Morocco - National Rural Finance Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No. 12197-MOR STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT October 29, 1993 Middle East and North Africa Region Maghreb and Iran Department Agriculture Operations Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authonzation.  CURRENCY EOUIVALENTS Currency Unit = Dirham (DH) US$ 1.00 - DH 9.00 DH 1.00 = US$0.111 (as of September; 1993) FISCAL YEAR January I to December 31 GLOSSARY OF ABBREVIATIONS ADB African Development Bank ASAL Agricultural Sector Adjustment Loan ASIL Agricultural Sector Investment Loan BAM Bank Al-Maghrib (Central Bank of Morocco) INDE Banque Nationale de D6veloppement Economique (Industrial Development Bank) CAS Country Assistance Strategy CFD Caisse Francaise de Developpement CIH Credit Immobilier et H6telier (Housing and Tourism Bank) CPPR Country Portfolio Performance Review CLCA Caisse Locale de Crddit Agricole CNCA Caisse Nationale de Cr6dit Agricole (National Agricultural Credit Bank) CRCA Caisse Regionale de Cre'dit Agricole EEC European Economic Community EIB European Investment Bank FAA Fonds d'Assurance Agricole contre les Calamit6s Naturelles (Agricultural Insurance Fund for Natural Calamities) FADES Arab Fund for Economic and Social Development FDA Fonds de Developpement Agricole FEC Fonds d'Equipement Communal (Communal Infrastructure Fund) Fl Fiscal Income FSDP Financial Sector Development Project ICR Implementation Completion Report IRCA Inspection Regionale de Credit Agricole KfW Kreditanstalt fur Wiederaufbau of Germany MARA Ministry of Agriculture and Agrarian Reform MF Ministry of Finance MTASAP Medium-Term Agricultural Sector Adjustment Program OECF Overseas Economic Cooperation Fund of Japan ORMVA Office Regional de Mise en Valeur Agricole (Regional Irrigation Development Agency) UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development  FOR OFFICIAL USE ONLY SAFF APERASAL RWRT KINGDOM OF MOROCCO NATONAL RURALFINANCE PROJECT Loan and &sdric Summarv Caisse Nationale de Cr6dit Agricole (CNCA) Kingdom of Morocco Ahoml: US$100.0 million Equivalent Terms: 20 years, including five years of grace, at the Bank's standard variable interest rate. The proposed Project would assist Morocco and CNCA, for 19941997, to consolidate pomion: and deepen the institutional reform process (initiated under Loan 3088-MOR), and to develop the sustainable foundations of a financially sound rural finan%e system well- itegrated into a gradually liberalized financial sector. Strategically consistent with the Governmentis adjustment program and priorities supported by the Bank, in particular through the recent Financial Sector Development Project and two successfilly completed Agricultural Sector Adjustment Loans, the Project would help: (a) achieve a key transition in CNCA's institutioPal development by supporting CNCA's conversion to a more diversified bank with increased managerial autonomy, geared to serve agriculture and to reach small farmers, young entrepreneurs/graduates and non-farm clients (notably women) in poverty-related areas; (b) promote private investment in viable projects, including agro- industries with export potential; (c) increase domestic resource mobilization and secure the rural banking system through a pilot drought relief fund/crop insurance system drawing on best practices worldwide; and (d) develop banking and technical skills needed to manage the changed organization and special features of a sustainable rural finance operation. Specifically the Project would fund over a four-year implementation period: (a) medium- and long-term credit to private farmers and investors to finane a wide range of investments including water conservation measures in irrigation, farm equipment, tree crop and livestock development, storage facilities, land improvement, greenhouses, agro-processing plants, coastal fisheries, rural housing, forestry -md environmental protection, and rural ncn-farm investments, and (b) project-related traiing, consulting services for the strengtheming of CNCA management and planning and to manage the effects of drought. A mid-term review will assess progress made during implementation. Since the Government of Morocco reemphasized the role of CNCA in the development of the country's rural sector and the need to transform CNCA into a universal bank so as to improve its long-term viability, CNCA has the highest political support for its reforms. Thus, the risk of a slower pace than expected in the continued execution of the proposed improvements is considered reduced. Morocco, however, is vulnerable to droughts, and these have an immediate adverse impact on farm credit recoveries and rural savings mobilization. On the basis of past and current experience, iBRD funds are not expected to be at more than normal risk, if the Government is committed to improving its ability to manage droughts. CNCA overall operating results are positive and should stay that way, in view of its prudent lending policies, non-drought-related good collection record, the quality of its management, and the adoption of enhanced prudential banking regulations for loan classification and loan loss provisions currently introduced in Morocco, as part of the ongoing financial sector reforms. Thi docment has a rlcted distribuion and may be used by recipients only in the perfonmanc of their ofidl dies.Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Local Foreign Toal (U(S$ million) Estimated Cost: CNCA Credit Operations 710.5 437.0 1,147.5 (Medium- and long-term) Institutional Development 0.5 2.0 2.5 (Training, consultants, MIS Software) Total Pjgect Cost Ja 439Q 1150.Q /A emgd P - :i IBRD - 100.0 100.0 CFD - 30.0 30.0 EIB - 60.0 60.0 FADES - 60.0 60.0 KfW - 34.0 34.0 OECF - 95.0 95.0 CNCA 371.0 60.0 431.0 Sub-borrowers 340.0 - 340.0 TOTAL 711.0 432. 1,150 Fmaed Disbmse_:t Bank FY 1994 1995 1996 .7 (US$ million) Annual 15.0 30.0 30.0 25.0 Cumulative 15.0 45.0 75.0 100.0 EUvhronmeaW Raft: B Poverb Cwatqorv: Important elements of targeted interventions to respond to the credit demand for investment at market conditions of rural women, artisans, and small farmers. La Includes US$125 million of taxes and duties.  - iii - STAFF ALM REPORT EINGDOM OF MOQRCQO NAT1ONAL RURAL FINANCE PROJECT Table of Cnen DEuLIt I. W IRQQUC ION .1..................... I H. TIE AGRICULTURAL SECTOR ......................., 2 A. Economic Outlook. 2 B. Place of Agriculture in the Economy. 2 C. AgricUltural Performnce and Government Strategy. 2 D. Sectoral Issues Relevant to Rural Finace .3 E. Bank Role in the Agrcultural Sector. 3 M. THE FNANCAL SECTOR ......................... 4 IV. THE CAMSE NATIONALE DE CREDrr AGRICOLE. 4 A. Organization and Staffing. 4 B. Lending Pojicies and Procedres. 6 C. Lending Operations. 8 D. Financial Situation and Performance .10 E. CNCA's Develooment Objecdves and Strategy .14 F. CNCA's Projected Leig Program and Financing Requiements (1993-1996) .15 V. THEQPRJ.T .16 A. Rationale for Bank Involvement and Project Objectives .16 B. Summary Project Description .16 C. Detailed Features .17 D. Project Cost Estimates ..... 19 E. Project Fianing .21 F. Procurement .22 G. Disbursements .23 VI. PROJECTD4 EM-ATMN ....................................IL EN24 A. Credit Operations .24 B. Women's Participation a nd Environmental Aspects .25 C. CNCA Institutional Development .26 D. Agicultual Risk Management and I.surance Fund 28 E. Monitoring and Evaluation .28 F. Supervision, Mid-Term Review and Reporting .28 G. Accounts and Audit .28 VII. BENEFT. JUSTFMICATION AND RISKS .29 A. Benefits and Jusdfication .29 B. Project Risks .31 VII. AGRUEMENTS REACHED ANDRECOMENDATION . .31  - iv - STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT Table of Contents (Cont'd) aem No. 1. CNCA Lending Program ...... ............................... 33 2. Financing of On-Parm Investments and Credit Coverage .36 3. Project Cost Estimates . 38 4. Estimated Schedule of Disbursement of Bank Loan .................... 39 5. Agricultural Sector Performance, Government Strategy and Sectoral Issues Relevant to Rural Finance .......................... 40 6. The Financial Sector ........................................ 45 7. CNCA Financial Position (1988-96) .............................. 48 8. The Agricultural Development Fund .............................. 64 9. FSDP Key Policy Area ...................................... 65 10. Performance under Previous Agricultural Credit Projects ................. 73 11. CNCA's General Policy Statement ............................ 77 12. CNCA's Strategic Planning and Management Control ................... 83 13. Climatic Risk Management and Agricultural Insurance Fund .... .......... 85 14. CNCA's On-lending Appraisal Methods ............................ 91 15. Project Implementation and Bank Supervision ........................ 93 16. Measurement of CNCA's Dependence on subsidies (1988-1992) .... ......... 95 17. Selected Documents and Data Available in the Project file ................ 97 This report was prepared by Mr. B. Dussert (Task Manager) and is based on the findings of a Bank appraisal mission that visited Morocco in April 1993. The other members of the mission were Mr. 0. Sacay (FSD), Messrs. P. Beuzein, J. Tillier (Consultants), Mr. R. Hartel (IUW Representative), and Mr. W. Dick (KfW- funded Consultant in Agricultural Insurance). Ms. Lucie Tran (OPRPG; Investment Models) and Ms. C. Sarvaas (KfW-funded Consultant in WID) also participated in the pre-appraisal mission in November 1992. The Peer Reviewer is Mr. M. Long (FSD). The Division Chief is Mr. 0. Knudsen (MN1AG) and the County Department Acting Director is Mr. Mahmood Ayub (MNI). Legal advice was provided by Ms. N. deWitt and Mr. J.P. Dupuy (LEGMN). Word Processing assistance was provided by Ms. N. Wong and Ms. C. How.  SfAFIW APPRAISAL RFPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROIECT I. INTRODUCllON 1.01 The Kingdom of Morocco and the Caisse Nationale de Crddit Agricole (CNCA) have requested Bank assistance to finance, with other cofinanciers, a National Rural Finance Project. The Project would consolidate and expand previous successful Bank-financed agricultural credit projects implemented by CNCA, in particular the innovative National Agricultural Credit Project (Loan 3088-MOR) which has progressed well and was timely implemented. Compared to agricultural credit institutions in other countries, including Asia, CNCA's perfornance has been quite good. CNCA has been able to reach small- and medium-size farms and is considered to be one of the premiere rural financial institutions in developing countries. It is a well-managed and efficient bink. However, CNCA is lending in a risk-prone environment that has limited the participation of other Moroccan banks in rural finance. Periodically droughts strike Moroccan agriculture causing severe hardship for many vulnerable and relatively poor farmers (as has been the case in the last two years where particularly severe droughts have occurred in Morocco). As a consequence, loan areas increase and the financial sitution of CNCA is weakened, requiring injections of capital or direct and indirect drought relief subsidies from the Government. One important objective of the proposed project is to help farmers in managing severe climatic risk while assisting CNCA to become a stronger financial institution. A key element of this strategy is to assist the Govermment in building a climatic risk management and insurance scheme that would not only permit broader risk sharing but reduce the burden on the budget of periodic droughts. Another element is to support CNCA in becoming an even more efficient and universal bank, still specialized in rural finance but with a more diversified portfolio. ITis involves transforming CNCA into an increasingly autonomous and decentralized bank geared to rural fmance while strengthening its managerial efficiency and financial condition through improved financial performance and higher margins, increased mobilization of voluntary domestic savings, and adequate provisioning against risky investments. In addition, the project would improve agricultural productivity by fiancing on-farm investments, and would generate job and income opportunities in rural areas by increasing access by creditworthy farmers, women, and young graduates to irstitutional credit and savings services. The result would be an increasing share of investment in agriculture by the private sector. Also, by building better risk management mechanisms for agriculture, open to all banks in Morocco, rural finance would gradually interest other banks. 1.02 The Project would be implemented by CNCA and finance on-farm investments undertaken by private farmers and farmers' cooperatives, investments for the establishment or expansion of agro- industries (including working capital and technical assistance), of private coastal fisheries, of artisans (men and women), of rural non-farm enterprises, for reforestation and environmental protection, and for rural housing investments. The Project would also finance, training/technical assistance to strengthen CNCA's organizational and regional structure, and improvement of the planning and control process, including CNCA's decetalized Management Information Systems (MIS) and of Morocco's crop insurance system. The Project would be implemented over a four-year period (1994-1997). 1.03 The total cost of the Project is estimated at US$1,150 million, of which US$439 million (39%) is foreign exchange. A Bank loan of US$100 million to CNCA would finance part of CNCA's medium- and long-tm lending, and part of its institutional development cost during the Project period. The remaning investment resources would be mainly provided by CNCA's own resources, sub- borrowers' contributions, and by loans from the Kreditanstalt fur Wiederaufbau (KfW) of Germany (KfW loan to Government to be passed on to CNCA as a capital increase), the European Investment Bank (EIB), the Overseas Economic Cooperation Fund (OECF) of the Government of Japan, the Arab Fund for Economic and Social Development (FADES), and the Caisse Francaise de Developpement (CFD). 1.04 The Project was identified and prepared by CNCA with the assistance of Bank missions supervising the National Agricultural Credit Project (Loan 3088-MOR). The Project was appraised in April  1993 by a Bank mission (joint appraisal with KfW), in coordination with other cofinanciers and in close cooperation with the Moroccan authorities. II. TE AGRICULT-URAL SECTOR A. Economic Outlook 2.01 Background on the Moroccan economy, past economic performance, recent economic trends and the Government's adjustment efforts, as well as social indicators are fully described in a report on a Structural Adjustment Loan to the Kingdom of Morocco (Report No. P-5637-MOR) which was signed on April 30, 1992. Current economic, financial, and social priorities are highlighted in the Country Assisanc Stal.gy (CAS) for Morocco, attached to the Memorandum of the President for this project. Agriculture is a major sector priority for development in Morocco. 2.02 The Bank and the iM!I have supported the economic adjustment process in Morocco to foster sustainable and equitable growth. Morocco has made substantial progress on macro-economic stabilization this past decade. The piesent Project would help the Government meet its reform objectives of private sector investment, progress in development and employment in poor rural areas, export promodon and domesdc resource mobilization while reducing pressure for public expenditures. B. }lace of Agricuire in the Economy ^.03 Agriculture plays a crucial role in the nation's economy. It accounts for about 18% of GDP, provides about 40% of employment, and 30% of export earnings. During 198-89, agriculure recorded an impressive average annual growth of 6.7%; the average GDP growth during the same period was 4.1%. Together with phosphates and tourism, agricultural export is the leading source of foreign excange earings in the economy. However, the contribution of agriculture to the economy varied considerably between the 1960s and the early 1990s: % of GDP % Employment % 1960. rapid expansion 29 44 38 1970s decline 17 42 33 1980/84 drought peiod 14 39 28 1965191 ined growth 18 40 32 1991f93 drought 17 39 31 Of Morocco's toal land area of 60 million ha, 8 million ha or 13 % is suitable for agriculture. 'he dominant crops are cereals and pulses. Of the cultivated land, about 50% receives good but inconsistent rainfall. About I million ha are irrigated to grow fruits, vegetables, forage and industrial crops. C. Agdrta Sector Perform and Government S pM 2.04 Pad Perf . Ihe agricultural sector has played a dynamic role in the growth of Morocco's economy despite periodic droughts as shown in the table of para. 2.03. After a period of slow growth in the 1970s (2.4% p.a.), the growth rate increased during the 1980s to 6.7% p.a. mainly due to favorable weather conditions since 1985. Farm productivity is low except in irrigated areas but the sector has considerable untapped growth potential (Annex 5). 2.05 Govmmen Sate. Growth through private sector investments in rural areas with consideration to the poverty that exists in certain regions of the country is the balanced approach to  -3- agriculture and rural development being sought by the Government and the Bank. This principal objective is being pursued within the framework of the Mediun.-Term Agricultural Sector Adjustment Program (MTASAP). The components of this strategy are detailed in Annex 5. 2.06 Ubstjgi.nal Credit and .yM nvisimet. A key element in the Government's strategy is to shift emphasis to private investment channelled through institutional credit, and away from public sector investment. The Project would be an important provider of funds for the implementation of this strategy, in particular to finance investments in on-farm and market level storage, farm mechanization, field irrigation facilities and agro-industfy. 11). Secdoral -ues Relevant to Rural FINce 2.07 Sectoral issues that affect the design of rural finance operations are the following: (a) poverty among rural families, which results in low debt service capacity (a poverty assessment is available on Morocco - Bank Report No. 11918-MOR of July 1993); (O) the need to mobilize deposits and savings at. market conditions; (c) financing of agro-industrial development to complement primary agricultural .produStion (this sub-sector is fully described in Bank Report No. 11727-MOR of June 30, 1993); (d) !alleviation of land tenmre constraints to investment incentives, productivity and access to credit; and (e) high climatic risk faced by agricultural production. To reduce this risk, it is proposed to create an agricultural insurance Fund involving private insurance companies (pira. 5.15). Tlese sectoral f.atures are more fully discssed in Annex 5, paras. 8 to 14. E. Bank-Rol in the AnroimWlua Sector -2.08 The Bank Group has provided considerable support to Morocco. As of June 30, 1993, 105 loans (including S IDA Credits) have been made, supported by US$9,714 million Bank/IDA funds (US$45.2 million of IDA Credits), net of cancellations. Total IFC net commitments in Morocco amount to US$184.2 million. In agriculture, the Bank plays an important role. To date, 21 projects and two adjustment loans (ASAL I and U) have been completed and five projects and one sector investment loan (ASIL) are at various stages of implementation, with a total sum of US$1,765 million Bank Group lending (see details by project in Annex 5, para. 15). As part of the Bank's recent portfolio managemet initiative, a Country Portfolio Performance Review (CPPR) took place in Morocco in FY93. There is currendy no candidate projects for restucturing or loan cancellation in the agriculture portfolio. 2.09 Lmo Leaned from Past gic ral Credit Pre . Performance of the Agricultura Credit Projects has been good. OED reports stress the contribution made by the projects to agricultral development, their success in mobilizing capital for private sector investment in Morocco, and in introducing institution building measures (CNCA) and the successful expansion of credit to small farmers. One important lesson learned from past projects is that a financially viable farm credit system can be maintned with a positive interest rate strucure (para. 4.20). Experience has also shown that CNCA needs to be strengthened to provide more competitive banking services to its diversified clientele (para. 6.09(e)), and to improve domestic resource mobilization (para. 4.29). Increased private sector lending by CNCA in Morocco provides a major source of growth for Moroccan agriculture. A more detailed description of the projects' performance and development impact is given in Annex 10.  - 4 - m. TM EM-4-a 3.01 isttutiona &Ift. Morocco has a well-developed financial sector. It consists of the Cental Bank-Bank Al-Maghrib (BAM)-, 15 commercial banks, five specialized credit institutions, among them: the Agriculttiral Credit Bank (CNCA); the Housing and Tourism Bank (CIH); and the Industrial Dovelopment Bank (BNDE). Tbere is also a capital market (Casablanca stock exchange) where stocks and bonds of private companies are listed and traded. It has, until now, played a limited role in mobilizing equity finance. At the end of 1992, the total banking system provided about DH 104.0 billion to the economy, about 63% of which (DH 65.0 billion) were short-term. There are also two savings banks, six leasing companies, mostly owned by the banks, and several insurance companies. Agricultural insurance is in its infancy in Morocco and needs to be further developed. The Treasury of the Ministry of Finance (MF) plays an important role in defining financial sector policies (para. 3.02). The Government is al.so promoting, under a new law and with Bank's assistance, the role of the Communal Infrastructure Fund (FEC). FEC will be both a financial institution subject to the supervision of BAM and a public sector enterprise controiled by the MF. FEC's basic mission, is to finance local investments to enhance the quality of communal infrastructes ncluding in rural areas. Details are in Annex 6. Jina Sector Policies and Reforms 3.02 In the mid 1980s, the Government started to implement a program of progressive elimination of direct monetary controls, to increase the efficiency and responsiveness of financiW intermediation. In 1990, improved macroeconomic stability and the projected decline in the need for domestic fiancing of the budget deficit encouraged authorities to move to a second phase of reforms. These reforms are supported by the Financial Sector Development joect (FSDP) for which a Bank loan of US$235 million was approved in 1991. Reforms include: (a) the transition towards indirect instruments of monetary management; (b) the development of domestic financial markets, in particular for government securities; (c) the liberalization of most interest rates and the elimination of directed credit policies; and (d) the strengthening of bank supvision and prudential regulations. Details are in Annex 9. IV. THE CALSSE NATIONALE bE CREDIT AGRICOLE A. Oa on and Stffn 4.01 CNCA was established by the State in 1961 as the institution responsible for financing the development of the agricultural sector. It fulfilled that function very effectively and, in 25 years, became one of the largest and most important financial institutions in Morocco. In 1987, the Government decided that, while continuing to play a leading role in agriculture, CNCA should broaden its activities into rural and commercial banking to become a multipurpose bank (a universal bank). Its mission is still enhanced by the higher priority being given to rural development and to the activities expected of CNCA in the future: expansion of credit, especially to small farmers; prudent diversification of operations, especially into agro- industries, fisheries, artisanal industries and other rural activities (notably women clients); increased mobilization of voluntary deposits and savings in particular rural savings; continued regionalizationldecentralization of credit and banking activities; and enhanced financial autonomy. Q _on 4.02 To fulfll effectivel the above functions, CNCA embarked, at the end of 1991, into the implementation phase of a major r., &cization of its structure. For that purpose, five wdeldgations", equivalent to vice-presidencies, are being created at the Headquarters office: Loau and Portfolio  Management; Branch Network Development and Promotion; Hunan Resources and Logistics; Finance and Accounting; and Planning, Management Control and Internal Audit. The Inspection Directorates (para. 4.09) will also be strengthened. 4.03 The Loan and Portfolio Management is responsible for providing support to the 'Caisses Regionales" (Regional Branch Offices) in the appraisal of lending operations, ensuring the technical quality of operaions, and processing the loans that are beyond the approval limits of regional branches. The Branch Network Development and Promotion is mainly responsible for providing pro-active marketing support to CNCA's branch offies and for assisting in the expansion of the branch network. 4.04 The new structure will include an International Opemions Departnent ([OD) and a Data Processing Department (DPD). The main responsibilities of the OI) will be to help CNCA develop its commercial activities in import-export prefinancing. This is a relatively new field of operations for CNCA which will require a great deal of staff training. To ensure e success of this activity, CNCA has recruited a commercial banker with experience in international trade financing. The other department, DPD, is in charge of developing CNCA's data processing capabilities which need to be rapidly upgraded. The new organization structure took effect in May 1993. 4.05 In addition to these organization changes at CNCA's Headquarters. a significant innovation is being introduced in CNCA's field organization. It consists of the creation of eight Regional Delegations, that is one,for each new economic region of the country with the region of Casablanca having two delegations becamse of its size and economic weight. The main functions of the regional delegation are to coordinate, support and monitor the operations of the various regional and local branches established within the region. 4.06 The long-maturing sew organization has merits because it consolidates various activities under the authority of a limited number of managers and provides CNCA with a structure needed for the expansion and the diversification of its operations. In the long run, the regional delegations are expected to evolve towards increased line authority and responsibility in their respective region. 4.07 CNCA is administered by a board of directors and a Director General who is the chief executive officer (CEO). The board includes representatives from the ministries of Agriculture, Finance, Planning, and Interior, of the Bank AI-Magbrib and of local farmers/institutions. Its role is being reoriented toward the normal and appropriate board functions of strategy and policy making, budget approval, overall supervision and evaluation of performance, and approval of audited accounts. The Director General is appointed by Royal Decree and is in charge of the overall management of the bank and of overseeing its performance. 4.08 To implement CNCA's change In strategic direction, the King of Morocco appointed a new Director General in January 1987. The Director General appoints CNCA's staff with the exception of the financial controller who is appointed by the Ministry of Finance. The Controller is required to report to Govenment on CNCA's compliance with pertinent laws. An independent private auditor is hired by CNCA to perform an amnal audit of the bank's financial s emets before they are approved by the Board at the annual meeting. CNCA's top management is experienced and capable. The Project will support CNCA's institional strengthening by providing funds for training, data processing and consultant services (paras. 5.12 to 5.14). 4.09 CNCA's credit is extended from its Headquarlers office in Rabat, 51 Regional Branches (CRCAs)' and 126 Local Branches (CLCAs)1, about 50% of which offer banking services. In addition, 1V Caises REgionales do Crdi AVicole. yI Ca].. Locaes do Crt Agrico.  -6- 155 seasonal credit outlets attached to CLCAs are operational as well as 16 deposit branches in major urban centers. There are siX Inspection Directorates (IRCAs)' in charge of banking inipection, coordination of credit activities, and undertaking special surveys and studies. Due to the rapid ewvansion of the lending program and other banking services, CNCA needs additional and more modem office space. atmn ad NW iIflin 4.10 At the end of 1992, CNCA staff numbered 3,385, 27% of whom were located at headquarters and 73% in the field. The distribution of staff between Headquarters and field offices (CRCAs and CLCAs) at the end of 1987, i.e five years earlier when staff totaled 2,474, was 33% at Headquarters and 67% in the field. This evolution is favorable. 4.11 Staff productivity is fairly high. Between 1987 and 1992, CNCA's total staff increased at an average annual rate of about 6% while the volume of lending increased at an annual rate of about 11%. The volume of annual lending per staff is about DH 1.6 million for Headquarters and the CRCAs (about 230 loans processed per staff per year) and about DH 1.2 million for the CLCAs (500 loans processed per staff per year). CNCA's staff is relatively well educated. Most support staff are high school graduates or have a professional training diploma. Middle and higher management staff (22% of total) are university graduates. Every newly appointed employee receives induction training of from one to six months depending on his or her position. 4.12 CNCA has made considerable effort under Loan 3088-MOR to upgrade the training provided in its in-house center. Results have been quite encouraging in terms of the number of staff attending training programs and also in terms of the variety of programs being offered. While in 1988 35% of the staff received training, the proportion increased to 41 % in 1989 and to 48% in 1990. Furthermore, the center developed programs that are in line with CNCA's objective of becoming a multi-purpose bank. These include seminars on commercial banking operations, marketing, data processing, human resources management, resource mobilization, import-export, pre-financing, appraisal of agro-industry lending including enviromental impact. Emphasis was also placed on improving the quality of the training itself. B. MI PoLcies and P 1oedures 4.13 CNCA's lending policies are spelled out in its statement of policies approved by the Board of directors in 1989 (Annex 11). The forms of services are very diverse: short-, medium- and long-term loans; all banking operations; leasing schemes; underwriting of equity investments; assistance to enterprises to mobilize resources; management of public finds or loans for the account of the State. The policy statement also indicates that CNCA will finance only projects that meet specific criteria of technical, environmental, economic and financial viability; and that it will not finance more than 80% of the total cost of an investment program, including leasing schemes. These policies are sound and satisfactorily implemented. 4.14 Simplification of procedures and expansion of the range of investment financed have been the main feaures of CNCA's credit policies. Lending operations are governed by 'Credit Guidelines"' which are revised periodically. A major oveaul of these guidelines was done in 1990-91 to incorporate CNCA diversified operations and recent elements of financial sector liberalization. They are comprehensive and cover types of credit available for each activity, appraisal criteria, financing norms, sub-borrower contributions, inerest rates, maturities, loan approval authorities, security for loans and maximum credit ceilings available to borrowers. Lending procedures are different for commercial farmers, clients of Headquarters or CRCAs, and for small farmers who are clients of CLCAs. Loans from Headquarters and 2/ lIpons Rfgiondes de C6dit Agicole. i/ Normes et conditios p6cifiques de fiancament.  CRCAs are subject to considerably more stringent appraisal criteria than loans from CLCAs, for which procedures are streamlined. Short-term loans are usually granted for periods of 3 months (harvest loan) to 12 months and finance farm inputs and produce marketing; medium- and long-term loans extend from 2 to 20 years (up to 25 years for rural housing) and finance a wide range of on-farm and other investments. CNCA is servicing about one million clients nationwide. Headquarters OMce and CRCAs 4.15 The Headquarters office lends to about 18,000 clients, essentially large farmers whose borrowings exceed the CRCAs' loan approval authority, irrigation development agencies (ORMVAs), and private agro-industrial enterprises. CRCAs lend to about 300,000 clients. This includes individual farmers with a fiscal income (Fl)s above DH 6,000 (actual net farm income of at least IH 12,000 or US$1,500), Agrarian Reform Cooperatives, agricultural and agro-industrial enterprises and exporters. Loan approval authority is below DH 650,000 (US$72,000). 4.16 CNCA has achieved an acceptable balance between thoroughness of appraisal and the objective of reaching a large number of farmers with limited staff resources and operating costs. Field appraisal is systematically undertaken for investments in land improvement, irrigation, purebred livestock, plantations, poultry farming, rural housing, coastal fishing and for all loans disbursed by installments. On-farm appraisal is also carried out for other purposes when considered necessary. Loans made for the purchase of equipment can represent up to 70% of investment costs. 4.17 Loan applications are reviewed and approved by the CRCAs' credit committee which meets weeldy. It is chaired by the CRCA director. The type of guarantee required from borrowers is based on CRCA staff judgment of credit risk. Short-term loans to individuals are generally secured by crop liens and sureties and medium- and long-term loans by a chattel mortgage on equipment. Loans for land improvement, irrigation and construction are secured by a mortgage. 4.18 CLCAs process 65% of all CNCA loans (but about 18% only of total loan amounts) and make loans to about 600,000 clients, essentially small farmers, artisans and rural women with a fiscal income of less than DH 6,000, which corresponds roughly to an annual net farm income of less than DH 12,000 (US$1,500). Comprehensive lists of farmers' Fl are kept with CLCAs and consulted for every loan application. As in the case of CRCA clients, loan amounts are determined on the basis of norms revised annually. However, there is a ceiling on maximum borrowings intended to keep borrowing within the estimated debt capacity of CLCA clients. For farmers having documented title to their land, maximum short-term borrowing is limited to DH 40,000 (US$5,000) and maximum medium-term loans outstanding to DH 80,000 (US$10,000). For borrowers without any evidence of ownership, short-term loans are limited to 200% of thei FI and medium-term loans to 800% of FI. The current trend is towards decentralization, making local branches more autonomous in their lending decisions. 4.19 The ceiling on borrowing capacity reduces CLCA lending risk. This is important, because loan appraisal is based on desk review. Systematic field appraisal and supervision of loans made to small farmers (average loan in 1991 was about DH 5,100 or US$640) would not be administratively or financially feasible. The FI ceiling is necessarily arbitrary, but it minimizes risk. Interest Rates 4.20 Current nominal interest rates (1993) on CNCA's loans are presented below (inflation was 5% in 1992 and in the 4-5% range in 1993): I/ Net income estimated for tax purposes. Depending upon the crops grown, real annual not farm incomes range from 2 to more than 20 times fiscal incomes.  - 8 - Table 4.1: CNCA's NOMINAL INTEREST RATES ON LOANS/d Per Per HQs and CRCAs Annum (%) CLCAs Annum (%) Short-term Loans Short-term Loans Crop Marketing 12.5/a Cereals and Pulses 9.5 Handicraft 9.0/12.0 Harvest Loans 12.0 Export Prefinancing 10.0/11.0 Artisanal/Fishing 11.5 Coastal Fishing 11.0 Other 11.5 Cereals & Pulses 10.0 Other 11.0/14.0 Medium- & Long-term Loans M_dium- and Long-term Loans Agriculture Over 7 Years/Under 7 years 12.0 Agriculture (5 to 10 yrs) 11.5 Coastal Fishing Coastal Fishing 11.0 Over 7 years/Under 7 years 12.0 Rural Housing 12.0 Agro-Processing and Wood-Processing Loans tb 14.0 Rural Housing /c 12.0/14.0 Rural Land Acquisition 14.0 Handicraft 9.0/14.0 /a Rate fixed by the Govemnment for all banks, increased from 8.0% to 12.5% in June 1993.. ib= Maturity periods 5-10 years. Rates of 12% for small-scale enterprises. /c With a Govemment 4%-5% rebate fcr a new house if its total cost (social housing) is less than DIH 150,000/100,000 (US$19.000/12,500). Subloan term : up to 25 years. /d Effective interest rates are higher than nominal rates because of additional fees. 4.21 Interest rates on CNCA's loans are compatible with those charged by commercial banks for comparable loans. Real interest rates are high in Morocco. In addition, an appraisal fee of 0.05% is charged on CRCA and Headquarters loans6 and a 0.75% commitment fee is charged on the part of the loan that has not been disbursed six months after the signature of the loan agreement, regardless of the amount of other loans. Medium- and long-term loans are also charged a 1% front-end guarantee commission to partially cover the foreign exchange risk with the exception of loans for rural housing. A life insurame premium for housing and medium- and long-term credit was introduced in July 1993. 4.22 The domestic rate of inflation, which rose from 3.1% in 1989 to 6.7% in 1990 and 8.2% in 1991, declined to about 5% in 1992 and less than 5% in 1993. As inflation is expected to remain in this order of magnitude in coming years, CNCA lending rates would remain positive in real terms during the project period. Increase in the cost of CNCA's resources would also impact CNCA's financial viability. A mechanism has been established under the Project to enable CNCA to freely adjust its interest rates on its loans so as to protect its financial margins and profitability (para. 6.09 (b)). C. Lendng Operations 4.23 In 1992, total CNCA lending reached DH 3,343 million (Annex 1, Table 1) down from DH 4,918.9 million the previous year, only because of the drought. From 1988 to 1991, CNCA achieved 6/ On loans of more than DH 5,000.  -9 - an annual average rate of growth of 15%. Including the year of drought in 1992, the average annual rate of growth was only 3%. In real terms, lending increased at about 10% per normal year. 4.24 Over the 1988-92 period, the share of short-term credit in total credit varied from 55% to about 60%. In 1992 ( a non-drought year), short-term loans to private farmers primarily financed crop production (56%), animal production (14%) and animal feed (5%). Short-term credit to State agricultural companies, which represented 10% of total short-term lending, was used mainly to finance, through the ORMVAs, industrial crop production (cotton, sugar beet and sugar cane) in irrigated perimeters. New private sectors of short-term lending activities opened in 1989 now represent 10% of short-term lending. They include handicraft, fisheries and agro-industries. In 1991, about 25% of total medium- and long-term credit went to CLCA clients (mostly for livestock, including construction7 as for previous years), 55% went to individual CRCA clients and the balance to Agrarian Reform Cooperatives (2%), State companies (2%), private agro-industries (8.4%), and rural housing (10%). The last two activities and fisheries expanded since 1989. Four types of investment (all private) represented about 74% of total lending: livestock (25%), farm and irrigation equipment (25%), rural housing (10%), and agro-industries including green-houses (14%). Fann Credit Coverafe 4.25 The extent of CNCA's farm credit penetration in rural areas is illustrated in Annex 2, part B, showing tle number of potential and actual CNCA individual farm clients. 4.26 About 70% of potential CRCA clients, but only 35% of potential CLCA clients were receiving credit in 1991. Very few marginal farmers with an Fl below DH 1,600 (about 5 ha rainfed land) were actual CLCA clients, reflecting their low borrowing capacity and their lack of participation in the monetized economy. The increase in the number of clients has followed the expansion of the network of CRCA and CLCA offices, but certain upper limit may have been reached. A sharp increase in 1981/82 coincided with the opening of 90 seasonal credit outlets to bring credit facilities closer to farmers, while containing distribution costs. Given the already current high coverage level of CRCA clients (70%), only modest scope, in particular in the aftermath of a two-year drought, exists to increase coverage of farm clients in rainfed areas. The diversification of CNCA's banking activities is essential. 4.27 CNCA's recovery procedures are efficient, and repayment performance is good when the crop season is normal. Arrears accumulate, however, during drought years. At the end of 1992, total arrears (essentially drought-related and including previous rescheduled loans coming due) amounted to DH 3.8 billion, i.e 30% of total outstanding loan portfolio. However, CNCA recovers more than 95% of all its credits, but it takes six to seven years after maturity to reach this target as shown in Annex 7, table 12A, which also summarizes key indicators on CNCA loan recovery for 1985 to 1992. In August 1992, as result of the drought, CNCA took a series of actions to improve recovery performance due to default (not delinquency) in particular at CLCAs servicing small-farmers in rainfed areas, and in March 1993, additional measures were ordered to cushion the impact of a second consecutive drought (details are in Annex 7, Table 12B). Loan loss provisions are currently covering 100% of arrears of more than 18 months, and are planned to cover 100% of arrears of more than 12 months in 1996. 