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 substitution industrieswith export oriented manufacturingactivities taking a relatively 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 employment, 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 industrial 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 whole sector, indicating a rather good performance. According to this survey, the Malawian industry also appears as one of the most labour-intensive in Africa with fixed assets averaging K1330 per employee in 1973. Productivity is satisfactory with a net value-added of K840 per employee. For the period after 1973, the evidence suggests that this good record of profitability and labor intensiveness has been maintained in the more recent years. Indeed, industrialists report that dividend payments above 10% of equity after tax are common, and these high returns are confirmed by the recent performance of the companies financed by INDEBANK (paras 4.05 to 4.07). Concerning industry's labor intensiveness, on the basis of the list of licenses for new industrial projects (para 1.10), the ratio of project capital costs to number of jobs created has increased notably in 1970-1975 but still remains rather low with an average of slightly above K9,000 for new investments in the period 1974-77.

1.03 Official statistics available on capital formation up to 1973 show an acceleration of industrial investment in the early 1970s, particularly for import substitution of consumer goods. The gross fixed capital formation in manufacturing increased from 11% of the national total in 1970 to 19% or K13 million in 1973. For the period 1974-76, investments do not seem to have grown significantly. Indeed, although no statistics are available for the period after 1973 an indication of this lack of growth is apparent in examin- ing the licenses issued to new industrial investments from 1974-76. The main reason for this relative tapering off is the negative impact of the external factors described in para 1.15 on the investment climate. In 1977, however, and as a result of the improvement of the overall situation, industrial investments have picked up (paras 1.16-1.17).

Structure

1.04 Sectoral Distribution. In 1976 industrial production came mostly Erom manufacturing (72%) and construction (28%). According to the 1973 NSO survey, manufacturing production had spread out from the traditional processing of tobacco - 13% and tea - 7%, to engage in food processing - 16% (sugar, meat, grain milling, bakeries and canning); textiles, clothing and footwear - 17% (including cotton fibers for export); beverages - 10%; metal works and assembly engineering - 8%; drugs and cosmetics - 8%; sawmilling and wood furniture - 7%; paper and printing - 6%; and non-metallic minerals also 6%.

1.05 In recent years, production in these subsectors has been differently affected by the evolution of the external factors described in para 1.15. However, over the same period, the most significant change was a large increase in sugar production (13% of domestic exports), which became the third major export, after tobacco and tea. The importance of sugar processing is likely to continue with the implementation of the large Dwangwa Sugar Project (para 1.17). In addition, on the basis of the licenses issued in the period 1974-77, an increasing number of new production units have been created in the agricultural implements and engineering, and motor and vehicle assembly activities - representing 34% and 18% of new project's investments through these last years, excluding the Dwangwa Sugar project. 1.06 GeographicalDistribution. Industry is heavily concentratedin the Southern Region. In 1975, industry employed 25% of the wage earners in the Southern Region but only 15% in the Central Region and 13% in the Northern Region. The Southern Region comprised three-fourthsof industrialemployment and Blantyre alone one half. Within industry,manufacturing is more skewed than constructionin favor of the Southern Region which includes up to 90% of all manufacturingemployees 1/.

1.07 Ownership Pattern. At independence,local entrepreneurshipwas virtually absent and British owned firms dominated the industry. Because of the poverty and the low level of savings in the country, only a few individual Malawian entrepreneurshave slowly emerged in the small scale industry. Most of the industrialinvestment has been contributedby a few larger local enterpriseswith strong Government support and participation,and with complementaryforeign financing: the private holding company Press Holding Ltd (paras 2.13-2.14),the parastatal for crop marketing ADMARC (paras 2.11- 2.12), the publicly owned Malawi DevelopmentCorporation (paras 2.09-2.10)and its trading subsidiaryImport-Export Ltd. (para 2.15). Strengthenedby the profitabilityof their investments,these four companieshave gradually placed the larger part of the industrialsector under majority Malawian ownership, with the major exception of textiles. Through a complex system of interlock- ing participationsand joint ventures, they are now estimated to own more than half of the industrialsector in Malawi.

1.08 Most of the managerial and specializedtechnical positions in the large industriesare still occupied by expatriates,frequently under a technical assistancecontract with a minority foreign partner. In 1977, the 215 industrialfirms with more than 10 employees licensed by the Ministry of Industry were employing 600 expatriates,that is about three per firm or 1.2% of their total employment. The lack of local managerialand technicalskills is an increasingconstraint to industrialdevelopment. The main vehicle for vocationaltraining in industry and commerce, at present, is the Polytechnic of the Universityof Malawi, with a staff of 85 full-time teachers. Apart from its 500 students in University courses, mostly in engineeringand business, it accommodatesan average of 800 students in apprenticecourses (welding,motor vehicle repairs and maintenance,secretarial, etc.) and provides evening classes, in Blantyre and in its two branches, in basic business and industrialskills to about 2,000 students per year. The next three year developmentprogramme of the Governmentprovides for a large increase in education expenditures(from 2.4% of total expenditureto 5%), and places its main emphasis on vocational training in the specialitiesmost needed by the industry: accounting,engineering and management. 2/

1/ Correspondsto all enterpriseswith more than 20 employees.

2/ Indeed, the Polytechnicplans to: (a) start an engineering- Master's equivalent- degree and, (b) prolong the Business degree up to a chartered accountantequivalent. -4-

Government Policies

1.09 General Development Policies. Since independence the Government has applied a pragmatic and consistent industrial policy. Its main principles, set out in the DEVPOL (Development Policy 1971-1980) 1/, are to encourage private investment in industry, support promotion of Malawian entrepreneurhip and place emphasis on a better regional distribution of investments. Strong emphasis has been placed on the need for private, competitive and profitable companies which are viewed as the main motor of growth in industry. To attract foreign investors, Malawi has pursued and publicized continuously since independence a liberal policy allowing free repatriation of profits and, eventually, disinvestments. In view of Malawi's landlocked situation, the priority has focused on the development of industries based on local resources and aiming at self-sufficiency in basic goods (food, clothing, building materials, etc.).

1.10 Licensing. The main control instrument on new investments is the licensing by the Ministry of Industry under the 1966 Industrial Development Act, which applies to all industries employing more than 10 persons or using more than 25 horse-power. Its main purpose is to regulate investments by sector and, in particular, avoid investments: (i) in a few domestic markets already saturated; clothing, metal sheets, (ii) below the minimum efficient scale or (iii) requiring large imports in relation to the value-added. Licenses are seldom denied (11% of applications in 1977) but applicants rather are persuaded to modify their projects. In addition, the licensing system is used selectively to encourage the development of Malawian entrepreneurs.

1.11 Incentives Systems. Industrialists benefit from a wide range of tax and customs duty incentives. They may apply for the following tax deductions which are most often granted automatically: (i) 10% of new plant and equipment costs (ii) all expenditures incurred during the 18 months prior to the start of operations, and (iii) a large initial depreciation at the rates of 10% on buildings and 20% on new plant and equipment. They may also request the following customs duty incentives which are negotiated on a case by case basis: (i) concessionary duty rates on machinery imports for important projects (5% in general and duty free for imports from the Commonwealth and EEC), (ii) variable tariff protection from imports for major investments and (iii) rebates of duties on parts and raw materials imported for further processing in selected industries. This incentives system has been applied selectively and, as a result, the level of protection remains rather limited compared with other developing countries. Indeed, high duty rates exist only in a few sectors: 35% for cotton fabrics and 30% for clothing, furniture and wheat flour. Manufacturers of export commodities are automatically granted a full drawback of duties on parts and raw materials.

1/ DEVPOL is a statement of intent with targets and priorities for development, implemented through three year roll-over public investment programs, revised annually. 1.12 Price Control. The Governmentapplies a flexible and limited price control system. Maximum retail prices are set only for a few essential consumer goods (meat, sugar, matches), but for most other locally manufactured products, the Ministry of Industry issues "recommended"retail prices, which are generally observed although not legally binding. Both controlledand recommendedprices are reviewed regularly in consultationwith the industries. Usually manufacturersconsult with the Ministry before increasingprices and price increases are generally granted if they can be justified by higher costs of production or imports. This rather flexible policy is complementaryto the Government'spolicy limiting wage increases to productivityincreases. It does not, thus, appear to have representedan undue burden on industrialists.

1.13 GovernmentInstitutions. Central Governmentinstitutions exercise a relativelymodest role on industrialdevelopment except in the general formulation of overall policies and through the day to day administrationof the licensing system. The Economic Planning Division at the President'soffice defines the overall planning and policy formulation in the context of the DEVPOL. Its influence on the decision-makingprocess for individualindus- trial projects appears to be, though, rather limited. The Ministry of Trade, Industry and Tourism is the administratorof the licensingand incentives system and, thus, formulatesthe Government'sposition on a license application. In addition it plays a promotionalrole in pushing ideas for the implementationof individualprojects, having, thus, the major influence in the day to day activitiesof the country's industrialsector. Finally, the Ministry of Finance (EconomicAffairs Division) plays the usual - and crucial - role of financialplanning for the specific developmentprojects through its overall control of funding for public institutions,Government bodies and internationalfinanciers.

Recent Developments

1.14 After the initial period of fast expansionMalawi's manufacturing productionhas been hampered by several external factors in the recent years. Table I below shows the evolution of manufacturingoutput: - 6 -

TABLE I

Sectoral Distribution and Growth of Manufacturing Output, 1/ 1970-77

Distribution of Total Output % Annual Output Increases (%)

1970 1976 1970-73 1974 1975 1976 1977 2/ (Annual Average)

Consumer goods Mainly for the Domestic Market:

Food, Beverages, Tobacco 3/ 33 44 19.3 13.4 17.4 5.7 9.7

Textiles, Clothing, Footwear 14 9 4.8 4.3 8.4 (15.6) 14.7

Others 15 15 12.5 23.0 7.0 (5.6) 10.4

Intermediate Goods Mainly for Construction 18 13 13.9 (12.6) 22.2 (18.4) 8.8

Export Industries 20 19 11.3 (4.4) 17.0 11.9 9.2

Total Manufacturing 100 100 13.8 5.8 15.4 (1.0) 10.0

I/ Source: Monthly Statistical Bulletin, October 1977.

2/ Based on the first eleven months of 1976 and 1977.

3/ The increase in the total output share in 1970-1976 is mostly due to surgar processing which NSO includes in this category.

1.15 In 1974, excessive rains for the estate crops caused a decline in the output of export industries, and the disruption of the trading routes between Malawi and the Indian Ocean ports due to the political situation in Mozambique also caused a decline in the output of the intermediate goods industries, more sensitive to supply conditions. As a result, the growth rate of the total manufacturing output fell to 5.8% in that year. In 1975, as the weather improved and trade through Mozambique resumed, there was a strong recovery as indicated by a 15.4% growth rate. In 1976, however, the closure of the border between Mozambique and Rhodesia cut the traditional trading route to Rhodesia and South Africa which accounted together for 36% of - 7 -

Malawi imports in 1975. Manufacturershad to reroute their supplies by air or through the Mozambique ports which became congestedwith the resulting delays in bringing raw materials and equipment. This was compoundedby the foreign exchange crisis which followed the withdrawalof Malawian miners from South Africa. Thus, the total manufacturingproduction declined for the first time since independence.

1.16 In 1977, most industriesappeared to have completed the rerouting of their supplies and resumed normal production,albeit with higher costs of raw materials and inventories. Industrialistswere also reporting shorter delays in processingsupplies through the Mozambique ports than in 1976. These improvementsappear to be confirmed by the manufacturingoutput level registeredduring the first eleven months of 1977, which indicateda 10.0% increase over 1976. The only integratedtextile manufacturerin Malawi, David Whitehead and Sons Ltd., completed its $12.4 million expansionduring 1977, which IFC helped finance with a $6 million loan. The expansionwill increase the company's capacity by 25% to 30 million yards per annum. In addition, the number of licenses - and correspondinginvestments - to new industrialenterprises in the first nine months of 1977, reached already the average annual level of 1975 and 1976. Other indicatorsof industrialactivities like constructionwork and electricityconsumption also show upward trends, indicating that a clear recovery is under way. Finally, the share of transport in total Governmentexpenditures, already substantial- 35% - in the past three years, is brought up to 46% in the DEVPOL for 1978-80, and this effort should inter alia contributeto alleviate constraintson the trade of manufacturing supplies.

1.17 This recovery should be bolstered by a number of importantprojects coming into fruition. The Dwangwa Sugar Corporationis a K59 million sugar developmentproject in Lake Malawi cultivatingabout 13,000 acres. It would create employmentopportunities for some 3,000 people, and, with expected production of 67,000 tons per year, almost double the country'sexisting capacity. Financing agreementswere signed in May 1977 by DEG, EIB, IFC - which provided a $9 million loan - and INDEBANK. The Viphya Pulp and Paper project - costing about K500 million 1/ - is a very importantpulp project in the Northern Region, with a total acreage of about 160,000,and a planned annual capacity of about 180,000 tons of bleached kraft pulp, entirely for exports. Financial arrangementsare being sought by the Government. If they can be negotiated in the near future, it is hoped that the mill would be operational in the early 1980's. Finally, KfW has granted DM 1.2 million to undertake,during 1978, a series of feasibilitystudies to develop industrial opportunitiesin activitiesusing local resources. They are: molasses util- ization, ceramics, tannery and leather-working,motor oil rerefining,knitted fabrics and infusion solutions. The Ministry of Industry also requestedUNDP assistancefor three other feasibilitystudies: productionof furfural from waste materials,of calcium carbide from hydrated lime, and creation of kilns for hand-made bricks. Additional investmentopportunities should result from these studies. This recovery should be sustainedand prospects for further development in the industrialsector are good (para 5.01).

1/ Including infrastructure. -8-

Small Scale Industries

1.18 Definition and Structure. Although there is no legal definition, SSIs in Malawi are understood to refer to any business engaged in manufacturing, processing, assembling or repairing, owned and operated by Malawian private citizens. The emphasis is, thus, put on the personality of the promoter and the type of activity rather than on the size of the unit. How- ever, publications of the NSO classify as "larger" industries those with 20 or more employees, which indicates that enterprises below this limit would then be medium/small size units. The Industrial Development Act of 1966 provides, however, another dividing line since industries which employ 10 persons or more are subject to licensing policies (para 1.10). SSIs would then be generally those employing less than 10 people 1/. There is no definition of what the informal sector would be in Malawi, nor is there a lower limit to differentiate SSI from handicraft activities.

