Report No. 1341a-SO FILE COPYSomalia: Appraisal of theSomali Development Bank (SDB)March 31, 1977

Industrial Development and Finance Division

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENT

So. Sh 6.295 = US$1

ABBREVIATIONS

AFESD Arab Fund for Economic and Social Development

CBS Central Bank of Somalia

DLS Development Loan Section, Credito Somalo

ECA Economic Commission for Africa

GOS Government of Somalia

NCB National Commercial Bank

SDB Somali Development Bank

SIDAM Somali. Institute of Development Administration and

Management

SICOS State Insurance Company of Somalia

SRC Supreme Revolutionary Council

UNDP United Nations Development Program

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

SOMALI DEVELOPMENT BANK

Table of Contents

Page No.

BASIC DATA .............................. i - ii

SUMMARY AND CONCLUSIONS ................. ....................... iii-vi

I. INTRODUCTION ..................................... . ....... ......... 1

II. ENVIRONMENT ................................ 1

The Economy ........... .......................................... 1eMajor Sectors ....................................... ........... .. 2Industrial Sector ......... . . . . . . .................... ...... . 3Financial Sector ................................... 6

III. SDB's ROLE .................... ................. 9

Volume and Characteristics of Financing ............ 9Promotional Activities ............................. 10Management of the Development Loan Section (DLS) ... 11

IV. THE INSTITUTION ...........................* ........................... 11

(.harter ......................................................... 11Capital ............................................ 11Board ................. ........ .......................... *1Management .............. ........................................ 12Organization and Staff ......................... .... 13Staff Development and Technical Assistance ......... 13Procedures ... ................................ .. . ... .. ..... 14Policies ................................... 0 ............. 0...... 15

V. PORTFOLIO, FINANCIAL CONDITION AND RESOURCES ............ 18

Portfolio Evaluation .. ...................... .. .. . . - 18Financial Position ...... ........................... 18Financial Results ...... ...................... ...... 19Resources .......................................... 19

This report was prepared by Messrs. Zia Ahmed and Ismail Dalla on the basisof their mission to Somalia in August 1976.

This document has a tets d dtribution and may be USW by hcipients only In the performanceod their offciW duts. Its cotents maY not otherwbe be dbclosed without Wodd Sknk authoruzation.

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Pase No.

VI. PROSPECTS ................................................. 20

Business Outlook . .... ... ...... ......... ........ .. . . ... 20Strategy ...................................... 000.... 20Forecast of Operations .... ......................... 21Resource Requirements . ..... ........ . . . . . . . . . . . . . . . . 21IDA Credit ... o ..........- ......................... -*oe ... .o .ooo.. 22Projected Financial Position .......... .. .......... 23Projected Financial Results -. o- ..... ......... 23

VII. RECOMMENDATIONS .o.. .. .. . . .. . . . ....... . ...... *...24

List of Annexes

Somalia

1. An Overview of the Industrial Sector in 19732. Outstanding Loans of the Commercial Bank by sectors3. Interest Rates Structure4. Mogadiscio Consumer Price Index (December 1971-February 1976)

SDB

5. Summary of Operations (1968-1976)6. Loan Approvals by sector (1968-1976)7. Board of Directors8. Proposed Organization Chart9. Draft Statement of Operating Policies10. List of Equity Investments Outstanding as of December 31, 197611. Balance Sheets (1972-1976)12. Income Statements (1972-1976)13. Pipeline of Projects as of December 31, 197614. Assumptions for Operations and Financial Projections15. Forecast of Operations (1977-1981)16. Projected Balance Sheets (1977-1981)17. Projected Income Statements (1977-1981)18. Projected Cash Flow (1977-1981)19. Actual and Projected Financial Ratios (1973-1981)20. Estimated Disbursement Schedule for Proposed Credit

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SCMALI DEVELOPMENT BANK

BASIC DATA

Exchange Rate: US$1 a So. Sh 6.295

Date of Establishment: May 1968

Ownership (as of December 31, 1976; amounts in Sh million)

Authorized Paid-inCapital % Capital %

Government 120.0 60.0 87.3 87.5Central Bank of Somalia 60.0 30.0 21.6 12.2National Commercial Bank 15.0 7.5 3.2 0.3Somali Insurance obmpany 5.0 2.5 1.2

Total 200.0 100.0 113.3 100.0

Resource Pbsition (as of December 31, 1976; amount in Sh million)

Uses

Net Fixed Assets 2.0Equity Investments 17.1Loans - Disbursed & Catstanding 120.0Undisbursed Commitments 7.8

Total Uses 147.

Sources

Share capital 113.3Retained earnings & reserves 3.3Long & Medium term loans:

IRAQ 4.5USAID 0.3Central Bank 2.9Somali Government 26.1 33.8

Total long & medium term sources 150.4

Cooperative fund 1.0

Total sources 151.4

Available for new commitments 4.3

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Cperations (Sh million)

Year ending December 31 LOANS EquityApprovals Commitments Disbursements

1973 49.4 49.4 34.1 3.71974 35.8 35.8 36.7 2.81975 39.5 39.5 45.9 5.21976 13.3 13.3 9.6 3.0

Cperating Results (Sh million) 1974 1975 1976(Provisional)

Profit before taxes 1.8 3.9 1.4Prifit after taxes (PAT) 1.3 0.4 0.8PAT as % of average networth 2.0 0.4 0.7

Financial Position (Sh million)

Net Worth 79.3 101.5 116.0Long-term debt 12.9 10.3 33.8Total Assets 98.0 140.3 161.1Long-term debt/equity 0.2 0.1 0.3Provisions as % of total portfolio 0.1 1.5 1.2Administrative expenses as % of

average total assets 1.6 1.1 2.0

Interest Rates and Other Charges

Interest Rates Agriculture/ Industry & OthersHandicraft Mining

Medium-term (2-6 years) 5.5, 6.0% 6.5%Long-term (7-20 years) 6.o% 6.5% 7.5%

Charges

Commitment fee: 1% of undisbursed loan balancesLoan investigation fee: 0.5% of the loan amountLate Payment fee: 2% on amount overdue for 30 days or more

IDA/ EAPIDFebruary 28, 1977

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SUMMARY AND CONCLUSIONS

(i) The Somali Development Bank was established in 1968 as a publiclyowned institution to take over the long-term loan portfolio of Credito Somalo,a Government-owned bank which was being wound up, and to provide financialassistance to productive enterprises in various sectors within the frameworkof the country's development programs and priorities.

(ii) Since 1969, when the revolutionary government took over power,Somalia has adhered to "scientific socialism". Despite its poverty, it hasperformed creditably in recent years in its attempts to achieve economicgrowth which will benefit the bulk of its people. Except in 1974 and 1975when sizeable resources had to be diverted to drought rehabilitation, Somaliahas contributed substantial amounts to financing development expenditure.Livestock, agriculture, industry and fisheries constitute the major sectorsof the Somali economy.

(iii) The Somali manufacturing sector, which contributes approximately9% to GDP, consists of a few relatively large-scale publicly owned enterprisesand a large number of privately owned small scale enterprises, mainly engagedin producing consumer goods out of local raw materials for the domestic mar-ket. The only export-oriented industries are two factories producing meatand meat products and five factories engaged in fish processing. The mainproblems affecting the growth of the manufacturing sector are scarcity ofnatural resources, smallness of the domestic market, lack of skilled man-power and ability to prepare and execute projects. The private sector hasonly a limited role and future industrial investments will predominantly bein the public sector.

(iv) Parastatal enterprises have constraints of skilled manpower, man-agement and financial discipline. Most of them are not very efficient.There is also a multiplicity of public sector agencies, including SDB andthe Ministry of Industry, each carrying out a number of functions startingwith project identification to ownership and management of industrial enter-prises. The Government needs to rationalize these functions. A Bank para-statal mission, which visited Somalia in April 1976, is presently studyingvarious policy alternatives for initiating discussions with the Governmentto improve the overall situation.

(v) The Somali economy is largely non-monetized and Somalia's only fourfinancial institutions, all publicly owned, are the Central Bank, a commercialbank, a development bank, and an insurance company. Somalia's financialauthorities tend to discount the role of interest rate in mobilization andallocation of resources. An upward revision in private deposit rates inJanuary 1975 did not lead to any increase in the rate of growth of privatesavings and time deposits. The authorities propose to mobilize privatesavings through opening commercial bank branches in rural areas and throughthe postal savings system. Resource allocation is made on criteria ofimport substitution, availability of raw materials, foreign exchange earningsand employment potential and the opportunity cost of capital has littlerelevance in this context. The interest rate structure in Somalia reflects

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the Government's emphasis on the various sectors of its development program.Commercial bank rates on short-term loans are the lowest for public entities,higher for the private domestic borrowers and highest for the foreign borrow-ers. SDB's long-term rates are lower than the commercial bank's short-termrates and the SDB rates for loans to agriculture and handicrafts are lowerthan those to industry. The Somali financial authorities justify thesedifferentials on grounds of higher profitability of commercial operationsthan that of industrial enterprises and the need to give incentives forincreasing production in agriculture and handicraft sectors.

(vi) Somalia has had a low inflation rate until 1973. The ConsumerPrice Index (CPI) increased by 1.4% in 1971 and decreased by 1% in 1972.However, as a result of the drought in 1973 and 1974 and the world wideinflation, the CPI rose by 17.8% and 19.4% respectively. In 1975, CPIincreased by only 8%. The Somali authorities estimate that under normalconditions inflation will not exceed 5-6% per year. If this estimate isborne out by experience, real interest rates in Somalia would be marginallypositive. At the negotiations the Somalis agreed to increase their interestrates on mediumm-term and long-term loans to industrial sector from 6% and6.5% respectively to a uniform 7.5%, while maintaining the existing rateson loans to agriculture and handicraft sectors.

(vii) Despite its limited professional and management capabilities, SDB'sperformance so far has been creditable. It is the single most importantsource for medium and long-term funds in Somalia. Its disbursements in recentyears have increased sharply from the Sh 8 million annual average prior to1973 to Sh 46 million in 1975 accounting for 13% of total investments inSomalia and 27% of industrial investment. As of December 31,1976, SDB's cumu-lative approvals (net of cancellations) amounted to Sh 180 million of whichSh 17 million were equity investments. The main reason for SDB's largeincrease in operations since 1973 is its investment of Sh 70 million insubsidiaries two of which were promoted by it. SDB's financing has concen-trated in industrial and agricultural (crop-production) sectors. SDB is keento diversify its portfolio further and in particular is paying greater atten-tion to the fisheries sector. Most SDB clients are private Somalis parti-cularly in the agricultural sector. The average size of agricultural loanswas Sh 76,000 compared with an overall average size of SDB loans of Sh 353,000.Most industrial loans are large and are to the public enterprises as well asto SDB's directly promoted projects. Due to problems of infrastructure mostSDB loans are concentrated in three major urban areas, namely, Mogadiscio,Kismayu, and Berbera.

(viii) SDB is managing on behalf of the Government the long-term portfolioof Credito Somalo, known as the Development Loan Section (DLS), transferredto SDB on the former's dissolution. This section has a paid-in capital ofSh I million and accumulated losses of Sh 11 million. The Somali Governmenthas accepted responsibility for all portfolio losses of the DLS.

(ix) During 1976 SDB's paid-in capital was raised from Sh 99.8 million toSh 113.3 million. It is further proposed to raise it to Sh 200 million by 1980.

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The Government and the Central Bank will take up 90% of the capital whereasthe commercial bank and the insurance company will subscribe the remaining 10%.

(x) SDB's management is dynamic and influential but SDB lacks profes-sional staff with competence in project appraisal and financial management.It has agreed to recruit a few more Somali professionals and undertake anextensive staff development program including recruitment of four experts foran initial period of two years each and deputing staff to overseas institu-tions for training. IDA will help SDB organize this program. The Arab Fundfor Economic and Social Development (AFESD) has agreed to provide a technicalassistance grant of about $340,000 to SDB. The overall cost of the technicalassistance program agreed by SDB with IDA is $600,000 of which $260,000 willbe provided out of the proposed IDA Credit.

(xi) The overall quality of SDB's loan portfolio is satisfactory. Asof June 30, 1976, SDB's loan portfolio (including loans to its subsidiaries)consisted of 356 loans amounting to Sh 117 million, of which Sh 23 millionwere affected by arrears of over three months. Some of these arrears havesince been cleared and only loans totalling Sh 15 million were affected byarrears as of August 15, 1976; these include three loans aggregating Sh 11million to parastatal enterprises guaranteed by the Government. Of the 6equity investments amounting to Sh 17 million, outstanding as of December 31,1976, four involving Sh 16 million were in SDB's subsidiaries. SDB's equityinvestments in projects in serious difficulties amounted to Sh 7 million. Asof December 31, 1976, SDB's unaudited accounts show provisions against loansamounting to Sh 1.7 million, which appear to be inadequate. No provisionshave yet been made against SDB's investments in its subsidiaries, but SDBhas informed us that it will make adequate provisions there in its 1977accounts.