7/ Construction is usually of stables for livestock and thus is often part of a total on-farm investment in livestock activities.  - 10- D. Finandal Situation and Performance Finnda Condition 4.28 Resores. As of end 1992, CNCA's total balance sheet including provisions (10%) amounted to DH 17,342.2 million (US$1,927 million). This represented a yearly compounded increase of about 12% over the 1988-92 period (total 1988 assets: DH 11,093.3 million). Table 4.2 below shows the distribution of CNCA's resources (liabilities) for 1988 to 1992. CNCA's detailed financial statements are in Annex 7, Tables I to 5. Table 4.2: CNCA RESOURCES AS OF DECEMBER 31 (in DH Million) ---1988-- -1989- -1990 ----1991-- - 1---1992- Amounts % Amounts % Amounts % Amounts % Amounts % Capital 425.6 4 425.6 3 425.6 3 425.6 3 465.6 3 Reserves 512.9 5 551.6 5 590.7 5 631.0 4 642.6 4 Other /a 137.9 1 138.5 1 138.8 1 139.1 1 139.2 1 Total Equitv 1.076.4 10 1.115.7 9 1.155.1 2 1.195.7 8 1.247.4 8 Provisions 812.3 7 1,079.2 8 1,281.2 9 1,534.8 10 1,808.6 10 Deposits 1,316.7 12 1,751.2 14 2,152.5 16 2,709.8 17 2,853.2 17 One-year bonds 1,307.0 11 1,447.1 11 1,077.6 8 1,148.2 7 1,256.8 7 Other Current Liabilities 623.6 6 682.8 6 812.5 5 832.2 5 873.1 5 Current maturities of LT Borrowings 376.7 3 424.9 3 465.1 3 521.1 3 594.4 3 Long-term Liabilities 5,580.5 50 5,877.6 48 6,824.4 50 7,919.7 50 8,708.7 50 Total Liabilitis 10016.8 90 11.262.8 91 12.613.2 91 14.665.8 92 16.4094.8 92 IQThL 11.093.3 100 12.378.5 100 13.768.2 100 15.861.5 100 17.342.2 100 a/ Including CLCAs' quasi equity fund of DH 94 million. During the 1988-1992 period, the average annual rate of increase of the total balance sheet stabilized at about 12% in current terms, but this indicates that CNCA is still growing. At the end of 1992, long-term borrowings (DH 9,303.1 million) net of current maturities falling due in 1993 (DH 594.4 million), i.e, DH 8,708.7 million represented 50.2% of CNCA's total resources. About 98% of long-term borrowings were external borrowings, of which DH 3,867.9 million (42%) were from the World Bank, followed by KfW. Domestic long-term borrowings declined from DH 224 million in 1988 to DH 91 million in 1992. The relative decline in CNCA's capital adequacy as measured by the ratio of total equity to risk assets8 (about 13% in 1988 compared to 10% in 1992) is partly due to the new taxation at 40% of net income (down to 38% in 1993), and it indicates that the institution is not able to generate internal equity fast enough to compensate for the increase in lending volume and business development. While capital adequacy during the Project period (para. 7.04) is expected to remain above the 8% of risk assets that is generally being adopted as the international standard for commercial bank capitalization (10% is better for development banks), the trend line would be monitored annually during project implementation (para. 6.09(b)). KfW proposed that its contribution to the project be passed on by Government to CNCA as a capital increase. Over the disbursement period, this would increase CNCA's equity by about 25%. 8/ Loans, and bills discounted.  - 1 1 - 4.29 D Recently, CNCA has been relatively successful at mobilizing short-term domestic resources, and the relative share of voluntary deposits in CNCA's total resources increased significantly from 12% in 1988 to 17% in 1991. In 1991, deposits increased by 25% over the previous year. In four years, the average annual rate of increase has been nearly 30%. The total amount of deposits increased from DH 1,317 million in 1988 to DH 2,853 million in 1992 (+ 117%). Core deposits are primarily sight deposits on current accounts (66%), and are mostly mobilized from the CRCAs and zie new "Guichets bancaires" (banking outlets), installed in the main urban areas specially to attract deposits. Deposit collection at CLCA level starts to increase even faster (except in 1992), but still represents a small percentage of the total (2.2%). Since 1987, CNCA has been serving new markets including women farmers and artisans and since June 1988, it has also been serving Moroccans working abroad. There is still a large scope for developing savings deposits at CNCA, which now represent less than 5% of total deposits in the whole banking system as compared with a market share of 2.2% in 1988. 4.30 One-Year Solidait - Bends. To cushion two past major droughts, and to allow CNCA to meet vastly increased credit demand, commercial banks have accepted, beginning in 1981, to place 3.5% (down to 2% since December 1991) of their deposits in agriculture through CNCA at an interest rate of 3% p.a, then at 4.25% since 1987. These one-year solidarity bonds have decreased from DH 1.4 bilion in 1989 to DH 1.2 billion in 1992 and now represent only 79 of total CNCA's resources (11% in 1989). Commercial banks are unlikely to make quick progress in financing small farms because of the high risk and cost involved, and expertise needed. In the poorest rural areas, there is not yet enough business to support two institutions. This is partly why, in an imperfect financial market, CNCA has to be made stronger to meet the double challenge of: (a) competition from commercial banks located in urban centers along the coast for attractive banking activities; and (b) specialization, to fulfill its basic development mission of financing the rural sector including in the poorest areas. Farm incomes dropped sharply in 1992 and 1993 as a result of two consecutive droughts. The Government and CNCA, however, decided not to recourse to additional one-year bonds from other banks to cushion the impact of the drought on CLCA operations (para. 4.33), but to use transitional budget resources instead. With a view to establishing an improved level playing field in the years to come, a sustainable crop insurance scheme (open to all banks) to cushion the effects of future droughts will be established under the project (paras. 5.15, 6.12, 7.06, and Annex 13) in anticipation of the eventual elimination of solidarity bonds as part of the liberalization of the Financial Sector in Morocco. Lem Portfolio Oualt 4.31 Collection performance and appropriate provisions are good indicators of loan portfolio quality. Overall, CNCA's track record compared to other, rural finance institutions in developing countries is strong. Collection performance on drought-related arrears, however, has deteriorated these past years (Annex 7, Table 12B) and this has led to a certain degree of uncertainty as to the real value of part of CNCA's loan portfolio and thus the adequacy of its loan loss provisions and real capital. In July 1988, CNCA made the prudent decisions to convert its current provisions of DH 409.1 million into a special reserve for unpaid loans, and to introduce an improved approach to calculating new provisions as of 1988, including a climatic risk provision. The improved approach includes a systematic loan evaluation and classification system for all loans above a certain amount9 to single borrowers or related entities. Each borrower is reviewed, at least annually, on the occurrence of any change in the credit lines approved or significant change in the borrower's condition. A standard classification is applied based on the extent of past dues, if any, the financial condition of the borrower, the quality of the documentation, the value of the security held, and the specific loan loss potential identified for the total outstanding to each financially 2/ Initially quite high, but to be lowered progressively to DH 500,000 or DH I million.  - 12- troubled borrower or related group of borrowers. CNCA has defined appropriate loan classification levels, criteria and related risk level guidelines, and set up a monitoring process. According to these new guidelines and procedures, CNCA increased the overall level of credit risk provisions from DH 612 million in 1988 to DH 1,280 million in 1991, a level that the external auditor confirmed to be adequate in normal years i.e when the crop season is good. Provisions further increased to DH 1,530 million in 1992. Provisions for bad debts now amount to more than 40% of arrears. Assuming an average real recovery rate of 95%, CNCA should continue to provision at least 5% of its yearly disbwrsements. This will allow CNCA to maintain in its accounts an adequate level of provision for bad debts that covers 100% of the real risk of default as determined by analyzing overdues annually. These steps are essential to establishing CNCA's market reputation for financial responsibility. Assurances were obtained at negotiations that CNCA would apply policies and procedures satisfactory to the Bank for loan classification and loan loss provisioning, in accordance with the prudential regulations and advice of the Central Bank (BAM). Through the gradual implementation of the climatic risk insurance scheme, provisioning would also be more reflective of normal credit risk. Overall Onprn Results. Profitability and Subsdy Dependenc 4.32 CNCA's operating results are positive. CNCA's financial status for 1988-92 is presented in the summary balance sheets, income statements, and flow of funds statements in Annex 7, Tables I to 4. CNCA's net profit in 1992 was DH 11.6 million, compared with DH 23.2 million in 1988, DH 38.6 milion in 1989, DH 39.1 million in 1990 and DH 40.2 million in 1991. CNCA's financial performance during this period can be summarized as follows:  - 13 - Table 4M3: C4A FIACIAL PEREOEl5 (DH MUlion) Interest income 952.0 1,073.4 1,198.2 1,331.3 1,409.5 Interest expeose (426.2) (538.3) (606.8) (695.6) (759.1) Qlleratins Income 5=f8 535.1 S91.4 63S 7O650.4 Staff cost 207.8 225.2 270.5 293.2 314.3 Depreciation 9.0 10.4 14.1 17.9 21.9 Other expenses 42.7 48.5 61.3 63.9 75.6 Qemrating Exenses (2,9.5) (284.1) 34i.9) (37S.0) (4.I1.6) Opering Result /g 266.3 251.0 245.5 260.7 238.6 Other Income 38.4 44.2 45.6 43.8 31.4 Provisions for losses (203.2) (232.4) (209.7) (227.5) (249.3) Exchange risk provisions (13.9) (14.6) (15.9) (11.5) (13.5) Other provisions (38.9) (2.8) (2.8) (3.0) (3.0) Prior period adjustments 0.2 20.1 5.2 5.7 15.9 Net Incme before tax /k 4 65.5 67.9 2 Income tax (25.7) (26.9) (28.8) (27.9) (8.5) Net Profit /I 38.6 39. 40.2 1L6 Free Reserves 23.2 38.6 39.1 40.3 11.6 Rt (%): Pretax Return on Equity 5.1 6.0 6.0 5.8 1.8 Net Return on Equity 2.4 3.5 3.4 3.4 1.0 Pr-x Return on Risk Assets 0.6 0.8 0.7 0.6 0.3 /A Operaing income less operatng expenses. /, Since its creation In 1961, CNCA was empt from income tax (till end 1987). Ic As a Government development bank, CNCA does not pay dividends. CNCA's average cost of funds in 1992 was roughly 5.5%, compared with 5.0% in 1988. The profit and loss data in Table 4.3 above shows that the gross interest margin (operating income) over the 1988-92 period has declined from 55% of interest income in 1988 to 46% in 1992. During the 1988-91 period, CNCA earned a net return on equity of 3.4% (5.8% before tax) in 1991 but it declined significandy in 1992 where the net return on equity was only 1.0% (1.8% before tax) as the result of declining margins (due in part to the impact of the drought on recovery performance) and increased provisioning. Clearly, the profitability of CNCA is bighly sensitiveto policy and procedures applied to provisioning for loan losses. Once its statuts have bej lified (placing formally CNCA under the Central Bank regulations and supervision), CNCA will be under the guidance of the Central Bank, to the same banking law and prudential regulations that will >. - ,licable to other bankm as of 1995. CNCA's projected provisions for loan losses for 1993- 1996 are consistent with the prudential regulations stipulated under the new banking law (Annex 7 Table 11). On economic subsidies, CNCA and the Government of Morocco have reduced between 1988-91 farmers' and CNCA's implicit and explicit subsidies as measured by a Subsidy Dependency Index. However, for  - 14- 1992, this index increased as a consequence of drought-related impacts on the growth of profits (Annex 16)10. 4.33 CLCA Operatons. When they are not adversely affected by droughts, the CLCA operations can generate sufficient income to cover costs and to generate a small profit (e.g. about DH 0.9 million per year between 1988 an 1991), despite the higher administrative cost involved in lending to small farmers. This cost represents 3.4% of risk assets for CLCA operations, as compared to 2.9 % for CRCA's and headquarter's operations. The CLCAs currently represent a highly efficient, relatively low-cost rural finance window whose development impact is also positive in poor rural areas. In 1992, however, CLCA operations decreased sharply as the result of the drought and higher risk of default. It will be difficult to make improvements without increasing costs further until the climatic risk Insurance Fund is in place. The managers and staff of CLCAs are highly productive in credit operations. They need to maintain their overall financial viability and improve their performance in deposit mobilization, portfolio diversification, and farm credit recoveries in particular in the three regions (Sud, Tensift, Oriental) chronically affected by droughts. E. CNCA's Development Objectives and Straterv 4.34 The year 1987 marked a turning point for CNCA when the Government of Morocco, at the highest level, reemphasized the role of CNCA in the development of the country's rural sector. New orientations for CNCA include: (a) its transformation into a universal, full-service bank with a qualified and responsible Board of Directors, while maintaining its farm credit specificity; (b) expansion of CNCA's credit operations, to serve a larger number of farmers, particularly small farmers, the diversification of lending and banking activities to other subsectors, including fisheries, agro-industries, forestry, land consolidation, rural housing, artisanal and other rural activities; and (c) assurance of CNCA's managerial autonomy and financial viability. In line with these orientations, CNCA's management has defined the following medium-term development objectives which are consistent with its charter (para. 4.01) and its sound policy statement (Annex 11): (a) assure the sustainability of CNCA and its financial viability by implementing adequate policies of work organization, staffing, business development, and relations with Government, borrowers, depositors, and financiers; (b) improve its future resource position to meet the currently planned levels of agricultural, commercial and other diversified lending, by mobilizing demand, time and savings deposits, as well as new external funds during the Project period; (c) develop long-term plans to strengthen and diversify its business base and its asset and liability structure, and ensure that CNCA continues to have an effective role as the lead bank in the financing of the agricultural sector; (d) pursue the decentralization of its credit and other banking operations by setting annual objectives at decentralized levels of operations for the use of funds, deposits and savings, and loan recovery, by restructuring its branch network in the major regions of the country (regionalization of CNCA), and by opening new full service branches in nrual areas; and 10/ Considerable pmdence should be maintained ;n the interpretation of this subsidy dependency index. See Annex 16 for the assumptions on its calculations.  - 15 - (e) improve its operational efficiency by simplifying management tasks and procedures for some of its banking products, developing new banking services, improving the processing and supervision of loans and operations, and modernizing its management information, accounting and control systems (MIS). To help CNCA achieve these objectives the Project will support the institution to: (a) implement a long-term strategic and operational planning system (para. 6.09(c) and Annex 12); (b) implement its new internal organization and its executive decision-making information system developed under Loan 3088-MOR, and further develop the computerization plan of its banking activities and basic Management Information System (MIS), to allow for more efficient planning, budgeting, accounting, risk asset and liability management, branch network coordination, control function management, and personnel management; and (c) continue to implement its pluri-annual training program for CNCA's managers and staff (para. 6.10). The Project includes financing for technical assistance in the strengthening of CNCA's management, software, computer maintenance, staff training and small equipment (para. 5.12). F. CNCA's ProJected Lending Progg and F-lmdw Reafrements (1993-1996 4.35 Based on past trends, the Government's priorities and objectives, the private sector demand for credit to finance agricultural investments, and on CNCA's own business development plan and diversification strategy, CNCA's total lending (Annex 1), after growing at 15% p.a. from 1988 to 1991 (but decreasing in 1992) is projected to increase again during the coming years, but at a smaller growth rate of 7% to 8% (assuming that 1993 lending reaches the level of 1991). This projection takes into account the risks involved by lending too much at a time when loan rescheduling is still necessary to spread the impact of the 1991-92 and 1992-93 droughts and possible future droughts. Under these reasonable conditions, total lending would reach as much as DH 5,800 million (US$650 million) in 1995 with a ratio of short-term to medium-term credit of about 1.4:1. Pending revision of the business plan at the end of 1994, projections for 1996 and 1997 are based on the same assumption for growth. The resources necessary to finance such a lending program will primarily come from domestic sources through: (a) the repayment of outstanding subloans; (b) increased deposit mobilization; and (c) financial revenues. The remaining financing needs will be financed from external sources. The Project's cofinanciers would provide the external financing necessary. The expected increase in deposits (mostly sight deposits) would provide CNCA with the resources necessary to finance close to 90% of its short-term lending program as of 1996 (67% in 1992). The Project would provide CNCA with long-term resources to finance its medium- and long-term lending program.  - 16 - V. THE PROJECT A. Rationale for Bank Involvement and Project Objectives 5.01 Rationale for Bank Involvement. Bank involvement would consolidate and deepen the institutional reform process (initiated under Loan 3088-MOR) to develop a financially sound rural finmze system well-integrated into a gradually liberalized financial sector strategically linked to the FSDP. In Morocco, CNCA is a key institution, and its dual role as a bank and as a specialized financial institution in rural credit/savings is essential. Through CNCA, the Project would fulfill fundamental social and economic needs in the country for progress in rural development, banking efficiency in financial intermediation, including the need to separate normal credit risk from climatic risk, and private sector growth. In this context, the project would be integral to the strategy articulated in the Morocco Country Assistance Strategy by supporting Government efforts to alleviate rural poverty and to further develop the rural private sector. The Bank support would also assist CNCA's efforts to raise about US$279 million of additional cofinancing for investments in the sector and to implement, with Government's support, longer term technical assistance on drought management. 5.02 Project Objectives. Consistent with the Government's adjustment program and priorities, the objectives of the project are to assist Morocco in promoting private investment in rural areas and in developing the sustainable foundations of a financially sound rural finance system well integrated into a gradually liberalized financial system. The project would aim at: (a) financing demand-driven, private sector investments in rural areas and in agro-industries through CNCA; (-b) consolidating the institutional transformation of CNCA into a competitive, universal bank, in a prudent manner, through clientele and resource diversification; (c) increasing domestic resource mobilization and securing the banking system through a sustainable drought relief fund/crop insurance system; (d) providing a full range of competitive banking services and products to rural farm and non- farm clients (notably women), enterprises and young entrepreneurs/graduates; and (e) developing viable credit/savings schemes to reach the rural poor and make them both productive and creditworthy. B. S_usM Project Description 5.03 To achieve the above objectives, the Project would support over a four-year implementation period (1994-1997) the following activities: (a) CNCA Credit Program. First, the Project would continue financing CNCA's core activities and also support its diversification program: (i) on-farm and forestry investments by private farmers, enterprises and cooperatives, including water conservation measures; (ii) agro-indus,ry investments including working capital requirements and technical assistance wi#i UNIDO support; (iii) investments in rural housing constructien; (iv) private coastal fisheries; (v) private artisans (notably women) and rural non-farm enterprises; and (v) land consolidation. Second, as new elements of the proposed credit program, the Project would support CNCA financing of: (i) an expanding program of women's activities in rural areas; and (ii) young entrepreneurs/graduates.  - 17 - (b) Stergh of CNCA and Institutional Development. Consistent with CNCA's policy statement and change in strategic direction, the Project would support and fund: (i) the training program, MIS software and office technology equipment and maintenance needed to better manage CNCA as a universal bank, assist CNCA's clientele, and promote export-related operations and lending to women; (ii) training specialists; (iii) professional visits overseas for local trainers and managers; and (iv) consulting services required for the strengthening of CNCA management and to support Project implementation, including technical assistance for agricultural insurance development and drought management. C. EDetsled Featwur C-NCA Credit PQ 5.04 Investment Lending to Small Farmers. This component would finance about 267,000 subloans for on-farm investment by small private farmer clients of CLCAs. Beneficiaries include both men and women. Investment would mainly be for livestock, draft animals, stables, wells and pumps, land improvement, small mechanization and on-farm storage. This component (US$278 million) would represent about 27% of total investment under the Project. 5.05 Investmnt Lending to Medium and lAMe Fames. This component would finance about 48,000 subloans to larger commercial clients of CRCAs or CNCA Headquarters (including cooperatives) for on-farm investments in response to market demand. Lending would be mainly for agricultural machinery such as tractors and harvesters, transport, wells and irrigation, greenhouse construction and equipment, plantations, livestock and land improvement. In addition, CNCA would finance maintance operations undertaken by smallholders in large irrigation perimeters under the supervision of ORMVAs, including water conservation measures. This component (US$452 million) would represent about 43% of total investment under the Project. 5.06 Lending to Agindusties. This component would mainly finance investment in working capital and technical assistance needs of private small- and medium-size enterprises. The bulk of the market demand is for investments in fruit and vegetable packing and processing, olive oil processing and dairy production, flour milling, meat and fish processing, poultry, animal feed and storage. It also includes wood processing and other activities. This component (US$105 million for about 310 investment projects) would represent about 10% of total investment. Bank loan proceeds allocated to agro-industry represents only US$15 million. 5.07 Lfndiuf for the OCtr uction of Rural Housing. The main objective of this component is to provide well-targeted credit for construction of individual and collective .ural housing for farm families, agricultural laborers, rural women, and other rural families in order to reduce migration io urban areas. This component (US$90 million) will finance about 12,500 loans, mainly for low- and medium-income families and would represent about 9% of total investment under this project. 5.08 Lending to Private Coastal _in. Lending under this component, which is a recent activity for CNCA (since 1989), will be highly selective. Priorities are for the supply of fishing gear and equipment, major repair and the renewal of engines and boats to private fishermen, in particular coastal fishermen, who have a demonstrated record of fishing performance and creditworthiness in Morocco. This component (US$41 million for about 660 operations) would represent about 4% of total investment under the Project. 5.09 Lendinf to Artisanal and Women Activities in Rural Areas. CNCA has developed experintal saving and lending products for artisanal and non-farm rural clients. These products are particularly successful with women clients in the Khemisset and Rommani areas. The Project would further develop these promising activities and finance women borrowers, cooperatives and pre-cooperatives in new selected areas nationwide. The main objective of this program is to help women located in rural areas to  - 18 - start and develop their own entrepreneurial activities in handicrafts and cottage industries. This component is expected to finance about 14,400 loans. This component (US$37 million) would represent about 3% of total investment under the Project. 5.10 Land Consolidation Credit Program. The objective of this program, recently launched by CNCA, is to give private farmers access to credit to purchase land as part of the Government adjustment program for land policy initially supported by ASAL 11. The rationale for this is to promote the establishment of economically viable production units through land consolidation and prevention of land fragmentation. This program, which is not funded by the Bank (local cost component), would represent about I % of total investment under the Project (US$7 million). 5.11 Lending to Youn Entrepreneurs/Graduattis This component is designed to provide financing to young entrepreneurs/graduates to help them start their own enterprises. The component will provide funds for farm and rural non-farm enterprises consisting of private small-scale enterprises/young professionals (men and women) engaged or willing and capable to engage in farm or off-farm activities in rural areas. This includes service cooperatives and trading services, crop transport, food processing, tractor repairs and maintenance, input and spare parts supply, forest exploitation/reforestation and environmental protection, and construction. CNCA will carefully select both farm and non-farm enterprises to be financed. Tlis component (US$30 million) will finance about 435 loans and would represent 3% of total investment under the project. sdioU nsioImw 5.12 Improvement of CNCA's Oraanitional Structure. inandal Performance. Planning Process and MIS. The Project would provide for: (a) strengthening the organizational and regional structure of CNCA (para. 4.02) and its financial performance (para. 4.32); (b) making fully operational the planning and management control unit reporting to CNCA's Chief Executive Officer, and responsible for elaborating corporate objectives with the CEO, communicating them to lower levels within the organization for implementation, managing the planning process, and controlling results (Annex 12); and (c) further improvement of CNCA's MIS and accounting and expansion of computerizaion. The Project would finance: (i) MIS softwares, data processing and office technology maintenance during a three-year period at CNCA's Headquarters and branch level; and (ii) the related training needs (para. 5.13) and consulting services as necessary (para. 5.14). 5.13 Lroject-Related Training. The Project would fund training by CNCA's Training Center with the assistance of consultants. The pluri-annual training program already includes all the elements likely to ease CNCA's institutional transition, i.e., courses in human resources management, marketing and development, banking products and services, and applied technologies. Training will also include courses in credit appraisal, environmental planning, and portfolio management for credit staff; accounting for middle level and operational staff; planning, programming, MIS, management control, and communication skills for senior staff; electronic data processing for computer staff and computer users; banking services for branch managers and selected support staff; and risk management. The Project would also finance small equipment, professional visits overseas for senior managers, and as necessary the recruitment of appropriate training specialists (para. 5.14). A total of about 1,000 staff would be trained under the Project. Details of the training objectives, plan and activities are available in Project working document No. 5. 5.14 Technical Assistane. Technical assistance could be of considerable help in speeding up CNCA's refnrms and in training CNCA's top staff. This is particularly true for the planning process and other organizational/MIS aspects, for CNCA's new banking services and for the launching of the pilot  - 19' climatic risk Insurance Fund. The Project would finance the expertise necessary to support CNCA's reforms, Project implementation and training, up to a total of 15 man/months of consultants/ training specialists. The total cost of consultants is estimated at US$0.5 million. Cofinancing funds (CFD) will also be available. 5.15 Climaffc RNsk Moannent and Agricultural Insurnce Fund (not for Bank financing). The project wouid assist the Government in establishing a climatic risk Insurance Fund (Fonds d'Assurance Agricole contre les Calamites Naturelles - FAA) for the protection of farmers, and an agricultural insurance scheme. The establishment of the proposed scheme would take place at the end of 1996 after two years of pilot implementation in 1995 and 1996. An action plan for the Insurance Fund and its pilot implementation would be presented to the Bank by October 1994 and would be based on the results of the technical study and actuarial analysis prepared in May 1993 and reviewed in September and November 1993 using workshops to build commitment. Assurances were obtained at negotiations that the Government would put in place the Insurance Fund during project implementation and promote private agricultural insurance (paras. 6.12 and 6.14). D. Project Cost Eslimates 5.16 ESmted Cost. The total Project cost is estimated at US$1,150 million equivalent, including US$439 million equivalent (or about 39%) in foreign exchange and US$125 million equivalent in related taxes and duties (11 %). Baseline estimates are expressed in 1994-96 current prices for the credit component, and in September 1993 prices for the institutional development component. The credit component is based on financial projections that take account of past lending and the increase in lending expected under: (a) normal weather conditions (para. 4.35); (b) improved lending procedures (paras. 6.03 to 6.05), and (c) the expansion and diversification of CNCA's activities (para. 4.34). Subsectoral allocation of fimds within CNCA lending programs is market-determined through an annual planning process and scbeme approvals. The institutional component includes price and physical contingencies (the latter estimated at 10% for office technology, computer maintenance and software), consultant and training costs. Detailed cost estimates are presented in Annex 3 and are summarized in Table 5.1.  - 20 - TIa I.1: SUMMARY OF PFROECT CO / / Locad Foreign Totd Loca Foregn Totd Forign Towa DH Milion - - USS Millon - Exchange Cost % s 1. CREDIT COMPONe NT. 3,63. g4. 7. 437.1 1.14.S 22 92 FARMERS CoasUuci.on 352.0 62.0 414.0 42.4 7.5 49.9 IS 4 Equipmntd 1,362.0 1,S63.0 2,92S.0 164.1 188.3 352.4 53 31 Livetock 1,886.0 220.0 2,106.0 227.2 26.5 253.7 10 22 Land Conldwaion 398.0 60.0 4St.0 48.0 7.2 55.2 13 S Plasations 473.0 316.0 '89.0 57.0 38.1 95.1 40 a AGRO-INDUSTRIES 332.0 618.0 950.0 40 74.5 114.5 65 10 RURAL HOUSDNG 492.0 329.0 821.0 59.3 39.6 98.9 40 9 COASTIUL FMEtl]UIES 186.0 185.0 371.0 22.4 22.3 44.7 50 4 ARTSANS AND RURAL I/ WOMEN AC_IV1TIESI 324.0 283.0 607.0 39.0 34.1 73.1 47 6 2. aJ TOADVELO l g 22 16.8 21.2 QS 20 & 78 1 Tranlwcomutant 0.8 3.2 4.0 0.1 0.4 0.5 80 Dafa proceing 3.0 12.0 15.0 0.4 1.A 1.8 80 - Physda otngences 0.4 1.5 1.9 0.0 0.2 0.2 80 - Price coningencies 0.0 0.1 0.3 0.0 0.0 0.0 25 - 3. TOTAL PROJECT COST 3. +?a 53652.8 9.462.2 711.9 4d 1J15& lS 3 1 of whbib: Tot Base Cot 5,808.8 3,651.2 9,460.0 711.9 438.9 1,149.8 39 - ContiuMngnies 0.4 1.6 2.2 0.0 0.2 0.3 73 I/ Inludes taxs and dubes estimded at DH 1,120 mirlon (US$125 milion equivakga) and coningnces in USS. k' Iudes financing of young profesalWgra&utms. *- Does not icludoe Headquarxws and branch network consaucon financed by CNCA.  -21 - E. Irolject i_WU 5.17 FinagLhn. Financing of dhe Prject would be as folows: Table S.2: PROJECT FINANCING PLAN (US$ Million) Total Total Sub- Sub- Project Borowers CNCA IBRD CFD KfW BIB FADES OECF Lending Costs A. Small Farmas 101 / 154 2S 14 7 13 - 213 314 B. Medium & Lar FarmFers 48 150 35 - 7 45 34 75 346 494 C. Agro-induaties 34 35 IS - 10 10 10 80 114 D. Rurl Housing 30 St 10 - - - 8 - 69 99 E. Coastl Fisheries 13 2.5 10 10 ^ 5 - 5 32.5 45.5 P. Artisans and Rural Women Acdvities/nepris 12 33 4 5 10 - 5 5 62 74 G. LandConsoldation 2 5 - - - - - 5 7 H. Intion Development - 0.5 I 1 - - - - - 2.5 TOTAL 340 431 10O 3 3 60 60 95 807.5 1.150 30 37 9 3 3 5 5 8 (70) 100 I& Of which 10% from the Agricultral Development Fund created January 1, 1986, and supported by the ASIL I to promote investments aiming at the intensification of production and improved technology on farms in accordance with the Agricultural Investment Code. 5.18 The proposed Bank Loan of US$100.0 million would be made to CNCA to finance part of: (a) CNCA's lending operations (US$99 million); (b) office technology software and the maintenance of data processing facilities (US$0.5 million); and (c) training programs and consultant services (US$0.5 million). The Government would guarantee repayment, and foreign exchang, risk in accordance with a formula established by the Government (para. 5.20). The Bank loan would be for 20 years, including five years of grace, at the standard variable interest rate. Repayments of subloans not needed to service the Bank loan woouid be recycled by CNCA for additional subloans. 5.19 The balance of foreign exchange requirements (US$339 million) would be provided in the following manner: CFD (US$30 million), KfW (US$34 million), OECF (US$95 million), FADES (US$60 million), and EIB (US$60 million). The remainder (US$60 million) would come from CNCA's funds. ADB is also interested in CNCA. Local currency costs would be financed by sub-borrowers' equity contribution (US$340 million equivalent) and by CNCA's own resources (US$371 million equivalent). With regard to the Project credit component, Table 5.3 provides a summary of the cofinanciers' lending terms and conditions as well as their indiv contribution to each of CNCA's sublendinu categories: Table 5.3: FOREIGN COFINANCING BY SUBLENDING CATEGORY CNCA's Sublending Share Grace Intest by Category and Source La Amount Maui Period Rate A B C D B P G (USSM) (Years) (Years) (% p-a.) X IBRD 99 20 5 7.4/h 12 10 19 14 30 7 - CFD 29 15 5 4.0 7 - - - 30 8 - KfW 34 30 10 1c 3 2 12 - - 16 - BIB Ld 60 18 5 8.0 /_ - 13 12 - 15 - - PADES 60 15 5 4.0 6 10 - 12 - 8 - OCP /f 9S 30 10 3.0 /e 22 12 - 15 8 - TOTAL 377 /g 28 57 55 26 90 47 0 *1 For definion of categoxy see Table 5.2. bJ Variable rate. S/ As CNCA equity. 41 ECU 50 million. / Indicative. fi Possibly a higher amount (loan is in Yens). .g Tota CNCA lending US$807.5 million.  .22 - Foreign cofinancing of the Project credit component including the Bank loan would amount to the equivalent of US$377 million and would cover 86% of the foreign exchange requirements. The Bank loan would also finance computer services and training. The OECF, FADES, EIB and CFD loan agreements were concluded in 1993. Conclusion of the KfW loan agreement would be required before June 30, 1994. 5.20 Treatme_ of Forfn Exduae sk. In Morocco, foreign exchange risk coverage systems were revised several times this past decade: 1973, 1985, 1989 and 1991. The 1991 system would be applicable to CNCA for its new loan (see Annex 6 paras. 6 and 7). Assurances were obtained at negotiations that the Government woald ensure that CNCA remains financially viable (para. 7.04) and competitive as the result of the application of the 1991 foreign exchange risk coverage system. F. Prowument 5.21 Procurement arrangements under the Project are summarized in Table 5.4 and described in paras. 5.22 to 5.24. Tole 5A: SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (UJS$ million equivalent) /n, ProcurementMethod ICB LCB Other /b NBF/f Total Cost 1. Farm machinery, fiam and - - 1,140.5 7.0 Le 1,147.5 non-farm equipment and (99-0) (99-0) implements, livestoOk, fishing gear, civil works and workmg capta under suboans 2. Consuta/ts - - 0.5 - 0.5 (0.5) (0-5) 3. Software, computer - - 0.5 - 0.5 maintance, taning programn (0.5) (0.5) 4. Data processing1/ - - - 1.5 1.5 TOTAL - - 1,141.5 8.5 1,150.0 (100.0) (100.0) /I Figur in parentheses represt Bank loan financing. /1 See pares 5.22,5.23 & 5.24. Le Land consolidation credit program. /_ Includes training spcialists. /g Paid out of CNCA's and CFD's funds. /f NBF: Non Bank-fimced. 5.22 Inrestmet fllanced by CNCA's loans. The goods and civil works to be financed under the Project for on-farm and non-farm investments would not be suitable for bulk proement because of their variety, the small size of individual investments, and the wide dispersion of contracts both in location and time. Private dealers in Morocco sell and service a large variety of tractor makes and other farm equipment and implements. Both the international suppliers market and private contractors and suppliers are well represented. Competition is keen and prices competitive. Sub-borrowers would therefore purchase, under CNCA supervision (para. 6.06), farm machinery and equipment from eligible sources of their choice and commit civil works through existing local channds. As in the case of the Bank-financed FSDP which supports the financing of the private enterprise sector in Morocco, procurement for the agro-industry component would also be undertaken through existing local channels and according to normal commercial practices in Morocco, where the inherent self-intrest of eligible competing companies has led to almost universal competitive bidding or shopping.  - 23 - 5.23 ConsWQ a. Consultants and training specialists totalling about 15 man-months (US$0.5 million) would be appointed in accordance with Bank guidelines. 5.24 Other Procedures. MIS software, computer maintenance, and goods for training programs (US$0.5 million) would be procured through local shopping involving quotations from at least three suppliers, in accordance with Bank guidelines. These procedures are appropriate for the specialized nature of the goods and services involved. G. Disbursements 5.25 Disburs-ement Schedule. The proposed Bank ioan of US$100 million would be disbursed over a period of about four Bank fiscal years. This is consistent with the historical disbursement profile for agricultural credit projects in Morocco. A schedule of estimated disbursements under the proposed Bank loan is summarized below and detailed in Annex 4: _ESTMATED DISBURSEMENT Bank Fiscal Year 1884 1885 1996 1997 - ~ US$ million- - Annual 15.0 30.0 30.0 25.0 Cumulative 15.0 45.0 75.0 100.0 5.26 Disbursement Procedures. As the actual financing of subloans would be demand driven, the allocation categories are only indicative for financial planning and cofinancing allocations. With this provision, disbursement categories and the share of expenditures to be financed would be as follows: DISBURSEMENT PROCEDURES Category Amount of the Loan % of Expenditures to Allocated be Financed (US$ million) 1. Subloans to small, medium & large farmers, enterprises and cooperatives (a) Greenhouses 10.0 75% of amounts paid by CNCA (b) Other Investments 45.0 40% of amounts paid by CNCA 2. Subloans to agro-processing and wood-processing enterprises (a) Agro-industry 15.0 50% of amounts paid by CNCA (b) (ither Investments 10.0 50% of amounts paid by CNCA 3. Subloans for Rural Housing 10.0 35% of amounts paid by CNCA 4. Subloans to fishermen 5.0 30% of amounts paid by CNCA 5. Subloans to artisans and rural women activities/ 4.0 50% of amounts paid by CNCA . enterprises and young professionals 6. Computer maintenance and 0.5 100% of total expenditures software (80% for goods procured locally) 7. Training and Consultants 0.5 100% of total expenditures TOTAL 100.0  - 24- 5.27 All disbursements (for computer/equipment maintenance, software, training costs and subloans in categories 1-5) would be against certified Statements of Expenditures (SOEs). Full documentation for SOEs would be retained by CNCA for review by Bank supervision missions and would be reviewed and checked by the external auditors (para. 6.15). Retroactive financing up to US$10 million (10% of loan amount) is recommended for paymer.ts made for eligible expenditures approved by CNCA after April 1, 1993 (signing date is expected by end December 1993). The amount retroactively financed would permit continuous contracting for subloans, and training/consulting services so as to fill part of the financing gap between Loan 3088-MOR and this operation. The loan closing date is March 31, 1998. 5.28 Bank Approval of CNCA Subloans. Subloans to agro-processing and fishery investors of above DH 20 million (about US$2.2 million) would require Bank approval before financing. 