Colombia - Second Agricultural Credit Project

Report No. 1248-CO FILE COPY Appraisal of the Second Agricultural Credit Project Colombia November 135, 1976 Regional Projects Department Latin America and Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (at the time of appraisal and useidin this report) Currency Unit = Colombian Peso (Col$) C01$ 1 = US$0.033 Col$ 1,000 = US$33.33 C01$ 1,000,000 - US$33,333 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS Br, - Banco Cafetero Coffee Growers' Bank BCH - Banco Central Hipotecario Central Mortgage Bank BG - Banco Ganadero Cattle Raisers' Bank BOR - Banco de la Republica Bank of the Republic BP - Banco Popular Popular Bank CAJA AGRARIA - Caja de Cr6dito Agrario, Agricultural, Industrial and Industrial y Minero Mining Credit Bank CF? - Corporacion Financiera Popular Popular Finance Corporation COFIAGRO - Corporacion Financiera de Fomento Agricultural Development and Agropecuario y Exportaciones Exports Finance Corporation FFAP - Fondo Financiero Agropecuario Agricultural Financing Fund (BOR) FFI - Fondo Financiero Industrial Industrial Financing Fund (BaR) FIP - Fondo para Inversiones Privadas Fund for Private Investmqrnts (BCR) ICA - Instituto Colombiano Agropecuario Colombian Agricultural Institute IDENA - Instituto de Mercadeo Agropecuario Institute of Agricultural Marketing INCORA - Instituto Colombiano de la Reforma Colombian Institute for Agrarian Agraria Refonm INDERENA - Instituto de los Recursos Naturales Institute for Renewable Natural Renovables y del Medio Ambiente Resorces and the Envirorment MB - Junta Monetaria Monetary Board PA - Participating Agency BANCO DE LA REPUBLICA FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .......................... i-iii I. INTRODUCTION ............. I II. BACKGROUND ....... ................. 1 A. Agricultural Sector .. ....................... 1 B. Banking and Credit .................. 5 C. Previous Agricultural Credit Projects ....... 8 III. THE PROJECT ....... ............................... 10 A. Brief Description ..... ...................... 10 B. Detailed Features ..... ...................... 11 C. Cost Estimates ...... ........................ 15 D. Financing ................................... 17 E. Procurement ...... ........................... 17 F. Disbursement ....... . ......................... 18 G. Organization and Management . .............- 19 H. Lending Operations ...... .................... 20 I. Accounts and Auditing .................... ... 22 TV. PRODUCTION, MARKETING, PRICES AND PRODUCER BENEFITS ....................................... 22 V. ECONOMIC BENEFITS AND JUSTIFICATION .... .......... 24 VI. AGREEMENTS REACHED AND RECOMMENDATION .... ........ 28 This appraisal report is based on the findings of a mission which visited Colombia in April/May 1975 and was composed of Messrs. D.N.S. Evans (Mission Leader), K.W. Berg, J.A.N. Wallis, 0. Urbina, H.R. Feuerstein, M.L. Agarwal and Ms. I.C. Girardot (Bank) and Messrs. V.P. Malhotra and R.J. Hing (Consultants). Mr. L.H. Berlin (Bank) participated in the final mission discussions. 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.  TABLE OF CONTENTS (Continued) ANNEXES 1. The Agricultural Sector Table 1 - Gross Values of Agricultural Production and the Gross Domestic Product in Constant 1958 Prices Table 2 - Crop Areas, Yield and Production Table 3 - Total Area of Grassland and Cattle Distribution by Departments Table 4 - Number and Size of Beef Cattle Farms Table 5 - (a) National Beef Herd Production Indices (b) National Dairy Herd Production Indices Table 6 - National Beef Herd, Management Pattern and Its Percentage Composition Table 7 - National Dairy Herd, Grassland and Production Table 8 - Agro-industry - Three-Year Projections Table 9 - Agro-industry - Typical Capacity and Fixed Assets and Costs Table 10 - Associations and Federations 2. Recent Development in Agricultural Credit in Colombia Table 1 - Institutional Credit Outstanding by Economic Sectors as of December 31, 1960 to 1975 3. Performance Under Previous Agriculture Projects with Credit Components 4. Crop Models Table I - Annual Crop Development of a 10-ha Crop Farm - Investment Costs Table 2 - Annual Crop Development of a 10-ha Crop Farm - Production Projections Table 3 - Annual Crop Development of a 10-ha Crop Farm - Operating Costs and Sales Projections Table 4 - Annual Crop Development of a 10-ha Crop Farm - Cash Flow Projections Table 5 - Annual Crop Development of a 120-ha Crop Farm - Investment Costs Table 6 - Annual Crop Development of a 120-ha Crop Farm - Production Projections Table 7 - Annual Crop Development of a 120-ha Crop Farm - Operating Costs and Sales Projections Table 8 - Annual Crop Development of a 120-ha Crop Farm - Cash Flow Projections for Individual Ownership Table 9 - Annual Crop Development of a 120-ha Crop Farm - Cash Flow Projections for Group Ownership Table 10 - Perennial Crop Development of a 30-ha Crop Farm - Summary of Investment Costs  TABLE OF CONTENTS (Continued) ANNEXES (Continued) Table 11 - Perennial Crop Development of a 30-ha Crop Farm - Detailed Investment Costs Table 12 - Perennial Crop Development of a 30-ha Crop Farm - Production Projections Table 13 - Perennial Crop Development of a 30-ha Crop Farm - Operating Costs and Sales Projections Table 14 - Perennial Crop Development of a 30-ha Crop Farm - Cash Flow Projections Table 15 - Perennial Crop Development of a 10-ha Crop Farm - Investment Costs Table 16 - Perennial Crop Development of a 10-ha Crop Farm - Production Projections Table 17 - Perennial Crop Development of a 10-ha Crop Farm - Operating Costs and Sales Projections Table 18 - Perennial Crop Development of a 10-ha Crop Farm - Cash Flow Projections Table 19 - Crop Models - Summary of Financial Rates of Return Over 20 Years 5. Livestock Models Table 1 - 40-ha Dual-Purpose Cattle Farm - Investment Costs Table 2 - 40-ha Dual-Purpose Cattle Farm - Herd Projections Table 3 - 40-ha Dual-Purpose Cattle Farm - Sales and Operating Costs Table 4 - 40-ha Dual-Purpose Cattle Farm - Cash Flow Projections Table 5 - 60-ha Dairy Farm - Investment Costs Table 6 - 60-ha Dairy Farm - Herd Projections Table 7 - 60-ha Dairy Farm - Sales and Operating Costs Table 8 - 60-ha Dairy Farm - Cash Flow Projections Table 9 - 2,000-ha Beef Ranch - Investment Costs Table 10 - 2,000-ha Beef Ranch - Herd Projections Table 11 - 2,000-ha Beef Ranch - Sales and Operating Costs Table 12 - 2,000-ha Beef Ranch - Cash Flow Projections Table 13 - Financial Rate of Return Calculations - Livestock Models  TABLE OF CONTENTS (Continued) ANNEXES (Continued) 6. Agro-industry Models Table 1 - Grain Drying and Storage - Investment Costs Table 2 - Grain Drying and Storage - Production, Income and Operating Costs Table 3 - Grain Drying and Storage - Cash Flow Projections and Financial Rate of Return Calculations Table 4 - Small Feed Mill - Investment Costs Table 5 - Small Feed Mill - Production, Income and Operating Costs Table 6 - Small Feed Mtill - Cash Flow Projections and Financial Rate of Return Calculations 7. Table - Estimated Disbursement Schedule of Bank Loan 8. Table - Project Cash Flow - Banco de la Republica 9. Table - Project Cash Flow - Participating Agencies 10. Economic Rate of Return Table 1 - Producer's Prices Used in the Economic and Financial Analysis Table 2 - Economic Analysis and Financial Analysis Table 3 - Economic Rate of Return Calculations CHART Banco de la Republica - Organization MAPS IBRD No. 11689 - Agricultural Land Use - Predominant Crops IBRD No. 11690 - Cattle Distribution - Transportation  COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises an agricultural credit project for which a Bank loan of US$64.0 million equivalent is proposed. The loan would support a three-year lending program for medium- and long-term investments in agricul- ture (including livestock) by small-, medium- and large-scale commercial farmers and machinery contractors and in related agro-industries. ii. The agricultural sector in 1975 contributed about 27% of the Colombian Gross Domestic Product and about 59% of the value of all exports of goods and services. From 1971 to 1975, agricultural output grew on average 4.6% per annum in real terms. This is well above the historical average and is prin- cipally a result of substantially increased production of crops other than coffee, although the livestock sub-sector has also increased its output, mainly through a 3 to 4% annual expansion of the national herd. With the exception of wheat, oilseeds and cocoa, Colombia is self-sufficient in food production in terms of quantity, but, although the volume of food production over the past decade has kept pace with population growth, there has been little, if any, improvement in dietary standards. Production could be substan- tially increased by practicing more intensive farming in the highlands and by bringing