Ducmoks ad The WorldBank
FOROMCIAL USE ONLY Public Disclosure Authorized
Report No. 6334 Public Disclosure Authorized
PROJECT COMPLETIONREPORT
MALAWI
INVESTMENTAND DEVELOPMENTBANK (INDEBANK)
(LOAN 1610-MAI) Public Disclosure Authorized
June 27, 1986 Public Disclosure Authorized
IndustrialDevelopment and Finance Division Eastern and Southern Africa Projects Department
Thisdocument has a restricteddistribution and may be usedby recipientsonly in theperformance of theirofficial duties. Its contentsmay not otherwisebe disclosed without World Bankauthorization. CURRENCY EQUIVALENTS
Currency Unit - Malawi Kwacha (MK) US$1.00 - MK 1.60 MK 1.00 - US$.62
GLOSSARY OF ABBREVIATIONS
ADB - African Development Bank ADMARC - AgriculturalDevelopment and Harketing Corporation CDC - CommonwealthDevelopment Corporation DEG - Deutsche Eutnickhungsgesellschaft(German Finance Company for Investmentsin Developing Countries) EEC - European Economic Country EIB - European Investment Bank FMO - NederlandseFinancierings Maatschappi Voor - UutwicKeling Sladen (NetherlandsFinance Company for Developing Countries) IFC - InternationalFinance Corporation INDEBANK - Investmentand Development Bank of Malawi Limited MIC - Malawi DevelopmentCorporation SSE - Small Scale Enterprises
Fiscal Year
Governmentof Malawi : April 1 - March 31 INDEBANK : January 1 - December 31 p. FOROFFCIAL USE ONLY THE WORLD BANK Washington,D.C. 20433 U.S.A.
OVidCnd Diiwc-.CowalI
June 27, 1986
MEMORANDLUMTO TE.E EXECUTIVEDIRECTORS AND THE PRESIDENT
St'BJECT: Project Completion Report: Malawi - Investment and Development Bank (INrDEBANK) (Loan 1610-MAI)
Attached, fo- information, is a copy of a report entitled "Project Completion ReDort: M'alawi- Investment and Development Bank (INDEBA1K) (Loan 1610-MAI)" prepared bv the Eastern and Southern Africa Regional Office. Under the modified system for proj ct performance auditing further evaluation of this project by the Operations Evaluation Department has not been made.
.p
This document has a restricted distnrbution and may be used by recipients only in the performance of their offic:ai duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFML4IL US ONLY
PROJECTCOMPLETION REPORT
MALAWI- INVESTMENTAND DEVELOPMENTBANK (INDEBANK) (LOAN 1610-MAI)
TABLE OF CONTENTS
Page No.
PREFACE......
BASICDATA SHEET ...... ii
HIGHLIGHTS ...... i
I. INTRODUCTION...... , 1...... Background ...... 1 Project Objectivesand World Bank Group Role ...... 3
II. MACROECONOMIC,INDUSTRIAL AND FINANCIALOBJECTIVES ...... 3
III. THE INSTITUTION ...... 6
IV. ALLOCATIONOF THE LOAN ...... 11
V. OPERATIONALAND FINANCIALPERFORMANCE ...... 12
VI. CONCLUSIONS...... 15
Annexes
1. List of SubrrojectsFinanced under Loan 1610-MAI .17 2. EconomicCharacteristics of SubprojectsFinanced under Loan 1610-MAI 18 3. FinancialCharacteristics of SubprojectsFinanced under Loaa 1610-MAI 19 4. Analysis of Loan Approvalsas of June 30, 1983 . 20 5. Comparisonof Projectedand Actual Operations1978-1982 .21 6. Analysis of EquityPortfolio as of December31, 1983 .22 7. SummaryDescription and Present Status of SubprojectsFinanced under Loan 1610-MAI...... 23 8. Projectedand Actual Income Statements(1978-1982) .26 9. Projectedand Actual Balance Sheets (1978-1982).27 0. Projectedand Actual Sourcesand Uses of Funds (1978-1982).28 Projectedand Actua'lFinancial Ratios (1976-1982).29 2. Scheduleof Estimatedvs. Actual Disbursements . .30 3. Coments Received from Borrower ...... -...... 31
Thisdocument has a restricteddistribution and may be usedby recipientsonly in the performance of theiroMcial duties. Its contents maynot otherwisebe disclosed without World Bank authorization. PROJECTCOMPLETION REPORT
MALAWI:INVESTMENT AND DEVELOPMENTBANK (LOAN 1610-MAI)
PREFACE
This report presentsan evaluationof Loan 1610-MAItc the Investmentand DevelopmentBank of Malawi (INDEBANK). The loan was approvedin July 1978, declaredeffective in November 1978. Disbursemex.ts were closed in December1983.
The Bank'sEastern and SouthernAfrica Regionaloffice has preparedthis reporton the basis of informationgathered during missions to Malawi in 1984. The report presentsa factualreview of INDEBANK'suse of the loan proceedsand of its institutionaldevelopments over the past six years.
In accord,.ncewith the revisedproject performance reporting proceduresthis reporthas been read in the OperationsEvaluation Depart- ment (OED) but the projectwas not auditedby OED staff. The draft CompletionReport was sent to the Borrower for comments. The Borrower's commentshave been taken into accountin finalizingthe report and are reproducedas Annex 13. - i.i -
PROJECTCOMPLETION REPORT
INVESTMENTAND DEVELOPMENTBANK OF MAU-WI(INDEBANK) Loan 1610-MAI BASIC DATA SHEET (Amounts ii' US $ Million)
As of January 31, 1986
Original Disbuised Cancelled Repaid Outstanding
Loan No.1610-MAI 3.0 2.76 .24 1.39 1.37
CumulativeDisbursements
1979 1980 1981 1982 1983 1984 Fiscal Year Ti) Estimated .18 .45 2.78 3.0 3.0 3.0 (ii) Actual 0 0 .93 1.37 2.72 2.76 (iii) (ii) as X of (i) 0 0 33 46 91 92
ProjectData
OriginalLoan Dates Actual/Revised
Board Apora.al 07/06/78 07/06/78 Loan Agreement 07/07/78 07/07/78 Effectiveness 11/01/78 11/01/78 Completionof Commitments 12/31/81 04/05/82 Loan Closing 07/01/83 07/01/83
Mission Data
No. of No. of Staff Month/Year Weeks Pe-sons Weeks Date of Report
Appraisal 11/77 2.5 2 5.0 05/03/78 Supervision1 12/78 .5 1 0.5 01/22/79 Supervision2 07/79 1.5 2 3.0 09/06/79 Supervision3 03/80 1.0 2 2.0 04/09/80 Supervision4 09/80 1.7 1 1.7 10/02/80 Supervision5 04/81 1.0 1 1.0 04/28/81 Appraisal1/ 03/82 1.7 3 5.1 07/07/82 Supervisio7n6 10/83 1.0 1 1.0 10/26/83
1/ 'NDEBANKwas appraisedfor a second Bank loan in March 1982; processing of the loan was, however,dropped on the Governmentof Malawi'srequest (para. 1.06). - iii -
PROJECTCOMPLiTION REPORT
MALAWI:INVESTMENT AND DEVELOPMENT BANK (INDEBANK)
Loan 1610-MAI
HIGHLIGHTS
The Investmentand DevelopmentBank (INDEBANK)was appraisedfor the first Bank loan in November 1977, and a line of credit in the amount of US$3.0 millionwas approvedin July 1978. The line of creditprovided INDEBANKwith foreignexchange resources to financepart of its investments in medium and large scale projectsin the industrial,agricultural and tourismsectors. The Bank had proposedto includein the loan to INDEBANK a componentof US$1.0million for financingsmall scale enterprises (SSEs). The componentwas dropped from the projectafter negotiationson requestof the MalawiGovernment (para. 1.03).
At the time of appraisalINDEBANK had severalweaknesses: its professionalstaff lackedexperience, it had not establishedappropriate operationalprocedures, the qualityof its appraisalsneeded to be improved,and projectsupervision was uncoordinatedand weak. INDEBANK made good progressin correctingmost of these weaknessesduring the period of project implementation.It has st.reamlinedits policies;the overall qualityof projectappraisals has improved;through staff recruitmentand training,INDEBANK has developeda cadre of well trained,Malawian professionalstaff that is increasinglygaining experience and has substantiallyreduced the need for expatriatestaff assistance. However, INDEBANKstill has to overcomeweaknesses in two main areas--aweak project promotioncapability and inadequateevaluation of the economicimpact of the projectsit finances(paras. 3.08-3.09 and 6.03).
INDEBANK'slevels of operationsduring the projectimplementation periodwere about 20% below levels estimatedat appraisalprimarily due to sluggishgrowth in the Malawianeconomy and a decline in investment activitiesof Press HoldingsLimited, Malawi DevelopmentCorporation (MDC) and the AgriculturalDevelopment and MarketingCorporation (ADMARC), which until three years ago investedin most projectsin cooperationwith INDEBANK. Its overallfinancial performance closely matches appraisal forecasts. INDEBANK'sfinancial performance and the qualityof its portfolioremain very good despitea generallydeteriorating industrial sector environment(paras. 5.08-5.09).
Other points of interestare:
- Trends in the Malawianeconomy and in the industrialsector (paras.2.01-2.06) - INDEBANK'sSmall Scale Enterp ise LendingOperations (para, 5.04) - ImplementationPerformance under the Bank ioan (para.3.08) - Performanceof projectsfinanced under the loan (Annex 6) PROJECT COMPLETION REPORT
MALAWI - INVESTMENTAND DEVELOPMENTBANK (INDEBANK) (LOAN 1610-MAI)
I. INTRODUCTION
Background
1.01 The Inv 4ment and DevelopmentBank of Malawi Limited (INDEBANK) was established ..December 1972 as a private limited liability company under Malawi's Companies Act. It is owned 22.25X each by the Agricultural Developmentand Marketing Corporation (ADMARC), the Commonwealth DevelopmentCorporation (CDC), the German Finance Company for Inivestments in Developing Countries (DEG), the NetherlandsFinance Company for Developing Countries (FMO), and .1% by the InternationalFinance Corporation (IFC). Its basic objective is to promote the economic developmentof Malawi by providing finance and other services to viable projects in the productive sectot. of the economy.
1.02 The World Bank Group's involvementwich INDEBANK began in 1976 when INDEBANK management asked IFC to make an equity investment in INDEBANK and about ttiesame time requesteda World Bank line of credit. An IFC mission visited Malawi in October 1976 to assess possibilitiesof participationin INDEBANK's equity and in December 1976 a Bank mission discussed with Malawian authorities INDEBANK'spotential role in the industrial sector and its financial requirements. Followingan exchange of letters between the Bank and INDEBANK management, the Bank agreed to send a mission to review INDEBANK's organization,role and resource needs.