(xii) SDB's financial position is quite good due to its relatively largeequity base, and very small long-term debt. SDB's long-term debt/equity ratioof 0.3:1, as of December 31, 1976, was much less than 4:1 allowed by its law.Although SDB's provision of Sh 1.7 million is not adequate, its equity base islarge enough to take care of possible portfolio losses without affecting SDB'screditworthiness.

(xiii) Somalia is currently implementing an investment program of Sh 3.9billion for the period 1974-78, of which agriculture and industry accountfor Sh 1.1 billion and Sh 0.6 billion respectively. In the industrial sec-tor the emphasis is on modernization and balancing of existing enterprises,which is in the right direction.

(xiv) SDB has a reasonable pipeline of projects and good prospects ofincreasing its business. It is considered to be a suitable institutionfor an IDA credit of $5 million. Our association will enable SDB to improveits appraisal capability and help better allocation of resources in Somalia.Also, it will give IDA an opportunity to discuss industrial policies with theGovernment.

(xv) Given the need for SDB to have a reasonable spread on its borrowedfunds and considering the interest rate situation in Somalia, IDA funds

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will be on-lent to SDB by the Somali Government at 5%. SDB needs to havea spread of about 3% on its borrowed funds during the next two years toenable it to meet its administrative expenses, to make adequate provisionsagainst a rapidly increasing portfolio, and to build up some reserves. TheSomali representatives informed the Association at the credit negotiationsthat the Government will charge an interest rate of 2.5% on its loan ofSh 26 million to SDB to enable SDB to maintain the average cost of its bor-rowed funds at about 4% p.a. during the next two years. With the averageyield on its future loans during this period at 7%, SDB will be able tohave a 3% spread on its borrowings.

(xvi) A $5 million IDA credit is recommended, of which an amount up to$260,000 will be available for financing the services of an Investment Advisorand an Agricultural Economist and for meeting a part of the costs of the staffdevelopment program. The balance amount of $4.74 million will be availablefor meeting the foreign exchange cost of sub-projects financed by SDB. SDBwill have a free limit of $50,000 for approval of a sub-project and an aggre-gate free limit of $1.5 million. Foreign exchange risk on SDB subloans willbe borne by the Central Bank of Somalia. SDB should have a fixed amortiza-tion schedule of 15 years with five years of grace for the sake of adminis-trative simplicity and convenience.

I. INTRODUCTION

1.01 The Somali Development Bank was established in 1968 as a publiclyowned institution to take over the long-term loan portfolio of CreditoSomalo, 1/ a Government-owned bank which was being wound up, and to providefinancial assistance to productive enterprises in various sectors. TheWorld Bank's involvement with SDB commenced in 1969 when at the requestof the Somali Government a Bank mission visited Mogadiscio to examine theinvestment outlook and SDB's prospective role, but no lending resulted fromthe mission. The Bank renewed contacts with SDB in 1975. A ReconnaissanceMission visited SDB in January - February 1976 and found SDB to be a suitableinstitution for channeling credit to productive enterprises in Somalia andrecommended its appraisal for an IDA Credit. This report appraises SDBfor an IDA Credit of $5 million.

1.02 Objectives. IDA's main objectives in approving the proposed creditshould be:

(a) to supply SDB with foreign resources to enable it toprovide medium and long-term financing to productiveenterprises in various sectors within the framework ofSomalia's development programs and priorities. This isimportant since SDB is the only financial institutionproviding such assistance;

(b) to build up SDB into a strong institution with ade-quate capability to promote, appraise and superviseprojects and to pursue sound investment policies; and

(c) to provide an opportunity for the Bank to engage into adialogue with the Government on its industrial policies.

II. ENVIRONMENT 2/

The Economy

2.01 Somalia is one of the poorest developing countries; its per capitaGDP is only about US$100 (1975). The bulk of the population (3.2 million),

1/ Credito Somalo, a Government-owned bank established in 1959, had obtainedfrom USAID (through the Somali Government) a loan of US$2 million forinvestment in development projects. Most loans turned out to be bad anduncollectible. Consequently, the Government dissolved Credito Somalo in1968 and transferred its Development Loan Section (DLS) that is, itslong-term loan portfolio, to SDB to be managed as a separate fund.

2/ For a detailed analysis of Somalia's economy, see IBRD report no.702-SO dated 8/20/75 "Somalia: Recent Economic Developments andCurrent Prospects" in 2 volumes, and the Economic Updating memoran-dum dated November 12, 1976.

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35-40% of whom are nomads, is very poor with a simple and largely non-monetized economy depending on subsistence from livestock and agriculture.While there are no national income accounts in Somalia, GDP estimates, pre-pared by the Economic Commission of Africa, at constant factor cost duringthe period 1970-74, indicate an average growth rate of 5.3% per annum. How-ever, indications are that overall domestic output declined in both 1973 and1974 due to drought but recovered slightly in 1975, with the return of betterweather conditions. The main sectors of the economy are livestock, agricul-ture and industry.

Major Sectors

2.02 Livestock. Livestock is the principal source of livelihood ofabout two-thirds of the country's population. Livestock exports havetraditionally constituted over 50% of Somalia's total exports. Despitethe tremendous losses of livestock during the drought the value of live-stock exports was kept high due to higher prices and a 25% increase involume. Export earnings increased from Sh 223 million in 1974 to Sh 360million in 1975. The processing of meat in Somalia has improved recentlyand prospects for meat and leather industries are good.

2.03 Agriculture. Next in importance to livestock is the agriculturalsector. Bananas represent the second most important export item after live-stock and in 1974 accounted for 20% of export earnings. Total productionduring 1971-74 averaged about 150,000 metric tons per year but declined to130,000 metric tons in 1975 due to persistence of drought in the early partof the year. The National Banana Board (NBB), is planning to increase theproduction to 200,000 tons by 1979. Although banana exports, which havetraditionally been of the order of about 100,000 metric tons, declined to82,000 tons in 1975, their value increased from Sh 80 million in 1974 toSh 87 million in 1975 due to a sharp increase in export prices.

2.04 Fisheries. Considering Somalia's long coastline and continentalshelf, the fisheries sector has remained relatively underdeveloped. A 1974FAO fishing survey estimated that exploitable marine resources in Somaliarange from 200,000 to 2 million tons annually. An initial target to in-crease national production to 125,000 tons from the current catch of 5,000tons has been recommended. Somalia's 1974-78 development plan has givenhigh priority to development of this sector and the planned outlay is aboutSh 48 million. Presently there are five fish processing plants, includingthree canneries and two freezing and storage facilities. The industry hasbeen operating far below capacity due to insufficient catch. The Governmentis planning to increase the capacity of the fishing fleet, establish threefish harbors, and set up boat construction, repair and maintenance facili-ties. Fishing cooperatives are also being formed to operate the nationalcoastal fleet. About 80% of the total output is exported, the main exportbeing canned tuna. The value of fish exports has increased from Sh 2.9 mil-lion in 1969 to about Sh 15 million in 1974. It is believed that the volumeof exports in 1975 was twice that in 1974.

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Industrial Sector

2.05 Although the industrial sector in Somalia is rather small, itsimportance is increasing. The only comprehensive study on the industrialsector was carried out by UNIDO in 1973. The contribution of the manufac-turing sector to GDP was estimated to be 9% in 1973 and the number of work-ers employed was about 7,000. However, the share of the sector in GDP isestimated to have increased in 1974 and 1975 when significant increase incapital expenditures in the sector took place. During 1971-73 investmentsin the sector averaged Sh 26.0 million per year. In 1975, Sh 130.5 million,or 38% of estimated total annual investment, were invested in 19 industrialprojects including Sh 73 million for the expansion of a textile factory.Annex 1 provides an overview of the Somali industrial sector. The sectorconsists of a few relatively large-scale publicly owned enterprises and alarge number of privately owned small enterprises. In 1973, there were 273manufacturing establishments employing five or more workers, of which 241were in the private sector and 32 in the public sector. Most industriesare agro-based, depending on local raw materials from agriculture, livestockand fisheries sectors and produce consumer goods. There are, however, sevenexport-oriented enterprises engaged in production of meat and meat products(2) and canned fish (5). Of the 273 manufacturing units, 77 are engaged inthe manufacture of food products, 41 in wearing apparel, 37 in structuralclay products'and 30 in furniture. The gross value of output has grownsteadily from Sh 81.4 million in 1968 to Sh 246 million in 1973, at an aver-age annual rate of 25%. Value added in industry increased from Sh 51 mil-lion in 1968 to Sh 125 million in 1973 at an annual rate of 16%. Publicsector enterprises accounted for about 65% of industrial employment, 74%of value of gross output and 85% of value added. Mogadiscio and the sur-rounding area are the main commercial centers and account for 75% of totalindustrial establishments and 80% of the industrial output.

2.06 Objectives. Although the Government's objectives in the industrialsector are not explicitly stated, they appear to be the following: (a) reach-ing self-sufficiency in some essential goods such as sugar; (b) encouragingagro-based industries primarily for local consumption; (c) promoting importantimport substitution industries particularly consumer goods; (d) creating jobssufficiently to absorb all university and high school graduates; and (e) in-creasing exports. These objectives are reflected in actual investments duringlast two years and in planned investments for 1976. Out of Sh 154 millionearmarked for industry in 1976, 58% is to be invested in modernization andexpansion of existing enterprises like the sugar, textile, meat and fishfactories. It appears that the Government has not placed enough emphasison export oriented industries, particularly livestock, where Somalia has arelative competitive advantage. Because of the very early stage of industrialdevelopment in Somalia, and the scarcity of skilled manpower, the Governmentis moving rather slowly in developing export oriented industries.

2.07 Strategy. In line with its political ideology, the Government hasselected public enterprises as a major vehicle to accomplish its objectives

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in the industrial sector. The main elements of Somalia's "industrial strat-egy" are: (a) improving the efficiency and profitability of existing pub-lic sector enterprises; (b) setting up new enterprises vital to the econ-omy in the public sector; (c) consolidating small units into cooperatives;(d) permitting foreign investors to set up joint ventures with public enter-prises.

2.08 Role of the Public and Private Sectors. The Government has notso far clearly spelt out the areas for public and private sector participa-tion. But it is clear that major new enterprises will be set up in the pub-lic sector in line with the Government's socialist orientation, althoughforeign investors particularly from Arab countries may be allowed to par-ticipate in equity in minority positions. The private sector's role isrelatively small and likely to be further reduced; the current plan in-cludes only nine small projects in the private sector, of which eight havealready been implemented.

2.09 Institutions for Industrial Development. There are a number ofministries and other Government authorities (Ministry of Industry, Ministryof Fisheries and Marine Transport, municipalities and SDB) involved in theestablishment, supervision, and management of manufacturing enterprises.Of these, the Ministry of Industry and SDB are the most important. Theyhave been involved in some projects from the identification stage. Neitherof them possesses adequate expertise in preparation of feasibility studies,project implementation or industrial management; they were compelled toassume responsibility in these areas in the absence of alternative insti-tutional arrangements. In doing so they had to overstretch their limitedstaff capability and since they were unable to recruit good managers, themanagement quality of most enterprises is poor. The future role of theseagencies in industrial development has not been clearly defined. However,this does not appear to be a problem at this time due to the fact that theconcerned agencies are represented in all decision making committees andthere is frequent consultation among them concerning the selection and imple-mentation of projects.

2.10 A UNIDO expert recently submitted a proposal to the Governmentfor setting up of an Industrial Holding Agency which would establish newenterprises, make equity investments in and loans to industrial enterprisesand supervise and monitor the progress of projects; the prospects of theacceptance of the proposal in this form by the Government are slim because thenew institution would duplicate in certain respects, the functions for whichSDB was created. However, some of the functions currently executed by SDB,are not typical functions of a development finance company, and could perhapsmore appropriately be discharged by another agency. This is a problem whichshould be reviewed, and a suitable forum could be the discussions on the reportof the Bank mission which has reviewed the parastatal sector in Somalia. SDBcould carry out its development financing functions better if it concentrated

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on providing an independent check on its projects through its financing. Itcould also promote projects without assuming responsibility for their controland management.

