Malawi - Industrial and Agricultural Credit Project

Doument of The World Bank FOR OMCIAL USE ONLY Report No. 14011 PROJECT COMPLETION REPORT MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT (LOAN 2646-MAI) MARCH 2, 1995 Industry and Energy Operations Division Southern Africa Department Africa Regional Office This document has a restricted distribution and may be used bY recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit = Malawi Kwacha (MK) Exchange Rates 1985 1993 (at appraisal) (at closing) Current US$1.00 = MK 1.80 MK 4.42 MK 4.39 MK 1.00 US$0.56 US$1.37 US$1.36 GLOSSARY OF ABBREVIATIONS CBM Commercial Bank of Malawi GDP = Gross Domestic Product IBRD = International Bank for Reconstruction and Development IDA = International Development Association IFC = International Finance Corporation INDEBANK = Investment and Development Bank of Malawi Limited NBM = National Bank of Malawi TA = Technical Assistance  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Ofce of Director-Genral Operalonr Evaluation March 2, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Malawi Industrial and Agricultural Credit Project (Loan 2646-MAI) Attached is the Project Completion Report on Malawi - Industrial and Agricultural Credit Project (Loan 2646-MAI) prepared by the Africa Regional Office. No comments have been received from the Borrower. The project comprised a loan of US$7.8 million to the Investment and Development Bank of Malawi (INDEBANK) for onlending to industrial and estate agricultural enterprises. Separate loans were made to INDEBANK for each of these purposes. The objective of the industrial component was to support expansion through the provision of term finance, while the agricultural component was specifically targetted at agricultural diversification activities. These broad objectives were attained. Available funds were quickly commited, but take up of loans was initially slow. Monitoring of the agricultural component was inadequate and it was not noted until well into implementation that the devaluation of the kwacha meant that additional local funds would be available. Since by that time alternative funds were available through an IDA credit, the unused portion of the loan (23 percent) was cancelled. Funds from the technical assistance component were used to prepare a corporate Strategic and Business Plan for INDEBANK This has been implemented through the development of commercial banking activities, and has increased the organization's available funds and improved its overall financial performance. The outcome of the project is rated as satisfactory, institutional development as modest and sustainability as likely. The Project Completion Report provides an adequate account of project implementation. No audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT (LOAN 2646-MAI) TABLE OF CONTENTS Page No. PREFACE . .............................................. i EVALUATION SUMMARY ................................... iii PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE ......... I Project Identity ....................................... 1 Background ......................................... 1 Project Objectives and Description .......................... 3 Project Design and Organization ............................ 3 Implementation ...................................... 4 Project Results ....................................... 6 Project Sustainability ................................... 8 Bank Performance ..................................... 8 Borrower's Performance ................................. 8 Project Relationship .................................... 9 Project Documentation and Data ............................ 9 PART II - PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ........ 10 PART HI - STATISTICAL PROFILE ............................. 11 Attachment 1 - Related Bank Loans and/or Credits ......................... 11 - Project Timetable .................................... 11 Attachment 2 - Loan/Credit Disbursements ..................... 12 Attachment 3 - Project Costs and Financing ..................... 13 Attachment 4 - Status of Covenants .......................... 14 Attachment 5 - Use of Bank Resources ........................ 16 Attachment 6 - Commercial Bank of Malawi .................... 17 Attachment 7 - National Bank of Malawi ....................... 18 Attachment 8- INDEBANK .............................. 19 Attachment 9 - Financed Subprojects ......................... 21 INDEBANK Commercial Bank of Malawi National Bank of Malawi This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. l   - i - PROJECT COMPLETION REPORT MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT (LOAN 2646-MAI) PREFACE This is the Project Completion Report (PCR) for the Industrial and Agricultural Credit Project in Malawi, for which Loan 2646-MAI in the amount of US$7.8 million was approved on December 19, 1985. The loan was closed on January 13, 1993, six months earlier than the planned date. The last disbursement was July 21, 1992 and US$1.8 was cancelled. The PCR was prepared by the Industry and Energy Division of the Southern Africa Department (Preface, Evaluation Summary, Parts I and III). Comments (Part II) from the Borrower were expected by end-May 1994.1/ Preparation on this PCR was started during the Bank's final supervision missions, and is based, inter alia, on the Staff Appraisal Report, the Loan and Project Agreements, supervision reports, correspondence between the Bank and the Borrower, and internal Bank memoranda. 1/As of June 24, 1994, no comments had been received.   - iii - PROJECT COMPLETION REPORT MALAWI INDUSTRIAL AND AGRICULTURE CREDIT PROJECT (Loan 2646-MAI) EVALUATION SUMMARY 1. The Industrial and Agricultural Credit Project (Loan 2646-MAI) for US$7.8 million was appraised in March 1985, signed in April 1986 and became effective in July 1986. The project closed in January 1993, earlier than the planned date of June 1993. At closing, only 77 percent of the loan amount had been disbursed. The Bank encouraged the Government of Malawi to cancel the remaining amount as there were funds available to the Government on IDA terms under the Financial Sector and Enterprise Development Project (FSEDP, Cr. 2221), which became effective in August 1991. 