1.03 A Bank mission appraised INDEBANK in November 1977 (Appraisal Report No.1914a-MAI)and recommendeda line of credit of US$4.5 million to INDEBANK consisting of: (i) US$4.C million for financing part of its investmentsin medium and large scale industrial,agro-iniustrial and tourism projects and, (ii) a component of US$0.5 million for financing small scale enterprise (SSE) projects. During loan negotiations,INDEBANK indicated that it expected to obtain a second line of credit from the European Investment Bank (EIB), and as the terms of the EIB loan were expected to be more attractive than those of the proposed Bank loan, the amount of the loan earmarked for medium and large scale enterpriseswas reduced at INDEBANK's request from US$4.0 million to US$3.0 million while the amount for small-scaleenterprises was, at that time doubled to S1.0 million.
1.04 Following loan negotiations,however, INDEBANK's foreign shareholdersand the Governmentof Malawi expressed doubts on the suitabilityof INDEBANK as a channel for financingSSEs. The Government requested that the SSE component be deleted from the project and that a separate, possibly nation-wideSSE project be considered for financial assistance laterl/. The Bank agreed to these changes and a line of credit of US$3 million was approved on July 6, 1978, signed on July 7, 1978 and
1/ In 1981 the Government of Malawi, with assistance from the European Economic Community (EEC), establishedthe Small Scale Enterprise DevelopmentOrganization of Malawi (SEDOM) to provide financialand technical assistance to SSEs (para. 2.06). - 2 -
became effectiveless than four months later on November 1, 1978. Concurrentto approvalof the Bank loan, the Board of Directorsof the Corporationapproved an IFC investmentin 500,000 INDEBANKshares woith US$562,000equivalent and IFC took a seat on the Board of Directors. The Bank loan was made to INDEBANKat an interestrate of 7-1/2%p.a. and would be repayablein accordancewith a scheduleconforming substantially to the aggregateof the amortizationschedules applicable to the subloans. The maximum repaymentperiod was set at 17 years. INDEBANKagreed to on-lend the proceedsof the loan at interestrates varying between 10-1/2%and 11% p.a. The foreignexchange risk wouli be borne by the subborrowers.Other importantfeatures of the loan includadan individualsubproject free limit of US$100,000with an aggregatefree limit of $750,000. To ensure that the proceedsof the loan would be utilizedto financeas many projectsas possiblethe maximum size of subloanto a single subprojectto be financed under the Bank line of creditwas set at MK600,000(about US$770,000). INDEBANKagreed to maintaina consolidateddebt to equity ratio not xceeding4:1. The recruitmentof expat iates for the positionsof Controllerof ProjectInvestigations and Project InvestigationManager and five Malaw-.annationals to be trainedfor positionsin INDEBANK's technical,monitoring and accountingdepartments were set as conditionsof effectivenessof the loan.
1.05 Due to availabilityof resourcesfrom other sources2/, the pace of utilizationof the Bank loan was initiallyslower than anticipatedat appraisal. By December 1980, about two years after loan effectiveness, commitmentsamounted to US$1.3 millionand disbursementsto US$0.9 million--50%of both commitmentand disbursementlevels estimatedat appraisal, Subsequerntlyhowever, commitments and disbursementspicked up and by the subprojectsubmission deadline--of December 31, 1981 about 84% of the loan amount had been committed;91% of the amount had been disbursed by the closingdate of July 30, 1983. Due to delays in the implementation of a project approvedfor financingunder the loan, and as a result of some subprojectshaving been implementedin full at less cost than estimatedat appraisal,a toLal of US$235,000remained undisbursed and was eventually cancelled(para. 3.08). In March 1982, followinga requestfrom both INDEBANKand Government,the Bank appraisedINDEBANK for a second line of credit. During the courseof appraisalhowever, INDEBANK indicated it was seeking a loan from the AfricanDevelopment Bank (ADB); the ADB loan was expectedto be on more favorableterms than those of the proposedloan. On requestfrom INDEBANKand the Governmentof Malawi, the Bank stopped processingof the loan. In 1984, INDEBANKrequested a follow-upline of credit. A secondWorld Bank loan to INDEBANKwas appraisedin February/March1985 and is under processing.
2/ INDEBANKhad a credit from the EuropeanInvestment Bank (EIB). Due to a relativelyshort period (2+ years) over which the line of credithad to be disbursed,INDEBANK gave priorityto the utilizationof EIB resources. -3-
Projectobjectives and World Bank Group Role
1.06 The main objectiveso. the loan were to: (i) provide the Bank Group the opportunityto participateactively in the developmentof Malawi'sindustrial sector by providingINDEBANK with resourcesfor fi:tancingpart of its investmentsin industries,agro-industrial, agricultural,tourism and other productiveprojects; and (ii) build INDEBANKinto an effectiveand efficientinstitution through helping it to: (a) improve its operationalpolicies and financialstrategy, (b) reinforce its strategyto be a more aggressiveand promotionallyoriented institution,(c) recruitand train Malawianprofessional staff and, (d) rationalizeand consolidateits appraisaland supervisionprocedures. The main objectivesof the projecthave substantiallybeen met (para.6.0).
1.07 In additionto providingINDEBANK with resourcesthrough an IFC equity investment(para. 1.04)and a line of credit, the World Bank Group played a significantrole in strengtheningINDEBANK's institutional capabilities. In line with World Bank recommendations,INDEBANK strengthenedits capabilitiesby recruitingexpatriate, Malawian professionalstaff and by increasingits staff trainingefforts. Through the rcview of projectproposals submitted to the Bank for financingunder the line of credit, the Bank assistedINDEBANK in improvingits project appraisalcapabilities, although further improvementin this area is still required(para. 3.07 (ii)). The IFC repre3entativeon the INDEBANKBoard of Directorshas played an importantrole in helping Whe institution develop suitableinvestment policies and improveits financialperformance.
II. MACROECONOMIC,INDUSTRIAL AND FINANCIALOBJECTIVES
Introduction
2.01 Malawi is a small,densely populatedcountry with moderately fertilesoils, good water resourcesand climatefavorable to crop production. At the time of independencein 1964, its economywas characterizedby surpluslabor, a lack of capital,technology, skilled labor and managerialtalent. Being landlocked,Malawi dependson other countriesfor access to the sea. Since independence,Malawi has pursueda set of objectivesaimed at achievingsustained economic development. These objectives,set out in the Statementof DevelopmentPolicies in 1977 includa: (i) increasingagricultural productivity to improverural living standards,provide employment opportunities and earn foreignexchange, (ii) encouraginggrowth of industrialactivity based on local resources,(iii) achievinga bettergeographical balance in economicde-velopment within the country, (iv) increasinglocal participationin skilledemployment, managementand ownershipof enterpriseand, (v) eliminationof dependence on foreignfinance to cover governmentrecurrent budget expenditures.
2.02 As a strategyfor pursuingthese objectives,the Governmentof Malawi has opted for an open market, export-orientedgrowth based on agricultureand agro-basedmanufacturing. This strategyis reflectedin the Government'spolicies toward the agriculturaland manufacturingsectors as well as i-'the treatmentof domesticand foreigninvestment. In order to attract foreigncapital, Government policy has encouragedthe -4-
establishmentof an open, market-orientedeconomy with the privatesector as the primaryengine of economicgrowth. The role of public enterprises has been that of investmentpartners with privatesector entitiesand has been focussedon few key sectors. Public investment,particularly through the MDC and ADMARC, has been intendedprimarily to supportprivate initiativesin the productivesectors throughprovision of essential infrastructure,public utilitiesand supportingservices, Relativelylow tariffsand judicioususe of quantitativerestrictions on importshave preventedthe emergenceof inefficientlocal import substitutingindustries so characteristicof many other developingcountries. The Governmenthas also deliberatelykept wages at market-determinedlevels, thus encouraging the establishmentof labor-intensivemanufacturing firms and agricultural estates.
2.03 The MalawiGovernment has, in the last 20 years, demonstrated determinationin pursuitof its developmentobjectives and has had an impressiverecord of success. Real GDP and per capita incomegrew at an average rate of 5.5% p.a. and 3.0% p.a. respectively,during the period 1967-79. Despite this impressivegrowth rate, the Malawianeconomy, increasinglydependent on three primary commodityexports--tobacco, tea and sugar--remainshighly vulnerableto internationalprice fluctuations.The countryhas experiencedperiodic balance of paymentsdisequilibria since 1974 due to: (a) cyclicalswings in export prices of tobacco,tea and sugar, (b) rapid escalationin import prices, especiallyof fuel, intermediateand capitalgoods and (c) increasingcosts of trnasportfor both exportsand importsdue to rising freight charges,port congestionin Mozambique,and disruptionsof the overlandroute. Balanceof payments problemsbecame severebetween 1978 and 1981. Due to reducedagricultural export volumes and large importsof food stuffsfollowing a drought in the early 1980s;and due to an increasein the petroleumimport bill, Malawi's trade balancedeteriorated rapidly and overallgrowth of the economy declined. GDP growth which had averaged 5.5% p.a. up to 1979 fell to 2.0% in 1980 and to -0.3% in 1981. GDP gtowth resumedat 2.6% in 1982 and moved to 4.3% in 1983.
2.04 While Malawi'seconomic difficulties in the past six years were primarilycaused by the drought,the deteriorationin the country'sbalance of trade and transportbottlenecks, the crisis also revealedstructural weaknessesin the economy,notably: (i) the heavy relianceon three agriculturalcommodities produced by large estates,(ii) the slow growthof smallholderproduction for export,and (iii) the modern sector'sdependence on costly importedoil, and the progressivedepletion of domesticfuelwood resources;(iii) the deterioratingfinancial position of public enterprise; (iv) a growing imbalancebetween government recurrent and capital expendituresand (v) rigiditiesin the system of administeredprices and wages. In order to tacklethese problems,the Government,in consultation with the Bank and the IMF, formulateda medium-termprogram covering the period 1981-1986. The Government'smajor objectivesduring this period include:(i.) a real GDP growth rate of 4.8%; (ii) diversifi- cation of foreignexchange earnings by developingnew smallholderand estate crops, acceleratinggrowth of smallholderexport crop, livestockand forestryI dustries, (iii) expandingindustries based on local resources especiallyagro-processing; and (iii) improvementin the financial - 5 -
performance of the Government and public enterprises to reduce dependence on external resources and domestic borrowings. The policies for achieving these objectives were incorporated in a comprehensive structural adjustment program supported by IMF stand-by arranger4ents in 1979, late 1980 and 1982 an EFF in 1983, and two IBRD Structural Adjustment lending operations approved in 1981 and 1983.
