, running parallel with this 'drought recovery' loan rescheduling, there occurred a large-scale distribution of free seed and fertilizer packs for 'drought recovery'. In this environment many farmers had difficulty discerning the difference between loan and grant programs, involving some of the same extension staff at the local level. This, undoubtedly, was a contributing factor to the poor loan recoveries in 1992/93. 38. Marketing and Pricing Policies: The SACP was implemented during a period of volatility in government policies with regard to the pricing and marketing of agricultural inputs and commodities. Wide swings occurred in the nominal and relative prices of different commodities. Produce markets were partially liberalized, yet the GOM intermittently imposed embargoes on private trading of certain crops. While fertilizer market reforms were envisioned for the late 1980s, these were delayed until 1993/94, with ADMARC continuing to play a dominant role in this market throughout the SACP period. Financial constraints faced by ADMARC inhibited both the timely availability of fertilizer and the functioning of maize and other commodity markets. During this period there also occurred a partial relaxation of controls on smallholder burley tobacco production, with the quota allocated to smallholders increasing from 1990/91 onward. 39. SACA Management and Management Information: SACA was not guided adequately by its management and staff, who lacked the necessary professional expertise to formulate appropriate credit and operational policies, lacked the authority to make decisions regarding the hiring, firing, transfer, and remuneration of staff, and lacked an effective MIS for tracking loans and expenditures. The specific duties and responsibilities and performance goals of field staff were not clearly indicated. With an expansion of lending, staff were not properly redeployed in order to balance out workload. Hence, by 1992/93, the average number of clubs handled by staff in Kasungu were three times that in Karonga. SACA never did develop an effective system to properly supervise the end use of its credits and to monitor loan recoveries. It also accorded inadequate attention to financial management and adopted questionable policies with regard to provisions for bad debts. -12- D. PROJECT SUSTAINABILITY 40. SACA was conceived to emerge as a financially viable system to provide credit to smallholder farmers. It would initially obtain a 100% subsidization of its staff costs from GOM and cost-free funds for on-lending. In the initial years it was able to meet its operating costs from its income but with the steep increase in loan defaults, its operations ended up in huge losses. At appraisal, it was envisaged that an amount equivalent to 2% of the resources transferred by the GOM to the Smallholder Credit Fund per year out of the proceeds of the IDA credit and IFAD loan would be paid by SACA to MOF as a measure towards gradually phasing out GOM support to SACA's administrative costs. No such payment was effected during the entire project period. 41. With heavy accumulated losses, coupled with the lack of professional expertise of SACA management, organizational weaknesses and external environmental constraints, SACA was not viable and hence the project was not sustainable. The accumulated loan defaults as of the end of September 1994 stood at MK 263 million (Appendix C-1, Table 9). In regards to the MMF, its organizational arrangements have suffered from high operating costs with prohibitive overheads and limited outreach. Furthermore, MMF lacked the required infrastructure and institutional capacity to expand its operations to achieve the required economies of scale to operate in a cost- effective manner. Therefore, MMF was not able to achieve financial viability with its operating structure and mandate. E. BANK PERFORMANCE 42. The project was identified during the negotiations for the IDA-financed Extension and Planning Support Project (Cr. 1626-MAI), as part of continuing IDA/IFAD assistance to the National Rural Development Programme (NRDP). A joint IDA/IFAD mission visited Malawi in June 1986 and again in September/October 1986 and finalized the project preparation in line with the GOM's priority for supporting smallholder farmers. The preparatory missions made an extensive study of various aspects of smallholder credit before finalizing the project. The technical and training components of the project were well designed to impart the requisite strength to SACA to transform itself into a financially viable organization. The project was appraised by a joint IDA/IFAD mission in March 1987 and the credit agreement was signed in December 1987. An important underlying assumption in the project was that SACA would be able to operate autonomously. In practice, this did not occur. 43. A total of 15 supervision missions visited the project, the number being relatively large for a project of this size. Of these, two missions covered all on-going projects in the agricultural sector while three missions also covered the RFSP. At each stage, task plans were drawn up by the missions to facilitate timely action on the pending items. In problem areas spotted (i.e. organizational arrangements for ADDs, decline in loan recovery and the absence of medium- term lending, etc.), IDA organized special studies or consultancies for sorting out the problems. With the increase in SACA loan disbursements, IDA readily agreed to reallocate funds to seasonal credit (Category 1) from funds relative to Categories 2, 4 and 7. A mid-term review was not undertaken, ostensibly because of the preparation work being undertaken for a follow-up project. 44. One major problem encountered by the project was slippage in loan recovery performance. IDA continuously expressed its serious concern regarding this matter and at its insistence, the borrower drew up an action plan for the recovery of the defaults. However, the -13- action plan could not be effectively implemented by the GOM/SACA due to extraneous/political interference. GOM found the input of the supervision missions useful, both technically and administratively, and the skill mix of the missions was fairly well-balanced, although the inclusion of a banking specialist in one or more missions could have contributed to improvements in SACA's MIS and internal procedures and systems for tracking and monitoring loans. F. BORROWER'S PERFORMANCE 45. The borrower's performance in the project preparation was constructive and considered satisfactory. In the implementation also, it fulfilled its organizational commitments by creating SACA and setting up MMF. GOM made available the counterpart funds and its own contribution on a prompt basis. It generally complied with the major covenants of DCA, a very important exception being non-compliance with the recovery discipline provision (Part II, Table 10). SACA's lending programs were supported by national-level plans for credit, input supply and agricultural production. However, similar interest was not evidenced by GOM in the matter of loan recovery. 46. Although IDA brought to the notice of GOM/SACA the need to improve the MIS and accounting system, no special steps were taken by GOM to address this or to update the audit of SACA on time. SACA accounts lacked transparency and did not present a true picture in as much as provisions were not adequately made for its bad/doubtful debts and income was inflated with unrealized interest earnings even on its overdue loans. The final position of SACA at the end of September 1994 was one of heavy losses. 47. SACA/GOM focused almost entirely on the short-term credit component, devoting little attention to the other project objectives such as diversification of the loan portfolio, promoting medium-term agricultural investments, encouraging women's participation, and mobilizing rural savings. 