into production unused areas in the lowlands. The territory east of the Andes, which represents 57% of the total land area of Colombia, is in- habited by only 3% of the total population. Within the 1.2 million existing farms of Colombia, about 7.7 million ha is used for crop production. In addition, there are some 17.5 million ha of grassland and 5.9 million ha of unused land on the 1.2 million farms. The rural population of 9 million constitutes about 37% of the total population, and the economically active population in the rural areas is also about 37% of the total economically active population. iii. Although unemployment in rural areas is still high, the rural employ- ment situation appears to have improved in recent years, particularly in the season of peak labor needs. Average annual income per capita in 1974 was estimated to be about US$260 in the rural areas and US$525 in the urban areas. However, in 1975 about 63% of the rural population lived below the poverty income level as defined by the Bank (US$148 per capita in 1975) including almost all farmers with less than 20 ha. iv. The Government has formulated a long-term development strategy in which key elements are the expansion of agricultural output, the raising of nutritional standards and the improvement of income distribution, thereby raising the living standards of the poorest segment of the community. A vital component of the National Food and Nutrition Plan, which has high priority in  - ii - Government policy, is an increase in production of carbohydrate and protein- rich foods, such as maize, wheat, soybeans and milk. Attention is also being focused on the possibilities of manufacturing formulated and fortified foods using locally produced inputs. This proposed Second Agricultural Credit Loan and a proposed loan for a rural development project would both contribute to attaining these objectives. v. The Bank has made eight loans for agricultural development in Colombia since 1966 totalling US$114.6 million. These loans, of which five were smallholder oriented, have been restricted to specific subsectors or geographical areas. Credit has been channeled through the Colombian Institute for Agrarian Reform (INCORA), the Banco Ganadero (BG), and the Caja de Credito Agrario, Industrial y Minero (CAJA AGRARIA). vi. The proposed Second Agricultural Credit Project would be production oriented and would be in line with the Government's development strategy in that, by financing investments for crop and livestock production and for related agro-industries, it would help strengthen the Government's efforts to raise the total output and employment levels of the agricultural sector. It would also help narrow the income disparities between urban and rural areas by providing employment for rural labor and by increasing the incomes of the small commercial farmers. Small commercial farmers are defined as those having gross assets not exceeding the equivalent of US$25,000, including land, the greater part of which is invested in farming activities, and who derive at least 75% of their income from farming. The project would contribute to the implementation of the National Food and Nutrition Plan by increasing the pro- duction of carbohydrate and protein-rich foodstuffs. The proposed Integrated Rural Development Project would focus on the economic and social development of subsistence farmers who are currently mainly outside the market economy, and another project is under preparation which would set out to improve nutritional standards and family health. vii. Total Project cost would be about US$174.1 million equivalent which would be financed as follows: (a) the Bank loan of US$64.0 million, or 37% of total Project costs, would finance all the foreign exchange costs; (b) the Banco de la Republica (BOR) and participating agencies would contribute US$73.8 million, or 42% of Project cost; and (d) sub-borrowers would finance US$36.3 million, or 21% of Project cost. viii. The proposed Project would be country-wide and sector-wide in scope (except for coffee production and fisheries). BOR would be responsible for overall administration of the Project and would channel credit to sub-borrowers via participating agencies (PAs). A PA could be any financial institution entitled to BOR's rediscount facilities. BOR would be responsible for ensuring that Project investments are technically, financially and economically sound. To discharge this responsibility, BOR would require PAs to enter into subsi- diary loan agreements under which they would undertake to provide complementary working capital requirements of sub-borrowers and qualified technical staff to evaluate subloan applications and ensure the provision of adequate technical assistance to sub-borrowers. In addition, BOR would carry out random checks of subloan investments.  - iii - ix. The basic interest rate for farmers would be not less than 15% per annum, with compulsory charges and fees this would be equivalent to an effective cost of credit of between 17% and 19% per annum. In addition, all farm sub-borrowers, except the smiall commercial farmers, would be required to expend annually on private technical assistance the equivalent of aL least 2% of the outstanding balance of subloans. For agro-industries the interest rates would be between 18% and 26% per annum depending upon the locality and. size of the investment being financed. BOR would rediscount not less than 37% of subloans made by PAs to farmers and machinery contractors and not less than 60% of subloans for agro-industrial enterprises. Rediscount rates would be not more than 13% per annum for subloans to farmers and machinery contractors, and for agro-industry subloans rediscount rates would be between 14% and 23% per annum depending upon the locality and size of the investment being financed. x. Since the items to be financed by subloans are varied and scattered over a wide geographic area, they would not be suitable for international com- petitive bidding. Therefore, local trade channels would be used. There are many suppliers of the required inputs in Colombia, competition is keen among them and repair and service facilities are widespread and adequate. At least three bids would be required, however, whenever the cost of machinery and equipment for agro-industries in a single investment exceeds US$150,000. xi. Estimated financial rates of return would range from 16% to 40%, and the overall economic rate of return would be 28%. xii. During negotiations appropriate assurances were obtained that pro- vide a suitable basis for a Bank loan of US$64.0 million for a term of 15 years, including a 3-1/2-year grace period. The borrower would be BOR, which would assume the foreign exchange risk.   COLOMBIA SECOND AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 The Government of Colombia has requested a Bank loan to help finance a three-year lending program for medium- and long-term investments in agricul- ture (including livestock) by small-, medium- and large-scale commercial farmers and machinery contractors and in related agro-industries. The Bank loan would be to BOR with the guarantee of the Republic of Colombia for the equivalent of US$64.0 million. The proceeds of the loan would be relent by BOR to both public and private financial intermediaries for the purposes requested. The Bank has made eight loans for agricultural development in Colombia since 1966 totalling US$114.6 million of which five were smallholder oriented. 1.02 The proposed Second Agricultural Credit Project was prepared by various official entities in Colombia under the guidance and coordination of BOR and with the assistance of a Bank/FAO Cooperative Program mission which visited the country in November/December 1974. II. BACKGROUND A. Agricultural Sector 2.01 Out of a total estimated population of about 24.5 million in 1976, nearly nine million, or 37%, live in rural areas. Some 85% of rural families are exclusively involved in farming. Migration to urban areas has been con- siderable and the rural population has been increasing only by 0.5% per year between 1964 and 1973, as compared with 2.8% for total population and 4.7% for urban areas. The agricultural sector supports 37% of a total labor force of about seven million and, in 1975, contributed 27% of GDP and 59% of the value of all exports of goods and services. With the exception of wheat, cocoa, oilseeds, pulses and barley, Colombia is self-sufficient in food. In 1975, following considerable Government efforts at diversification, coffee, grown in the Andes by small- and medium-scale farmers, provided about 62% of earnings from agricultural exports and about 44% of total merchandise export value. Other main export crops are sugar, cotton, rice and bananas (Annex 1). 