2. Objectives. According to the President's Report, the objectives of the project were: (i) to stimulate the efficient expansion of Malawi's industrial, commercial, transportation and tourism sub-sectors by providing term finance; (ii) to improve the utilization, efficiency and productivity of agricultural estates and gradually encourage diversification into viable new crops; and (iii) to sustain and strengthen INDEBANK's institutional capabilities to effectively promote efficient development in the agricultural, industrial, and commercial sectors. The three components of the project included: (i) a US$3.0 million line of credit to finance viable industrial, commercial, transport and tourism investments; (ii) a US$4.5 million agricultural line of credit to provide investment to agricultural estates. This component of the project was a pilot project to provide investment credit to strengthen the existing production base and support the efforts to initiate crop diversification; and (iii) US$0.3 million in technical assistance to INDEBANK to strengthen its capability to promote, appraise and monitor agricultural projects. Implementation Experience and Project Results 3. Industrial Component. The industrial component of the project substantially achieved its objectives. Implementation of this component was done by INDEBANK. In general, implementation of this component of the project was satisfactory. Seven sub-projects were financed and all are performing as expected except for Viphya Plywood. Viphya Plywood is experiencing problems and the shareholders, which include the Government and IFC, are considering restructuring options. This component initiated a healthy relationship between the World Bank and INDEBANK that led to another line of credit and continued technical assistance under FSEDP, Cr. 2221-MAI. 4. Agricultural Component. In addition to INDEBANK, the National Bank of Malawi (NBM) and the Commercial Bank of Malawi (CBM) participated in this component. In general, progress in the achievement of the development objectives was minimal. In part, this was because the objectives were very ambitious for a small pilot project: the agriculture line of credit was only a very small fraction of the agricultural portfolio of the commercial banks in Malawi,  - iv - and there was no technical assistance aimed at promoting the developmental objectives. Only 10 sub-projects were financed by the participating financial intermediaries (PFIs), of which six had been fully repaid at the time of the PCR mission (August 1993). Some estates were able to achieve some efficiencies and better productivity during the project period, primarily related to the installation of irrigation. 5. More importantly, however, the lack of success is attributable to inadequate linkages between the project, and the sector work that was going on at the same time regarding agriculture diversification, which identified a number of possible crops. This report, Malawi: Agricultural Diversification, was published in November 1984, which meant that the findings of the report could have been better incorporated into the design of Loan 2646. However, other than stating that an important objective was to encourage diversification, and providing a small amount of term finance for the estate sector, the project did nothing to facilitate the diversification process. The assumption underlying the design of this component was that improvements in estate productivity, particularly regarding tea and tobacco, would, almost automatically, engender diversification away from those two products; there was no technical assistance provided under the project aimed at assisting farmers to determine how to diversify and what to diversify into. The diversification effort was complicated by the boom in burley tobacco prices between 1986 and 1992: tobacco became more profitable, and accordingly, diversification out of it, less attractive. Most of the estates that attempted diversification replaced tea with coffee, which did not achieve diversification. How to achieve diversification of the Malawian economy and specifically of agriculture remains a structural problem. A draft Agricultural Sector Memorandum has been prepared, and the key to unlocking Malawi's diversification potential is considered to be that of providing an enabling environment for investment by farmers and non- agricultural businesses through the removal of policy obstacles and the improvement of institutional support. 6. Some progress was made in strengthening the capacity of INDEBANK in agricultural lending. However, it should be mentioned that during the project period, INDEBANK undertook a strategic analysis of growth options and decided to reduce its exposure in agriculture lending. 7. The US$1.3 million that was cancelled from the loan proceeds was entirely from the agriculture component. However, this cancellation does not indicate lack of interest by would-be sub-borrowers, but rather inadequate monitoring of commitments and disbursements on the part of the Bank and the Government. Once the loan became effective, the agriculture component was committed quickly; however, subsequent devaluations meant that the US dollars went further than expected at time of commitment. This situation was not discovered until well into implementation, by which time the Government preferred to cancel the proceeds in favor of using Cr. 2221. 