this document has a restricted distribution and may be
TRANSCRIPT
Document ofThe World Bank
FOR OFFICIAL USE ONLY
Report No.: 20622
IMPLEMENTATION COMPLETION REPORT(Credit 2513-MAI)
ON AN
IDA CREDIT
IN THE AMOUNT OF SDR18.0 MILLION
TO
THE REPUBLIC OF MALAWI
FOR A RURAL FINANCIAL SERVICES PROJECT
June 20, 2000
Rural Development OperationsEastern & Southern Africa
This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
Currency Unit = Malawi Kwacha (Mk)At Appraisal US$1 = MK 4.00
At Completion US$1 = MK 45.70
WEIGHTS AND MESAURESMetric System
FISCAL YEAR OF BORROWERJuly 1st - June 30th
ABBREVIATIONS AND ACRONYMS
ADD Agricultural Development DivisionADMARC Agricultural Development and Marketing CorporationAPIP Agricultural Productivity Investment ProgrammeBDU Business Development UnitDCA Development Credit AgreementDEMATT Development of Malawi Traders TrustFAO Food and Agriculture OrganizationGOM Government of MalawiICR Implementation Completion ReportIDA Intemational Development AssociationIFAD Intemational Fund for Agricultural DevelopmentIDA Intemational Development AgencyLCB Local Competitive BiddingMFSP Mudzi Financial Services ProjectMOAI Ministry of Agriculture and IrrigationMOF Ministry of FinanceMRFC Malawi Rural Finance CompanyNGO Non Governmental OrganizationsQAG Quality Assurance GroupRBM Reserve Bank of MalawiRFSP Rural Financial Services ProjectSACA Smallholder Agricultural Credit AdministrationSAR Staff Appraisal ReportUSAID United States agency for Intemational DevelopmentWB World Bank
Vice President: Callisto MadavoCountry Manager/Director: Barbara Kafka
Sector Manager/Director: Sushma GangulyTask Team Leader/Task Manager: Jorge A. Mufioz
FOR OFFICIAL USE ONLY
IMPLEMENTATION COMPLETION REPORT
MALAWI
RURAL FINANCIAL SERVICES PROJECT
TABLE OF CONTENTS
Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 96. Sustainability 107. Bank and Borrower Performance 128. Lessons Leamed 129. AnnexesAnnex 1. Key Performance Indicators: 15
Table 1: Outreach IndicatorsTable 2: Sustainability Indicators
Annex 2a Project Costs and Financing, 16Annex 2b Project Costs by Procurement Arrangements 16Annex 2c Project Financing by Component 16Annex 3. Cost Benefit Analysis 17Annex 4a Bank Inputs: Site Visits 18Annex 4b Bank Inputs: Staff 18Annex 5. Ratings for Achievement of Objectives/Outputs of Components 19Annex 6. Ratings of Bank and Borrower Performance 20Annex 7. Supplementary Tables 21Annex 8. ICR Mission Aide MemoireAnnex 9. Government of Malawi's Project Completion Report
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.
1. Project Data
Name: RURAL FINANCIAL SERVICES Credit 2513-MAINumber:
Country/Department: MALAWI Region: Eastem & SouthemAfrica
Sector/subsector: AC - Agricultural Credit; FS - FinancialSector Development
Key DatesOriginal Revised/Actual
PCD: 07/24/91 Effective: 07/16/93 09/30/96Appraisal: 03/01/93 MTR: 11/22/95 11/30/96Approval: 06/15/93 Closing: 12/31/96 12/31/99
Borrower/Implementing Agency: Govemment of Malawi/Malawi Rural Finance CompanyOther Partners:
STAFF Current At AppraisalVice President: Callisto Madavo Kim Jay CoxCountry Manager: Barbara Kafka Steve DanningSectorManager: Sushma Ganguly Chaim HelmanTeam Leader at ICR: Jorge A. MuniozTeam Leader of Appraisal N. OkidegbeICR Primary Author: Tim Lamrock (FAG)'
2. Principal Performance Ratings
(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely,HU=~Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N-Negligible)
Outcome: S (with qualification)Sustainability: L (with qualification
Institutional Development Impact: SUBank Performance: S (marginally)
Borrower Performance: S (marginally)
QAG (if available) ICRQuality at Entry: U U
Project at Risk at Any Time: No No
FAO/CP This ICR is based on a draft prepared by the FAO/World Bank Cooperative Program, led by Mr.Lamlock, which carried out an ICR mission to Malawi from March 20 to 3 1St, 2000. The Mission's AideMemnoire is included as Annex 8 to this report. The ICR was finalized by Jorge A. Munioz (AFTRI) and StanleyHiwa (AFMMW), with contributions from Steven Jaffee (AFTPS).