2.11 Performance of Public Enterprises. Most public enterprises arenot efficient due to various reasons including shortage of natural resources,exacerbated by the recent drought, smallness of the domestic market, lackof financial expertise and poor management. A number of them did not haveadequate long-term funds and used short-term commercial bank funds to financefixed assets, large inventories and inter-enterprise debt during the last fewyears. Primarily for this reason, commercial bank advances to trade andindustry jumped from Sh 330 million in 1972 to Sh 865 million in September1975 (see Annex 2), which led to a liquidity crisis compelling the centralbank to advance huge sums to the commercial bank. To rectify the situationa law was passed in October 1975 empowering the Central Bank to reorganizethe financial structure of parastatals. The main objective of the legislationis to settle inter-enterprise debt in order to have a clear picture of eachentity's financial situation. The Central Bank has undertaken an exerciseto take over from the commercial bank such portion of the outstanding short-term loans as had been used by the parastatal enterprises to finance fixedassets and to convert them into long-term debt of about 10 years maturity at2.5%. This exercise is still underway and should contribute to a healthierfinancial picture of the parastatals.

2.12 The Somali authorities have recently initiated a few other pro-grams to develop the accounting and financial skills of the staff working inparastatal enterprises. Firstly, the central bank has intensified its train-ing program in the areas of accounting and financial control for the benefitof the junior and intermediate level staff of parastatals in addition to thetraining facilities available in SIDAM. Secondly, the Government has recentlyinvited a leading British firm of chartered accountants to make an offer as tocosts, time, etc., for strengthening auditing capability in Somalia and forfinding solutions to the present financial situation of a number of parastatalagencies. Thirdly, a UNIDO expert has been commissioned by the Government todraw up a "National Unified Accounting System" for the parastatal enterprises.Also a Bank mission recently visited Somalia to look at the parastatal sectorand to suggest measures for improving its performance. Its study is under-way. These are steps in the right direction and should contribute to theevolution of an environment wherein parastatal enterprises could operate moreefficiently.

2.13 Small-Scale Industries and Industrial Cooperatives. There is alarge number of small scale enterprises in Somalia. Sixty-eight percentof the total or 151 such establishments employed 5-9 workers and 84% employed5-19 workers. 1/ Small family units or proprietary concerns employing less

1/ Source: "Small Scale Industry Development: Proposal and Programsfor its achievement in Somalia". UNIDO, July 1974.

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than five workers were estimated in UNIDO's 1973 Survey Report at about 3,700,employing over 4,700 workers. In view of the limited role of the privatesector in meeting industrial investment targets under the Plan, an investmentof only Sh 1.5 million is expected to be made in 1976 in small-scale indus-tries and handicrafts. The bulk of this amount is earmarked for developmentof cooperatives. The Ministry of Industry, has so far organized 16 coopera-tives with a total membership of 1,164 and more are expected in the nearfuture. Those already established include six cooperatives of hand loomersand two each of iron workers and basketery producers. These cooperativesemploy nearly 1,200 workers. The Ministry has so far spent Sh 3.75 millionin providing worksheds to the cooperatives and is planning to spend more onmechanizing some of the units.

Financial Sector

2.14 Somalia has only four financial institutions, all publicly owned:the central bank (CBS), a commercial bank (NCB), a development bank (SDB) andan insurance company (SICOS). NCB was established in 1975 by merging the thenexisting two commercial banks (the Somali Commercial Bank and Somali Savingsand Credit Bank). NCB has a paid-in capital of Sh 15 million contributedequally by the Somali Government and CBS and reserves (as of December 31,1975) of Sh 9.5 million. It has a network of twenty-five branches of whichsix are located in Mogadiscio. NCB normally provides only short-term loans 1/and charges interest rates ranging from 7-12%. As of December 31, 1975,NCB's total assets amounted to Sh 1,270 million; its deposits totalled Sh 564million of which Sh 179 million were in savings and time deposits.

2.15 Commercial credit to the private sector and public enterprises,which had increased by about 69% in 1973, rose at substantially reduced ratesof 49% and 4% in 1974 and 1975 respectively. The bulk of the credit expansionis related to trade and industry, although in recent years agriculture hasreceived a markedly higher percentage (see Annex 2). The credit expansion isdue not only to rising world prices of Somali imports of food grains, oil etc,but also to the dependence of many public enterprises on the banking systemfor their capital requirements. The absence of inventory control and per-sistence of inter-agency indebtedness among Government entities have alsocontributed to pressures on bank credit (see para 2.11).

2.16 SICOS was set up in 1969, with a paid-in capital of Sh 1 millionto be the sole insurer in Somalia to undertake fire, accident, marine, avi-ation and motor insurance. It invests its surplus funds in fixed depositswith NCB. SICOS is also contemplating to set up a reinsurance corporationas a joint venture with an Italian insurance company.

1/ A few parastatal enterprises have in the past used short-term fundsfrom the commercial bank for capital expenditures.

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2.17 Despite an upward revision of interest rates on private deposits inJanuary 1975, savings and time deposits rose by 16% in 1975 compared to anannual average rate of about 36% in the preceding three years. This slow-downin the rate of increase is partly attributable to a reduction of idle commer-cial bank deposits of public enterprises following increasingly strict creditpolicies pursued since 1974. The slower growth in deposits in 1975 alsoappears to be due to a decline in the savings potential of the employees inthe monetized sectors where adjustments in salaries and wages have not keptpace with the rising cost of living. The Government is now placing greateremphasis on encouraging savings habits among farmers and nomads through thepostal system.

2.18 The Interest Rate Structure

The main characteristics of the interest rate structure shown inAnnex 3 are as follows:

(a) Historically, Somalia has followed a low interestrate regime. While the Central Bank has recentlyrevised upwards the commercial bank's interestrates on deposits from and short-term commercialloans to the private sector, interet rates on short-term loans to parastatals and medium- and long-termdevelopment loans have remained unchanged for someyears.

(b) The differential rates for both deposits and loansfor the public and private sectors charged by thecommercial bank and for loans to various sub-sectorsof economic activity by SDB reflect Government'spriorities:

(i) the medium- and long-term rates on loans chargedby SDB (5.5% to 7.5%) are lower than the short-term commercial bank rates (7% to 12%); and

(ii) the medium- and long-term rates charged by SDBon loans for agriculture and handicraft (5.5-6%)are lower than those for industry (6.0-6.5%).

2.19 At the present time, Somalia does not seem to have a well devel-oped policy on the role of interest rates. The Somali authorities defendthe existing interest rate structure as follows:

(a) in view of the low level of monetization of theeconomy and of the level of disposable incomes,interest rates do not currently play a significantrole in mobilizing resources. The Government plansto step up efforts to mobilize private savings bythe establishing a number of branches of the commer-cial bank in rural and semi-urban areas and through

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the postal saving system. The level of interestrates might then play an increasing role in genera-ting private savings through these means;

(b) interest rate plays very little role in resourceallocation in Somalia. New private investment inthe future is likely to be minimal. Investmentdecisions in the public sector are taken by Gov-ernment agencies and the criteria for projectselection generally are import substitution, avail-ability of raw materials, foreign exchange earn-ings, and employment and training of local staff.The concept of opportunity cost of capital isalso nebulous in the Somali context. The commer-cial bank and SDB are the only sources of fundsin Somalia and their interest rates "represent"the cost of capital available in the country.Foreign resources available to Somalia in recentyears have all been at concessional rates of in-terest;

(c) interest rates on short-term commercial loans arehigher than on medium and long-term developmentloans because of higher profitability of the com-mercial operations which have long experience.Somalia's experience in managing and runningindustrial enterprises is limited. In view ofthe acute shortage of skilled manpower to operateand manage industrial enterprises the Somalis donot wish to "burden" such enterprises with highfinancial costs;

(d) low rates on loans for agriculture and handi-crafts are designed to increase production andto attract a larger number of nomads to settledoccupations.

2.20 While the allocative and mobilization role of interest rates inSomalia might not be irrelevant, it is not of critical importance. However,the Somali Authorities have agreed with the Association to carry out a studyof the level and structure of interest rates during the implementation ofthe proposed project to determine their adequacy (para 4.18). Somalia hashad a low inflation rate until 1973 as shown by the Mogadiscio Consumer PriceIndex (CPI) in Annex 4. The CPI increased by 1.4% in 1971 and decreased by1% in 1972. As a result of the drought in 1973 and 1974, and the world wideinflation, the CPI rose by 17.8% and 19.4% respectively. This was mainly dueto an average increase of 25% in food prices. The inflation rate declined to7.9% in 1975. The Somali authorities estimate that under normal conditionsinflation will not exceed 5 to 6% p.a. If this estimate is borne out byexperience, real interest rates in Somalia would be marginally positive.

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III. SDB'S ROLE

3.01 SDB was established to promote, assist and develop productiveenterprises in agricultural, industrial, mining, tourist, fisheries and live-stock sectors. Despite the various handicaps under which it has operated sofar, namely limited professional and management capacities and lack of supportfrom international institutions, SDB's performance has been quite creditable.Due to lack of entrepreneurship in Somalia and the predominant role earmarkedfor the public sector, SDB took the initiative in promoting a number of proj-ects in the industrial and agro-industrial sectors and even provided manage-ment, where necessary. In doing so, while it has stretched its capability tothe extreme, it has demonstrated great dynamism in accomplishing its tasksand is, therefore, regarded as an important development agent in the country,enjoying the support of the highest Government authorities.

Volume and Characteristics of Financing

3.02 Volume of Operations. SDB is the single most important source formedium and long-term funds in Somalia. In 1975, SDB's disbursements of Sh 51million accounted for 14% of total investments in Somalia and 27% of indus-trial investment. SDB's operations since its inception in 1968 are summarizedin Annex 5. As of December 31, 1976, SDB's cumulative approvals (net ofcancellations) amounted to Sh 180 million of which Sh 17 million were equityinvestments. Except for about Sh 8 million, all SDB's loan commitments as ofDecember 31, 1976, were disbursed. SDB operations recorded a sharp increasefrom 1973 onwards, mainly because of its investments amounting to Sh 69.6million in subsidiaries, including projects promoted by it (see para 3.07).Prior to 1973, SDB's annual approvals averaged only Sh 8 million.

3.03 Sectoral Distribution. SDB's financing has concentrated mainly ontwo sectors; industry and agriculture. An analysis of SDB's loan approvalsby sector is provided in Annex 6. SDB made 51 loans to manufacturing amount-ing to Sh 119 million, or 65% of total approvals. The second most importantsector, agriculture, received Sh 30 million or 17% of approvals. Othersectors receiving loans from SDB and their relative proportions were:transport (7%); tourism (2%); livestock (2%); construction and housing (2%);fisheries (1%); and others (4%). Although the manufacturing sector was themain beneficiary of the loans, the agricultural sector was the most importantin terms of number of operations; during 1968-1976 SDB approved 443 loans,or 77% of the total, to the agricultural sector mostly for small bananaplantations. SDB is keen to diversify its portfolio further and is payinggreater attention to the fisheries sector in particular.

3.04 Client Characteristics. Most SDB clients are private Somalisparticularly in the agricultural, livestock and fisheries sectors. Thirtypercent of loans to agriculture were for amounts up to Sh 18,000; the averagesize of agricultural loan was Sh 76,000 compared with an overall average sizeof SDB loan of Sh 353,000. In the industrial sector, the average size of SDBloan was Sh 2 million. Most industrial loans are to the public enterprises

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as well as to SDB's directly promoted projects. However, SDB's industrialclientele also includes 12 private borrowers, three of whom have recentlyset up a soap factory, a paint factory and a tile factory. The privateprojects are reportedly operating profitably. In line with the Government'spolicy SDB embarked on a program to actively assist cooperatives in 1973. Asof December 31, 1976, SDB had made loans to 37 cooperatives amounting to overSh 5 million. Cooperatives receiving loans from SDB were in the folllowingcategories: Fisheries (16 loans); agriculture (10 loans); handicrafts (7loans); chalk (2 loans); and salt (2 loans). SDB is planning to increase itslending substantially to cooperatives particularly in agriculture and handi-crafts sectors.

3.05 Geographical Distribution. Most SDB loans are concentrated in 3major urban areas: Mogadiscio, Kismayu and Berbera. This is due to the pat-tern of infrastructure development in Somalia; Benadir, the region whereMogadiscio is situated, has 75% of total number of establishments and accountsfor 80% of industrial output. To expand its activity in other regions of thecountry, SDB recently opened a branch in Hargeisa in the northern region andhas plans to open two more branches, one in the south and the other in themidlands (see para 4.06).

3.06 Economic Impact. SDB's activities have made substantial economicimpact by encouraging development of agro-industry and providing employmentto Somalis in both rural and urban areas. SDB has not kept statistics onemployment creation from all its projects but a rough estimate from a fewlarge industrial projects shows that investment cost per job ranged fromSh 87,500 - Sh206,000 ($13,900 - $32,000); this appears rather high but itis based on a very small sample. There are no data on investment cost perjob in the agricultural sector but they are believed to be much lower.