8. Technical Assistance Component. The technical assistance component of the project had a permanent positive impact on INDEBANK, and more generally, on the financial sector in Malawi; the presence of this component alone would have made the project worth doing. However, it should be carefully noted that the beneficial TA was not the TA envisioned at project design. Several years into the implementation of the project, it became clear that agricultural lending did not constitute a profitable, growth business activity for INDEBANK, and the Bank and INDEBANK agreed to redirect the funds towards developing a corporate strategy aimed at  v "growing' INDEBANK. In 1990/91, INDEBANK undertook, with the assistance of a consulting firm, the development of a Strategic and Business Plan to Diversify Current Operations, which identified moving into commercial banking activities. A commercial banking facility within INDEBANK, formerly called the Banking and Financial Services Division and currently INDEFinance, was set up in 1992. The Banking and Financial Services Division contributed to the profitability of INDEBANK and since April 1993 the division became independent and is now a subsidiary of INDEBANK. INDEBANK also was successful in mobilizing local resources amounting to K4.3 million. The flexibility shown by Government, INDEBANK and the Bank in handling the technical assistance component is commendable. Issues eardinf the Lines of Credit 9. Foreign Exchange Risk. The design of the two lines of credit in respect of the foreign exchange risk was inappropriate. The industrial sector in Malawi is mainly composed of non- exporters. However, under the industrial line of credit, sub-borrowers accepted directly the foreign exchange risk. Many industrial companies were reluctant to accept this risk, and the industrial line of credit was slow to commit. Many of those companies that did borrow under the industrial line of credit ran into trouble when the kwacha was devalued during the course of the project, and INDEBANK was forced to restructure several loans. In contrast, Government accepted the foreign exchange risk for the agricultural borrowers, virtually all of whom were exporters and accordingly would have been better able to hedge the risk. This line of credit was committed very quickly. 10. Inlementation - involvement of two Bank divisions. During the design period, the country department debated whether to prepare two separate projects, one for industrial lending ("INDEBANK I") and one for agricultural lending. It was agreed that in view of Board slot constraints, only one project would be prepared, and that the IDF division would take the lead, with the agriculture division providing support. Accordingly, for much of the early implementation period, during which the agriculture line of credit was commited, two separate divisions, IDF, and Agriculture, supervised and implemented the two lines of credit. This division of labor on the Bank's part reflected the Bank's previous approach to lines of credit, by separating them into the relevant sector divisions (e.g. housing, agriculture). While this division of implementation between two divisions was intended to facilitate the inclusion of required skills, while maling clear overall responsibility, the actual implementation did not work this way. The two divisions had different approaches to implementation and supervision of the same project. Inadequate records were kept on the agriculture subprojects, primarily related to disbursements, which meant that an enormous amount of work was required by later missions and by the Reserve Bank to reconstruct disbursements by project (necessary to determine how much was actually disbursed on the subprojects). In addition, different procedures caused some confusion for INDEBANK, which participated in both components of the project. The IDF division is at fault for not managing the implementation more proactively, and ensuring that certain practices were followed. 11. Special Accounts. Separate special accounts were set up for the agriculture and industry components. Neither account was well managed, largely because responsibility within Government was never clear. It should be noted that poor experience with special accounts in Malawi has not been limited to this project. Problems with disbursement recordkeeping in relation  - vi - to the agriculture subprojects also impacted the agriculture special account. In trying to address this problem the RBM and Bank established an Apex Unit in the Reserve Bank of Malawi; all World Bank projects, and some donor projects, are managed by this unit. Filndings and Lessons Learned 12. Regarding the agricultural component, changes in sectoral orientation, such as diversification, must be based on a well designed strategy, based on an in-depth understanding of the constraints to agricultural diversification. This strategy must be clearly 'operationalized' in the project design; in particular, the design should include technical assistance, with a strong orientation toward capacity building, aimed at achieving the required supporting environment (policy changes, development of support services). 13. Foreign exchange risk in lines of credit should only be passed to sub-borrowers in cases where they have the means to adequately cover the risk (e.g. export earnings, hedging capabilities). In general, Governments should bear the foreign exchange risk for those enterprises that do not have foreign earnings with the pricing of the loans structured in such a way that there is compensation to the Government for this cost. 14. Flexibility in project desi2n can reap large rewards by responding to changing circumstances. The technical assistance to INDEBANK has been one of the most significant developments in the financial sector by increasing the level of competition in the banking sector. However, this TA, which was directed to the commercialization of INDEBANK, is far removed from the original design, which further developed the developmental activities. This component of the project was the most successful part of the loan and the impact of the TA alone would have made the loan worthwhile. 15. The past practice in the Bank of establishing sectoral lines of credit with different terms and conditions, and supervision arrangements was inefficient (e.g. re-submission of audit of progress reports), and confusing to implementing institutions. The current trend in the Bank toward non-sectorally specific lines, which share common terms and conditions, should result in more efficient use of the lines. 