48. During the last two IDA supervision missions, GOM was advised to initiate preparation of its ICR. However, this exercise was not commenced by GOM until much later. During the ICR mission's visit to Malawi, it was assured that the borrower's ICR would be finalized and submitted to the World Bank before end March 1995; however, it was not received until November, 1995, and, in many ways, was incomplete. The final project audit was not available until April 1996. Given the unavailability of many relevant records, the audit was incomplete. G. ASSESSMENT OF OUTCOME 49. Although the objective of credit support to smallholders was substantially achieved (and this credit contributed to increased/accelerated smallholder adoption of hybrid maize technology and entry into burley tobacco production), SACA's lending operations were not sustainable and the organization was not financially viable. Similarly, the MMF that was established to implement the pilot component of savings and credit was not cost-effective. For these reasons, the project sustainability has been rated as unlikely, and therefore the project's outcome is assessed as unsatisfactory. However, as noted below, the lessons learned by the GOM and by IDA in the course of SACP implementation have contributed to the design of new arrangements for the delivery of financial services in rural areas. These new arrangements, under the auspices -14- of the Malawi Rural Finance Company, show prospects for continued financial viability and the growth and diversification of financial services. H. FUTURE OPERATIONS 50. Under the IDA-financed Rural Financial Services Project (RFSP), the assets (and most of the staff) of SACA were taken over by the Malawi Rural Finance Company (MRFC) on October 1, 1994. The objective of the RFSP is to improve the access to financial services in rural areas on a sustainable basis, with MRFC to be eventually converted into a full-fledged rural bank. Similarly, the MMF was merged with MRFC on August 1, 1995 to become a special financial facility to the rural poor on a national scale, under the IFAD-funded Mudzi Financial Services Project (MFSP). MRFC was formed at a time when the credibility of SACA was very poor with heavy loan defaults and accumulated losses. 51. To re-establish credit repayment discipline, MRFC and the GOM have (a) reaffirmed the commitment to 100% recovery, (b) have restricted defaulters from new financing, (c) have re- introduced the practice ofjoint and several liability among club members, and (d) have required borrowers to deposit 10-20% of their loan in a collateral savings account. MRFC, through its management and a GOM-appointed Board of Directors, is to operate autonomously in the setting and implementation of its credit policies. The company is expected to charge (near) commercial rates of interest on loans and, within a short period, to earn a profit. 52. In its first year of operations, 1994/95, MRFC was able to disburse 6,136 loans totalling MK 34.2 million. Despite the adverse impact of drought on agriculture in parts of the country, the MRFC achieved a loan repayment rate exceeding 93%. In its second season, loan disbursement exceeded MK 240 million, reaching some 125,000 beneficiaries. This lending has been instrumental in the further expansion of smallholder burley tobacco production and adoption of hybrid maize technology. I. KEY LESSONS LEARNED 53. The main lessons learned from the project were as follows: * to remain solvent, rural financial institutions need to be able to operate free of political interventions, both in the selection/screening of clients, in the determination of interest rates, and in the supervision and recovery of loans; * the prevailing policy environment has a crucial impact on the viability of smallholder lending. SACA operated within a conflicting policy environment, featuring periodic 15 For MRFC to become fully operational, certain actions were taken and a summarised Action Plan for the April-October, 1994 period is provided in Appendix C-I (Table 12). The MRFC has since prepared a multi- year Action Plan which it is now implementing. -15- distribution of free inputs, shifting policies on input and commodity prices, and changing policies on loan recoveries; * the application of below market interest rates on loans (and/or subsidized inputs) for a target clientele is inevitably accompanied by a rationing of such credit and the 'leakage' of this credit and subsidized inputs to non-targeted beneficiaries; * beneficiary training in credit discipline is crucial; its virtual absence in this project provided no counterweight against political intrusions promising 'grants' in response to votes. In circumstances where farmer (credit) clubs are formed through political patronage or similar types of interventions, such clubs will remain vulnerable to external manipulation; * savings mobilization is a critical dimension in the development of sustainable rural financial services. This element was largely ignored within the SACP, but has been incorporated within the follow-on project; * input packages (and the loans supporting them) need to be flexible to meet actual beneficiaries' needs according to different agro-climatic conditions and cultivation practices; * initiatives to provide credit (and savings facilities) to the very poor through cohesive groups can achieve beneficial impact with high repayment rates, yet financial sustainability is a major challenge given the initial high overhead and other costs associated with such activities. - 16 - PART II: STATISTICAL TABLES TABLES 1. Summary of Assessments 2. Related Bank Loans/Credits 3. Project Timetable 4. Loan/Credit Disbursements: Cumulative Estimated and Actual 5. Key Indicators for Project Implementation 6. Key Indicators for Project Operation 7. Studies Included in Project 8A. Project Costs 8B. Project Financing 9. Economic Costs and Benefits 10. Status of Legal Covenants 11. Compliance with Operational Manual Statements 12. Bank Resources: Staff Inputs 13. Bank Resources: Missions - 17 - Table 1: Summary of Assessments A. Achievement of objectives Substantial Parial Negligible Not Aplicable Macro policies Li L I Sector policies EJ Li Li Financial objectives L Ei FE L7 Institutional development ED Li L7 Ei Physical objectives EJ E7 Ei Li Poverty reduction EJ E7] l Li Gender issues D E] l Li Other social objectives Li EZ] ] Environmental objectives Li Li [;7] Public sector management EL] Li Li Private sector development LI] Li L] Other (specify) Li 71 Li Li B. Project sustainability Likly Unlikely Uncertain (/)0,) (v'0 Highy C. Bank performance satisfactory Satisfactor Deficient Identification Li I Preparation assistance L Fi Li Appraisal L Supervision Li L7 Li - 18 - Highly D. Borrower performance satisfactory Satisfactor Deficien (10 (V) (V) Preparation [V] ] Implementation EJ F1 Covenant compliance E-1 [ill Operation (if applicable) l E-1 ighly ff'ZbjY E. Assessment of outcome satisfactory Satisfactory Unsatisfactory unsatisfactory OV)(O - 19 - Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year of approval Status 1. National Rural Development To assist GOM to November 1978 Closed 30 June 1985 PCR Programme - NRDP Phase I implement the first 5-year dated June 1987 phase of the programme. Completion of Lilongwe Land Development Programme (LLDP). 2. National Rural Development Similar components to October 1981 Closed September 1988 Programme - NRDP Phase III NRDP IV. Main PCR dated May 1990 (Cr.1183-MAI) objectives to increase agricultural production, income and welfare of the smallholder sector. 3. National Rural Development The project included April 1983 Closed April 1991 Programme - NRDP Phase IV components to strengthen PCR dated April 1991 (Cr. 1343-MAI) and support extension services, training and adoptive research and made provision for improved credit and marketing facilities. 4. Smallholder Fertilizer Assist the smallholder April 1983 Closed 31 March 1988 (Cr. 1352-MAI) sector in the procurement of inputs, mainly fertilizer. 5. Fisheries Development Project To support GOM's efforts February 1992 Under implementation (Cr.2225-MAI) to increase fish production, marketing and distribution. Line of credit also included. 6. Agricultural Services Project Designed to help formulate June 1993 Under implementation (Cr.2514-MAI) and implement institution and management reforms in research, extension and input supply system. 7. Rural Financial Services Project To improve the access to June 1993 Under implementation (Cr.2513-MAI) financial services for the rural sector. - 20 - Table 3: Project Timetable Steps in project cycle Date planned Date actual/ latest estimate Identification' July 1985 July 1985 Preparation2' June 1986 June 1986 Final preparation Sept./Oct. 1986 Sept./Oct. 1986 Appraisal" March 1987 March 1987 Credit negotiations May 1987 14-17 September 1987 Board presentation June 1987 17 November 1987 Credit agreement (signing) 22 December 1987 Credit effectiveness 15 December 1987 8 September 1988 Mid-term review 31 December 1990 Not carried out. Project completion 30 September 1994 Loan closing 30 June 1995 31 December 1994 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) IDA Fiscal Year 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 . ............................................... . (U S $ '0 00) .................................................. Appraisal estimate 200 700 1,600 2,700 3,700 4,600 5,900 Actual 305 644 2,654 5,307 5,779 6,053 6,378 Actual as % of 153 92 166 197 156 132 108 disbursement 1/ The project was identified during the negotiations (held in Lilongwe) for the IDA-financed Extension and Planning Support Project (Cr. 1626-MAI). 