1.19 In reality, most existing SSIs are just emerging from the level of self-employed artisans and rarely employ more than 10 people. No quantita- tive information is available but, on the basis of information on recent SSI financing examples SSIs with total investments above K 50,000 seem to be very rare. Main activities appear to be wood and metal working, garment making and leather working, furniture making, construction materials and light metal products. According to a recent small survey 2/ on 64 SSIs in the Blantyre area, more than half of them (39) are in metalworking/woodworking activities, eight in textiles, seven in automobile repairing, the remaining 10 being scattered among food and paper products and other activities. Investment and employment patterns confirm the main features of SSIs' as they have been described above. Investments per job appear to be below K 1,000.

1.20 Financing of SSIs. There is no established financing scheme in Malawi which specifically caters to SSI needs. Some financial assistance was provided to SSIs in rural areas by the Government under the Government Loans Board, administered by the Ministry of Industry. Further allocation from Treasury are however necessary to maintain the activities of this Loans Board.

1.21 The commercial banks have been providing to a limited extent, short and some medium term credit to SSIs. The National Bank of Malawi (para 2.07), in particular, launched in 1973 a special program for SSI financing. Since

1/ Special regulations exist, however, for textile industries - which are exempted from the licensing system if they employ less than five people - and some categories of metal working, paper confection and other activities, for which the limit is three employees.

2/ The Ministry of Industry circulated questionnaires to more than 100 SSIs requesting the applicants to fill information concerning their activities (i.e. sector, location, number of employees, investment and type of assistance required). - 9 - inception, the scheme attracted over 750 applicants, but only half of the applications were processed. A total of 350 loans totalling K 620,000 has been granted (about K 150,000 per annum average) of which K 484,000 have already been repayed, leaving a K 136,000 portfolio outstanding of over 140 loans at September 31, 1977. Repayment experience has been very reasonable, with less than K 10,000 written off since inception.

1.22 The Commercial Bank of Malawi (para 2.08), although with no special scheme for SSI financing, has an outstanding portfolio of close to K 300,000 of mainly short-term credit to small entrepreneurs, most of them, however, being small holders in the agricultural sector. Repayment experience is also good. No technical assistance is carried out.

1.23 Government Policies and Present SSI Development. DEVPOL 1971-80 states that there should be increased opportunities for Malawian SSIs as development proceeds; reportedly, more emphasis on SSI development will be put during the 1978-1980 review, which is still to appear. In fact, SSI development has not been among the Government's priorities until recently, given the country's setting of its main priorities in agriculture and transportation during its development efforts after independence. The Government has however, decided to put an increasing emphasis on SSI development mostly as a result of its increasing reliance on regional decentralization, employment generating activities and Malawian entrepreneurship.

1.24 SSI development has also been promoted by the recent setting up of two industrial estates: one in the capital city of Lilongwe, as a component of the Government's policy to develop that city, and another one in Liwonde under the aegis of the Import-Export Company (para 2.15). However, no SSI has yet set up on the Liwonde Industrial Estate, while the estate in Lilongwe is moderately successful with 18 SSIs installed at the end of 1977.

1.25 Responsibility for SSI development lies in the Ministry of Trade, Industry and Tourism which receives technical assistance from UNIDO and UNDP. In 1975, a Small Scale Industries Unit was set up within the Industrial Devel- opment Division of the Ministry to propose policies and legislation to promote and to provide technical assistance to SSIs. There are only two Malawian professionals in the unit at present: one senior industrial development officer and one industrial economist seconded by the Economic Planning Division of the President's Office. In addition, Dutch technical assistance provided one SSI expert at end 1977 and another is to join the unit by mid-1978 1/.

1.26 In order to better understand the SSI sector, the Bank and the Government have agreed to undertake a joint feasibility study to gather the basic data and evaluate the situation, needs, constraints and potential for SSI development in Malawi. Terms of Reference for the study have been agreed

1/ Total staff of the Industrial Development Division is eight professionals and recruitment is in progress for four more. - 10 - with the Government. A Bank consultant, together with three local counter- parts (the three existing officers at the Ministry of Industry's SSI Unit, including the Dutch expert) will carry out the study in mid-1978. This should provide the Bank and the Government with enough basic data to allow for an appraisal for an SSI nationwide project, if justified, hopefully during FY 79 1/. The European Development Fund, which has also been approached by the Government for the financing of the eventual scheme, agrees with this proposal.

II - THE FINANCIAL SECTOR

,The Central Bank's Role, Credit, Policies and Interest Rate Structure

2.01 The Reserve Bank of Malawi has the usual powers of a Central Bank and, thus, the authority to prescribe cash ratios and minimum percentages of specific liquid assets to the demand and time liabilities of the commercial Banks. In addition to changing the Central Bank's lending rate and commercial banks' interest rates, credit control has been traditionally effected by way of moral suasion with the banking community. More active, and direct, involvement of the Reserve Bank took place in the second half of 1976 in light of the worsening of the balance of payments situation. Accordingly, compulsory ratios (25%) were established and a stricter definition of liquid assets was implemented. The Reserve Bank can lend to any "statutory corporation or body" 2/ subject to the prior consent of the Minister of Finance, following an amendment of the Reserve Bank of Malawi Act passed at the end of 1976. No major constraint exists in the availability of foreign exchange.

2.02 Domestic credit has been sharply increasing in Malawi in the last few years, by more than three times. This has been the result of credit going to Government to finance larger budget deficits and to statutory corporations. Although this increase in domestic credit has been mostly due to the public sector's borrowings, credit to the private sector has also increased very fast: by 43% in 1975 and by about 30% in 1976. The slower growth in 1976 was a result of the Central Bank measures (see para 2.01) and, at end of March 1977, total credit outstanding had levelled off to the same level as of the end of 1976. In the first half of 1977 the financial developments were characterized by a marked resumption in the accumulation of resources, the continued slow down in the expansion of domestic credit and some building up of reserves (a turnaround from the situation of sharp decline in the fourth quarter of 1975 through 1976).

1/ It is also possible that assistance to rural SSIs could be channelled through the Bank's next agriculture project in Malawi (FY80 or FY81).

2/ Quasi-Government controlled institutions reporting directly to the President of the Country, but enjoying a relatively high degree of autonomy in the management of their day to day operations. - 11 -

2.03 The two principal instrumentsof Governmentborrowings in Malawi are treasury bills (mostlyheld by the commercialbanks and the Reserve Bank) and medium-long term securitiesknown as local registeredstock (LRS), most of which are held by the financial intermediariesand the statutory corporationsbut with the Reserve Bank and the commercialbanks taking increasinglyimportant proportions. In 1976 the Governmentsubscribed its first Eurodollarborrowing, arranged by Chase Manhattan, at 2% above the London Interbank rate (resultingin a final rate of close to 9% in 1977). The issue was oversubscribed. Similar borrowingshave been carried out by other Governmentbodies. Main sources for private sector borrowing are the banking sector, the financial intermediariesand the foreign private financial institutions. The private sector subscribesmarginally to the LRS, representingonly slightly above 10% of such borrowings. There is no stock exchange in Malawi.

2.04 From 1970 to the beginning of 1976 interest rates in Malawi were generally low and unchanged. The Reserve Bank's discount rate was 6% and rates for savings and time deposits were around 4.5-6%, with minimum lending rates of the commercialbanks at 8.5%. A small increase in the commercial banks' deposit rates took place at the beginning of 1976. In November 1976, and in support of the restrictivecredit policies and to further stimulate domestic savings, the discount rate was raised to 7% and the minimum rates of commercialbanks to 10% with their lending rates restrictedto a maximum of 15%. Additional increases in deposit rates, together with those of the New Building Society (para 2.16) also took place. The Governmentaims at main- taining rates at levels conducive to encouraging the growth of savings and investmentswithin Malawi's economy. Deposit rates now range from 5.5% for savings deposits to 8.5% for 36 month deposits,with varying rates in between for call and deposits for different time periods up to 36 months. Lending rates range from a low 8 1/2% for individualhousing loans (up to 15 years) 1/ to a maximum of 15%. The commercialbanks' average lending rates oscillate between 12-13% (charges included). This interest rate structure is coherent with Malawi's monetary objectivesand its present and expected level of inflation. INDEBANK'srates are presented in para 3.27.

The InstitutionalBase

2.05 For a country with limited resources and at a rather early stage of its development,Malawi has a well developed financial system. In addition to the Central Bank (para 2.01) it comprises: (i) two commercialbanks - The National Bank of Malawi (NBM) and the CommercialBank of Malawi (CBM); (ii) a "traditional"development bank - INDEBANK: (iii) eight specializedfinancial institutions,of which six have medium and long-term funds available for development;the Malawi DevelopmentCorporation (MDC), the Agricultural Developmentand Marketing Corporation (ADMARC),the National InsuranceCom- pany Ltd (NIC), the Old Mutual, the New Building Society (NBS), and the i/ ADMARC has lent on occasions,at lower rates for specific projects (para 2.12). - 12 -

Malawi Housing Corporation (MHC), while the other two are of marginal importance - the Post Office Savings Bank (POSB) and the Mercantile Credit Ltd; (iv) one holding group involved in agriculture, industry and trade promotion, Press Holdings Ltd; and (v) a trading company, Import-Export Company of Malawi Ltd.

2.06 Among these institutions, the two commercial banks, INDEBANK, MDC and its subsidiary Import-Export Co, ADMARC, and Press Holdings Ltd are involved in industrial development. Indeed, NBM and CBM provide the typical financial services offered by commercial banks. INDEBANK and MDC are both promoters and term-equity financiers of industrial projects. ADMARC is a source of financing for specific projects but does not promote - nor evaluate - them. Finally, Press Holdings plays solely a promoter's role, and so does the Import-Export Co. A summary of each of these institutions' activities follows.

2.07 The National Bank of Malawi (NBM) is the successor of a series of banking institutions, beginning with the African Lakes Corporation in 1894. In 1971, NBM was reorganized, with Barclay's Bank Ltd and Standard Chartered Bank Ltd keeping a 51% control, and the rest held by Malawian interests. Since 1976, Press Holdings Ltd (para 2.13) owns 57% of the shares, and Standard and Barclays 10% each, with the balance being held by other local interests. With assets totalling Kill million at March 31, 1977 NBM has had a continuously strong performance in the recent years with no write offs for bad debts and an excellent profit record (a 20% dividend is proposed for 1977). Close to 50% of NBM's lending goes to the agricultural sector - of which more than 30% to the tobacco related activities - with manufacturing and trading activities taking close to 30%. NBM has a special program for SSI Development (see para 1.21). The overwhelming majority of NBM's lending is in the form of overdrafts. The Board is chaired by the Managing Director of the Press Holdings Group. Management and extensive experience in commercial banking business is provided to the Board by the representation of Barclays and Standard Banks. NBM trains local staff to assume senior positions; the number of expatriate officers was 36 in 1916, as opposed to 126 in 1971. The bank has a widespread coverage in the country: 12 branches and 59 other offices were operating at mid-1977. NBM's share in the private sector domestic deposits is 70%.

2.08 The Commercial Bank of Malawi (CBM), was founded in 1969 with local interests holding 60% of the shares and the Portuguese Banco Pinto 40%. Since 1974 and following the withdrawal of Banco Pinto, the ownership is as follows: Press Holdings Ltd 40%, MDC 20%, ADMARC 10% and Bank of America 30%. Since that restructuring, CBM has evolved satisfactorily eliminating past accumulated deficits and distributing its first dividend in 1976. As NBM, CBM is princi- pally engaged in financing the agricultural sector, mainly through overdrafts: by mid-1977, 72% of its total lending was in the agricultural sector, 21% in the trade and manufacturing sectors, with the remaining scattered among various activities, including, to a very limited extent, SSI financing (para 1.22). CBM's Board Chairman is the same as NBM's, and its management is also provided by its foreign shareholder. A policy of increasing Malawianization - 13 - is, similarly,being pursued. CBM's agencies network is even more extended than that of NBM; 14 branches (one overseas)and 88 other offices, but, with total assets of about K 40 million at June 30, 1977, CBM's size is slightly more than one third of NBM's. Its share in the private sector domestic deposits is close to 30%.

2.09 The Malawi Development Corporation (MDC) is a statutorybody (para 2.01) wholly Government owned, its shares being held by the Ministry of Finance. It was set up in 1964 to promote joint venture undertakingswith foreign investorsas well as to undertake its own projects deemed of national importanceand within the priorities set up by the country'sDEVPOL. It is today a holding group with a number of subsidiaries(i.e. companiescontrolled - directly or.indirectly - at more than 50%) and associated companies (i.e. with an MDC share of between 20 and 50% plus one seat at the Board). MDC operates mostly through equity investmentsand it lends solely to companies in which it holds shares. Its policy is to take a seat on the Board of the companies it assists - about 40 today - and to provide management to all its subsidiaries. MDC's objective is to develop and promote new project ideas in all productiveactivities, except in the agriculturalsector. MDC does not have any single limit exposure in individual projects nor any minimum or maximum loan amount. It has a staff of 14 professionals,of whom three are expatriates. Some training has been financed by UNIDO.

2.10 MDC is financed by annual equity contributions- and also loans - from the Government,and it has also borrowed from official and private sources, both locally and, since 1973, internationally(Eurodollar borrowings from Bank of America and First National City Bank, with Governmentguarantee at 2 1/4% above the Libor rate). It manages its finances and liquidities on a centralizedbasis and, as a result, there are a number of intergroup transactions. Total amount of loans and equity investmentsby MDC was around K 1 million per annum until 1976 but rose dramaticallyto above K 4 million in 1977, (mostly on account of a few rather large projects). Projec- tions call for average yearly approvalsof K 3 million in the coming years. Close to 60% of MDC's operationsare in the manufacturingand agroindustrial sectors, slightly above 10% in tourism, the rest in commerce and service activities. Most of these are medium-largescale industries. MDC's involvement with SSI has been nil, following a reportedlybad financingexperience in its early years of operationsbut mostly because of its lack of adequate funds for SSI financing and staff constraints. At end 1976, MDC's total assets were about K 14.3 million and the group's consolidatedsituation totalled K 44 million.

