Liberia - Third Development Finance Company Project

Report No. 1155a-LBR FIL COPY Appraisal of the Liberian Bank for FILE COPY Development and Investment Liberia August 20, 1976 Development Finance Companies 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: US Dollar Acronyms ABEDIA Arab Bank for Economic Davelopment in Africa ADB African Development Bank DER Deutsche Entwicklungsgesellschaft KfW Kreditanstalt fur Wiederaufbau LAMCO Liberian American Swedish Minerals Comparn LBDI Liberian Bank for Development and Investment LDC Liberian Development Corporation NBL National Bank of Liberia NSXB National Savings and Housing Bank IBDI's Fiscal Year: January 1 - December 31  FOR OFFICIAL USE ONLY APPRAISAL OF THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT TABLE OF CONTENTS Page No. BASIC DATA ........................ i SUMMARY... . ................ iv I. INTRODUCTION .......................... 1 II. ENVIRONMENT ............. . ... * 1 The Economy ....................................... 1 The Industrial Sector ..... ........................ . 3 The Agricultural Sector ..... ....................... 6 Investment Prospects ............................... 7 The Financial System ... ................ ..... .... ........ 7 III. THE INSTITUTION ............................................... 0........ 9 LBDI's Role ........................................ 9 Ownership . .. ........ .... 0* 9 Operating and Financial Policies ................... 10 Board, Executive Committee and Management ........ .. 11 Organization and Staff .............. .. ............. 12 Procedures ....... .................................. 13 IV. RESOURCES, OPERATIONS AND FINANCIAL CONDITION .... ....... 14 Resources ............ .......... 14 Operations ....... .............. ................... 14 Focus of Lending ................ .. ................. 14 Portfolio .................................................. ..O.. 15 Financial Condition and Results .................... 16 V. PROSPECTS ............................................... 17 LBDI's Strategy . . . ................................... 17 Forecast Operations ................. .... . ....... 18 Resource Requirements . ............... ... ... . ...... 19 Projected Financial Results ..... ................... 19 VI. CONCLUSIONS AND RECOMMENDATIONS .20 This report was prepared by Mr. Pieter J.M. Bulters and Ms. Myrna Alexander on the basis of their mission to Liberia in February 1976. This document has restrictod distribution and may be usd by recipients only in the performanc of their offcil dutie. Its contents may not otherwise be discld without Wodd Sank authoriation.  FOR OFFICIAL USE ONLY TABLE OF CONTENTS (Continued) ANNEXES 1. LBDI: Proposed Capital Structure 2. LBDI: Policy Statement 3. LBDI: Board of Directors 4. LBDI: Organization Chart 5. LBDI: Summary of Borrowings 6. LBDI: Summary of Operations 7. LBDI: Analysis of Loan Approvals 8. LBDI: List of Equity Investments 9. LBDI: Income Statements for Years 1972 to 1975 10. LBDI: Past and Projected Financial Ratios 11. LBDI: Balance Sheets for Years 1972 to 1975 12. LBDI: Pipeline of Projects 13. LBDI: Assumptions of Projected Operations and Financial Statements 14. LBDI: Projected Operations 15. LBDI: Projected Resource Position 16. LBDI: Projected Income Statements 17. LBDI: Projected Balance Sheets 18. LBDI: Projected Cash Flows 19. Estimated Disbursement Schedule for Proposed Bank Loan 20. Liberian Laws Applicable to Proposed IFC Investment in LBDI This document has a ruttictd distribution and nay be used by recipients only in the performance of thirofficial duti. Its contents may not otherwise be disclosed without World Bank authorization.  - i - THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT BASIC DATA Year of' Establishment: 1965 Ownership (as of January 31, 1976) Local Investors and IFC (Class A) US$ Percent Government of Liberia 248,500 24.85% IFC 248,490 24.85% Private Liberian Investors 13,Q10 1.30% Sub-Total 510sO0O 51.00% Foreign Investors (Class B) International Trust Comqpany 125s000 12.5o% First National City Bank of New York 120,000 12.00% Instituto Mobiliare Italiano 120,000 12.00% Firestone Plantation Company 50,000 5.00% Liberia Mining Company 50,o00 5.00% LAMCO Joint Venture Operating Co. 25,000 2___0_ Sub-Total 490,000 49.00% Total 1,000,000 100.00% Resource Poaition (as of December 31.1975) Domestic Funds (US$ '000) Sources: Share Capital 1,000 Reserves, unappropriated profits and Dro-ision- 580 Borrowing (less cancellations and repayments). 1/2,10 Total domestic expenditure resources 3,730 Uses: Net Fixed Assets 95 Loans and Equity Investments 3,205 Undisbursed Commitments 269 Total domestic expenditure commitments 3,569 Available for new domestic expenditure commitments 161 1/ Excludes non-redeemed portion of GOL notes; $1,400,000 as of December 31, 1975.  Foreign Funds ii - (US$ ' 000) Sources: KfW (4.5%, amount at exchange rate prevaiLling at time of disbursement) 1,056 IBRD Line of Credit (7.25%) 944 ADB Line of Credit (7%) 552 IBRD 2nd Line of Credit (8%) 4,ooo ADB 2nd Line of Credit (7%) 2,413 Total foreign expenditure resources 8,965 Uses: Loans Outstanding 4,1432 Net Fixed Assets 324 Undisbursed Commitments 635 Total Commitments 5,391 Available for new foreign expenditure commitments 3,574 Commitments/Disbursements (US$ '000) 1970 1971 1972 973 174 1975 Loans Commitments 197 185 289 W5 3,120 3v698 Equity Commitments - 26 - 52 270 30 Loan and Equity Disbursements 368 214 141 476 2,744 3,959 Earnings Record (%) Net profit to average equity 2.7 (11.3) (1.0) 0.6 7.0 23.4 Net profit to year end share capital 3.4 (13.5) (1.1) 0.7 8.1 30.2 Financial Position (as of December 31, ]975) Real term debt equity ratio 2.8:1 6.3:1 Convt.ntianal debt to equity plus the subordinated Government loan 1.2:1 1.7:1 Provisions to loan and investment portfolio 2.4% 2.2% Interest Rates and Charge (as of March 31. 1975) Interest Rate 10.0% p.a. Service Charge (on amount outstanding) 1.5% p.a. Commitment Charge 1.0% (on undisbursed balance) Commission Fee 1.0% (one-time charge) Brokerage Commission on new issues 3.0% (one-time charge) Giuarantee fee 2.0-3.0% p.a. Penalty fee (on loans in arrears of over 3 months) 5.0% p.a. 1/ Debt includes subordinated loans but excludes unredeemed and undiscounted portion of Government loans.  THE LIBERIAN BANK FOR DEVFLO1MENT AND INVESTMENT BASIC DATA ON BANK GROUP LOANS AND INVESTMENTS I. Bank Loan A. Status of Loans In US $'000 Status as of February 29, 1976 Date of Rate of Effectiveness Interest Amortization Amount of Loan Authorized Disbursed Outstanding No. 839-LBR 11/10/72 7.25% Std. 1,000 1000 994 943 No. 1055-LBR 1/3/75 8 % Std. 4,000 2, V8 1,215 1,215 B. Summary of Special Features of Loan (No. 839-LBR) (No. 1055-LBR) 1. Foreign exchange risk: Borne by sub-borrowers Borne by sub-borrowers 2. Terminal date for project submission: December 31, 1974 June 30, 1977 3. Closing date for disbursement: December 31, 1976 June 30, 1979 4. Free limit: $ 50X000 $ 1001000 5. Aggregate free limit: $200,000 $1,000,000 6. Commitment charge: 0.75% from date of authorization 0.75% per annum from 60 days i for withdrawal of each project. after date of signing on the P principal amount of loan v- not withdrawn from time to time. 7. Retroactive financing Up to $750s000 8. Local currency financing 95% of local expenditure up to $500,000 II. IFC Investment SummarY Eguity (US$) No. of Shares No. 96 - LB Approved 8/10/65 A o cfn 2.95 Disbursed 11/24/65 24p895 Less: Sales 460 6 Held by IFC 246s490 24,K9 Average Cost per Share 10.00 Market Price per share not quoted Par Value per share 10.00 Book Value per share at 12/31/75 14.08 Latest Dividend Return on IFC Investment as of 12/31'75 6i  - iv - APPRAISAL OF THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT SUMMARY i. The Liberian Bank for Development and Investment (LBDI) was estab- lished in 1965 with the assistance of the International Finance Corporation. LBDI has received two Bank loans totalling $5 million and two lines of credit from the African Development Bank for $3 million. The first Bank loan and ADB line of credit have been fully committed and it is expected that the second loan and line of credit will be fully committed by the second half of 1976. ii. Liberia's economy has performed well over the past decade. This performance, however, has been led by the predominantly foreign-owned enclave sectors of iron ore mining, rubber and timber. These sectors have little link- ages with the rest of the economy. The Government hopes to focus future devel- opment along more diverse lines. iii. The outlook for investment remains favorable. The Government con- tinues to support private investment as the prime vehicle for industrial development through its open door policy and liberal incentives scheme. The most promising areas for future industrial investment are wood and rubber pro- cessing, agro-based industries and other export oriented industries. While opportunities for import substitution continue to exist, they can be more efficiently exploited by small scale entrepreneurs. iv. Small scale industries in Liberia have not received much encourage- ment. Government policies have tended to favor large projects and, further- more, security requirements imposed by local financial institutions prevent small scale entrepreneurs, who lack collateral, from gaining access to credit. To remedy this the government and the Bank plan early discussions on a study of guarantee and technical assistance schemes for small scale enterprises. v. LBDI has emerged as the prime source of development financing in Liberia especially for Liberian entrepreneurs. Its level of operations was slow to build up but a tremendous upturn was experienced in 1974 when approvals rose to nearly $5 million. Approvals; including guarantees in 1975 reached just over $5 million. A growing share of LBDI's financing has been for wood and rubber production as well as small agricultural projects. Other major areas of financing include manufacturing, hotels and services. The majority of LBDI's loans, in terms of numbers, has been for small, Liberian sponsored projects.  - v - vi. The President of LBDI, a Liberian national, has been with LBDI since 1973 and has been instrumental in expanding the scope of LBDI's operations. He is assisted by a well qualified expatriate General Manager who will remain with LBDI until a suitable Liberian replacement has been found. vii. LBDI has intensified its efforts to strengthen its Liberian staff. Three recruits are expected in 1976 which will allow LBDI to undertake a program of training and development for some of its existing staff. It is recommended that the foreign cost of this program be financed with a tech- nical assistance component of $150,000 out of the proposed Bank loan. viii. LBDI's policies are generally satisfactory and recent changes have been made to strengthen its organization. The Follow-Up and Client Assistance Unit has been created within the Projects Department to provide assistance to clients, particularly small-scale entrepreneurs. ix. The interest rate plus service charge levied by LBDI stands at 11-1/2% and has not been reviewed in eighteen months. Inflation, the higher cost of funds and the prevailing interest rates in Liberia indicate the need to keep LBDI's lending rate under review. LBDI will begin to review annually its lending rate on the basis of criteria to be discussed with the Bank. x. LBDI's net profits, which reached $302,000 or 23% of average net worth in 1975, have shown an increase commensurate with its expanded level of operations. A dividend of 6-1/2% has been declared for 1975. Projections of LBDI's future profitability point to continued strong performance. xi. The company's financial position is sound. Provisions were increased in 1975 to $172,000 or just over 2% of the outstanding portfolio. Only 5.5% of the loan portfolio was affected by arrears of more than three months. LBDI's debt/equity ratio (which is limited to 7:1) stood at 6.3:1 at the end of 1975 and LBDI has taken appropriate steps to increase its paid-in capital by $2 million. xii. With a favorable investment climate and LBDI's growing stature as a source of long-term financing, lending operations are conservatively projected to reach $4 million in 1976 and to increase by $1 million each year thereafter. The planned increase in paid-in capital plus other local sources will adequately meet LBDI's projected local resource needs. A foreign resource gap of $8 million is anticipated over the period 1977 to mid-1979. A Bank loan of $7 million is recommended to cover part of the requirements while LBDI should pursue other sources to meet its remaining needs. An IFC investment of up to $306,300 is also recommended as part of the anticipated increase in paid- in capital. xiii. The free limit on individual sub-projects should be raised to $150,000 from $100,000 and the aggregate free limit raised to $2 million. These limits would permit the Bank to review a substantial portion of the projects expected to be financed under the loan. Other terms and condi- tions of the proposed loan should be those normally applied to Bank loans to development finance companies.   APPRAISAL OF THE LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT I. INTRODUCTION 1.01 The Liberian Bank for Development and Investment (LBDI) was estab- lished in 1965 with the assistance of the International Finance Corporation, which subscribed to 25% of LBDI's $1 million share capital. A representative of IFC has been a member of LBDI's Board of Directors since inception. LBDI has been the recipient of two World Bank loans. The first loan of $1 million was extended in 1972 and the second loan of $4 million in 1974. This report appraises LBDI for further Bank Group assistance and recommends a Bank loan of $7 million and exercise of subscription rights by IFC to a number of shares of $10 par value each up to a total cost of $306,300. 1.02 Objectives. The major objectives of the proposed loan and investment are the following: (1) To supply LBDI with foreign resources so that it may continue to provide medium and long term financing to productive enter- prises in Liberia. This is particularly important since LBDI remains the primary source of development financing in Liberia especially for Liberian entrepreneurs; (2) To encourage, through dialogue with the Government and LBDI, improvements in credit and technical assistance facilities for small Liberian enterprises; and (3) To provide assistance for the training and development of LBDI's Liberian staff and for further strengthening of LBDI's project appraisal and supervision capacity. II. ENVIRONMENT The Economy 2.01 An in-depth analysis of Liberia's economy appears in the basic economic report entitled "Growth with Development" (Report No. 4260-LBR, dated March 1, 1975). The Economic Memorandum (Report No. 873-LBR, dated September 15, 1975) describes subsequent developments. 2.02 With a population of roughly 1.5 million, Liberia has an annual per capita income of about $410. Income distribution is highly skewed, however, with 5% of the population accounting for 60% of income. Three- quarters of the total population is engaged in subsistence farming and has per capita incomes below $70 per annum. 2.03 Economic Performance. The Liberian economy has performed well over the past decade. Increases in GDP averaged about 6% p.a. in real terms from 1964 to 1972 with GDP at factor cost reaching $517 million in  - 2 - 1974. Although recent growth of GDP in real terms has been somewhat slower (4.3% in 1973 and about 2% in 1974), Liberia has been able to weather the im- pact of the energy crisis as a result of its substantial iron ore exports. Since Liberia uses the US dollar as its currency, balance of payments analysis is tenuous; however, indications are that recent trade surpluses have been sufficient to offset capital deficits. The Government has been able to generate overall budgetary surpluses despite rapid increases in recurrent expenditures. 2.04 Indications are that the rate of price inflation, which is esti- mated to have been from 15% to 20% in 1974, did not subside substantially in 1975. The Consumer Price Index for Monrovia, which presents only a limited account of price changes in Liberia, increased on average by about 4% per annum until 1974 when prices jumped by 20%. The products hardest hit by price increases were in food, clothing, fuel and transportation, reflecting the rising cost of imported goods and commodities. Liberia's inflation has largely been the result of international factors. It is expected that the rate of inflation will decline gradually over the next few years to 8% following the pattern in international markets. 2.05 Economic Structure. The breakdown of GDP by major sector is as follows: % of 1974 GDP Agriculture 16 of which Rubber (10) Mining 37 of which Iron Ore (34) Manufacturing 5 Construction 3 Transportation and Communications 8 Wholesale and Retail Trade 13 Government Services 8 Other Services 10 All Sectors 100 2.06 As can be seen from the above data, the economy is dominated by foreign owned enclave sectors of iron ore mining and rubber production. In 1974, iron ore contributed 66% of the value of exports while rubber contri- buted 16%. Timber concessions have been growing in importance in recent years and now account for 4% of exports. These enclave sectors have long been the major sources of growth in the Liberian economy with little linkages with the rest of the economy. 2.07 Gross domestic investment in Liberia totalled $76 million in 1972, having grown at an average annual rate of 7% since 1967. In general, the period since the mid-1960's has been one of low investment. Investment in the mining sector has declined from 45% of total investment in 1967 to 25%  - 3 - in 1972. The share of public sector investment has decreased from 36% of total investment in 1967 to 22% in 1972. No further breakdown of invest- ment by sector or by source is available. The Industrial Sector 2.08 Manufacturing is a small part of the Liberian economy accounting for 5% of GDP. The domestic market is small and industries so far have been limited largely to typical import substitution such as petroleum refining, cement, food and beverages, construction materials, clothing and furniture. Real growth in the sector has averaged 10% per annum from 1964 to 1972; however, given the small size of the base, this rate disproportionately reflects the establishment of the petroleum refinery in 1969. The bulk of the output of the sector is sold domestically; exports of manufactured goods account for a small proportion of output although processed fish and wood products are increasingly important exports. 2.09 Only a few of the major manufacturing establishments are owned by Liberians although the number of Liberian entrepreneurs is growing. Most industries are concentrated in and around Monrovia reflecting the country's infrastructure. Recorded manufacturing employment is low (only 1,700 in 1973) and has been declining. Most industries are privately owned. 2.10 Government Industrial Policies. The Government has recently ap- proved the first National Development Plan covering the period 1976 to 1980. In the industrial sector, priority will be given to increased processing of local raw materials such as timber, rubber and agricultural products. Aware that the scope for further import substitution is limited, the Government plans to encourage production and assembly industries especially for export. Import substitution industries, such as clothing, furniture, utensils and building materials, should best be left to small scale enterprises. Planned public investment in the sector amounts to only $17 million largely for infrastructure projects such as the Industrial Free Zone, further development of the Monrovia Industrial Park and industrial estates in rural areas. The government will continue to rely heavily on private investment in the indus- trial sector. 2.11 Incentives. The Government encourages private investment by a liberal incentives policy and its traditional "open door policy" which allows unrestricted capital flows. Incentives are granted either under the Incentive Code or -- in the case of iron ore, rubber and forestry concessions -- in concession agreements. An earlier Bank review of the code pointed out that overly generous incentives led to high cost import replacement with no special incentives for exporters. The code was subsequently revised in 1973 and now contains the following features: (1) up to 90% exemption from import duty on equipment and inputs; (2) full income tax exemption on re- invested profits and 50% exemption on other income taxes; and (3) other benefits such as tariff protection, loss carry forward and accelerated depreciation. As a special incentive for exporters, the code entitles investors to a full rebate of import duties and full refund of income and excise taxes paid in respect of exported goods. Incentives are granted for a period of up to five years but may be extended for another two years.  - 4 - I.L2 The Code Ls administered by the Concessions and Incentives 'mmission, which consists of various Ministers and is chaired by the 'linister of Finance. The Concession Secretariat forms a semi-autonomous agency attached to the Finance Ministry. The Secretariat evaluates invest- ment projects following a review by the relevant Ministries. Priority is given to employment creation and use of local raw materials. There must be a minimum of 25% local ownership and at least 25% local value-added. iBDI is not presently represented on the Committee and it may be worth- while for LBDI to become a member to see that its views are known when incentives are granted. In 1975, thirteen applications were reviewed by the Secretariat and four approved involving investments of $3 million. 2.13 Tariff Protection. A 1973 Bank study concluded that the effec- tive tariff protection of industries in Liberia was high with large vari- ations among individual industries. Tariffs have since been revised and fall into these categories: 75% on luxury goods, 40% on other consumer goods, 11% on raw materials and 5% ott capital goods. Under the Incentive Code, additional tariff protection maey be granted to approved projects. The additional tariff is at least 5% and may be as high as 25%. In some cases quantitative restrictions have also been imposed. 