2/ Preparation carried out by GOM with IDA and IFAD assistance. With IFAD participation - 21 - Table 5: Key Indicators for Project Implementation Key implementation indicators in SAR/President's Report Estimated Actual A. Institutional Building (SACA) Technical Assistance: - Credit/training adviser (p/m)- System analyst 30 36 (p/m) 12 12 - Monitoring/studies (p/m) 10 - Overseas Training: - Short courses (no.) 20 91/ - Seminars and study tours (no.) 16 41 Local Training: - HQ staff (no.) 70 92 - Field staff (no.) 400 400 - Club officials (no.) n.a. 9,000 Office Equipent - Calculators (no.) 400 400 - Safe boxes (no.) 10 10 - Computers/printers (no.) n.a. 6 - 4x4 (no.) 4 6 - Bicycles (no.) 1,000 100 - Motorbicycles (no.) - 200 B. Pilot Credit Operation Technical Assistance (p/m) 9 - Vehicles: - 4x4 (no.) 2 1 -Bicycles (no.) 6 8 - Motorbicycles (no.) 20 2 Overseas Training: - Study tours (no.) 7 n.a. - Local training (groups) n.a. 500 - Office equipment (set) various various C. Credit Operations Short-term credit disbursement (US$ million) 8.9 11.9 Medium-term credit disbursement (US$ million) 2.1 - 7 on credit administration (4 in USA of 6 weeks and 3 in Swaziland of 4 weeks), and 2 on rural finance in Thailand. 2/ One in Bangladesh (Grameen Bank), one in Kenya (Agricultural Finance Corporation), one in Zambia (LIMA Bank) and one in Zimbabwe (Agricultural Finance Corporation of Zimbabwe). - 22 - Table 6: Key Indicators for Project Operation Not applicable to this Project Table 7: Studies Included in Project Purpose as defined Study at appraisal/redefined Status Impact of study 1. Medium-term credit To identify investment Completed No direct impact. opportunities to be pursued January 1990 by smallholders. 2. Defaults under Ad hoc study to improve the Completed No direct impact. medium-term loans effectiveness of medium-term January 1990 loans. 3. Extension/credit Ad hoc study to separate Completed Recommendations delinkage extension activities from 1993 implemented in September credit operations. 1994. 4. Defaulter survey in To examine the reasons for Completed Valuable Kasungu ADD the declining trend in loan 1990 recommendations for recovery. future loan policy and recovery. - 23 - Table SA: Project Costs Appraisal estimate (US$M) Actual/latest estimate (US$M) Item Local Foreign Total Local Foreign Total" costs costs costs costs 1. Incremental seasonal credit 2,230 6,692 8,922 2,979 8,940 11,919 2. Medium-term credit 421 1,681 2,102 - - - 3. Vehicles and equipment 20 456 476 - 547 547 4. Technical assistance 56 509 565 - 442 442 5. Training 605 463 1,068 504 390 894 6. Operating costs and 247 76 323 247 65 213 maintenance 7. Pilot credit and saving 464 483 947 19 20 39 scheme TOTAL 4,043 10,360 14,403 3,749 10,404 14,153 Table 8B: Project Financing Appraisal estimate (US$M) Actual/latest estimate (US$M) Source Local Foreign Total Local Foreign Total costs costs costs costs IDA 1,432 4,493 5,925 1,573 4,805 6,378 IFAD 1,896 4,976 6,872 1,653 4,922 6,575 Domestic - GOM 681 715 1,396 523 677 1,20011 - Project beneficiary 43 167 210 - - - TOTAL 4,052 10,351 14,403 3,749 10,404 14,153 v/ Including GOM contribution estimated at US$ 1.2 million (see Table 8B). 2/ Mission estimate: official figure not available. - 24 - Table 9: Economic Costs and Benefits No attempt has been made to compute the overall financial and economic rates of return for the project. The main economic benefit from the project stems from the increased income and purchasing power made available to large numbers of smallholder farmers through access to credit. This was an important factor in the rapid and steady expansion of plantings of hybrid maize during the period of the SACP. Smallholder plantings of hybrid maize increased from some 59,000 ha. in 1987/88 to 326,000 ha. in 1992/93. While the initial growth in hybrid maize plantings came primarily at the expense of groundnut production, in the early 1990s there was an apparent shift from local to hybrid maize amongst farmers accessing credit. Some two-thirds of smallholder fertilizer purchases were through credit. While maize production was uneven throughout this period, the output obtained in 1992/93 was nearly 70% above that in the mid-i 980s, with the provision of smallholder credit being a contributing factor. For individual farmers, analysis in the early 1990s pointed to a doubling or even tripling of gross margins when shifting from local to hybrid maize technologies. The analysis undertaken for this ICR, taking into account 1994/95 prices, shows a less dramatic yet still significant improvement in gross margins and returns to labor as a result of this shift, aided by access to credit. The analysis shows an estimated return to labor of MK 13.2/day for unfertilized local maize compared with MK 18.0/day for hybrid maize (Appendix C-1, Table 2). The second and perhaps unintended important economic impact of the SACP was its contribution to the expansion of smallholder and small estate burley tobacco production in the late 1980s and early 1990s. Between 1990/91 and 1992/93, smallholder burley production increased from only 1,600 to 17,900 tons, generating an aggregate net income over that period of some MK 25 million. A similar level of expansion was recorded amongst small estates, many of whom continued to be farmers' club members and borrowed money from SACA. This was especially the case in Lilongwe and Kasungu ADDs. Nevertheless, the total number of tobacco-producing smallholders and small estates who borrowed directly from SACA or who obtained SACA-financed (GOM subsidized) fertilizer through various channels probably did not exceed 40,000 (i.e. about 10-15% of total SACA beneficiaries). The impact of beneficiary access to MMF financial services was not directly measured. However, an evaluation study suggested that there occurred little incremental employment, yet beneficiaries were generally in a better position to purchase additional food, pay school fees, or increase consumption in some other way. The study found no evidence that loans provided under the scheme had resulted in an significant change in the socio-economic status of participants. - 25 - Table 10: Status of Legal Covenants [MALAWI] [Smallholder Agricultural Credit Project] Page 1 Covenant Present Description of covenant Comments Agreement Section type status Credit 3.03 2,9 C Periodically review and revise Interest rates were revised upwards in interest rate to ensure that rates are 1993 to 30% p.a. for seasonal and in line with the overall interest rate medium-term credit from 18% and structure in the country. 15% respectively, applied during 1991 and 1992. Currently interest rates is 40% p.a. 4.01(b) 1,3,9 C Audit of special account, MMF and Completed in 1995. SCF. 4.01(c) 1,9,3 C Audit of statements of expenditure. Completed in 1995. Schedule 4, 5 C SACA to have departmental status para 2 within MOA with responsibility for managing at national level and smallholder agricultural credit system. Schedule 4, 5 PC SACA to employ qualified and Intermittent employment of para 3 experienced Administrator, accountants and financial controller. Financial controller, Accountants, Credit Officers, Supply and Marketing Officer and Support Staff. Schedule 4, 2,3 C Deposit funds in interest bearing para 4 account. Schedule 4, 5 C Appoint Savings Coordination para 5 Committee. Schedule 4, 10,5 C Carry out study on Medium-term Study complete in January 1990. No para 6 Credit. impact. Schedule 4, 5 C Plan for phasing out of Government Government support ceased when para 8(b) support of administration costs. SACA's lending operations were taken over by the Malawi Rural Finance Company under the new Rural Financial Services Project (Cr. 2513- MAI) as of 1 October 1994. Complied after delay. - 26 - Page 2 Covenant Present Description of covenant Comments Agreement Section type status Schedule 4, 5 NC Seasonal credit and medium-term Effectively the covenant was not para 9 credit to be made by SACA in complied with since SACA issued accordance with procedures and fresh loans for 1989/90 and terms and conditions specified in its 1990/91 with 80% recovery credit manual. discipline. In 1991/92 loans were extended across the board due to drought in certain