Promotional Activities

3.07 Due to lack of a Government investment promotion agency, SDB hasshouldered the responsibility of promoting projects in the industrial sec-tor. In recent years SDB has promoted a number of projects, including 6grain mills, a fruit processing factory (ITOP), and a flour and pasta mill.SDB has primarily provided 100% loan funds to these enterprises and directlymanaged these enterprises by seconding its senior and qualified staff. Thishas strained SDB's scarce manpower resources and has somewhat weakened SDB'sability to perform its primary function of financing productive enterprises.While SDB should continue its promotional activities, it should avoid, asfar as possible, assuming management responsibilities for these projects andshould try to find independent management for them. SDB's management isagreeable to such a suggestion, but feels that in the absence of an institu-tional framework for implementation and management of industrial enterprises,it may have to undertake these functions on a temporary basis in exceptionalcases in the future also. The Bank's parastatal sector mission is stillstudying appropriate recommendations in this area (see para 2.10) and willdiscuss them in due course with the Somali authorities. Meanwhile the tech-nical assistance arrangements which are an integral part of this project

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should help improve SDB's project promotion capabilities (paras 4.09 and4.10).

Management of the Development Loan Section (DLS)

3.08 On SDB's establishment in 1968, the Government transferred to itthe management of DLS as a portfolio to be kept separate from SDB accounts.DLS has a paid-in capial of Sh 1 million funded wholly by the Somali Gov-ernment, and a long-term USAID loan of Sh 9.5 million, originally on-lentto the defunct Credito Somalo by the Somali Government. As of December 31,1975, DLS's accumulated losses amounted to Sh 11.2 million. SDB realizedfrom the DLS in 1975 a management fee, at the rate of 25% of SDB's admini-strative expenses for that year, for looking after the operations of DLS.SDB shareholders have since decided to discontinue this fee. The Ministerof Finance has confirmed to the Association that SDB has no financial respon-sibility in respect of DLS.

IV. THE INSTITUTION

Charter

4.01 SDB was originally established under a Presidential Decree Law in1968 and its Charter was issued on April 30, 1970. Since the enactment of theCharter, Somalia's policy environment has undergone substantial changes, therevolutionary Government having announced adherence to "scientific socialism,"and SDB has outgrown its original dimensions. SDB's original objective wasto assist productive enterprises in various sectors and to take any otherinitiative aimed at the economic development of the country, with particularreference to encouraging the development of the private sector and within theframework of development programs and priorities established by the Govern-ment. In view of the revised priorities set in the country after the estab-lishment of the revolutionary government, SDB's main role is actually in thepublic sector with the exception of assistance to small farmers and to a fewsmall private industrial projects.

Capital

4.02 SDB's authorized capital has recently been increased from Sh 100million to Sh 200 million. No shareholder other than the Government ofSomalia (GOS) and the Central Bank of Somalia (CBS) is allowed to own morethan one-fourth of SDB's subscribed equity capital. SDB's paid-in capitalas of December 31, 1976, was Sh 113.3 million and is being increased toSh 200 million by 1980 in almost equal four annual tranches.

Board

4.03 Annex 7 contains a list of the Board members as of August 15,1976. According to the by-laws, SDB's Board is required to have a minimum

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of five and a maximum of eleven members. SDB's Board presently consists ofDr. Mohamud Jama Ahmed, Chairman (who is also the President), two represen-tatives of the Ministry of Finance, two nominees of the Central Bank ofSomalia and a representative of INCAS. 1/ SDB's Board meets about four timesa year and appears to be independent in making investment decisions. Withthe proposed new structure of SDB's equity, the Board would also probably berestructured to accommodate representatives of NCB and SICOS. In order toexpedite the approval of routine agricultural loans, SDB Board has delegatedpowers to the President to approve loans up to Sh 200,000 in any one casewithout an aggregate limit.

Management

4.04 Dr. Mohamud Jama Ahmed, an ex-civil servant and a former Ministerof Information and National Guidance, is the President of the Bank. He isvery dynamic and influential. He is ably assisted by Mr. Mohamud MohamedNoor, General Manager since 1970. Mr. Noor joined Credito Somalo in 1964after serving the Eastern Bank Ltd., Aden, for 13 years. He is responsiblefor the day-to-day management of SDB's affairs.

Organization and Staff

4.05 Organization. SDB is presently organized into five departments:Loan, Finance, Technical, Secretariat and Personnel. In addition it hasa separate unit for Internal Audit. The Loan Department receives all loanapplications, appraises agricultural loan applications up to Sh 200,000, anddoes documentation, disbursement and follow-up work. The Finance Departmentmaintains books of accounts, statistics and loan records. The TechnicalDepartment is responsible for project identification and promotion, technical,financial and economic appraisal of projects and implementation of projects.The Secretariat and Personnel Departments carry out routine service and per-sonnel functions. In view of the small number of professional staff and theneed to use it productively, IDA suggested to SDB to consider reducing thenumber of departments by having all appraisal and follow-up work done in onedepartment, to be called the Operations Department, and to carry out the dis-bursement and treasury functions in the Finance Department. Similarly, thePersonnel and Secretariat Departments could be combined in one AdministrationDepartment. IDA also suggested that SDB should have separate units for legalwork and SDB's subsidiaries. Annex 8 contains the proposed organizationchart, which is being implemented by SDB.

4.06 In order to expedite the processing of small agricultural loans, SDBestablished a branch office in 1975 at Hergeisa in the northern region of thecountry. It is managed by the former Chief Accountant of SDB who has beendelegated the authority to approve and disburse routine agricultural loans upto Sh 60,000 in any one case without any aggregate limit. Other branchoffices at Kismayu in the south and at Baidoa in the midlands are planned for1977.

1/ A joint venture manufacturing corrugated board cartons for bananas.

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4.07 Staff. SDB employs 61 staff members, of whom 16 are professionals;of the latter, three have been seconded to management positions in SDB's sub-sidiaries. Included among the professionals is Mr. D.L. Prasad, an Indianchartered accountant who, until February 1976, was on secondment from theNational Industrial Development Corporation (India) and is presently under aUNDP-financed UNIDO assignment up to June 1977. He is doing a fine job andSDB will need a man of his experience for the next 3-4 years. SDB intendsto retain him under the proposed financing arrangements for the technicalassistance program (para 4.10).

4.08 SDB currently needs to recruit five new Somali professional staffto carry out its existing operations adequately and also to cope with theincreasing volume of work in the foreseeable future: (a) two with under-graduate degrees in Economics 1/ to help appraise financial and economicaspects of projects, (b) one with a degree in Agriculture or AgriculturalEconomics to assist appraisal of projects in agricultural sector, (c) oneengineer to appraise technical aspects of projects, and (d) a legal advisorto take charge of the legal aspects of SDB's work. SDB has agreed to recruitmost of the new staff before the effectiveness of IDA credit.

Staff Development and Technical Assistance

4.09 The general level of skills of SDB professional staff is ratherlow and needs to be upgraded. While SDB has in the past sent some of itsstaff to training courses in Italy and to the EDI's project appraisalcourses, 2/ the training needs are still substantial. SDB has agreedwith IDA to undertake an extensive staff development program as early aspossible, on the lines indicated in the following paragraphs.

(i) Recruitment of the following experts for a minimumperiod of two years: (a) Financial Advisor to assistin financial planning and control; (b) InvestmentAdvisor to assist SDB in introducing appropriateappraisal and follow-up techniques; (c) an IndustrialEngineer to assist in technical appraisal of indus-trial projects; and (d) an Agricultural Advisor,with some experience in organizing cooperatives, toassist in appraisal of applications for financialassistance from the farmers and agricultural cooper-atives and in organizing cooperatives on sound lines.Somali counterparts will be attached to the expertswho will be required to give on-the-job training tothe other professional staff members as well in theconcerned areas.

1/ Degrees in Business Administration, Commerce or Accounting are notawarded by the Somali National University.

2/ Two staff members have attended EDI's Agro-industrial Project coursesin Washington and Kuwait and a third has attended the Industrial Proj-ects Course in Washington.

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(ii) Training of 4-5 SDB staff in institutions special-izing in project appraisals. This will be a long-term program extending over 4-5 years.

(iii) Training of 2 professionals in financial controland management in experienced DFCs for a period of6 months each.

(iv) Training of at least one suitable staff member withsome financial/accounting background to work for anaccountancy qualification (ACA or ACCA).

4.10 The Arab Fund for Economic and Social Development (AFESD) hasapproved a technical assistance grant of Kuwaiti Dinars 100,000 (aboutUS$340,000) for financing over the next two years the costs of (a) a Finan-cial Advisor and an Industrial Engineer for a period of two years each and(b) a major portion of the staff development program for the Somali staffspelled out above (para 4.09 (ii) to (iv)). The effectiveness of this grantwill be a condition of effectiveness of the IDA credit. For financing thecosts of an Investment Advisor, an Agricultural Economist and part of thestaff development program, it was agreed at the negotiations to set aside asum of $260,000 out of the proceeds of the IDA credit.

Procedures

4.11 Appraisals. The quality of SDB's appraisals (which are carried outin the Somali language) is somewhat mixed. While appraisal of routine agri-cultural loan applications up to Sh 200,000, which constitute the majority ofapplications appraised by SDB, is done in a standard format and is adequate,other appraisals are weak. For example, (i) contingencies and pre-operatingexpenses are not included in the cost of project; (ii) summarized financialprojections are prepared for only three years without indicating the mainassumptions; (iii) internal rate of return calculations are not carried out;and (iv) management capabilities of the sponsors and technical trainingarrangements are not adequately assessed. SDB plans to carry out internalfinancial and economic rates of return calculations in its project appraisalsin order to determine the financial viability and the economic soundness ofprojects. SDB also informed us that, before making commitments in the future,it will ensure that the beneficiaries of its assistance are legal entities.In the case of a few projects it promoted in the past, SDB first set up theprojects and then went about giving them a legal status. In order to involvethe heads of Technical, Finance and Loan Departments in the decision makingprocess to a greater degree than in the past, SDB is planning to set up a LoanCommittee, consisting of these officials and presided over by the GeneralManager, to review all appraisals before they are put up to the Presidentfor approval or clearance for presentation to the Board.

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4.12 Follow-up. Although SDB's internal procedures include basic fol-low-up of projects, these are not regularly implemented because of lack ofadequately trained staff. However, in respect of projects experiencingdifficulties, the management takes personal interest in investigating thesituation and in resolving their problems. Some of the major projects ex-periencing difficulties are SDB's own subsidiaries, located near Mogadiscioand managed by SDB's own staff; in such cases there is frequent consultationand reporting of operational position. The expatriate accountant also helpsin improving the quality of accounting in these projects and in evaluatingthose experiencing difficulties.

4.13 SDB's procurement and disbursement procedures are adequate. Incase of imported goods and equipment, SDB insists as far as possible, oncompetitive quotations, and disbursements are normally made to suppliers ofgoods and equipment. SDB's standard loan contract appears adequate but itwill have to be amended to include the usual covenants regarding IDA's rightsto visit projects financed out of IDA Credit, etc. SDB has not in the pastprepared amortization schedules of projects at the signing of the loan agree-ments but has now agreed to do so in the future. Also, SDB plans to obtainadequate insurance cover on project assets mortgaged to it.

4.14 Audit. SDB's accounts are audited by Messrs. Pannell BellhouseMwangi and Co., a Nairobi-based associate of the British firm of PannellFitzpatrick and Co. The auditors' certificate to SDB's 1975 accounts hadtwo important qualifications: a) the auditors were unable to ascertain thevalue of SDB investments; and b) SDB had exceeded in some cases the exposurelimits laid down in its by-laws. The reasons for the first qualificationwere that some of SDB's "subsidiaries" had not been given a legal status,they did not maintain proper accounts and no information regarding their oper-ations was available to the auditors. Out of four subsidiaries three havesince been given legal status and the drafting of the legislation in respectof the fourth is in progress. Audited accounts of three subsidiaries, as ofDecember 31, 1975, and of the fourth as of June 30, 1976, have been submittedto IDA. For the future also SDB will have its subsidiaries' accounts auditedat the same time as its own accounts by the same auditors. The position inrespect of the second qualification has since been regularized by amendment ofSDB by-laws. The auditors and SDB have confirmed to IDA that future audit ofSDB accounts will be carried out along the lines indicated in the Bank Group's"Illustrative Form of Audit Reports for DFCs".

Policies

4.15 SDB's statement of policies is incorporated in its law and by-laws.With a view to consolidating these policies in one place, SDB agreed at thenegotiations to adopt an operational policy statement as per Annex 9, beforethe effectiveness of the proposed IDA credit. This statement spells out SDB'soperational policies, investment criteria, exposure limits, loan conditions,financial policies etc. SDB is precluded from:

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(a) borrowing more than four times its net worth;

(b) lending for less than one year and more than 20 years;

(c) lending more than 75% of the total capital requirementof any individual project;

(d) providing financing (including guarantees) to an enter-prise in excess of 20% of SDB's net worth and makingequity investments in an enterprise exceeding 5% ofSDB's net worth;

(e) participating in excess of 49% in the equity of anenterprise;

(f) making equity investments in excess of 50% of SDB's ownnet worth; and

(g) managing an enterprise except as a temporary or transitionalmeasure.