16. Inadequate implementation and supervision of the project contributed to the need to cancel US$1.3 million from the loan amount. Several factors contributed to inadequate supervision, including the split in supervision responsibility between different divisions. In addition, the 1987 Bank reorganization was particularly disruptive, as the involvement of a third division was introduced. In situations like this project, which can be unavoidable due to project complexities, the managing division has to be particularly diligent about ensuring comprehensive and uniform supervision practices are followed.  PROJECT COMPLETION REPORT MALAWI INDUSTRIAL AND AGRICULTURAL CREDIT PROJECT (Ln. 2646-MAI) Part I - Project Review from the Bank's Perspective 1. Project Identity Name : Industrial and Agricultural Credit Project Loan Number 2646-MAI RVP Unit Africa Region Country Malawi Sector : FIL 2. Backeround 2.1 In formulating its development strategy after independence in 1964, the Government of Malawi emphasized the development of agriculture, exports, and the private sector. In order to implement some of its policies, the Government established the Investment and Development Bank of Malawi (INDEBANK) in 1972. The main objective of INDEBANK was to make a contribution to the advancement of productive business enterprises which in turn would contribute to economic and social progress in accordance with the developmental goals set and pursued by the Government. 2.2 The country presented one of the major development success stories in the region, when its real GDP doubled and real per capita income grew by 3 percent per year. This strong economic growth came to a halt in the early 1980s when the country faced a combination of unfavorable terms of trade, high interest rates, weather related shocks, and other major domestic policy weaknesses. The first series of adjustment operations throughout the 1980s was a response to this set of shocks. These structural reforms and improvements in short-term macroeconomic management created a stable macroeconomic environment. After negative growth in 1986 and 1987, GDP (at market prices) grew by 4.8 percent in 1990 and 7.8 in 1991, restoring per capita GDP growth to a positive level. In 1992, the economy was affected by two major shocks; a severe drought that reduced the maize crop by nearly 60 percent and the outcome of May 1992 Consultative Group meeting, when bilateral donors and the European Community abstained from pledging additional external assistance to Malawi. 2.3 Agricultural sector. Agriculture has been the backbone of Malawi's economy. Farms are categorized as either "estate" or "smallholder". The estate sector has been the primary foreign exchange earner in Malawi: although at the time of project design (1984) only about 4 percent of Malawi's total land area was held under the estate sub-sector and the area devoted to estate production was less than 10 percent of land suitable for cultivation, the estate sub-sector accounted for about 80 percent of the country's foreign exchange earnings with exports of tobacco, sugar, tea, coffee, and macadamia nuts. The development of the estate sub-sector has been left to the private sector, with very little Government assistance. In the early 1980s the prospects for traditional estate crops  - 2 - worsened because of a weak world demand for tobacco and sugar. It became critical for Malawi to diversify away from traditional crops to increase growth in exports and stabilize earnings. There was then a need for Government to play a more active role in assisting the estate sub-sector address these critical needs, particularly term credit and technical assistance. 2.4 Loan 2646 was the first IBRD operation to assist the estate sector. Prior to this project, the Bank Group had funded 14 projects totalling US$121 million for smallholder agriculture. With the exception of one Third Window loan of US$9.2 million, the financing had been made through IDA credits. The Bank assigned priority to the rehabilitation, expansion and diversification of agricultural estates, based on the recommendations of an agricultural diversification study conducted in 1984. This study proposed: (i) a consistent export promotion strategy complemented by import substitution where economically feasible; (ii) strengthening and focussing on adaptive research to help resolve the technological constraints and increase efficiency in land and labor use; and (iii) improving the administration of agricultural programs. In addition, it indicated that in order to improve the efficiency of agricultural estates and to encourage diversification away from tobacco, tea and sugar, there was a need to improve the mechanism for channelling credit to the estate sector and to increase the amount of credit to the sector. 2.5 Industrial sector. The industrial sector in Malawi is very small, accounting for about 12 percent of GDP. The World Bank's strategy in the industrial sector in Malawi was to encourage and assist continued manufacturing expansion in Malawi, building on Malawi's agricultural bases. The Bank's only industrial sector operation in Malawi, prior to Ln. 2646, had been an industrial development finance operation to INDEBANK through the Government of Malawi (Ln. 1610) for US$3 million. This loan was approved in July 1978 and closed in July 1983. Approximately US$235,004 of the loan was cancelled due to some sub-projects being implemented at lower than estimated cost. The objectives of this project were to provide financing for investments in productive sectors and technical assistance for institution building of INDEBANK. This project was recognized as having substantially met its objectives. However, at the time of the completion report, it was noted that INDEBANK still had to overcome weaknesses in the area of project promotion and evaluation of the economic impact of the projects it financed, and needed to strengthen its institutional capabilities to be able to play a leading role in the development of Malawi's industrial sector. 