2.14 The Secretariat lacks objec(tive criteria on which to base its recommendations for additional tariff' protection. In theory, the ex-factory price for goods produced by projects must be lower than the international price of comparable goods to qualify for incentives. Tariff protection is supposed to be granted only to dissuade consumers from exercising their preference for imported goods. In practice, however, the decision to grant tariff protection and other incentives has often been made before the project is in operation, based on data provided by the applying firm. With this limited data, the Secretariat is unable to determine a realistic cost struc- ture for the goods produced. Recent procedural changes have been made so that the level of tariff protection is usually not determined until the enterprise is in operation. In this way, the quality of the goods can be taken into account. 2.15 Licensing and Price Controls. All new industries must obtain a license from the Ministry of Commerce, Industry and Transportation. The licensing decision takes into account existing capacity in the particular industry. To avoid inefficient and high cost production as a result of the combination of licensing and tariff protection, the Government controls prices of products that have obtained incentives. Price controls are loosely administered, however, and rather ineffective as the prices are normally determined on the basis of cost of production immediately after start-up. 2.16 Industrial Free Zone. As part of the Government's strategy to promote export oriented processing and assembly in Liberia, it plans to establish an industrial free zone which would offer exporters exemption on import duties and taxes. Public investment of $6 million in land develop- ment and infrastructure is planned with anticipated opening of the site in  -5- 1978. Industries that the Government hopes to attract include electronics, textiles, and vehicle assembly. An extensive promotion campaign aimed at foreign investors is being planned. The advantages that Liberia would offer potential investors include associate membership in the European Common Market, a favorable location, unrestricted capital flows, and a plentiful supply of cheap, albeit unskilled, labor. 2.17 Liberian Development Corporation. The Government's primary instru- ment for promoting industrial projects is the Liberian Development Corpora- tion (LDC). Set up in 1961 as an autonomous public corporation, LDC has responsibility for identifying, promoting and establishing viable business enterprises in Liberia. It can guarantee loans to Liberian enterprises which would otherwise be unable to borrow. Staff and budgetary constraints have limited LDC's effectiveness in issuing guarantees to small scale entre- preneurs. Outstanding guarantees amount to only $200,000 and all but $20,000 is to one firm. LDC was also conceived as the channel for Govern- ment investment in the industrial sector but so far its impact has been minimal. LDC's total assets of $1.5 million consists largely of three equity investments and two loans. New management, installed in late 1975, is attempting to overcome LDC's staff constraints with UNDP assistance and is presently promoting a shoe factory, citrus canning factory and cassava dehydration plant. Further improvements could be made by granting LDC greater f;sal autonomy and by concentrating its efforts on priority areas. The President of LBDI is a member of LDC's Board of Directors which promotes coordination between LDC's promotional work and LBDI's financing activities. 2.18 Small-Scale Industries. Little information is available on small- scale industry in Liberia. The general impression is that small indigenous enterprises are not as common as in other West African countries. Predominant activities are carpentry, jewelry, tailoring and cement block making. Small- scale entrepreneurs have received little Government support. In fact, busi- ness registration fees discriminate against small businesses by charging a flat fee of $100 per annum for sole proprietorships. Only those with assets of less than $500 are exempt from the fees. Corporations, no matter how large, pay annual fees of $200. There is a lack of Government sponsored programs offering managerial and technical assistance and, furthermore, indigenous entrepreneurs often have difficulties in obtaining credit since most cannot meet the security requirements of financial institutions. 2.19 Appropriate technical assistance is required for the development of small-scale industries in Liberia. LBDI has recently created a special unit to provide assistance in accounting and business management to its small borrowers but more general programs are also needed. In addition, small scale entrepreneurs require greater access to credit facilities. Since the finan- cial institutions are unwilling to rei:., their security requirements due to the higher risks involved, a credit guarantee scheme is needed. LDC is empowered to issue guarantees but due to its staff and financial constraints  -6- so far has been unable to reach many entrepreneurs. Similarly, the National Bank of Liberia is a young institution and lacks the experience and the admin- istrative ability to do so. During negotiations, the Government expressed general agreement with the above concerns and indicated it would welcome early discussions with the Bank concerning the initiation of a study of credit guarantee and technical assistance schemes for small scale enterprises. The Agricultural Sector 2.20 Agriculture, including rubber, forestry and fishing, contributed 16% of GDP and about 23% of exports in 1974; it sustains the livelihood of about three-quarters of the population. Liberia's main agricultural products are rubber, oil palm, timber, coffee, cocoa and rice. The sector consists of: (1) foreign owned concessions which are highly productive; (2) Liberian owned commercial farms which have entered into rubber and oil palm production as a result of the demonstration effect; and (3) traditional farmers who account for 90% of agricultural holdings in Liberia. The tra- ditional sector is largely outside the monetized economy and produces mostly subsistence crops such as rice and cassava and some cash crops such as coffee, cocoa and sugar cane. The Government has recently initiated programs to improve the productivity of the sector as well as to increase incomes in the rural areas. The Upper Lofa County Agricultural Development Project, cosponsored by IDA and USAID, is the first of such projects planned for Liberia. 2.21 Forestry. The exploitation of Liberia's timber reserves has pro- gressed at a fast pace from less than $1 million in value added in the mid- 1960's to almost $10 million in 1973. There are 45 forestry concessions covering nine million acres of land. Only half of the concessions are active. Most timber output, particularly primary species, is exported to Europe as round logs. The Government, in a move to increase the value-added in timber exports, has set minimum local processing requirements. Although the con- cessions have not been able to meet the levels set by the Government, the move has promoted several new investments in sawmill facilities for process- ing secondary species. A plywood plant has recently been established and some concessions have plans to expand into veneer, wood panelling, and pre- fabricated housing. Other possibilities include pulp and paper. In an effort to stimulate competition and to have better control over transfer pricing, the Government intends to set up a forestry authority to handle marketing operations. 2.22 Agricultural Credit. Liberia has not been successful in creating an institutional source of credit particularly for traditional farmers. The Government owned Agricultural Credit Corporation, established in 1957, ceased operations in 1963 due to heavy financial losses. Since then, limited credit facilities have been offered through the Credit Division in the Agricultural Ministry, the cooperatives and credit unions. LBDI's financial support has largely been directed towards commercial farmers although small farmers have received financing provided they were able to meet LBDI's security requirements. The Lofa County project includes a revolving credit fund to be administered by LBDI in conjunction with local cooperatives. LBDI will also offer general banking services in  -7- the area. Recognizing the need for continued agricultural credit facilities, the Government is considering establishing an agricultural credit institution which will primarily lend through cooperatives. The new institution would lend to small farmers who lack adequate security and need supervised credit while LBDI will continue to finance commercial farms and forestry projects. Investment Prospects 2.23 The general outlook for investment in Liberia points to more rapid expansion than was experienced in the late 1960's and the early 1970's. Three major developments in the iron ore sector, involving investments of over $1 billion, may be realized within the next few years. The investment would double Liberia's production of iron ore by mid-1980. These investments will have spill-over effects into other areas of the economy, especially the con- struction industry. The mining sector has few long-term growth prospects and, as a result, Liberia must look to future development along broadly based sectoral lines and in areas that offer greater opportunity for Liberian participation. 2.24 The best opportunities for such development are in rubber and wood processing, ar' agro-based and other export oriented industries. Liberia has great potential for wood product industries including veneer, plywood, furniture, flooring, panels, and prefabricated housing. Potential industries based on rubber production include the manufacture of rubber shoes, industrial components and latex products such as gloves and bottles. Manufacturing industries have suffered due to the small size of the domestic market and low per capita incomes but the market will increase as a result of the recently created customs union with neighboring Sierra Leone. Small-scale entrepreneurs can develop import substitution industries on an efficient scale with the addi- tional benefit of promoting Liberian management and technical skills. The Government is keen to attract export oriented industries to the industrial free zone although this may be a slow process. The Financial System 2.25 Given Liberia's use of the US dollar as currency and its relatively open economy, many financial transactions fall outside the domestic financial system. The major rubber, mining and timber concessions as well as the large domestic enterprises can deal directly with banking institutions in Europe and the United States. As a result, the development of a domestic financial system has been limited to essentially LBDI and the commercial banks, which are often subsidiaries of major American banks. Liberia has no post office saving bank and no pension fund for civil servants; the use of life insurance is minimal. Past investment needs have been largely met from foreign sources, resulting in little incentive to create the institutional framework needed to mobilize domestic savings and to channel those savings into productive investments. As Liberia attempts to reduce its dependency on the enclave sectors, domestic resource mobilization will have increased importance. In 1972 a Banking Commission, with IMF assistance, studied the financial system and the Government has begun to take action on its recommendations.  -8- 2.26 National Bank of Liberia. Prior to the establishment of the National Bank of Liberia (NBL) in 1973, Liberia was without a central monetary authority. Based on theb recommendations of the Banking Commission, the central bank was formed with responsibility for overall banking super- vision, clearing house operations, credit to the Government and banks, and the supply of currency. Since it began operations in mid-1974, NBL has set legal reserve requirements of 5% of deposits for the commercial banks, a move which was intended primarily to generate resources for NBL; it has undertaken a study of the cost of rural banking; and it routinely collects statistics from the commercial banks. A review of the interest rate struc- ture in Liberia is also underway.. At present, minimum interest rates have been fixed at 5% on savings deposits and 6-1/2% on time deposits. The ceil- ing on lending rates is set at 25% by the Usury Law. 2.27 Commercial Banks. There are five active commercial banks in Liberia, of which only the Bank cf Liberia is predominantly owned by Liberians. Two banks, the Bank cf Liberia and Chase Manhattan, dominate the system with over 70% of the total bank assets. As of November 1975, total assets stood at $139 million including $79 million in outstanding bank credit. Of this amount, 592 went to the trade and retail sector. Agriculture, mainly the rubber concessions, received the next largest share of bank lending with 19%. Manufacturing received only 1.2% while personal loans accounted for 10%. It is estimated that as much as 60% of corporate loans goes to foreign owned enterprises while most of personal lending is for Liberians. Lending rates depend largely on the perceived risk and range from 12% to 16% for corporate clients and up to 24% on per- sonal loans. Commercial bank lending rarely goes beyond two or three years although the maturity is not legally restricted. Some longer term lending does take place for prime. customers. 2.28 The commercial banks have done little to mobilize domestic savings. They have access to the international markets to supplement their resources or to reinvest their surpluses. Bank facilities in the rural areas are non-existent with the exception of the major concessions. Com- mercial banks are extremely reluctant to incur the high cost of establishing rural branches and have failed in their attempts to do so. Even within the urban center of Monrovia, the tendency is to limit operations to corporate clients or wealthy individuals by setting minimum deposit requirements. Only one commercial bank concentrates on attracting savings deposits and making personal loans. 2.29 National Savings and Housing Bank. This bank (NSHB) is the first financial institution, other than the National Bank of Liberia, which is owned and controlled by the Government. Since it became operational in December 1975, it has been able to attract over $100,000 in savings deposits from small customers and hopes to have deposits of over $1 million by the end of 1976. The primary purpose of NSHB is to mobilize the savings of the large number of Liberians who are neglected by the commercial banks and to channel those savings into residential mortgages. The commercial  - 9 - banks have financed housing on a limited basis with maturities of not more than five years. NSHB plans to provide mortgages up to 20 years for amounts up to 60% of value or $30,000. The interest rate charged will be about 14-15%. 2.30 As part of its campaign to mobilize savings, NSHB will offer 6% on its savings deposits and require minimum deposits of only $25. It is attempting to promote contractual savings plans for large groups of em- ployees. The Government has extended its support to the new bank by granting income tax exemption on interest from its investment certificates and by authorizing NSHB to handle all public corporation accounts. NSHB plans to open two branches outside of Monrovia within the next year and to expand further into rural areas later. III. THE INSTITUTION LBDI's Role 3.01 LBDI has emerged as the primary source of medium- and long-term financing in Liberia especially for Liberian entrepreneurs. Under its charter, LBDI's broad objectives are to finance productive enterprises in manufacturing, agriculture, transportation, tourism and services. It is empowered to make loans, invest in equity capital, issue guarantees and underwrite stock issues. LBDI's loan and equity portfolio of $7.6 million is equivalent to about 35% of outstanding commercial bank credit other than personal loans and loans to the mining and retail sectors. Ownership 3.02 LBDI presently has an authorized share capital of $1 million divided into Class 'A' shares (51%) and Class 'B' shares (49%). Class 'A' shares are restricted to the Government, Liberian citizens and corporations, and international institutions. There has been no substantive change in LBDI's capital structure since its formation (see Basic Data): the Govern- ment and IFC each hold about 25% of LBDI's share capital; local investors hold 1%; and various foreign investors hold the balance. 3.03 An increase to $5 million in authorized share capital has been approved and it is anticipated that paid-in share capital will increase from $1 million to $3 million by mid-1977. A stock dividend of $250,000 out of retained earnings has been proposed for all existing shareholders at the rate of one share for every existing four shares. Tentative sub- scriptions from new shareholders amount to $706,800 while existing share- holders have been asked to increase their holdings to meet the remaining balance of $1,043,200. LBDI's proposed capital structure is presented in Annex 1.  - 10 - 3.04 It is recommended that IFC participate in the increase in paid-in share capital through an investment of up to $306,300 in the share capital of LBDI. An investment of $306,300 would bring IFC's shareholding in LBDI, after the stock dividend to be issued in conjunction with the capital increase, up from $248,490 (representing 24.8% of existing share capital) to $616,910 (representing 20.6% of share capital after the capital increase). The Government and IFC would contintue to hold an equal number of shares and would remain the two largest shareholders. IFC was not only instrumental in the formation of LBDI, but has also invested considerable effort in recent years in assisting the Company through IFC's representative on LBDI's Board. IFC's representative has played an active role in providing tech- nical assistance and advising management in the development of LBDI's policies and operations. IFC's participation in the capital increase is considered necessary to complete the capital increase successfully. More- over, IFC's participation would pernit IFC to keep parity with the Government in the shareholdings of LBDI and thereby help to maintain LBDI's commercial character and IFC's role in assisting the company. Since LBDI has good prospects and an important role to play in financing Liberian development, continued active support by IFC is desirable. LBDI expects the whole share issue to be subscribed. IFC's subscription would be con- tingent on commitments for at least $1,300,000 of the proposed total of $1,750,000 for new subscriptions. Operating and Financial Policies 3.05 LBDI's Policy Statement presented in Annex 2 sets forth the general guidelines that govern LBDI's operations. Investment projects are to be selected on sound technical, financial and economic criteria. Financing limits have been set which normally restrict LBDI's exposure in any single enterprise to 30% of its net worth plus 5% of its subordinated debt. LBDI's total equity investments are limited to LBDI's net worth and individual equity investments will not exceed 10% of LBDI's net worth. Combined loan and equity investments in a single enterprise will not normally exceed 50% of the enterprise's total assets ancl LBDI's equity investment will normally not exceed 25% of the firm's paid-in capital. Public sector projects can be financed up to 30% of LBDI's total commitments at any point of time. LBDI may not assume the foreign exchange risk on its borrowings; it is passed on to the sub-borrowers. 3.06 LBDI's Board has recently approved two changes to its Policy Statement that would allow it as an experimental measure for one year to: (i) refinance existing assets and (iLi) finance permanent working capital independent of the financing of fixed assets. The rationale behind permit- ting the refinancing of existing assets is to enable LBDI to restructure a firm's liabilities in cases where firms are encountering liquidity prob- lems. At present, LBDI does finance permanent working capital in conjunction with the financing of fixed assets. The amendment would allow it to do so independently. The Board, in approving the changes, imposed strict conditions as to the circumstances when such fiLnancing would be permitted. Such finan- cing would undergo the same analysis as LBDI's routine financing with limits as to the individual and aggregate amounts involved.  - 11 - 3.07 Financial Charges. LBDI currently charges 11-1/2% on loans in- cluding 1-1/2% service charge. It also charges a commitment fee of 1% on the undrawn balance, a one-time commission fee of 1% of the approved amount and an additional penal charge of 5% on outstanding balances in arrears by more than three months. 3.08 LBDI's lending rate is 11-1/2%. Commercial banks charge prime borrowers 12-13% and other corporate clients up to 16% for maturities of two to three years. The return on six-month time deposits is recently as high as 11-1/2%. The rate of inflation in Liberia has been in the range of 15-20% and is expected to decline to about 8% in the foreseeable future. The cost of LBDI's resources has increased and will continue to increase as LBDI expects to obtain the bulk of its resources from the Bank and commer- cial sources over the next few years. In view of these conditions, LBDI indicated during negotiations that it would undertake annual studies of its lending rate and would consult the Bank on the criteria to be used in re- viewing the rate. LBDI further indicated that the present lending rate of 11-1/2% would not be reduced without the prior approval of the Bank. This restriction would not apply, however, to future concessionary loans which carried conditions for lower lending rates for projects financed from such loans. 3.09 Security Requirements. LBDI normally takes first mortgage on the enterprise's fixed assets and often requires collateral outside the projects. It insists on a collateral of at least 150% of the loan amount and in many cases has obtained collateral between 200% and 250%. LBDI requires this level of security to ensure the sponsor's commitment to the project. It is afraid that a relaxation of its security requirements would lead to ex- cessive pressure from unqualified borrowers and is therefore reluctant to do so. Greater flexibility in LBDI's security requirement, however, would in- crease its financing of small-scale enterprises. Since a system of varying collateral requirements especially for small-scale industry would be difficult to put into practice, a practical alternative would be for the Government to guarantee loans made by LBDI to viable small-scale enterprises. During negotiations the Government agreed with the concerns of the Bank and indicated it would welcome discussions with the Bank on a study of a credit guarantee scheme. Board, Executive Committee and Management 3.10 Board and Executive Committee. Annex 3 gives a list of LBDI's Board of Directors. The Board consists of eight members, three represent- ing Liberian interests, one representing IFC and four representing foreign shareholders. The Chairman of the Board is the Minister of Finance. The Board takes an active interest in LBDI's affairs. It met five times in 1975.  - 12 - 3.11 The Board of Directors has delegated the power to approve projects up to $150,000 to an Executive Committee. The Committee consists of five members, the Board Chairman as ex-officio member and two representing each class of shareholders. LBDI's President, who chairs the Committee, is a non-voting member. The Executive Committee meets more frequently than the full Board and discusses all matters prior to Board presentation. An affirm- ative investment decision by the Board or the Committee requires a majority vote. 3.12 Management. LBDI's senior management consists of the President and General Manager. The President, a Liberian national, has been with LBDI since 1973 and has been instrumental in expanding LBDI's operations. The position of General Manager is occupied by a well-qualified expatriate who has been with LBDI since 1970. His contract expires in May 1976. LBDI's former Projects Manager, who was expected to succeed the General Manager, recently resigned to take up an important government position. LBDI does not have another candidate for the position and the General Manager has consented to remain with LBDI until a suitable Liberian replacement has been found. The President has the power to approve investments up to $25,000 with a global limit of 10% of LBDI'Es aggregate approvals each year. Organization and Staff 3.13 LBDI's organization and staff allocation is presented in Annex 4. In addition to its senior management, LBDI's professional staff numbered 16 of whom 12 are Liberians. The remaining four are Peace Corps volunteers. The basic organization consists of two departments - Projects and Comptrollers. The Projects department has recently been divided into two units, one for project appraisal and the other for project supervision. LBDI plans to re- cruit a lawyer and an internal auditor. 3.14 Training and Development. LBDI has good middle management. Its staff has suitable backgrounds in economics or accounting but lacks depth of experience in project evaluation. The recruitment of three additional analysts--with graduate training in business administration and some prior experience with LBDI--will allow LBDI to upgrade the quality of its existing Liberian staff. A program of staff development and training for the next three to four year period has been proposed. It would entail the following: (1) the training of four analysts at a management consulting firm or similar institutions that offer courses in project appraisal techniques and analysis; (2) graduate programs in business ad[ministration for four at universities abroad; (3) appropriate courses and seminars and short term secondments to other dfc's; and (4) hiring of consultants on short term assignments to provide assistance in specialized technical areas. The latter would compen- sate for cancellation of previously approved UNDP assistance. It is recom- mended that a technical assistance component of $150,000 with the subcompon- ents described above be included in the proposed loan to finance the foreign cost of the program.  - 13 - Procedures 3.15 Appraisal. The general quality of LBDI's project appraisal has im- proved considerably in recent years. A check list has been devised which covers all important aspects of appraisal. To make the list more comprehen- sive, it could be expanded to include procurement, environmental impact and sensitivity analysis. Financial rate of return calculations are carried out for projects involving LBDI financing of more than $25,000 and economic rate of return for projects of more than $50,000. LBDI's processing time is quite rapid. Project appraisal is normally completed in two to three months and loans are usually committed shortly after approval. LBDI's appraisals, however, often lack justification of the critical project assumptions; some- times these assumptions appear not to have been given sufficient scrutiny. This may reflect the staff's general lack of experience or the fact that LBDI often becomes involved with projects late in the project cycle and has little opportunity to affect project design. LBDI is trying to get involved earlier in projects. This aspect of appraisal can be strengthened through relevant training and the Bank's review of subprojects. 3.16 Follow-up and Client Assistance. As the level of LBDI's opera- tions expanded, it became increasingly difficult for analysts to devote adequate attention to project supervision. At the same time, LBDI's growing portfolio called for increased follow-up. LBDI has now established a separate Follow-up and Client Assistance Unit in the Projects Department. The unit consists of three professionals with exclusive responsibility for project supervision. The title of the unit reflects LBDI's emphasis on assistance to clients, particularly small entrepreneurs who may need managerial assistance. Routine inspections are planned quarterly with specific attention paid to problem projects. LBDI has little expertise in follow-up and it is intended that part of the proposed training program will focus on project supervision, primarily through secondment to dfc's that have strong follow-up departments. 3.17 Other Procedures. Procurement and disbursement procedures are adequate. However, given LBDI's general lack of technical expertise, the choice of equipment and supplier often receives little attention in project appraisal. There is generally a good standard of accounting and internal control. Some difficulties were encountered with one of the legal firms retained by LBDI; a more satisfactory firm has since been retained and, moreover, LBDI plans to recruit a lawyer to handle routine legal work. 3.18 Auditors. LBDI retains the accounting firm Coopers and Lybrand for its audit. Their work has been satisfactory showing an in depth know- ledge of LBDI and many of its clients.  - 14 - IV. RESOURCES, OPERAI'IONS AND FINANCIAL CONDITION Resources 4.01 As of December 31, 1975, LBDI's long-term resources amounted to $14 million consisting of its paid-in share capital ($1 million), reserves and retained earnings ($408,000) and long-term loans from the Government, KfW, ADB and the World Bank ($12.5 million). The Government has provided LBDI with two subordinated loans totalling $3 million in the form of redeemable promissory notes. As of December 31, 1975, LBDI had redeemed or discounted $1.6 million of the notes. A further loan of $500,000 was extended by the Government to cover LBDI's commitment in a large Government sponsored hotel project. The outstanding amount of the KfW loan is about $1 million. The first line of credit from ADB for about $600,000 and the first Bank loan for $1 million have been fully committed and disbursed. The second Bank loan for $4 million and the second ADB line of credit for about $2.5 million are ex- pected to be fully committed before the end of 1976. A summary of LBDI's term borrowings appears in Annex 5. 4.02 LBDI has contracted short-term borrowings from the Government and the National Bank of Liberia amounting to $2.0 million. A Government deposit for $1 million at 7-i% is due in January 1978. The National Bank of Liberia has made a series of six-month deposits with LBDI (the latest maturing in December 1976 at 8-3/4%). In addition the Government has placed in non-interest bearing trust with LBDI $100,000 for Lofa County pro- jects. As of December 1975, these deposits were matched with LBDI's cash and short-term deposits of $2.4 million. LBDI has obtained positive spreads on its reinvestments. Operations 4.03 LBDI's operations have increased rapidly in recent years. It had been slow to build up its level of operations until 1973 when the present management was installed. In that year, LBDI finally surpassed its targeted goal of $1 million in annual approvals mainly due to the aggressive new management installed in 1973. LBDI achieved a record level of operations of $4.8 million in 1974 when approvals, commitments and disbursements were higher than for the six previous years taken together. Loan and equity ap- provals slowed somewhat in 1975 when 42 loans and two equity investments totalling just over $3 million were approved. Three guarantees for about $2 million were also approved in 1975. A summary of LBDI's past operations ap- pears in Annex 6. Focus of Lending 4.04 An analysis of loans approved by LBDI in 1974 and 1975 is presented in Annex 7. In general, LBDI's financing activities have been in support of relatively small Liberian sponsored enterprises. More than 50% of LBDI's approvals (by number) are for loans of less than $10,000; the median loan size is $10,000 while the average size is $79,000. Medium and large scale  - 15 - projects (involving loans of more than $100,000) account for the bulk of LBDI's lending (79%). The maturity distribution indicates that smaller loans are usually medium-term (less than five years) whereas larger loans generally have terms of five to ten years. The weighted average maturity is six years. Expansions of on-going enterprises accounted for 72% of the amount approved. About 80% of the projects are Liberian controlled. This is in sharp contrast to the general pattern of industrial ownership and the lending pattern of other financial institutions in Liberia. Over half of the projects and 42% of the amount involved rubber production, timber and wood processing and other agri-business (including poultry, cocoa, coffee, sugar cane and rice). The share to manufacturing is relatively small (15% of number and 23% of amount). The category of "Other services" which includes a variety of services such as retail trade, restaurants, transportation, bakeries, tailoring and garages, accounts for the largest single number of projects. 4.05 LBDI appears to have made sound investment decisions. For those projects where internal rates of return have been calculated, the financial rate of return has averaged 32% and the economic rate of return 35%. Expected employment creation by projects receiving financing is substantial. Over 3,000 jobs were anticipated at an average investment per job of only $2,500, reflect- ing the labour intensity of rubber and forestry projects. LBDI accounts for a large share of project financing, averaging 72% of total project cost. This is due primarily to the number of expansion projects financed by LBDI and the unique position LBDI holds with respect to long-term financing of local entre- preneurs. Another reason is that, in the case of small borrowers, LBDI is willing to finance a substantial share of the cost of new projects, if security outside the project can be obtained; this device is popular with small new borrowers. Portfolio 4.06 As of December 31, 1975, LBDI's loan and equity portfolio comprised 130 loans totalling $7.1 million and 9 equity investments for $500,000. Annex 8 presents a list of LBDI's equity investments. Two of LBDI's equity investments made profits in their last fiscal years; most of its investments are in their initial stages of operations and it is no surprise that these investments are not yet operating profitably. Provisions amounting to $47,000 have been set aside for probable losses in two investments, one of which has ceased operations and the other is beginning to recover. LBDI's present policy with respect to equity investments is to try to obtain cumulative preferred shares yielding the same rate as its lending rate. Six of LBDI's equity in- vestments are in this form. Dividend income from investments amounted to $62,000 in 1975. Only one investment actually paid dividents of $26,000 in 1975. The balance was accrued on the basis of the cumulative preferred shares held by LBDI. The auditor has noted this practice in his review of LBDI's 1975 accounts.  - 16 - 4.07 LBDI's loan portfolio at the end of 1975 amounted to $7.1 million, an increase of $3.3 million over the previous year. Despite this rapid expan- sion, the quality of the portfolio remains sound. Only 5.5% of the total loan portfolio by amount was affected by arrears of more than three months as com- pared to 5.0% at the end of 1974 and 10% in 1973. One third of the outstand- ing projects, however, are affected by arrears. The majority are small loans since the average size of loan affected by arrears of more than three months is $12,000. This highlights the need for close supervision of LBDI's small loans. Legal action is pending on half of those projects while provisions for probable losses have been made against five loans based on a case by case analysis of LBDI's portfolio. Provisions against loans as of December 31, 1975 were $125,000 or about 2% of the outstanding loan portfolio and those against equity investments amounted to $47,000 or over 9% of the outstanding equity investments. Financial Condition and Results 4.08 LBDI's income statements from 1972 to 1975 appear in Annex 9. Until 1974, the company showed minimal profits and suffered substantial foreign ex- change losses. In 1974, net profits amounted to $81,000 and enabled LBDI to declare its first dividend. Net profits in 1975 increased considerably to $302,000 or about 23% of average net worth. A dividend of 6-1/2% has been de- clared for 1975. The increase in net profits has been the result of the com- pany's expanded level of operations and its increased lending terms which com- pensated for its higher cost of debt. As shown in Annex 10, gross income amounted to 10.3% of average total assets while financial expenses were 4.1%. Administrative expenses amounted to 2.5% of average total assets. 4.09 LBDI's financial condition is sound. Balance sheets for the years 1972 to 1975 are shown in Annex 11. Total assets rose to $12 million by the end of 1975, an increase of $4.1 million over the previous year. The growth was largely due to increases of $3.3 million in loan and equity investments. LBDI's long-term debt showed a corresponding increase of $2.9 million to $8.3 million. 4.10 LBDI has been successful in eliminating the exchange risk on its borrowings from KfW. However, because LBDI can make some revolving use of its borrowings from the African Development Bank, 1/ the related foreign exchange risks could be unduly high. During negotiations LBDI explained that it was minimizing this foreign exchange risk by passing the exchange risk on to the sub-borrowers with the revolving funds and planning the composite of the amortization schedules of all tlhe subloans financed from the ADB revolving funds to conform as closely as possible to the fixed payment schedule for the ADB loan. This procedure is satisfactory to the Bank. 1/ The two ADB loans are repayble in 24 equal semi-annual installments, the first commencing on July 1, 1975 and the second on January 1, 1978.  - 17 - 4.11 7rovisions and accumulated reserves appear adequate, amouLA-ing to 1.4% and 3.4% respectively of total assets. LBDI's charter limits its long- term debt to three times net worth plus subordinated debt. This ratio stood at 1.7:1 at the end of 1975. According to the second loan agreement between the Bank and LBDI, long-term debt is limited to seven times net worth, where debt includes guarantees but excludes unredeemed or undiscounted portions of Government debt. At the end of 1975, only $1.6 million of the Government loans was disbursed resulting in a debt/equity ratio of 6.3:1. LBDI has taken ste,ps to iLcrease its equity base substantially. 4.12 The terms and conditions of LBDI's borrowing from the Government of $500,000 associated with the Government sponsored hotel project have not been formally agreed to by the Government and LBDI. During negotiations, LBDI indicated that agreement would be reached with the Government on the terms and conditions of this borrowing by April 30, 1977. V. PROSPECTS LBDI's Strategy 5.0Ji The general business outlook in Liberia is favourable. Investors, both foreign and domestic, continue to show confidence in Government invest- ment policies. The new developments in the iron ore sector will provide a major impetus to the economy over the next several years with spill over ef- fect into other sectors. Areas where most future industrial expansion may be expected are wood processing, rubber processing, agro-based industries and other export oriented industries. While opportunities for new import substi- tution industries have declined, the Government hopes to give new impetus to industrial development through its encouragement of export industries. 5.02 Given this investment climate, LBDI can expect further growth in its level of operations. Following the trend set in its operations in 1975, forestry and wood processing projects will account for an increasing amount of LBDI's future financing. In line with its multi-sectoral approach, LBDI's financing will continue Lo support investments in agri-business, manufacturing and service sectors, especially where Liberian entrepreneurs are involved. 5.03 LBDI has begun assisting the construction industry by providing per- formance guarantees for three construction firms totalling $2 million in 1975. The demand for such guarantees will increase as Liberian firms gain experience and increase their capacity and competence to bid for construction contracts. Given the substantial investments expected in the mining sector, the overall volume of construction work is also expected to increase. LBDI is considering special assistance to this industry by initiating arrangements which would pro- vide leasing facilities or co-financing of construction equipment as well as continued support in the form of guarantees.  - 18 5.04 The promotion of a capital market in Liberia is a key objective for LBDI. It plans to underwrite new issues on a best efforts basis and plans to divest its equity investments to the Liberian public as those investments mature. LBDI intends to encourage greater participation by Liberians in pro- ductive enterprises by ensuring that a nominal portion of the equity of foreign owned firms receiving financing from LBDI is made available to the Liberian public. 5.05 LBDI's efforts over the next few years will also turn to strengthen- ing its organization and staff. Several new recruits are anticipated in 1976; this will allow LBDI to undertake a program of development and training for its existing Liberian staff members. LBDI's future recruitment plans include an in-house lawyer and an internal auditor. 5.06 By creating a follow-up and client assistance unit LBDI hopes to strenghten portfolio supervision and also to provide technical and managerial assistance to its clients, particularly, small scale entrepreneurs. It is expected that, while this program will be small initially, it can concentrate on the most difficult cases and provide the necessary feedback to improve project operations. 5.07 Moreover, if satisfactory guarantee arrangements are provided by the Government for a small enterprises financing program, LBDI is likely to increase further its substantial level of operations in that area. Forecast Operations 5.08 At the end of January 1975, LBDI had a project pipeline requiring some $4 million in financing from LBDI. Annex 12 shows the projects requiring LBDI financing in excess of $100,000. They require a total of $3.7 million and include about ten major investments in transportation,manufacturing and agro- industries including two timber and wood processing projects. In addition there were numerous small scale projects mainly in the service sector and agriculture. Typical service projects include retailing, garages, bakeries, and restaurants while small agricultural projects are generally for cultiva- tion of oil palm, cocoa, rice, sugar cane and rubber. 5.09 LBDI's financial projections and the assumptions behind them appear in Annexes 13 to 18. Annex 10 shows selected financial ratios. LBDI expects to approve at least $4 million in loans and $200,000 in equity investments in 1976. Targets for loan approvals increase by $1 million each year there- after while approvals of new equity investments are expected to remain con- stant at $200,000 each year (see Annex 14). These levels appear reasonable; however, given the size of LBDI's present pipeline, the potential demand for financing in the construction industry, and the magnitude of investment required in individual wood and iubber processing projects, the demand for LBDI's financing could exceed the projected levels.  - 19 - 5.10 Subloan iraturities are expected to range between 2 and 15 years with an average of six years including two years of grace. Rubber projects, where a protracted period is required before reaching commercial production, in particular require longer maturities. A small portion of LBDI's loans (10%) are to have maturities averaging four years including six months grace. This is comparable to LBDI's experience in 1975 when average loan maturity was 5.8 years including 1.5 years of grace. Resource Requirements 5.11 During the three and one-half year period, from 1976 to mid-1979, LBDI expects to commit loans and equity investments totalling about $17.2 mil- lion. Loan commitments alone would amount to $16.5 million of which 70% or about $11.6 million would be for financing imports. As of December 31, 1975, LBDI had $3.6 million in uncommitted foreign resources remaining from the second lines of credit from ADB and the Bank. The resulting foreign resource gap stands at $8 million as shown in Annex 15. 5.12 Besides the Bank, LBDI has approached various external sources in- cluding ADB and ABEDIA to finance LBDI's foreign resource gap. It also hopes to be able to raise lntnds on the commercial market mainly for its refinancing and workin apiLal financing operations if and when these generate substantial resource needs. Institutions like ADB and ABEDIA, however, are not ready to provide fuinds to LBDI at this time and LBDI has not been able to obtain com- mitments from any other institutions. As a result, LBDI has asked that the Bank meet the full foreign resource gap. The door to other sources, however, is still open and, to encourage LBDI to pursue other sources of finance, it is recommended that the Bank finance not more than 85% of LBDI's foreign resource gap. A Bank loan of $7 million including the technical assistance component of $150,000 is therefore recommended to cover part of LBDI's foreign resource needs up to mid-1979. 