4.16 Investment Policies. Because major investment activities inSomalia are earmarked for the public sector and SDB is the only institutionestablished to promote or finance development projects, SDB in the pastassumed the role of an entrepreneur, a promoter and a financier. In theprocess it exceeded its exposure limit in financing a few enterprises pro-moted by it or salvaged by it out of the portfolio of the defunct CreditsSomalo. Some of these are still SDB subsidiaries while some others havebeen handed over to local bodies or other agencies of the Government aftercompletion. The Somali representatives at the credit negotiations clarifiedthat it is not SDB's intention to carry out a holding company function on apermanent basis even in respect of its existing subsidiaries (3) and that inthe near future SDB proposes to divest itself of its equity investments inthese enterprises and to assist them in recruiting independent management.However, the Somalis stated that in the absence of any alternative institu-tional arrangements in Somalia at present for setting up (and managing) pub-lic sector industrial enterprises, SDB may be called upon in certain casesto undertake these functions, in addition to its normal functions of promotingand financing projects, as a temporary measure. To enable it to do so withoutinfringing any provision of its by-laws, the latter have recently been amendedto authorize SDB to exceed its exposure limits in case of Government-sponsoredprojects, provided (a) such projects are first approved by SDB shareholders;and (b) credit risk in such cases is assumed by the Government. These amend-ments should provide adequate protection to SDB from undue direct exposure inGovernment-sponsored projects.

4.17 SDB's Autonomy. Many authorities and agencies are usually involvedin the investment decision making process in Somalia. Very often the projectideas are generated in the Ministries of Industry, Agriculture or Planning.

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Once these ideas are passed on to SDB for further examination and implementa-tion, SDB makes its own independent appraisal of the project (often with the

help of outside consultants); it can suggest changes in the design of theproject and even reject it outright.

4.18 Interest Rate. SDB charges interest from 5.5% to 7.5% on itsloans, with the lowest rate applicable to medium-term loans for agriculture,livestock, and handicrafts (see Annex 3). Considering the fact that theserates would only be marginally positive, (should the long-term Somali fore-casts of inflation at 5-6% p.a. be borne out by experience), IDA suggestedto the Somali delegation at the negotiations that SDB charge a uniform 9%on all its loans. The Somalis stated that any rate beyond 7.5% would repre-sent a major depature from the present level and structure of interest ratesin Somalia and would require a careful study and examination. The Governmenthas agreed to undertake such a study which will form the basis for continuingthe dialogue on interest rates between Somalia and IDA during the implementa-tion of this project. Further, the Somalis were keen on maintaining theexisting rates for loans to agriculture, and handicraft sectors. An agree-ment was reached during negotiations that SDB will in the future charge 5.5%and 6% on its medium- and long-term loans respectively to agricultural andhandicraft sectors and a uniform 7.5% on all loans to industrial and othersectors. Pending the outcome of the proposed interest rate study, the maincriterion for agreeing to the aforementioned rates was to ensure that SDBwould have a spread of about 3% on its borrowed funds during the nexttwo years to enable it to cover its operating expenses, make adequate pro-visions against doubtful investments, and build up some reserves. It wasalso agreed that the Somali Government would on-lend IDA credit to SDBat 5% p.a. and that the Government would charge 2.5% p.a. on the presentGovernment loan of Sh 26 million to SDB. Since this loan and the proceedsof the IDA credit would constitute the major portion of SDB's borrowedfunds for the next two years or so, the average cost of borrowed funds forSDB during this period would be around 4%. With loans to industrial enter-prises constituting about 80% of the operations, SDB's average yield on newloans during the next two years would be about 7%.

4.19 Foreign Exchange Risk. Until recently SDB was assuming exchangerisk on its foreign currency loans (USAID and Iraqi loans), which in thepast resulted in some exchange losses. As the outstanding amount of theseforeign exchange loans is only Sh 4.8 million ($800,000) and SDB also hasa revaluation reserve of Sh 78,887, its future exposure to exchange fluc-tuations is limited. SDB has recently amended its By-laws to the effectthat it will not assume such risks in the future. The Somali delegationat the negotation stated that such risks in the future will be assumed bythe Central Bank of Somalia. The Somali Government is against collectionof any fee from the ultimate borrowers of the IDA credit for the assump-tion of this risk by the Central Bank for the reason that this would amountto increasing the cost of foreign currency sub-loans. It however, agreed tostudy this question also when carrying out the interest rate study (seepara 4.18).

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V. PORTFOLIO, FINANCIAL CONDITION AND RESOURCES

Portfolio Evaluation

5.01 Loan Portfolio. As of June 30, 1976 SDB's loan portfolio (in-cluding loans to its subsidiaries but excluding DLS) consisted of 356 loansamounting to Sh 117 million. Loans to the industrial sector amounted toSh 85 million (or 72% of the total loan portfolio), of which Sh 46 millionaccounts for loans to SDB's own subsidiaries. However, in terms of numberof loans, agriculture accounted for 80% of total number of loans outstand-ing. SDB's loan portfolio also included 22 loans amounting to Sh 2 millionto cooperatives, most of which were engaged in fishing and crop production.

5.02 The overall quality of SDB's loan portfolio is satisfactory. Asof June 30, 1976, out of 356 loans totalling Sh 117 million, 103 loans amount-ing to Sh 23 million, or 20% of SDB's loan portfolio, were in arrears of overthree months. Some of these projects have since cleared their arrears andonly Sh 15 million of the loan portfolio was affected by arrears as of August15, 1976. The major defaulters were three parastatal enterprises accountingfor Sh 11 million of the portfolio; loans to these borrowers are guaranteed bythe Government and SDB is pursuing the recovery of the defaulted amounts fromthe Government. The remaining arrear-affected portfolio of Sh 4 million con-sisted of 93 small loans to farmers, most of which SDB believes are collect-able.

5.03 Equity Investments. Annex 10 provides details of SDB's six equityinvestments as of December 31, 1976 amounting to Sh 17 million. Four equityinvestments aggregating Sh 16 million were in SDB's subsidiaries; two subsidi-aries are problem-free, while the other two involving equity investmentsof Sh 7 million are facing difficulties. Of the remaining two equity invest-ments, only one investment in INCAS, a producer of corrugated banana boxesand polyethylene bags, was in serious difficulties. SDB decided towards theend of 1976 to write off Sh 1.048 million out of this investment in threeequal annual installments commencing December 1976.

5.04 Provisions. SDB has generally followed a resonable policy formaking provisions in respect of its loans and equity investments except itsloans to or equity investments in its subsidiaries in respect of which noprovisions in the past were made. As of December 31, 1976, as per SDB's pro-visional accounts, total provisions against loans amounted to Sh 1.7 millionwhich appear to be adequate only in respect of SDB loans to enterprises otherthan its subsidiaries. SDB's two wholly-owned subsidiaries (involvingequity investments of Sh 7 million), which are in difficulties, had cumula-tive losses, aggregating over Sh 10 million, as of December 31, 1975. Under-standings were reached at the negotiations that SDB will make adequate pro-visions against them in its 1977 accounts.

Financial Position

5.05 SDB's financial position is sound due to its large equity base, andvery low long-term debt. SDB's audited balance sheets covering 1972-1975 and

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provisional balance sheet as of December 31, 1976, are summarized in Annex 11.SDB's assets have increased fivefold from Sh 33 million in 1972 to Sh 161million in 1976. Such a rapid increse was mainly due to SDB's promotionalefforts and financing of a few large projects such as the flour and pasta milland the fruit processing factory. The increase in portfolio was primarilyfinanced by SDB's paid-in capital which increased from Sh 21 million in 1972to Sh 113 million in 1976. As of December 31, 1976 SDB's total assets wereSh 161 million consisting of loans (75%), equity investments (10%) fixedassets (2%) and current assets (13%). SDB's long-term debt/ equity ratio of0.3:1 was much less than 4:1 allowed by its law. Although SDB's provision ofSh 1.7 million is not adequate (see para 5.04), SDB's equity base is so largethat even if it were necessary to write off the entire amount of doubtfuldebts and accumulated losses of its subsidiaries, SDB would still be credit-worthy.

Financial Results

5.06 Since its inception SDB has been able to consistently generate amodest profit. Annex 12 provides SDB's audited income statements for 1972-1975 and provisional accounts for 1976. SDB's net profit after taxes de-creased from Sh 1.3 million in 1974 to Sh 0.4 million in 1975, or 0.4% ofaverage equity, due to provisions for bad debts of Sh 1.7 million and losseson investments amounting to Sh 0.4 million written off. According to theprovisional 1976 accounts SDB's profits for the year are likely to be aboutSh 0.8 million of 0.8% of average equity. SDB's administrative expenseswhich were 1.1% of its average total assets in 1975 increased to 2% in 1976due to recruitment of a number of new staff members, shifting of SDB Headoffice to more spacious premises and establishment of a Branch office inHargeisa. SDB's profitability is marginal due mainly to its interest ratestructure which allows it a very modest spread and to a very low leverage.SDB paid a dividend of Sh 16 per share of Sh 1000 in 1976 for 1974. Thisdistribution of unappropriated profits was done in view of the likelihoodof the Libyan Arab Foreign Bank participating in SDB's equity to the extentof 40% of the proposed Sh 200 million paid-in capital. However, the Libyanparticipation did not come through. Otherwise, SDB's shareholders do nothave dividend expectations from their investments in SDB's equity.

Resources

5.07 As of December 31, 1976, SDB had resources of Sh 4 million forfuture commitments; it had committed Sh 147 million as against its totalresources of Sh 151 million. SDB's local resources consisted mainly of itspaid-in capital (Sh 113 million), retained earnings (Sh 3 million), and amedium-term loan of Sh 3 million from the Central Bank. SDB also received aloan of Sh 26.1 million from the Government, regarding which understandingswere reached at the negotiations that it would have a maturity of 10 yearswith interest at 2.5% p.a. SDB's foreign resources include a Sh 4.5 millionloan from Iraq and a small loan of $50,000 from USAID. SDB's resource posi-tion became tight in mid-1976 because the earlier proposal of an equity in-vestment of about Sh 80 million from Libya did not materialize. To rectify

- 20 -

this situation the Government approved an increase in SDB's equity fromSh 100 million to Sh 200 million in five equal annual tranches startingOctober 1976. However, during 1976 SDB received only Sh 13.5 million outof the first tranche of Sh 20 million; the unpaid Sh 6.5 million is likelyto be received in 1977 in addition to the second tranche of Sh 20 million.

VI. PROSPECTS

Business Outlook

6.01 SDB's business prospects for the next few years appear to be good.The Five Year Development Program (1974-1978) envisages an investment of Sh3,863 million. The shares of the major sectors are as follows: agricultureSh 1,124 million; transport Sh 945 million; and industry Sh 588 million.The Annual Development Plan for 1976 involved an investment of Sh 813 million,including Sh 154 million for industry, Sh 151 million for agriculture, Sh 38million for livestock and Sh 12 million for fisheries. Out of Sh 154 millionearmarked for industry, 58% was to be invested in modernization and expansionof existing enterprises like the textile, sugar, fish and meat factories.While data on actual investments in these projects in 1976 are not yet avail-able, it is known that their modernization programs were underway in 1976.Some of the new projects to be implemented in the near future include anothersugar factory, a cement factory, a fibreglass boat factory, an oil refinery,a hide and skins development center, a fishing gear factory, and salt works.SDB, being the only Somali institution providing term finance for development,is expected to finance a sizeable portion of the projected investments.

Strategy

6.02 SDB perceives the following as areas of most immediate concern toit in the near-term:

(i) recruitment of professionally qualified Somalistaff and their training;

(ii) obtaining technical assistance in the areasof financial, economic and technical appraisal,follow-up and financial control;

(iii) organizing independent corporate set-up forwholly-owned projects and maintenance ofadequate independent accounts;

(iv) locating independent management for subsid-iaries and wholly-owned projects; and

(v) reaching out to the small farmers by estab-lishing branch offices in agriculturaldevelopment areas.

- 21 -

Forecast of Operations

6.03 While SDB's annual net approvals averaged Sh 42 million per yearduring 1973-1975, they declined to Sh 16 million in 1976 primarily due to lackof resources. With the proposed foreign resources from IDA and appropriatestaff development and technical assistance programs to improve SDB's capacityto appraise projects, SDB should be able to start operating at a much higher

levelin the near future. SDB expects to commit Sh 142 million (US$22.5million) over the period January 1, 1977 - June 30, 1979 in loans and equityinvestments. Given SDB's past record of financing about 15%-20% of theplanned investment in the industrial sector and its pipeline of projects as ofDecember 31, 1976, the forecast of operations is attainable. Annex 13 providesSDB's pipeline of projects which consisted of 92 projects needing financialassistance of over Sh 46 million. These projects are in addition to theprojects being identified by SDB for promotion and those specified in the FiveYear Development Program (see para 6.01). SDB also expects to provide Sh 8million in loans to 80 agricultural cooperatives.