3. Assessment of Development Objective and Design, and of Quality Entry
3.1 Original Objective:
The main development objective of the project was to improve access to financial services for therural sector on a sustainable basis. The overall strategy was to corporatize and convert the SmallholderAgricultural Credit Administration (SACA) into a limited liability finance company (Malawi RuralFinance Company - MRFC) for eventual privatization and conversion to a privately-owned rural bank.The other stated objective was to improve the policy and institutional framework for financialintermediation by supporting the development of linkages between the formal and informal financialsectors, and strengthening related non-financial institutions serving the rural sector.
The main objective was clear, concentrated on improving the impact and securing sustainabilityof rmral financial services, and built on the experience of previous rural credit projects2 . The initiativeformed part of continuing efforts in Malawi to assist smallholder farmers to increase their incomesthrough the use of purchased inputs and to enable a diversification of income in rural areas by financingthe start-up and expansion of micro and small non-farm business activities. The design of the project wasbased on the perceived satisfactory experience of SACA, through which large numbers of farmers wereorganized into groups and provided with loans and achieved, for a period of time, loan recoveries thatexceeded 90%. However, the SACA program was based on interest rate and crop input price subsidiesand harsh, politically-backed methods of loan recovery. SACA had been apart of the Ministry ofAgriculture and rural credit was thoroughly integrated into farm extension activities. The underlying totalcosts of the rural credit program were unknown. Achieving sustainability in rural financial servicesrequired that the new financial intermediary operate autonomously, that rural credit and extension beformally de-linked, that the company obtain high recovery rates, and that it apply commercial principlesto its operations. It was believed that SACA would need to be converted into a private rural bank toensure its sustainability. The project design provided for this transfomiation to take three years.
The objective of a commercially-run, rural financial intermediary was ambitious, given therelatively weak state of the Malawi economy in the early 1990s, as well as the weak human resource baseof the implementing agency. This challenge was even greater since MRFC was formed at a time of majorpolitical change and came to operate within a very volatile macroeconomic and sectoral environment.The original three year time horizon for transforming SACA into a private niral bank was unrealistic.However, the broader objective of establishing a commercially-viable rural financial institution, cateringto smallholder farmners and small rural businesses, was appropriate.
The second objective was not as clear and was too broad. The improvement of the policy andinstitutional framework for rural financial intermediation was a valid objective, yet this falls largely in thedomain of public policy and should have therefore been the responsibility of the Government. No specificprovisions were made for within the project to directly assist consensus-building and policy-making onrural finance. Instead, a responsibility for creating inter-organizational linkages was given to a newBusiness Development Unit within MRFC and it was assumed that, through such linkages, there wouldbe improved interaction between formal and informal financial institutions. Even if this were to occur, itwas not appropriate for a unit of MRFC to be leading a wider process of policy development for ruralfinance. Any public role was inconsistent with the activities of a Company that was working its waytoward a private sector status.
3.2 Revised Objective:The assumption in the SAR that MRFC would start from a solid foundation was undermined by
the virtual collapse of SACA in 1992/93 following a drought in 1991/92 and the politicization of credit inthe run-up to the 1994 elections. More than 80% of SACA's loan portfolio from the 1991/92 and 1992/93seasons was in default. The impact of this collapse on the project became clear between the time ofappraisal and effectiveness. Whilst the project documentation unden-vent no formal revisions, it was clear
2 In particular, the Bank-supported Smallholder Agricultural Credit Project (Cr 185 1 -MAI)
2
that the first and most critical step in project implementation was to rebuild a system of small farmercredit and to re-establish a culture and system for credit repayment. The perceived vacuum in smallfarmer credit was a major factor behind the decision on the part of the Bank's management to go aheadand declare the project effective in 1994 despite all the prevailing uncertainties.