areas of Malawi and fresh loans were issued to defaulters. Schedule 4, 9,10 CD MOA to carry oui mid-term review Detailed review carried out during para 12 not later than 12 December 1991. RFSP appraisal in 1992. Schedule 4, 5 CD Establish MMF not later than 12 Operation started in July 1990. para 13 December 1988. Schedule 4, 5,9 CD MMF to carry out mid-term review Detailed review carried out during para 17 not later than 12 December 1990. MFSP appraisal in 1993. Covenant Class: 1. Accounts/audit 2. Financial performance/generate revenue from beneficiaries 3. Flow and utilization of project fund. 5. Management aspects of the project or of its executing agency 9. Monitoring, review and reporting 10. Implementation - 27 - Table 11: Compliance with Operational Manual Statements Basically, there was compliance with the applicable Bank Operational Manual Statements. Table 12: Bank Resources: Staff Inputs Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ Through appraisal n.a. n.a. n.a. n.a. 50.3 n.a. Supervision 72.0. n.a. 84.1 n.a. 63.9 n.a. Completion" n.a. n.a. n.a. n.a. 11.0 n.a. TOTAL . . . n.a. . . . n.a. 125.2 n.a. 1/ Carried out by FAO/CP. - 28 - Table 13: Bank Resources: Missions Performance rating Number Specialized Implemen- Develop-men Stage of Month/ of Days in staff skills tation objectives Types of project cycle year persons field represented" status problems" Identification July 1985 n.a. n.a. n.a. - - - Preparation June 1986 n.a. n.a. n.a. - - - Final Preparation Sept/Oct 1986 n.a. n.a. n.a. - - - Appraisal March 1987 5 21 CS,CS,FA,E,A - - - Supervision May/June 1988 1 18 CS 1 2 M Supervision November 1988 1 8 CS 1 2 M Supervision January 1989 n.a. n.a. n.a. n.a. n.a. n.a. Supervision September 1989 1 7 E 1 1 M Supervision February 1990 2 14 CS 2 2 M Supervision August 1990 n.a. n.a. n.a. n.a. n.a. n.a. Supervision November 1990 4 12 E,A,A,CS 2 2 M Supervision April 1991 4 11 E,CS,CS,A 2 2 M Supervision Oct/Nov" 1991 4 27 FA,A,A,CS 2 2 NR Supervision June/July3'1992 4 22 FA,A,E,E" 2 2 NR Supervision November 1992 2 n.a. FA,CS 2 2 F Supervision June/July31993 4 16 FA,CS,E,E4' 2 2 F Supervision MarchlApril/"1994 3 20 FA,E,CS41 2 2 F Supervision July1994 4 20 E,E,FA,CS U S M Supervision October3'1994 2 11 E,E n.a. n.a. n.a. ompletion" Jan/Feb"'1995 2 14 E,CS - - A = Agronomist; E = Economist; FA = Financial Analyst; CS = Credit Specialist. 2/ F = Financial; M = Management. In continuation with supervision of other IDA projects. 4/ Including IFAD staff. Si Carried out by FAO/CP. MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT APPENDIX A AIDE MEMOIRE MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire A. Introduction 1. An FAO/WB Cooperative Programme mission comprising Messrs. R. Suppa (Economist/Mission Leader) and P.V.A. Rama Rao (Credit Specialist/Consultant), visited Malawi from 26 January to 9 February 1995 for the preparation of the ICR of the above project. The mission held meetings with the concerned officials of the Ministry of Finance (MOF), the Ministry of Agriculture and Livestock Development (MOALD),the Reserve Bank of Malawi (RBM), as well as with the staff of Malawi Rural Finance Company (MRFC), Malawi Mudzi Fund (MMF) and the Centre for Social Research (CSR). During the field trips to Lilongwe East RDP and Zomba, the mission received useful feedback from project beneficiaries and field implementation staff. The mission received valuable advice and guidance from staff of both the FAO and WB Representations in Lilongwe. During its stay in Malawi, the mission had also the opportunity to discuss its findings with Mr. D. Fullerton, WB Task Manager and with Mr. C. Dickerson, IFAD Project Controller for SACP. 2. The mission acknowledges the cooperation and courtesy extended to it by the GOM and its agencies. The mission's preliminary findings, as indicated below, are subjected to review and confirmation by the IDA and IFAD Management. B. Background 3. The project was appraised in February 1987, the Credit Agreement was signed on 22 December 1987 and became effective on 8 September 1988. The primary aim of the project was to transform Malawi's smallholder credit system into a better-managed, more efficient, low-cost and financially viable national credit system benefiting a large number of smallholders. To this end, project components as foreseen at appraisal included: (a) Provision of funds for financing both on-farm requirements of inputs, and viable on-farm and off-farm investments; (b) Institutional support including the establishment of a Smallholder agricultural Credit Administration (SACA), Technical Assistance and Training; and (c) A pilot credit and savings scheme for rural poor on the lines of the IFAD-financed Grameen Bank project in Bangladesh. 4. The project cost was estimated at US$ 14.4 million, to be financed as follows: IDA credit US$ 5.9 million, IFAD US$ 6.9 million, project beneficiaries US$ 0.2 million and GOM US$ 1.4 million. Actual project costs and disbursement are presented in Section D. 1 MAIAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire C. Project Implementation General 5. Overall, project implementation can be considered satisfactory and, as indicated in Section D, SACP Credit was closed six months in advance of the stipulated date given in the Development Credit Agreement (DCA). SACA was established in 1988 replacing the earlier credit unit within the Ministry of Agriculture. Both the Technical Assistance and Training programmes were implemented in line with Staff Appraisal Report (SAR) estimates. No major problems were experienced in procurement of vehicles and office equipment, and availability of funds to cover incremental operating costs was timely and adequate. Finally, the Malawi Mudzi Fund (MMF), which was set up to implement the Pilot Credit and Savings Scheme Component of the project, was developed to adapt the Grameen Bank model in Malawi to provide banking facilities to the poor in rural areas, and its lending operations commenced in June 1990. Agricultural Credit Component 6. Seasonal credit. Funds were made available under the project to cover, nationwide, short- term credit needs of smallholder farmers for the purchase of inputs. During the 1992/93 season, when the peak lending level was achieved, about 15,650 clubs representing some 390,000 farmers obtained input credit from SACA. Considering the corresponding figures for the without project situation (in 1987/88 government lent to 9,100 clubs consisting of 243,500 farmers), the project recorded substantial growth rate in the coverage of clubs (70%) as well as farmers (60%), in line with SAR estimates. Sub-loans for beneficiaries, borrowing through farmers clubs, averaged some MK 350 as against the SAR goal of MK 150, resulting from the increased use of inputs and the cost escalation. With the use of improved crop packages, seasonal loan disbursements increased from MK 43.5 million in SACA's first year (1988/89) to MK 144.7 million in 1992/93. 7. The credit disbursed to the smallholders by SACA has recorded an impressive growth from MK 43.5 million in its first year, to a peak of MK 144.7 million in 1992/93. However, during the 1993/94 season, disbursement plummeted and only 4,155 clubs received loans, because many clubs remained defaulters due to the 1991/92 drought and external interventions in the recovery process thereafter. The poor recovery performance has also effected the flow of credit during 1994/95 season when the amount of loans further declined to MK 15 million spread over 2,252 clubs including an amount of MK 2 million for 522 Estates (as of 20 January, 1995). 8. With quick and high turnover of seasonal credit, SACA has exhausted much in advance the original allocation of IDA Credit for Category 1 (seasonal credit) of about SDR 3 million. At the request of the GOM, IDA had amended the DCA reallocating to Category 1 further SDR 1 2 MALAWI: Smallholder Agricultural Credit Project (Cr. 185 1-MAI) Appendix A: Mission's Aide-Memoire million from Categories 2 (Medium Term Credit), 4 (Technical Assistance) and 7 (Unallocated), which was also fully utilized. 