5.13 During the forecast period, LBDI's need for local resources will amount to $0.7 million for equity investments and $4.9 million tor loan com- mitments. At present, LBDI has local resources of about $160,000. This, together with the expected increase in equity, redemption of Government notes, and internally generated funds including loan collections, will adequately satisfy LBDI's requiremwents to finance local expenditures. Uncommitted local resources will gradually increase to $2.2 million during the period. Based on these projections, there is no need for local expenditure financing out of the proposed Bank loan. Projected Financial Results 5.14 LBDI's projected income statements are shown in Annex 16. LBDI's profits are expected to increase from $320,000 in 1976 to $850,000 in 1980. Taking into account the proposed increase in share capital expected by 1977, profits in 1980 would amount to 28% of share capital or 18% of average net worth.  - 20 - Despite the anticipated higher cost of debt, LBDI will be able to maintain ade- quate spread on its lending operations. Gross income will redch 11.4% of aver- age total assets by 1980. LBDI's administrative expenses, which are expected to increase substantially in 1976 as the result of additional hirings, will gradually decline as a proportion of average assets to 1.9% in 1980. LBDI expects to increase its dividend rate from 6-1/2% at present to 8-1/2% by 1980. Since LBDI's expected profitability would permit a still higher dividend, LBDI will consider raising the dividencd rate even more. 5.15 Balance sheet projectiorns are given in Annex 17. Over the five year period, LBDI's total assets would rise to about $28 million with the loan and equity portfolio increasing to close to $23 million. The expected capital increase plus retained earnings will be adequate to maintain an appropriate debt/equity ratio until 1980. LBDI's accumulated cash balances as shown in Annex 18 will increase to over $5 million, indicating that LBDI should not encounter any liquidity problems during the forecast period. Provisions as a percentage of total portfolio will rise to 3% by 1980, an adequate level given LBDI's normal security coverage. Annex 10 indicates that LBDI's coverage on interest and principal payments will remain at a satisfactory level. With expected maturities on borrowings at least as long as LBDI's subloans, debt service coverage should be adequate throughout the life of the proposed Bank loan. VI. CONCLUSIONS AND RECOMMENDATIONS 6.01 LBDI is the primary source of development financing in Liberia especially for Liberian entrepreneurs. Its operations h-,ave increased drama- tically since the first Bank loan was approved in 1972. It has good manage- ment, a sound portfolio and financiial condition and is making serious efforts to strengthen its staff. LBDI deserves the continued financial and institu- tional support of the Bank Group and a third Bank loan and a second IFC' invest- ment are recommended. Based upon present projections, a loan of $7 million would meet 85% of LBDI's additional foreign resource needs during t['e period 1977 to mid-1979. The high percentage is justified in view of LBDI's present diffictulties in obtaining foreign funds from other sources but LBDI is actively pursuing other sources of financing. It is recommended that $150,000 of the proposed loan be made available to provide technical assistance and fellowships for suitable training and development of LBDI's Liberian staff (para 3.14). An IFC investment of up to $306,300 is also recommended as part of the antici- pated $2 million increase in LBDI's paid-in share capital (para 3.04). This investment would help to maintain LBDI's commercial character and IFC's role in assisting the Company. 6.02 Terms and conditions of the proposed Bank loan should be those generally applied to recent Bank loans to development finance companies. The foreign exchange risk would be taken by sub--borrowers. The amortization schedule of the loan should be the aggregate of the amortization schedules of  - 21 - LBDI's sub-loans with a maximum maturity of 15 years from date of approval by IBRD of the last individual sub-project. The technical assistance component would be amortized according to a fixed schedule over a 15-year period. Loan proceeds will meet (i) the foreign exchange cost of directly imported goods and services, (ii) 75% of the invoice price of goods previously imported into Liberia, (iii) 60% of total expenditures for civil works, representing the foreign exchange component, and (iv) 100% of the foreign expenditures for consultants and fellowships for training LBDI's staff. 6.03 The free limit on individual sub-projects should be raised from $100,000 to $150,000 to coincide with the limit on approvals by LBDI's Executive Committee and in light of the improvements made in LBDI's appraisal work. The aggregate free limit should be increased from $1 million to $2 million. These limits will allow the Bank to review about 15% of the number of projects to be financed by LBDI under the proposed loan and at least 70% of the amount. 6.04 During negotiations the Government indicated that it would welcome early discussions with the Bank concerning the initiation of a study of credit guarantee and technical assistance schemes for small scale enterprises (paras. 2.19 and 3.09); and LBDI indicated that it (1) would undertake in consultation with the B.,II.. studies of its lending rate on an annual basis, (2) would not re- duce the present lending rate of 11-1/2% without the prior approval of the Bank, with the exception of future concessionary loans which carried restrictions for lower lendina rates for nroiects financed from such loans (Para 3.08) and (3) would reach agreement with the Government by April 30, 1977 on the terms and conditions of the $500,000 borrowing from Government (para. 4.12.) 6.05 During negotiations LBDI also presented its proposals for minimizing the foreign exchange risk associated with the loan from the African Developihent Bank, and these proposals were satisfactory to the Bank (para. 4.10).   ANNEX 1 LIBERIAN BANK FOR DEVELOPMENT ANT) INVESTMENT Proposed Capital Structure (As of June 30, 1976) Existing Stock New Subs- V % Holding Dividend criptions Total- Holding (US $ '000) Class 'A' GOT 248.5 62.1 306.3 616.9 20.6 IFC 248.5 62.1 306.3 616.9 20.6 PrLvate Liberians 13.0 3.3 - 16.3 065 LAXCO A __C 250.0 250.0 8 Subtotal 510.0 127.5 862.6 1,500.1 50.0 C 1aS !B? LAY1C ) 25.0 6.2 31.2 1.0 international Trust 125.0 31.2 93.8 250.0 823 First National City Bank 120.0 30.0 61.3 211.3 7.0 Instituto Mobilia-'e Italiano 120.0 30.0 _150.0 5.0 Firestone 50.0 12-5 _ 62.5 2.1 Liberia Mining Co. 50.0 12.5 2.5-* 88.0 2.9 DE 23 - - 250.0* 250.0 .)4 Bong Mines - - 200.0 200.0 6.7 Chei,iial. Bank and Bank of Liberia - - 250.0* 250.0 8.3 0ther possibilities - - 6.8* 6.8 0.3 Subtotal 490.0 122.4 887.4 1,499.9 50.0 Total 1,000.0 250.0 1,750.0 3,000.0 100.0 1/ Subtotals do not addl due to rounding.. No firm commitments as of June 30, 1976 IBRD/DF'D  ANNEX 2 page I of 4 LIBERIAN BANK FOR DEVElOPMENT AND NVEST3MENT Policy Statement (As of March 31, 1976) The Liberian Bank for Development and Investment (LBDI) will carry on its business -n accordance with the following policies which have been adopted by the Board of a-rectors. 1. Purposes and Types of A2tivty LBD- shall assist in the economic development of LIberia. To this end it Trill encourage the development of private productive enterprises in the country 'oy providing medium and long term loans (up to a maximum of fifteea years) and equity financLng. It may also sponsor and underwrite new issues of securities and guarantee loans and commitments of other investors. Subject to detailed guidelines to be issued by the Board :rom time to time, LBDI nay engage in refinancing and 'inancing of perma- nent working capital in conjunction with the types of financing mentioned above, as well as separately where such financing or refinancing will re.ult ln better utilization of existing productive assets or in increases in output. Enterprises eligible for financing by LBDI include projects in fields such as Manufacture (including Handicrafts), Agriculture, (including life stock) Mining, Fishery, Forestry, Tourism (including Hotel Industry) and Services. 2. Dtversification of Financing: LBDI will diversify its financing (except for the temporary investment Df liquid funds in short term securities) among different types of enter- prises and types of financing. Therefore it shall,in general, observe the following guideline-: (a) Security will be taken commensurate with its risk exposure. In particular, in cases where it is in LBD-'s interests to take an exposure Li an imdi ridual enterprise that is equivalent to more than the Combined amou!nt representing 30% of net worth and 5% of quasi-equity, special care x11 be taken to adjust its securitv requiremenrt to ens-are adequate protec- tion aga_nst the maonitude of risk involved. Investment in the equity, of any single enterprise Ehall not exceed 10% of LBDI's paid-in share capital and free reserve,. The aggregate -va'ie of all investments, computed at cost, in the equi ty of all enterprises shall, at no time, ex.eed the aggregate of the paid-in share ca;pital and free reserves of LBDI.  ANNEX 2 page 2 of 4 (b) Invrestment in the form of both loan and equity by LBDI shall normally not exceed 50% of the total assets of the enterprise. In the form of equity alone LBDI's participation shall not exceed 25% of the equity of the enterprise. Notwithstanding the above, for the purpose of supporting small enterprises, LBDI may in the case of each such enterprise with total assets of $50,00 or less, provide a larger propor- tion of loan finance, if the client is able to provide additional security (inciuding 3rd party guarantee and/or other assets external to the project) acceptable to LBDI . 3. Definition of Private Enterprise: LBDT shall finance only Private En;erprises. A nominal share participation in, or the loan of money to any commer- cial enterprise by the Government of Liberia or of a county, or any political sub-division thereof (whether direct or indirect) shall not by itself be deemed to remove such enterprise from the private sector, so long as such enterprise is privately operated and managed. Aoy enterprise, in which the Government of Liberia or any political sub-division thereof has a controlling interest, shall not by itself be deemed a public enterprise and removed from the private sector, and such enterprise may obtain financing Crom the Bank so long as it is commer- cially operated, preferably under private management, and the aggregate amount of the Bank's financing of such enterprise does not at any time exceed thirty (30%) per cent of the aggregate of the Bank's total cumula- tive commitments at the time of such financing. 4. Collateral Requirements (a) LBDI will, normally and as a general rule take a first mortgage on the present and future fixed assets, and chattel mortgage on the present and future movable assets of the enterprise financed. (b) If the mortgage and chattel mortgage described in (a) were not sufficient to give adequate protection against LBDI's risk, then a charge on other fixed and/or movable property of the applicant or additiona' :ollateral will be requested. (c) In special situations when circumstances warranted it, LBDI will seek assignment of all or any of the followirg types of security: (i) A legal assignment of income or of book - debts; or of an insiz-Ance policy covering the life of the borrower, or (ii) A guarantee by an acceptable financial institution or third party.  