Such a major change in operating circumstances should have ordinarily led to a re-appraisal of
the project. This was not done. Even without a re-appraisal, there should have been a formal reassessmentand restatement of the project's objectives, time-frame, and performance targets. This would haveprovided a realistic framework for implementation and facilitated subsequent supervision and ratings.The major changes in the country's political and economic circumstances had a substantial impact on the
operations of MRFC and on its own scope for growth and institutional development. Although a formalrestmicturing of the project never took place, from the time of the mid-term review it was recognized that
the 'private rural bank' solution might be both unrealistic and inappropriate, especially given MRFC'sclientele and its important 'public' or 'developmental' role in the rural economy. During the last twoyears of project implementation efforts were made to promote a dual commercial/developmental missionfor MRFC and to lay the basis for an altemative governance and ownership structure for the company
which might involve one or more strategic partners.
3.3 Original Components:The project originally had three components: (i) institution building (US$ 16.7 million with US$
8 million IDA financing) to corporatize and convert SACA into MRFC, and to use various institutions,including the Development of Malawi Traders Trust (DEMATT), to assist in preparing investnentproposals for agricultural, small and micro-enterprises and to provide related training and advisory
services; (ii) a line of credit component (US$ 20 million with US$ 17 million with IDA financing) tofinance the short-term loan requirements of farm and non-farm rural activities provided under asubsidiary loan agreement between the Reserve Bank of Malawi and MRFC3 ; and (iii) a pilot programcomponent4 to support innovative approaches to providing financial services to rural womenentrepreneurs.
During the project's implementation period, MRFC was also the implementing agency for the
IFAD-financed Mudzi Financial Services Project (MFSP). This project was designed to provide credit toboth farm and non-farm activities in a manner similar to RFSP, but to poorer groups for whom therequirement of collateral was waived. MRFC managed this portfolio on an agency basis for a fee. TheMudzi project has provided support to building the institutional capacity of MRFC in terms of technicalassistance, equipment and systems development.
3.4 Revised Components:The components were not revised, although some resource re-allocations were made within the
institution-building component and between this and the line of credit. The pilot program to support ruralwomen entrepreneurs was essentially developed under the Mudzi Financial Services Project.
3.5 Quality at Entry:An assessment carried out in 1999 by the Bank's intemal Quality Assurance Group (QAG)
concluded that the quality at entry for this project was poor. QAG determined that the design of theproject was not sound, especially with regard to the unrealistic expectation of converting SACAIMRFCinto a private rural bank within a relatively short time period. The QAG also noted that the overallmacroeconomic and policy environment had changed significantly after appraisal and that the project wasnot ready for implementation, which led to a gap of 15 months between project approval andeffectiveness. The ICR reaches the same conclusions, additionally supported by the finding that theassumption in the SAR that the repayment experience of SACA would continue following major political
Term of I5 years, with a 10 years grace period. The interest rate would be the RBM-determined reference rate, an average ofthe prevailing rates payable by the two commercial banks on savings.
'This was to support the development of new products and services and required no a-priori specification or budget allocation inthe SAR.
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and structural change was proved to be invalid before effectiveness, that the delay in effectiveness wascaused mainly by the changes and uncertainty in the project's operating environment due to the collapseof SACA, and that the component to achieve improved policy and institutional linkages in the ruralfinancial sector was wrongly designed. However, under the supervision of the Bank, there were changesto the strategy and targets of the project in line with the changed implementation circumstances so that,whilst the strict design and description of the project was deficient, its implementation satisfactorilyfollowed a more pragmatic approach with more realistic actions and targets.