9. Medium-term credit. SACA did not utilize the credit allocation of SDR 0.7 million under this sub-component which was reallocated for seasonal credit (para 8). However, during the project period, an amount of about MK 2.5 million was made available as loans to smallholders/clubs to support various on-farm and off-farm investments. This expenditure was met by SACA from its own resources and from funds available under bilateral assistance. Institutional Support 10. As indicated above, SACA was established in 1988 as a separate management and accounting unit with departmental status within MOA as a Smallholder Credit Scheme. The overall responsibility for policy guidance and control rested with PS of MOA who was supported by the National Smallholder Credit Committee. Day to day management was carried out by the Administrator supported by the Financial Controller, and other supporting staff. The former two key positions were filled up in consultation with IDA. As of September 1991, a total of 433 staff were assigned to work exclusively on SACA duties under ADD supervision in the field. However Field Assistants (FAs) have undertaken large part of credit processing, supervision and recovery and used an average of 40% of their working time in doing so. As a result of the restructuring of SACA, and particularly the commencement of the Rural Financial Services Project (RFSP), extension services have been delinked from credit activities as of September 1994. SACA staff, as of 30 September, 1994 totalled 442 including 325 established posts. 11. A total of 48 pm of Technical Assistance (TA) was provided by the project to develop credit policies and procedures, establishment of an accounting and information system and training programmes. As at appraisal, the total TA requirement was estimated at 52 pm, the financial savings made under this category were used to carry out four studies: two on MT credit and one each on Extension-Credit Delinkage and Defaulter Survey in Kasungu ADD. As indicated by SACA officials, the technical advice rendered by the expatriate consultants lacked in full appreciation of the problems and practices of the smallholder sector. 12. The training programme included a total of nine overseas short term courses and four study tours. Under the local training programme, a total of 92 SACA staff (supervisory level) participated in various workshops/courses on credit and management, and informatics. A total of about 400 field staff received training on various aspects of credit, club formation and administration and computer application. Finally, under the project, some 9,000 club officials attended training courses on club management, accounting and record keeping. Other guided credit courses followed by courses for training of trainers, were given to 30 SACA staff under a co- financing arrangement between IDA and USAID. 3 MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire 13. Vehicles, office furniture and equipment were procured without difficulties and included two saloon cars, three four-wheelers and one pickup. As foreseen at appraisal, a total of 1,000 bicycles were to be provided to the field staff. With a view to improving their mobility, SACA requested IDA to switch over to motorcycles. On acceptance, 100 bicycles and 200 motorcycles were finally purchased. The first lot of 100 motorcycles were registered as GOM vehicles while the rest were allowed to be registered in the names of individual staff concerned on hypothecation, for operational convenience and economy of maintenance. As designed at appraisal, transport facilities were not foreseen for the ADD offices and this has negatively affected staff mobility in the field. Pilot Credit and Saving Scheme for the Rural Poor 14. The MMF was established in 1989. SDR 0.7 million IFAD loan was approved in December 1987 and became effective in April 1989. The overall MMF programme, as designed at appraisal, consisted in the establishment and staffing of four branch units of which two were to be set up under Phase I, to be followed by the opening up of the two remaining branches under Phase II. Phase II has not been implemented because of the start-up delay of almost one year for Phase I. MMF, registered as a Trust to provide loans for off-farm activities only, had 23 staff, 8 in the Management Unit based at HQs in Zomba and 15 in the two branch offices in its last year of operation. Since inception and commencement of lending operations in June 1990, the MMF scheme has successfully assisted some 510 groups (2,440 members), established regular training and weekly interaction with groups. 15. Though the scheme has to date disbursed MK 0.7 million to about 2,400 beneficiaries, and has reached an overall recovery rate of 85%, its sustainability without subsidies remains questionable in its present form. Organizationally, MMF faced difficulties related to its status of a public institution managed mostly by Government officials. This has given wrong signals to the beneficiaries who perceived loans as grants (para 16). In its final form, MMF had diseconomies of scale and disproportional high development costs and operational overheads, due to its restricted area coverage and small lending volumes. Up to 1992/93 fiscal year, for every MK lent, about MK 6 were spent but, as a result of intensified operations and gradual transfer of responsibilities to groups to partially assist in credit administration, operating costs have presently been reduced by 50%. 16. The mission observed a few deviations from the Grameen Bank principles in the implementation of the scheme such as: (i) the full loan is given in one tranche without enquiring into the nature of the activity financed; (ii) a concessional interest rate, slightly below the rates charged by SACA, is applied; (iii) the repayment period, originally fixed at 50 weeks, has been reduced to 25 weeks in view of the seasonality of the activities financed (this had a positive effect 4 MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire on the recovery performance of the scheme); (iv) the weekly repayment system has in some cases, been relaxed; (v) the perception of loans as grants by some beneficiaries; (vi) the relaxation of the criteria of five members per group; and (vii) the non-involvement of village leaders in the sanction of loans. 17. The MMF pilot scheme has confirmed that rural households could repay credit even if they could not provide acceptable collateral, and that cohesive self-help groups could be a very effective mechanism for those without collateral to gain access to credit. Savings linked loans have facilitated sanction of loans without collateral and, in this respect, MMF was able to establish four savings schemes namely: the Group fund, the Personal Savings, Emergency Savings and the Special Savings Fund, which are all well accepted by the members of the groups. In 1994/95, total savings aggregated to MK 26,500. 18. The MMF has made an important contribution to poverty alleviation by inducting and adequately sustaining various income generating activities carried out by women. Disbursement by gender has shown a strong and growing trend in favor of women who appear to be lower credit risks than men. During the 1993/94 fiscal year, more than 90% of the loans were given to women. Loan recovery rates, initially staggering around 50%, have substantially improved and reached 100% during 1993/94. 19. An evaluation study of MMF was undertaken by CSR. The purpose of the study was to analyze the operations and achievements of the MMF and document the lessons learnt during its operations. In addition, an assessment of MMF staff was made in regard to their potential role in the MRFC. D. Actual Project Cost and Disbursement 20. Actual project cost is estimated at US$ 14.2 million. Final overall disbursement includes: IDA US$ 6.4 million, (SDR 4.6 million), IFAD US$ 6.6 million (SDR 4.7 million) and GOM US$ 1.2 million. IDA credit has been fully utilized and final disbursement took place on 28 July 1994, although Credit 185 1-MAI was closed on 30 June, 1995. IFAD loan 212-MW, under which some SDR 0.2 million are still available, will remain open until MMF assets and liabilities are transferred to MRFC. E. Institutional Performance 21. Management. The establishment of SACA was intended to be the first step to the establishment of an independent viable and sustainable rural financial institution providing credit to both smallholders and the entire agriculture sector. To this end, SACA could not be adequately 5 MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire guided by its management which lacked the required professional expertise to formulate appropriate credit policies in line with the GOM development strategy. At the same time, some management decisions were allowed to be influenced by external political considerations contrary to sound banking principles as evidenced in the matter of loan recovery. In 1989/90 and 1990/91, the 100% recovery rule was diluted to 80% for issue of new loans contrary to the covenant of the DCA. In the following year, when Malawi experienced a severe drought, all new loans were rescheduled across-the- board without enquiring into the intensity of the crop failure. Further, new loans were also issued to defaulters. In 1992/93, despite the record maize production from the smallholder sector of 2.0 million tons, the credit discipline further deteriorated due to wide-spread political interventions in the recovery process. As a consequence of the above, the good recovery performance of more than 95%, which characterized previous credit operations, decreased to about 85% during 1988/89 and 1990/91, 25% in 1991/92, and 15% in 1992/93. However in the following year, loan recovery slightly improved to about 30% mainly due to very restricted lending, amounting only to MK 27.4 million (para 6). 