5.29 The Revolving -Fnd. To facilitate the efficient and timely implementation of the Project, the Bank would deposit, after loan effectiveness and at CNCA's request, an initial sum of US$10 million (about four months estimated disbursements by CNCA) to set up a revolving fund in accordance with Bank guidelines. The deposit would be made into a Special Account at a financial institution and under terms and conditions acceptable to the Bank. VI. PROJECT IMPLEMIENTATION 6.01 CNCA will be responsible for the implementation of the Project, and the Government will provide its full support to CNCA and be accountable for the launching, on a pilot basis, of the climatic risk Insurance Fund and agricultural insurrnce scheme. A. Credit Onerations Lending Proedures and Terms 6.02 Credit Guidelines. Purpose of CNCA subloans, subloan size and terms, interest and spread, sub-borrower's contribution, collateral, appraisal and approval methods are detailed in the CNCA Credit Guidelines (para. 4.14), which are available in the Project file. 6.03 Appraisal of Subloans to Farmers. Fishermen, Rural Women. Artisans and Othe Rural Qpgaor. Investment lending to these categories of clients are subject to a technical-econouc, and financial appraisal carried out by CNCA's field staff under the guidance of CNCA's Headquarters. Details are in Annex 14. 6.04 Appraisal of Subloans to Agro-Industrial Investors. CNCA uses an appraisal methodology (Annex 14 para. 2) that is specifically designed for investment decisions in this sector, and conducts environmental assessments. 6.05 Lendina for Rural Housinig. Through its CLCA offices, CNCA is well placed to finance the housing needs of rural clients including women. Since 1987, CNCA is employing an engineer and an architect, whose qualifications and experience are satisfactory to the Bank, to assist in appraising and supervising the investments (see Annex 14). 6.06 Disbursement and Supervision of Subloans. Disbursement and supervision of subloans will be handled by CNCA and its branch network as in previous projects (Annex 14, para. 4).  - 25 - B. Women's Participation and Environmental Aspecs 6.07 Women's Paiciaton in Credit Aclivities. CNCA lends to women without prejudice, and employs women on an equal footing with men. However, traditional family attitudes in some rural areas are still a limiting factor for women's access to credit. As part of the preparation of the previous credit Project, CNCA carried out a study in 1987 financed by USAID, on a CNCA pilot credit operation in the Province of Khemisset to expand savings and credit for women clients. Study findings demonstrated that rural savings are a key factor in improving women's access to credit. As a result, the Bank prepared a report in January 1988 to incorporate a rural women pilot project as part of Loan 3088-MOR to CNCA. The pilot project in Khemisset was designed keeping in sight the main findings of this report: (a) women in Morocco perform a large part of agricultural, industrial and services work; (b) important conditions, besides access to credit, such as markets for their products and services, access to technology and modern skills, group organization and networking are influencing the scope of women's production; and (c) women in Morocco are showing a strong interest in credit and savings facilities despite several constraints of a legal and financial nature, such as lack of collateral, land ownership, fiscal income and identity card. To implement the project, CNCA has assigned a few dedicated and highly qualified staff to develop its female clientele and to make direct contacts with the target population. The artisanal industries are a particularly mportant source of employment and income for women and are well developed in both rural and urban areas. CNCA is now the only bank in Morocco that has disaggregated its clientele by sex, and the Khemisset project has been successful in developing deposits and savings tenfold in the area from 1987 to 1989 and in tripling them from 1989 to 1992. In addition, women receive high marks for loan recoveries. Under the Project, action to promote rural savings and loan packages for women clients (para. 5.09) would be expanded in several selected areas to help develop a combination of farm and non-farm activities which have shown a promising trend in Khemisset (and in Rommani). The program will then be expanded nationwide. Details are given in the Project working documents No 4. A sector report (No. 8536-MOR, September 1990) "Towards the Increased Participation of Women in Societv" comments favorably on CNCA action to improve access of rural women to credit. Building on the Morocco experience, the Bank is currently carrying out a sector study on the role of rural women in Development in Maghreb, starting with Morocco, to enhance government strategies aiming at improving the participation of rural women in the economic development process. 6.08 Environmental Aspects. Some regulations for environmental protection exist in Morocco and provide for a certain degree of protection of the environment. The Moroccan authorities are also fully aware of the Environmental Program for the Mediterranean, and understand the need to promote environmental policies. Government, however, despite its enthusiasm for environmental considerations, does not yet have the institutional capacity to catalogue, prioritize, and solve the environmental problems facing Morocco, from potential locust invasion and desertification to industrial and urban pollution. After the Rio de Janeiro summit on Environment and Development in 1991, the Government of Morocco moved forward by creating a Deputy- Ministry for the Protection of the Environment within the powerful Ministry of Interior and Information. Under the Project, CNCA would continue to pay special attention in its subloan appraisal to assessing the impact of agriculturalagro- processing pollution and forestry degradation for the proposed investments that are likely to raise major environmental issues. CNCA's experience shows that no major issues arose these past years. In Morocco, in particular since 1988, it is current practice that agricultural products destined for export are subject to EEC quality standards. No pesticides would be purchased under the proposed loan and CNCA advises farmers to use only those chemicals considered safe under present conditions. Assurances were obtained at negotiations that CNCA staff in the agro-processing units are trained in properly evaluating the environmental impact statements submitted as part of the subloan documentation when applicable.  - 26 - C. CNCA Institutional Development 6.09 Implementation of CNCA's Organiational SrucuLre. Financial Performance, Planning Process and MIS. The following set of actions and measures have been taken and others would be taken under the Project to make it possible for CNCA to become a multi-purpose bank geared to rural finance: (a) Orgaization and Branch Network Regional Structure. Since the beginning of 1992, CNCA has been implementing a new organization structure (see paras. 4.02 to 4.06). In addition, CNCA is in the process of putting in place eight regional delegations (para. 4.05). During project implementation, the Bank would supervise closely the setting-up of the eight regional delegations so that at the end of the project period, (September 1997) they are all operational. (b) CNCA's Finanial Viability. CNCA 'as provided a financial performance development letter, satisfactory to the Bank, with monitorable indicators aiming at maintaining minimum standards as follows: (i) CNCA's capital adequacy as measured by the ratio of equity to risk assets to remain at or above the 8% international standard"1 for commercial bank capitalization (para. 4.28); (ii) CNCA's liquidity as measured by the ratio of current assets to current liabilities12 to be maintained at not less than 1.2 to 1; (iii) CNCA annual profits to be sufficient to protect the value of CNCA's net equity from inflationary erosion and to earn at least an average real return on equity of 3% after the climatic risk Insurance Fund is operational; (iv) CNCA to ensure that its CLCA branch offices maintain separate cost accounts and continue to produce, globally each year, total revenues that cover at least the CLCA's total operating cost; (v) CNCA's annual financial margin (interest income as a percentage of average net portfolio outstanding minus interest expenses as a percentage of average borrowing outstanding and deposits) to be maintained at not less than 2% as measured before June 30 in each fiscal year; in addition, to protect CNCA's financial performance and viability, assurances were obtained at negotiations that (vi) CNCA would maintain annually a maximum level of debt (over 18 months) to equity 13 of 10 to 1; and (vii) CNCA would maintain, at a minimum, positive real interest rates (the rate of inflation would be measured by the annual producer price index published by BAM). Interest rates and spreads would be monitored on an annual basis to verify that CNCA's financial margin remains at not less than 2% (see para. 6.14 on Mid-Term Review and para. 7.04, Table 7.1 on CNCA's financial indicators for 1992-96). The Government has also provided a letter (viii) on financial measures as of beginning of 1994 in favor of drought- stricken farmers and to maintain CNCA's financial viability as a consequence of the two-year drought of 1992 and 1993 (transparent budget transfer of DH 150 million p.a. up to a cumulated maximum of DH 1 billion). CNCA's annual profits, equity, and related financial ratios would be calculated while ensuring that provisions against loan losses adequately reflect risks with its loan portfolio and are in accordance with prudential regulations and advice of BAM. However, since CNCA lends in an environment of periodic drought, the financial indicators of this rural financial institution will be vulnerable to periods of downturn until a fully implemented climatic risk sharing mechanism can be put in place (see para. 4.31). (c) Strategic and Operational Plann and Manaemnt Control. In recent years CNCA has demonstrated a good sense of overall direction and good operational and financial performance. It needs to make fully operational appropriate mechanisms to carry out, on a systematic basis, its strategic objectives, a corporate long-range development plan and its annual business plans. The executive decision-making information and management control system being currently developed (since March 1992) with the assistance of a reputable consulting firm, is an important first step in the right direction. However, to be fully implemented, the process will need to be 11/ In 1992, CNCA's equity to risk assets ratio was 10%. 12/ In 1992, CNCA's current ratio was 1.8. 13/ In 1992, Debt/Equity ratio was 6.9.  - 27 - institutionalized and CNCA-owned. Under the Project, CNCA would make fully operational, by June 30, 1994, its Planning and Management Control system within a formally established planning unit, which will be responsible for the following: (i) articulating corporate objectives developed by Executive Management; (ii) making sure that the operational Departments and Divisions and regional delegations are codtmitted to achieving planned results; (iii) ensuring that plan requirements are met; (iv) managing the review process; (v) developing balance sheet and earning forecasts and coordinating contingency planning; and (vi) controlling results including the measurement of all aspects of CNCA's financial performance and condition including subsidization. Details are in Annexes 11 and 12, and in working document no. 15. (d) Basic MES. Account and EDP Systems. CNCA's present management information system does not provide prompt feedback on operations. CNCA is well aware of the deficiencies in its present accounting and information system, and of the magnitude of the task facing it to get a sound MIS coherent with modern banking practices so that its activities and new products can become fully competitive on a basis of quality of service and operating cost. Under Loan 3088- MOR, CNCA management has started to overhaul the entire management infbrmation system. Under the Project, CNCA would take further action to upgrade its data processing capability, keeping in mind a potential client base of some 1.5 million. CNCA practical experience in EDP should be used for managing the installation in its new Headquarters building of a purchased MIS/EDP system (contract with an international consulting firm, specialized in data processing for banks). Putting in place a new banking accounting plan and enhancing operating procedures at CNCA is planned for January 1, 1995, in harmony with the new banking law adopted by the Moroccan authorities as part of the FSDP. Under the proposed CNCA Project, the Bank will closely supervise the process, so that by January 1997, the banking accounting plan is fully operational at CNCA. (e) New Banking Services/Products and Diversificaton of Activitie. Since 1988, Government has authorized CNCA to compete with the commercial banks for non-agricultural lending under the same terms and conditions as those applied by commercW banks. This is an important step in transforming CNCA into a full-service bank and in establishing a level playing field in the banking sector in Morocco. In addition to loans, CNCA already offers deposit products in the form of checking accounts, savings accounts (super carnets verts), fixed-term deposits, money transfers, cashing of cheques and commercial bills, payment orders, addressing services, foreign exchange and documentary credits. Marketing efforts are being undertaken to reposition CNCA as a bank that specializes in rural finance as opposed to the past image of a Government-sponsored farm credit institution. During Project implementation, the Bank would carefully monitor the institutional strengthening undertaken by CNCA to introduce the tools and techniques needed to carry out its expanded role, and to improve the operational and control bases of current and anticipated activities. 6.10 Project-Rdated Taining. CNCA will be responsible for project-related training and would use its own facilities and/or any other appropriate facilities that would be necessary to hold seminars in Rabat or in other cities of the country. CNCA will also draw from its qualified trainers, and from its experience in organizing training courses. As part of its proposed staff development program, CNCA would also organize relevant training programs overseas for its most qualified staff and trainers, or would enter into a twinning arrangement with a similar but more mature agricultural credit bank in another country. CNCA's pluri-annual training plan for 1992-1995 and the 1993 program are acceptable to the Bank. Assurances were obtained at negotiations that CNCA will prepare, by October 31 of each year, an annual training program for the following year acceptable to the Bank. 6.11 Construton of eada_rters (not for Bank financing). At present, CNCA's Headquarters staff is housed in ten different buildings scattered in various parts of Rabat. The lack of a modern Headquarters office regrouping staff results in costly problems of communication among organizational units, waste of time, managerial inefficiencies and makes it difficult to build up an adequate team spirit and sharp inmage of the institution. CNCA has already obtained the land to build up its Headquarters and architectural plans have been  -28 - drawn up. For the reasons above, the construction of the Headquarters is to be considered as a necessity and not a luxury. D. Agiutua Risk Mment ad bM hind 6.12 The technical study on Agricultural Risk Management and Insurance Fund (Working Document No.3B and Annex 13) will serve as the basis to develop and establish the proposed climatic risk Insurance Fund. A workshop in Morocco during project launching with all agencies concerned will enable to discuss the recommendations of the technical study and reach a consensus on the actions and details of the insurance program to be launched on a pilot basis during project implementation in 1995 and 1996. On i ow and to what extent the insurance program is implemented will be closely reviewed in connection with the nmid-term review of the Project (para. 6.14). E. hMoitoring and Evaluation 6.13 CNCA is in the process of implementing a comprehensive executive decision-making information and management control system. Monitoring will become an integral part of the day-to-day operational management of CNCA's activities at Headquarters and branch levels. CNCA's monitoring and evaluation unit at Headquarters will collect and consolidate the data on commitments and disbursements under subloans, physical achievements under selected subprojects, operational results of representative investment operations, recovery performance, transaction costs, subsidies, financial ratios, and progress in deposit mobilization. In turn, these data and the corresponding evaluation reports will enable CNCA to take actions to remedy project implementation constraints, and to upgrade subloan appraisal, delivery, supervision and repayment, assets/liabilities management, and financial results. F. ision Mid-Term Review and Reportifg 6.14 Bank strategy for the spegrvision of project implementation and performance is spelled out in Annex 15. As part of this strategy, the Government, CNCA and the Bank will carry out a joint Mid-Terim Review of the project around May-June 1996. The review would: (i) monitor progress on implementation performance of agreed objectives, financial indicators, and legal covenants; (ii) examine key actions taken by the Government to launch and support implementation of the climatic risk management mechanism and Agricultural Insurance Fund; (iii) evaluate CNCA's uses and sources of funding; (iv) assess CNCA's strateg in light of its policy statement and the likely development impact and sustainability of the project at mid-tem of its implementation; and (v) update, as necessary the implementation program of the project until completion. Assurances were obtained at negotiations on the purpose and content of the mid-term review. On rporting, CNCA wi'l provide to the Bank: (a) semi-annual progtess reports, within three months of the end of each semester; these will include commitments, disbursements, subloan maturities and actual collections by category of beneficiaries, CNCA's financial statements and results, changes in lending policies and procedures, and progress being achieved in the implementation of the institution-building activities including the crop insurance program; and (b) an annual evaluation report, within three months of the end of each calendar year. In addition, CNCA wiil prepare its part of a combined Inplemenation Completion Report (ICR) on Loan 3088- MOR and this loan, to be submitted to the Bank within three months of the closing date of this loan. G. Accounts and Audit 6.15 CNCA has a relatively reliable accounting system involving: (a) a centralized accounting system; (b) an internal audit unit; (c) a stable and qualified work force in terms of key financial staff; (d) separation of incompatible tasks; (e) defined procedures; (1) timeliness in producing annual financial statements of satisfactory quality; and (g) few external audit adjustments. During Project implementation, CNCA will further improve and modernize its system by: (a) implementing, as of January lst, 1995, a new chart of  -29 - account4 incorporatig improved standards for bank accounting consistent with the now banking law; and (b) developing decentralized MIS and EDP applications, in particular for detaied cost accountig purposes at branh level. In the past, CNCA accounts and financial statements have been audited annually by independet auditors (Price Watewhouse) acceptable to the Bank and this includes the audit of CNCA 1992 accounts and of Loan 3088&MOR. This practice would continue under the Project. CNCA will send to the Bank, within six montis of the close of each fiscal year, a full audit report. This will incorporate in one document with the auditors' opinions: (a) a management letter; and (b) a long-form report on CNCA's overal financl statemnts and project accounts with four specific auditors' opinions on (i) CNCA accounts, (ii) project accounts, (iii) Statemets of Expendiures (SOEs), and (iv) the revolving fund (Special Account), if applicable. CNCA will sewd to the Bank audit reports of adequate international standards. Report contents will be discussed with CNCA and the auditors during Bank supervision missions. VU. B . QEiCAlO AND RIS A. Bnefits and Justifiaton 7.01 The proposed Project would provide part of the financing and institutional framework necessary for the private sector (m particular small- and medium-scale farmers) to respond to the improving policy environment, including the opening of external markets. It would help achieve a vital transition in CNCA's insttional development and ongoing conversion into a full-service bank while promoting entry of other banls ito rural finance by improving conditions for a level playing field. This would improve Morocco's instiutional abilities to promote private sector investment in rural areas, and increase domesdc savings nationwide. Through provision of investment credit to private farmers, agro-industries, and other oprators, the Project would also contribute to increased production and productivity, exports, and rural employment while increasing competition among banks and reducing pressure for public investment. By developing crop insurance and building the foundations for an Agricultural Insurance Fund, it would assist farmers in managing risk and reduce the hardship and budgetary costs of periodic droughts. This, in turn, would impact favorably on Morocco's ecowmic and social goals. 