Malawi - Smallholder Agricultural Credit Project

 Smallholder agricultural credit project Report No: ; Type: Report/Evaluation Memorandum ; Country: Malawi; Region: Africa; Sector: Agricultural Credit; Major Sector: Agriculture; ProjectID: P001632 The Malawi Smallholder Agricultural Credit project (SACP), supported by Credit 1851-MAI for SDR 4.6 million (US$6.4 million), was approved in FY88. The credit was fully disbursed and closed on schedule on June 30, 1995. Cofinancing, amounting to SDR 4.7 million (US$6.6 million), was provided by the International Fund for Agricultural Development (IFAD). The Implementation Completion Report (ICR) drafted by the FAO/World Bank Cooperative Programme (FAO/CP) was reviewed and updated by the Africa Regional Office. The borrower prepared an ICR, but a summary is not included. The cofinancier commented on the initial FAO/CP draft of the ICR and its comments were incorporated in the update. The revised draft was not sent for comments. Through much of the 1980s, the primary vehicle in Malawi for external support of the agricultural sector was the area-based project, which typically included a credit component. The availability and terms of credit varied between project areas and donors. The primary objective of the SACP was to transform Malawi's existing smallholder credit system into a better managed, more efficient, lower cost and financially viable national credit delivery system, so as to provide uniform access to credit, based on standard criteria. The main components were: (i) the provision of funds for financing both seasonal credit (primarily for inputs) and viable on- and off-farm investments (medium-term credit); (ii) institutional support for the establishment of a Smallholder Agricultural Credit Administration (SACA) within the Ministry of Agriculture and Livestock Development (MOALD), and provision for technical assistance and training; and (iii) an IFAD-funded pilot savings and credit scheme for the poor. The primary objective was not met. Initially, SACA made good progress and sustained the high recovery rates which had been characteristic of smallholder credit in Malawi in the 1980s (supplied on a group basis through farmers' clubs). The number of participating clubs (and club members) increased from a pre-project level of 9,072 (with 242,500 members) in 1987/88, to a peak of 15,650 clubs (392,000 members) in 1992/93 (about 25 percent of households with land). Prior to 1991 the discipline within the single political party had been a major element in maintaining the system. However, a series of events beginning in 1991/92 led to its effective collapse. There was a major drought during this crop season and many farmers could not repay their loans. Eventually, the Government declared a moratorium, and allowed repayments to be rephased over several years, and then made free deliveries of inputs for the 1992/93 season, ostensibly for subsistence requirements. By that time the first multi-party elections were pending and parties were taking positions which undermined even limited repayment. This experience made it clear that a credit system could not be run on commercial principles through a ministry, and it was agreed that a publicly owned, but autonomous, Malawi Rural Finance Company (MRFC) should be established. This agency is being supported under the Rural Financial Services project (Credit 2513-MAI) and shows prospects for continued financial viability, having reestablished the principle of joint and several liability among group borrowers, and also requiring the provision of some collateral by borrowers, by depositing at least 10 percent of a loan in a savings account. Under SACP technical assistance was provided to SACA to develop credit policies and procedures and accounting and information systems. Training was provided, in particular to about 400 field staff, on credit and accounting, and about 9,000 club officials also benefited from similar short courses. Many of these staff have since been absorbed by MRFC. The pilot credit and savings scheme, the Malawi Mudzi Fund (MMF), was loosely modeled on the Grameen Bank approach. It was established in 1989 as a separate legal entity from SACA. By the end of 1994 it had made loans to about 2,400 persons, totaling almost MK700,000 (US$150,000), and recovery rates had risen to about 90 percent. Most of the borrowers were women. However, because of small loan size and intensive supervision, costs were high. MMF was merged into MRFC in 1995, but remains separately funded by IFAD. The Operations Evaluation Department (OED) agrees with the ratings of the ICR that the outcome of the project is unsatisfactory, sustainability is unlikely, institutional development is negligible. OED also rates Bank performance as satisfactory, despite the poor performance of the project, since the approach adopted was the most appropriate and feasible means available in the circumstances to strengthen and improve the chaotic pre-existing system, and the lessons from this project have been incorporated in the design of the ongoing Rural Financial Services project. The ICR provides a good account of the implementation of the project, in particular its discussion of the achievement of objectives. However, although the borrower prepared an ICR, this was based on the draft ICR prepared by the FAO/World Bank Cooperative Programme and did not include a summary. Hence, the Borrower's views are not reported in the ICR. The principal lessons from the project are that (i) to remain solvent, rural credit institutions need to be able to operate free of political interventions, both in the selection/screening of clients and in the supervision and recovery of loans; and (ii) the prevailing policy environment has a crucial impact on the viability of smallholder lending. No audit is planned.