The Manufacturing Sector
2.05 Trends in Malawi's manufacturing sector in the past two decades are largely similar to those in the whole economy. From independence in 1964 through the late 1970s manufacturing activity in Malawi was buoyant. Starting from a very low level, manufacturing activity grew rapidly at an average rate of over 10% p.a. or twice the rate of GEP growth during 1970-78, bringing the sector's GDP share to around 12%. Initially, food, beverages, and the processing of tea and tobacco crops accounted for the bulk of manufacturing operations, but over the years the range of goods produced expanded to include textiles, footwear, packaging materials. pharmaceuticals, and wood and metal products. The general setback in the Malawian economy that started after 1978 reversed the trend of growth in the sector. Growth of manufacturing activity which averaged 10% p.a. during the 1970s, declined to an average rate of 6.7% p.a. during the period 1979-1983. Employment in manufacturing hab shown a similar reverLal of the trend. The growth of employment in industry, which averaged about 6% p.a. through 1980, started to decline after 1981. As a a result, the sector's share in total wage employment dropped from about 12% in 1980 to about 9% in 1982. The decline in manufacturing sector growth is attributed to the same factors that have caused a general setback in the whole economy--deterioration in balance of trade, transportation bottlenecks, droughts and structural weaknesses in the economy that continue to hinder recovery. The Government's main objectives in the industrial sector are to: (i) encourage and promote private investment, (ii) accelerate growth of an c.xport-oriented industrial base as opportunities for import-substitution diminish, and (iii)develop indigenous Malawian entrepreneurship.
2.06 In response to the economic crisis, the Government, has in the past few years taken some policy decisions such as price control, tightened foreign exchange control and increases in company tax and import tariffs which could slow down recovery in industrial activity. Overall, however, Malawi's industrial policies remain relatively sound. Measures for addressing some of the policy weakness are being handled in the conte:t of the Bank's SAL Operations in Malawi.
The Financial Sector
2.07 Malawi's financial sector consists of: (i) the Reserve Bank of Malawi which plays the usual role o' a central bank, (ii) two commercial banks - The National Bank of Malawi (NBM) and the Commercial Bank of Malawi (CBM), (iii) a development bank, INDEBANK,(iv) a housing finance company - th3 New Building Society (NBS), (v) two insurance companies - the National Insurance Corporation (NIC) and Old Mutual, (vi) the Post Office Savings Bank (POSB), and (vii) Mercantile Credit Limited, a small private institution predominantly engaged in hire purchase financing. Two . -6-
statutorybodies, MDC and ADMARC and the quasi-publiccorporatioi--Press Holdings--make equity investmentsin a broad range of economicactivities. The financialinstitutions, especially the commercialbanks have playeda major role in resourcemobilization. Domesticsaving rose from 4% of GDP in 1967 to 17% in 1979, increasingthe share of investmentfinanced from domesticresources to about 60%.
2.08 Interestrates in Malawi have been revisedupwards fairly regularlyover the past five years to take into account trendsin the rate of inflationand to regulatecredit. The Centralbank discountrate was raised from 8% to 10% p.a. in 1980 but has remainedunchanged since then. Lending and depositrates on the other hand were revisedin 1979, 1980 and more recentlyin May 1983. Commercialbank lendingrates range from a minimum of 11-1/2%p.a. on loans to the agriculturalsector to a maximumof 16-1/2p.a. for loans to other sectors. Minimum rates chargedby the New BuildingSociety vary from 13.75%for residentialhousing mortgages to 17.75%p.a. on mortgagesfor commercialproperties. INDEBANKcharges a minimum of 12% on medium and long term loan to agriculturalenterprises and on loans denominatedin foreigncurrencies, and up to a maximumof 16-1/2% p.a. on localcurrency loans for various other activitieswith an inflation rate of around 10%, interestrates in Malawiwere positivethroughout the projectimplementation period.
III. THE INSTITUTION
3.01 During the course of appraisal,loan negotiationsand project implementation,the followingissues were discussedwith INDEBANKand Malawianauthorities. Issues relatingto INDEBANKprocedures are discussed in para. 3.07.
(i) Managementand Staffing: At the time of appraisalin 1978, INDEBANK'sexpatriate General Manager was due to leave the followingyear upon expirationof his contract. To ensure that a replacementwould be recruitedin time so as to avoid potentialmanagement succession problems, the appraisal missionrecommended that the identificationof a suitable candidateto replacethe departingGeneral Manager be made a conditionof Board Presentationof the project. At negotiations,the Bank was informedthat INDEBANK,under Government'srecommendation, had appointeda Malawian GeneralManager designatewho would succeedthe expatriate GeneralManager at the end of his contract. The appraisal missionhad also found that althoughINDEBANKVs professional staff was of good qualitywith solid academicbackgrounds, it was insufficientin number and still inexperienced.Five of the ten professionalstaff had been with INDEBANKfor -7-
less than six months. In order to strengthenINDEBANK's professionalstaff capabilities,agreement was reachedat negotationsthat INDEBANKwould recruit:(a) an expatriate Controllerof ProjectInvestigations, (b) an expatriate Project InvestigationManager to assist in the identificationand appraisalof projects,and (c) five suitablyqualified Malawian nationalsto be trainedin projectidentification, promotion and appraisaland in accounting. The recruitmentof suitablyqualified people, in consultationwith the Bank,wasset as a conditionof effectivenessof the Bank loan.
(ii) Treatmentof IncomeNotes: In additionto the subscribed share capital,INDEBANK shareholders had agreed to provide additionalresources to INDEBANKin the form of income notes. Under the Financeand CooperationAgreement between the Governmentand the shereholders,the income notes which were unsecured,convertible into ordinaryshares at the option of the holdersare to be repaid (in instalmentsor in a lump sum) by the year 2020. INDEBANKconsidered these income notes to be quasi-equity,and proposedto treat them as equity for purposesof determiningan appropriate debt/equityratio for the institution. During negotations, however,it was agreed that the income notes would be treatedap borrowingsfor the purposesof calculatingthe debt/equityratio.
(iii) FinancialCovenants: The Loan Agreementbetween INDEBANK and the Bank includedseveral principal financial covenants: (a) under section4.10 INDEBANKagreed to limit its total financialassistance (in the form of loans and/or equity investments)to any one individuallegal entity to a maximum of 25% of INDEBANK'sunimpaired share capitalplus general accumulatedreserves. However,it was agreed that INDEBANK could, in consultationwith the Bank exceed this limit ia the case of projectssponsored by the Governmentand consideredto be of nationalimportance, provided that the repaymentof principaland interestof the portionof such loan in excess of the 25% limit would be fully guaranteedby the Government. During the courseof project implementation INDEBANKrequested an amendmentto section4.10 of the Loan Agreementto enable it to make investmentsin the form of loans and/orequiLy in a single projectup to 30% of INDEBANK'snetworth. The Bank did not agree to the requestedamendment because: INDEBANK did not provideany justificationfor it, there was no indicationthat the 25% exposure limit had been a constraintto INDEBANK's investmentplans and an increasein the exposurelimit to 30% of INDEBANK'snet worth would lead to a significantand unnecessaryincrease in risk exposure;(b) under section 4:11 of the Loan AgreementINDEBANK agreed not to make equity investmentsin any enterpriseif the total amount of such investmentswould exceed INDEBANK'sunimpaired paid-in share capitalplus general accumulatedreserves. In 1982 INDEBANKrequested an amendmentto the Loan Agreementto increasethe aggregatelimit for equity investmentsup to 120% of networth, As INDEBANK'sequity portfoliowas of high qualityand profitable,the Bank agreed to this request and section 4.11 of the Loan Agreementwas amended accordingly. The Loan Agreementincluded three other financialcovenants to which INDEBANKagreed: (a) not to distributedividends exceeding 75% of its after tax profit in any one year, in order to build up an adequategeneral reserve;(b) to make sufficientprovisions to cover the risk arisingout of doubtfulinvestments; (c) maintaina consolidateddebt/equity ratio not exceeding4:1 and; (d) take the necessarymeasures to protect itselfagainst foreignexchange risk on foreigncurrencies used in its operations. INDEBANKcomplied with these covenants.
DevelopmentsDuring Project Implementationand PresentStatus
3.02 Management. From the time of its establishmentin 1972 until mid-'379, INDEBANKwas headed by Mr. G. Raynor, an expatriateGeneral Manager providedby CDC, one of the institution'sshareholders. Under his leadership,INDEBANK achieved a solid reputationand a strong financial base. At the end of Mr. Raynor'scontract in September1979, Mr. Lawrence Anthony,a Malawiannational previously General Manager of the ReserveBank of Malaw;.was appointedINDEBANK's General Manager. The change in managementwas accomplishedwithout any major disruptionin INDEBANK's organizationand operations. In a relativelyshort time, the new General Manager providedeffective leadership and expandedINDEBANK's role. In additionto placinggreater emphasis on INDEBANK'srole in developing projectsof nationalimportance jointly with severalother Malawian investmentgroups, Mr. Anthonyplayed the key role in the establishmentof INDEFUND--anINDEBANK subsidiary set up in 1981 to promotethe development of Malawianowned small scale enterprises(para.5.04).
3.03 In recognitionof his abilities,Mr. Anthonywas appointed GeneralManager of the much largerADMARC and left INDEBANKin November 1982. Efforts to recruita suitableMalawian national as his replacement were unsuccessfuland Mr. Jack Thompson,an expatriatewho had joined INDEBANKas Coordinatorof Project Investigationswas appointedGeneral Manager. His contractis due to expire in June 1986.
3.04 During the period of projectimplementation, INDEBANK also experiencedseveral changesin its middle level management. In line with measuresagreed with the Bank for strengtheningits institutional capabilities,INDEBANK recruited three senior expatriatesto fill key positions--theCoordinator of ProjectInvestigations, the Supervision Managerprovided by FMO and the AgriculturalProjects Investigation Manager providedthrough German TechnicalAssistance. The Coordinatorof Project Investigationsand the SupervisionM-.rager left INDEBANKat the end of their contractsin 1981. Although INDEBANKrecognized the key role played by these expatriates,it was slow in recruitingsuitable replacements to fill these positions. This was one of the most importantissues that -9-
emergedduring implementationof the loan. The positionof Coordinatorof Project Investigations'ias been recentlyfilled with an expatriatefrom the Irish DevelopmentAgency, and the positionsof SupervisionManager and AgriculturaiProjects Investigation Manager have been filledwith senior Malawianstaff who has been with INDEBANKfor severalyears.