2.6 During the supervision of Ln. 1610 in 1983 INDEBANK and the Government of Malawi expressed their interest in a follow-up line of credit to continue financing for productive activities in industry. Concurrent with the discussions with INDEBANK on follow-up Bank assistance to the industrial sector, the Bank held discussions with the Government of Malawi on possible Bank assistance to the Malawian agricultural sector. In response to this the Government of Malawi hired consultants to prepare a proposal for the establishment of the Agricultural Development Bank (AGRIBANK). The consultants, the Government of Malawi and the Bank agreed that AGRIBANK was not a viable proposition. On the Bank's recommendation, the Government agreed to channel Bank assistance to the agricultural sector through the existing institutions (INDEBANK, Commercial Bank of Malawi and National Bank of Malawi). This was defined as a pilot arrangement to allow assessment of potential demand and the performance of participating institutions.  3. Project Objectives and Description 3.1 According to the President's Report, the project was expected: (i) to stimulate the efficient expansion of Malawi's industrial, commercial, transportation and tourism sub-sectors by providing term finance; (ii) to improve the utilization, efficiency and productivity of agricultural estates and gradually encourage diversification into viable new crops; (iii) to sustain and strengthen INDEBANK's institutional capabilities to effectively promote efficient development in the agricultural, industrial and commercial sectors. The three components of the project included: (i) a US$3.0 million credit line to finance viable industrial, commercial, transport and tourism investments; (ii) a US$4.5 million agricultural credit line to provide investment credit to estates; and (iii) US$0.3 million in technical assistance to INDEBANK to strengthen its capability to promote, appraise and monitor agricultural projects. 4. Project Design and Organization 4.1 IBRD funds were borrowed by the Government of Malawi, through the Reserve Bank of Malawi, at standard variable interest rate, repayable in 15 years including four years of grace. 4.2 The Government agreed to on-lend US$3.0 million to INDEBANK to finance industrial, and commercial projects at the variable interest rate to be paid by Government. Repayment would be in accordance with the aggregate of the amortization schedules applicable to sub-loans. The maximum repayment period was 15 years including four years of grace. INDEBANK on-lent loan proceeds at a variable rate that would be positive in real terms and adequate to cover reasonable administrative expenses. INDEBANK's rate for industrial credit was 13 percent per annum. 4.3 The Government also agreed to on-lend, through the Reserve Bank of Malawi, US$4.5 million for agricultural projects to INDEBANK, the National Bank of Malawi (NBM), and the Commercial Bank of Malawi (CBM) at a rate initially set at 10.5 percent per annum. These institutions on-lent at rates initially ranging from 11.5 percent to 15 percent per annum. The Government bore the foreign exchange risk for the agricultural component, which was deemed appropriate in view of the Govermment's objective to expand credit availability and stimulate development in the estate sub-sector. 4.4 The Government provided a grant of US$0.3 million to INDEBANK to help strengthen the institution's capabilities to promote, appraise and monitor agricultural projects. Proceeds of this component would finance the cost of employing a manager for the Agricultural Projects Department, for a term of three years, and an experienced agricultural specialist. In view of a shortage of Malawians with the required appropriate experience, INDEBANK was expected to recruit expatriates to fill these positions. In addition, proceeds of the technical assistance component would finance the cost of employing two suitably qualified Malawian counterparts. 4.5 The Reserve Bank of Malawi opened two spial accounts for each component with a bank overseas. Funds were channeled from the loan account to these special accounts. Initially, RBM managed both Special Accounts, although INDEBANK eventually assumed full responsibility for the industrial Special Account, with RBM playing a minimal role.  -4- 5. kmRementation 5.1 General. Implementation of this project was recognized as satisfactory and problem-free. The project was rated p1" in 1987 and thereafter it was rated '2' until the closing date. Ihe project closed on January 13, 1993, six months ahead of schedule. The Bank encouraged the Government of Malawi to close the loan early, as there were funds available to the Govermment of Malawi at IDA rate, under Cr. 2221. 5.2 As the only participating financial institution (PFI) in the industry component, INDEBANK, for the most part, managed the industrial line of credit and the special account. RBM managed the agricultural line of credit and the special account. A few problems were experienced due to of lack of knowledge of Bank procedures. The two commercial banks, CBM and NBM, participated in the agricultural line of credit with INDEBANK. 5.3 Imnlementation of the Industrial Component. In general, implementation of the industrial line of credit was satisfactory. INDEBANK was the sole executing agent for the industrial credit line. Seven sub-projects were financed under this credit line and a total of US$2,495,799 was disbursed. Annex B, attached hereto, gives details on these sub-projects. Approximately US$504,201 (17 percent) was cancelled from the line of credit. 5.4 The sub-borrowers under this line of credit had to bear the foreign exchange risk, which resulted in slow use of funds. The devaluation of the Malawian Kwacha in 1987 resulted in outstanding debtor balances increasing. As a result of this, INDEBANK rescheduled most of the loans. After the rescheduling of loans, repayments occurred as expected except for Concrete Tile Industries and Viphya Plywood, both of which ended up accruing arrears. However, Concrete Tile Industries managed to pay the arrears and the payments are now occurring as expected. 