4. Achievement of Objectives and Outputs
4.1 Outcome/Achievement of Objectives:The project supported the restoration of the smallholder farmer credit system during the mid-
1990s, rebuilding upon elements of the SACA staff and institutional structure, yet applying a new set ofoperating principles to better ensure sustainability and transparency. While it was not anticipated atappraisal, the operations of MRFC proved instrumental in the take-off of smallholder burley tobaccoproduction in the wake of structural adjustment reforms. This is one area where the Bank's contributionto the country's liberalization process was not limited to balance of payments support, but actuallyincluded significant assistance aimed at strengthening the emerging private sector. MRFC providedessential working capital for a large proportion of the newer smallholder and small estate tobaccogrowers, which in turn stimulated the emergence of the private Intermediate Buyer system in tobaccomarketing. MRFC credit provided the impetus and structure for an intensive effort-supported by theMinistry of Agriculture and Irrigation-to form and train farmer clubs. Many such clubs have receivedother types of support and are now aiding their members in input procurement, crop transport, and themarketing of different commodities. Survey and other evidence point to the beneficial effects of MRFCloans on smallholder client incomes and savings. The net profit of burley tobacco for an average MRFCsmallholder client (cultivating 0.2 ha) was estimated5 at US$ 132 during the 1998/1999 seasolk. MRFCfinances more than half of country's organized smallholder burley producers. During the 1998/99 season,MRFC financed roughly 25% of Malawi's total burley production, thus directly contributing to thegeneration of some US$ 39 million in foreign exchange eamings. These activities have injected someUS$ 20 to $30 million annually into the smallholder rural economy. MRFC's impact in small businessdevelopment has been more modest, although the company's financial services have provided improvedliquidity to crop trading networks in recent years.
The project was successful in creating, implementing, anid strengthening a rural financialinstitution that has operated on commercial principles', while retaining a focus on smallholder farmersand small business in a rural development setting. It was successful in formally de-linking credit fromextension, although MOAI extension officers remain important in the process of group training. Theemphasis on autonomy (especially in matters of lending policy and decision-making), despite the evidentpressures of Malawian politicians during a period of substantial adjustment and structural change in theagricultural sector, and the decision to adopt and implement selected commercial principles provedvaluable in progressing towards the project's objectives and helped in ensuring its sustainability during aperiod of volatile and generally unfavorable circumstances. There was a constant effort to enforce adiscipline of prudent financial management and to improve MRFC's products, loan recovery and clientrelations. On the negative side, MRFC has not developed effective local savings services, and was onlymarginally successful in creating a diversified risk profile in its lending operations as the projectmaintained a heavy bias towards rural lending to smallholders with one cash crop (tobacco), a riskyendeavor for a commercially-oriented institution. During the implementation of the project, it becameclear that MRFC could not operate as a profit-maximizing company if it were to continue to serve the
This is likely to drop by more than 30% this year, as tobacco prices are averaging only US$0.90 per kg,, down from an averageof US$ 1.38/kg. in 1999.
6 As a reference, Malawi's per capita income was estimated at US$ 190 in 1998/99.7 Including the application of commercial interest rates, the need for financial or physical collateral for loans, economic and
financial evaluation of proposed crop and business activities, and no loans to past defaulters unless they participate in a loanrestructuring and repayment program.
4
rural farming population, and the strategy that was followed was to apply, as far as possible, commercialprinciples to a development role.
The project was successful in re-establishing a smallholder farmer credit system. This has had amajor impact in facilitating the rapid growth of export-oriented smallholder farmers and increasing niralincomes in Malawi. MRFC's operations are likely to continue in the short-term, but the long-term futureof these operations, and the achievement of the main development goal of the project, sustainability inrural financial services, is doubtful and continigent on the decisions to be taken on the strategic optionsand other matters (see section F. Sustainability). At the time of writing the ICR, processes to examinethese issues are underway and the operating experience of MRFC in the next twelve months withoutBank supervision will be crucial in determining its future. It is considered too early to accurately assessthe final outconme, and the likely longer-term future of MRFC. For these reasons, the outcome of theproject is provisionally rated as satisfactory, with the qualification that this assessment needs to bereviewed in twelve month.s time to take these decisions into account. The following would need to bepresent at this time to maintain this rating: (i) continued expansion in outreach to the rural sector andimprovement in loan recovery resulting purely from actions of MRFC in the absence of Banksupervision; (ii) continued profits from operations; (iii) responsible cost control; (iv) satisfactoryresolution of issues concerning the future financial and technical partnerships currently under discussion;(v) determination of a plan for supervision of MRFC under Malawi legislation'; and (vi) continuedcommitment of the Government to support, or at least not to disadvantage, MRFC in the context of futurepolicy movements and donor-supported activities in rural finance. Non-perfonnance in any of these areaswould make the sustainability of MRFC in the longer-term unlikely.
