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World Bank Document WfrtI54 1fG/ ? 1 -xecuiveDirector | Document of 2 - Permanent office Copy The World Bak FOR OFFICIAL USE ONLY FILECOpy Public Disclosure Authorized Report No. 1914a-MAI Public Disclosure Authorized MALAWI STAFF APPRAISAL REPORT THE INVESTMENT AND DEVELOPMENTBANK OF MALAWILIMITED Public Disclosure Authorized May 3, 1978 Public Disclosure Authorized East Africa Projects Department Industrial Development and Finance Division This document has a restricted distribudon 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 EQUIVALENTS US$ 1 K 0.909 K 1 US$1.1 K 1 million = US$1.1 million GLOSSARY OF ABBREVIATIONS NSO - National Statistical Office LRS - Local Registered Stock NBM - National Bank of Malawi CBM - Commercial Bank of Malawi INDEBXNK - Investment and Development Bank of Malawi Ltd. MDC Malawi Development Corporation ADMARC - Agricultural Development and Marketing Corporation CCDC - Capital City Development Corporation NIC - National Insurance Company NBS - New Building Society MHC - Malawi Housing Corporation POSB - Post Office Savings Bank CDC - Commonwealth Development Corporation DEG - Deutsche Gessellschaft fur Wirtschaftliche Zusammenarbeit FMO - Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. EIB - European Investment Bank KfW - Kreditanstalt fur Wiederhaufbau FRR - Financial Rate of Return ERR - Economic Rate of Return FISCAL YEAR January 1 to December 31 FOR OFFICIALUSE ONLY MALAWI INVESTMENT AND DEVELOPMENTBANK OF MALAWILTD (INDEBANK) STAFF APPRAISAL REPORT Table of Contents Page No. BASIC DATA ................................................o .....- o.ooo. ii I. THE INDUSTRIAL SECTOR .. ..... .o... ...... ...... ...... 1... Contributionto the Economy and Performance.... 1 Structure *..........*e.................................... 2 GovernmentPolicies .... o. o .......... .. o... .. .... 4 Recent Developments ........ -. .. .. ..... ........... ...... .... ... 5 Small Scale Industries .. o o .......o.... ... .. .....o...o..o.o 8 II. THE FINANCIAL SECTOR ... .... ............. ... ... ...... 10 The Central Bank's Role, Credit Policies and Interest Rate Structure .........................ooo.......................o... 10 The Institutional Base .- ... -....-... .. ......... 11 III. THE INVESTMENT AND DEVELOPMENT BANK OF MALAWI LTD .-..... o. 16 Background, structure and Role .. .............. 16 Ownership ......--.......... o.........................- - o .o.-.... 16 Policies .- o-o-oo-o .............................-.. o.oo .....-- 17 Board of Directors and Management . ...... ... ..... 18 Staff and Organization ........ ....--... ... ... .. 19 Procedures ...... ............. ........... ..........- 20 Terms and Conditions of Loans: Interest Rates .... oo 22 Auditors ..- oo-o........................... ............- .... .o.. 23 IV. OPERATIONS AND FINANCE ........ .. ...... 23 Operations ........ .........ooo..... o....o...........................23 Financial Condition .-... ...... .... ...-. ....... ... 25 Resources ................................ 25 Operational Performance ..- .............. 26 This report was prepared by Messrs. Jose Luis Mombru and Michel Cramer following their visit to Malawi in November 1977. 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. -2- Page No. V. PROSPECTS .................. ................. ............. 27 Industrial Development ........... ....................... 27 INDEBANK's Strategy ................................... 28 Forecast Operations ....... ...... .......... .. .. ....... 28 Resource Requirements ................. ... ............. 29 Forecast Financial Results ............................ 31 VI. THE PROPOSED BANK LOAN AND IFC INVESTMENT ................. 32 Recommendations ........ ............... ..... ........... 32 Main Features of the Bank Loan ....................... 32 Support to INDEBANK ................. .................. 32 Main Features of the IFC Investment ................... 33 Objectives, Benefits and Risks ....................... 34 - 3 - LIST OF ANNEXES Annex No. 1 Malawi, INDEBANK - Board of Directors. 2 Malawi, INDEBANK - Organization Chart. 3 Malawi, INDEBANK - Summary of Past Operations (1973-1977). 4 Malawi, INDEBANK - List of Projects Approved (as of December 31, 1977). 5 Malawi, INDEBANK - Analysis of Total Approvals (Loan plus Equity). 6 Malawi, INDEBANK - Summary of Investment Portfolio. 7 Malawi, INDEBANK - Resource Position as of December 31, 1977. 8 Malawi, INDEBANK - Summary Balance Sheets 1973-1977. 9 Malawi, INDEBANK - Summary Income Statements 1973-1977. 10 Malawi, INDEBANK - Summary Sources and Uses of Funds Statements, 1973-1977. 11 Malawi, INDEBANK - Financial Ratios, 1973-1977. 