5.5 Viphya Plywood has been unable to make any repayments since the loan was extended. INDEBANK restructured the loan and repayments are expected to commence in 1996. The company has been experiencing problems and the main reason seem to be associated with understatement of projected figures at the time of the feasibility study of the project. The company is presently under a foreign management team and the shareholders, which include IFC, are considering restructuring options, including privatization. 5.6 Implementation of the Agricultural Component. National Bank of Malawi (NBM), Commercial Bank of Malawi (CBM), and INDEBANK were executing agencies of this component of the project. US$3,158,475, of the US$4.5M available for agriculture lending was disbursed, and the remaining US$1,341,525 (30 percent) was cancelled. Ten sub-projects were financed under the agricultural line of credit. Four of these estates diversified into coffee, of which one diversified into both coffee and macadamia nuts. Three of the estates purchased irrigation equipment and the remaining three rehabilitated the estates. 5.7 Three agricultural sub-projects were financed by INDEBANK, of which two have been taken over by one owner. This company is performing well and is involved in a diversifying program. The other sub-project had difficulty repaying the loan due to low tea prices. The loan was paid in full under the Tea Industry Rescue Package. Under this scheme Press Corporation extended cheap  -5- loans to estates affected by low tea prices and the outstanding debtor balances for these estates were settled by Press Corporation. 5.8 NBM financed 4 sub-projects of which three have been fully repaid. The remaining sub- project had difficulty meeting the repayments due to tea crop losses and the loan was rescheduled. Repayments are currently occurring as expected. 5.9 CBM financed 3 sub-projects, of which 2 have been fully repaid and one was sold to General Farming and was settled in full when it was being transferred to NBM. 5.10 The need to cancel such a large amount was not indicative of lack of interest by the estate sector; in fact, this component was quickly committed. However, disbursements were not well tracked either by RBM or by the World Bank. RBM monitored commitments and disbursements in Malawi kwacha, while the Bank monitored in US dollars. While it appeared to RBM that the component had been fully committed and disbursed, the devaluations of the Malawi kwacha during this period meant that there actually was a large, unused balance in the agriculture component - about US$1.8 million. Had this amount been identified earlier in the project life, it undoubtedly would have been committed and disbursed. However, by the time it was identified as a commitment problem, rather than just lagging disbursements, the Government was no longer interested in using IBRD funds for this purpose. 5.11 A special accunt was opened in July 1986 and a balance of US$400,000 was maintained. All disbursements for agricultural sub-projects were debited from this account. As with many projects in Malawi, the special account was not audited regularly. Had it been, the problem with under-commitments would probably have come to light sooner. 5.12 Technical Assistance Component. This component of the project (US$0.3 million) was provided by the Government of Malawi to INDEBANK as a grant to help the institution strengthen its capabilities to promote, appraise and monitor agricultural projects in order to expand its role in agricultural lending. Actual amount disbursed under this component was US$352,006. 5.13 The recruitment of the Agricultural Credit Manager did not take place in 1986 as was agreed. INDEBANK was only able to recruit an expatriate in November 1987 to manage the agricultural credit department, who stayed for only one of the expected three years. An agreement was then reached between the Bank and INDEBANK to engage consultants as necessary for agricultural projects evaluation. Meantime, an agricultural projects officer was sent to the U.K. for training. 5.14 The expatriate had a minimal impact on INDEBANK. In the year that he spent with INDEBANK, little training was accomplished. However, he prepared a draft manual for the appraisal of agricultural projects which was used as a guideline in evaluating agricultural projects. 5.15 Near the end of the project, the Bank, Government and INDEBANK agreed to re-direct the technical assistance to finance a strategic options study. This study led to the creation of a wholesale commercial banking facility, the Banking and Financial Services Division in 1991. This division contributed to the profitability of INDEBANK and in April 1993 the division became independent and is currently a subsidiary of INDEBANK.  -6 - 6. Project Results 6.1 The project objectives were: (i) to improve utilization, efficiency and productivity of agricultural estates; (ii) to sustain and strengthening the institutional capabilities of INDEBANK; and (iii) to stimulate the efficient expansion of industrial, commercial, transportation and tourism sub- sectors. The project substantially achieved its objectives on the industrial and technical assistance components, particularly the strengthening of INDEBANK's institutional capabilities. The reorientation of the technical assistance to develop commercial banking facilities was especially effective. 6.2 However, the objectives in regards to agriculture cannot be viewed as having been achieved. In part, this was because the objectives were very ambitious for a small pilot project: the agriculture line of credit was only a very small fraction of the agricultural portfolio of the commercial banks in Malawi, and there was no technical assistance aimed at promoting the developmental objectives. Only 10 sub-projects were financed by the participating financial intermediaries (PFIs), of which six had been fully repaid at the time of the PCR mission in August 1993 (repayment of the others is on schedule). Some estates were able to improve efficiency and productivity during the project period, primarily related to the installation of irrigation. 