3.05 Organization. INDEBANK'sorganization is simpleand has remained unchangedsince inceptionin 1972. It comprisesof three divisions:(i) the Project InvestigationDivision which deals with the identification, promotionand appraisalof projects;(ii) the ProjectMonitoring Division which handles the implementationand supervisionof projectsand, (iii) the CompanySecretary's/Financial Controllers' Division which is responsible for accounting,financial management, administrative and legal matters. INDEBANK'sorganization is appropriatefor its objectivesand operations.
3.06 Staffing. INDEBANK'sprofessional staff has increasedfrom 10 in 1977 to 24 at present includingtwo expatriates. Three of the professional staff are secondedto INDETRUST,and five to INDEFUND--INDEBANK'stwo managed subsidiarycompanies. Overall,the staff is of good quality. The majority of the staff have solid academicbackgrounds. Thirteenof the 24 professionalstaff are universitygraduates with qualificationsmostly in either Economics,or BusinessAdministration. The rest of the staff possessjunior collegediplomas in bankingand businessstudies and several have obtainedor are studyingfor professionalqualifications in accountancy. Althoughthe majorityof the staff have been with INDEBANK for a relativelyshort period of four to five years, they have gained considerableexperience in their jobs and are highly productive. In order to meet effectivelythe manpowerrequirements of its managed subsidiaries, especiallyINDEFUND, as well as develop adequateprofessional staff to manage its own operations,INDEBANK has recentlyhired a legal officerand plans to recruitfour additionalproject officers.
3.07 Staff Training. INDEBANKbecame active in providingtraining to its staff followingthe appointmentof a MalawianGeneral Manager in 1979. Based on its operationsforecasts INDEBANK prepares, each year, a comprehensivethree year staff recruitmentand trainingplan. Staff trainingia INDEBANKhas been relativelyeasy due to the solid academic backgroundpossessed by the majorityof the professionalstaff. As such, emphasisis placedon on-the-jobtraining. In addition,however, INDEBANK sends its staff to selectedoverseas training programs. In the past five years, four staff have been sent on post-graduatecourses in financial managementand businessadmiriotration and four other staff have attended short-termcourses in projectpromotion and appraisalin the UK and USA. INDEBANKprovides financial support to its staff who are taking correspondencecourses for furtherqualifications in accountancyand banking.
3.08. Procedures
(i) Appraisals. At the time INDEBANKwas appraisedfor the Bank loan, the overallquality of its appraisalwas unsatisfactoryand needed to be improved:project appraisals were preparedand presentedin a - 10 -
summarized,sketchy form and did not provide all the informationcollected throughthe appraisalprocess. INDEBANKdid not have capabilityto evaluatethe projects'technical aspects and dependedexclusively on outsideengineering consultants or promotors'views; and it did not evaluatethe economicimpact of the projectsit financed. The Bank recommendedmeasures to address these weaknessesand during negoti.ations INDEBANKagreed to: (a) hire two experiencedexpatriate managers to strengthenproject appraisalcapabilities (para. 3.01) (i); (b) preparean appraisalmanual establishingappropriate appraisal procedures and, (c) carry out economicevaluation of projectsit proposedto finance. The overall qualityof appraisalshas improvedover the past seven years. INDEBANKnow routinelycalculates economic rates of returnfor all projects it financesand covers in sufficientdetail importantaspects such as projects'potential for creatingemployment and dependenceon imported inputs,and hence projects'reliance on foreignexchange.
(ii) ProjectSupervision. INDEBANKsupervises the projectsin its portfolioregularly. During the course of projectimplementation, however,Bank Supervisionmissions noted that INDEBANKdid not have standardsupervision procedures. In order to simplifythe supervision functionand improvethe quality of supervisionreports, Bank missions recommendedthat INDEBANKprepare a project supervisionmanual establishing standardsupervision procedures. After a sonsiderabledelay, due to manpowerconstraints, INDEBANK prepared a sipervisionmanual in 1983. INDEBANKsubmits reportson the performanceof selectedprojects in the portfolioto each Board meeting and seeks its Board'sguidance on measures for dealingwith projectsencountering problems. Overall,the supervision reportsare comprehensiveand of high qulity.
(iii) Procurementand Disbursements.For the procurementof major machinery and equipment items, INDEBANK requires project entities to obtain at least three competitivequotations before suppliersare selected. It also takes steps to ensure that borrowersobtain machinery and equipmentfrom the cheapestsource while taking into accountsuch factors as machineryand equipmentservice support and quality specificationsof the project.
3.09 INDEBANK'sequity and loan disbursementsare made on the basis of the investmentprogram and the costs of each approvedproject, upon presentationof invoices,once the sponsors'contributions have been fully paid. In the majorityof cases, payment is made directlyto suppliers. INDEBANK'sprocurement and disbursementprocedures are adequate.
(iv) Audit. Since its establishment,INDEBANK's annual accounts have been auditedby DeloitteHaskins and Sells, a firm of international repute. The audits are timely,comprehensive and satisfactory. INDEBANK has compliedwith the reportingrequirements agreed with the Bank: it submits its auditedaccounts to the Bank within three to four months alter the end of its fiscalyear and also regularlysubmits quarterly reports on its operations,portfolio and financialsituation. - 11 -
ImplementationPerformance Under Bank Loan
3.10 Due to availabilityof resourcesfrom other sources,the pace of utilizationof the Bank loan was slower than anticipatedat appraisal. By December30, 1980 almost two years after loan effectiveness,commitments amounted to only US$1.3 millionand disbursementsto US$0.9million--about half the commitmentand disbursementlevels anticipated at appraisal. Subsequently,however, INDEBANK earmarked five projectsto be financed under the Bank loan and the commitmentsand disbursementspicked up. By December 31, 1981--theterminal date for subprojectsubmission, about 84% of the loan amounthad been committedand the balancewas committedfour months later. The loan was 91% disbursedat the time of the closingdate in July 1983 (Annex 12). It was not considerednecessary to postponethe closingdate as disbursementswere expected to be completedwithin the next six months. Due to delays in the implementationof one of the projects approvedfor financingunder the loan, and as a resultof some subprojects having been completedat lower cost than estimatedat appraisal,a total of US$235,004remained undisbursed six months followingthe closingdate and was eventuallycancelled.
IV. ALLOCATIONOF THE LOAN
4.01 The proceedsof the Bank loan were utilizedto financea total of seven subprojectsincluding: (i) six large and medium size subprojects, all above the free limit,and (ii) one below free limit subproject(Annex I). Another subloanwas approvedfor a second below free limit subproject but it was eventuallycancelled as a resultof a long delay in project implementation.The size of the seven subloansranged from S100,000for a corrugatedroofing sheet manufacturingproject to $673,557for A propylene bag manufacturing project. Most of the subloanscarried an interestrate of 12% p.a. for a term of ten years includinga two-yeargrace period. The foreignexchange risk is borne by the sub-borrowers. The presentstatus of these subprojectsis describedin Annex 7.
4.02 Economicand financialcharacteristics of the projectsfinanced under the Bank loan are summarizedin Annexes 2 and 3 respectively.The seven projectsinclude an iron and steel foundry,a hotel, a propylenebag manufacturingproject, a local alcoholicbeverage brewery, a polyester/ cotton textilemill, a corrugatediron sheet factoryand a projectfor manufacturingplastic crates for bottleddrinks. Five of the seven subprojectsare locatedin Blantyre,Malawi's principal commercial and industrialcenter and two are in Lilongwe,the capitalcity. Six of the seven subloansfinanced under the loan were for the expansionand/or modernizationof existingprojects; only one subloanwas approvedfor a new project. Total investmentcost for the seven subprojectsamounted to K28.7 million (aboutUS$23 million)and ranged from K19.9 million (US$15.9 million)for the polyester/cottonfabrics manufacturing project to K600,000 (US$480,000)for the expansionof the corrugatediron roofingsheets project. As a proportionof total investmentcost per project,INDEBANK financingranged from 6% for the polyester/cottonfabric manufacturing project to 66% for the local alcoholicbeverages brewery project; and averaged about 43% of total projectcost, well below the 75% limit set in INDEBANK'sPolicy Statement. Three of the seven subprojects--theiron and , -~~~~~~~12 -
steel foundrywhose productionis based on scrap steel,a brewerywhich processesalcoholic beverages from local ingredientsand the hotel in Lilongwe--arenot import dependent. On the other hand, about 75% of the raw material requirementsof the other tour subprojectsare imported. All the six subprojectsin operationproduce exclusivelyfor the local markets The six subprojectswhich have been implemented,generated 461 new jobs at an average investmentcost per job of $49,000. The investmentcost per job ranged from $14,000for a hotel project to $85,600for the textilemill. The foundry project,when completedis expected to create 15 new jobs at a cost of $68,000per job. The investmentcost per job was high becausethe investmentin the six subprojectswas mainly for expansionof existing capacitywhich typicallyrequire only marginal increasesin the labor force.
4.03 Six of the seven subprojectsfinanced under the Bank loan were implementedon scheduleand within costs estimatedat appraisal. The implementationof the seventhproject, an iron and steel foundry,is about two years behind schedulefollowing a decision by a foreigncompany-one of the originalproject promotors--not to participatein the project. Implementationis currentlyunderway and it is anticipatedthat the project will be operationalby June 1985. All six Bank financedsubprojects that are in operationare profitable(Annex 3).
V. OPERATIONALAND FINANCIALPERFORMANCE
5.01 Operations. Annex 4 gives a summary analysis of INDEBANK'sloan approvalsfrom inceptionto June 30, 1983. During this period INDEBANK approved72 loans totallingK27.1 million (US$21.7million) and equity investmentsamounting to K4.9 million (US$3.9million) in 20 companies. Details of INDEBANK'sequity investments are presented in Annex 6. In terms of number, the majority of loans were between K200,000 and K50U,OUO, and accounted for 35% of the amount approved. In terms of value however, approvals were dominated by loans of between K500,U0O and Ki million; these accounted for 42% of the total amount approved. Large-size loanas of over one million accounted for only 1U%of the amount approved. In line with INDEBANK'spolicy of limiting its total financial commitment in a single project to a minimum of K100,000 except in exceptional circumstances, loans of up to K100,000 accounted for only 2% of the total approved loan amount.
5.02 INDEBANK'sloan approvals are diversified in terms of sectoral distribution and cover a variety of economic activities notably manufacturing,tourism, property development and construction,agriculture, li,restockand agro-processing.Manufacturing represents the principal economicactivity for which loans were approved: 57% of the amount approved was for manufacturingactivities, mainly textileand chemicalproduction. Agricultureand livestockactivities accounted for 17% of the amount approved. Sixty percentof both the number and amount of loans were approvedfor new projects;expansion projects accounted for 29% and 27% of the number and value of loans approvedrespectively with the balance representingloans for rehabilitationprojects. In line with INDEBA±iK's private sector orientation,about 90% of both the numberand amount of - 13 -
loans approvedwere for projectsIn the privatesector; loans for public sect'jrprojects accounted for les than 10 of the number and amount of loan approvals.