Resource Requirements

6.04 SDB's forecast of operations during the next five years (1977-1981)and the underlying assumptions are provided in Annex 14 and 15. SDB's fore-cast level of commitments during January 1977 - June 1979, and the projectedresources position are likely to be as follows:

Resources 1977 1978 1979 TOTAL(Sh in million) (June 30)

Resources (gap) at the beginningof the year 4 (3) (31)

SDB Capital increase 27 20 10 57Algerian Development Bank loan 6 - - 6Internally generated funds 14 15 12 41

51 32 ( 9) 104

Uses

Loan commitments 45 52 30 127Equity investments 6 6 3 15Debt repayments 3 5 2 10

54 63 35 152

Surplus (gap) (3) (31) (44)

6.05 SDB needs Sh 152 million (US$24 million) to cover its projectedcommitments and debt repayments up to June 30, 1979. SDB expects to financethis by new equity of Sh 57 million, internally generated funds (loan collec-tions, depreciation, earnings and provisions) of Sh 41 million, a loan of

- 22 -

Sh 6 million from the Algerian Development Bank and SDB's uncommittedresources of Sh 4 million as of December 31, 1976. This will leave agap of about Sh 44 million ($7 million), of which IDA will provide Sh 31million ($5 million, that is, 22% of SDB's projected commitments for theperiod). SDB's other sources of long-term foreign exchange funds in thenear future are likely to be the European Investment Bank, which has re-cently shown interest in SDB's operations, and the AFESD. Furthermore,SDB has an understanding with the Government that should SDB need addi-tional resources earlier than the present projections indicate, the Govern-ment and the Central Bank would accelerate payment of their shares ofSDB's increased paid-in capital.

IDA Credit

6.06 The proposed IDA credit of $5 million would be on-lent by theSomali Government to SDB at 5% p.a. SDB would be able to use up to $260,000of the credit for financing part of the technical assistance program involv-ing an expenditure of about $600,000, of which $340,000 is being providedby AFESD (see para. 4.10). The balance amount of $4.74 million would financethe foreign exchange cost of goods and services of sub-projects approved bySDB. Foreign exchange risk on the sub-loans would be borne by the CentralBank of Somalia.

6.07 Amortization schedule. For the sake of administrative simplicityand convenience a fixed amortization schedule of 15 years with five yearsgrace has been proposed. SDB sub-loan terms are likely to range between fourto ten years, with an average life of seven years. Principal grace periodswill vary between one to three years. About 80% of SDB borrowers by number,accounting for about 20% of SDB sub-loans, are likey to be small agricultur-alists with loans having maturities of about four years. About 80% of theamount would be lent by SDB to parastatals, which are so intimately linkedto the Government, and the latter to SDB, that a composite repayment scheduleappears inappropriate. The fixed amortization schedule would involve roll-over of IDA funds by SDB. This is intended to improve SDB's resource positionduring the coming years when IDA will be one of SDB's main external sourcesof funds. Secondly, this should give SDB greater autonomy in planning andmanaging its cash flow, by reducing the need to go back to Government so fre-quently for resources.

6.08 Free Limit. IDA should require prior approval of each sub-projectusing more than $50,000 of the proceeds of the credit. This limit will enableSDB to approve the vast majority of its sub-loans, which are individually foramounts below the free limit. An appropriate aggregate free limit would be$1.5 million which would ensure that at least 70% of the amount of the creditwould come to IDA for approval.

- 23 -

6.09 Disbursements. The proceeds of the proposed credit would finance100% of the CIF cost of direct imports, and appropriate percentages, to beagreed with SDB, of invoice price of goods previously imported into Somaliaor of those manufactured locally and of construction costs, representing inall cases the import component of such costs.

Projected Financial Position

6.10 Projected balance sheets for 1977-1981 (see Annex 16) show thatSDB will continue to be a sound financial institution. SDB's assets areprojected to increase from Sh 161 million in 1976 to Sh 373 million in 1981,an annual growth rate of 18%. This appears attainable. The increase inassets will be primarily financed by equity increase (Sh 87 million), bor-rowed funds (Sh 100 million), and internally generated funds (Sh 25 million).SDB's long-term debt/equity ratio is expected to remain below 0.7 throughoutthe projection period reflecting substantial additional borrowing capacity;SDB's authorized debt/equity limit is 4:1. SDB's debt service coverage forinterest and principal payments is projected to increase from 2.5 in 1976to 5.5 in 1981, leaving ample cushion for any unforeseen shortfalls in loancollections. Provisions are projected to increase from 1.2% of loan andequity portfolio in 1976 to 4.1% in 1980. This is reasonable.

Projected Financial Results

6.11 SDB's projected income statements and cash flows are shown inAnnexes 17 and 18. Annex 19 shows relevant financial ratios. Projectionsshow that SDB's profit after tax is estimated to increase from Sh I millionin 1977 to Sh 5 million in 1981. The figures allow for provisions to bemaintained at 3% of year-end loan portfolio and 5% of year end equity invest-ments which are considered adequate. Net profit after tax as percentage ofaverage total assets is estimated to gradually increase from 0.5% in 1976to 1.4% in 1981. Given SDB's large equity base and its low interest rates,returns on its equity are projected to average only 1.7%. This is a verylow return. Since SDB's shareholders have no dividend expectations from SDB,this can be considered acceptable. Returns from SDB's loan portfolio areestimated to increase gradually from about 3.7% in 1976 to 6.6% in 1978 andto 7% in 1981 while the cost of borrowed funds is estimated to increase from2.4% in 1976 to 3.4% in 1978 and 4.6% in 1981. During the next two yearsthe average spread will be over 3%, but it will gradually decrease to 2.4%in 1981; this appears to be satisfactory. SDB's administrative expenses at2% of the average total assets in 1976 were rather high due to expenses asso-ciated with SDB's expansion but are estimated to gradually decline to 1.5%by 1981 with the projected increase in SDB's operations.

6.12 SDB's projected financial results are based, among other things, onthe critical assumptions that (a) SDB would charge an average 7% on all itsnew loans; (b) it would pay 5% on IDA credit and other future foreign credits;(c) it would pay 2.5% on the Government loan of Sh 26 million; and (d) it wouldhave no other domestic currency borrowings. On these assumptions, SDB wouldhave an average spread of 2.8% during the next five years on all its borrowedfunds. While the average cost of all long-term resources to SDB will be muchlower due to the projected increase in its equity, SDB would need a spread of

- 24 -

the magnitude indicated above on borrowed funds to be able to meet is admin-istrative expenses, make adequate provisions on a rapidly expanding port-folio, and create some reserves. Any increase in the interest rate onfuture foreign borrowings would adversely affect SDB's profitability; thisunderscores the need for the Somali authorities to complete their interestrate study (para 4.18) as soon as possible and for SDB to review its interestrate structure periodically.

VII. RECOMMENDATIONS

7.01 It is recommended that an IDA credit of $5 million be approved foron-lending by the Somali Government to SDB on the following terms and condi-tions. In view of the need to allow SDB a reasonable spread on the IDA credit,it is recommended that the credit be on-lent by the Somali Government to SDBat 5% per annum. The foreign exchange risk on the sub-loans would be assumedby the Central Bank of Somalia. For the sake of administrative simplicity andconvenience the credit should have a fixed amortization schedule of 15 yearswith a five year grace period. The proposed term of IDA credit would allowa rollover of funds by SDB which would help improve SDB's resource position.IDA should require prior approval of each sub-project using more than $50,000of the proceeds of the credit. An appropriate aggregate free limit would be$1.5 million, which would ensure that at least 70X of the amount of the creditwould come to IDA for approval. SDB will be required to maintain a debt/equityratio of 4:1.

7.02 The following are recommended as conditions of effectiveness of theabove credit:-

(a) that SDB has appointed an Agricultural Economist, anEngineer, a Legal Advisor and two graduates in Eco-nomics (para 4.08);

(b) that the AFESD Technical Assistance grant has becomeeffective (para 4.10); and

(c) that SDB's Board of Directors has adopted the State-ment of Operating Policies, as at Annex 9 (para 4.15).

ANNEX 1

SOMALIA

An Overview of the Industrial Sector in 1973

Public Private Total

Manufacturing establishments 32 241 273

Employment 4.,482 2,377 6,859

Wages & salaries (Sh million) 2500 7.2 32.2

Value of Gross Output (Sh million) 181.9 64.1 246.0

Value added (Sh million) 106.8 18.7 125.5

Gross fixed capital formation 18.7 4.7 23.4(Sh million)

Source: Industrial Sector Review,, UNIDO - DP/SOM/72/007, January 1976

IDA/EAPIDFebruary 28, 1977

ANNEX 2

SOMALIA

Outstanding Loans of the Commercial Bank by Sectors /(in Sh. million)

Sectors 1971 1972 1973 1974 Hpt .

Agriculture 18.3 46.1 64.9 184.1 207.2 19.0

Industry andHandicrafts 69.0 48.2 75.9 159.2 217.4 20.0

Trade 181.2 281.6 470.6 616.5 647.6 59.5

Other loans 28.8 27.2 61.8 6.8 16.7 1.5

Total 297.3 403.1 67302 966.6 1,088.9 100.0

1/ Including loans of public enterprises.

Source: Central Bank of Somalia

IDA!EAPIDFebruary 28, 1977

ANNEX 3

SOMALIA

Interest Rates Structure(as of Aug. 1,1976)

Central Bank of Somalia (CBS)

Discount rate ------------ 3.5%Government Credits ------------ 2.5%

National Commercial Bank (NCB)

Deposits Private PublicDomestic Foreign

Savings (ordinary) 2.0 2.0 1.0

Fixed Deposits

3 months 4.o 4.0 2.5

6 months 4.5 4h5 3.0

12 months 5.0 5.0 4.0

24 months 6.o 6.0 4.5

Over 24 months 6.5 6-5 5.0

Lending rates - overdraftsand advances 9.0 12.0 7.0

Somali Development Bank (SDB)Agriculture/ Industry/Handicraft Mining Others

Medium Term-tZ-6 years) 5.5% 6.o% 6.5%

Long-term (7-20 years) 6.o% 6.5% 7.5%

Source: Central Bank of Somalia

IDA/FAPIDFebruary 28, 1977

ANNEX 4

SOMALIA

Consumer Price IndexDecember 1971-February 1976-

(1970=100)

Rent & Fuel & General AnnualPeriod Food Water Clothin Lighting Miscellaneous Index ChargeWeight m (13) (4) (16) (100)

1971December 97.2 141.2 102.8 101.5 97.9 101.4 1.4%

1972December 101.0 110.5 107.8 6665 98.5 100.4 (1.0%)

1973December 123.8 121.0 115.2 80.4 107.9 118.3 17.8%

1974December 152.1 117.2 137.4 84.0 128.2 141.2 19.4%

1975March 154.9 117.6 138.6 83.9 145.1 146.1June 163.8 120.1 1145.9 91.0 148.3 153.0Sept. 158.7 125.0 151.4 79.3 148.7 150.5Dec. 160.8 125.3 158.4 79.3 149.1 152.4 709%

1976Jan. 167.8 125.1 160.1 79.3 152.9 157.6Feb. 166.8 126.5 162.0 79.3 156.9 157.9

General Index: average annual increase (1970-75) = 9.1%Food average annual increase (1970-75) = 10.4%

1/ Based on Mogadiscio surveys.

Source: Central Bank of Somalia

IDA/EAPIDFebruary 28, 1977

ANNEX 5

SOMALI DEVELOPMENT BANK

Summaa of Operations(1968-1976)

(Amount in ShIOOO)

Year Ending December 31 LOANS EQUITY TOTALNo. Amount No. Amount Amount

1968-1972 Approvals 184 35,429 4 2,454 37,883Commitments 184 35,429 4 2,454 37,883Disbursements n.a. 27,670 4 2,454 30,124

1973 Approvals 90 49,357 4 3,679 53,036Commitments 90 49,357 4 3,679 53,036Disbursements n.a. 34,138 4 3,679 37,817

1974 Approvals 75 35,820 3 2,824 38,644Commitments 75 35,820 3 2,824 38,644Disbursements n.a. 36,716 3 2,824 39,540

1975 Approvals 91 39,460 3 5,210 44,670Commitments 91 39,460 3 5,210 44,670Disbursements n.a. 45,915 3 5,210 51,125Cancellations n.a. (10,105) 1J - - (10,105)

1976 Approvals 136 22,784 2 9,5o8 32,292Commitments 136 22,784 2 9,508 32,292Disbursements n.a. 9,618 2 9,508 19,126Cancellations 2 (9,500) 2/ 4 (6,573)3/ (16,073)

Cumulative(1968-1976) Approvals 576 182,850 6 23,675 206,5Z5

Commitments 576 182,850 6 23;675 206,525Disbursements n.a. 155,478 6 23,675 179,153Cancellations n.a. (19,605) - (6,573) (26,178)

1/ Including a transfer of Sh. 4.5 million loan to ITOP's equity and cancellations ofundisbursed portion of some small loans.