6.3 More importantly, however, the lack of success is attributable to inadequate linkages between the project, and the sector work that was going on at the same time regarding agriculture diversification, which identified a number of possible crops. This report, Malawi: Agricultural Diversification, was published in November 1984, which meant that the findings of the report could have been better incorporated into the design of Loan 2646. However, other than stating that an important objective was to encourage diversification, and providing a small amount of term finance for the estate sector, the project did nothing to facilitate the diversification process. The assumption underlying the design of this component was that improvements in estate productivity, particularly regarding tea and tobacco, would engender diversification away from those two products. No technical assistance was provided under the project to assisting farmers to determine how to diversify and what to diversify into. Most of the estates that attempted diversification replaced tea with coffee, which did not achieve diversification. One or two estates attempted to diversify, planting coffee and macadamia nuts instead of tea: however, it is evident that these estates did not have any information about the markets of the crops they diversified into, nor were support services available to them. In addition, the market for burley tobacco boomed during the 1986-92 period. How to achieve diversification of the Malawian economy and specifically of agriculture remains a structural problem. A draft Agricultural Sector Memorandum has been prepared; the key to unlocking Malawi's diversification potential is considered to be that of providing an enabling environment for investment by farmers, especially commercial smallholders and viable estates, and businesses (including agro- processors) through the removal of policy obstacles and the improvement of institutional support to ensure a private sector-led agricultural diversification. 6.4 INDEBANK Subloans. INDEBANK was the sole executing agency of the US$3.0 million industrial line of credit, of which US$2,495,799 was disbursed and seven sub-projects were financed. Of the agricultural line of credit INDEBANK disbursed K 2,401,886. The following table summarizes INDEBANK subloans financed under Ln. 2646:  -7- Sector ~~Number Disbured Agriculture 3 K 2,401,886 Industry 7 USS 2,495,799 Agro-industry 3 USS 1,802,946 6.5 Ten agricultural sub-projects were financed under the agricultural component of the project. Actual amount disbursed was US$3,158,475 and the remaining US$1,341,525 was cancelled. 6.6 NBM Subloan. NBM participated in the agricultural component of the project. NBM has been involved in agricultural lending for a long time, and more than 60% of its customers are involved in agricultural activities. Of the US$4.5 million agricultural line of credit, NBM financed four subloans, disbursing K3,474,117. As at June 1993 K2,834,117 had been repaid with only K 640,000 outstanding. 6.7 CBM Subloans. CBM participated in the agricultural component of the project, disbursing K 2,222,787. Like NBM, CBM has a substantial portfolio in agriculture. Four sub-projects were financed by CBM under the agricultural line of credit and all the loans have been fully repaid. 6.8 Technical Assistance. The technical assistance component was meant to help INDEBANK strengthen its capabilities to promote, appraise and monitor agricultural projects in order to expand its role in agricultural lending. However, two years into the implementation of the project, based on a strategic planning exercise, the Bank and INDEBANK agreed to redirect these funds to establishing a Banking and Financial Services Division and mobilizing local resources. A total amount of US$352,005 was disbursed. 6.9 The TA contributed significantly in building capacity within INDEBANK. INDEBANK has grown to a sound, profitable and well managed financial institution. INDEBANK's financial performance has steadily improved during the past five years. Assets increased from K39 million in 1988 to K162 million in 1992. Profits after tax increased from K1.4 million in 1988 to K3.4 million in 1992 and to K2.6 during the first half of 1993. As reflected in Attachments 4 and 5, the return on average shareholders' funds increased from 17.4 percent in 1988 to 23.9 percent in 1991. In 1992 the share capital increased by about 60 percent and the return on average shareholder's finds was 16.4 percent. The return on total assets also increased from 3.5 percent in 1988 to 5.2 percent in 1991. Assets in 1992 increased about 114 percent from 1991, the return on average total assets was 2.1 percent in 1992. In 1991 INDEBANK started the Banking and Financial Services Division, a deposit taking division. As at June 1993 the division had 120 depositors, most of whom have term loans with INDEBANK. 6.10 The above success, however, does not obviate the need to review the role of the formal financial institutions in supporting agriculture, and diversification in particular. Agriculture is the cornerstone of the Malawian economy. Appropriate financial support is essential to its development and diversification.  -8 - 7. Proect Sutaxabfitib 7.1 The agricultural component of this project was a small pilot project. In view of lack of the diversification strategy, the impact of the project was negligible. However, the components implemented by INDEBANK (industrial and technical assistance) achieved a much more sustainable impact. INDEBANK was considerably strengthened by the technical assistance. The impact on the financial sector has been significant. INDEBANK's market share of financial assets has been increasing, at the expense of commercial banks' shares. 