MJNEX 2 page 3 of 4 (d) LBDI will be willing to share its security with other creditors if: (i) The security leaves enough margin for LBDI 6o do so, and (ii) Sharing by LBDI of its security with other creditors is in the interest of the borrower. LBDI's policy is to take security commensurate with its risk expo- sure. If such exposure in a particular enterprise is considered to be relatively high in relation to LBDI's own net worth, then the security requirement will naturally need to be so adjusted as to ensure that adequate protection is available against the magnitude of risk involved. 5. Management of Enterprises: LBDI shall refrain from taking a controlling interest in any enter- prise or any other interest which would give it primary responsibility for the management of such enterprises. 6. Promotion of Capital Market: LBDI shall conduct its operations so as to assist in the investment of both private Liberian and foreign capital in Liberian industry. In order to encourage the development of El capital market, it will revolve its own por-tfolio whenever it can be so on satisfactory terms. 7. Soundness of Ent rises to be Financed: LBDI iill finance undertakings which are soundly managed and which appear, on careful investigation, to be economically viable. It will watch the operations of such undertakings and will give technical assistance to management when necessary. 8. Geographi3al Distribution of Financing: LBDI w11 select projects, subject to sound investment criteria, on as broad a geographical basis as possible. 9. LBD7's awn Management and S;aff: LBDI dill build and strengthen its own management and staff so as to achieve a well balanced organization, including financial and economic analysis, technical, accountancy and -LegaL services, and supervision of previously concluded investnents. 10. Prevention of Control: LBDI will prevent any one person or company or group of affiliated persons or companies from gai-iing effective control of the organization.  ANNEX 2 page ' or 4 I'. Non-competition wTith Commercial Banks LBD7 shall not accept deposits nor compete with commercial banks in its loaning activities. 12. Reserve Policv: LBDI will buil. reserves consistent with sound financial practice, incl>iding -eserves for bad debts and investments and supplementary reserves. 13. ForeLon Exchan!e Risk: LBDI shall not assume the foreign exchange risk in respect of re- lending of any non-Liberian monies borrowed by it.  ANNEX3 LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT Board of Directors (As of March 15, 1976) Class of Name Interest Shares Mr. James Phillips (Chairman)* Goverrnment of Liberia A Mr. Frank Stewart * Government of Liberia A Mr. P.M. Mathew Irnternational Finance Corporation A Vacant * Private Liberian Shareholder A Mr. M. Bissi Inistituto Mobiliare Italiano B Mir. A. Baisden * International Trust Company B Mr. J.P. Carmichael * Firestone Plantations Company B Mr. T. Beames First National City Bank of Liberia B Also member of the Executive Committee.  ANNEx 4 LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT Organization Chart (As of January 31,1976) Board of Directors Chairman J. Phillips Excutive Committee Chairman E. Saleeby Presi dent - | E. Saleeby General Manager l R. Chellapah Projects Manager Comptroller P. Kutu-Akoi .M. Titus , Follow-up and Project Loan Disburse- Accounts Client Appraisal Collection ment 2 officers Assistance 6 analysts 2 officers 1 officer analysts Professional Staff 16 Non-professionals 11 Total Staff 27 IBRD/DFCD April 20, 1976  ANNEX 5 LIBERIAN BANK 'FOR DEVELOPMENT AND INVESTMENT Summary of Borrowings (ias of December 31,1975) Original Amount Interest Repayment Source Amount Outstanding Rate Period $'10C)0 $'000 Foreign: KfW 1,056 1,056 4-1/2% 1984/94 IBRD I 1,000 944 7-1/4% 1975/901/ ADB I 603 552 7% 1975/871J IBRD I1?./ 4,000 1,080 8% 1976/90V ADB II 2/ 22h13 1,126 7% 1978/19 Local: Government I 1,000 800 - 1982/921/ Government II 2,000 800 5% 1993/983/ Government III 500 500 - 4/ LAMCO 50 50 2% I/ Conforming to aggregate repayment ,chedule of sub-loans financed out of line of credit. / Includes up to $500,000 for local currency financing. 3 9ubordinated to other debt. Repayment in accordance to project for which funds were used. 5/ No repayment schedule, convertible into equity. IBRD/DFCD April 20, 1976  ANNEX 6 LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT Summary of Operations (as of December 31, 1975) Loans Equity Total No. Amount No. Amount No. Amount (US$'000) (Us$'OOO) 1967-1972 Approvals 69 2,653 5 234 55 2,887 Commitments 50 1,391 5 234 55 *1,625 Disbursements 57 2,177 5 168 62 2,345 1973 Approvals 34 1,216 3 111 37 1,327 Commitments 38 885 2 51 40 936 Disbursements 36 476 0 0 36 476 1974 Approvals 53 4,523 4 270 57 4,793 Co mitments 49 3,120 4 270 53 3,390 Disbursements 47 2,447 5 297 52 2,744 1975 AppZ'ovals 42 3,000 2 72 44 3,072 Commitments 38 3,726 1 30 39 3,756 Disbursements 53 3,894 2 65 55 3,959 1967-1975 Approvals 198 9,989 14 688 212 10,677 Commitments 175 9,122 12 586 187 9,707 Disbursements 193 8,994 12 530 205 .9,524 IBRD/D?CD  ANNEX 7 LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT Analysis of Loaoa Approvals 1974 and 1975 (In Us '000) Size No. % Amounts % $ 5,000 or less 19 20 56 1 $ 5,001 to $ 10,000 34 36 282 4 $10,001 to $ 50,000 13 14 313 4 $50,001 to $100,000 11 11 914 12 Over $ 100,000 18 19 5,958 79 Total 97 100 7T523 100. ^.verage size .$ 79,000 Median size $ 10,000 Maturity (including grace period) Under two years 5 5 25 - Two to five years 60 63 2,618 35 five to ten years 27 29 3,871 t 52 over ten years 3 3 1V009 13 Total --7 100 7 10 ^eighted average 6 years Type of Project New 24 25 2,075 28. Modernization/Expansion 71 75 5;,4L8 72 Total -y 7,523 : 5 Ownership 100 Liberian 6,9 73 More than 50^' Liberian 6 8 2,676 36 Less than 50 Liberian JI 19 2 927 39 Total 75 175100 Economic Activity Agri-business 20 21 46E 6 Rubber Production 22 23 995 13 Timber and wood processing 6 6 1,714 23 Hotels 6 6 1,47L 20 Other Services 27 29 1,164 15 Manufacturing 14 15 1 706 23 Total 9> 100 100 IBRD/DFCD April 20, 1976  LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT LBDI's Equity Investments as at December 31, 1975 LBDI's Percen- Type Amount Amount tage Pro- Economic of Approved Disbursed Share- vi- NAME OF COMPANY Activity Shares $ $ holding sions Remarks Liberia Port Warehousing Ordinary 131,860 76,016 44% - After initial losses this Storage Co. Services company is now making profits. West African Oil Palm Ordinary 50,000 49,250 4% 15,000 Affected by drought in Agricultural Plantation 1974. Cash surplus Corporation and Mills generated in 1975. Liberia Meat Meat Proces- Ordinary 32,220 32,220 27% 32,220 LMPC has ceased operations. Processing Co, sing P.P.PO Timber Wood Proces- Cumula- 130,000 130,000 11% - Still losing in initial Limited sing tive stage; gradually reaching Conver- full capacity. tible Preferred Corniffe's Art Commercial " 25,000 24,920 15% - About breaking even. Printery Printing L.I.P.F.O. Co. Polyurethane " 26,500 26,500 18% - Profitable. Maryland Wood Wood 1 4o ,000 1h0,000 11% - Still losing in initial Processing Co. Processing stage. Industries Caesar Beach Motels etc. " 25,000 25,000 17% - Experiencing some Enterprise difficulties. Metalloplastica Plastic goods 4 2,040 - 20% - Operating well in initial stages 602,620 503,906 47,220 IB!DtDFCD April 20, 1976  ANNEX 9 LIBERIAN BANK FOR DEVELOFMENT AND INVESTMENT Income Statements for Years 1972 to 1975 (In US$ 1000) 1972 1973 1975 Investment Income Interest and other income on loans 136 150 296 658 Interest of notes and deposits 101 94 187 247I Other income 9 16 13 123 Gross Revemne 246 260 496 1.028 Operating Expenses Interest and Commitment Charge 48 59 167 409 Administrative Expenses 124 125 162 229 Depreciation 4 4 5 19 Increase in Provisions 68 (94) - 69 Total Operating Expenses 244 94 334 726 Operating Income before Extraordinary Items 2 166 162 302 Less Extraordinary Losses _i L59 81 - Net Income (loss) (11) 7 81 302 Dividends - - 38 65 Net Income (loss) after Dividends -112 _7 43 227 Net Income (loss) as % of Year end Share Capital (1.1) 0.7 8.1 30.2 Net Income (loss) as % of Average Net North (1.0) 0.6 7.0 23.4 1/ Other income includes $62,000 in dividend income from equity investments and $33,000 in commission on guarantees. 2/ Exchange losses on deutsche mark, borrowvings from KfIT. IBRD/DFCD April 20, 1976  ANNEX 1 0 LIBERIAN BANK FOR DEVELOPMENT LND INVESTMENT Past and Projected Firnancial Ratios Actual Projected 1974 1976 197 1978 1 1 Income Statement Items as % of Average Total Assets Gross Income 8.9 10.3 9.8 10.1 10.4 11.1 11.4 less: Financial Expenses 3.0 4.1 4.3 5.0 5.1 5.6 6.o Administrative Expenses 3.0 2.5 2.5 2.3 2.2 2.1 1.9 Gross Profit 2.9 3.7 3.0 2.8 3.1 3.4 3.5 less: Provisions - 0.7 0.5 0.5 0.6 0.6 0.6 Foreign Exchange Loss 1.5 - - - - - - Net Profit 1.4 3.0 2.5 2.3 2.5 2.8 2.9 Selected Income and Cost Items Dividend Income as % of average equity portfolio 1/ 3.4 13.1 4.0 4.0 5.0 5.0 6.o Income from loans as % of average loan portfolio 10.5 12.0 11.6 11.9 12.1 12.3 12.3 Cost of debt as % of average total debt 2/ 7.3 5.9 5.8 6.5 6.5 6.8 7.1 Net Profit and uividends Net profit as % of year-end Share capital 8.1 30.2 16.0 18.9 24.6 31.7 39.3 Net profit as % of average equity 7.0 23.4 15.8 13.7 16.1 18.2 19.3 Dividends as % of average equity 3.3 5.0 4.9 4.7 4.2 3.7 3.2 Structural Ratios Term Debt/Equity J 2.8:1 6.3:1 4.7:1 4.3:1 4.4:1 4.9:1 5.1:1 Debt/Equity plus Subovdinated debt / 1.2:1 1.7:1 1.9:1 2.2:1 2.3:1 2.7:1 3.0:1 Provisions as % of total portfolio 2.4% 2.2% 2.4% 2.6% 2.7% 2.9% 3.0% Portfolio Affected by Arrears of more than 3 months as % of total portfolio 5.0% 5.5% - - - - - Debt Coverage Interest and principal coverage 4.2 2.8 2.5 2.1 2.0 1.9 1.9 1/ Dividend income in 1975 included accrued dividends of $36,000. Projected dividend income is assumed on a cash basis. 2/ Total debt does not include guarantees nor undisbursed portion of GOL Loans. 3/ Term debt includes guarantees but exclude_ undisbursed portion of GOL loans according to Loan Agreement. 4/ First two loans from GOL amounting to $3 million in 1975 are subordinated; Debt included guarantees. IBRD/DFCD April 20, 1976  ANNEX 11 LIBERIAN BANK FOR DEVELOPMENT AND INVESTMEN1'T Balance Sheets as of December 31, 1972-1975 : ~~~~~~~~~~(in U.S. $1000) ASSETS 1972 1973 1974 1975 Cash and time deposits 272 449 1,012 2,494 Accrued income from loan & notes 76 67 169 225 Tnvestments in P.C.C. notes / 206 39 - 4 Other current assets 14 15 44 54 ~otal current assets 668 670 1,225 2,777 oans and advances 1,670 1,823 3,815 7,133Z/ 'auity lnvestments 159 142 439 504 :.ess: provisions (195) (103) (103) (172) .'et portfolio 134 1,4,151 :ixed assets (net) 24 25 314 419 .overnnent notes (6.5- & 3' redeemable 1972/81) goo 800 2,200 1,400 _otal assets 3L126 3257 12060 --A.ILITIES AND EQUITY .Iccounts payable 6 9 1,224 2,281 Proposed dividend - - 38 65 .otal current liabilities 6 9 1,262 2,346 Long-term debt (3cvernment loan - subordinated 1,000 1,000 3,000 3,000. - unsubordinated - - - 500 /