2.11 The AgriculturalDevelopment and Marketing Corporation (ADMARC), was establishedin 1971 as a statutorybody with the objective of promoting the volume of exportablecrops from Malawi by improving the standards of the country's agriculturalproduction, providing an efficient system for the purchase of crops produced by small farmers, marketing the main agricultural export crops, and developing agro-industrialenterprises. ADMARC, which took over the responsibilitiesof the earlier Farmers' Marketing Board, admini- stratively depends on the Ministry of Agriculture and Natural Resources and - 14 - has an extensive network of more than 760 branches throughout the country including three regional offices and four divisional offices. Most of these branches are depots and buying markets for the main crops traded by ADMARC: tobacco, cotton, groundnuts, maize, cassava and rice being the most important. ADMARC's minimum guaranteed buying prices are fixed in consultation with Government at levels supposedly consistent with world commodity market prices and with the need to provide adequate stabilization funds to protect the farmer from market price fluctuations.

2.12 With total assets of K 84 million at March 31, 1976, ADMARC is the single largest non-banking institution in Malawi and the country's most important foreign exchange earner. It employs more than 15,000 people (of Which 1/3 seasonal) at the peak season. Most of ADMARC's resources are self- generated funds, coming from the substantial profits made by its operations (annual profits of K 8.5 million average in 1975-76). Additional resources come from the Government and Central Bank's borrowings and an outside Euro- dollar borrowing from Chase Manhattan for onlending to the Press Holdings Group (para 2.14). Of ADMARC's total portfolio of K 39 million at March 31, 1976, close to K 25 million were made to Press Holdings. Outside Press Holdings, ADMARC's involvement in the industrial sector mainly relates to the growing agro-industrial activities, but there are also a few investments in a cement factory, a shoe manufacturing and in the two commercial banks and most of the country's other financial institutions (MDC, INDEBANK, Malawi Housing Corporation etc). Although in its agricultural activities, ADMARC deals predominantly with smaller farmers, its industrial operations have been to medium/large firms and no financing of SSIs has ever taken place so far. ADMARC's investment policies are subject to Government directives and the institution - which has no appraisal capabilities - tends to invest its surpluses at the specific request of the Government.

2.13 The Press Holdings Ltd. The origin of the Press Group, a substantial - highly diversified - holding company, is the creation in 1960, of the Malawi Press Company, mainly to publish the "Malawi News" as the publicity instrument of the Malawi Congress Party 1/. In 1969 it converted itself into a private limited holding company whose shares are registered under the name of the President who keeps them "in trust for the people of Malawi". The group has developed rapidly into an important conglomerate with a very diversified outlook: It has now 15 subsidiaries - of which 14 are wholly owned - and 23 associated companies (in which the group holds non-majority interests) active in agriculture (the Group produces about 20% of the country's flue-cured tobacco and 40% of burley tobacco, and is heavily involved in ranching), industry (textiles, wood making, agro-industries, construction materials), wholesale and retail trade (also of petroleum and petroleum products), real estate, transportation and banking and insurance underwriting. The group's consolidated balance sheet at December 31, 1976 shows assets of K 69 million.

1/ Malawi's sole political party. - 15 -

2.14 The Press Group's policy is to take equity investmentsand identify, implement and develop its own projects. It has recently started to develop its appraisal capabilitiesand has establishedgood relationswith both MDC and INDEBANK,on whom it traditionallyrelied for appraisalwork. Sales of the subsidiariestotalled close to K 37 million in 1976 (with net profits close to K 4 million). The substantialprofits generated are reportedlybeing reinvestedwithin the group. Additional resources for Press come from local (ADMARC, commercialbanks, financial institutions),and foreign borrowings (Bank of America, Commerzbank). Press does not thus, receive direct financial support from the Government.

2.15 The Import-ExportCo. of Malawi, was created in 1975 as a subsidiary of MDC (51%), with Press Holdings owning the remaining 49% of its capital. It is mainly a trading company and has two monopolieson imported items (second hand clothing and light gauge iron roofing sheets) and three monopolieson locally manufactureditems (sugar, matches, and agriculturalhoes). In these cases, the prices are subject to Governmentcontrols but, in all other mer- chandise activities, it operates in a competitivemarket. In addition, it has leased from MDC an industrialestate at Liwonde, is capable of offering purchasing and marketing assistanceand it has a substantialtraining program for its employees,hoping to expand these activitiesto include the training of Malawian businessmenand their staff. The company, with its four subsidiaries, had total sales around K 34 million in 1975/76. Assets were K 15.2 million according to the consolidatedbalance sheet at December 31, 1976. The company is organized into five divisions. The two main ones take care of: (i) trade in general (ChipukuWholesale stores: 59 depots and K 25 million annual turnover in basic consumer goods) through which it is implementingthe Government'spolicy to replace the Indian traders in the rural areas by Malawian businessmen;and (ii) marketing services, through mobile vans, selling about K 9.5 million per annum worth of more sophisticatedinterna- tional brands of imported products. The remaining three divisionshave marginal importance. They deal with: (iii) pharmaceuticaland related products (through its subsidiaryMalawi PharmaciesLtd); (iv) imported motor vehicles (through its subsidiaryMalawi Motors Ltd); and (v) radio and electrical equipment also providing services and repairs.

2.16 Finally, the National Insurance Company Ltd (NIC) and the Old Mutual are insurancecompanies. The New Building Society (NBS) and the Malawi Housing Corporationprovide funds for residential,low and modern cost housing development, and the Post Office Savings Bank (POSB) and Mercantile Credit Ltd are two small private financing institutionslending to Government and financing hire purchase activitiesrespectively. Accounts of these institutionstogether with annual reports and accounts of those described in paras 2.07 to 2.15 above are available in the Project File. - 16 -

III - THE INVESTMENT AND DEVELOPMENT BANK OF MALAWI LTD (INDEBANK)

Background, Structure and Role

3.01 INDEBANK was established as a private limited company incorporated in December 18, 1972 under Malawi's Companies Act 1/. It operates as a traditional development bank set up to promote, finance and expand commercially viable development projects of value to the economy of Malawi in the agricultural, industrial and commercial and other sectors, sponsored by private or public investors. Particular focus is to be given to projects sponsored and partly financed by Malawian interests but, on unwritten instructions by the President, it is prohibited from financing projects sponsored by Government Ministers, Chairmen of Statutory Corporations and Senior Executives of the Malawi Congress Party. In addition, projects promoted by foreign owned companies have to prove that they cannot raise financing overseas and, prefer- ably, that a local partner is going to be found.

3.02 Basic functions are laid down by the Memorandum and Articles of Association; the institution is widely allowed to carry out all borrowing, investment, and lending activities with the objectives above mentioned. INDEBANK does not have any branch office and its headquarters are in Blantyre. By 1980, however, it plans either to move the head office to the capital city of Lilongwe or open a branch office there.

Ownership

3.03 INDEBANK's promoters, and its present shareholders, are ADMARC (paras 2.11-2.12) and three bilateral development agencies, the Commonwealth Development Corporation (CDC), the Deutsche Gessellschaft fur Wirtschaftliche Zusammenarbeit (DEG), and the Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO). INDEBANK's authorized share capital is K 4.5 million, of which K 3 million have been issued equally (25%) to each of the shareholders. Both concerning its ownership and its operational procedures INDEBANK is similar to the Development Finance Company of Kenya (DFCK) and the Tanganyika Development Finance Company (TDFL), in Tanzania.

3.04 The contractual agreements defining the Government, the sponsors and the institution's rights and obligations are set up in the Finance and Cooperation Agreement signed in December 30, 1972 by the Government of Malawi, INDEBANK, and its shareholders. This agreement defines: (i) the partners' general objectives in creating INDEBANK, (ii) the procedures governing the creation of shares and income notes (paras 4.09 to 4.13), (iii) the arrangements for the company's first General Manager and the management and technical advice to be provided by the shareholders, (iv) the

1/ The British Companies Acts 1900 and 1913 as applied to Malawi by the Companies Act (Cap. 46:03). - 17 - obligationsof INDEBANK and those of the shareholders,and (v) the tax and repatriationadvantages given by the Governmentto INDEBANK and to its shareholders.

Policies

3.05 INDEBANK'sInvestment Policy Principlesare contained in the Annex to the Finance and CooperationAgreement mentioned above, as amended from time to time by special resolutionof the Board. This prerogativehas been often used and, over time, a set of regulationshave defined in a very precise way these policies.

3.06 The objective of the company is to assist in the developmentof Malawi's economy while being viable on its own account. Refinancing is consideredonly in special circumstances. No investmentin infrastructure projects will be made but all other sectors are to be consideredwhile attempting to diversify investmentsas much as possible both geographically and sectorally. Financing for existing or new projects is to be made available in the form of equity and medium and long term loans, subject to an overall limit on the proportionof shareholdingsset by the Board (currently at one third). No managementresponsibilities will be normally accepted.

3.07 Sponsors are expected to put up 25% of total project's cost and INDEBANK will not normally provide more than 35% of the total equity needed by the project. Each investmentby INDEBANK must make a significantcon- tributionto the capital cost of the project and no token investmentswill normally be made. Loans are limited to a maximum amount which was increased in March 1978 from K 600,000 to K 1,000,000in view of the increasingequity base of the institution. In case of projects of particularnational importance, lending above this maximum is left to the Board's discretionon a case by case basis.

3.08 Although INDEBANK'sgeneral policy principlesare in accordance with Bank policies regarding lending through financial intermediaries,it was necessary to have these policies incorporated- in a summarizedway - in a document which would constituteINDEBANK's Policy Statement. At negotiations INDEBANK presented such a Policy Statement in a satisfactoryform and its Board has approved it. INDEBANK further agreed that its new Policy Statement will not be changed without the Bank's consent.

3.09 For the purpose of the Loan Agreement with the Bank, INDEBANKagreed to have a limit on its total exposure by project related to INDEBANK'sown equity, which would not need to be revised as the institutiongrows. This limit was set at 25% of INDEBANK'sequity to give due considerationto the institution'sspecial financial structure,and, particularly,to the nature of income notes (paras 4.09 to 4.11). This limit should satisfactorilyhelp INDEBANK to keep a sound and well diversifiedportfolio, without unduly limiting the company's possibilitiesto finance relativelyimportant projects.

3.10 Concerningthe question of INDEBANK'sfinancing above K 600,000 for projects of particularnational importance,the Board has been somewhat - 18 - restrictive in the application of the cases of particular importance. InAeed, INDEBANK has, so far, invested more than K 600,000 in two projects; (i) two loans of K 0.9 million and 0.3 million were made to General Farming in 1973 and 1977 respectively (total loans outstanding to the company at September 31, 1977: K 1.2 million) and (ii) a K 1 million loan was made to the Dwangwa Sugar Processing Company in 1976. These two projects are both ilalawian controlled and fully export oriented. General Farming grows flue-cured tobacco and maize; it is one of the largest flue-cured tobacco growing organization in the world and it profitably produces 20% of Malawi's flue-cured tobacco, the country's main domestic export commodity (45% of total exports). Dwangwa Sugar is a very important export oriented sugar growing project (para 1.17). In addition, two other companies, - publicly owned - each received two successive loans totalling more than K 600,000; Grain and Milling (maize and wheat milling) and Malawi Housing Corporation (low cost Housing); these loans are guaranteed by ADMARC and the Government respectively.

3.11 In spite of this satisfactory performance and independence of views, and to safeguard the institution's financial soundness, INDEBANK was requested to obtain a Government guarantee in all cases for the part of its financing exceeding its normal exposure limit (25% of equity), and INDEBANK agreed to this condition during negotiations.

Board of Directors and Management

3.12 Under the Articles of Association each shareholder or group of shareholders holding shares having a total value above K 200,000 has the right to appoint two directors to the Board (list in Annex 1). ADMARC's Director is the Chairman of the Board. The foreign shareholders have usually opted for having one Director coming from headquarters and appointing a local businessman as alternate Director.

3.13 The Board meets about four times a year and is responsible, under Lhe Articles of Association, for the Management of the Company. These powers have been delegated to the General Manager, subject to Board guide- lines on matters of policy, under the Finance and Cooperation Agreement between INDEBANK's founding shareholders (para 3.05). INDEBANK's Directors take a very active interest in - and contribute substantially to - the development of the company, striking a very well balanced equilibrium between local - "in situ" - experience and views from the institutions' headquaters. Their major contribution is, thus, one of quality control over INDEBANK's activities although they also provide new ideas and, more precisely, technical assistance in project and general matters. In conjunction with IFC's proposed equity investment (para 6.09), INDEBANK invited IFC to participate on its Board by appointing a Director.

3.14 INDEBANK's General Manager, who is not a member of the Board, is a CDC staff member provided by the institution since the time of INDEBANK's creation. Under his aegis, INDEBANK has sailed through its first - difficult - years, and has achieved a solid reputation and a strong financial base. How- ever, his contract expires by mid-1979 and it is clear that, unless specific - 19 - arrangementsare made soon to provide for his efficient replacement,his departureat that time would be disruptivefor the institution. INDEBANK's Board decided in December 1977 to appoint, as soon as possible,an experienced Controllerof Project Investigationswho would be responsiblefor coordination of project evaluationwork and deputize in the absence of the General Manager. INDEBANK, in consultationwith the Bank, is looking for a suitably qualified person to take up this post.

3.15 During negotiations,the Bank was informed that INDEBANK,under Government'srecommendation, was able to appoint a Malawian General Manager- Designate in April, 1978, who will work with the General Manager, undergo some specific developmentbanking-oriented training programs, and succeed the incumbent in mid-1979. The new appointee has occupied various high-level Government positions and was General Manager of the Reserve Bank of Malawi prior to this appointment. In this context, the early recruitmentof the Controller of Project Investigationsshould provide for managementcontinuity and strengthen the control and coordination of INDEBANK's project evaluation work during this transition period. The recruitment of an experienced Con- troller of Project Investigationsis a condition for effectivenessof the proposed Bank Loan. The foregoingmanagement arrangements are satisfactory.