5.03 A summary of INDEBANK'sactual operationsduring the loan implementationperiod 1978-1982and comparativedata as forecastat the time of appraisalare given in Annex 5. INDEBANK'stotal loan and equity investmentapprovals grew from K4.6 millon in 1978 to K5.) million in 1980 and declinedto K2.1 in 1982. Approvals,commitments and disbursements during the 5-year period 1978-1982were on average 21X below levels projectedat appraisal. The decline in the volumeof operationsespecially during the last three years when actual approvalsrepresented only about 302 of appraisalestimates, was due to two principalfactors: (i) sluggish growth in the Malawian econouy as a whole and especiallyin industrial activity-overthe last three years; and (ii) a sharp decline in new investmentactivity by the major Malawian conglomeratecompanies--Press Holdings, MDC and ADMARC--which,up to three years ago, either directlyor throughtheir subsidiariesfinanced projects jointly with INDEIANK.Due to liquidityand other operationalproblems investment activities especially of Press Holdingsand MDC have been severelycurtailed.
5.04 Small EnterpriseActivity. In 1981 INDEBANKset up a subsidiary company,INDEFUND Limited to provide financingfor projectsranging In size from K25,000--themaximum project size eligiblefor fundingunder the GovernmentSEDOM program (para. 2.07) to KlOO,000--theminimum loan size allowedunder INDEHANK'spolicies. INOEFUNDwas establishedwith a paid-in share capitalof K650,000,of which 62X is subscribedby INDEBANKand 38% by FMO. As of December 31, 1984, it had approved43 loans amountingto K1.7 millionof which Kl.1 million had already been disbursed. The 43 loans were approvedfor a variety of activities--includingconstruction, manufacturing,agro-processing and printingand range in size from K17,000 to K64,000;the average loan size was K48,000. The interest rates charged by INDEFUNDrange from 12% to 15% p.a. the higher rate is charged on loans to projectswhose forecast financialperformance demonstrates the projects' abilityto servicedebt at 15% p.a. The majorityof INDEFUNDloans are for a term o' 5 years includingin most cases a 1 year grace period.
5.05 Portfolio.
Loans. As of December 31, 1983 INDEBANK'stotal portfolio amountedto K21.5 million consistingof K16.8 million in loans and K4.7 millionin equity investments. Manufacturingactivities accounted for 53% of the loan portfolio,agriculture and livestockfor 17% and tourism-- mainly hotels for 14%. The remaininglb% is outstandingin variousother activitiesnotably constructionand engineering. In spite of difficult economicconditions in Malawi in the past five years, INDEBANKhas maintaineda very good arrears record. As of December31, 1983, only three projectsinvolving 9% of the value of the loan portfoliowere in arrears of over three months. These arrears amountedto about 2% of loans outstanding. Since inception,INDkBANK has rescheduledeight loans involving about K3.4 million. - 14 -
5.06 Althoug:ithe projectsin the loan portfoliohave maintaineda very good debt servicerecord as indicatedby the low level of arrears,the underlyingquality of INDEBANK'sportfolio is still of some concern because of the portfolio'sconcentration in enterpriseswlholly or partly owned by Press Holdings,MDC, and ADMARC--Malawi'sthree largestholding companies. As of June 30, 1983, about 5bX of INDEBANK'sloan portfoliowas in enterpriseswholly or partly owned by these four companies;and as such as 2b% of 1NDEBANK'sportfolio was in projectsin which Press holdingsis the largestinvestor and an additional 13% in MDCprojects, Although individual loans are well secured, the overall safety of the portfoliowill continueto depend on these companies'financial performance and condition. Except for ADMARC, these conglomeratecompanies have faced, since 1980,seriousfinancial and operationalproblems. Risks associated with the Press Group have lessenedsubstantially, however, followilng a major financialrestructuring which has been recentlyimplemented under the Second StructuralAdjustment Loan. In view of the potentiallyhigh risks faced by the portfolio,INDEBANK has recentlybegan to make provil;onsfor possiblelosses on the portfolio. Accumulatedprovisions made in the past three years, amount to about 4% of the portfolioand are adequate.
Equity Investments
5.07 As of December31, 1983 INDEBANK'sequity portfolioamounted to K4.72 millionin 20 companies(Annex 6). Two of these companiesare non-profitmaking, wholly wned subs6d4ariesof INDEBANK. INDETRUST Limitedprovides pension a,l death benefitschemes for employeesin Malawi and Indetrust(Holdings) 1 mited holds investmentson behalf of Indetrust Limited. INDIBANK'sinve *nt in the other 18 companiesvaries from K62,000 in Southern BottlerL '.imited,a manufacturer of soft drinks to K71,UU00in the EthanolComp .y, a producerof a blend componenttor motor fuel. Overall,the equity portfoliois in very good condttion. As of December31, 1983, 14 companies(including the two non-profitINDEMANK subsidiaries)were operatingprofitabiy; only three were unprofitableand three were still under implementation. INDEBANKownership in these companiesrange from 2% of the soft drinks bottlingcompany's share capital to 10O% in the two non-profitmaking subsidiaries;in most cases INDEBANK ownershipis in the 15X-30%range. In additionto its equity holdings, INDEBANKhad made loans to these companiesamounting K3.2 million. Ih 1983 INDEBA4Kearned an excellentreturn of about 16.4% on averageequity portfolio.
FinancialPerformance and Condition
5.08 INDtLBANK'sforecasted and actual incomestatements, balance sheets,sources and uses of funds and financialratios for 1978-1982are presentedin Annexes8, 9, 10 and 11. Due to a lower volume of operations than anticipatedat appraisal,income from loans was lower than previously forecasted. This shortfallhowever, was, compensatedby significantly higher dividendincome. Administrativeexpenses averaged an acceptable 2.3% of averagetntal assets as comparedto 1.3Z projectedat appraisal. Overall,INDEBANK's financial performance during the projectimplementation periodmatched appraisalforecasts. Its return on average total assetsand return on equity averaged 1.7% and 6.0% respectivelyover the five year - 15 -
period,about the levelsestimated at appraisal. INDEBANK's1982 net profit after tax of K167,000representing a 0.82 return on average total assets and a modest 3.31 return on equity wag howeversubstantially lower than appraisalestimates due to large generalprovisions made during the year.
5.09 INDEBANKmaintained a sound liquidityposition and an adequate debt service capacitythroughout the five year period;current ratio and debt service coverageaveraged 2.5 and 2.8 respectively. Its long-term debt, equity ratio remainedwell below the 4:1 limit agreedwith the Bank. After a decline in 1982, INDEBANK'sprofitability has Improvedin the past two years. Net profit after tax for 1984 represented8.1X and 1.5X of averagenet worth and averagetotal assets respectivelyup from 3.3X and 0.7X in 1982. With a current ratio of 2.7, debt service coverageof 2.9 and long-termdebt equity ratio of 3.8:1 as of December31, 1984, INDEtANK'sfinancial condition remains very good.
ResourceMobilization
'.10 Being a sound, well managed and fairly profitableinstitution, INDEBANKenjoys a good reputationamong bilateraland multilateralagencies and has been successfulin mobilizingsuff±c4ent resources to finance its operations. In additionto MK4.5 million share capital,MK9.25 million in income notes subscribedby its shareholders,and the World bank line of credit, INDEBANKhas raisedabout MKI5 millionequivalent in loans from EIB, ADB and CDC. These loans carry interestrates of around b% p.a. and have an averagematurity of 15 years. A secondBank loan to INDEBANKwas appraisedin February/March1985 and is under processing.
VI. CONCLUSIONS
6.01 Since its inceptionin 1972, INDEBANKhas played a key role and positionin the developmentof Malawi'sindustrial sector. Over the years, it has &stablishedand maintainedvery good relationshipswith the Government,Malawi's other financialsector entities, local development 4nstitutions, variousexternal fitiancial±nst4tutions, bilateral and multilateralaid agencies. Despiteseveral management changes since 1979, INDEBANKis a well managed institution;its overallfinancial performance and conditionremain sound despitedeteriorating conditions facing the Malawianeconomy and the industrialsector in the last six years.
6.02 Implementationof the Bank loan under review progressed relativelyeasily and the project'sprincipal objectives of: (i) affording the World Bank Group the opportunityto part'cipatein the developmentof Malawi'sindustrial sector and, (ii) strerngthenINDEBANK's institutional capabilitiesto enhanceits importantrole, have substantiallybeen met. The line of credit to INDEBANKfinanced seven medium to large size projects in manufacturing,agro-processing and tourism. Six of these projectshave been fully implementedand are operatingprofitab'y. Altogetherthe six projectsin operationgenerated 461 new jobs at an average investmentcost per job of S49,000. Like elsewherein the region,the average investment - 16 -
cost per job was high because the investmentwas mainly for expansionof existing capacitywhich typicallyrequire only marginalincreases in the labor force.