22. Functional organization. Although training was provided to the field staff, in practice, their specific duties and responsibilities and performance goals were not clearly indicated. This is reflected in the SACA inability to get loan balance confirmations from clubs for an amount of debts totalling MK 8.4 million as at end of March 1994, due to the failure of the field staff to locate the concerned clubs. Although the failure was partly due to time constraint in so far as the entire work was required to be concluded in 10 days time, the matter was not followed up by the field staff nor pursued by the management of SACA. This also points to the inadequate internal checks and controls built into the system and raises the question whether the credit assistants can effectively command the number of clubs assigned to them. 23. Financial management. The training component of the project was not adequately designed to reflect the financial management requirements of SACA and too much emphasis was given to credit administration, which resulted in poor attention being paid to book-keeping and accounts. Although SACA regulations require provision for bad and doubtful debts, as of March 1994, the shortfall in the provision amounted to some MK 56 million. An additional effect of the bad debt policy is that penalty interest has been charged on overdue debt and taken to the profit and loss account as realized income despite the limited likelihood of achieving recovery. The above consequences point to the need for a competent financial specialist which has been ignored in the design of the project. Finally, in view of the fact that SACA had to deal with various funding agencies operating in project-area specific programmes, the required coordination could not be effectively brought about in the absence of a financial specialist. 24. Policies and procedures. SACA was able to develop multiple and individual input packages on which the relative loan amounts were based. Although useful feedback from field staff and ADDs was taken into consideration in designing the input packages, SACA was not in a position to make these packages flexible enough to respond to different agro-climatic conditions 6 MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire and local cultivation practices. In addition to the above, the actual credit disbursement was guided by the resource availability of SACA often resulting in arbitrary cuts and rationing indicating that the system was not demand-driven. In the absence of an operational strategy, SACA could not build-up a system for supervision over the end use of the credit and monitoring the loan recoveries. With this coupled with the impact of drought of 1991/92 and the political interference during 1992/93, total amount of defaulted loans reached MK 263 million by the end of 1994. Legal actions have been initiated only in respect of defaults aggregating MK 4 million against the chronic defaults amounting to MK 56.5 millions, presumably due to external pressure. Similarly, recovery of loans through employers (e.g. GOM and/or SACA) by way of deduction from salaries of the defaulters was not fully pursued and as of end January 1995 only about 40% of the total amount in default at MK 0.7 million has been recovered. F. Project Sustainability 25. Although SACA benefited from 100% subsidization of its operating costs and cost free resources for on-lending at near market rates, its operations have ended up in large losses if full provision for bad and doubtful debts and unrealized income are taken into consideration. The above, coupled with the lack of professional expertise of SACA management, organizational and financial weaknesses, and external environmental constraints, clearly indicate that the project is not sustainable. In regards to MMF, its organizational arrangements have suffered from high operating costs with prohibitive overheads and limited outreach (paras 14 - 19). Furthermore, MMF lacked the required infrastructure and institutional capacity to expand its operations to achieve the required economies of scale to operate in a cost-effective manner. Therefore, MMF was not able to achieve financial viability with its operating structure and mandate. G. Future Outlook 26. Under the IDA-financed Rural Financial Services Project (RFSP), SACA was taken over by the Malawi Rural Finance Company (MRFC) as of I October 1994. The objective of RFSP is to improve the access to financial services in rural areas, to be achieved through MRFC as it expands the activities carried out by SACA on a sustainable basis and eventually become a full fledged rural development bank. Similarly, the MMF was merged with MRFC on 1 August 1995 and is to be a special financial facility to provide financial services to the rural poor on a national scale, under the IFAD funded Mudzi Financial Services Project MFSP). 27. The key lessons learnt are as follows: * Based on historical performance, the viability of lending to smallholders is largely dependent on the policy environment (e.g. price policy, infrastructure support, 7 MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire etc.) and institutional management, including loan recovery policies. Conflicting policy environment (e.g. free distribution of inputs, actions and announcements against recovery discipline) had undermine the financial system being developed. * Credit institutions must be able to operate free from political intervention. * The delinkage of credit and agricultural extension activities has been beneficial to the project and the feedback from farmers has been positive. * The absence of beneficiaries' education on credit discipline and repayment ethics has limited the effectiveness of the project training programme and failed to mitigate the negative impact of political interventions. * Input packages should be flexible enough to meet actual beneficiaries' needs according to different agro-climatic conditions and cultivation practices. 28. Important lessons can be learnt from the MMF experience, including the following: * Certain aspects of the Grameen Bank model were modified and proved to work under Malawian conditions. * The mobilisation of savings from resource-poor households was successful, provided resources to the groups, and also built up risk funds. * Lending to women for off-farm activities proved to be very successful. * The repayment performance of women was higher than for men, which indicates that lending to women reduces credit risk. * Internal harmony and cohesion within a group is essential to develop group dynamics and strengthen the group. * Personal contact with the beneficiaries can help both the clientele and the institution, in regards to improving loan recoveries. I. Follow-Up 28. The mission returned to Rome on 9 February 1995. During the ensuing three weeks it prepared the draft ICR which was transmitted to the WB by the end of February 1995. It is 8 MALAWI: Snallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix A: Mission's Aide-Memoire recommended that the GOM should also finalize its implementation completion report and submit it to the World Bank. 9 MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT APPENDIX B BORROWER'S CONTRIBUTION TO THE ICR � � а � � О б � � �а� д. р ... й а � � � о -��s , о � 'тs (� �° С � � � � CD п�,! � �.. А� �г. � ь'� и � �� � ��� � о � и О' к � '�'� � (D й cD �. � О �' � � U�G О �' �р �-- �г. �С („t�°D � �а � �. о. � о � � � � � �' с��и �, а � � Г� 'b к iU О. к �р 'б м � � 'о �i, c�D п 'о � (�D � ¢. с� б D �С С1. MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT APPENDIX C-1 SACA CREDIT OPERATIONS MALAWI: Smallholder Agricultural Credit Project (Cr. 185 1-MAI) Appendix C-1: SACA Credit Operations Table 1. SACA: Seasonal Credit Disbursement - Coverage of Beneficiaries and Average Size of Loans Coverage of Beneficiaries Average Size of Loan Year No. of No. of Of % of Club Member US$ Clubs Benefici which Women (MK) (MK) aries Women 1987/88 9,072 243,468 72,543 29.80 2,943 110 44 (17.90) 1988/89 10,570 301,375 74,808 24.82 3,993 140 54 (22.16) 1989/90 10,772 315,170 94,338 29.93 5,223 178 66 (23.18) 1990/91 12,394 362,648 108,541 29.93 6,307 216 80 (26.67) 1991/92 11,199 320,707 93,454 29.14 7,717 269 100 (23.58) 1992/93 15,646 392,291 112,305 28.63 9,249 369 84 (28.84) 1993/94 4,155 78,405 26,752 34.12 6,595 350 78 (5.77) Notes: Figures in bracket - no. of beneficiaries as % of total number of farm families (total no. of farm families assumed to be constant at 1,359,885 as of 1982/83). Source: SACA. I/ No. of beneficiaries/women estimated as of 1990/91. 