2.02 From 1971 to 1975, agricultural output grew on an average of 4.6% in real terms. However, this good overall performance conceals important differences between rural areas. Most of the rural population live in  - 2 - conditions of poverty, where unemployment and under-employment are serious problems. The main reasons for this situation are: (a) poor distribution of land, associated with a high concentration of small farmers on the poor and deteriorating soils of the Andean mountains; (b) the lack of coordinated production support services (research, extension, credit and marketing) adapted to their production systems and socio-economic condition; and (c) the inadequate physical infrastructure (roads and electricity) and social services (education and health). Land Tenure and Type of Farming 2.03 An exceptional regional diversity in altitudes (from sea level to 5,800 m), soils and climates (from tropical to alpine) enables Colombia to produce a wide range of agricultural commodities. Out of a total area of 114 million ha, the agricultural census of 1970/71 showed that only 31 million ha were occupied by the existing 1.2 million farm units--7.7 million ha were cropped (2.1 million ha in seasonal crops, 2.3 million ha in permanent crops and 3.3 million ha in fallow); 17.5 million ha were in grassland; and 5.9 million ha were unused. 2.04 There are six main types of farming in Colombia: (a) large-scale extensive ranching on the lowlands of the Caribbean and Andean valleys; 80% of the 22.5 million head of cattle in 1974 were found in those regions; (b) medium- and large-scale mechanized farming in the inter-Andean valleys, which has been expanding steadily and which mainly produces cotton, soybeans, oil palm, rice and sugarcane; (c) small- and medium-scale farming at intermediate altitudes in the highlands, with coffee as the main cash crop; (d) organized resettlements of small farmers on land acquired and reclaimed by the Government, mainly in the Caribbean lowlands but also in the Amazon basin; (e) spontaneous colonization of up to 1 million ha a year in the areas of tropical rainforest and in the Eastern Plains; and (f) high altitude, small-scale farming (less than 20 ha) in the Andean highlands. In such densely populated areas, the average farm size is 4 ha. These farms are often on poor soil and steep slopes and produce mostly for family sub- sistence, although surpluses are marketed. Production  - 3 - diversification is a hedge against risk, and farming system characteristics are essentially low input, low risk, and low output. Overgrazing and cropping steep slopes without soil conservation practices have resulted in substantial erosion. Insufficient technical assistance and lack of access to institutional credit and to markets are among the major obstacles to improvement. Land Distribution and Income Structure 2.05 The 1970/71 agricultural census showed that the largest 8% of farms (50 ha and above) accounted for 80% of the total farmland, while 60% of all farms occupied only 4% of all farmland in small holdings with less than 5 ha, of which 270,000 units had less than 1 ha. Some 83% of all farmers had less than 20 ha and operated only 13% of the farmland. In addition, 200,000 rural families, dependent on agriculture, were landless. The distribution of rural income is consequently very skewed, with half going to 10% of the rural popu- lation. In 1975, 63% of the rural population had incomes below the poverty income level as defined by the Bank (US$148 per capita for 1975), including almost all farmers with less than 20 ha. 2.06 Rural unemployment and underemployment are high, estimated at an average of 20% of total available labor. Nevertheless, the situation appears to have improved in recent years, particularly in the season of peak labor needs. Migration to cities is significant especially from the populated highlands where the labor force is decreasing. 