6.03 The Bank played an importantrole in helping to build INDEBANK into a stronger and more efficientinstitution. Overall,INDEBANK was receptiveto Bank recommendationsand advice during the implementation period. During this period,it consolidatedits policies,established and implemented,to a large extent,adequate procedures and built up a solid core of well trainedMalawi staff. ntowever,INDEBANK still has to overcome weaknessesin the area of projectpromotion and evaluationof the economic 4mpact of the projectsit finances. The proposedfollow-up Bank Group assistancewould help INUEBANKovercome these weaknessesand further strengthenits institutionalcapabilities to play a leadingrole in the developmentof Malawi'sindustrial sector. - 17 -
MALAWIW
List of &ftrojects F1num UhderLoan 1610-MAI
9ubproject Date Amounkth l int my,roj ect Wam ?.adber AuthorizedAithoriad DIbbirsed nlled
1. MblawiIron and Steel Corporation A-1 7/79 416,670.00 400,595.00 16,075.00 2. Ilami.e Hbtels Lmitad A-2 10/79 769,230.00 673,551.00 95,679.00 3. Blantyre NettirgCcnpany Ltd. A-3 7/81 151,160.00 151,160.00 - 4. CarlsburgMalawi Brewry Ltd. A-4 11/81 400,000.00 400,000.00 - 5. alibku Products Ltd. -5 12/81 589,690.00 589,690.00 - 6. DavidWhitehead and SorsLtd. A-6 4/82 450,000.00 450,000.00 - 7. Presn Steel Irdustries Ltd. B-1 12/78 100,000.00 100,000.00 - 8. Mtal Products Ltd. B-2 10/81 82,500.00 - 82,500.00
2,959,250.00 2,764,996.00 194,254.00 TAL
EAPID April 1984 tlfED*2 AME "ON MMT (DS))
Ecxslc Ohracteritics of 1iIpIjects Fiu_vnd Urker ltm 16114I (Amxnts K ' 00)
1 Subproject aln lwaic Tw of Anhual Value I Ikctic f c 1/ No. at .bl 1 _tm (bt/b 2/ dMO iyWL _____tr ctLivity locati. tr>ject of Pnt L1c. Pm Pbterials RPatecfi Smu Ck.Mtd ____ _
1. I_t.1 Iran " Stwl Corp. A-1 Fomdry BLvtyme 1w - - - 23. - 2. Llom IAe Ltd. A-2 HdeAl Lilmga Eiqpwsi*V Ibd rn1zatLon 2.0) - 22 114 21.9 84.4 3. Uayr Nt~tUz C~y A-K #'djumfetug1zq.1 lblyprapy Il e KWs Miayre tqwston L.450 33 24 U. 30.3 25. 4. Carinbrg ILmvi Ltd. A-i Pruactim cnow (kat_m Rlamtyxe klqmion 5,939 A) 3 7 4.0 ".3 S. Ctbtn Ptu&t* Ltd. Ar-S Ytedact1m of kwr._n Blantyre Eqii b,2(D 90 S23 1.23s.1 6. lId tIt_c NWdSau fuif ctw4m of Ltd. Aatile 3mtyxe E Im%Lon 27,3ao 3U 29 U 86 ..00 7. Ft okl bytr NItXuf8ctuItfU o rodire 9meta UJnhUwe bqmfulGn 2,847 25 i5 7 41.2 .,
11 UImetu t 4gapiml; DfhC du not c.Ilate in-pu MUR. V n Ll!; OJW
WID
IsX IALAWI INVESTMENT ANU IEVLt;JWntNT BANK (INDEMANK)
Financial Charactertetica of Subprojects Flnanced Under Loan *bIU-IAi
Subproject Pro ect Cost INDbMAhNK FinancPn II betore Tax"it N32/ bubproj*ct Nar L_cL l orln Tborotl Loan AtToA 1& ,W- A,iiT~,; z xammr,k-
1. alaw-l Iroe 4 Steel A-) 245 1,025 1.270 325 149 474g 421 - - pro)ect still undr
Z. Lilongwe Corp. lotel Ld. A-2 I,le 890 2,056 goo - MOO M17 174 21A PSrottLcble
. bla.tyra Netting Co. A-3 1.000 1 700 2.70U 500 250 t5U 341 Wi 2b.b0 rotitablo
4. Carloberc Malawi Ltd. A-A 362 56V 942 4U1 - 40U )1.os 1.191 *e.u 1`rotI(.ble
5. Chibuku troducta Ltd. 1,200 A-, 1.200 791 -- 791 III ()l) 19.5 l DirJe luau 1i 198A. compoll 10 gw ptoiidIabia o. Davld Whitehead A Sonr Ltd. A- 6,oSS 13.245 19.900 I,US -- 1 .i5o i.230 J UJ 2U1.0 &rotlatble
7. rV.O Ste-l IndusLtrilo 4-1 350 250 bUU 25U 2IU 450 AdS St,3j _5. 4- Prulible
I/ For 19iT 2 laaacal Rate of Raturn coatiated at appraisal; INIJIANK doc- not calcuL&te eR-poL t.ItKd. - 20 -
ANNEX 4
MALAWI
INVESTMENTAND DEVELOPMENT BANK (INDEBANK)
Analysisof Loan Aptrovalsas of June 30, 1983 (K 'OOn)
Number % Amount % A. SIZE Up to K 100,000 8 11 591 2 100,001- 200,000 19 26 3,008 11 200,001.- 500,000 27 38 9,455 35 500,001- 1,000,000 16 22 11,428 42 Over 1,000,000 2 3 2,602 10 72- 100 27,084 100
B. PRINCIPALECONOMIC ACTIVITY Manufacturing 38 55 15,244 57 Tourism (Hotels) 8 11 3,731 14 Construction/Properties 5 7 2,070 7 Agriculture/Livestock 15 21 4,589 17 MiscellaneousServices 6 8 1 450 5 72 To-0 27,I084 100-
C. TERMSOF LOANS Up to 5 years 4 5 618 2 Up to 7 years 9 12 1,648 6 Up to 10 years 42 58 15,369 57 Over 10 years 17 25 9,449 35 72 l00 27,084 0T0 D. INTERESTRATE 8 - 10o 26 36 10,719 40 10 - 12% 28 39 10,603 39 12-14% 18 25 5,762 21 72 100 27,084 100
E. TYPE OF PROJECT New 43 60 16,247 60 Expansion 21 29 7,418 27 Rehabilitation 8 11 3 419 13 T2 -27,084 TO-0
F. TYPE OF OWNERSHIP Private 67 93 24,574 91 Public 5 7 2,510 9 72 100 27,084 100
EAPID January 1985 MALAWI
DnfS AND TVENl BANC(IMAM)
(qarison of Proected aud ktual OpratiQn 1978-1982 (Amots in K '000)
1978 1979 1980 1981 1982 la1liw Projected Actual i'ojectedAtual Projected ktual ProjerteddAktual Prjetd rjecte A UWALS1/ 1;WE 3,348 2,984 3,908 4,482 4,377 3,730 4,902 2,881 5,834 2,061 22,369 16,138 Equity Investmnts 560 1,613 977 300 1,094 1,284 1,226 540 1,029 - 4,886 3,737
Total 3,908 4,597 4,885 4,782 5,471 5,014 6,128 3,421 6,863 2,061 27,255 19,875
Ioasu 3,880 2,849 3,721 1,322 4,221 4,735 4,727 2,496 5,523 2,949 22,072 14,351 Equity Investments 573 1,363 838 451 1,055 966 1,182 934 1,095 - 4,743 3,714
Total 4,453 4,212 4,559 1,773 5,276 5,701 5,909 3,430 6,618 2,949 26,815 18,065 1nsHMSEirS LDoHn 3,138 2,333 3,753 1,445 4,121 3,354 4,626 2,486 5,363 2,340 21,001 11,958
Equity Investmes 516 1,342 811 472 1,033 486 1,170 1,360 1,104 - 4,634 3,660
Total 3,654 3,675 4,564 i,917 5,154 3,840 5,7% 3,846 6,467 2,340 25,635 15,618
0ULCfl( Loan6 462 2,108 953 943 1,346 1,036 1,83 1,400 2,455 1,520 7,055 7,007
1/ Net of Cancelatin.
EU1D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~U EAPID ALgust 1984 MALAI
INESrhrr AND [EVE1AJIENT BAW( O MALAWI(NEAK)
Analysis of Equity PoRtfolio as of December 31, 1983 (K '000)
Fanrs _ _ Div La1 1/ DIEBAW Net Worth beturn an IReim mx DIEAMIK Amnt wnership ID(EBAN IEBAW Net Worth INVEDIN*T Disbursed (X) btal Share Total Share (X) Amhxt (2) I. Profitable CGxpanies 1. British American Tobaco Liited 350 24 3,214 771 670 161 21 230 66 2. Press Steel Industries Ltd. 75 25 1,194 296 470 118 39 175 233 3. Sxothern Bottlers Limited 62 2 7,104 142 336 7 8 12 ao 4. Irnustrial Develpments Limited 297 46 580 267 23 10 4 85 35 5. Capital Irestments Limited 250 25 3,252 813 182 45 6 54 22 6. Cpticlen (alawi) Limited 280 16 1,043 417 134 54 13 112 40 7. MIrdala limited 680 13 7,847 1,098 634 89 8 51 2/ 8 8. Enterprise C(etainers Limited 93 34 440 132 151 45 34 75 7/ 79 9. Standard Tobacco Packers Limited 400 13 3,131 407 (11) (1) - 72 18 10. Blantyre Netting CaWany Limited 250 16 802 240 364 109 45 100 40 11. Capital Developmnts Limited 70 17 649 117 195 35 30 56 80 12. Cattle Feelot Capany Limited 70 25 233 58 13 2 6 - - 9ubtotal 2,877 29,489 4,760 3,161 674 - 1,022 II. Unprofitable Gmpanies Capital Hotels Ltnited 500 14 1,593 223 (218) (31) (14) 50 10 Press Ranchirg Ltmited 100 20 179 36 (113) (23) (63) 0 0 Malawi Hotels Ltmited 91 15 1,718 258 (662) (99) (38) 11 6 Subtotal 691 - 3,490 517 (993) ( 153) - 61 IlI.Under lnsleuentation Mla.ii Iron and Steel Coporation 40 20 352 70 - - Etharkol Cciany 710 23 2,500 567 - - - - Indefund Ltmted 400 62 650 400 - - - - Subtotal 1,150 - 3,502 1,037 - -- -
Irdetrust Ltmited 5 100 17 17 - - - - Irdetrust Holdirgs LAited 5 100 17 17 9ubtotal 10 - 34 34 _ _ -
1L. 4,728 36,515 6,348 2,168 521 1,083
11 ce1 v y jrCjEA( in 1983 _/ Received in 1982 - 23 -
ANNEX7 Page 1 of 3
MALAWI
Investmentand DevelopmentBank (INDEBANK)
Summary Descriptionand Present Status of Subprojects
Financed Under Loan 1610-MAI
1. Malawi Iron and Stee'lCorporation. Subloan $416,670. The Malawi Iron and Steel Corporation(MISCOR) was establishedin 1979 to operate a small iron and steel foundry in Blantyre. The company would convert local unutilizedscrap iron and steel into a variety of products based primarily on individualjob orders from local industry. The project was promotedby MDC and its paid-in capital of K 746,000was subscribedby MDC (24%), Press Holdings Ltd (24%), Apex Industriesof South Africa (32%), and INDEBANK (20%). Total project cost amounted to K 1.25 million. The World Bank subloan approved in 1979 financed the cost of importinga second hand electric arc furnace and other equipment. MISCOR had entered a management agreementwith Apex Industriesunder which the latter would provide the necessary technical,and managementexpertise. In 1981, however, before project implementationwas completed,Apex Industrieswas taken cver by another South African Companywhich decided not to participatein the project. Due to lack of technicalmanpower, the projectwas closed in March 1982. In March 1983, MISCOR reach. a tentativeagreement with a Channel Island based company which would invest K 60,000 in the projectand provide the necessarytechnical expertise in return for a 33% ownershipof MISCOR. To facilitatecompletion of the project, INDEBANKconverted K 142,000of its outstandingloans into income notes, approveda new loan of K 200,000 for the project and rescheduledrepayment terms on a K 400,000 loan and througha capital reductionscheme had its original share capital of K 149,000reduced to K 40,000 by writing off against equity certain pre-operatingexpenses. The project has been fully operationalsince 1984.