7.02 FJ lpona Beneiciaries. The projected impact of the Project on farmers' and investors' incomes would be substantial at full development. Under the best conditions, fiancial rates of return (FRR) vary from 25% to 50% for the seven investments models analyzed: five farm models, one fishing investment and one ardsanal industry. These FRRs, however, are very sensitive to decreasing profits or increasing costs. Detailed analysis and results are in Working Document No. 11. 7.03 Edc . Similarly, an economic rate of return (ERR) has also been calculated for each typical investment model. ERRs also vary from 25% to 50% but with some differences with the FRRs depending on the model analyzed. The results have not been aggregated into an overall ERR for the Project as a whole, because the distribution of loans among these types of investment or among variations of the models wUi depend on changing relative prices, attractiveness of alternative inestments, land use, and market forces. Details are in Working Document No. 11. 7.04 Fna l Impact on CNCA. Projected financial statements for 1993-1996, with key assumptions, are given in Annex 7, Tables 6 to 12. Key ratios reflecdng CNCA's projected financial condition are presented in Table 7.1: IV Plan comptable bmncati.  - 30 - Table 7.1: CNCA'S PROJECTED FINANCIAL INDICATORS 1993-1996 1991 1992 1993 1994 1995 1 -(Actual)- ---(P jcted) Total Debt-to Equity (Leverage) 10.9 11.3 10.9 10.5 10.1 10.0 Pro-Tax Return on Equity % 5.8 1.8 5.2 8.5 8.4 7.2 Net Return on Equity % 3.4 1.0 3.2 5.3 5.2 4.5 Equity to Risk Assets /a (Capital Adequacy) 10.1 10.0 9.6 9.9 10.6 10.6 Cumeat AssetslCurrent Liabilities 1.8 1.8 1.7 1.7 1.7 1.7 LT Debt to Equity 6.6 6.9 6.5 6.0 5.7 5.3 Provisiaos /k as % of Risk Assets For CLCAs 16.2 19.7 21.1 22.7 24.1 25.7 For CRCAs and CNCA (HQ) 9.1 9.9 10.7 11.7 12.8 14.0 Deposits Le I Risk Assets % 22.9 22.6 23.4 26.3 29.7 33.4 Deposits/Short-term Loans % 62.8 66.6 62.4 69.4 78.3 88.6 Finanial Margin % 4.8 4.3 5.0 5.2 5.0 5.0 Growth Equity % 3.5 5.4 6.9 12.3 14.6 6.7 A/ Intrnational standard is at least 8% for commercial bank capalization. b/ Consistent with the new baning law prudentia regulations. g/ Voluntay deposits, including romittances from Moroccan workers abroad. The table shows that CNCA is expected to maintain its underlying financial health and earnings capacity on condition that there is no major change in foreseen domestic inflation rates, real interest rates or foreign exchange rates. While aital adgeqacy would remain above the 8% of risk assets that is generally being adopted as the international standard for commercial bank capitalization, the trend line could be worrisome if CNCA's capital base is not increased. Not increasing the capital could force a reduction in CNCA's support for rural finance. Under the Project, financial objectives have been proposed to maintain CNCA's financial soundness (para. 6.09 (b)j and to increase its capital. Regarding retumn on qity, performance dipped sharply in 1992-consistent with a rural institution undergoing major itrnal change at a time of adverse cdimatic conditions-but then is expected to rise again in the years to come. Liuidt, defined as current assets divided by current liabilities (with current assets equal to liquid assets plus short-term risk assets minus provisions on short-term risk assets), is expected to remain constant at about 1.7 which is adequate. In terms of growth, CNCA would amply benefit from the support of the international financial community, and CNCA finacial improvements would stem from the combined results of: (a) sharper increases in interest incomes than in interest expenses; (b) improved quality of portfolio (collections and adequate provisions); and (c) continued increases in deposits as reflected in the improving trends in the ratios of deposits to loans. This projected growth of deposits is achievable because (i) the total deposit market in Morocco is expanding; (ii) CNCA's market share in 1992 was still low (about 5% of the total deposit market), and (iii) CNCA is authorized since 1988 to compete with other banks to raise off-shore deposits. For CNCA to implement the Project is therefore financially justified. CNCA's financial indicators, in particular the liquidity, debt to equity, and capital adequacy ratios (para. 6.09(b)) will have to be closely monitored during Project implementation and the mid- term review to prevent or correct any deteriorating trends. 7.05 Financal Implications for Government'5. The impact of the Project on the Government's finances would come from: (a) capital subsidies paid to small farmers clients of CNCA to finance 3% of the cost of selected on-farm investments in accordance with the Agricultural Investment Code (Annex 8); (b) interest rebates on social rural housing loans; (c) taxes and duties on imports, farm assets, fishing boats and agro-processing equipment; (d) budget transfers to compensate CNCA for the foreign exchange risk losses II/ The remaining dependence of CNCA on direct and indirect subsidies would be monitored durnng project implementation (pam. 6.09 (c)) usig a Subsidy Dependence Index developed by the Bank, and to be custom- tailored to CNCA (Annex 16).  - 31 - resulting from the application to CNCA of the 1991 risk coverage system (para. 5.20); and (e) part of the administrative costs of the climatic risk Insurance Fund (FAA). Investment subsidies under the Project for (a) above are estimated to equal US$11.0 million and are partly financed out of the ASIL and of an EEC grant to the Agricultural Development Fund (FDA). Interest rebates on social housing in rural areas are estimated at US$0.3 million p.a. during three years. Import duties and other taxes are estimated to amount to about US$125 million equivalent, or about 11% of the total Project cost. Budget transfers for exchange risk losses are estimated at US$20 million covering a three-year period. Administrative costs for the FAA are estimated at about DH 10 million p.a. (US$1.1 million for premium subsidy, and at DH 1.3 million p.a. (US$145,000) for administration (Annex 13). These costs are cheaper than facing a financial crisis each time a major drought occurs in Morocco. For example, 1993 budget allocations to cushion the impact of recent droughts on farmers clients of CNCA amounted to DH 650 million or US$70 million. It is also worth noting that the Project, by supporting rural finance development has a positive indirect impact on the export revenues of Morocco on agricultural and food products, which represented about US$1,100 million and 31% of total exports in 1991. The Project, which is also encouraging exports, is expected therefore to have a positive impact on the Government's finances in the long run. B. Proect Risks 7.06 Agicultural Risk Manafement. The major risk in this Project is the threat of severe drought and/or sustained drought conditions such as those Morocco has experienced these past years, in 1980-81 and 1983-84 in particular and again in 1991-92 and 1992-93. Adverse weather conditions translate into decreased yields and livestock output, reduced demand for agricultural investments and services, reduced production of raw materials for processing or conditioning, lower farm incomes, reduced ability to repay loans, and decreasing amounts of rural savings collected. These droughts seem to occur every five years or so. Droughts create problems in credit recoveries and might warrant writing off arrears or rescheduling farmers' debts. On the basis of past and current experience this risk has not adversely affected CNCA long-term viability, partly because of CNCA's prudent lending policies, collection methods, provisions for bad debts and the support of the international donor community. For example, USAID and EEC provided CNCA with financial assistance in 1984-85 to cushion the effect of the drought with the injection of fresh cash (US$13.5 million and an equivalent US$29 million, respectively). This has allowed CNCA to roll over the short-term debt into a medium-term rescheduled repayment for those farmers most affected by the drought (in certain geographic areas). For the 1992 drought, CNCA and the Government took measures in August 1992 to cushion its impact (Annex 7, Table 12B). For the 1993 drought, strong measures were authorized in March 1993 to stabilize rural income and employment and to maintain CNCA's financial viability. The Project will set the stage for a long-term approach to drought management as the Government has agreed to establish the FAA. 7.07 Other Risks. Another important risk in this Project is associated with the current transformation of CNCA from an agricultural credit institution into a universal, full service bank. The success of this endeavor depends upon CNCA's ability to provide its clients with services of a quality at least equal to the one of its new competitors, mainly the commercial banks. This implies substantial changes in the work habits and the attitude of all CNCA's staff. It also requires significant organizational changes which are now in progress. The financial strengthening of CNCA must also succeed for CNCA to become a sustainable institution. These risks are currently under control because of the quality of CNCA's current management. However, it is important that this quality and continuity in the management of CNCA be maintained, so that reforms can succeed and open the door, in the long run to some elements of possible privatization when the regionalization process of CNCA is more advanced. VIII. AGREEME1S REACHED AND RECOMMENDATION 8.01 The Guarantor has provided two letters, satisfactory to the Bank (a) on foreign exchange risk coverage (para. 5.20), and (b) on the implementation of {he financial measures officially authorized on March 27, 1993 to be applied as of beginning 1994 in favor of drought-stricken farm families and to maintain CNCA's financial viability as a consequence of the two-year drought (para. 6.09 (b) (viii)). The Guarantor also  - 32 - commited itself to establishing an agricultural insurance scheme and climatic risk Insurance Fund by th end of 1996 aRer two years of pilot implementation in 1995 and 1996 (para. 5.15). 8.02 CNCA has provided (a) a letter defining its procedures for loan clusification and loan loss provisioning (paras. 4.31 and 4.32); and (b) a financial performance development letter with monitorable indicators aiming at maintaining minimum standards of capital adequacy, liquidity, profitability and financial margin (para. 6.09 (b) (i) to (v)). These letters are satisfactory to the Bank. 8.03 Agreement was reached during negotiations on the following: (a) CNCA would obtain Bank approval for individual subloans to agro-prcessing and fishery investors of above DH 20 million (US$2.2 million equivalent) (paras 5.28); (b) CNCA would adopt the banking accounting plan as of January 1, 1995 and upgrade its procedures in agreement with the recommendations of the Central Bank, i.e., Bank of Al-Maghrib (BAM) (para. 6.09 (d); (c) CNCA would maintain a maximum level of debt to equity of 10 to I (para. 6.09 (b) (vi), and, at a minimum, positive real interest rates, as measured before June 30 in each year, and monitor interest rates and spreads on an annual basis to verify that CNCA's financial margin remains at no less than 2% (para. 6.09 (b) (vii)); (d) CNCA would send to the Bank annual audit reports of adequate international standards (para. 6.15); (e) CNCA would prepare by October 31 each year, as part of its five-year strategic plan for training, an annual training program for the following year acceptable to the Bank (parm 6.10) including training in environmental matters (para. 6.08); (f) CNCA would take satisfactory actions during project implemention to implement its banking diversification and regionalization plan (paras. 6.09 (e) and 6.09 (a); (g) CNCA would further develop and implement its new strategic and management control tool (by June 30, 1994) introduced under Loan 3088-MOR (para 6.09 (c); (h) CNCA and the Govermment would carry out a comprehensive mid-term review (according to agreed terms of reference) with the Bank in June 1996 to assess progress on implemention (para 6.14); and (i) fulfillment by CNCA of conditions of effectiveness of all cofinanciers' loans by June 30, 1994 (para. 5.19). 8.04 In view of the above agreements, the Project is suitable for a loan to CNCA, with the Guarantee of the Kingdom of Morocco, for US$100 million equivalent with a term of 20 years, including a five-year grace period. Tbe Project is expected to be completed by September 30, 1997.  - 33 - ANNEXI Table 1 STAFF APPRAISAL REPR KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA Actual Lendin; 1988-1992 (Disbusementsl 1988 1989 1990 1991 1992 1990/91 - - (DH'000) - (%) Crop Producfon 1,020,243 783,667 845,901 1,659,917 883,744 56 Indudsrl Crops 271,025 582,010 572,003 272,640 416,489 9 livestock Production 553,912 494,289 510,703 553,775 285,070 19 Agro-Industties 25,036 0 33,533 137,253 115,392 5 AztisanalRuns Activities /a 67,431 0 241,122 160,316 4,955 7 Odters 23,245 61,013 20,208 172,797 180,744 4 TOTAL SHORT-TERM 1.960.892 1.920.979 2.223.470 2956698 1.886.394 JD0 of which CLCAs 242,844 237,389 316,918 383,558 115,723 Shae of ClCAs 12.4% 12.4% 14.3% 13.0% 6.1% 2. MEIUM- AND LONG- On-farm constuction 82,950 69,521 66,342 61,386 34,238 3 Rural Housing 34,889 141,548 151,197 142,060 167,658 8 Land Purcas 3,996 8,916 112,268 151,613 113,743 7 On-Fam Equipment /h 482,287 448,087 486,659 586,512 347,003 30 Livesock 593,543 487,485 560,164 555,497 219,903 28 Plantations 36,405 45,829 51,028 107,420 63,618 5 Agro-Industries 87,776 73,944 127,216 163,953 244,259 8 Artisds and other activities /a 34,559 122,377 227,421 193,807 266,160 11 TOTLY W MrIIUlONG 1,356.405 1.397.707 1.782.295 1.962.248 1456.582 10 of which CLCAs 500,706 454,043 525,168 505,281 191,972 Share of CLCAs 37.0% 32.5% 29.5% 25.8% 13.2% 3. TOTALLaw= 3.317.297 3,318.686 4.005.765 4918 3.342.976/c (10 of which CLCAs 743,550 691,432 842,086 888,839 307,695 Share of CLCAs 22.4% 20.8% 21.0% 18.1% 9.2% l madily womnn's activities. h/ includes greenhouse equpment. g/ sharp drop in lending by CLCAs in 1992 is due to drought  - 34 - ANNEX 1 Table 2 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA roJie-ed Leanding 193-1995/# (Disbursements) Total Period 1993 1994 1995 1993-1995 - -- - -(DH'000) --- % 1. SHORT-TERM LENDING (9 Agriculture 2,381,000 2,591,000 2,800,000 7,772,000 82 - Crop production 1,123,000 1,174,000 1,241,000 3,538,000 37 - iivestock production 678,000 732,000 780,000 2,190,000 23 - dutidral crops 580,000 685,000 779,000 2,044,000 22 Agro-Industries 146,000 155,000 166,000 467,000 5 Artisnal and Rural Activities /b 175,000 190,000 210,000 575,000 6 Other sectors 208,000 214,000 224,000 646,000 7 TOTAL SHORT-TERM 2.910.000 3150 3.400.000 9460 100 Of which CLCAs 378,300 409,500 442,000 1,229,800 13 Percent CLCAs 13% 13% 13% 13% 2. MlDIUM- AND LONG-TERM LENDING On-fam construction 90,000 97,000 103,000 290,000 4 Rural Housing 180,000 190,000 205,000 575,000 9 Land Purchass/Improvement 103,000 105,000 112,000 320,000 5 On-farm Equipment Ic 614,000 678,000 756,000 2,048,000 31 Livestock 510,000 494,000 471,000 1,475,000 22 Plantations 145,000 174,000 212,000 531,000 8 Agro-ladustries 200,000 220,000 245,000 665,000 10 Arisana and other Activities /b 228,000 262,000 296,000 786,000 12 TOTAL MEDIUM/LONG-TERM 2.070.000 2.220.0 2.400 6.690.000 100 of which CLCAs 514,000 582,000 670,000 1,766,000 26 Percent CLCAs 24.8% 26.2% 27.9% 26.4% 3. TOTAL LENDING 4.980.000. 5370. 58 16.150.000 (10) of which CLCAs 892,300 991,500 1,112,000 2,995,800 19 Percent CLCAs 18% 18% 19% 18.5% 4. Total Growth (% p.a.): short-term 35%/4 8% 7% medium/long-term 30%1d 7% 8% p/ These are projected lending levels expected to be driven by demand and are not allocations or directed credit amounts. Lending projections for 1996 can be esimated by using a growth rate of 8% on 1995 figures. k/ mainly women's activities. c/ includes greenhouse equipment. 4/ but 0% growth if compared with 1991 lending.  - 35 - ANNEX I Table 3 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO MTIONAL RURAL FINANCE PROJECT %ndicative Proiect Lending Progm (Medium- and Lone-Term Credit) Average Unit Cost Nri'oer % of CNCA Lendins of Investment of Sub- Total Investments Total Million Million (DH) (US$)/b Projects (DH '000) (JS$ '00O)Cost (DH) % (USS) 1. Small Farmers (CLCA) 9,457 1,041 266,901 2,525,000 277,851 27 1,766 70 196 2. MediumLage Farmers (CRCA) 84,948 9,351 48,312 4,104,000 451,783 43 2,874 70 319 3. Agro-Industfies 3,0U4,416 339,544 308 950,000 104,579 10 665 70 74 4. Rural Housing 65,470 7,207 12,540 821,000 90,379 9 575 70 64 S. Coastal Fisheries 562,121 61,880 660 371,000 40,841 4 260 70 29 6. Artisans and other Rural Women Activities 23,441 2,581 14,419 338,000 37,209 3 263 80 29 7. Young Entrepreneurs/ Graduates 616,972 67,919 436 269,000 29,613 3 242 80 27 8. Land Consolidation /a 542,373 59,706 118 64,000 7,045 1 45 70 5 9. I cotalC g/d1f 343.694 9.442.000 1.039.300 IO 6.690 743 Less: Sub-borrowers minimnum contribution 2,752,000 296,300 29 10. Total Credit Pro_ m 6,690,000 743,000 W/ Not financed by the Bank. k/ Exchange ate DH 9.00 = US$1 as of September 1993. gf With 10% contingencies, totd cost in US$ is about 1,147,500. 4/ Reprenting three years of lending commitments.  - 36 - ANNEX 2A STAFF APRAISAL REPORT KIDQM OF MQROCCO NATIONAL RURAL FINANCE PROJECT A. Financine of On-Farm Investmengt 1993 1994 1995/a Total ------------- (DH '000)- 1. CNCA Loans 1.450,463 1,540.767 1.648.570 4.639.800 Construction 90,304 97,304 102,204 289,812 Land Improvement 85,404 90,304 100,104 275,812 Irrigation Equipment 224,010 263,211 297,513 784,734 Farm Machinery 298,213 338,815 382,917 1,019,945 Draft Animals 68,603 64,403 51,802 184,808 Livestock 441,019 429,119 419,318 1,289,456 Plantations 144,906 .174,308 212,109 531,323 Greenhouses 91,704 76,303 74,903 242,910 Forestry 6,300 7,000 7,700 21,000 2. Sub-Borrowers' Eauitv 621,692 660.398 706,605 1.988.695 3. Total Investments 2072,155 2.201.165 2 355175 6.628.495 of Which: Taxes (11.5%) 242,442 257,536 275,555 775,534 /a 1996 figures are obtained by using a growth rate of 8 on 1995 figures.  - 37 - ANNEX2B STAFF APPRAISAL REPORT KINGDOM OF MOCQQ NATIONAL RURAL FINANCE PROJECT B. Farm Credit Coverage NUMBER OP POlENTIAL AND ACrUAL CNCA INDIVIDUAL FARM CLIENTS la No. of Actual Clients as % Individual Farmers Potential Actual CNCA Clients of Potential Clients Farm Size Fiscal Income Clients 1973 1987 1991 1973 1987 1991 (1a) (DH) - (number) --- - -- Leas then 1S CLCACLet 1 to 7 DH S0-DH 1,600 1,082,800 n.a. 168,926 n.a. n.a. 15.6 n.a. 7 to 10 DR 1,600-DH 2,800 133,000 n.a. 111,887 n.a. n.a. 83.9 n.a. 10 to IS DH 2,800-DH 6,000 162. aa 142.236 na n.a. 87.8 n.a. Subtotal 1,387,800 64,988 422,749 499,869 4.7 30.5 36.0 Mre tbha 1S HO/CRCA Clide 90,000 42,790 61,562 64,582 47.3 68.2 71.7 (more than DH 6,000) TOTAL 1,477,800 107,779 484,111 564,561 8.1 32.8 38.2 &l Excluding women farmers and artisans and clients reached through Agarnan Reform Cooperatives and ORMVAs. 1. Of the approximately 1.9 million farms in Morocco, 480,000 (24%) have a fiscal income of less thn DR 50' and only about 9% of them are eligible for credit. In 1991, about 564,S00 individual farmers had an active file with CNCA. This correspotds to 38.2% of the total number of CNCA's potential farm clients. In addition, it is estimated that another 100,000 farmers were receiving credit through Agraian Reform Cooperatives and ORMVAs. Between 1988 and 1991, the number of credit applications for both CLCA and CRCA clients declined from 236 930 to 217 765 p.a Total lending, however, has increased substantially. Average loan amounts increased by 24% to DH 5,088 for CLCA clients and by 200% to DH 93,549 for CRCA and other clients. Compared to -ny other coumnties, firm credit coverWe for small farmers is high in Morocco, but not yet at fill potential. 2. About 70% of potential CRCA clients, but only 35f% potential CLCA clients were receiving credit in 1991. A 2% increase since 1987 for CRCA clients, and an 8% inrease for CLCAs. For the latter, CNCA penetration was relativey high for farns having an Fl in the DH 1,600-6,000 range (which corresponds to approximately 5 ha to 15 ha of rainfed land). However, very few marginal farmers with an Fl below DH 1,600 (about 5 ha rainfed land) were actual CNCA clients, reflecting their low borrowing capacity and their lack of participation in the monetized economy. The increase in the number of CNCA clients has followed the expansion of the network of CRCA and CLCA offices, but certain upper limit may have been reached. In 1973, there were 21 CRCAs and 54 CLCAs; in 1977, 24 and 88 respectively; in 1987, 44 and 108; in 1991, 50 and 122. During this period the number of CLCA clients has increased at an average rate of 15% p.a. jV Corresponding to less than one hectare of merginatty productive land or two sheep.  - 38 - ANNEX 3 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATNAL RURAL FINANCE PROJ Project Cost Estimats 1994 1995 1996 1994-1996 Loa Foreign Tota Forign Exchange (DH '000) 1. SMALL FARMERS (CLCA 735.0S0 832.000 7000 1.948. 577.000 225 23 - Contuction 63,000 69,000 75,000 176,000 31,000 207,000 is, - Land Inpoventm 56,000 73,000 90,000 186,000 33,000 219,000 1S - WeIls aNd Punps 117,000 147,000 184,000 246,000 202,000 448,000 45 - Farm Equipment 69,000 93,000 136,000 178,000 120,000 298,000 40 - Draft Animals 64,000 61,000 57,000 183,000 - 183,000 0 - ivestock 330,000 329,000 329,000 870,000 118,000 988,000 12 - Planttons 36,000 60,000 86,000 109,000 73,000 182,000 40 2. MEDIUM A)ND LARGE ERMEIRS 1.337 .000 19 1.398. 2.459.0S0 1.645.0S0 4.104.00 - Construction 66,000 70,000 71,000 176,000 31,000 207,000 1S - Land hIprovement 66,000 56,000 53,000 148,000 27,000 175,000 1S - Wels and Pbuns 203,000 229,000 241,000 370,000 303,000 673,000 45 - Farm Equpment 357,000 391,000 411,000 464,000 695,000 1,159,000 60 - Draft Animads 34,000 31,000 17,000 82,000 - 82,000 0 - Livestock 300,000 284,000 270,000 751,000 103,000 854,000 12 - Phlanons 171,000 189,000 217,000 346,000 231,000 577,000 40 - Greenhouses 131,000 109,000 107,000 104,000 243,000 347,000 70 * Foresty 9,000 10,000 11,000 18,000 12,000 30,000 40 3. SPECIFIC SUB SEC0RS 8 .00 9 1.02A000 1.398.000 1.415.000 2813 SO - Agro-Induastries 286,000 314,000 350,000 332,000 618,000 950,000 65 - Rural Housing 257,000 271,000 293,000 492,000 329,000 821,000 40 - COsta Fishefies 114,000 123,000 134,000 186,000 185,000 371,000 50 - Young Ebflr%mmauraGraduates 64,000 89,000 116,000 108,000 161,000 269,000 60 - Rutnd Wona anW Artbsans 110,000 114,000 114,000 216,000 122,000 338,000 36 - Land Consolidation 26,000 21,000 17,000 64,000 64,000 0 4. SUB TOTAL LENDNG929000 3.133.000 3.379.000 5.805.000 3.637.000 9.442.000 5. INST4 TUTIONAL DEVELOPMENT 17.930 1.547 1.759 4.167 16.668 21.Z36 78 - TraininlConsultat Servicms 1,300 1,300 1,400 800 3,200 4,000 80 - Conputr Maintenae and Sofiwase 5,000 - 1,000 4,000 5,000 80 - Ohers /4 10,000 - - 2,000 8,000 10,000 75 -Base Costs B/ 16,300 1,300 1,400 3,800 15,200 19,000 78 - Physical Co _ es 1,630 130 140 300 1,200 1,900 80 - Priboe niiesl9 - 117 219 67 268 336 80 6. TOTAL PROJEC`r COST L2946.923 3.134.547 3.380.759 5.809.167 3.653.668 9.463.236 39 7. TTrAL COSTIN USS'000 35S.S2 377.6S6 4073j20 699.900 440.201 1.149.028 _ (with 10% continencies) h/ 10% an equpmete nounIawnce omultutsand swvibes. I See main text, pam. 5.10, footnt 13. 4V Offce tochnoogy fianced by CNCA with CFD's asaisnce. If In 1994-96 cnt pufe se amption in pam 5.16 (an 4.35) of main texL  - 39 - ANNEX 4 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT Estimated Schedule of Disbursement of Bank Loan /a Bank Disbursements /b Relevant Profiles /c IBRD By End of Cumulative Bankwide Morocco Devel. Fiscal Quarter Quarter Cumulative Disbursed Agr. Credit Finance Year Ending -- US$ million ----% %(Cumulative) % 1994 Sept. 1993 10 4 Dec. 1993 15 6 March 1994 10.0 /d 10.0 10 19 10 June 1994 5.0 15.0 15 24 14 1995 Sept. 1994 7.5 22.5 22 29 19 Dec. 1994 7.5 30.0 30 35 24 March 1995 7.5 37.5 37 40 29 June 1995 7.5 45.0 45 46 34 1996 Sept. 1995 7.5 52.5 52 51 40 Dec. 1995 7.5 60.0 60 56 47 March 1996 7.5 67.5 67 61 51 June 1996 7.5 75.0 75 66 55 1997 Sept. 1996 7.0 82.0 82 70 61 Dec. 1996 6.0 88.0 88 74 67 March 1997 6.0 94.0 94 78 70 June 1997 6.0 100.0 100 82 73 1998 Sept. 1997 85 77 Dec. 1997 88 82 March 1998 91 87 June 1998 93 92 1999 Sept. 1998 95 96 Dec. 1998 98 100 March 1999 100 &I Expected Signing Date December 1993 Expected Effectiveness Date January 1994 Expected Completion Date September 1997 Expected Closing Date March 1998 I/ For a three-year commitment period (instead of the usual four to five years under relevant profiles). /j Taking into account that retroactive financing is recommended after April 1, 1993. d/ Initial disbursement under Special Account.  - 40 - ANNEX S Page I of S STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT ALnicultural Sector Performance. Goverment Stt and Sectora! Iss Relevant to Rural Flnance 1. Background. Of Morocco's total land area of 60 million ha, 8 million ha or 13% is suitable for agriculture. Of the cultivated land, about 50% receives good but inconsistent rainfall, and rainfed cultivation remains largely traditional with cereals and pulses as the dominant crops. About I million ha or 12% of the cultivated land are irrigated growing mostly cereals, fruits, vegetables, forage and industrial crops. The remaining half of the cultivated land receives an erratic rainfall of less than 400 mm and can only be put under low value crops and fallow. About 20 million ha in semi-arid or mountain regions of the country is only suitable for grazing and forests. Given the high variability in rainfall and periodic droughts, the Government concentrated its efforts on developing a modern irrigated sector. Considerable progress has been made in farming techniques and yields in this sector, and the current emphasis is on water conservation measures. 2. Past Performance. After a period of slow growth in the 1970's when agriculture grew at only an average of 2.4% p.a., the growth rate increased considerably during the 80's to 6.7% p.a. This acceleration in growth was largely due to favorable weather conditions since 1985 and policy changes brought about as part of the Medium-Term Agricultural Sector Adjustment Program (MTASAP). Food production, however, has not kept pace with the increased domestic demand generated by a combination of rapid population growth (2.6% p.a) and a high rate of urbanization (4.5% p.a.), and food inports have increased. 3. Although the agricultural sector in general is still characterized by a low farm productivity, it has considerable untapped growth potential. It can play a key and dynamic role in the growth of Morocco's economy. A major proportion of this growth will be generated through private sector investments largely through improvements in on-farm water use efficiency and additional public investment in basic irrigation infrastructure. It is essential that the Government follows a growth strategy which stimulates private on-farm investment and cost effective public investment in infrastructure and agricultural services. At the same time, the Goverment is mindful of the dual nature of Moroccan agriculture with relatively prosperous areas of high technology agriculture contrasting with poorer rainfed areas practicing traditional forms of cultivation. Growthwith consideration to the poverty that exists in certain regions of the country is the balanced approach to agriculture and rural development being sought by the Government and the Bank.  - 41 - ANNEX 5 Page 2 of 5 4. Government Strategy. The Government's objective in the agricultural sector is to promote efficiency in the sector by encouraging a more active involvement of the private sector in input supply, support services, marketing and agro-processing, streamlining the use of public resources and reducing the burden of agricultural price policies on the Government's budget. The Government's Agricultural Sector Adjustment Program, the MTASAP, was supported by the Bank through two Agricultural Sector Adjustment Loans (ASAL I and 11). Certain reforms are still being supported under an Agricultural Sector Investment Loan (ASIL) and a second ASIL is under preparation. 5. The key objectives of the Government's medium-term adjustment program in agriculture are to: (a) restructure the public investment and expenditure programs towards high return investments, provide adequate funds for the operation and mainitenance of the existing productive infrastructure, and increase private sector financing through increased lending by CNCA; (b) strengthen agricultural support services needed to be provided by the Government while privatizing others; (c) improve productivity of land use and management of the country's natural resources; (d) build up institutional capacity for agricultural policy planning and analysis and improve capability in monitoring and evaluation of sector performance; and (e) improve resource allocation and re-orient the prices and incentives structure to encourage shifts towards the production of crops and livestock products for which Morocco has a comparative advantage. 6. Despite impressive achievements, more needs to be done to ensure the sustainability of sector performance, and further Bank support will be needed to reach the final objectives set out in the MTASAP. 7. Institutional Credit and Private Investment. In agriculture, private investment now accounts for about 59% of total investment, of which 70% is financed by CNCA'. CNCA lending is targeted to both irrigated and rainfed areas. To carry out its strategy of gradual privatization of the economy, Government plans to reduce its own investments in agriculture. Private investors are turning chiefly to CNCA to finance their investments in on-farm and market level storage, farm mechanization, field irrigation facilities and agro-industry. J/ The rest is mainly self-financing by investors with some lending by commercial banks, Which is primarily short-term and to agro-industries. The commercial banks in Morocco, despite record profits, are not willing to take the risk of lending to farmers and are not organized for financing on-farm investments -.---. 4g1  - 42 - ANNEX S Page 3 of 5 8. Poverty and LOw Debt Service Capacity of Rural Families. Some constraints exist to expanding CNCA credit to farmers. One is the limited savings and debt service capacity of many rural families with rainfed farms of less than 7 ha, which represent about 75% of the total number of farmers eligible for credit. A majority of these rural families operate at or near subsistence level, generate very few financial surpluses, and cannot accumulate significant savings and invest without credit. But their debt capacity is minimal and prevents them from having full access to institutional credit. The village level branch network of CNCA, "Caisses Locales de Cr6dit Agricole (CLCAs)" serve smaller scale farmers, with fiscal income DH 50 - 6,000. In term of credit coverage, the extent of CNCA's penetration in rural areas is relatively high for farms of more than 7 ha (75% of potential clients), but only 30% of potential smaller farms are receiving credit. In addition, because many farmers do not hold documented title to their land, CNCA's established lending criteria have been based on a notion of fiscal income (i.e., income estimated to be derived from existing land holdings plus livestock) and have resulted in credit extension to only a limited proportion of small farmers and for smaller than requested amounts. To increase accessibility of farmers to credit, particularly in rainfed areas, CNCA has begun to expand its branch network, to open seasonal credit outlets, and to develop a new credit policy on eligibility, based on the direct assessment of farmers' credit needs and creditworthiness. CNCA will implement this credit policy, while making sure that it does not add more risk to the CNCA portfolio. Efforts are also underway to assess the savings capacity of small farm families. With the 1992 and 199 droughts, however, farmers face additional liquidity difficulties that have a negative impa, on their debt service and savings capacity. 9. Deposits and Savings Mobilization. CNCA has started to implement a medium- and long-term strategy to increase voluntary savings mobilization under Loan 3088-MOR for 1989-92 and this strategy would be further supported under the follow-up Project (paras. 4.29 and 6.09 (e) of main report). 10. AMroindustrial Development2. In recent years agroindustries, complementary to primary agricultural productions, have developed at a rapid pace in Morocco. Between 1986 and 1990, investments by enterprises in the sector rose at an annual tate of 21.5% and, in 1990, reached DH 2 billion or 31 % of total industrial investment. Most investments were carried out for the extension of existing activities rather than for the creation of new enterprises. The sugar agro- industry and the processing of fruits and vegetables predominate in terms of gross capital formation. 11. Banking services to agroindustries are provided by CNCA, and by commercial and other banks currently supported by a Bank loan (FSDP). Lending interest rates have been virtually liberalized with two exceptions, the first one being export pre-financing. The second exception is rediscounting in > ff~~~~~~~~~~Ii ' .ft'; ,t t i,* a ' L. t t-{  - 43 - ANNEX 5 Page 4 of 5 favor of commercial banks only, on direct medium-term investment loans at 12% to small-scale enterprises. Other interest rates are freely determined within a ceiling which is set at 2.5 percentage points above the weighted average interest rate on six and twelve-month bank deposits and is adjusted by the Central Bank every six months. 12. As of December 31, 1991, outstanding short-term and investment credit to agroindustrial enterptises amounted to DH 4.2 billion, excluding small loans of less than DH 100,000 each, mostly made by CNCA. Until 1987, CNCA's lending to agroindustrial enterprises was rather small at DH 145 million. However, in 1988 credit approval increased almost six-fold to about DH 900 million. This significant increase was largely due to CNCA's move into the competitive market of short-term financing of enterprises doing business in the marketing of cereals. By 1991, the annual volume of loans approved to the agroindustrial sector, including the cereals subsector, exceeded DH 2 billion (UJS$241 million). In 1991-92, about 80% of these CNCA's loans were short-term credits financed at market terms and conditions out of CNCA's own resources, mainly for the commercialization of cereals, the sugar subsector and the grain mill and bakery subsector. Under Loan 3088-MOR, CNCA committed US$ 25 million to finance medium- and long-term investments for agro-processing and wood-processing enterprises. As of December 1992, CNCA used 100% of that amount to finance a total of 35 projects. 13. Land Tenum. Major land tenure issues in Morocco include: (a) fragmentation of farms which reduces the efficiency of operation of the larger ones and contributes to the reduced viability of smaller ones; tJb) lack of clear land titles which inhibit many farmers from seeking long-term credit, and discourage investment in land improvements; (c) insecurity of land tenure for tenant farmers reducing their incentive to invest in farm assets and to conserve the soil; and (d) absentee land ownership resulting in under-use of resources and the tendency for the land collectively owned to be poorly managed and over-exploited causing low productivity. The Government has taken measures to correct these problems, by on-going programs of land consolidation and issuance of land titles. CNCA is providing credit for land acquisition, land consolidation and improvements, and land registration operations. 14. Clhc Rislc. Agricultural production is faced with high risk due to the variability of rainfall. Cereals produced under rainfed conditions are the most sensitive to the onset of drought. A vast majority of farmers grow cereals and there has been a significant increase in the area grown to cereal during the five good years before the 1992 drought. Of the total area  - 44 - ANNEX S Page 5 of 5 of agricultural land of 8,944,100 ha (including fallow of 1,906,800 ha), 5,490,800 ha or 59% is grown to cereal. Of the total cereal area, 4,243,000 ha or 77% are predominantly rainfed. Some of these areas are the most sensitive to drought. National cereal average yields have fluctated from as low as four quintals to as high as 15 quintals per ha. As a result, total annual production has ranged from as low as 16.4 million quintals to as high as 85.3 quintals. Other crops grown under rainfed conditions are at risk of being affected in a similar fashion. This variability in production has major implications on financial stability and on the capacity of farmers to service their debt. This has in turn a direct impact on the financial performance of banking institutions serving agriculture, principally CNCA. To correct this, the Government will create an agricultural insurance fund (para. 5.15 of main report). 15. Bank ProjectS in AgXriculure (29 Projects). Bank group lending in agriculture include nine irrigation projects: Sidi Slimane (FY65), Sebou (FY70), Souss Groundwater (Y75), Doukkala I (FY76) and n (FY77); Small- and Medium-Scale Irrigation Projects (FY83, FY88) and Large-Scale Irrigation Improvement I (FY86) and n (FY93); seven agricultural credit irolecs and five rainfed agricultural development projects, in the Meknes (FY75), Loukkos (FY80), Fes-Karia- Tissa (FY79), Middle-Atlas (FY82) and Oulmes Rommani (FY83) areas; an aro-industrial and flood control project (Sebou nI FY74); a Vegeble and Marketing Project (FY80); and a FQrggiarojiect (FY82), all completed. An Ariculturad Research and Extension (FY89) and a Erey.ProEject (FY90) are on-going.  - 45 - aANNEX 6 Page I of 3 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NAflONAL RURAL FINANCE PROJECT The mnanial Sector 1. Commercial and SaM Banks. At the end of 1991, the assets of the fifteen commercial banks totalled DH 131.8 billion (US$14.6 billion equivalent). The three largest commercial banks account for 60% of total assets. The assets of the four medium-size banks represents 29% of total bank assets and eight smaller banks account for 11 % of total assets. The commercial banks have a combined network of 936 branches which are unevenly distributed geographically: 25% of all branches are located in Casablanca where about one third of all deposits are collected and another 50% of the branches are in cities along the Atlantic coast. 2. In 1991, commercial banks extended DH 54.2 billion in credits to the economy (or 58% of total credit), of which about 79% were short-term. In spite of Government encouragement, banks have been cautious in extending investment credit, partly because of the possibility of making higher profits at lower risk on short-term lending. However, in recent years they have increased their investment lending activities, in particular in the profitable urban housing and industry sectors. At the end of 1991, the commercial banks' medium- and long-term lending (DH 11.7 billion) represented (a) 30% of total medium- and long-term credits to the economy, (b) 19% of their sight deposits (DH 61.8 billion), and (c) 39% of their term deposits (DH 30.4 billion). By comparison, at the end of 1987 their medium- and long-term lending accounted for: (a) only 12% of total tmedium- and long-term credits to the economy, (b) 11 % of their sight deposits, and (c) 25% of their term deposits. About 30% of all commercial bank deposits originated from Moroccan immigrant workers with the Banque Populaire taking the lead on this activity. 3. Commercial banks participate, under the control of the MF in the syndicated financing of the production and marketing operations of state-owned agricultural enterprises. In principle, they also offer seasonal and investment credit to individual farmers. However, their agricultural lending to individual farmers is minimal because: (a) their branches are mostly located in urban centers along the coast; (b) they avoid making small loans with relatively high processing costs;  - 46 - ANNE 6 Page 2 of 3 (c) they lack adequately trained agricultural staff; and (d) their lending is usually restricted to bortowers who also keep sizeable deposit balances and offer sufficient guarantees. Further details are in working document no. 16. 4. pCredit hS. Specialized credit institutions account for the bulk of medium- and long-term lending. In 1991, they provided about DH 26 billion or 70% of all medium- and long-term credit to the economy (DH 37 billion). CNCA's share in total credit distributed by specialized financial institutions was about 16% in 1991 (DH 5 billion, out of which DH 2.0 billion medium- and long-term lending). Since 1984, credit extended by these institutions has grown at an average annual rate of about 12% (in current terms), at the same rate as total credit to the economy. CNCA's annual growth, after levelling in 1988 and 1989 peaked at above 20% in 1990, and 1991, but fell in 1992 as the result of recent droughts. CNCA is expected to grow again from 1993-96. 