2/ Transfer of a Sh. 7.5 million loan to the equity of Flour and Pasta Factory and aShs. 2.0 million loan to the equity of the Brick Factory.

a/ Includes investments sold or written off.

IDA/EAPIDFebruary 28, 1977

ANNEX 6

SOMALI DEVELOPMENT BANK

Loan Approvals by Sector(1968-1976)

(Amounts in Sh'OOO)

SECTOR Up to 1975 1976 1968-1976 %No. Amount No. Amount No. Amount No. Amount

Industry 48 107,950 3 11,264 51 119,214 9 65

Agriculture 327 25,069 116 4,892 443 29,961 77 17

Livestock 7 3,494 1 300 8 3,794 2 2

Fisheries 29 1,778 3 229 32 2,007 5 1

Transport 13 8,899 3 3,493 16 12,392 3 7

Water Development 4 2,517 - - 4 2,517 1 1

Construction andHousing 2 2,800 1 811 3 3,611 - 2

Tourism 2 4,201 - - 2 4,201 - 2

Others 8 3,358 9 1,795 17 5.153 3 3

Total 440 160,066 136 22,784 576 182,850 100 100

IDA/EAPID

February 28, 1977

ANNEX 7

SOMALI DEbELOPMENT BANK

Board of Directors(As of Aug. 15, 1976)

Board Member Position Appointed By

Dr. Mohamud Jama Ahmed!/ Chairman & President President

Mr. Sherif Abubaker M'ed Deputy General Manager Central Bank ofSomalia

Mr. Ali Mohamed Ibrahim Senior Officer Central Bank ofSomalia

Mr. Omar Haji Said Senior Officer, Ministry Governmentof Finance

Mr. Ahmed M. Nur2/ Director of Budget, GovernmentMinistry of Finance

Mr. Adam Abdi Hussen Director, INCAS Government

1/ Alternate Governor of the World Bank2/ Alternate Governor of the International Monetary Fund.

IDA/EAPIDFebruary 28, 1977

SOMALI DEVELOPMENT BANKPROPOSED ORGANIZATION CHART

(As of August 15, 1976)

HOARD OF DIRECTORS

I

PRESIDENT

Mohamud Jansa Ahmned

Advi,sor GENERAL MANAGER |

Investment Advisor Mohamrud Mohatned NoDo(vacant) BRANCHES

Fiwancial Advisor S_BRANCHE5

(D.L. Prasad)Industrial Engineer

(vacant) LOANAgricultural Economist C TTE

(vacawt)

SUBSIDIARIES INTERNAL AUDIT OPERATIONS FINANCE ADMINISTRAFION LEGALvacant Mohamned Shaikh llmi vacant Hassan Nur Osman vacant

3 p..tessionals I Professional

PROJECT DIVISION LOANS DIVISION PERSONNEL SECRETARIATHussen Mobhaniud Siad Mohamed Dirie Khayre Ahmed Abdi Isse Onmar Idosir Shaik

1 professional 2 professionals

Positions Filled Vacant

Professionalsat l .'dqar tars 18 12 6

Professninals dt

Subsidisrses 4 3 1

Non .roIvssis 45 45 -

C.patriates

Atisms 4 1 S

T,,tal 71 61 10

World Bank 16454

IDA/ EAP IDFebruary 28, 1977

ANNEX 9

Page 1 of 3

SOMALI DEVELOPMENT BANK

DRAFT STATEMENT OF OPERATING POLICIES

OBJECTIVES

1. The objectives of the Bank shall be to promote, assist and developor modernize any productive enterprise in the agricultural, industrial,mining, tourist, fisheries and livestock sectors and, in general, to takeany other initiative aimed at the economic development of the country, withinthe framework of development programmes and priorities established by theState.

OPERATIONS

2. The Bank will promote the agricultural and industrial developmentof Somalia through one or a combination of the several of the followingmethods:

(a) Provision of medium and long-term loans(b) Direct equity investments(c) Provision of guarantees for loans from other sources(d) Underwriting security issues, shares, stocks and similar

obligations(e) Preparation of feasibility studies

3. The Bank shall seek to diversify its investments by location, sizeand economic sectors.

4. The Bank shall give special consideration to projects utilizing con-siderable local raw material and emphasizing the use of national laborresources and to export oriented projects.

5. The Bank shall not normally refinance the existing indebtedness ofenterprises.

INVESTMENT CRITERIA

6. The Bank operations shall be guided by sound banking principles. Itsinvestment decisions shall be based on sound appraisal methods and will partic-ularly take into account the total financial requirements of the project andthe soundness of the resulting financial structure for the enterprise.

7. The Bank shall finance only economically sound, financially viable,technically feasible projects and those which have or will have competentmanagement; in determining the soundness and viability of the projects itproposed to finance, the Bank will normally carry out internal rates ofreturn calculations. It will also take into account the other economic benefitsof projects, such as employment potential and investment cost per job created,foreign exchange savings or earnings, transfer of technology etc.

ANNEX 9Page 2 of 3

CRITERIA FOR DIVERSIFICATION OF RISK

8. The Bank shall not extend loans exceeding three fourths of the totalcapital requirements of any individual project and shall further requirethat at least one-fourth of the total capital requirements of the project beactually paid in by the sponsor before the loan funds are released.

9. The Bank's total financing including guarantees to any individualenterprise shall not exceed 20% of the Bank's paid in capital and reserves.

10. The Bank's equity participation in any individual enterprise shallnot exceed 5% of the Bank's paid-in capital and reserves and 49% of thecompany's paid-in capital.

11. The Bank's total equity participations shall not exceed 50% of theBank's paid-in capital and reserves.

12. In exceptional circumstances where the Bank is required to providefinancing to large Government-sponsored projects, in excess of the limitslaid down in the preceding paragraphs (8-10), the Bank shall do so providedthe credit risk on the concerned projects is assumed by the Government.

LOAN CONDITIONS

13. The Bank shall not make loans for a period longer than 20 years orshorter than one year.

14. The Bank's Board of Directors shall determine from time to time therates for interest, commission, fees and other charges for the Bank's fundsor services. The charges will, as far as possible, be in line with the pre-vailing market rates for similar funds and services and will be at levelswhich will enable the Bank to cover its administrative and financial expenses,make adequate provisions against possible bad debts and provide a reasonablereturn on the paid-in capital.

15. The Bank shall at all times seek to protect itself against exchangerisks of foreign borrowings.

16. The Bank shall take such security for its loans and guarantees as itsBoard shall determine.

SUPERVISION OF PROJECTS

17. The Bank shall supervise its investments to protect its interests andto enable it to assist its projects to the maximum extent possible.

ANNEX 9

Page 3 of 3PROHIBITION OF BUSINESS

18. The Bank shall not accept from the public any deposits for periodsof less than twenty-four months.

19. The Bank shall not directly manage or administer any enterpriseexcept as a temporary or transitional measure.

FINANCIAL POLICIES

20. The Bank's total borrowings shall not at any time exceed four timesits paid-in capital and ordinary reserve funds.

21. At the close of each financial year, the Bank shall carry out athorough review of the quality of its portfolio and on the basis of thisreview make adequate provisions for possible bad debts and equity invest-ments out of its income for the year.

22. At the close of each financial year the Bank shall prepare theProfit and Loss Statements and the Balance Sheets of its own operationsas well as those of its subsidiaries and have them audited by independentauditors appointed by the Bank's shareholders.

23. Before the close of business each year the Bank shall prepare itsbudget for the next financial year, showing the estimated receipts andexpenditures of the Bank.

24. Before the close of business each year, the Bank shall prepare theforecast of its operations and resource requirements for the next two years.

25. The Bank shall allocate not less than 25% of its net profit eachyear to its Reserve Fund.

STAFF

26. The Bank shall recruit, as far as possible, qualified Somali staff forits operations. It shall employ foreign nationalsonly on contract for speci-fied periods for setting up adequate operational and financial procedures andfor providing training to the Somali staff. The Bank shall also arrange fortraining of its staffin appropriate institutions inside or outside Somalia inproject appraisal, supervision, and financial control and management.

IDA/EAPIDFebruary 28, 1977

ANNEX 10SOMALI DEVELOPMENT BANK

List of Equity Investments(As of December 31, 1976)

SD 's Share

Economic Amount as % of Net Profit DividendName Activity Outstanding Total Equity (Loss) Received Remarks

(Sh'000) (Sh '000) (Sh'000)A. Enterprises operating

profitably or problem-free

1. FIMA Auto spare 1,400 100% 918 880 Subsidiary.part distri- (1975) (1975) Received SDB loanbution of Sh 200,000.

Good prospects.

2. Flour & Past Flour & Past 7,500 100% 801 - Subsidiary.Plant production (6 months ended Received SDB loan

June 30, 1976) of Sh22.8 million.Good prospects.

B. Enterprises inimplementation/rehabilitation stage

3. Somaltex Textile 1,200 n.a. n.a. nil Recently modernized,and new managementinstalled. Goodprospects.

C. Enterprises operatingat a loss or intechnical difficulties

4. I.T.O.P. Fruit 5,000 100% (2,144) nil Subsidiary.processing (1975) Cumalative loss as

of December 31, 1975Sh6.4 million.Prospects improving.Received SDB loanof Sh12.5 million.

5. Brick Factory Bricks and 2,0nn 100% (3,938) nil Being incorperated astiles pro- (1975) a subsidiary. Uncertainduction prospects. Received

SDB loan of ShlO.4million.

6. INCAS Corrugated 2 n.a. (7,000) nil Being reorganized.cardboard boxes (1975) SDB wrote off its& polyethylene investment ofbags production Shl,048,000. Uncertain

prospects.17,102

IDA/EAPIDFebruary 28, 1977

ANNEX 11

SOMALI DEVELOPMENT BANK

Balance Sheets 1972-1976(Amounts in Sh T000)

As of December 31 1972 1973 1974 1975 19

Assets

Cash, deposits & S T Inveatments 8,900 10,200 8,800 2,354 14,948Accrued interest on loans 400 1,100 1,400 4,904 4,576Other current assets 700 1 300 1,200 - 1 503

Total current assets = 1 2,600 71,25 ,

Equity investments 2,500 4,900 7,800 12,952 17,102Loan portfolio 18,800 50,000 76,500 118,524 121,932Less: provisions (400) (700) ( (500) (2 079) (1,687)Loan Fbrtfolio (net) 1 0 49,200 760 I 120,245

Net Fixes Assets 200 400 400 1,203 2,039Deferred expenses 699

Total Assets -3,__0 69,10 ",0 1 2 16,1

Qaarantees as per contra 2,000 2,000 2,400 2,400 2,314

J-iabilities and Net Worth

Interest suspense - 100 100 1,565 3,903Short-term borrowings - - - 19,600Tax payable - - - 215 592Other current liabilities 700 2,100 3,300 3,650 5,791

Total current liabilities 700 2,200 3,400 25,030 10,286

Cooperative funds - - - 1,007 962

Z*dium and long-term liabilities

Loan from the Central Bank - 7,000 5,700 4,345 2,946Government loan - - - - 26,071Foreign loans 9,4oo 8,300 7,200 5,994 4,842

Total medium-& long-term 9,400 15,399 12,900 10,339 33,859loans

Paid-in share capital 20,600 48,600 76,800 99,807 113,307Reserves and surplus 400 1,000 2,200 1,425 2,698Grant - - 300 250 -

TItal Net Worth 21,00 49,6 7g,300 101 lI,

Total Liabilities and Net 33 100 69,100 98,000 140,258 161,112kbrth .. L.. -___ ___

Guarantees as per contra 2,000 2,000 2,400 2,400 2,314

P ProvisionalIDA/EAPIDFebruary 28, 1977

ANNEX 12

SOMALI DEVELOPMENT BANK

Income Statements (1972-1976)(Amounts in Sh '000)

Year BEding December 31 1972 1973 1974 1975 1976 l/

Revenue

Interest on loans 763 2,143 3,279 4,359 4,245Commitment fees 98 84 330 52 230Tncome from equity investments - - - 6 880Interest from short-term investments 277 57 (6) - 50Management fees / - 227 329 - -Other Income 3 17 64 60 94

Total Revenue 1,141 2,528 3,996 4,477 5,499

Expenses

Interest on borrowings 266 315 440 439 521Commitment fees - - - - -'rOtal financial expenses 266 315 440 439 521