12 Malawi, INDEBANK - List of INDEBANK Project Possibilities as of November 30, 1977. 13 Malawi, INDEBANK - Projected Operations, 1978-1982. 14 Malawi, INDEBANK - Projected Balance Sheets 1977-1982. 15 Malawi, INDEBANK - Projected Income Statements, 1978-1982. 16 Malawi, INDEBANK - Projected Sources and Uses of Funds Statements, 1978-1982. 17 Malawi, INDEBANK - Projected Financial Ratios, 1978-1982. 18 Malawi, INDEBANK - Schedule of Projected Draw-Downs from Proposed Bank Loan of US$3 million. 19 Malawi, Legislation Relevant to the IFC Investment in the Investment and Development Bank of Malawi, Ltd. 20 Malawi, INDEBANK - Related Documents and Data Available in the Project File. MALAWI INVESTMENT AND DEVELOPMENTBANK OF MALAWI LTD (INDEBANK) Basic Data Date of Creation: December 30, 1972 Ownership Paid-Up Capital as of September 30, 1977 K '000 % ADMARC (Malawi) 710 25 CDC (U.K.) 710 25 DEG (West Germany) 710 25 FMO (Netherlands) 710 25 Operations 1973 1974 1975 1976 1977 Total -___________---- = (K '000)…-------_________ Approvals (8) (3) (7) (5) (10) (31) Loans 3,970 1,000 2,160 2,355 1,968 11,453 Equity Investments - 394 640 70 215 1,319 Commitments Loans 2,470 2,500 1,360 2,005 1,470 9,805 Equity Investments - 394 340 300 85 1,119 Disbursements Loans 2,270 2,900 470 2,723 2,408 9,771 Equity Investments - 394 140 250 335 1,119 - ii - Financial Record 1973 1974 1975 1976 1977 ________- -- - - - - --- % - -- -- -- -- -- -- -- -- -- - Net Earnings before tax as % of average Total Assets - 1.1 2.2 1.8 3.0 Administrative Expenses as % of average total assets 5.2 2.6 2.6 2.1 1.7 Net Earnings before tax as % of average equity - 4.2 8.6 7.3 11.7 Financial Position 1973 1974 1975 1976 1977 Total Assets 3.44 4.87 5.81 8.56 11.07 Total Portfolio 2.27 4.51 5.01 7.69 9.57 Equity 1.00 1.24 1.41 2.06 2.94 Ratios: Long-Term Debt/Equity 2.2 2.7 2.8 2.9 2.5 Current Ratio 5.4 1.1 1.7 1.4 1.7 Lending Terms Interest charge on loans: 10.5% - 11% in industry 9.5% in pure agriculture 11% - 12% in commerce Commitment charge at 0.1% per month on unwithdrawn loan commitments. Investigation fee of 0.5% of total investment (loan and equity). MALAWI INVESTMENTAND DEVELOPMENTBANK OF MALAWI LTD (INDEBANK) I. THE INDUSTRIALSECTOR Contributionto the Economy and Performance 1.01 At independencein 1964, Malawi's industrialsector was practically limited to tobacco and tea processingon a few agriculturalestates. From that narrow base, industry has expanded and diversifiedat a remarkable pace into a vhriety of import-substitutingand food - processing activities. Until 1973, industrialproduction 1/ grew by an average rate of 13% per year, about twice as fast as the overall GDP in constant terms. Between 1973 and 1976, its growth was more irregularaveraging 5% per year, due primarily to the rerouting of trade with Rhodesia,but signs of a strong recovery appeared in 1977 (para 1.16). Overall from 1964 to 1976, the industrialsector has contributed 18% of the GDP increment and increased its share of GDP from 13% to 17% 2/. This industrialgrowth has been fuelled mostly by import substitu- tion industrieswith export oriented manufacturingactivities taking a rela- tively small role; they represent only a marginal contribution- 1.6% - 3/ to total exports. In 1976, industry provided average earnings per employee of K36 per month, 3.3 times higher than agriculture,to 54,500 employees or 21% of the national wage employmentamong enterpriseswith more than 20 employees. Together with an estimated employmentof 35,000 people in smaller enterprises,industry thus accounted for about 5% of the active population estimated at 1.7 million. By comparison,agriculture, which is by far the largest sector of the economy, contributesabout 40% of the total paid employ- ment, 46% of total GDP and 94% of exports 4/. 1.02 The industrialsector appears to have a good record of efficiency and profitability. The latest reliable available data on the industrial sector dates from 1973, when a comprehensivesurvey of the 164 existing in- dustrial enterpriseswith more than 20 employeeswas made by the National StatisticalOffice (NSO). The survey showed a net profit before tax averaging 1/ It includes, essentially,manufacturing and construction. 2/ If only manufacturingactivities are considered,these percentagesare about 9% to 13% respectively. 3/ This percentage excludes the industrialprocessing of a few major agriculturalcrops (mainly sugar, tobacco and tea). 4/ Four main crops account for almost 90% of exports: tobacco - 48%, tea - 20%, sugar - 13% and groundnuts - 8%. - 2 - averaging up to 24% of fixed assets and 13% of total assets over the
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