2/ No. of beneficiaries/women are approximate. MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-1: SACA Credit Operations Table 2. SACA: Seasonal Credit Disbursed to Smallholder Farmers Clubs (Amount"MK million) ADD 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 Karonga 0.59 0.97 1.31 1.26 1.25 1.77 0.83 Mzuzu 3.22 4.17 9.88 8.73 7.85 15.74 6.64 Kasungu 8.88 13.55 12.32 16.17 26.90 44.31 6.64 Lilongwe 8.50 14.28 18.32 27.48 34.21 48.00 6.38 Salima 1.45 3.08 3.77 6.06 5.68 8.08 1.42 Machinga 1.71 3.36 5.51 8.08 8.79 14.32 4.29 Blantyre 2.38 3.63 5.44 9.28 6.00 10.96 0.72 Ngabu 0.39 0.51 0.81 1.11 0.32 1.53 0.48 TOTAL: 27.12 43.55 57.36 78.17 90.00 144.71 27.40 Source: SACA. N.B.: During 1994/95, Seasonal Credit Disbursed amounted to MK 15 million over 2,252 clubs (including MK 2 million for 522 Estates). Includes interest for 12 months and excludes loans to barley tobacco clubs (Mk 11.18 million in 1992/93; MK 7.70 million in 1993/94). MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-1: SACA Credit Operations Table 3. SACA: Seasonal Credit for Inputs-Growth Rates Seasonal Credit Inputs Amount Quantity Year Disbursed Growth Value (fertilizer)" Growth (MK mil) (%) (MK mil) ('000 tons) (%) 1987/88 27.12 - 23.65 50 - 1988/89 43.55 60.6 37.15 55 10.0 1989/90 57.36 31.7 52.04 76 38.2 1990/91 78.17 36.3 67.81 76 ... 1991/92 90.00 15.1 78.14 77 1.3 1992/93 144.71 60.8 121.77 80 3.9 1993/94 27.40 (-81.1) 21.10 13 (-84.0) SACA estimates. MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-1: SACA Credit Operations Table 4. MMF - Groups Formed and Trained No. of Groups No. of Members Year Male Female Total Male Female Total 1990/91 48 132 180 240 660 900 1991/92 2 32 34 10 160 170 1992/93 - 89 89 - 337 337 1993/94 - 85 85 - 419 419 1994195" - 123 123 - 617 617 Cumulative 50 461 511 250 2,193 2,443 Source: MMF. Table 5. MMF - Credit Disbursement No. of Loans Loans Disbursed (MK) Year Male Female Total Male Female Total 1990/91 130 348 478 43,370.00 87,395.20 130,765.20 1991/92 17 151 168 3,664.50 29,449.75 33,164.25 1992/93 2 221 223 609.00 48,807.00 49,416.00 1993/94 - 621 621 - 143,189.00 143,189.00 1994/95" - 921 921 - 326,537.00 326,537.00 TOTAL: 149 2,262 2,411 47,643.50 635,377.95 683,021.45 Source: MMF. I/ Represent period April to December 1994. 2/ Represent period April to December 1994. MALAWI: Srnallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-i: SACA Credit Operations Table 6. MMF - Loan Recovery Performance Year Amount Repaid (MK) Repayment Rate (%) 1990/91 77,184.53 52 1991/92 24,863.52 65 1992/93 48,872.40 89 1993/94 156,466.38 92 1994/95 315,695.39 99 TOTAL: 623,102.25 85 Source: MMF. Table 7. MMF - Group Savings Savings (MK) Year` Group Fund Personal Emergency Special Total 1990/91 7,454.90 1,259.32 - - 8,714.22 1991/92 10,509.00 2,189.00 330.00 207.00 13,235.00 1992/93 4,250.00 4,379.00 1,948.00 231.00 10,808.00 1993/94 11,141.00 9,543.00 5,233.69 654.35 26,572.04 1994/95 23,665.44 11,115.76 11,943.46 1,262.85 47,988.01 Source: MMF. I/ Balances at the end of each financial year. MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-1: SACA Credit Operations Table 8. SACA - Performance of Clubs in Recovery Average No. of Clubs" per Staff No. of Clubs Financed No. of Clubs Repaid Recovery Total No. of Member (field) (seasonal credit) Percentage Clubs Defaulting Year Full Part No. Financed No. Defaulted 1987/88 9,072 7,981 1,683 94.66 1,683 34.2 6.4 1988/89 10,861 7,674 3,135 86.26 3,135 41.0 11.8 1989/90 10,985 7,610 3,320 87.70 3,322 41.2 12.5 1990/91 12,394 7,913 4,066 85.15 4,127 46.8 15.6 1991/92 12,133 1,180 8,592 24.85 10,953 45.8 41.3 1992/93 15,646 1,090 6,520 15.04 14,557 59.1 54.9 1993/94 4,155 548 1,860 31.44 3,486 15.7 13.2 Source: SACA. Entire staff in ADDs (excluding headquarters/non-established staff): - (assumed no change in staff at 265) - (clubs exclude burley clubs, etc.) MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-1: SACA Credit Operations Table 9. SACA - Accumulated Loan Defaults and Provisions (as at end September 1994)" Defaults Provision Needed ......................... (M K m illion) ........................ (a) Defaults under 1993/94 Loans 27.2 1 (b) Areas Loans 1992/93 121.8 103.3 (c) Rescheduled Loans 1991/92 57.7 J (d) Old Loans (over 3 years) 56.5 56.5 Total 263.2 159.8 (e) Provision made - 103.8 (f) Shortfall in Provision 56.0 Data provided by SACA: Figures do not include M.T. Loans and losses on interest income as well as likely losses from disputed loans (MK 0.4 million) and book differences (MK 8.4 million). MALAWI: Snallholder Agricultural Credit Project (Cr. 185 1-MAI) Appendix C-1: SACA Credit Operations Table 10. Action Plan for Credit Recovery Prior to RFSP Effectiveness Action Responsibiity Performance Indicators Status 1. General Statement on Credit Recovery Policy CABINET/NCC Radio and newspaper announcements Complied with and Enforcement 2. Restoration of 100% Credit Repayment Policy Government (MOA/MOF) a. Daily radio and weekly newspaper announcements for Complied with (only clubs which pay their loans in full qualify April and May for future loans) b. Administrative circular to all SACA staff and FAs restating Credit Recovery Principles and Guidelines 3. Restatement of Members Joint and Several Government (MOA/MOF) a. Daily radio and weekly newspaper announcements for Complied with Liability for all Farmers' Club Debts April and May b. Administrative circular to all SACA staff and FAs restating Credit Recovery Principles and Guidelines 4 Enforce 100% Recovery and Restore Credit Government through SACA/MRFC Discipline i. List of all Defaulting Clubs and Individuals SACA/MRFC Copies of list of defaulters provided to MOA, MOF and Complied with IDA by April 30, 1994 ii. Place Liens on Salaries and Pensions on MOF/SACA Letter issued by MOF authorising deduction at source for all Defaulting Individuals listed defaulters in paid GOM employment iii. Place Liens on Tobacco Auction Floor Proceeds MOA/SACA Letter issued to TCC requesting that stop-order to recover for Defaulting Clubs and Individuals outstanding loans from listed defaulters iv. Institute Court Action Against Defaulting MOA/SACA/MRFC A minimum of 2,000 cases of largest defaulters taken to Clubs/Individuals court and evidence of judgement on defaulted amount of at least MK 20 million Although letters were issued for deduction of loan amounts due from salaries for an amount of MK 0.7 million, covering 984 employees, an amount of only MK 0.3 million was recovered due to ineffective follow-up of the recoveries. 2/ As at end September 1994, the recovery of loans from burley tobacco clubs was 63% for 1992/93 at 58% for 1993/94 from cut of loans due at MK 11.18 million and MK 7.07 million, respectively. 3' As at end September 1994, Court Cases were filed up in respect of MK 3.97 million covering about 14,000 cases as against chronic defaulted amount of MK 56.54 million; of this, an amount of MK 0.22 million has been received. MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-i: SACA Credit Operations Table 11. SACA - Recovery Performance of Seasonal Credit vis-A-vis Field Staff in Position (Amount in MK million) Clubs Financed Clubs Defaulted No. of field Average No. of clubs per Staff Member Name of ADD % Recovery Staff a No. Amount No. Amount Financed Defaulted Total 1987/88 Karonga 538 0.59 152 0.06 89.31 20 27 8 35 Mzuzu 779 3.22 297 0.15 95.24 34 23 9 32 Kasungu 2,120 8.88 447 1.02 88.49 40 53 11 64 Lilongwe 2,533 8.50 385 0.03 99.68 70 36 6 42 Salima 641 1.45 127 0.07 95.36 25 26 5 31 Machinga 1,002 1,71 115 0.04 97.79 39 25 3 28 Blantyre 1,061 2.38 90 0.05 97.86 31 34 3 37 Ngabu 398 0.39 70 0.03 93.35 14 29 5 34 TOTAL: 9,072 27.12 1,683 1.45 94.66 265 (34)1/ (6)2; (40) 1992/93 Karonga 610 1.77 408 1.03 42.08" 20 31 21 52 Mzuzu 2,002 15.74 1,883 13.67 13.17 34 59 56 115 Kasungu 3,784 44.31 3,639 39.70 10.42" 40 95 91 186 Lilongwe 3,571 48.00 3,508 41.34 13.87 70 51 50 101 Salima 1,151 8.08 1,088 7.22 10.54 25 45 44 89 Machinga 2,001 14.31 1,718 10.26 28.34 39 51 44 95 Blantyre 1,786 10.96 1,636 8.97 18.14 31 58 53 111 Ngabu 741 1.53 587 0.76 50.59 14 53 42 95 TOTAL: 15,646 144.71 14,557 122.95 15.04 265 (59)21 (55)11 (114)"' Source: SACA. I/ Entire staff in each ADD (excluding HQs/non-established staff). 