2.07 Since 1961, the Instituto Colombiano de la Reforma Agraria (Colombian Institute for Agrarian Reform - INCORA) has been involved in pro- grams of distribution of public land (4.1 million ha up to the end of 1974) and redistribution of private land (0.4 million ha) associated, to varying degrees, with investments in land reclamation and infrastructure and the provision of supervised credit and technical assistance. However, accom- plishments have been limited in view of the magnitude of the task. Most of the land distributed so far has been assigned to families already occupying the land. INCORA's land titling activities are limited mostly to distributing to small-scale farmers titles on public land in colonization areas. Agro-industries 2.08 The facilities for processing and storage of crop and animal products have not improved as fast as the expansion of production from the commercial segment of the agricultural sector. Processing of agricultural products traditionally has been concentrated in sugarcane processing plants, cotton ginneries, rice and wheat mills, oil extraction plants and a few other indus- tries such as milk, vegetable and fruit processing plants. Considerable additional investment is required to expand and modernize existing agro- industries and to establish new facilities in areas in which production is expected to increase.  -4- Government Policy 2.09 The Government's principal objectives in the agricultural sector are (i) to increase agricultural production as rapidly as possible; (ii) to raise nutritional standards; and (iii) to improve income distribution. The main strategies for achieving these objectives are contained in the National Food and Nutrition Plan prepared by the Colombian administration, which assumed office in August 1974. This Plan identifies the following five main components for the stimulation of food production and for raising the income of the rural poor; (a) investments in research and the adaptation of new varieties for production on small farms; (b) an integrated rural development program; (c) a national agricultural credit program in which high priority is to be given to the production of cereals, legumes, starch crops, and animal products; (d) investment in agro-industries; and (e) investment in the development and marketing of fishery products. The investments envisaged under the proposed Project form part of items (c) and (d) of this Plan, and, consequently, would help the Government to achieve its objectives. The proposed Integrated Rural Development Project would include parts of items (a) and (b) of the Plan. 2.10 The modern agricultural sector receives Government attention in two important respects--as the main source of foreign exchange earnings and as a source of foodstuffs not produced by the traditional sector but essential to the implementation of the National Food and Nutrition Plan. Additional credit resources and export incentives will be directed at products in which Colombia is believed to have a comparative advantage (particularly livestock products, cotton, rice, sugar, bananas, tobacco and flowers) on international markets. Institutions and Technical Assistance 2.11 The Institute of Colombian Agriculture (ICA) and the Institute for Renewable Natural Resources and the Environment (INDERENA) are responsible for research, quality control and technological development in the sector. In addition they train extension agents and check the quality of advice provided by private consultants. ICA also has a special responsibility for advisory services for farmers with less than 10 ha. The Institute for Agricultural Marketing (IDEMA) is charged with stabilizing prices and ensuring adequate supplies of agricultural products by storage and importation. Each of the institutions has experienced serious financial and managerial problems,  but the difficulties have been recognized by the Government, which is com- mitted to strengthening these key entities in the agricultural sector. The financial condition of ICA has been improved by instituting charges for many of its services while the activities of IDEMA have been brought more closely into line with its financial capacity. 2.12 Associations of producers have formed important institutions in Colombia and have assumed many of the functions undertaken by public agencies elsewhere. In addition, banks also have technical staff for credit evaluation and supervision and the provision of technical assistance. The private sector has about 1,000 professionals and 700 assistants engaged in advisory work, while the public sector has about 900 professionals and 1,500 assistants con- cerned exclusively with technical assistance. B. Banking and Credit 2.13 Monetary and banking policy is determined by the Monetary Board (MB), chaired by the Minister of Finance and Public Credit, which regulates loans and deposits, compulsory investment, and rediscounting., The Minister of Agriculture and the General Mlanager of BOR are members of MB (Annex 2). 