4.2 Output by Components:Institutional Development: MRFC: The project was instrumental in creating the Malawi Rural
Finance Company as a private limited liability company registered under the Companies Act. The netvalue of SACA's assets and liabilities that were transferred as a Government contribution to the projectwas MK 45 million (US$3 million equivalent at the time of the conversion). MRFC commencedbusiness in October, 1994 with expatriate technical assistance in two key positions - General Managerand Financial Controller. The project supported MRFC with vehicles, equipment and supplies. A Boardof Directors was appointed which enabled MRFC to operate and take decisions independently ofGovernment. Significant investment was made in creating the maniagement and systems capacity ofMRFC, and the project was successful in creating the Company as a commercially run institution. WhileMRFC independently adopted its lending policies, there remained inevitable ties with Government. TheGovemment retained a 100% shareholding. Operational cooperation witlh the Ministry of Agriculture(and several other Ministries) was important, most significantly in the fonnation and training of farmerclubs. The vast majority of MRFC field and branch offices were located at Ministry of Agriculture ADDoffices.9
The majority of staff of MRFC initially came from the SACA program of the Ministry ofAgriculture, and a corporate culture change was needed to refocus staff towards commercial practices andattitudes. This was a high risk factor for the company's development, and the caliber and vision of themanagement of the company would be crucial in this challenging role. In addition, there was no provisionin the project to establish new branch and field offices separate from those of the Ministry of Agriculture.In spite of the extra costs that would have been incurred, it could be argued that this would have beendesirable for three reasons: (i) to create the perception in the minds of the borrowers that MRFC was nota continuation of SACA, and that strict repayment discipline and full commercial principles would beemployed; (ii) to clearly identify the cost of operating a branch network which would otherwise remain as
The current institutional and legal status of MRFC does not compel any Government authority to supervise it.Dmuing the project's implementation, MRFC was also the implementing agency for the WFAD-supported Mudzi Financial
Services Project. This project was designed to provide credit to both farm and non-farm activities in a manner similar toRFSP, but to relatively poorer beneficiaries for whom the requirement of collateral was waived. MRFC managed thisportfolio on an agency basis for a fee, and therefore the assets and liabilities of the Mudzi project do not fonm part of those ofMRFC. The Mudzi project has contributed to some innovations, yet it has consumed a large amount of MRFC managementattention and almost completely monopolized the efforts of MRFC's Business Development Unit.
5
a "subsidy" from the Govemment to MRFC; and (iii) to create identifiable "assets" that could be valuedin the context of a shift to private ownership. This issue should have been considered more thoroughly bythe senior management of MRFC as a necessary step in improving its knowledge of its customers and itsability to manage loan recovery, but the costs of so doing would have been high.
The project provided funds for the Development of Malawi Traders Trust (DEMATT) toundertake the preparation of investment proposals for potential clients of MRFC. DEMAIT didundertake some training for MRFC staff, but no investment proposals were prepared. More generally,MRFC failed to take advantage of the project resources available for consultancy support. The resistanceof management and the Board to drawing upon external (paid) advisors, was one factor which contributedto an over-dependence on the part of MRFC on technical and other advice from the World Bank.
The original objective of tuming MRFC into a private bank was never formally changed,although by the time of the mid-tern review (and indeed earlier) there were discussions about whether itwould be more advantageous that MRFC be registered and supervised as a 'non-bank financialinstitution' rather than as a 'bank' under Malawi law. Subsequent discussions focused on the feasibilityand desirability of privatizing the company. To most of the concerned stakeholders, a pure privatizationwas not considered an appropriate direction for MRFC. It was agreed that an Options Study be prepared,under the auspices of the Privatisation Commission, to explore various institutional options and makerecommendations to Government. A considerable delay occurred in the negotiations between thePrivitisation Commission and the selected consulting firm, such that the Options Study had not yet begunby the closure of the RFSP. In the meantime, it is 'business as usual' for MRFC with the exception that itno longer is formally supervised by IDA.