Staff and Organization

3.16 INDEBANK'sorganization chart is attached in Annex 2. Given the company's size, INDEBANK's organization is a relatively simple one: it is divided in two parts, one dealing basicallywith the evaluationof projects and the other taking care of financialand administrativematters. The two Project InvestigationDepartments are responsiblefor the promotion,identification and appraisal of the agricultural,and industrialand other projects respectively. The FinancialAdviser is responsiblefor reviewing the financial aspects of the appraisalsprepared by the projects departmentsand for the - case by case - follow-up of projects. It advises also the General Manager on specific aspects of the company'sfinancial policies. The Account- ing Department carries out the accounts and general administrativematters. In addition it serves the Board as a secretariat. INDEBANK'sorganization is well adapted to the needs of the institutionat its present stage.

3.17 INDEBANK'sstaff totalled 16 at end November 1977, of which 10 are professionals. Four professionals,including the General Manager, are expatriates. The two Project InvestigationManagers, are provided by Dutch and German Aid. INDEBANK'sstaff is, overall, of good quality and with solid academic backgroundsbut still rather inexperienced. With the exception of the General Manager, only 4 professionalshave been with the institution for more than one year, and the remaining five for less than six months. INDEBANK'spolicy is to progressivelyrecruit and train Malawian nationals; two Malawian professionalshave received overseas training.

3.18 In order to be able to process the increasedlevel of operationsand to provide for a solid base for the future, INDEBANK plans to hire an additional Projects InvestigationManager to start technicalanalysis of projects - 20 -

(para 3.21). In addition, and to diminish gradually the institution's depen- dence on expatriates, its Board has agreed to accelerate both the hiring of additional Malawian staff and its training. It has consequently undertaken to hire 5 more Malawian professional staff before the end of 1978; two in the proposed technical department, two for supervision work (para 3.25), and one in the accounts department. Furthermore, INDEBANK's Board has also undertaken to train overseas two Malawian professional staff per annum and has requested Bank's help to do so. Development banking courses in England, Ireland and India, management courses in US, project evaluation courses at the CDC's Agricultural Training Center in Swaziland, and training periods in development banks in the area with experience relevant to Malawi's (Mauritius and Kenya) are amongst the concrete possibilities envisaged.

3.19 During negotiations, INDEBANK confirmed to the Bank the undertakings defined in para 3.18. The recruitment of the new Projects Investigation Manager and the identification and agreement to recruit the five Malawian professionals are conditions for effectiveness of the proposed Bank Loan.

Procedures

3.20 Appraisals. Preliminary screening of all serious applications is made by the General Manager. A particular feature of project processing is that, once a project is found worth studying, a clearance in principle is required from the shareholders before formal appraisal is undertaken, to ensure that the projects proposed do not contravene the principles of the shareholders. Clearance is provided on a no-objection basis in a maximum delay of one month after reception of the request. In practice, INDEBANK never waits for the month to start studying projects and no clearance in principle has ever been refused. This procedure has, thus, never been a limiting factor and, in practice, it has just a formal nature and does not detract unduly from the institution's independence.

3.21 Although investment decisions have generally been taken on a sound basis, the overall quality of INDEBANK's appraisals could be improved. Indeed, there are a few weaknesses: (i) a rather sketchy and summarized presentation which does not usually offer all the information accumulated through the appraisal process, (ii) some lack of coordination between the market, financial and other aspects, (iii) no evaluation of the projects' technical aspects, which is exclusively dependent on outside consultants, or promoters' views, and (iv) no formal economic evaluation of projects is made. The hiring of INDEBANK's Controller of Projects Investigation with specific responsibility for appraisal coordination (para 3.14) would remedy the weaknesses described in (i) and (ii), while the hiring of the new Projects Investigation Manager (para 3.18) will permit to develop the technical aspects of INDEBANK's appraisals. Also, with the help of the Bank, INDEBANK's General Manager is preparing an "appraisal manual" which should consolidate procedures and have an additional beneficial impact on its future quality. During negotiations, INDEBANK agreed to formally focus on the economic aspects of the projects it finances and undertake to calculate economic rates of return, at least for import substitution projects. - 21 -

3.22 Promotion. Since its inception, INDEBANK has played an effective catalytic role by putting together proposals emanating from the Press Group, MDC and its subsidiaries, the Government - and some of its own - and bringing in foreign investors and technical expertise into the country. Most of INDEBANK-financed projects have these features. In addition, and since 1976, three projects have been wholly promoted by INDEBANK: a project for feeding cattle for slaughter with cane-tops, a plant for moulding plastic bottles and a pension scheme for medium-income people (INDETRUST); the latter, a wholly- owned subsidiary of INDEBANK, would contribute to local resource mobilization and provide a market for INDEBANK's selling its shareholdings in the long term. 1/ These complete promotional efforts started after the institution achieved its priority goal of creating a sound portfolio and financial structure. Having achieved this goal, INDEBANK plans now to be more aggressively involved in ptoject promotion by reinforcing - and even institutionalizing - its collaboration with MDC and with the Press Group. The hiring of the Controller of Projects Investigation should free INDEBANK's General Manager and the Projects Managers from some of their appraisal tasks and allow them to develop promotional activities in line with these policies.

3.23 Disbursements. INDEBANK's disbursement procedures are adequate. They are made on the basis of the predetermined investment program for each project and upon presentation of invoices, once the sponsors's equity funds have been fully used. Control of these disbursements is the responsibility of the Accounts Department which checks that all preconditions have been - and continue to be - met in accordance with the legal agreements, which have been prepared by the Company's lawyer 2/.

3.24 Procurement. Although INDEBANK does not have special rules regarding the source of supply for equipment, competitive quotations are always required. All possible steps are taken to ensure that plant and equipment are acquired from the cheapest source in relation to the quality specifications of the project. This has been hampered in the past by the lack of engineering staff but, in some cases, outside consulting engineers

1/ Following a request made by the tea industry, INDEBANK set up this pension fund -- INDETRUST -- which, turned out to be potentially applicable to all non-Government employees. The rationale for the creation of such a fund stems from the lack of any national pension scheme in Malawi together with the wish to start a simple mechanism of capital accumulation. The fund has been set up as a subsidiary of INDEBANK and will be managed by an insurance broker, who will, thus, carry all the administrative work involved. Investments to be made with INDETRUST's resources will be decided by INDEBANK's Board. With rather modest amounts (K 100,000) estimated available for investments in 1978/79, the proposal could, in the longer run, represent an addition to the local resources mobilized by INDEBANK.

2/ Sacranie, Gow and Company, a Malawian firm handling, among others, IFC's investments in the country. - 22 - have been engaged, with the concurrenceof the project sponsor, to advise INDEBANK. The recruitmentof the Project InvestigationManager to develop technical evaluationsshould also improve this aspect of INDEBANK'swork. Overall, procurementpolicies are acceptable.

3.25 Project Follow-up. Supervisionof projects is handled by the Financial Advisor but, because of their special nature, agriculturalprojects are followed up primarily by the Projects InvestigationManager for agriculture projects. Also, supervisionis done through INDEBANK'srepresentation at the Board of its clients. Reports on the performanceof every project financed by INDEBANK are submitted at each Board Meeting. However, because of staff constraintsand the resulting scarcity of formal supervisionvisits, INDEBANK has been mainly relying on informationregularly provided by its clients and reporting to the Board has tended to focus on those few projects encounteringspecific problems. Given the general soundness and relatively small size of INDEBANK'sportfolio, the procedure followed until now has proven to be adequate. However, with the developmentof INDEBANK'soperations, supervisionwork needs to be extended and made more systematic. Two Malawian professionalsfor this departmentwill be recruited (para 3.18), and the new Project InvestigationsManager will contributeto technical supervisionof projects under construction,which is practicallynon-existent today. In addition, and with Bank's help, INDEBANK'smanagement is preparing a "Super- vision Manual", which should help institutionalizeprocedures.

Terms and Conditionsof Loans: Interest Rates

3.26 INDEBANK'sloans are not normally made for less than three years and in any case, no longer than the economic life of the main assets which secure the project; usually between 9 and 12 years for industrialprojects including an appropriategrace period. Adequate securitiesare taken in the form of secured debenturesand INDEBANK'sposition as a lender will not usually be subordinatedto that of any other lender.

3.27 INDEBANK's interest rates vary depending on the type of loan, its duration, risks and security offered. Loans in the industrialsector are made at 10.5%/11%,while those in the purely agriculturalsector at 9.5%, and those for commercialand real estate activities,at a minimum of 11%. A few low cost housing loans were made at 9% in the past but no such operationswill be made in the future. INDEBANK will not normally lend at a rate lower than that of other lenders for equal terms. A commitmentfee of 0.1% per month is charged on undrawn balances of the loan and, on occasion, a study fee of 0.5% will also be charged. The weighted return on INDEBANK'sportfolio during 1977 was 10.3%, as compared with a weighted average interest payable on its outstanding borrowingsof 8%, leaving an average interest spread of 2.3%, which is adequate given the institution'slow leverage. The level of INDEBANK's interest rates is consistentwith the country's interest rate structure (para 2.04) and is - and will be - positive in real terms when compared with the projected average inflation rate of 8-9% for Malawi in the coming years. Up to end 1977, INDEBANK'sresources, both in equity and in income notes, have been denominated in Malawi Kwacha. INDEBANK'slendings in foreign exchange - 23 - started with a line of credit from EIB (para 4.08). The foreign exchange risk associatedwith it will be passed on to INDEBANK'sborrowers. INDEBANK,as a policy, will pass on to its clients the foreign exchange risk on its foreign borrowings,which is satisfactoryand consistentwith the policy of those other institutionsin Malawi lending in foreign exchange 1/.

Auditors

3.28 INDEBANK's annual accounts are audited by Deloitte Haskins and Sells, a firm of internationalrepute and world-wide coverage. INDEBANK's auditors have agreed to follow in the future the Bank's IllustrativeForm for Audit of DevelopmentFinance Companies. Auditing arrangementsare, thus, satisfactory. INDEBANK confirmed its agreement to retain competentauditors and to submit audited accounts to the Bank three months after the end of the year. A clean opinion on INDEBANK's accounts at December 31, 1977 has been received by the Bank.

IV. OPERATIONS AND FINANCE

Operations

4.01 From its inception in December 1972 until December 1977, INDEBANK has approved 29 loans and 13 equity investments in 31 projects, for a total of K 12.9 million, 87% in loans and 13% in equity, and has disbursedalready K 10.9 million. A summary of INDEBANK's operations is presented in Annex 3; INDEBANK's operationsreached a substantiallevel in its first year but have remained roughly constant thereafterwith total approvals averagingK 2.6 million per year during 1973-1977. INDEBANK had adopted a prudent policy adapted to the country's temporaryeconomic difficultiesand in view of its limited economic resources. It, thus, placed priority on establishinga solid portfolio in low-risk investments,rather than on growth. Consideringthat INDEBANK had no more than 7 professionalsuntil 1977, its volume of approvals indicates a good staff productivitywhich compares favorablywith most development banks at the same stage of development. In addition, INDEBANK has an unusually good record in processing projects rapidly. The lags between approval and commitment and between commitment and full disbursementaverage 4-1/2 and 5 months respectively.

4.02 Project Size and INDEBANK'sfinancing. The projects approved by INDEBANK in 1973-1977are listed in Annex 4 and their characteristicsare analyzed in Annex 5. By far the largest is the new Dwangwa Sugar project, with a total cost of K 59 million (para 1.17). When excluding this project, the total project cost averages K 2.1 million. Projects with a total cost

1/ Edesa, the Swaziland-basedSouth African Group, has loaned at 10.5% plus foreign exchange risk. The same goes for MDC's financingswith its Eurodollarborrowings (para 2.10). Supplierscredits are not a significantsource of financing. - 24 - between K I million and K 6 million account for 81% of the amount approved. Most of INDEBANK'sapprovals of loans and equity investmentsrange between K 200,000 and K 600,000,with 40% of total amounts investedbetween K 400,000 and K 600,000, and close to 30% between K 200,000 and K 400,000. Indeed, INDEBANK's total investmentper project averages K 415,000 and represents a rather normal share of 20% of total project costs (excludingthe Dwangwa project).

4.03 Project Ownership. INDEBANK'sapprovals reflect the general interlockingpattern of ownershipin Malawi (para 1.07). Press Holdings, ADMARC and MDC together have major shareholdingsin two-thirdsof the 28 companies financedby INDEBANK to date. ADMARC is a frequent shareholder in agriculturaland agro-industrialcompanies and MDC in industrialand commercial companies,while Press Holdings is present in all sectors. The total share capital of all companies1/ is distributedapproximately into 28% from Press Holdings, 16% from MDC, 7% from ADMARC, 6% from INDEBANK, 8% from other local partners,mostly public corporations,and 34% from foreign investors. Overall projectsunder majority Malawian ownershipare largely predominantand account for 79% of total amounts approved by INDEBANK. Less than 20% of INDEBANK'sapprovals have been to fully Governmentowned corporations.

4.04 EconomicCharacteristics. Projects using primarilylocal raw materials are predominantand account for 78% of the amount of approvalsto date. The proportionof new projects as opposed to expansionsis relativelysmall but it increasedfrom 40% of the amount approved in 1973-1975to 54% in 1976-1977,following the start of INDEBANK'sinvolvement in project identification (para 3.22). Despite their relative large size, INDEBANK'sinvestments are reasonablylabor-intensive and show an average investmentcost per job of $13,000,notably below the overall average of about $25,000 observed among other African developmentbanks. The FRR, calculatedfor a sample of INDEBANK's projects show that they average about 24%. No ERR is calculated. The total amount of approvals is rather well distributedamong three main sectors: 54% in industry and agro-industry,19% in pure agriculture(mostly tobacco growing - 16%) and 17% in commercialbuildings and housing. INDEBANK'sBoard has decided to monitor closely the relative concentrationin the tobacco sector and to maintain the share of investmentsin commercialbuildings and housing below 20%. The foreign exchange component in INDEBANK'sprojects, can be estimated at about 60 to 65% of total project'scost, on the basis of an analysis of a representativesample of its projects financed.