2.14 The policies of MB are implemented by BOR, which, in addition to performing the functions of a Central Bank, administers the special funds which have been established by the Government, with both internal and external resources, to channel credit to specific sectors according to Government prior- ities. Of particular importance to the agricultural and agro-industry sectors are Fondo Financiero Agropecuario (FFAP), Fondo para Inversiones Privadas (FIP), and Fondo Financiero Industrial (FFI). The FFAP is managed by BOR's Agricul- tural Credit Department, while FIP and FFI are managed by the Development Credit Department. 2.15 The major financial intermediaries in the private sector are 21 commercial banks and 15 development finance companies, the latter specializing in medium- and long-term loans and equity financing. In the public sector, Banco Popular (BP) and its subsidiary, the Corporacion Financiera Popular (CFP), specialize in financing for small- and medium-scale industry; and the Banco Central Hipotecario (BCH) is engaged in housing finance. There are also institutions of mixed ownership: the Caja de Credito Agrario, Industrial y Minero (CAJA AGRARIA) which provides the largest share of the country's total credit for crop and livestock production; the Corporacion Financiera de Fomento Agropecuario y Exportaciones (COFIAGRO), which finances agricultural development, processing and exports; Banco Ganadero (BG), which is engaged principally in livestock finance, and the Banco Cafetero (BC). Although not a bank, INCORA has in recent years been a significant agent in channeling credit to agriculture, particularly to small farmers.  -6- 2.16 Institutional credit (including INCORA's) to the agricultural sector in 1974 totalled US$400 million and the credit outstanding to the sector at the end of 1974 was about US$500 million. This agricultural credit portfolio was shared by CAJA AGRARIA, 39%; commercial banks, 37%; BG, 5%; INCORA, 9%; and others, 10%. Total loan commitments to the agricultural sector from various sources rose to US$491 million in 1975. 2.17 With the object of directing substantially larger credit resources to the agricultural sector, the Colombian Congress, in 1973, enacted Ley Quinta (Law 5) under which banks (except CAJA AGRARIA, BG and BC) are required to invest an amount equivalent to a variable percentage of their portfolios (regulated by MB and currently 17%) in agricultural bonds issued by BOR which carry 8% per annum interest. Funds raised through this compulsory system are used to finance the FFAP from which banks, including those exempted from com- pulsory bond purchase, are permitted to rediscount loans made to the agricul- tural sector. In 1974, FFAP approved 23,000 rediscounts, amounting to US$213 of which US$80 million was for medium- and long-term credit. In 1975 the total credit financed by FFAP dropped slightly to US$202 million, while during the first nine months of 1976 FFAP provided about US$169 million. Some two- thirds of the resources are used for short-term credit and one-third for refinancing medium- and long-term loans in the sector. 2.18 Interest rates for agriculture range from 14% to 30% per annum al- though there are only limited funds available at lower rates and only to small- scale subsistence farmers; the latter funds are provided by CAJA AGRARIA and INCORA. During 1974, MB issued regulations which simplified rates payable for rediscounts from FFAP and the rates chargeable to sub-borrowers for most loans. Currently, the basic FFAP interest rate through official and commercial banks is 15% per annum payable quarterly. Interest is collected at the beginning of each quarter, unless the term of the loan includes a grace period, in which case it is collected at the end of each quarter throughout the term of the loan. Development finance companies are permitted to charge up to 20% interest, including all commissions and charges for studies. On all agricultural loans, individual borrowers are required to pay an annual amount equivalent to 1% of their outstanding loan balance for life insurance while large agricultural borrowers (assets, including land, in excess of Col$ 500,000) have to pay a levy of 1% per annum on their outstanding loan balance towards a national small farmer technical assistance fund. The current FFAP rates and rediscount margins are as follows:  -7- Nominal Nominal Interest Rate % of Sub-loan Rediscount Rate Payable by Rediscounted Type of Credit Charged by FFAP Sub-borrower by BOR