Policy and Institutional Linkages: The operations of MRFC were greatly affected by a range ofagricultural and financial sector policies, and a considerable amount of Bank supervision time was spentattempting to improve the policy and institutional environment. The emphasis of the project was oncommercially-based operations and it was not appropriate that MRFC would undertake activities thatwere clearly the responsibility of Government. However, the project did provide an opportunity for theBank and MRFC to participate in the national debates on wider institutional and policy issues, such asinterest rate policies, credit guarantee schemes, the choice of credit vs. grants for very low incomefarmers, tobacco marketing arrangements and costs, foreign currency or foreign exchange-linked lendingby financial institutions, and drought risk management in relation to agricultural credit. The commercialprinciples upon which MRFC was operating were a subject of much policy debate within Malawi. Effortswere made in promoting the continuation of reforms to improve market access and marketing efficiencyfor tobacco, raising awareness of the need for drought and exchange rate risk management measures, andpromoting an approach which makes clear policy and program distinctions between farm credit and ruralsafety nets (including grants). The impact of the project on policy and institutional reform was greater interms of preventing the back-sliding on sectoral policies or minimizing the potentially damaging effectsof certain govemment initiatives than on the design or implementation of new policy reforms in thefinancial sector. In spite of this effort, the whole policy and planning area for rural financial serviceswithin the Government remains weak. Several other credit/finance schemes were implemented during theproject with different terms and conditions which had a negative impact on MRFC, and which placed atrisk MRFC's (and others') efforts to create a strict repayment discipline in rural areag°
The project design did not make adequate provision for actions to affect the wider institutionaland policy framework for rural finance. There was an expectation that MRFC's Business DevelopmentUnit would strengthen inter-organizational linkages and perhaps foster dialogue on broader policy issuesin rural finance. In practice, the BDU focused its activities on staff training anid MRFC loan productdevelopment, with most of its efforts devoted to the Mudzi Project. Once the Mudzi procedures and MIS
" For example, both the Agricultural Productivity Investment Programme (APIP) and the Agro Inputs Fund operated with non-commercial interest rates and with a large measure of loan default guarantee from Government. 1lhese provided the privatesector operators (i.e. fertilizer companies) of these schemes advantages over MRFC. Repayment rates under these schemeswere comparatively poor despite the favorable terns offered to farmers.
6
arrangements were put in place, the BDU was essentially closed and its functions absorbed elsewhere in
the company.
Line of Credit: As a result of the collapse of SACA, when MRFC started its operations in 1994,its initial outreach covered only about 50,000 farm household beneficiaries. Economic reforms at the time
altered the economics of maize production such as to make it financially marginal for farmers to borrowmoney to implement the recommended maize technology package. The resulting shortfall in demanid wasmade up through the requirements for working capital of emerging small-holder tobacco growers. Over
the next two years, this outreach increased two and half times to approximately 120,000 households,including a small number of borrowers under the Mudzi program. Over the subsequent three years,MRFC's agricultural outreach has remained within the range of 100,000 to 140,000 (including Mudzi
borrowers). This outreach is partly a result of demand and partly as a result of MRlFC lending policies.
Demand has been influenced by prevailing interest rates and input and crop prices and by competitionfrom otlher soturces, both the commercial banks and various govemnment-backed schemes.
With liberalization came a relaxation of the former exclusion of smallholders from growing burleytobacco. This provided a major opportunity for some small farmers to engage in the production and direct
sale of a profitable export commodity. One key constraint they faced was access to operating capital. Thus,MRFC was instrumental in facilitating this process which in the course of just a few years wouldsignificantly change the structure of burley tobacco production and marketing in Malawi. Seasonal lendingoperations started in the 1994/95 cropping season. Seasonal loans were provided to fanners' clubs
(consisting of some 15-17 members) and to small estates (i.e. farms with some 10-25 hectares of land).The core of the agricultural lending was for inputs for tobacco and maize production, yet a small
proportion (i.e. 15-25%) of MRFC's agricultural portfolio was for otlher crops (i.e. cotton, rice, tea,spices) and livestock enterprises (especially poultry). Annex 7, Table S 1 shows the progress inimplementing seasonal loans. Overall loan recoveries have fluctuated between 72% and 96% during theproject, with an unweighted average loan recovery rate of 85%W1 Although this result was below the SARtarget of 95%, it is better than the performance of other Malawi financial institutions during this volatileperiod. Seasonal loans reached a peak in 1998/99 at MK 480 million, up from MK 191 million in1997/98, but with much of the increase due to the dramatically higher cost of inputs, and only a relatively
small increase in outreach, 110,000 beneficiaries as compared with 92,000. In 1999/00, some MK 373million has been lent to an estimated 83,500 beneficiaries.MRFC's average loan size is small in percapita terms, largely explained by the country's extremely low per capita income. The ratio of its loan
size to per capita income is 40%, comparable to 41% for other rural or microfinance institutions.