1/ Excludingthe large Dwangwa Sugar Corporationin which local shareholders are ADMARC (39%) and Press Holdings (20%). - 25 -

Financial Condition

4.05 Portfolio. As of December 31, 1977, INDEBANK held a portfolio of K 9.6 million 1/ of which 82% were loans and 18% equity investments (Annex 6). Projects in the portfolio reflect with a slight lag the main characteristics of approvals; apart from a moderate concentration in tobacco growing (19% by amount), the portfolio is well diversified among a variety of industrial (17%) agro-industrial (43%), commercial buildings and housing (12%) and other activities (9%). Out of the 27 projects in the portfolio, two-thirds are already completed and only three (10% by amount) are causing some concern: Grain and Milling Ltd., (wheat overstock and competition of subsidized European flour), Malawi Pharmacies Ltd., (slow-growing market and high rent of premises) and Capital Hotels (low occupancy until the new capital city develops). These three loans were guaranteed by ADMARC, MDC and CCDC respectively, and INDEBANK has been following them up closely and providing advice to management. Apart from these three, companies operating in INDEBANK's portfolio all made profits in FY1976 and one third of them, accounting for 29% of portfolio amount, showed net returns on equity above 20%. Overall the quality of INDEBANK's portfolio is good and ranks above average among African development banks.

4.06 Loan Portfolio. Since its inception, INDEBANK rescheduled loan principal repayment in three cases: by two years for the industrial estate in Lilongwe due to a deferment in the building program, by one year for a brewery which needed to build up its stocks after the Rhodesia- Mozambique border closure, and by six months for a corrugated steel manufacturer due to a delay in machinery delivery. All three companies are now in a good position and are paying interest regularly. The brewery started principal repayments. As of November 30, 1977, eight loans, representing 33% of total outstanding loan portfolio, had commenced repayment periods but INDEBANK had no interest or principal arrears on its loan portfolio. Prospects for interest and principal collections are good.

4.07 Equity Portfolio. INDEBANK has earned a regular and high dividend income from its investments; in 1976-1977, the return on the equity portfolio averaged up to 12.5% per annum. Dividend prospects appear good.

Resources

4.08 The four shareholders (paras 3.03 to 3.04) have provided pari passu all INDEBANK's resources through 1977. On a need basis, they contributed to an increase in the paid-up share capital in each year and followed each increase by the disbursement of a threefold amount in income notes, a peculiar form of longterm debt (paras 4.09 to 4.11). As of December 31, 1977, INDEBANK had withdrawn K 2,840,000 in share capital and K 7,350,000 in income notes,

1/ According to the actual figures at September 30, 1977 and the scheduled account movements of the last quarter of 1977. - 26 - and its shareholders were committed to complement these amounts to K 3 million in share capital and K 9 million in income notes during 1978. In addition, INDEBANK applied successfully for a loan of K 3 million equivalent from EIB, which was signed in November 1977. The use of this loan is restricted to finance INDEBANK's loans in industry, mining and tourism but excluding agriculture. It carries an interest rate of 5.05% which will leave to INDEBANK a substantial spread on its loan income (para 5.13). Annex 7 presents INDEBANK's resource position at December 31, 1977 which shows that, at that time, INDEBANK had K 2.3 million available for new commitments.

4.09 Income Notes. INDEBANK's sole borrowings prior to EIB have been the income notes subscribed by its shareholders. The nature and conditions for ,the subscription of income notes, are described precisely in the Finance and Cooperation agreement (para 3.04). All income notes are convertible into ordinary shares, at par, at the option of the holders. Interest rate is fixed at 8% but this payment depends on INDEBANK's capacity to pay interest out of profits and is, thus, to be made only after deduction of administrative expenses, provisions for losses and write offs (as determined by the Auditors), depreciation, and interest payments on loans received by INDEBANK other than income notes. Since its operating margin has been satisfactory, INDEBANK has been paying 8% on its income notes since inception.

4.10 The income notes, which are unsecured, are to be repaid by INDEBANK in the year 2020 but no precise form under which this repayment is to take place has been defined. It is assumed that, at that time, the income note holders would decide on converting them -- totally or partially -- into equity. However, certain features of the income notes allow the shareholders to request repayment prior to 2020 from INDEBANK which, if exercised, could clearly impose a major financial burden on INDEBANK. Such features were introduced by INDEBANK's shareholders, inter alia, as a leverage to ensure that the company carries out its business -- and is permitted to do so -- in a manner consistent with the objectives subscribed to at the time of INDEBANK's creation. Given this rationale and the composition of INDEBANK's shareholdings it is clear that the shareholders' Governments have a moral commitment to support INDEBANK and to ensure its financial viability under any foreseable circumstances.

4.11 In order to protect, nevertheless, its legitimate interests, the Bank should be in a position to ask for early repayment of its loan to INDEBANK if a shareholder envisages a similar action. To this end, a financial covenant has been added to the usual negative pledge clause in the proposed Loan Agreement, whereby INDEBANK will notify the Bank as soon as it becomes aware that an early repayment will be required. INDEBANK agreed to that covenant at negotiations.

Operational Performance

4.12 Financial Position. INDEBANK's financial statements in 1973-1977 are summarized in Annexes 8 to 10. INDEBANK's total assets have increased at an average rate of 26% per year since 1973 to K 11 million in 1977. The - 27 - shareholders'policy of accompanyinggradual increases in the paid-up share capital by threefoldpayments of income notes has maintained a reasonable leverage of debt over equity. INDEBANK's liquidityposition in 1977 was satisfactorywith a current ratio of 1.7:1. To cover possible future losses on investmentsINDEBANK has included no provisions in its expenses to date but has limited dividends to 75% of its profit after tax to keep sufficient levels in its general reserve, now amounting to about 1% of total portfolio.l/ Specific provisionsfor projects in difficultieswould, nevertheless,be made above these levels on a case-by-casebasis. This practice is acceptableand adequate for the time being in view of the portfolio quality and its relative youth (paras 4.05 to 4.07), but it had not been formally defined. However, for the future, INDEBANK agreed at negotiationsto specify its provision policy as a covenant to the proposed loan, emphasizingthat (i) at least 25% of the profit of each year will be accumulatedin a non-distributablegeneral reserve, and (ii) in addition, specific provisionswould be deducted from its profits or its general reserve to cover the investment risk on specific projects in difficulties. Overall, INDEBANK has shown a proficientfinancial management and its financial position is satisfactory.

4.13 Profitability. Despite its youth, INDEBANK certainly is one of the most profitable DFCs in Africa. Net earnings before tax have increasedat an average rate of 70% per year and reached K 291,000 in 1977, i.e. a return of 11.7% on average equity. After tax, net earnings in 1977 amounted to K 154,000- i.e., a return of 6.2% on equity. Administrativeexpenses have decreased regularly from 34% of total expenses in 1974 to 23% in 1977. Dur- ing the last three years, the return on portfolio equity investmentsaveraged 10.3%. As a result of this high profitability,dividend payments started in 1975 and amounted to an average retVrn of 3.9% on equity in 1975-1977. The most relevant ratios applicable to INDEBANK's financial statements in 1973-1977 are presented in Annex 11.

V. PROSPECTS

IndustrialDevelopment

5.01 Prospects for industrial developmentin Malawi are good and they appear to support further growth. Main reasons for this are: i) large import substitutionopportunities still exist and the Government is aware that they have to be fully utilized, ii) the take off of a few major development projects which will create additionalmanufacturing activities around them: Dwangwa Sugar (K 60 million), Lilongwe InternationalAirport (K 60 million), and Viphya Pulp and Paper (close to $300 million), iii) the gradual -- though unpublicized-- return of Malawian workers to South African mines will have a considerableimpact on today's depressed income levels of the rural popula- tions, iv) the generally stable political situationbased on a rather cohesive

11 INDEBANK's financialsituation is so presented: i.e., the full amount of the General Reserve included in the equity of the company. - 28 - social system and helped by a relatively efficient administration and by liberal investment regulations geared towards attracting foreign investment, and v) in the longer run, the relatively good export possibilities for the low bulk, low weight, high value-added activities (textiles, handicrafts, etc.) supported by what probably is the cheapest -- yet fairly productive -- labor force in Africa. Constraints to these good prospects for the development should be, as in the past, the lack of supplies (only low quality coal may be available in the North), scarcity of managerial skills and experience, limited domestic purchasing power for consumer goods, and high sensitivity to events -- both economic and political -- in neighboring countries, which are outside Malawi's control. These constraints have existed in the past and industrial growth has taken place at a reasonable pace in spite of them. There is no reason to believe now that they will not continue to be more than offset by the additional positive features mentioned above.

5.02 In view of this, the country stands a rather good chance for continued industrial investment to fuel the expansion of the existing industrial base and the creation of new activities, mostly of an import substitution nature. DEVPOL for the period 1977/78 to 1979/80 reportedly maintains past priorities in the private sector, including foreign investment, and gives more emphasis to export oriented industries and SSI development.

INDEBANK's Strategy

5.03 During its five years' existence, INDEBANK has built up its financial security with a particularly sound portfolio through a difficult economic period. Now that the country's economic recovery is being consolidated INDEBANK plans to strengthen its staffing and formalize its procedures in order to expand substantially the volume of its operations over the next five years. While sustaining its high quality standard in financial management, INDEBANK will place a new emphasis on project promotion and technical assistance activities so that project proposals at an earlier stage of formulation than in the past may be added to INDEBANK's operations with an acceptable level of risk. It will also put more emphasis on the economic impact of the projects submitted to it. In view of the firmness of INDEBANK's pipeline of future projects (para 5.04) and considering that INDEBANK's disbursements have averaged less than 2% of the estimated investment in the monetary economy in 1973-1976, there is ample scope for INDEBANK to achieve substantial increases in the volume of its operations.

Forecast Operations

5.04 Project Pipeline. At the end of 1977, INDEBANK had a large pipeline of 36 projects representing total possible financing by INDEBANK of K 16 million (Annex 12). Many are medium-scale projects to be sponsored by INDEBANK and, with an average total project cost of K 1.9 million, projects in the pipeline are slightly smaller than in past approvals (para 4.02). The distribution of INDEBANK's financing in the pipeline confirms the trend towards an increasing proportion of new projects as well as the continued emphasis on private sector projects under majority Malawian ownership. The pipeline - 29 - continues to be centered on industries (32% by amount of financing)and agro-industries(28%) mostly based on local raw materials, but it shows a further diversificationin several new subsectors: hotels (10%), mining (9%), services for the airport project in Lilongwe (12%), transport (8%), tea and rubber processing.

5.05 Volume of Operations. INDEBANK's projectionsof operations are presented in Annex 13. The expected operations are based mainly on INDEBANK's past performance in project processing and on the annual level of approvals indicatedby the pipeline 1/. This would represent approvals of about K 4.9 million in 1978. However, to allow for the time needed by the new recruits (para 3.18) to become operational,it was assumed that INDEBANK will not reach that level of'approvalsbefore 1979. From 1979 onwards, however, INDEBANK can be reasonably expected to achieve a growth in approvals on the order of 12% per year following its increase in staffing and the developmentof its promotional activities. On this basis, total approvals should grow from K 3.9 million in 1978 to K 6.9 million in 1982. Following some lag, total disbursements should average K 5.1 million (US$5.9million) per year over the period 1977-1981and thus represent about 3-4% of the expected total investmentin Malawi throughout the same period. INDEBANK should have no difficultiesin increasing its share of investmentsin the country given its role in the country's industrialsector and in view of its more aggressivepromotion policy.

Resource Requirements

5.06 The following table summarizes the projected evolution of INDEBANK's needs for funds on the basis of the forecast of operations as presented in para 5.05 above (in K million):

1/ Discounted by the probability of each project to be approved within one year, as discussed in depth with INDEBANK'smanagement. - 30 -

1978 1979 to mid-81 Total

Commitments: in foreign exchange 1/ 2.9 8.3 11.2 in local currency 1.5 4.5 6.0 Total 4.4 12.8 17.2

Resources Available: in foreign exchange 4.5 2/ 3.0 7.5 in local currency 0.8 5.0 3/ 5.8 Total 5.3 8.0 13.3

'Surplus (gap): in foreign currency 1.6 . (5.3) (3.7) in local currency (0.7) 0.5 0.2 0.9 (4.8) (3.9)

1/ Assuming a 65% import component for all INDEBANK's investments, loan and equity according to the foreign exchange component of the projects in the pipeline . 2/ K 3 million from the EIB and the foreign exchange component of the K 2.3 million uncommitted resources available at end 77. 3/ K I million from INDEBANK's local shareholders plus the cash generation of the period 1978 - mid-81.

5.07 INDEBANK's projected commitments are expected to total K 17.2 million over the period 1978 to mid-1981. Over the same period, INDEBANK's operations are projected to yield a total cash generation of K 4.0 million in addition to the uncommitted surplus of K 2.3 million carried over from 1977 (para 4.08); this leaves a resource gap of K 10.9 million. To meet this gap, INDEBANK has already secured from EIB a loan of 3 million units of account- or approximately K 3 million - which was signed in November 1977 and is expected to be effective in early 1978. The use of this loan is, however, restricted to manufacturing industry, mining and tourism. In addition, the shareholders have accepted to contribute up to K 4 million to cover part of INDEBANK's needs during the next four years (para 5.10).

5.08 The proposed Bank Loan of $3 million or about K 2.6 million equivalent and the proposed IFC investment of K 500,000 would cover about 80% of the remaining resource gap of K 3.9 million and about 84% of the estimated foreign exchange component of this gap (K 3.7 million). INDEBANK should have no problem in securing additional resources: indeed EIB is prepared to consider a second loan to INDEBANK once the present one is exhausted - by 1980. Together, the Bank Loan and the IFC investment would represent about 24% of INDEBANK's total commitments over the two and a half year period 1979 to mid-1981, which is a reasonable percentage. - 31 -

Forecast FinancialResults

5.09 Increase in Share Capital. Financialprojections, presented in Annexes 14 to 16, indicate that INDEBANK's total capitalization(i.e. long-term debt plus equity) will build gradually up to K 29 million in 1982. ConsideringINDEBANK's sound portfolio and the special nature of its repayment obligationson income notes (paras 4.09 to 4.11), INDEBANK may increase its debt to equity ratio to extend its sources of funds during the projected expansion in its operations,but such increase should remain limited in view of INDEBANK's relative youth. At negotiationsINDEBANK agreed with the Bank to observe an upper limit of 4:1 on its debt to equity ratio. INDEBANK's current equity consists of K 3.0 million of issued share capital and K 97,000 of retained earnings. Thus, according to the financialprojections, INDEBANK needs to start increasing its share capital by 1979 to maintain a 4:1 debt to equity ratio.