2. LilongweHotel Limited. Subloan $769,230. The subloan, approved in August 1979 financed 37% of the cost of expansion and modernizationof Lilongwe Hotel, a three star hotel in Lilongwe owned by Malawi Hotels Limited (MHL). MHL is the leading hotel company in Malawi and is owned 48% by MDC, 26% by the CDC, and 26% by CarlsbergBreweries (Malawi)Ltd. The expansionof Lilongwe Hotel was considereda good investmentin view of a high occupancyrate of 72% in 1979 and growing demand for hotel accomodationfollowing the relocationof Governmentoffices from Blantyre to Lllongwe and the constructionof an internationalairport a few miles from the hotel. The expansionprogram was completedon schedule in 1981. The hotel had occupancyrate about 95% in 1982 and is profitable. The expansionprogram generated 114 new jobs at an investmentcost per job of $14,000. - 24 -
ANNEX 7 Page2 oi
3. BlantyreNetting Company. Subloan $151,160. BlantyreNetting Company (BNC) has manufacturedfishing nets and twine since 1959. In 1981 it undertooka major expansionthrough the addition of a plant for manufacturingpolypropylene bags for the sugar, fertilizerand seed industry. The company is majority (52x) owned and managed by the David Whitehead and Sons group, which also manages a successful,large textile company and has a reputationas one of the better managed groups in Malawi. The rest of BNC shares are held by CDC (32%) and INDEBANK (162). The project was identifiedin the Bank funded agro-industrystudy carried out in 1980. The expansionprogram was completedsix months ahead of schedule at an estimatedcost of K 2.7 million. The company is profitable and has recently financed (throughinternal cost generation',additional production capacity to meet growing demand for polypropylenebags.
4. CarlsbergMalawi Limited. Subloan $400,000. The subloanwas approved in November 1981 and financed part of the cost of importationand installationof injectionmolding equipment for the manufactureof plastic crates for use by CarlsbergMalawi Brewery (CMBC) and its associated company, Southern Bottlers Inc. a soft drink manufacturer. CHBL is partly owned by United BreweryLimited of Denmark (49%) which providesall senior m.-aagementfor the company,Malawi DevelopmentCorporation (27%) and by Press Holdings Limited (242). The cost of the project amounted to K 944,000 of which K 400,000was financedby the Bank subloan and the rest by internallygenerated funds. The project was completedon time and within budgeted costs. The project is profitableand repaymentof the INDEBANK loan is expected to proceed as scheduled. The additional investmentgenerated 17 new jobs at an investmentcost per job of $44,300.
5. Chibuku Products Limited. Subloan $589,690. Chibuku Products Limited (CPL), owned 702 by Lornho (Malawi) Ltd. and 30% by Press Holdings Limited brewers and markets locally, Chibuku--analcoholic beverage processedfrom maize and sorghum. At the time the subloanwas approved in 1981, CPL operated three breweriesand required financingto build a new brewery and seven taverns in the capitalcity, Lilongwe. Totel cost of the expansionprogram amounted to K 1.2 million and was financed by an INDEBANK loan and self-generatedfunds. The Bank subloan portion of the INDEBANK loan financed the cost of additionalbrewing tanks, part of the cost of civil works (excludingthe constructionof taverns). Up to 1981, CPL was a highly profitablecompany with return on equity averagingabout 33% a year. Following the impositionof controlon the price of Chibuku in 1981 the companymade a loss in 1982. In March 1983, however,a price increase was authorizedby Governmentand CPL's financialperformance began to improve. The company is well managed, its productiondepends on locally available raw materialsand has ready market for itb product;its future prospectsare consideredexcellent. The project generatedfifty-three new jobs at an investmentcost of $18,000 per job.
6. David Whiteheadand Sons Ltd. Subloan $45U,OJO. David Whitehead and Sons Limited is one of Malawi's largest private enterprisesand the only manufacturerof cotton textiles in the country. In 1982 the company embarked on a program to refurbish its cotton fabric manufacturingplant and set up two new plants, one for the recovery of waste cotton and the - 25 -
ANNEX7 Page 3 of 3
other for the manufactureof polyestercotton fabrics. The projectwas completedat a coot o' K 16.7 million financedby loans from the CommonwealthbevelLomen: Corporation (CDC), IFC, INDEBANK,suppliers' credit and self-generatedfunds. The projectproduces about fouir million yards of pol3estercotton fabrica year to substitutefor a portionof importswhic.a amounted to about six million yards a year before implementationof the project. Raw cotton which representsabout 30% of raw materialrequirements is locallyavailable. The companyis well- managed and profitable. 1982 profits representeda 22% return on equity. Its future financialprospects are consideredexcellent. The expansion programwas completedon scheduleand generated186 new jobs at an investmentcost per job of $85,600. This was relativelyhigh because the bulk of the investmentwas for expansionand machineryreplacement which requiredonly a marginalincrease in the size of the labor force.
7. Press Steel IndustriesLimited. $100,000. The projectowned 75% by Press HoldingsLimited and 25% by INDEBANK,was established1975 and producesa range of corrugatediron sheets. The Bank subloan,approved in December 1978 financedpart of the cost of expandingthe project's productioncapacity, construction of an office buildingin Lilongweand buildinga railwaysiding to facilitatetransportation of materials. Total cost of of the project amountedto K 500,000and was financedby an INDEBANKloan of K 300,000(including the Bank subloan)new equityof K 100,000and K 100,000in self-generatedfunds. The projectwas completed on scheduleand became fully operationalin 1980. Press Steel Industries performancehas been good since inception. Due to rapid growth in demand for roofingsheets in the past few years, the company'sturnover grew by about 70% in 1982 leadingto a sharp increasein profitability;1982 i4et earningsrepresented a high 40% return on equity;the projecthas maintaineda strong financialposition and regularlyservices its debt. Seven jobs were createdat an investmentcost per job of $68,000.
8. Metal ProductsDistributors. Subloanapproved $82,500. The projectpromoted by two Malawianentrepreneurs was establishedin 1979 to manufacturewire nails for the domesticmarket. Total projectcost was estimatedat K 110,000,68% of which would be financedby the World Bank subloan and the rest by the promoter'sequity contributions.Project implementationis almost three years behind scheduleprimarily due to promoters'poor implementationcapabilities; the promoterswere late in making availableto INDEBANKtitle deeds and propertyvaluations of the collateralsecurities to enablepreparation of collateralmortgages, and delayed in submittingmachine maintenance contracts and obtainingexchange control permissionfor the importationof machinery. Althoughthe matters were eventuallyresolved, the machineryhas not been delivered. As the closing date for loan 1610-MAIwas July 1, 1983, the subloanapproved for this projecttogether with other unutilizedfunds under the loan were cancelledas of December31, 1983. INDEBANKwill utilize resourcesfrom other sources to finance the cancelledsubloans. MAU4(I
INVESTfEr AND IVE1OPMENrBAC (DIEBAK)
Projected and Actual Income Statements 1978-1982 (K '000)
1978 1979 1980 1981 1982 Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Year Ending Deceiiber 31
Loan IncoKuj 1,006 872 1,285 1,004 1,567 1,196 1,850 1,453 2,138 1,726 Dividends 128 258 188 453 277 544 400 578 553 777 Other 102 93 108 65 114 148 134 188 152 243
Total Incoe 1,236 1,223 1,581 1,522 1,958 1,888 2,384 2,219 2,843 2,746
EXFES Andinistrative Expenses 1% 220 226 364 261 456 302 450 349 523 , Depreciation Fixperse 18 22 19 33 21 41 41 39 42 3 °0 Financial Charges 697 600 90D 723 1,124 862 1,370 1,047 1,621 1,243 Provisions 37 - 46 - 52 - 58 40 65 585
Total Experses 948 842 1,191 1,120 1,458 1,359 1,771 1,576 2,077 2,39
Profit Before Tar & Dividerds 288 381 390 402 500 529 613 642 766 357 LessTax 130 174 176 187 225 246 276 302 345 190
ProfitAfter Tax 158 207 214 215 275 283 337 340 421 167
Less Dividerds 119 132 161 153 206 105 253 179 316 125
Increase in Retaired Earnings 39 75 53 62 69 118 84 162 105 41 X EAE) April 1984 X MAIAWI
INEHTN ANSEURIN AK (ROA)
ProjectedAnd ActualBalare Sheets1978-1982 (K '000) 1978 1979 1980 1981 1982 As at Decemiber 31 Projected Actual Projected Artual Projected Actual Projected Actual Projected Actual
ASS Cash and Accounts Receivable 419 598 485 1,054 558 1,279 638 1,389 725 1,970 Local RegisteredStock 1,186 700 1,100 670 1,324 840 1,559 1,062 1,747 1,219 0.rrent Maturitiesof long- TermLoans - 974 - 896 - 1,307 - 1,691 - 1,909
Total Current Assets 1,605 2,272 1,585 2,620 1,882 3,426 2,197 4,142 2,472 5,098 P(RrFYLIO Loans 11,126 8,819 13,926 9,456 16,701 11,388 19,488 12,739 22,396 14,234 Equity lnvestments 1,635 2,462 2,446 29,34 3,479 3,420 4,649 4,485 5,753 4,742 less Provisions (37) - (83) - (135) - (193) (40) (258) (585)