8. Bank Performance 8.1 Until 1989/90, the project was supervised by two Bank divisions, Agriculture and Industry. As discussed above, the two divisions had different approaches to supervision, which eventually contributed to the need to cancel 30 percent of the agriculture line of credit. This split in responsibility was worsened at the time of the 1987/88 Bank reorganization, at which time the lead task manager (for industry) moved outside the Southern Africa Department. This situation, in which both implementing Bank staff were outside the responsible division, was clearly unsatisfactory in terms of ensuring uniform and consistent implementation. In 1989/90, the responsible division, AF6EE, took responsibility for all aspects of implementation. The split in responsibilities between several divisions, who pursued different approaches to implementation and who clearly did not work closely enough, resulted in incomplete use of project funds. In addition, it was confusing and time consuming to the participating PFIs, particularly INDEBANK, the only PFI that participated on both components. 8.2 The design of the project could have been significantly strengthening by providing a better conceptual basis for the agriculture component, in terms of a well defined diversification strategy, and related technical assistance to ensure support during the diversification process. The design of the project also overestimated the ability of all involved parties (lNDEBANK, CBM and NBM) and in particular, the Government and RBM, to work under Bank procedures. The subsequent 1989 Agriculture Marketing and Estate Development Project (Cr. 1960) has experienced similar problems, and has achieved little toward diversification. These projects highlight the need for a comprehensive approach to promoting diversification. The Agriculture Diversification Project currently under preparation will look at both financial and non-financial constraints. 9. Borrower's Performance 9.1 The main parties involved in the implementation of Ln. 2646 included RBM, INDEBANK, National Bank of Malawi and Commercial Bank of Malawi. 9.2 Government. The Reserve Bank of Malawi largely handled the project on behalf of the Government. This was the first Bank project in which RBM played an implementing role. A number of difficulties were encountered, in particular insufficient inowledge of Bank procedures, and change in personnel. The Bank and RBM attempted to address these issues under Cr. 2221 with the establishment of the Apex Unit. 9.3 INDEBANK. The performance of INDEBANK throughout the project was commendable. The openness and willingness of management to address problems and more importantly, to think and  - 9 - act strategically, was the key factor in the successful inplementation of this project, and the growth and development of INDEBANK more generally. Competency and stability in key posts, including the finance manager, has also been a factor in INDEBANK's success. 9.4 NBM and CBM. The project had little impact on the commercial banks as it was a small fraction of their agricultural portfolio. Due to the drought some tea estates were unable to repay the sub-loans as expected. However, Press Corporation, the largest shareholder of NBM, fully repaid the sub-loans of the affected sub-projects under the Tea Industry Rescue Package. Under this scheme Press Corporation extended cheap loans to estates affected by low tea prices and the fully repaid their outstanding loans. 9.5 The management of the two special accounts by different agents resulted in confusion. No proper reconciliation of the accounts was maintained, to the extent that at some stage it was not clear how much funds were still available under the agricultural component. 10. Proect Relationship 10.1 The relationship between the Bank and the involved parties in Malawi was cordial throughout the project cycle. The management of INDEBANK was very supportive and respected the advice of the Bank. 1. Project Documentation and Data 11.1 The Staff Appraisal and the President's reports, and the legal documents were well-prepared. Problems arose after reorganization within the Bank, when the project was supervised by two divisions. As a result of this some correspondence, reports and documents related to agricultural component of the project were lost. In particular, documentation on the agricultural sub-projects appear to have been lost, and this resulted in lack of detailed information on these sub-projects. All disbursements in the industrial component were recorded by sub-projects and this eased the task of analyzing the use of funds. However, this was not the case will some of the agricultural projects and this presented some difficulty in reconciling the agricultural disbursements.  - 10- pROJECT COMEPLEONREPR MALAWI INDUSMlAL AND AGRCULTURAL CR13DIT PROJECT (Ln. 2646-MAD) PART II - Project Review from Borrower's Perspective 1. Comments from the Government were not received.  - 11 - Attachment 1 PROJECT COMPLETION REPORT MALAWI INDUSIRIAL AND AGRICULTURAL CREDIT PROJECT (Ln. 2646-MAD1 PART III - Statistical Profile 1. Related Bank Loans and/or Credits Loan/ Title Purpose | Year of Status Credit _ Approval 1610- Investment and Improve operations 1978 Closed MAI Development of INDEBANK ___ ___ Bank 2221- Financial Sector Apex line of credit to 1991 Ongoing MAI and Enterprise five institutions, Development including beneficiaries of Ln. _________ ~~2646 1966- Agr. Marketing Development of 1989 Ongoing MAI and Estate marketing and large Development and small estates 2. Project Timetable Date Date Date Item Planned Revised Actual - Identification 5/84 - Preparation - Appraisal Mission 2/85 3/85 - Loan Negotiations 10/85 10/85 - Board Approval 12/19/85 - Loan Signature 4/14186 - Loan Effectiveness 1/86 7/16/86 - Loan Closing 6/30/93 1/13/93 - Loan Completions 12/31/89  - 12 - Attachment 2 3. LoanCredit Dhkbummim Cumulative Estimated and Actual Disbursements EY6 FY87 F EY8 FY89 FY9 FY1 XE2E FY93 Estimated: Annual 1050 2000 1740 1390 940 320 180 180 Cumulative 1050 3050 4790 6180 7120 7440 7620 7800 Actual: Annual 0 799 423 1762 1527 1439 56 0 Cumulative 0 799 1222 2984 4511 5950 6006 6006 Actual as % of estimate (annual) 0 40 24 126 162 450 31 0 Actual as % of estimate 0 26 25 48 63 80 79 77 (cumulative) Date of Final Disb. - 7/21/92  - 13 - Attachment 3 4. Project Costs and Flnancing A. Poect Costs Appraisal Estimate Actual Foreign Foreign Local Exchange Local Exchange Iem Costs CCosts Tt C