5.10 The existing shareholders,ADMARC, CDC, DEG and FMO have already agreed to provide K 250,000 each in share capital out of their expected contribution of K 1 million, the remainingK 750,000 being income notes, or a Sterling loan in the case of CDC. 1/ In addition,INDEBANK has requested IFC to provide K 0.5 million of share capital, which would give IFC 11.1% of INDEBANK's share capital.

5.11 With these new share capital contributions,INDEBANK would have ensured that it can maintain the proposed 4:1 debt to equity limitation over a reasonableplanning period up to the second-halfof 1981. At that time INDEBANK could request the Bank to increase its debt to equity ratio from 4:1 to 5:1 if its financial condition continuesto be sound.

5.12 Financial Position. Following the increasedvolume of operations, total assets are expected to reach K 30.7 million by 1982. Projected balance sheets show that INDEBANK is capable of sustaining this growth while main- taining a good liquidity position with a constant current ratio of 1.7 and keeping its debt to equity ratio below 4:1. During 1977-1982,INDEBANK has no substantialrepayments obligationson its borrowings;and thus shows a high debt service coveragewith a ratio above 2.7 through the period.

5.13 Profitability. The financial ratios correspondingto INDEBANK's projected financial operations are attached in Annex 17. Although assuming conservativeprovisions for possible future losses on investments,financial projectionsshow that, during the next five years, INDEBANK can easily maintain a rather high spread of about 2.4% between the return on portfolio and cost of debt, mainly due to the low interest charged by EIB (para 4.08). Due to this high spread compoundedby the growth of operations,INDEBANK's net profits are expected to increase from 6.2% of equity in 1977 to 7.7% in 1982.

1/ CDC is reported to draw its present funding solely from UK Government loans, which makes its contributionsin income notes increasingly difficult. Conditionsof the K 750,000 loan are yet to be defined. - 32 -

This level of profitability should allow the institution to build up a general reserve of 1.6% of total portfolio while distributing dividends of 5.8% in 1982.

VI. THE PROPOSED BANK LOAN AND IFC INVESTMENT

Recommendations

6.01 INDEBANK is today one of the most independent, reputable and efficient institutions involved in industrial development in Malawi. It has played an effective catalytic role by putting together proposals emanating from the Press Group, MDC and Government - and some promoted on its own - and has become a focal point in bringing into the country the needed foreign capital and technical expertise. After an initial strategy of careful investments in commercially viable - yet development oriented - projects, INDEBANK is today an efficient institution at the crossroads of the second - crucial - stage of its development. Supported by a good portfolio, a solid financial situation, capable management and active, involved, shareholders very experienced in - and geared towards - economic development, INDEBANK will enter into a more aggressive policy of project promotion, double the level of its business and that of its staff - particularly Malawian professionals - and consolidate its organization and operational procedures.

6.02 All the above features make INDEBANK a particularly suitable allocator of Bank resources into Malawi's industrial sector, one that has good growth prospects and which is increasingly among the Government's priorities after the initial stages of the country's successful economic development efforts after independence. Consequently, a Bank loan of $3 million and an IFC investment of K 0.5 million (about US$560,000 equivalent) are recommended. This would represent a coverage of about 24% of INDEBANK's projected total commitments during the period 1979 to mid 1981 for the financing of medium and large scale industrial, agricultural and tourism projects. Some agriculture related projects, like ranching, cattle and rabbit raising etc, should also be acceptable for Bank financing, given their complementarity to industry in an overwhelmingly agricultural country, and in order to provide INDEBANK with some flexibility in its resource utilizations.

Main Features of the Bank Loan

Support to INDEBANK

6.03 Sector Distribution. The $3 million Bank loan to INDEBANK would provide equity, medium and long-term financing for fixed investments and permanent working capital of medium/large industrial, agro-industrial and tourism projects, with some agriculture-related projects being accepted. Pure agriculture projects and commercial building financing, together with trade operations would be excluded. - 33 -

6.04 Ceiling on Loans and Free Limit. Maximum credit granted to a single project by INDEBANK under the Bank loan should be limited to K 600,000 to avoid that the Bank loan be used up by a few large projects. The individual free limit should be set up at $100,000 and the aggregate free limit at $750,000; this should allow the Bank to review about 80% in number of the projects submittedby INDEBANK for financing and, thus monitor closely the expected improvementsderived from the institution'sconsolidation of its procedures.

6.05 Relending Rate, Foreign Exchange Risk and Commitment Fee. The interest rate charged by INDEBANK to its subborrowerswould be 10.5 - 11%, with the foreign exchange risk passed to them. This would mean a positive interest rate,,in real terms, above the forecast level of inflationin Malawi.

6.06 Debt/EquityLimit. A 4:1 debt equity limit is proposed. This is reasonable in view of INDEBANK'ssolid financial situation,good portfolio, and to recognizeand take into account the special nature - as debt - of the income notes used by the company in the financing of its operations.

6.07 Disbursements. The proceeds of the loan, expected to be fully disbursed by 1982 as shown in Annex 18, will be used for the financingof: (i) the foreign exchange cost of imported equipmentand services needed for the implementationof eligible subprojects;(ii) up to 75% of the cost of the equipment previously imported in Malawi and purchased locally for the implementation of the above subprojects;and (iii) up to 50% of the total cost of civil works, representingthe foreign exchange component.

6.08 AmortizationSchedule. As usual with Bank loans to DFCs, the proposed loan would have a flexible amortizationschedule conformingsub- stantiallywith the aggregate of the repayment schedulesof the subloans made by INDEBANK, with a maximum of 15 years, including two years grace period.

Main Features of the IFC Investment

6.09 By investing in the share capital of INDEBANK, IFC would be support- ing an institutionwhich has been the main source of assistance and encourage- ment to the developmentof the private sector in Malawi. The Chairman of INDEBANK, with the agreement of its Board of Directors, has written to IFC that INDEBANK and its current shareholdersconsider INDEBANK's supportof the private sector to be an important role which the Company performs in Malawi, as has been demonstratedby its past operations. The proposed IFC investment is expected to be reasonablyprofitable. The discounted return on the investment is expected to be about 9%, given the projected dividendsand assuming capital appreciationresulting from selling our shares at net asset value in 1982 1/ and no change in the kwacha/dollarexchange rate. Given the forecast

1/ The last year for which projections have been prepared. In fact IFC would very likely hold its shares for a longer period, which should increase its return. - 34 -

that INDEBANK'sprofitability and dividend yield will continue to increase, its shares could become a reasonablyattractive investment, especially for an institutionalinvestor such as one of the half-dozen financial institutions in the country. However, like many DFCs, the potentialmarketability of INDEBANK'sshares is affected by its Articles of Association. These provide for INDEBANK being a private company, limiting the number of shareholdersto 50 and prohibiting a public offering. The Articles also provide that, should any shareholderwish to sell his shares, then the other shareholdershave pre-emptive rights. They further provide that the seller should agree on a sales price with the directors or, in the case of a difference,that the price should be determinedby INDEBANK'sauditors. The current shareholdershave agreed that if IFC should want to sell its shares, then the price would be net asset value. In addition,ADMARC has agreed to give IFC a put option whereby if the existing shareholdersdo not take up IFC's shares offered to them and IFC has been unable to find other purchasers,then IFC may require ADMARC to buy its shares at their net asset value over a period of 4 years after IFC had held the shares for 8 years. Through this investmentIFC would provide both financial assistance to support INDEBANK'soperations as well as technical assistanceby having a seat on its Board of Directors. The investment would meet IFC's objectivesof supportingthe private sector in the smaller and poorer countries through establishingcloser links with local DFCs. It is also likely to be a reasonableinvestment from the point of view of profitability and marketability.

Oblectives,Benefits and Risks

6.10 This first loan and equity investmentin INDEBANKwould give the Bank Group the opportunityto participateactively in the developmentof Malawi's industrialsector given the institution'skey role and position in it. In addition, support of INDEBANK at this crucial stage of its development would have considerableinstitution building improvementswhich would particularly be prompted by the Bank Group's interventionat this stage. Main aspects of this impact are: (i) improvingthe operationalpolicies and financial strategy of the institutionin order to put INDEBANK on a sound footing to efficientlyplay its increasinglyimportant role in the future; (ii) reinforcingINDEBANK's strategy to be a more aggressive,promotionally oriented institution;(iii) reinforcingand training INDEBANK'sstaff - particularlyMalawian professionals;(iv) rationalizingand consolidating appraisal and supervisionprocedures.

6.11 The proposed total financing of about $3.6 million for INDEBANK will support investmentstotalling about $18 million. On the basis of the same average cost per job than in projects financed by INDEBANK in the past ($13,000),1,400 new jobs would be created, i.e. about 2% of present employment in manufacturing enterprisesin Malawi. There are no specific risks related to INDEBANK,which appears as a solid institution.

6.12 The study on SSIs in Malawi, which would pave the way for a full fledged SSI project, would allow the Bank to collaborateclosely with the Government in the formulationof policies conducive to efficient SSI development in the future. - 35 - ANNEX 1

MALAWI - INDEBANK

Board of Directors (at November 30, 1977)

Director InstitutionAppointing Occupation of the Director the Ditector

D.Z.U. Tembo (Chairman) ADMARC Chairman of ADMARC

A.V. Kambalametore ADMARC Director of Business Studies Malawi Polytechnic

M.A. Boyd C.D.C. Regional Controller(Central Africa) - CDC

D.H.R. Killick C.D.C. Manager - Malawi Office - CDC

M.H.G. Rempt FMO DevelopmentBanks Director - FMO

J.E. Bishop FMO Managing Director Imperial Tobacco Group - Malawi

J. de Gruyter DEG Prokurist - DEG

A. Schwarz DEG Managing Director Naming'ombaTea Estates Ltd - Malawi. MALAWI - INDEBANK

Organization Chart (at November 30, 1977)

General Manager! G. Ranor

Ft.nancial Adviser/Supervision Accountant/Secretary Projects Investigation Projects Investigation Manager Manager (Industry and Other)

M. Martin V. N ,wira P. T4n Arve V. Kobelt

Accounts Assistant Project Investigation Project Investigation Project Investigatio Project Investigatior Assistant Assistant Assistant Assistant

!M. N oni D. Kachali J. Chipasula D. Nsiyaludzu J. Kanunda

STAFF Total Professionals 1 2 1 3 3 10 Other - 3 1 1 1 6 Total 1 5 2 4 4 16 - 37 - ANNEX 3

MALAVI

INVESTMENTAND DEVELOPMENTBANK (INDEBANK)

Summary of Past Operations (1973 - 1977) (Amounts in K'OOO)

Approvals 1973 1974 1975 1976 1977

Loans 3,970 1,000 2,160 2,355 1,968 Equity Investments - 394 640 70 215

Total Approvals 8 2,42583

Commitments

Loans 2,470 2,500 1,360 2,005 1,470 Equity Investments - 394 340 300 85

Total Commitments 2470 2,89)4 1,700 2,305 1,555

Disbursements

Loans 2,270 1,900 470 2,723 2,408 Equity Investments - 394 140 250 335

Total Disbursements 2,270 2,294 610 2,973 2,743

Loans C6llections - 50 113 294 865 W.LA14I

List of Projects Approved (as of De-.cbr 31, 1977)

Ot'000) Percenotage Profit - Number Amounts Total of Imported After Tax of Jobs Cumpa.y OwnershipW7. Year of ApTproved Project New or Main Production Raw e-rTotal Created Comapny (Province) by Malaufan Approval Loan Enuity Cent Expansino of Pro.27ject Materials Esuity (%) Project Public Privare Foretgn INDEBANK Ele-triritySupply Commis.:onof Malas.i 1973 400 - 10,500 Expansion Hydro-Electrieity 0 + 5 30 100 --- (Southern) Blantyre Printing& Publishiog ConpanyLtd 1973 400 - N.A. Expans.iom Local Newspapers N.A. N.A. N.A. 50 50- (Southern') Grain and Milling Company Ltd 1. 1973 600 - 1,730 New Maize FlourMill 0 -29 30 50 5( (Southern) 2. 1975 400 - 1,530 New Wheat FlourMill 100 50 Malawi Heusing Corporation 1. 1973 510 - 510 Expansion Medium and Low- 40 +0.1 20 100 --- (1Central) 2. 1977 400 - 500 Cost Housing 40 N.A. Centre PropertiesLtd 1973 410 - 1,170 New Office & Industrial 45 +25 12 100 --- (Central) Buildings Malawi Pha rma,cies Ltd 1973 150 - 400 Expansien Pharma cy Retailing 100 -5 40 50 50-- (Southern) General Farming Company Ltd 1. 1973 900 - T,tal: Expansion Plum-Cured Tobaecn 0 +24 Total: - 100 -- (Central) 2. 1977 320 - 5,640 for Expert 0 2,228 CarlsbergMalawi Brewery Ltd 1973 600 - 2,600 Expansion Loe-I Beer 100 +5 100 24 27 49- (Southern) David Whitehead& Sons (Malawi)Ltd 1. 1974 600 - 2,900 Expa.sien Cotton Clothes for 0 +28 150 29 20 51 - (Southern) 2. 1973 400 - 10,340 Local Market & Zambia 0 300 Industrial Developments Ltd 1. 1974 400 44 730 New IndustrialEstate 40 + 1 200 17 (Central) - 48 35 2. 1975 - 200 N.A. 40 N.A. BritishAmerican Tobacco (Malawi)Ltd 1974 - 350 540 - Expansion Local Cigarettes 0 +10 11 (Southern) - -76 24 Optiehem (Malxvi)Ltd 1975 460 140 1,540 Expansion Pertili.erBlending 100 +13 40 20 - 60 (Southern) 20 Capital Hotels Ltd 1975 500 500 3,900 How High Class Hotel 50 -20 247 58 27 15 (Central) - Capital InvestmentsLtd 1975 150 250 4/ 2,500 Hew Oftice Buildings 50 +17 20 50 - 50 (Central) - Press Steel IndustriesLtd 1975 250 50 500 New CorrugatedSteel Sheets1Wo +107 35 - 75 (Central) - 25 Hotional Oil IndustriesLtd 1976 605 - 1,630 Expansion Rice Milling for Local 0 ±22 155 80 20 - - (Northern) Market and Export KiasuogoFlue-Cured Tobacco Authority 1976 600 - 3,710 Expansion Supplies & Equipment 0 +4 812 100 - -- (Central) for Tobacco Growers DwangwaSugar Corporation 1976 1,000 - 59,100 New Sugar 0 ± 14 5,000 39 20 (Central) 41 - IndetrustLtd 1976 - 10 10 New Pension Scheme 0 N.A. N.A. (Southern) - - - 100 EnterprineContainers Ltd 1976 150 60 505 New Plastic Bottles 100 ±11 35 30 30 10 30 (Southern) Cattle Feed Lot Company Ltd 1977 70 50 250 New Cattle Fatteofog 0 +10 91 33 33 (Southern) - 33 Southern Bottlers Ltd 1977 - 25 25 25/Expansion Soft-Drinks 100 N.A. N.A. (Southern) - 50 49 Can Makers Ltd 1977 109 - 430 New Cans for Fruits & 100 +15 26 100 - - - (Southern) Vegetables Malawi Iron & Steel Corporation 1977 80 70 600 New Foun.dryfor Castings 50 +15 33 45 -35 20 Tobacco EstatesLtd 1977 140 100 4/ 644 Ixpansion TobaccoGrowing 5 +14 502 (Central) 50 50 - Press RanchingLtd 1977 200 - 200 New Cattle 0 N.A. N.A. ----- Majority------Central Tobacco Properties 1977 250 - 3,000 New Tobacco Auction Floor 0 N.A. N.A. Majority------(Central) (Gradingand Selling) Property nvsmtsLtd 1977 400 70 1,300 New Office Bsfildiogs 45 N.A. N.A. Majority------TOTAL 11,453 1,419