Total Portfolio 12,724 11,281 16,289 12,390 20,045 14,808 23,944 17,184 27,891 18,391
Fixed Assets (Net) 170 227 166 339 160 356 369 333 342 333
TrJAL ASSETS 14,499 13,780 18,040 15,349 22,087 18,590 26,510 21,659 30,705 23,822
LIABILITIES (brrent Liabilities %3 1,504 951 1,205 1,129 1,075 1,319 1,434 1,483 1,866
Income Notes 9,000 7,800 9,450 8,120 10,800 9,000 11,250 9,000 11,250 9,600 LangTerm Debt 1,400 930 4,200 1,766 5,900 3,615 8,850 6,033 11,075 7,301 Paid-In Capital 3,000 3,375 3,250 4,025 4,000 4,500 4,750 4,500 4,450 4,500 Retaired Earnings Reserves & 136 171 189 233 258 351 342 692 447 555
Total Net Worth 3,136 3,546 3,439 4,258 4,258 4,851 5,092 5,192 4,897 5,055
Total Liabilities&Net Worth 14,499 13,780 18.040 15,349 22,087 18,540 26,510 21,659 30,705 23,822
EAPID April 1984 MAIAI
DAS W N _B M BANK(nKW)
Projected and Actual Sources And Lkws of ftids 1978-1982 (K 'I000)
1982 Lecamber 31 1978 1979 1980 1981 Year Endirg Act al Projected Actual Projected Actual Projected Actual Projectad Actual Projected SOURCES 84 340 105 167 Net Profit 39 207 53 215 69 283 41 39 42 38 Depreciation 17 22 19 32 21 41 - 58 22 65 440 Provisions 37 - 46 - 52 183 401 212 645 Total Funds Froxn Operation 93 229 T18 247 142 324 1,839 1,353 2,455 2,050 'nxan Collections 462 2,108 953 943 1,346 1,037 - 45 - 45 Sales and Shares - 310 - 30 - - 750 265 700 - Increase in Stire Capital 160 535 250 650 750 - Borrnwirgs: 475 450 - - 600 Incne Notes 1,650 450 450 320 1,350 880 2,95C - 3,600 656 lines of Credit 1,400 918 2,800 779 1,700 - 1,910 - 2,593 - 2 Oter Scurces - - - -
4,626 6,172 4,657 6,967 3,998 IUEAL SOURCES: 3,728 4,574 4,571 2,971 5,288
USES 58 250 16 15 39 Fied Assets 15 78 15 145 15 Distursements: 3,363 4,626 2,890 5,363 2,888 lom; 3,138 3,440 3,755 1,446 4,121 486 1,170 1,110 1,104 303 Eqtuty Investmnts 516 1,343 811 472 1,033 - 375 - Repe, of Borra s------154 - 165 - 179 Dividends - 132 - 154 -
4,060 6,046 4,171 6,857 3,409 TI:AL USE 3,669 4,993 4,579 2,217 5,169
566 126 486 110 589 Increase (Decrease) in Capital 96 (419) (8) 754 119
EAPiD April 1984 MAI
AND DfElVL2 B-. (UIE&VK)
Projected and Actual Fizrxcial Ratios 1978-1982 (z)
1978 1979 1980 1981 1962 Pject Acu Project Artual Projeted Acuml P Acll Pml laxg-Tamu Debt/Equity Ratio 3.3 2.5 4.0 2.3 3.9 2.6 3.9 2.9 4.0 3.3 CmrrentRatio 1.7 1.5 1.7 2.2 1.7 3.2 1.7 2.9 1.7 2.7 Debt-Servioe CAwerage Ratio - 2.8 - 2.6 - 2.9 - 2.8 - 2.9 Profit After Tax as % of AuerageTotal Assets 1.2 1.7 1.3 1.5 1.4 1.7 1.4 1.7 1.5 0.7 Profit After Tax as % of Average Equity 5.2 6.4 6.5 5.5 7.2 6.2 7.2 6.8 7.7 3.3 Financial Expeinse s 2 of AverageTotal Asets 5.4 4.8 5.5 5.0 5.5 5.1 5.6 5.2 5.7 5.5 AMird.strstimx ExDe as Z of AherageTotal Assets 1.5 1.8 1.4 2.5 1.3 2.7 1.2 2.2 1.2 2.3 Inamm frtmi low irteaaliu as % of Aherge LoaImPbrtfollo 11.2 11.2 10.3 11.0 10.4 11.5 10.4 12.0 10.2 12.8 Dividinds IrKxx as 2 of Fquity Pbrtfolio 7.8 10.3 7.7 15.4 8.0 15.9 8.6 12.8 9.6 16.4 Prowisiiw as 2 of Outstanding Itm Pbrtfolio 0.3 - 0.5 - 0.7 - 0.8 0.2 0.9 3.1
EAPID April 1984 IX I- - 30 -
ANNEX12 maJAm,
ESThK ANDEMEPWM BANKOF MI ( KIBA)
Schadule of Estimatedvs. Actual Disbursemnts
Appraisal Estimate Actual Year Qurter Per(Jarter Qnuilative Per Quarter Qwlative % of Estimate X of Total Loans
1979 Fourth 180,000 180,000 - - 0 0
1980 Flrst 275,000 455,000 - 0 0 Second 300,000 755,000 - - 0 0 Third 350,000 1,105,000 - - 0 0 Fourth 375,0O0 1,480,000 - - 0 0
1981 First 375,000 1,855,000 - - 0 0 SeL.ornd 375,000 2,230,000 - - 0 0 Third 300,000 2,530,000 796,597 796,597 31 26 Fourth 250,000 2,780,000 130,344 926,946 33 31
1982 First 150,000 2,930,000 76,418 1,003,360 34 33 Second 70,000 3,000,000 112,497 1,115,856 37 37 Third - - 113,900 1,229,757 41 41 Fourth - - 142,582 1,372,339 46 46
1983 First - - 194,956 1,567,295 52 52 Second - - 293,327 1,860,622 62 62 Ihird - - 125,589 1,986,211 66 66 Fourth - - 737,941 2,724,152 91 91
1984 First - - 19,643 2,743,795 91 91 Second - - 21,201 2,764,996 I/ 92 1/ 92
1/ Anundisbursed balair of $235,004.00 was cancelled on 12/31/83
EAPID April 1984 - 31 - ANNEX13 Page 1 of 4 INVESTMENTAND DEVELOPMENT BANK OF MALA*ILTD.
TELEPHONE 620055 OurRat CLM/efn Delamere House, TELFX 4735 IINDEBANKY VictoriaAvenue,
Co0i'rS RECEIVEDFROM BORROWER Blantyre. 7th April 1986Blnr.
Yuk.nori WatanabeEsq. Director Operations Evaluation Department 1818 H Street, N.W. Washington DC 20433 UJSA
Dear Mr Watanabe
PiRJECr CC%iU 1aN REICR - IWESMNSTAND DELO BANKOF NfALAI - LDN 1610 MAI
Thank you fnr the draft cofpletion report which yoJ sent to us together with your letter of March7, 1986. We are in general agreementwith the conclusions of the report, and we do not have much in the formof comrents. The weaknessesof Indebank in the areas of project appraisal and promotionas perceived at the tine of this project's appraisal, and during most of the period of its implementation has gradualiy beenattended to. During the past three years, Indebank has successfully trained some four Mvalawiansin project appraisal and this processis continuing.Project promotion did not receivesimilar attention nainlybecause Indebank continued to have adequateproject enquiries and applications.From 1986,a PromotionsDepartment has been created. Para. 3.08, page 10, has With regardsto economicappraisal, we wouldwish to mentionthat cluring been amended the lastyear or two, this has been given more and more prominence.We now to reflect carryout economic rate of returncalculations on each project;we also carry recent out foreignexchange funds flow on someprojects. It is our intentionto improvementscontinue applying economic appraisal criteria to almostall our projectsas in appraisalmore and more (IBRDand EIB) of our lenders require that we do it. procedures. it We are stiilweak,in hijuse technical appraisal. We have,whenever necessary, hiredconsultants to a.;sist.We do not thereforeerwisage employing an engineersoon.
21...... -32- AUNEX13 Pap 2rf 4 INVESTMENTAND DEVELOPMENT BANK OF MALA*ILTO.
t,, 1140BIF; :-,I I -N I j I . .N- ¢Ii ', -it A 1;}14 R'-S b ; | 'z''l %k)? ' t N;. VlI 1: TELEPHONF 620055 u Ref.: DelamereHouse,
TEiFx 4735 IINDEBANK) Your Rot: VictoriaAvenue, P.O.Box 358. Blantyre.
Finally on points of detail, we weud wish to suggestavirKkh,nts as detailed on ny amrore. I hope you f ind our commntsuseful. Yours sincerely
C L MWFHE 63hERALMNANA
Copy to Secretary to the Treasury P 0 Box 30049 CAPITALCITY LI LNO 3 33 - ANNEX 13 -~33 -Page 3 of 4
INVESTMNT AND DEVELOFMENTBN( OF M4LAII LIMITE)
PAGE 9 - PAR 3.06 - in 1983 and 1984, there were only two expatriate staff in Indebank. There were two others, one each in Indefund and Indietrust.
PAGE 22 - ANNiEX6 - amDnxts disbursed and Indebank ownership should read as follows for the followingconpanies: AMVLNT DI SULLSED I NDEBANK CERSH I P K Indust,ialDevelopments 'imited 297,000 Optichem (Malawi)Limited 16 Manidala Limited 13 Annex 6 has Enterprise Containers Limited 93 34 been amendedBlantyre Netting Ccrparny 16 to reflect Capital DevelopmentsLimited 17 these changes Malawi Hotels Limited 91 Malawi Iron and Steel Corporation 40
Sub-total under 1 2877 not 2825 11 691 not 781 'II 1150 nut 1259
Total 4728 not 4747
- Total equity disbursed should thereforebe K4,728 insteadof K4,742,000.
PACE 23 - ANNEX7 - (Proposed changes are underlined)
MALAWI IFON AND STEEL CC1PCRATICN(should read as follows) Subloan $416,670. The ialawi Iron and Steel Corporation (MISQOR)was Annex 7 established in 1979 to operate a small iron and steel foundry in Blantyre. (page 23) The cofpany would convert local unutilisedscrap iron and steel into a variety has been amended as of products based prirmrily on individualjob orders from local industry. suggested The project was promted by MDC and its paid-in capital of K746,000 was to be by the Borrowe;. subscribedby UCX (24%), Press Holdings Limited (24%),Apex Industries of South Africa (32%), and Indebank (20%). Total project cost amsunted to K1.25 million. The World Bank subloan approved in 1979 financed the cost of irrportinga second hand electric arc furnace and other equipment. MISCCR had entered a managerent agreementwith Apex Industries under wiic'i the latter would provide the necessary technical,and manageFentexpertise. In 1981, however, before project inplementationwas started Apex Industries was taken over by another South African Company which decided not to participate in the prcect. Press Holdings also withdrew and Malawi DevelcpnentCorporation (MDC)
2/...... ANNEX13 Page 4 of 4
took up part of their stake. Due to lack of technicalmanpower, the project was closed in Mbrch 1982, In Mbrch 1983,MISOCR reacheda tentativeagreement with a Channel Islandbased coqmanywohich would investK60,JOO in the project and providenecessary technical expertise in return for a 33% ownershipof MISCOR. To facilitatecompletion of the project, Indebankconverted K142,000 of its outstandingloans into incomenotes, approved a new loan of K200,000 for the project,rescheduled repaynmnt terms on K400,000 loan and througha capital reductionscheme had its originalshare capitalof K149,000reduced to K40,000by writing off againstequity certainpre-operating expenses. The projecthas been fully operationalsince 1984.