The commercial loan portfolio consists of individual business loans, group-based business loans,personal loans to employees of organizations, Mudzi group-based business loans administered under theIFAD Loan. Annex 7, Table S2 summarizes the commercial loan portfolios in MK million (and numbersof loans) consolidated for all MRFC branches. MRFC has revamped its lending operations for businessloans to improve the quality and sustainability of such lending. As a result of these changes, the nominalvalue of loans made and the number of beneficiaries fell in 1998/99 from the previous year. This
restructuring has improved the quality of the commercial loan portfolio. The percentage of loalis pastmaturity for personal and business loans has dropped from 12% in 1996/97 and 25% 1997/98,respectively, to 2% and 10% in 1998/99 (Annex 7, Table S3). Commercial/business loans (primarily for
crop trading, making and repair of farm implements, and retail shops) constituted around 15% of theMRFC total loan portfolio in 1998/99. The proportion for 1999/2000 will likely be just over 20%.
L MIRFC has experienced three very good years and two years during which its loan recoveries were below 80%. One of thesetwo poor seasons was 1995/96 when MRFC undertook a huge expansion in lending at a time when it was simultaneouslycutting large numbers of (SACA-inherited) staff. The outreach expansion overwhelmed the company's oversight capacityand compromised its performance. Loan recoveries also fell short during the 1998/99 season for a number of reasons largelyoutside of the company's control (including a drought in one part of the country, very adverse commodity price movementsat one point in the season, and the failure on the part of the public Smallholder Tea Authority to repay MRFC for loansalready repaid (to STA) by farmers.
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Pilot Program for Women Entrepreneurs: The activities for this component were subsumedunder the Mudzi project. The vast majority of Mudzi clients are women, while the proportion ofbeneficiaries under the RFSP lending has generally been in the range of 35-45% (lower than the 57%international average for other microfinance institutions). There was an RFSP loan covenant that awomen entrepreneur action plan be prepared and it was assumed that any actions would form part ofMRFC's overall micro/small business strategy. This was subsequently overtaken by several events. Onewas the crisis management/ rebuilding focus of MRFC's early operations and the second was theemergence of a plethora of new donor-supported schemes to assist income-generating activities amongwomen. Later on, MRFC saw little reason to develop a specific action plan, especially because already amajority of its business loan clients (including Mudzi) were women. In 1999 a consultant did carry out astudy for MRFC but there has yet been little impact from this work.
4.3 Net Present Value/Economic Rate of Return/Cost Effectiveness.Neither a net present value nor an economic rate of return for the project were calculated at
appraisal. Recent studies on the financial viability of agricultural enterprises in Malawi indicate thattobacco is the most financially attractive smallholder crop, and that its export market price can supportthe use of purchased inputs. With the rise on price of inputs, particularly fertilizer followingliberalization, most smallholder crops now have reduced financial viability to the extent that the use offertilizers is not feasible, particularly for food crops.
The following observations on cost effectiveness are relevanit. In the Malawi context, at the timethe project was appraised in the early 1990s, there were probably three options available to the Bank forproviding agricultural input credit to smallholders: (i) creating of a separate financial institution thatinteracts between farmers and inputs supply companies; (ii) modifying the operating procedures of aMinistry of Agriculture-based institution; and (iii) supporting a variety of small, localized savings andcredit organizations piloting various schemes. Option (ii) would not have been financially sustainable andit went against the principles of the policy reforms being pursued. Option (iii) has been pursued by otherdonors, notably USAID, with limited success. Therefore, the creation of MRFC and the building of itscapacity through the project was considered to be the appropriate path and, whilst there was no analysisof these options at appraisal, it was probably justified.
However, the cost effectiveness of creating a separate institution for the provision of agriculturalinput credit needs to be considered in the light of the economies that can be achieved by linking creditservices with input provision. This option may not have been available in the early 1990s, as inputsupply for smallholders was still dominated by state-owned institutions, especially ADMARC. So, likeoption (ii), providing credit linked to ADMARC input supply would have gone against the process ofreducing the role of the State and allowing the entry of private sector finns. One way that the projectincreased the cost-effectiveness of credit delivery was by using the existing ADD facilities.