5. unancial Sector Policies and Reforms. Details are in Annexes 9A and 9B. 6. Treatment of Foreign Exchange Risk. Under Loan 3088-MOR to CNCA with the guarantee of the Gov_rnment, a foreign exchange risk scheme was established under the letter No. 3/3789 dated May 9, 1989 from the Minister of Finance to the CEO of CNCA, establishing the level of participation of CNCA in foreign exchange losses. Under this 1989 system, the risk is shared in the manner described below: (a) CNCA bears full cost of the foreign exchange losses incurred from variations of up to 2% in the foreign exchange rate on its non concessionary foreign borrowings contracted before December 31, 1988; (b) a Foreign Exchange Risk Fund in the name of the Treasury is maintained on CNCA's books into which CNCA deposits: (i) the proceeds of a commission of 1 % charged, as of January 1, 1989, on medium- and long-term loans with the exception of loans for rural housing and of all loans made by the CLCAs; and (ii) the excess of CNCA's average lending rate (10.5 to 11.5%) over the non concessionary interest rates on foreign borrowings plus a margin to assure adequate profitability. This margin is 3 % for the non concessionary borrowings, except those for CLCAs, contracted before January 1, 1989, and 2% after January 1, 1989, including CLCAs. Any losses on non concessionary lending in excess of those covered by the Risk Fund would be borne by the Government;  - 47 - ANNEX6 Page 3 of 3 (c) the exchange risk generated by the ongoing concessionary borrowings (KfW, EEC and USAID) and those to be contracted, would be covered 100% by CNCA. CNCA will make all necessary provisions for risk to this effect. In September and November 1992, Government settled its 1990 and 1991 foreign exchange arrears to CNCA. 7. In 1991, the Government established a new foreign exchange risk coverage scheme pursuant to the letter dated May 30, 1991 from the Ministry of Finance, for the Moroccan banks to protect themselves against the risk of foreign exchange losses. The system introduces a reference rate to equate the cost of domestic and foreign capital which is the difference between the weighted average cost of commercial banks' 6 and 12-month deposit rates (11.7% end 1992) plus 0.75% fee and, for example, the Bank variable rate. The 1991 system has been incorporated into the loan documents of the FSDP which were signed in November 1991 by BNDE and seven participating commercial banks.  - 48 - ANNEX Table I STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECI =CA 1a-& Postin 1988-199 (Du Million) -- FY Throug December BALANCE SWEET /a 1988 1989 1990 1991 1992 A-SsEIS Uquid Assets Cash and Banks 861.1 834.8 125.9 308.8 505.5 Tresury Bills IS, 1.000. 1.452.0 l.W.o 1.350.0 Total liquid Assets 1,041.1 1,834.8 1,577.9 1,558.8 1,855.5 Short-Term Risk Assets Bills Disounted 3.3 . 26.8 33.6 37.9 11.7 HQ and CRCAs 2,083.8 2,349.6 2,872.4 3,802.3 3,835.5 CLCAs 383.6 378.4 445.7 515.3 449.5 Total Short-Term Risk Assets 2,470.7 2,754.8 3,351.7 4,355.5 4,296.7 Accounts Receivable 543 627 610 808 723 Medium/Long-Term Risk Assets HQ and CRCAs 3,238.3 3,647.8 4,310.6 5,123.7 5,910.2 CLCAs 2.366. 2.315. 2371.2 2.391.8 2448. Total Medium/ Long-Term Risk Assets 5,604.9 5,963.4 6,681.8 7,515.5 8,358.7 Investments Fmancial Investments 249.6 214.6 185.7 178.0 152.2 Fixed Assets 77.9 95.2 153.6 200.6 284.9 Exchange Rate Variation 1.106.6 888.7 1.207.0 1.244.5 1.671.4 Total Asssets 11.093.4 12.378.5 13.768.0 15.861.1 17.342.2 Amer. at End of Year 2,040.5 2,538.1 2,824.0 3,333.4 3,803.4 of which: Short-Term Loans 625.5 795.4 805.5 1,090.4 1,337.2 Medium/Long-Term Leas 1,415.0 1,742.7 2,018.5 2,243.0 2,466.0 In % of Loan Portfolio On Short-Term Los 0.25 0.29 0.24 0.25 0.31 On MediumlLong-Termn Ls 0.25 0.29 0.30 0.30 0.30 Loas Recovered Next Year 2,699.8 2,697.0 3,085.9 2,532.4 3,519.0 On Short-Term Loas 1,660.6 1,633.3 1,957.2 1,919.1 1,901.1 On Medium/Long-Term Loans 1,039.2 1,063.7 1,128.7 613.5 1,618.0 1/ Audited  - 49 - ANNEX 7 Table 2 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA Financial Position 1988-1992 (DH Million) --------------FY hrough December- ---- BALANCE SHEET /a 1988 1989 1990 1991 1992 IABILITIES Short-Term liabilities Deposits 1,316.7 1,751.2 2,152.5 2,709.8 2,853.2 One-Year Bonds 1,307.0 1,447.1 1,077.6 1,148.2 1,256.8 Other 623.6 682.8 812.5 832.2 873.1 Cufrent Maturities of Long-Term Borrowings 376.7 424.9 465.1 521.1 594.4 Total Short-Term liabilities 3,624.0 4,306.0 4,307.7 5,211.3 5,577.6 Long-Term Borrowings IBRD 2,542.2 2,485.5 2,972.9 3,380.5 3,867.9 Other Foreign 3,190.8 3,611.8 4-,153.8 4,935.8 5,344.4 Domestic 224.2 205.2 162.8 124.5 90.8 Current Maturities of Long-Term Borrowings (376.7 (424.9) (465.11 (521.1 (594.4) Total Long-Term Liabilities 5,580.5 5,877.6 6,824.4 7,919.7 8,708.7 Total Uabilities 9,224.5 10.183.6 11332.1 13.131.0 14.286.2 Provisions Exchange Risk 97.0 107.6 109.2 114.3 122.1 Climatic Risk 27.9 27.9 27.9 27.9 31.0 Credit Risks: CLCA Loans 216.3- 272.3 367.3 469.6 569.6 Other Lans 396.1 572.4 687.2 812.4 961.6 Other Risk KfW Equipment Subsidy 2.0 3.3 4.6 7.6 12.7 USAID Provision 12.0 14.8 17.6 20.4 23.1 KfW Reserved Interests 61.0 80.9 67.2 82.6 88.5 Total Provisions 812.3 1,079.2 1,281.0 1,534.8 1,808.6 Equity Funds Equity 425.6 425.6 425.6 425.6 465.6 Quasi Equity Funds (CLCAs) 94.0 94.0 94.0 94.0 94.0 General Reserves 489.8 513.0 551.6 590.7 631.0 Other Funds 43.9 44.5 44.8 45.1 45.2 Current Period Eamings 2.1 38.6 39.1 40.3 11.6 Total Equity Funds 1,076.4 1,115.7 1,155.1 1,195.7 1,247.4 Total Liabilities & Euity 11.093.3 12.378.5 13.768.2 15.861.5 17.342.2 .q Audited  - 50 - ANNEX 7 Table 3 ,STAFf APPRAISAL REPORT KINGDOM OF MRQOCCO NATIO'NAL RURAL FINANCE PROJECT CNCA limncala Position 1988-1992 (DH Mion) FY Through December INCOME AND PROFIT/LOSS STATEMENT /, 1988 1989 1990 1991 1992 INCOME Interest Income Short-Term Loans 210.3 243.7 330.3 366.7 406.2 Medium/Long-Term Loans 600.8. 645.2 694.4 778.7 799.0 Other Interest Income 140.9 184.5 173.5 185.9 204.3 952.0 1,073.4 1,198.2 1,331.3 1,409.5 Other Income 34.8 ,44.42 45.6 43.8 31.4 Total Income 986.8 1.117.6 1.243.8 1.375.1 1.440.9 EXPENSES Interest Expenses 426.2 538.3 606.8 695.6 759.1 Administrative Expenses Staff Expenses 207.8 225.2 270.5 293.2 314.3 Depreciation 9.0 10.4 14.1 17.9 21.9 Other Expenses 42.7 48.6 61.3 63.9 75.6 259.5 284.2 345.9 375.0 411.8 Total Exmpeses 685.7 822.5 952.7 1.070.6 1170.9 Net Qperating Income 301.1 295.1 291.1 304.5 270.0 Provisions for Bad Debt 203.2 232.4 209.7 227.5 249.3 Provisions for Exchange Risks 13.9 14.6 15.9 11.5 13.5 Special Provisions 38.9 2.8 2.8 2.8 2.8 Income Net of Provisions 45.1 45.3 627 62.7 4.4 Prior Period Adjustment (3.9) (9.9) (19.7) (10.7) (8.3) Exceptional/Other Income 7.7 -21 29 16.1 24.0 Net Income Before Taxes 48.9 65.5 67.9 68.1 20.1 Income Tax (40%)/k 25.7 26.9 28.8 27.9 8.5 NET P&QEi 23.2 38.6 39.1 40.2 11.6 A/ Audited b/ Since its creation in 1961, CNCA was exempted from income tax (till end 1987). As a Government development bank, it does not pay dividends.  ANNEX7 Table 4 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA Finandal Position Sources and AppUcationm of Funds 198S-92 (DR Millon) As of Dec. 31 1988 1989 1990 1991 1992 SOURCES Net Income 23.2 38.6 39.1 40.2 11.6 Depreciations and Provisions 256.0 266.9 201.8 253.8 261.1 Cash Flow Generated 279.2 305.5 240.9 294.0 272.7 Increase in: Deposits 284.6 434.5 401.3 557.3 143.4 One-Year Bonds 174.9 140.1 (369.5) 70.6 108.6 Managed Funds 32.3 0.6 0.3 0.3 12.8 Other liabilities 109.4 59.2 129.7 19.7 40.9 Equity - - - - 40.0 Long Term Borrowings 1,024.3 833.9 966.4 1,472.0 940.0 Loan Repayments 2.568.0 2.699.5 2.697.3 3.085.7 2.532.6 TOTAL SOURCES 4.472.7 4.473.3 4.091.0 APFICATnONS Loan Disbursements 3,317.3 3,318.7 4,005.7 4,918.9 3,343.0 Investments 23.1 27.7 72.5 65.0 106.1 Loan Repayments 509.3 366.1 423.0 490.0 500.8 Increase in: Financial Investments 241.3 (35.0) (28.9) (7.7) (25.8) Receivable (165.0) 84.4 (16.5) 197.8 (85.4) Liquid Assets 492.5 817.2 (250.1) (14.5) 270.5 Other Assetb 54.2 (105.8) (139.3) (149.6) (18.2) TOTAL APPUCATIONS 4.472. 4.473.3 4.6 4.091.0  - 52 - ANNEX 7 Table 5 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA Finaniad Position 19881992 (DH Million) RATIOS 1988 1989 1990 1991 1992 PROFITABIUTIY RAIIOS Growth Rate of CNCA's Equity 3.6% 3.7% 3.5% 3.5% 5.4% Rate of Inflation 2.3% 3.1% 6.7% 8.2% 4.9% Real Growth Rate 1.3% 0.5% -3.0% -4.3% 0.0% Pre-Tax Return on Avenage Equity 5.1% 6.0% 6.0% 5.8% 1.8% Net Return on Average Equity 2.4% 3.5% 3.4% 3.4% 1.0% Net Profit Marin 2.4% 3.5% 3.1% 2.9% 0.8% BALANCE SHEET RATIOS Uquidity Ratio/l 1.62 1.69 1.79 1.83 1.79 Quick Asset Ratio 0.40 0.58 0.50 0.41 0.45 EquitytoRiskAssets / 13.3% 12.8% 11.6% 10.1% 10.0% Long-Term Debt/Equity 5.18 5.27 5.91 6.62 6.97 Total Debt/Equity 8.55 9.13 9.81 10.98 11.34 Deposits/Risk Asset 16.3% 20.1% 21.5% 22.9% 22.6% Deeposits/Short-Term Lons 53.4% 64.2% 64.9% 62.8% 66.6% Extemal Funds/aLiabilities 62.3% 59.9% 62.9% 63.3% 64.5% Provisions/Risk Assets CLCAs 7.9% 10.1% 13.0% 16.2% 19.7% CRCAs and CNCA 7.4% 9.5% 9.6% 9.1% 9.9% Provisions/Arrears 30.0% 33.3% 37.3% 38.5% 40.3% OPERATING ACCOUNT RATIOS Gross Revenues/Risk Assets 10.5% 10.6% 11.0% 10.5% 9.8% Retun on Financial Assets 10.9% 10.9% 9.0% 10.4% 10.8% Average Retumn 10.5% 11.1% 11.0% 10.8% 10.2% Interest Cost/Average Liabilities 5.0% 5.6% 5.6% 5.7% 5.5% Financial Margin 5.5% 5.1% 5.3% 4.8% 4.3% Non-Interest Cost/Risk Assets 3.4% 3.4% 3.7% 3.4% 3.4% Pre-Tax Retrn on Risk Assets 0.6% 0.8% 0.7% 0.6% 0.3% After-Tax Return on Risk Assets 0.3% 0.5% 0.4% 0.4% 0.2% Annual Provisions/Risk Assets 2.5% 2.7% 2.1% 1.9% 2.0% Annual Provisions/Disbursements 6.1% 7.0% 5.2% 4.6% 7.5% Annual Provisions/Arrears 10.0% 9.2% 7.4% 6.8% 6.6% sI Defined as current assets divided by current liabilities, with current assets including liquid and short-term risk assets minus provisions for short-term risk assets. b/ Capital Adequacy (Cooke Ratio).  - 53 - ANNEX 7 Table 6 Page I of 3 STAFF APPRAISAL REPORT INGDOM OF MOROCCOQ NATIONAL RURAL FINANCE PROJECT ASSUMPTIONS FOR CNCA PROJECTED FINANCIAL STATEMENTS A. INCOME STATEMENTS 1. Interest Income (Short- and Medium-Term Loans) It is computed on the basis of average portfolio at the following nominal a interest rates, exclusive of fees and commissions: CLCA CCA Short-Term Loans 11.2% 11.0% Medium-Term Loans 11.5% 11.8% Rescheduled Loans 6.0% 10.5% No interest are computed on arrears of more than 14 months. Interest income on average cash reserve and financa investments is computed at current interest rate of 10.8%. 2. Iserest They include: (a) Interest on Foreign Loans. They are computed on the basis of actual lending rates, after deducting foreign exchange cost borne by Government on loans contracted before end 1992. 1993 1924 l.9S 1996 DH Million -- Total Inerests On Existing Loans 617.9 583.3 543.3 505.0 On New Loans 10.2 47.0 108.5 159.1 less: Government contribution 65.4 61.6 56.4 51.5 Not Interests 562.7 571.8 595.4 610.6  - 54 - ANNEX 7 Table 6 Page 2 of 3 (b) Interest on Deposits. They are based on current cost of 5.2% in 1993 and 5.5% thereafter to reflect current increase of these funds. (c) One- year Solidarity Bonds subscribed by comnmercial banks at current rate of 4.25% a year. (d) Othe Financial Co include commitment fee on foreign loans, commissions on banking transactions and payments to Government on the basis of current foreign exchange risk coverage regulations. The latter are as follows, on the basis of early 1993 exchange rates. 123 1994 1995 1996 DH Millior. On Existing Loans 61.2 55.2 51.9 49.4 On New Loans 6.9 28.0 56.0 6.6 Total 68.1 83.2 107.9 119.0 3. AdministrativeExpenses A yearly increase of 12% per year over 1992 expenses is assumed. This is consistent with past jrend and reflects the cost of diversifying CNCA activities and efforts to attract local depositors, modernize data processing and services to customers. 4. Provision for Credit Risk It is assumed that CNCA would continue to build provisions for credit risk at the same rate as previous years to comply with new banking law regulations. In 1996, provisions would cover arrears at 50% instead of 40% today. Arrears of more than one year would therefore be covered at 100%. Yearly provisions would amount to 7% of yearly disbursement, thus fully covering credit risks on the basis of past experience over the last eight years. B. SOURCES AND APPLICATIONS OF FUNDS (a) Increase in Deposits. Figures for 1992 and 1993 were affected by the drought years. As from 1994, increase in deposits are assumed to increase at the rate experienced before drought years. (b) Increase in Equity. It is the result of the proposed injection of the KfW's new loan to Government into CNCA's equity.  - 55 - ANNEX 7 Table 6 Page 3 of 3 (c) KfW Reserved Interests. The yearly increase reflects the difference between reserved interests accrued each year and the use of that funding to cover exchange rate differences on KfW funds. (d) Foreign Exchange Risk Incremental Cost. Government committed itself in March 1993 to compensate by a budget transfer (subsidy to farmers) the increase of CNCA cost of funds due to the application to CNCA as of 1993 of the 1991 system for foreign exchange risk coverage so as to maintain CNCA's nominal on-lending rates to farmers at their current (relatively high) level. A payment of DH 190 milliois over a three-year period is planned and would be used from 1993 to 1996. (e) Subsidy on a Portion of Rescheduled Loans. Government also committed itself to finance expected losses (DH 110 million) on loans to small farmers rescheduled in 1992. (f) Foreign Exchange Loss Sharng. This line represents the amounts to be received from Government and farmers according to the existing regulations (1989 scheme) applicable on past CNCA borrowings. (g) Sub-Loans Repayments. This line has been computed on the basis of previous years sub-loan repayment pattern of CNCA. Cumulative recovery rates are as follows (in %): Year O Year 1 Year 2 Year 3 Year 4 Year 5 CLCA Short-term 73 86 91 94 - - Medium-term 58 76 79 81 84 89 CRCA and CNCA Short-term 88 94 95 97 - - Medium-term 49 84 85 86 89 93  - 56 - ANNEX 7 Table 7 STAFF APPRAISAL REPORT KINGDOM OF MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA ProLected Financial Position 1993-96 {DH Millon BALANCE SHEET 1992 1993 1994 1996 (As of Dec. 31) Actual - ASSETS UQUID ASSETS Cash and Banks 505.5 790.5 1,261.5 2,180.5 2,448.9 Treasmy Notes 1,350.0 632.0 632.0 632.0 632.0 Drafts 11.7 11.7 11.7 11.7 11.7 1,867.2 1,434.2 1,905.2 2,824.2 3,092.6 SHORT-TERM RISK ASSETS HQ & CRCAs 3,835.5 4,641.6 5,030.8 5,387.1 5,721.5 CLCAs 449.5 652.3 740.9 812.2 885.8 4,284.9 5,293.9 5,771.8 6,199.3 6,607.3 ACCOUNTS RECEIVABLE 722.9 722.9 722.9 722.9 722.9 MEDIUM/LONG-TERM RISK ASSETS HQ & CRCAs 5,910.2 6,280.5 6,747.0 7,244.3 7,797.8 CLCAs 2.448.5 Z.530.2 2.700.5 2.92i. 3.127. 8,358.7 8,810.7 9,447.5 10,166.0 10,925.0 INVESTMENTS Finmancial 152.2 152.2 152.2 152.2 152.2 Fixed Assets 284.9 470.0 648.0 831.1 993.4 EXCHANGE RATE VARIATIONS 1.671.4 1.594.6 1.510.7 1.422.0 1328.9 TOTAL ASSETS 17.342.2 18,478.4 20.158.3 22.317.6 3 ARREARS AT END OF YEAR: 3,803.4 4,162.5 4,731.6 5,246.0 5,754.5 of which On Short-Term Loans 1,337.2 1,366.5 1,528.0 1,677.8 1,830.2 On Medium/Long-Term Loans 2,466.0 2,796.0 3,203.6 3,568.2 3,924.3 IN PERCENT OF LOAN PORTFOUO On Short-Term Loans 0.3 0.3 0.3 0.3 0.3 On Medium/Long-Term Las 0.3 0.3 0.3 0.4 0.4 LOANS RECOVERED NEXT YEAR 3,519.0 4,255.3 4,654.0 5,039.0 5,400.0 On Short-Term Loans 1,901.1 2,672.1 2,972.5 3,230.0 3,400.0 On Medium/Long-Term Loans 1,618.0 1,583.2 1,681.5 1,809.0 2,000.0  - 57 - ANNIE7 Table 9 STAFF APPRAISAL REPORT KINGDOM 0 MOROCCO NATIONAL RURAL FINANCE PRO.ECT CNCA Projected hIome Statenents 1993-96 (DH Miioi) (As of Dec. 31) 1992 1993 1994 1995 1996 Actul -- - - ----------- Projected - ------ - ---- INTEREST INCOME Short-term Loans 406.2 493.4 571.6 618.8 662.4 Medium/Long-term Loans 799.0 901.8 1,039.6 1,104.3 1,180.4 Other Interest Income 204.3 187.7 189.6 262.0 323.8 1,409.5 1,582.9 1,800.9 1,985.1 2,166.5 OTH3ER OPERATING INCOME 31.4 68.0 73.0 80.0 80.0 TOTAL INCOME 1.440.9 1 1.873.9 2.065.1 2.246.5 INTEREST EXPENSES 759.1 791.1 894.1 983.0 1,059.2 Less FE Subsidy to Farmers - (7.0) (28.0) (56.0) (70.0) ADMINISTRATIVE EXPENSES Staffing Cost 314.3 352.0 394.3 441.6 494.6 Depfeciation 21.9 39.9 62.0 76.9 97.7 Other Expenses 75.6 84.7 94.8 106.2 119.0 411.8 476.6 551.1 624.7 711.2 TOTAL EXPENSES .170.9 16 1,417.2 1.551.7 1.700.4 NET OPERATING INCOME 270.0 390.2 456.7 513.4 546.1 PROVISIONS FOR Credit Risk 249.3 310.0 320.0 360.0 400.0 Foreign Exchange Risk 13.5 12.0 13.0 13.0 13.0 Other Risks . . .* INCOME NET OF PROVISIONS 4.4 68.2 123.7 140.4 133.1 Prior Period Adjustments (8.3) (8.6) (9-1) (9.7) (10.1) Provisions Used - 8.0 7.0 6.0 6.0 Other/Exceptional Income 24.0 I 0 NET INCOME BEFORE TAXES 20.1 67.6 121.6 136.7 129.0 Income Tax (38 %)la 8.S 25.7 46.2 51.9 49.0 NET PROFIT 11.6 5.4 8480.0 FREE RESERVES/b 11.6 41.9 75.4 84.7 80.0 g/ 40% in 1992 h/ Net Profit is incorporated into reserves as CNCA does not distribute dividends.  - 58 - ANNEX 7 Table 9 STAFF APPRAISAL REPORT KINGDOM 0 MOROCCO NATIONAL RURAL FINANCE PROJECT CNCA Prolected bIcome Statements 1993-96 (DH Million) (As of De. 31) 1992 1993 1994 1995 1996 Actual --- Projected -- INTEREST INCOME Short-term Loans 406.2 493.4 571.6 618.8 662.4 Medium/Long-term Loans 799.0 901.8 1,039.6 1,104.3 1,180.4 Other Interest Income 204.3 187.7 189.6 262.0 323.8 1,409.5 1,582.9 1,800.9 1,985.1 2,166.5 OTHER OPERATING INCOME 31.4 68.0 73.0 80.0 0. TOTAL INCOME 440.9 1.650.9 ,.873.9 2,065.1 2.246.5 INTEREST EXPENSES 759.1 791.1 894.1 983.0 1,059.2 Ls FE Subsidy to Farmers - (7.0) (28.0) (56.0) (70.0) ADMINISTRATIVE EXPENSES Staffing Cost 314.3 352.0 394.3 441.6 494.6 Depreciation 21.9 39.9 62.0 76.9 97.7 Other Expenses 75.6 84.7 94.8 106.2 119.0 411.8 476.6 551.1 624.7 711.2 TOTAL EXPENSES 1.170.9 . 1.417.2 1.551.7 1.700.4 NET OPERAllNG INCOME 270.0 390.2 456.7 513.4 546.1 PROVISIONS FOR Credit Risk 249.3 310.0 320.0 360.0 400.0 Foreign Exchange Risk 13.5 12.0 13.0 13.0 13.0 Other Risks INCOME NET OF PROVISIONS 4.4 68.2 123.7 140.4 133.1 Prior Period Adjustments (8.3) (8.6) (9-1) (9.7) (10.1) Provisions Used - 8.0 7.0 6.0 6.0 Other/Exceptional Income 24.0 NET INCOME BEFORE TAXES 20.1 67.6 121.6 136.7 129.0 Income Tax (38%)/a 8.5 25.7 46.2 51.9 49.0 NET PROFIT 41.9 75. 84.7 80.0 FREIE RESERVES./ 11.6 41.9 75.4 84.7 80.0 _I 40% in 1992 b/ Net Profit is incorported into reserves as CNCA does not distribute dividends.  - 59 - ANNEX 7 Table 10 SUAFF APPRAISAL REPORT KIGDOM OF MdROCCO NATIONAL RURAL FINANCE PRO.IECT CNCA Finanial Situation Sourmes and Applicatlops of Funds 1992-96 (DH Million) (As of Dec. 31) 1992 1993 1994 1995 1996 Actual -- Projected ------------- SOURCES Net Income 11.6 41.9 75.4 84.7 80.0 Depreciations and Provisions 261.1 353.9 388.0 443.9 504.7 Cash Plow Generated 272.7 395.8 463.4 528.6 584.7 Icrease in: Deposits 143.4 450.0 700.0 850.0 1,000.0 One-year Bonds 108.6 50.0 60.0 80.0 100.0 Managed Funds 12.8 - - - - Other Uabilities 40.9 (24.1) 25.0 - - Equity 40.0 45.4 90.9 136.3 36.4 KfW Reserved Interests - 9.5 1.9 2.2 (1.0) Borrowings 940.0 444.4 963.0 1,253.7 526.9 Uan Repayments 2,532.6 3,159.0 4,255.3 4,654.0 5,039.0 1991 Foreign Exchange Risk - 183.0 (28.0) (56.0) (70.0) 1989 Foreign Exchange Sharing - 124.9 120.2 119.3 115.0 Subsidy on rescheduled loans - 110.0 - - - TOTAL SOURCES 4.091.0 5.307.9 6.651.7 7.6. 7.330.9 APPLICATIONS Loan Disbursements 3,343.0 4,980.0 5,370.0 5,800.0 6,206.0 Investments 106.1 225.0 240.0 260.0 260.0 Foreign Loan Repayments 500.8 457.7 507.3 534.6 564.7 Local Loan Repayments - 30.0 27.0 24.0 9.8 F.E. Difference 48.2 36.3 30.5 21.8 Increase in: Financial Investments (25.8) - - - Receivables (85.4) - - - - Liquid Assets 270.5 (433.0) 471.1 919.0 268.6 Other Assets (18.2) . . _ TOTAL APPLICATIONS 4.091.0 5.307.9 6.651.7 ?568-1 7.330-9  -60- ANNli 7 Table 11 KINGDOM OF MOROCCQ NATIONAL RURAL FINANCE PROJECT CNCA lbalm Rft" 192 1993 19 994 1996 Actual Projected A. PROlfTABIUllTY TIOS GROWTH RATE OF CNCA'S EQUITY 5.4% 6.9% 12.3% 14.6% 6.7% RATE OF INFLATION 4.9% 4.5% 3.5% 5.6% 6.2% REAL GROWTH RATE 0.0% 2.3% 8.5% 8.5% 0.5% PRE-TAX RETURN ON AVERAGE EQUITY 1.8% 5.2% 8.5% 8.4% 7.2% NET RETURN ON AVERAGE EQUITY 1.0% 3.2% 5.3% 5.2% 4.5% NET PROFIT MARGIN 0.8% 2.5% 4.0% 4.1% 3.6% B. BALANCE SHEET RATIOS UQUIDITY RATIO/a 1.79 1.76 1.73 1.74 1.69 QUICK ASSET RATIO 0.45 0.31 0.35 0.45 0.42 EQUITY TO RISK ASSETS /1 10.0% 9.6% 9.9% 10.6% 10.6% LONG-TERM DEBT/EQUITY 6.97 6.50 6.05 5.66 5.28 TOTAL DEBT/EQUITY 11.34 10.92 10.53 10.12 10.06 DEPOSITS/RISK ASSETS 22.6% 23.4% 26.3% 29.7% 33.4% DEPOSITS/SHORT-TERM LOANS 66.6% 62.4% 69.4% 78.3% 88.6% EXTERNAL FUNDS/LILABIL[TIES 64.5% 62.5% 60.6% 59.1% 55.5% CREDIT RISK PROVISIONS/RISK ASSETS CLCAs 19.7% 21.1% 22.7% 24.1% 25.7% CRCAs AND CNCA 9.9% 10.7% 11.7% 12.8% 14.0% PROVISIONS/ARREARS 40.3% 44.2% 45.7% 48.1% 50.8% C. OPERATING ACCOUNT RATIQS GROSS REVENUES/RISK ASSETS 9.8% 10.4% 11.0% 10.9% 10.9% INTERESTS/NVESTMENTS 10.8% 10.8% 10.8% 10.8% 10.8% GROSS REVENUES/TOTAL 10.2% 10.9% 11.4% 11.3% 11.2% INTEREST COST/AVG. 1AB1IIITES 5.5% 5.5% 5.8% 5.9% 5.9% FINANCIAL MARGIN 4.3% 5.0% 5.2% 5.0% 5.0% NON-INTEREST COST/RISK ASSETS 3.4% 3.6% 3.8% 4.0% 4.2% PRE-TAX RETURN ON RISK ASSETS 0.3% 0.5% 0.8% 0.9% 0.8% AFTER-TAX RETURN ON RISK ASSETS 0.2% 0.3% 0.5% 0.5% 0.5% ANNUAL PROVISIONS/RISK ASSETS 2.0% 2.2% 2.1% 2.2% 2.3% ANNUAL PROVISIONS/DISBURSEMENTS 7.5% 6.2% 6.0% 6.2% 6.4% ANNUAL PROVISIONS/ARREARS 6.6% 7.4% 6.8% 6.9% 7.0% a/ Defined as current assets divided by curmt liabilities (cufent assets = liquid + short-term risk assets - Provisions). hi Capital Adequacy (Cooke Ratio). Intemational standard is at least 8% for commercial bank capitalization.  - 61 - A