I/ During latnotfiocalyear or as projectedin first year of full operation. 2/ Mediun-teo loan fully.repaid by 1977. 3/Estimatedfrom increase in totalassets. 4/Preferenceshares, enpected to be approved shortly. 5/Commercialinves tment, non-projectrelated. MALAWI

INVESTMENT AND DEVELOPMENT BANK (INDEBANK)

Analysis of Total Approvals (Loan Plus Equity)

Breakdown of Approvals According to: "rojeets Approved during 1973-75 Projects Approved during 1976-77 All Projects Approved (1973-1977) Nbjuinh*xofAmount Percentage Number of Amount Percentage Number of Amount Percentage Average Size Projects Approved of Total Projects Approved of Total Projects Approved of Total of Total 1/ Size of INDEBANK's Financing Approved (K'000) Amount Approved (K'000) Amount Approved (K'000) Amount Project Cost - Approved Approved Approved (K'000)

Up to K200,000 1 150 2 6 613 13 7 763 6 274 K200,000 to K400,000 7 2,650 32 4 1,100 23 11 3,750 29 3,075 K400,000 to K600,000 7 3,820 47 2 1,070 23 9 4,890 38 2,151 K600,000 and above 2 1,544 19 2 1.925 41 4 3.469 27 2,1 17 8,164 100 14 4,708 100 31 12,872 100 2,118

Size of Total Project Cost

Up to K 1 million 5 1,954 24 9 1,463 31 14 3,417 27 393 K1 million to K 5 million 9 4,510 55 4 1,925 41 31 6,435 50 2,292 K5 million and above 3 1,700 21 1 1,320 28 4 3,020 23 8,893 17 8,164 100 14 4,708 100 31 12,872 100 2,118

Type of Project

New 7 3,254 40 9 2,518 54 16 5,772 45 1,259 Expansion 10 4,910 60 5 2,190 46 15 7,100 55 2,977 17 8,164 100 14 4,708 100 31 12,872 100 2,118 \0

Ownership Maiority

Foreign 5 2,594 32 2 160 3 7 2,754 21 2,688 Malawian 12 5,570 68 12 4,548 97 24 lZ,118 79 1,962 17 8,164 100 14 4,708 100 31 12,872 100 2,118

Main Origin of Raw Materials

Malawian 11 5,714 70 11 4,365 93 22 10,079 78 2,589 Foreign 6 2,450 30 3 343 7 9 2,793 22 940 17 8,164 100 4 4,708 100 31 12,872 100 2,118

Investment Cost per Job

Up to K5,000 3 2,114 26 3 1,280 27 6 3,424 27 2,569 K5,000 to K20,000 4 1,550 19 5 2,073 44 9 3,623 28 1,358 K20,000 and above 9 4,070 50 1 400 9 10 4,470 35 3,106 Non-available 1 400 5 5 955 20 6 1,355 10 907 17 8,164 100 14 4,708 100 31 12,872 100 2,118

Sector of Activity

Industry and Agro-Industry 10 4,850 59 6 2,098 45 16 6,992 54 1,928 Agriculture 1 900 11 4 1,480 31 5 2,380 19 2,089 Bricks and Mortars 3 1,320 16 2 870 18 5 2,190 17 1,196 Others 3 1,050 13 2 260 6 5 1,310 10 3.562 17 8,164 100 14 4,708 100 31 12,872 100 2,118 '

1/ Excluding the Dwangwa Sugar project. 2/ Including Dwangwa Sugar since the processing factory accounts for a larger share of the costs of this project (70%) than the agricultural estate (30%). riiALAWI INVESTMENTAND DEVELOPMENTBANK (INDEBANK) Summary of Investment Portfolio (Amount in K,OOO)

LOANS EQUITY INVESTMENTS Amount Outstanding as of: Year of Year of Interest Amount Paid-Up as of Company's Nature Of INDEBANK's Dec.31,1976 Dec. 31,1977 First Last Rate Dec.31,1976 Dec.31,1977 Share Capital INDEBANK's Approved Repayment Repayment (%) (Book Value) Pa:ticipation Shareholding (%)

Electricity Supply Commision 250 200 1974 1980 8.5 Blantyre Printing and Publishing Ltd 291 - 1975 1977 n.a. Grain & Milling Company Ltd 1 600 570 1977 1987 9 2 400 400 1979 1982 9.5 Malawi Housing Corporation 497 470 1976 1988 8.5 Centre Properties Ltd 333 282 1975 1983 12 Malawi Pharmacies Ltd 143 127 1976 1986 9 General Farming Company Ltd 1 320 900 1979 1989 8.5 2 - 320 1979 1989 8.5 Carlsberg Malawi Brewery 600 400 1977 1979 10 David Whitehead and Sons Ltd 1 500 400 1976 1981 10 2 400 400 1980 1985 10.5 Industrial Developments Ltd 1 400 360 1977 1987 11 44 44 128 Equity 35 0 2 200 200 128 Pref. Shares - British American Tobacco Ltd 350 350 1675 Equity 24 Optichem Ltd. 343 A60 1980 1988 12.5 140 140 724 Equity 20 Capital Hotels Ltd 500 500 1981 1987 11 Capital Investments Ltd 400 150 1979 1983 11 250 - Pref. Shares - Press Steel Industries Ltd - 250 1978 1983 10 50 50 200 Equity 25 National Oil Industries Ltd 330 545 1977 1986 9 Kasungu Tobacco Authority 600 600 1980 1990 8.5 Dwangwa Sugar - 1000 1982 1990 10.5

Enterprise Containers Ltd - 116 1979 1982 11 - 60 200 Equity 30

Southern Bottlers Ltd - 25 2545 Equity 1

6907 7 PT5-0 8-4 1119 - 41 - ANNEX 7

MALAWI INVESTMENTAND DEVELOPMENT BANK (INDEBANK)

Resource Position as of December 31, 1977

K'000

Share Capital 3,000 RetainedEarnings 97 IncomeNotes 9,000

Total Resources 12,097

Less PortfolioOutstanding

Loans 8,450 Equity Investments 1,119 Less Fixed Assets 172

ResourcesAvailable for Disbursement 2,356 Less UndisbursedCommitments:

Loans 3 Equity Investments -

ResourcesAvailable for Commitment 2,322 - 42 - ANNEX 8

MALAWI

INVESTMENTAND DEVELOPMENTBANK (INDEBANK)

Summary Balance Sheet 1973 - 1977 .(Amounts in K'OOO)

ASSETS 1973 1974 1975 1976 1977 Current Assets Cash 21 43 32 n1 217 134 Account- &eceivable 61 112 86 198 187 Stock 1 996 120 510 290 1,010

Total Current Assets 1,100 264 667 705 1,331

Portfolio

Loans 2,270 4,120 4,479 6,907 8,450 Equity Investments - 394 534 784 1,119

Total Portfolio 2,270 4,514 5,013 7,691 9,569

Fixed Assets (flet) 73 86 126 162 172

TOTAL ASSETS 3,443 4,864 5,806 8,558 11,072

LIABILITIES

Accounts Payable 203 245 391 500 785 Income Notes 2,240 3,370 4,ooo 6,000 7,350 Share Capital 1,000 1,225 1,375 2,000 2,840 Retained Earnings - 24 40 58 97

TOTAL LIABILITIES 3,443 4,864 5,806 8,558 l1,Q72 *m- mmaz *=zm m5S"m mumu.

1/ Cash balance-above K20,000 at Reserve Bank earns 5 1/2% interest. 2/ Local registered stocks and time deposits earning an average 8 1/2% interest. - 43 - MALAWt ANNEX9

INVESTMENTAND DEVELOPMENT BANK (INDEBANK)

Summary Incore Statements, 1973-1977 (Amounts in K'000)

1973 1974 1975 1976 1977

INCOM~E

Loan Incone 60 300 425 556 806 Dividends - - 82 . 72 85

Total Portfolio Incore 60 300 507 891

Stork and B-nk Interest 52 72 . 61 47 109 Other Incone 1 2 2 5 29

Total Income 37 570

E:XPE1tSES

Administrative Expenses 90 110 139 151 159 Interest on Inco'e Notes 10 291 312 385 570 Other Expenses 13 26 4 18 9

Total Expenses 13 327 455 554 738 Profit Before Tax and Dividend 47 115 126 291 Less Tax 24 48 52 137 Profit After Tax - 23 67 74 154 Iess Dividend - 51 56 116 Net Profit after Dividend - 23 16 18 38

g/ Including preliminary expenses, stamp duty on issue of income notes, Directors' fees,and depreciation. - 44 -

MALAWI ANNEX1O

INVE,SMENTAND DEVELOPMENT BANK ('INDEBANK) Summary Sourcesand Uses of Funds Statements,1973-1977 (Amounts in K'OOO)

1973 1974 1975 1976 1977 SOURCES

Net Profit - 23 16 18 38 Depreciation 6 7 8 12 16 Increasein Share Capital 1000 225 150 625 840 Issue or incomeNotes 2240 11-3 630 2000 1.0 Loan Collections - 50 112 294 865

Total Sources 3246 1435 916 2949 3109

USES Disbursementsof:

Loans 2270 1900 471 2722 2408 Equity Investments - 394 140 250 335

.TotalDisbursements 2270 2294 611 2972 2743

Increasein Fixed Assets 79 20 48 48 26

Total Uses 2349 2264 659 3020 2769

Increase(Decreas) in Working Capital: 897 (879) 257 '(71) 340 - 45 - MALAWI AMiEX ll INVESTMENTAND DEVELOPMET BANK(INDEBAN)1 Financial Ratios, 19/3-1977

1973 1974 1975 1976 1977

Income StatementItems as 7 of Average Total Assets

Gross Income 6.6 9.0 10.7 9.5 10.5 Less FinancialExpenses 1.3 5.2 5.9 5.6 5.8 Less AdministrativeExpenses 5.2 2.6 2.6 2.1 1.7 Gross Profit - 1.1 2.2 1.8 3.0 Less Tax - 0.6 0.9 0.7 1.4 Less Dividend - - 1.0 0.8 1.2 Net Profit - 0.6 0.3 0.3 0.4

Income from Investments

Income from Loans as % of Average Loan Portfolio 5.3 9.4 9.9 9.8 10.5 Dividerd Income as % of A.erage Equity Portfolio - - 17.7 10.9 8.9 Income from all Investmentsas 7 of Average Portfolio 5.3 8.8 10.6 9.9 10.3

Profitability

Profit before Tax a-s% of Average Equity - 4.2 8.6 7.3 11.7 Profit after Tax as % of Average Equity - 2.0 5.0 4.3 6.2 Dividend Paymentsas % of Average Equity - - 3.8 3.2 4.6

StructuralRatios

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 Interest Coverage 1.0 1.2 1.4 1.3 1.4 - 46 - ANNEX12

MATAWT

INVESTMENT AND DEVELOPMENT BANK (INDEBANE)

List of INDEBANK Project Possibilities as of November 30. 1977 (Amounts in X'000)

Date of Likelihood of Loan Equity Tots1 Project Status of Economic Ownership New or None of Froject Approval Approval (%) Amount Amount Cost Project ActivitY Majority Expansion

Malawi Tobacco Packers Ltd 197N 100 500 250 4150 Appraisal Finalieed Tobacco Processing Private Foreign New Shortly

Indulstrial Developneots Ltd 1978 100 350 - N.A. N.A. Industrial Estate Public Malawian Expansion

Vicara Dbb.r 1978 100 900 100 7000 Understudy by INDEBANIK Rubber growing & Private Foreign Expansion Processing :noicsicnProject 1978 30 100 - 200 Awaitinpg Fesibility Infusions ISf-Slvers Private Malawian New Study Press Steel Industries Ltd 1978 100 50 - 100 Understudy by INDEBANK Iron Sheets for Private Malawian Expansion Constructioc MzurL Hotel 1978 80 450 50 1600 Understudy by MDC Hotel Public Malawian New

Mount Soche Hotel 1978 90 300 - 500 Underecudy by MDC Motel Private Malewian Expansion

Bacn..; 'armers 1978 80 75 - 100 Understudy Distribution of Private Malawian New Bananas Packaging Icdustries 1978 100 250 150 1200 Understudy by MDC Cardboard Packaging Public Malawian Expansion

Nuto ..c Bolt: 1978 1IO 100 - 250 Understudy by INDEBANK Nuts and Bolts Private Malawian New

Cotton Wool 1978 70 60 _ 250 Uderstudy by INDESANK Sanitary Toels and Private Malawian New

Chibubk Packaging 1978 75 250 - 750 Understudy by INDEBANK Plastic Containers Private Malawian New for Beer Tobacc BOulk-Cures 1971 SO 100 - 250 Initia1 Concact Tobacco Proceacing Private Malawianc New