Salaries and allowances 475 578 ! 785 741 2,054Other administrative expenses 168 273 411 495 1,028Depreciation 40 56 108 150 146Total administrative expenses 6T3 907 774

Provisions for bad debt 94 787 69 1,648 _Investment written off - - - 395 350

Total expenses 855 2,009 1,813 3,868 4,099

Net Profit before Tax 286 519 2,183 609 1,400

Taxes _ 187 922 215 592

Net Profit 286 332 1,261 394 808

1/ Provisional

2 Fees for managing the Development Loan Section and Cooperative Funds.

IDA/EAPIDFebruary 28, 1977

ANNEX -iJ

SOMALI DEVEIOPMENT SANK

Pipeline of Projects as of December 31, 1976

Name of the Project SDBts Financing needed

1. Sugar Mill (Expansion) 3,000

2. Fishing 3,000

3. Oil seeds processing .4,000

4. Sponge factory 2,000

5. Plastic Industry 2,000

6. Fbundry 10,000

7. Bottling factory 4,000

8. Sisal project 9,000

9- 18. Small industries and handicrafts 1,255

19- 22. Smnll Fishing projects 262

23- 92. Small agricultural projects 7.54746,o64

Pro.jects in Identification Stage

Name of the Project Estimated Cost(Sh in million)

1. Vegetable Oil Complex 20.0

2. Banana Fibre Project 15.6

3. Alumrinum Utensils 18.0

4. Animal Feed 4.0

5. Sanitary Ware and Tableware 60.0

6. Dry Battery Cells 3.0

7. Fertilizer Blending 15.6

IDA/EAPIDFebruary 28, 1977

ANNEX 14page 1 of 2

SOMALI DEVELOMENT BANK

Assumptions for Operational and Financial Projections

Approvals

1. 1977 1978 1979 1 1981(Amounts in Sh'millionT

Loans 45 52 60 69 79Equity Investments 6 6 6 6 6

Total 51 58 66 75 85

Eighty five percent of agricultural loans are for imports compared with eightypercent of industrial loans. All equity investments are in local currency.

Commitments

2. All approvals are committed in the same year.

Disbursements

3. Seventy five percent of loan commitments are disbursed in the year of commitmentsand twenty five percent in the following year. Equity investments are disbursed in theyear of commitment.

Tnterest Income

U. cExisting loan portfolio and : an annual average yield of 6.1%Undisbursed commitments

New loan portfolio : 7.0%

Dividend Income

5. For existing portfolio : an annual yield of 5.5% in 1977. Thereafter,a return of 3% per year is assumed.

New portfolio : an annual yield of 3% after the third year.

Other income from Loans

6. An appraisal fee of 0.5% on full amount of the loan.7. A commitment fee of 1 percent on the average undisbursed commitments.

Income from Short-term Investments

8. An annual average yield of 1.75%.

ANNEX 14

Financial Expenses Page 2 of 2

9. Amounts and terms of outstanding debts are as follows:

Repayment CommitmentSource Amount Interest Pi-rind Fee

(Sh million)

Central Bank of Somalia 2.9 3.5% 1977/1978 noneIraq 4.5 2.5% 1977/1980 noneUSAID 0.3 2.5% 1980/2010 noneGovernment loans 26.1 2.5% 1978/1987 none

10. New Borrowirls

IDA (1977-1979) 31.5 5% 15 years, 5 0.75%years grace

Algeria (1977) 6.0 2.25% 5 years, 2years grace

Administrative Expenses

11. Salaries and allowances increase at an annual rate of 10%.

12. Other administrative expenses increase at an annual rate of 15% per year.

Provisions for losses

13. Provisions are to remain at 3% of year-end loan portfolio and 5% of year-endequity investments.

Taxes

14. Income tax 30% of net profit before taxesMunicipal tax : 16.7% of net profit after income taxStamp duty : 1% of net profit after income and municipal taxesEffective tax rate = 42.4%

Equity Increase

15. SDB's equity is to be increased by Sh 26. 7 million in 1977 and Sh 20 millionper annum during the next three years.

Loan Collections

16. For existing loans, projected collections are based on actual repaymentschedules. It is assumed that the new bans will have an average maturity of 7 yearsincluding 2 years grace.

Receivables

17. Seventy five percent of interest income to be collected in the same year and25 percent in the following year.

Fixed Assets

18. Expenditure on fixed assets will be Sh 300,000 per year. The building is tobe fully depreciated in 20 years on a straight line basis. Other assets are to bedepreciated in 5 years.

IDA/EAPID

February 28, 1977

ANNEX 15

SOMALI DEVELOPMENT BANK

Forecast of Operations (1976-1980)(Amounts in Sh million)

Year Ending December 31 1977 1978 1979 1980 1981

Approvals

Loans 45 52 60 69 79Equity Investments 6 6 6 6 6

Total Approvals 51 58 66 75 85

Commitments

Loans 45 52 60 69 79Equity Investments 6 6 6 6 6

Total Commitments 51 58 66 75 85

Disbursements

Loans 37 46 58 67 76Equity Investments 6 6 6 6 6

Total Disbursements 43 52 64 73 82

Recoveries

Loan collections 10 10 16 19Sales of investments - - - -

Total Recoveries 10 10 16 19

IDA/EAPID

February 28, 1977

ANNEX 16

SOMALI DEVELOPMENT BANK

Projected Balance Sheets (1976-1980)(Amounts in Sh '000)

As of December 31 1977 1978 1979 1980 1981

ASSETS

Cash, depesits and short-term invest. 23,847 16,034 18,080 17,465 6,616Accrued income 5,128 5,747 6,489 7,284 8,075Current maturities of loan portfolio 12,681 14,241 23,302 33,641 45,641Other current assets 1,503 1,503 1,503 1,503 1,503Total current assets 43,159 37,525 49,374 59,893 61,835

Loan portfolio 140,437 176,446 211,144 244,253 275,487Less: provisions (4,070) (5,946) (7,623) (9,280)(10,773)Loan portfolio (net) 136,367 170,501 203,521 234,973 264,714

Equity investments 23,102 29,102 35,102 41,102 47,102Less: provisions (1,140) (1,440) (1,740) (2,040) (2,340)Equity investments (net) 21,962 27,662 33,362 39,062 44,762Net fixed and other assets 2,730 2,663 2,535 2,348 2,100

Total Assets 204,218 238,350 288,792 336,276 373,411

Guarantees as per contra 510 510 510 510 510

LIABILITIES AND NET WORTH

Tax payable 740 1,814 2,354 3,098 3,635Current maturities of term debt 5,183 5,747 5,756 4,621 5,871Other current liabilities 9,694 9,694 9,694 9,694 9,694Total current liabilities 15,617 17,255 17,804 17,413 19,200

Foreign Currency borrowings 20,386 33,004 62,283 88,524 121,604Domestic borrowings 24,496 21,886 19,275 16,664 13,954Total medium and long-term liabilities 44,882 54,890 81,558 105,188 135,558

Total Liabilities 60,499 72,145 99,362 122,601 154,758

Paid-in share capital 140,000 160,000 180,000 200,000 200,000Reserves and surplus 3,719 6,205 9,430 13,675 18,653

Total Net Worth 143,719 166,205 189,430 213,675 218,653

Total Liabilities & Net Worth 20 2-8 2-38-350 2 88792 336 276 373N41i

Guarantees as per contra 510 510 510 510 510

IDA/EAPIDFebruary 28, 1977

ANNEX 17

SOMALI DEVELOPMENT BANK

Projected Income Statements (1976-1980)(Amount in Sh '000)

Year Ending December 31 1977 1978 1979 1980 1981

REVENUE

Interest on loans 8,540 11,016 13,984 17,164 20,327Comimitment fees 112 131 146 173 199,-Jrmission 249 283 323 368 420I:ncome from loans 8,901 11,430 14,453 17,705 20,946

Dividend income 941 512 512 693 873Interest on short-term investments 480 569 430 477 307Other income 50 50 50 50 50

Total Revenue 10,372 12,561 15,445 18,925 22,176

*EXPENSES

Interest on borrowings 1,198 1,843 2,907 4,285 5,772Commitment fees 148 29 259 47 75Total financial expenses 1,346 1.822 3.166 4.332 5,847

Salaries and allowances 2,259 2,485 2,733 3,007 3,307Other administrative expenses 1,182 1,359 1,563 1,798 2,067Depreciation 308 368 428 488 548Total administrative expenses 3,749 4,212 4,724 5,293 5,922

Provisions for losses: loans 2,383 1,876 1,677 1,657 1,493equity investments 1,140 300 300 300 300

3,523 2,176 1,977 1,957 1,793

Total Expenses 8,618 8,260 9,867 11,582 13,562

Net Profit before taxes 1,754 4,301 5,578 7,343 8,614

laxes 740 1,815 2,354 3,098 3,635

-iet Profit 1,014 2,486. 3,224 4,245 4,979

IDA/EAPIDFebruary 28, 1977

ANNEX 18

SOMALI DEVELOPMENT BANK

Projected Cash Flow (1976-1980)(Amounts in Sh '000)

Year Ending December 31 1977 1978 1979 1980 1981

SOURCES

Net profit before taxes 1,754 4,301 5,578 7,343 8,614Depreciation 308 368 428 488 548Provisions 3,523 2,176 1,977 1,957 1,793Cash from operations 5,585 6,845 7,983 9,788 10,955

Incresae (decrease) in

Current maturities of term debt 5,183 564 10 (1,136) 1,250Other current liabilities - - - -Borrowings - foreign 15,544 12,618 29,280 26,240 33,080

- domestic (5,483) (2,611) (2,611) (2,611) (2,711)Paid-in share capital 26,700 20,000 20,000 20,000 -

Total Sources 47,529 37,416 54,662 52,281 42,574

USES

Increase (decrease) in

Loan portfolio 31,186 37,569 43,759 43,448 43,234Equity investments 6,000 6,000 6,000 6,000 6,000Dividends - - - - -Fixed and other assets 300 300 300 300 300Accrued income receivable 552 619 742 795 791Payment of taxes 592 740 1,814 2,354 3,098

Total Uses 38,630 45,228 52,615 52,897 53,423

Increase (decrease) in

Cash, deposit and short-term 8,899 (7,812) 2,047 (616) (10,849)investment.

IDA/EAPIDFebruary 28, 1977

SOMALI DEVELOPMENT BANK

Actual and Projected Financial Ratios (1973-1981)Actual Projected

Year Ending December 31 1973 1974 1975 1976 1977 1978 1979 1980 1981

A. Income Statement Items asPercent of Average Total Assets

Gross Income 4.9 4.8 3.2 1/ 3.6 1/ 5.7 5.7 5.9 6.0 6.2Less: Financial Expenses 0.6 0.5 0.3 0.3 0.7 0.8 1.2 1.4 1.6

Administrative Expenses 2/ 1.8 1.6 1.1 2.0 1.9 1.7 1.6 1.5 1.5Provisions 1.5 0.1 1.3 0.2 1.9 1.0 0.8 0.6 0.5

Net Profit after taxes 0.6 1.5 0.1 0.5 0.6 1.1 1.2 1.4 1.4

B. Net Profit and Dividends

Net Profit as % of Average Net Worth 0.9 2.0 0.4 0.8 0.8 1.6 1.6 2.3 2.4Dividend as % of Year-End Share

Capital

C. Selected Income and Cost Items

Income from Loans as % ofAverage Loan Portfolio 6.5 5.7 3.6 1/ 3.7 1/ 6.5 6.6 6.8 6.9 7.0

Cost of Debt as % of Averageborrowed funds 2.6 3.1 3.6 2.4 3.2 3.4 4.2 4.3 4.6

Margin 3.9 2.6 - 1.3 3.3 3.2 2.6 2.5 2.4

D. Structural Ratios

Long-term Debt/Equity 0.3 0.2 0.1 0.3 0.4 0.4 0.5 0.5 0.7Provisions as % of Year-End Loan and

Equity Portfolio 1.4 0.1 1.5 1.2 3.2 3.6 3.8 4.0 4.1

E. Debt Coverage

Debt Service Coverage (DSC) n.a. n.a. n.a. 2.5 4.8 3.0 2.9 3.9 5.5

1/ SDB changed its accounting policy in 1975 by not realizing income from irregular loans.2/ Excludes depreciation.

IDA/EAPIDFebruary 28, 1977

ANNEX 20

SOMALI DEVELOPMENT BANK

ESTIfATEL DISBURSIMEZN' SCHEDULE FOP, PR0OPOSED CRIIIT

Amount ( 'COO)

FY 1978

First QuarterSecond Quarter 50G 000Third Quarter 500,000Fourth Quarter 500,000

FY 1979

First Quarter 700,000Sbcond Quarter 700,000Third Quarter 700,000Fourth Quarter 700,000

FY 1980

First Quarter 700, 000

Total 5,000,000

IDA/EAPIDFebruary 28, 1977