2/ Weigthered averages. 3/ Highest. 4/ Lowest. MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT APPENDIX C-2 MAIZE BUDGET (PER HA) IN ECONOMIC TERMS MALAWI: Smallholder Agricultural Credit Project (Cr. 185 1-MAI) Appendix C-2: Maize Budget (per ha) in Economic Terms Table 1. Import Parity Prices Maize Urea DAP ...... ......................... (U S$/ton) ............................. World market constant 1990 prices" 102 133 160 MUV index" 109 109 109 World Bank prices constant 1995 111 145 174 Freight insurance and port charges Aa - . Cif Mozambique port 156 190 219 Transport cost to Lilongwe" 40 40 40 Cif Lilongwe 196 230 259 ..................................M(MK.kg) ............................... Cif Lilongwe" 2.94 3.45 3.89 SFFRFM costs (10%)" - 0.35 0.39 Prices at main delivery sites 2.94 3.80 4.28 Transport farm delivery sites" (0.23) 0.23 0.23 Losses (7%) (0.21) - - Farmgate economic prices 2.50 4.03 4.51 Farmgate financial prices (1994/95) 2.00" n.a n.a " World Bank commodity price forecasts (November 1994). 2/ 400 km at MK 1.5/ton/km. 3/ US$ 1 = MK 15. 4' Including rebagging, storage, ADMARC fees, transport and overheads. 5' 150 km at MK 1.5/ton/km. 6/ Announced by GOM in February 1995. MALAWI: Smallholder Agricultural Credit Project (Cr. 1851-MAI) Appendix C-2: Maize Budget (per ha) in Economic Terms Table 2. Budget per Hectare for Local and Hybrid Maize in Economic Terms (1994/95) Local Maize Hybrid Maize Gross Value of Production: Yield (kg/ha) 900 2,700 Price (ton/kg)" 200 200 Gross value of production (MK/ha) 1,800 5,400 Production Costs: Seed (local)" 70 - Seed (selected: 25 kg)" - - Fertilizer - 23:21:0+45 (50 kg)" - 375 Fertilizer - DAP (80 kg)" - 361 Fertilizer - CAN (40 kg)" - - Fertilizer - UREA (170 kg)" - 685 Miscellaneous 30 30 Transport" 203 608 Credit charges" 58 Total production costs 303 2,639 Net Value of Production (MK/ha) 1,497 2,761 Number of mandays 113 153 Return per manday (MK/day) 13.2 18.0 "i As indicated in Table 1, the import parity price for maize has been estimated at MK 2.5/kg. In the context of Malawi where maize is to be considered as now tradeable, the farmgate price of MK 2.0/kg would better reflect the economic price of maize. 2/ At MK 2/kg: 35 kg/ha. 3/ At MK 15/kg (without subsidies). 4/ At MK 4.73/kg (estimated). 51 At MK 4.51 (see Table 1). 6/ At MK 4.66/kg (estimated). 7/ At MK 4.03/kg (see Table 1). 8/ At MK 1.5/ton/km; average 150 km. 9/ Estimated at 40% of input costs excluding transport. MALAWI SMALLHOLDER AGRICULTURAL CREDIT PROJECT APPENDIX C-3 SMALLHOLDER CROP HECTARAGE ESTIMATES Smallholder Crop Hectarage Estimates ('000 Hectares) 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/1 1991/92 1992/93 M 1,18A 1.182.6 1.144.8 1.193.3 1.182.4 i.215.1 1.270.9 1.34.7 1-mi1 1.366.1 1.327.1 Localnaize 1,067.5 1,048.4 1,104.6 1,131.5 1,137.5 1,180.0 1,184.0 1,193.6 1,137.9 996.8 COmpoutehMize 26.1 21.5 20.1 13.8 18.7 25.1 24.7 18.9 13.3 3.9 Hybrid maiz 89.0 74.9 68.6 37.1 58.9 85.8 135.0 179.4 216.9 326.4 Rice 20.3 21.9 20.8 22.9 19.1 22.7 25.6 29.0 32.8 18.2 38.6 Groundnuts 146.3 144.9 138.0 176.3 209.9 175.8 139.7 48.2 70.0 64.4 61.1 Tab~ane 47.0 37.7 331 24.1 21.5 303 33.3 32.5 4.31 nndt 35.8 29.4 27.6 20.2 16.7 24.4 26.7 25.6 21.5 addf 4.2 3.4 1.7 1.7 1.2 1.0 0.8 0.8 1.3 sun-dir 6.3 4.9 3.6 1.8 2.7 4.7 3.7 2.7 1.5 oriental 0.7 0.2 0.4 0.7 0.6 0.9 1.0 1.7 burley 0.2 0.2 1.2 2.4 20.2 Calon 32.6 51.1 60.8 51.9 34.5 43.6 47.7 48.5 58.7 58.3 53.7 Ca~ava 59.4 81.5 81.3 72.9 64.9 61.8 72.8 61.5 71.6 64.0 75.1 Sorghum 22.6 21.3 32.7 32.1 30.6 30.1 29.8 30.8 31.0 27.7 43.9 PAN«s 10.9 15.3 17.4 17.4 18.2 19.4 17.9 19.6 15.0 14.8 24.2 Pulues 82.9 91.3 80.0 114.0 153.0 160.0 149.0 215.0 191.0 192.0 196.4 beans 71.0 87.0 129.0 94.0 96.0 116.0 123.0 132.9 p"M 39.0 61.0 28.0 48.0 114.0 70.0 68.0 62.7 grMn 4.0 5.0 3.0 7.0 5.0 5.0 1.0 0.8 Soya 1.0 2.0 6.0 16.0 22.0 15.8 Ground Bens 1.0 1.0 1.0 1.0 0.9 Guar ean 3.0 3.0 3.0 2.0 2.0 2.0 3.0 3.0 5.0 2.0 3.2 Whet 2.0 2.0 1.0 2.0 3.0 3.0 2.0 2.0 1.0 1.0 1.6 Sunflionr 3.0 3.0 4.0 - 4.0 3.0 3.0 5.0 4.0 8.0 10.0 16.2 Chilles 1.0 2.0 2.0 2.0 1.2 Sweet Po~tae 21.0 23.0 22.0 29.0 29.0 44.0 30.0 48.0 20.0 36.8 Irish Potates 3.0 3.0 4.0 6.0 6.0 6.2 TOTAL 1,412.8 1,472.1 1,496.0 1,649.3 1,563.7 1,66.1 1,870.6 1,802.0 1.879. 1,821.4 1,848.6 Percemntage Distibutioni 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 847% 80.3% 78% 77.0% 75.1% 71.2% 7.1% 40% 741% 75.1% 71.8%, La mz 72.5% 70.1% 71.3% 72.8% 71.3% 69.4% 65.7% 63.5% 62.5% 53.9% Compi M%iz 1.8% 1.4% 1.3% 0.9% 1.2% 1.5% 1.4% 1.0% 0.7% 0.2% Hybrid maze 6.0% 5.0% 4.4% 2.4% 3.7% 5.1% 7.5% 9.5% 11.9% 17.7% Rice 1.4% 1.5% 1.4% 1.5% 1.2% 1.4% 1.5% 1.6% 1.7% 1.0% 2.1% Gro~udnutS 10.4% 9.8% 9.1% 11.4% 13.5% 11.0% 8.4% 2.7% 3.7% 3.5% 3.3% Tchm= 3-1% :L4% .1% 1.5% 1.3% 1.7% 13% 13% 2.5% nndt 2.4% 1.9% 1.8% 1.3% 1.0% 1.4% 1.4% 1.4% 1.2% uddf 0.3% 0.2% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.1% sun-er 0.4% 0.3% 0,2% 0.1% 0.2% 0.3% 0.2% 0.1% 0.1% orietal 0.1% 0.1% burley 0.1% 0.1% 1.1% Cotton 2.3% 3.5% 4.1% 3.3% 2.2% 2.7% 2.9% 2.7% 3.1% 3.2% 2.9% Cas~ 4.2% 5.5% 5.4% 4.7% 4.2% 3.9% 4.4% 3.4% 3.8% 3.5% 4.1% Sorghum 1.6% 1.4% 2.2% 2.1% 2.0% 1.9% 1.8% 1.7% 1.6% 1.5% 2.4% iet 0.8% 1.0% 1.2% 1.1% 1.2% 1.2% 1.1% 1.1% 0.8% 0.8% 1.3% ,Puls" 5.9% 6.2% 5.4% 7.4% 9.8% 10.0% 8.9% 11.9% 10.2% 10.5% 10.6% 4.6% 5.6% 8.1% 5.6% 5.3% 6.2% 6.8% 7.2% pe« 2.5% 3.9% 1.8% 2.9% 6.3% 3.7% 3.7% 3.4% mgrm 0.3% 0.3% 0.2% 0.4% 0.3% 0.3% 0.1% 0.0% Soy 0.1% 0.1% 0.3% 0.9% 1.2% 0.9% Ground Bears 0.1% 0.1% 0.1% 0.1% 0.0% Guar Ben 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.2% 0.2% 0.3% 0.1% 0.2% Whet 0.1% 0.1% 0.1% 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0,1% 0.1% Sunflower 0.2% 0.2% 0.3% 0.3% 0.2% 0.2% 0.3% 0.2% 0.4% 0.5% 0.9% Chinei 0.1% 0.1% 0.1% 0.1% 0.1% ISwemi Pottoe 0.0% 1.4% 1.5% 1.4% 1.9% 1.8% 2.6% 1.7% 2.6% 1.1% 2.0% Irish Poatoes 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 70TA. 100.0% I00% 100% 1000% 1000% 100.0% 100.0% 100.0% l.0% IM.0% 100.0% Source: Cmp Produc~in Eau.es.MOA SMALLHOLDER CROP HECTARAGES Is2 - 12~ O~mnd~. P~m G Cmp A ?9I363 106 s 1 99147 issale 191 19923 Year iвк� го�sо З�е Гп рЕп Е5 Sл�дFМ за° �е .�'У� •�„ �.-•\. -� MALAW 1 i �. � Сh,г,Р"��J�� � �'�.Т SMALLHOLDER AGRICULTURAL , � CREDIT PROJECT r �о,опдо �•�2 Т�о° 1�CARONGAIr � �.� �о° ` \ ` AGRINLTURAL DEVELOPMENT �`•� \` t D1V15tON5 BOUNDARIES ` \\ � ! � R: ADD HEADQUARTERS `�` IОChJomбa� � MA1N ROADS г r-1--Hti RAIL_WAY$ �г�пgvоп�о Ch�wera •� ' R1VER5 % 0M1owe � -•� 1NTERNATIONAL BOVNDARIES 1 �f J Ruпphr � ➢ ��� Rпo,we� 1` гJUs�sra ` (iмгиги �� _ J мzиги \'•� �-�� I , S _� i % Nkhato Bov' -. �.-.-.л.�'� ~ 1 � /' С ` % 1./"'�..✓ Z А М В I А �1 мгпьо %�;�г°i�йо �i°- ��l.J ; /сюгимиш I S�пиD •\.,-• 1 "� �. М О Z А М В 1 Q U Е j�'r 1 1 1 •` Nk60rokOlo I �1 ко:ппди � . �GJ � ! � `J � ' V�1c �аЬго1 1�Р7 \ � � .-• � f,i� Мl�опе� !� \ � ch�voro (•,1 �ow �i' � � Mch,п�i 5епда � •�, olima \ � ' �^V/ ��, �• LI�ONГiWE C+h�дoka �•\ ге' Ч / �rг..п, W Nw k@у � Г /•/ l вОУ � ```������111 /•�'` '�. CICONGWE _ �•�• � иед�о 1 � гп�о еаг евеп р.вее,еа ev 1-` �•� f'-•✓•ц � � Moпgochi � гпе wпne еапм�я яган о.ггиг,�еrЧ 5 •� .\ гоггпе соппапепга оггпе � .еаае.г ам �: в,ы�г��еу тг ие иferna use ог ГПе Wог1д ВапЧ апд ие иге,памопаr F,папса '` Nche 0`1оЕ � ,о п согоо.вмоп тме аепопмаг,опг - .1 1` егео апе гпе еоопая.�ег гпоwп 1V`� L: у- ''� оп rns mav оо пог �пеИ оп гпв ` Boloko _._У_^��/ оа.г or гпе июна еепи епе гне � �-^ 1пler�efronal Fиапсе CorporaLOп, апv rvорпепг оп гпе гвqаг sгагог � wопде � oI апу terrrloгу w аМ � Когире � впеоггепепг ог ассеогапсв or аиоп еоопдапег j � М О Z А М В 1 Q U Е �� zсмвА ' Мwоп_ Chdeko �\ Ch�radxulu I � о,`Г Г � BLAtiTYRE � l�mбe т�/ R Е I ' � ^ I 1Ми�опге � ---1 16° Chi4wawo � �Ь°-{ �� � � '4VZANIA уоlо zлiRE ,-�! ? r ,•v. '-гti г L_~ -еге I�(AУΡ/ G А ( 4N ,'7LA Г � � `� /MA�AW1 / у. ( lдмвгЧ - д 7 1 ) l J .�� �; �. \ г �--� �д_• 1MO,AMB�OUE \Чдаb. I' �ZIMBABWE` \\ \ vдмiВiд � PNP• Г \ � Вапgоl Е ео'S,в � ,' VV\� � �,� 1 � �� 1� /`� уswлziгпчо ��• � - и,- �� Ns пге � �е� I � , �f �� а � � �гЁS"гн0 �� SOUГH AFRICp�' � 0 20 40 60 BD 100 , MiLES � �. KILOMETERS а zo ао ьо во г iso �ло �ьо ,.��Е�е, Зе' APR1L 1987 (-1 LJ C --)