Mata Shoe Co. 197S 70 200 - 500 Initial Contact Plastic Shoes Private Foreign Expansion

Shell 2ransport 1978 50 500 - 300 Initial Contact Trucks Private Foreign Expansion

'tsel Tube Transport 1978 80 400 200 3500 Initial Contact Furnace Private Foreign New

Vermiculite Mining 1978 50 400 - 1000 Initial Concoct Mining Private Foreign New

Linbe Lrf 1978 25 500 - 5566 Understudy by INDEBANE Tobacco Processing Private Foreign NeM

Press ukheries 1979 90 600 - 750 Initial Ccotact Baking Bread Private Malawian Expansion ptros Transport 1979 85 350 - 350 Initial Contact Trunks Private Malawian Expansion

Nulwark Transport. 1979 60 400 - 600 Initial Contact Buses Private Malawian Expansion

Forn Rabbit Angora 1979 85 80 _ 200 Initia Contact Rabbits wool Private Malawian New

Wend Processing 1979 10 450 150 3000 initial Ccntact Particle Board Private Malawian New

Tea Fastory 1979 90 400 - 2500 InItial Contact Tea Factory for Public Malawtan Expansion Smallholders Lakeshore HMtel 1979 60 800 - 5000 Awaiting Feasibility Motel Private Malawian New Study Alcohol Project 1979 80 1000 - 3000 Initial Contact Spirits Private Malawian New

-ortland Cenent 1980!81 8O 1000 - 3000 Initial Contact Ce-eat Private Malawian Expansion t:rlsh.-rg MMlewi Srewery 1980/81 N.A. 500 - 1500 Initial Contact Beer Private Malawian Expansion

O5il R.cycl'ng 1980/81 50 10 - 250 Initial Contact Purifying uoed oils Private Malawian New

Chil-unha Coal 1980/81 80 1000 - 10000 Initial Contact COcl hining Priva-e Malawian NMw rTlypropylnne 1080/81 N.A. 100 120 3000 Initial Contact Propylene Bags Public Malawian New

Abattoir 1980/81 N.A. 480 120 2000 Initial Contact Cattle Slaughtering Public Malawia- N.e

Airport Industries 1980/81 N.A. 300 300 1000 Initial Contact Industrie- Servicing Public Malawian New Airport Airport Free Port 1980/81 N.A. 435 215 1OO Initial Contact Duty Free Area Public Malawian New

Airport Ctteniog 1980/81 N.A. 150 - 300 Initial Contact Food Public Malawian New

Airport Housing 1980/81 N.A. 500 - 2000 Initial Contact Residential Acconmo- Public Malawian New datios - 47 -

MALAWI ANNEX 13 IRVESTM-ENTAND DEVELOPMENTBANK (INDEBANK) Projected Operations,1978-1982 (K'000)

Approvals 1978 1979 1980 1981 1982

Loans 3348 3908 4377 4902 5834 Equity ITvestments 560 977 1094 1226 1029

Total Approvals 3908 4885 5471 6128 6863

Commitrents

Loans 3880 3721 4221 4727 5523 F:quityInvestments 380 838 1055 1182 1095

Total Commitments 445 4559 5276 5909 6618

Disbursements

Loans 3138 3753 4121 4626 5363 EquityInvestments 516 811 1033 1170 1104

Total Disbursements 3654 4564 5154 5796 6467

Loan Collections 462 953 1346 1839 2455 - 48 - ANNEXi4 MALAWI

INVEST1,fNmTAUID DEVELOP4MEIT BANK (IIDEBANK)

Pro;ected Balance Sheet - (K'ooo)

ASSETS 1977 1978 1979 1980 1981 1982

Current Assets

Cash 134 200 200 200 200 200 Accounts Receivable 187 219 285 358 438 525 Stock 1,010 1,186 1,100 1,324 1,559 1,747

Total Current Assets 1,331 1,605 1,585 1,882 2,197 2,472

Portfolio

Loans 8,450 11,126 13,926 16,701 19,488 22,396 Equity Investments 1,119 1,635 2,446 3,479 4,649 5,753 Less Accumulated Provisions - (37) (83) (135) (193) (258) Total Portfolio 9,569 12,i24 16,289 20,045 23,944 27,691

Fixed Assets (Net) 172 170 166 160 369 342

TOTAL ASSETS 11,072 l,)49918,040 22,087 26,510 30,705

LIABILITIES

Current Liabilities 785 963 951 1,129 1,318 1,483

Borrowings

Income Notes 7,350 9,000 9,450 10,800 11,250 11,250 CDC - - 200 600 750 750 EIB - 1,400 3,000 3,000 3,000 2,625 IBRD and others - - 1,000 2,300 5,100 8,700

Total Borrowings 7,350 10,400 13,650 16,700 20,100 23,325

Equity

Share Capital 2,840 3,000 3,250 4,000 4,750 5,450 General Reserve 97 136 189 258 342 447

Total Equity 2,937 3,136 3,1439 4,258 5,092 5,897

TOTALLIA3ILITIES 11,072 14,499 18,040 22,087 26,510 30,705 4g~

MALAWI ANNEX15

INVESTMEIT AND DFVELOPN-4T BAli (INDEBANK)

Projected Incor.eStatcmrnts, 1978-1982 (K'000)

Income 1978 1979 1980 1981 1982

Portfolio Incoe:

Commtitment and Investigation Fees 27 32 36 41 44 Loan Interest 979 1,253 1,531 1,809 2,094 Dividends 128 188 277 400 553 Less Provisionfor Losses (37) (46) (52) (58) (65) TotalPortfolio Incomn 1,097 17,792 2,192

Income from Stocks and Deposits 102 108 114 134 152

TotalIncome 1199 1,535 1906 2,326 __77

ExDenses

FinaicialExoenses:

Commitn.ent and other charges if 8 6 7 6 5 Interest on Income Notes 654 738 810 882 900 Interest on Other Borrowings 35 156 307 482 716

Total Financial Expenses 9-7 900 1,124 1,370 1,621

Administrative Expenses 196 226 261 302 349 Depreciation 18 19 21 41 42

Total Expenses . 14S 1 406 1713 2 012

Proflt Before Tax and Dividend 288 390 500 613 766 Less Tax 130 176 225 276 345 Profit After Tax 158 214 275 337 421 Less Dividend 119 161 206 253 316

Net Profit after Dividend 39 53 69 84 105

1T Including Stamp Duty on Income Note Issues. - 50 -

MALAWI ANNEX16

INVESTMENT AJIT)DINELOPMAENT BA1TK (ITDEMANK)

Projected Sourcesand Uses of Funds Statements, 1978-1982 (K'OOO)

SOURCES 178 1979 1980 1981 1982

Ret Profit 39 53 69 84 105 Depreciation 17 19 21 41 42 Provision for Losses 37 46 52 58 65 LoartCollections 1462 953 1,346 1,839 2,455 Increase in Share Capital 160 250 750 750 700 Borrowings: Income Notes 1,650 450 1,350 450 - CDC - 2OO .400 150 - EIB 1,400 1,6oo - _ _ 1BRD and Others - 1,000 1,300 2,800 3,600

Total Sources 3,(26 4TTi 5,20 61'2 b,9b'(

USES

Fixed Assets Increase 15 15 15 250 15 Diubursements: Loans 3,138 3,753 4,121 4,626 5,363 Equity Investments 516 811 1,033 1,170 1,104 Borrowings Repayments: - - - - 375

Total Uses -369 4,579 5,169 6046

Increase (Decrease) in Working Capital 96 (6) 119 126 110 - 51 -

MALAWI ANNEXN 7 INVESTMENTAND DEVELOPMENT BANK (INDEBANK) Projected Financial Ratios, 1978-1982

Income StaterentItems as % of AverageTotal Assets 1978 1979 1980 1981 1982

Gross Income 9.7 9.7 9.8 9.8 9.9 Less Provision for Losses 0.3 0.3 0.3 0.2 0.2 Less FinancialExpenses 5.4 5.5 5.6 5.6 5.7 Less AdministrativeExpenses 1.7 1.5 1.4 1.4 1.4 Gross Profit 2.3 2.4 2.5 2.5 2.7 Less Tax 1.0 1.1 1.1 1.1 1.2 Less Dividend 1.0 1.0 1.0 1.0 1.1 Net Profit 0.3 0.3 0.3 0.3 0.4

Income from Investnents and Cost of Resources

Income from Loans as % of Average Loan Portfolio 9.9 9.9 9.9 9.9 9.9 DividendIncome as % of AverageEquity Portfolio 9.3 9.2 9.3 9.8 10.6 Incomefrom All Investments as % of Average 9.8 9.8 9.8 9.9 10.0 Portfolio Cost of Long-TermDebt as % of AverageDebt 7.9 7.5 7.4 7.4 7.5 Outstsanding

Profitability

Profitbefore Tax as % of Average:Equity 9.5 11.9 13.0 13.1 13.9 Profitafter Tax as %of AverageEquity 5.2 6.5 7.1 7.2 7.7 DividendPayments as % of AverageEquity 3.9 4.9 5.4 5.4 5.8

Structural Ratios

Long-TermDebt/Equity 3.32 3.97 3.92 3.95 3.96 CurrentRatio 1.7 1.7 1.7 1.7 1.7 - 52- ANNEX 18

MALAWI

INVESTMNT AND DEVELOPMENTRANK (INDEBANK)

Schedule of ProjectedDraw-Downs from Proposed Bank Loan of US$3 Million

Amount in / % ($'000)

FY 79

April - June 180

FY 80

July - September 275 October - December 300 January - March 350 April - June 375 Subtotal 1,300 7

FY 81

July - September 375 October - December 375 January - March 300 April - June 250 Subtotal 1,300 93

FY 82

July - September 150 October - December 70 Subtotal 220 100

7/ Assuming the loan becomes effective in December 1978. 2 Percentagesare cumulative. - 53- ANNEX19

MALAWILEGISLATION RELATING TO IFC'S INVESTMNT IN THE

INVESTMENTAND DEVELOPMENTBANK OF MALAWILIMITED

Basic Legislation

Ihebasic laws relating to the Investmentand DevelopmentBank of Malawi Limited (the "Company") and to IFC's investment in the Company are:

(a) The Companies (Consolidation) Act 1908 of the United Kingdom (as amended by the Companies Act 1913 of the United Kingdom) and applied to Malawi by the CompaniesAct, Cap. 41:03 of the laws of Malawi, as subse- quently amended from time to time; and

(b) Exchange Control Act, Cap. 45:01 of the laws of Malawi, and the regulations issued thereunder.

There are no general laws regulating foreign investment in Malawi other than the legislationreferred to in item (b) above.

Approval and Repatriation

All equity investmentsfrom external sources must be approved by the Reserve Bank of Malawi under powers delegatedto it by the Minister of Finance, in accordancewith the Exchange Control Act and the regulations made thereunder.

Repatriationof dividends and the proceeds of sale of shares owned by foreign investorsmust also be approvedby the Reserve Bank of Malawi under and in accordancewith the same legislation. - 54 -ANC2t ANNEX 2D, Page 1 of 2

MALAWI

INVESTNENTAND DEVELOPMENTBANK OF MALAWILTD.

Related Documents and Data available in the Project File

A. General Reports and Studies on the Sector or Subsector

A.1 National StatisticalOffice. - Survey of all Enterprises with more than 20 employees.1973.

A.2 National StatisticalOffice. Annual Survey of EconomicActivities (largerestablishments) 1973 - December 1976.

A.3 National StatisticalOffice. Reported Employment and Earnings. Annual Report 1975 - September1976.

A.4 Ministry of Trade, Industryand Tourism.Analysis of Industrial License Issues 1967-77.

A.5 Ministry of Trade, Industry and Tourism. Memorandum on the Development of Malawian Small-Scale Industries - October 1976.

A.6 Ministry of Trade, Industry and Tourism. Malawian Industries Development Project. Organizational and Administrative Structure and Cash Flow Projections. Processing of Applications for Financial Assistance - September1, 1977.

A.7 Ministry of Trade, Industry and Tourism. OrganizationChart, Responsibil- it~ies and Detailed Informationon Staffing.

A.8 Ministry of Trade, Industry and Tourism. Summary of Preliminary Information for Financial Assistance. Malwian Small-Scale Industries(Blantyre Area) - November 1977.

A.9 Ministry of Trade, Industry and Tourism. IndustrialPromotion in Malawi.

A.10 Ministry of Trade, Industry and Tourism/WorldBank. Small Scale Industry Study. Terms of Reference.

A.ll Republic of Malawi. Trustees for the Developmentof Malawian Industrial Enterprises.

A.12 The Chamber of Commerce and Industriesof Malawi. Industrialand Trade Directory.

A.13 Malawi Tourism Report 1973-75. - 55 - ANNEX 20 Page 2 of 2

A.14 The Import-ExportCo of Malawi. Assistanceto Malawiansto establish rural trading operations- January 23, 1977.

A.15 The National Bank of Malawi. Summaryof the National DevelopmentLoans Scheme - November 16, 1977.

A.16 Reserve Bank of Malawi: - InterestRate Structurein Malawi.

A.17 Reserve Bank of Malawi, Financialand Economic Review - 1976-1977.

A.18 Annual Reports and Accounts of the followinginstitutions:

- Press Holdings Ltd - December 31, 1976 - National Bank of Malawi - March 31, 1977 - The AgriculturalDevelopment and Marketing Corporation- March 31, 1976 - The National Insurance Company Ltd - December 31, 1976 - The Import and Export Company of Malawi Ltd - December 31, 1976 - Capital City Development Corporation - March 31, 1976 - Commercial Bank of Malawi - June 30, 1976 - Malawi Development Corporation - 1974-76 - Reserve Bank of Malawi - December 31, 1976.

B. General Reports and Studies Relating to the Project

B.1 INDEBANK, PreaLeuresManual.

B.2 INDEBANK,Formation of IndetrustPension Fund - July 12, 1977.

B.3 INDEBANK,Operating Strategy. Report to the IBRD mission.

B.4 INDEBANK,Investment Policies. Small-ScaleIndustries - February 6, 1975. C. SelectedWorking rapers

C.1 INDEBANK,Assumptions for ProjectedOperations and ProjectedFinancial Statements- 1978-82.