4.4 Financial Rate of Return:No financial rate of return for the project was calculated at appraisal, but an indicator for
financial performance of MRFC was set as the after-tax return on investment of 5%. MRFC's current rateof return on investment is 6%. This assessment is nominal. When adjusted for inflation and exchangerate movements, the overall perfonnance of the Company is less encouraging, as the asset base isdeclining in real terms and reducing its capacity to loan finance largely imported inputs. However, themost significant financial returns of the project were those captured by beneficiary farmers. For examnple,during the 1998/1999 season, net profits from burley tobacco alone by MRFC clients totaled some US$19million.
4.5 Institutional Development ImpactThe project was successful in creating MRFC as a commercially-oriented institution serving
smallholder farmers. The rating is satisfactory.
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5. Major Factors Affecting Implementation and Outcome
5.1 Factors outside the control of Government or the Implementing Agency
With smallholders entering burley productioni, the stop order system operated by Auctioni HoldingsLimited provided an effective mechanism for loan recovery which had a major positive impact on thefeasibility of advancing credit to smallholders.
* The oligopsonistic tobacco marketing system (with a marketing single channel through the auction stage)resulted in lower than equivalent world prices being offered, and high charges for sales commissions andstop order fees. There remain inefficiencies in the collection, grading, baling and transport systems thatoften downgrade tobacco, resulting in lower prices to farmers. There were incentives for farmers to sellto intermediate buyers thereby by-passing the stop-order mechanism, and resulting in increasing loandefault.
* Farm margins and profitability dropped over time, particularly for food crops. With the deterioratingexchange rate, fertilizers rose in price, up more than double in 1998. Food and cash crop prices did notshow the same relative increases and therefore financial margins on agricultural production werereduced, which in turn reduced the feasibility of using purchased inputs on credit, especially at highinterest rates.
5.2 Factors generally subject to Government control
- Delays in project effectiveness.
* Macro-economic instability with high inflation, devaluation of the Kwacha and lending rates reaching ahigh of 50%. This negatively affected the interest rates charged to customers with a flow-on increaseddefault rate, and undermined the lending base of MRFC.
- Weak political commitment of Govenmnent to support MRFC to become a viable rural financialinstitution, and lack of a clear policy for rural financial sector intennediation. There was a proliferationof different input supply/inputs credit schemes implemented by Government and donors during theproject, adding to confusion in the minds of borrowers as to terms and condition of such schemes, anddiminution of the strict repayment discipline being promoted by MRFC.
- Failure to adhere to time-bound action plans for examnining and working towards furture strategic optionsfor MRFC in the context of the privatization process.
• Political interference in the lead up to elections conceming the expectation of farners in participating,and the repayment obligations of borrowers.
5.3 Factors generally subject to Implementing Agency control
There was a commitment of the Board and management of MRFC to pursue the corporate strategy ofMRFC but there was not sufficient effort put into building extemal relationships with key policy-makers,farmer organizations, local officials, and the media. MRFC also fell short in nurturing a corporate teameffort in staff at all levels.
5.4 Costs and Financing:The investment costs incurred in building the capacity of MRFC was less than that expected at
appraisal ($11.4 million compared with $16.7 million), but the cost of the line of credit component was asexpected at appraisal (US$ 20 million) (Annex 2a). A reallocation of resources was made in late 1998,from some of the categories under institutional development to the line of credit.
9
6. Sustainability
6.1 Rationale for Sustainability Rating:Sustainability of rural financial services is the core of this project, and it is therefore the major
aspect that need to be assessed in determining the rating of the outcome of the project. The underlyingoriginal target for sustainability of the project was that MRFC would become a private bank. This was anunrealistic target in the time frame and business environment in which the project was implemented.Other indicative indicators for sustainability are presented in Annex 1, Table 2. The record is mixed.Loan repayment rates have met or exceeded the original target in two out of five years of operation. Theproportion of business loans past maturity was very high in the early years but has dropped significantly,and by 1998/99 was at the target. The record on financial indicators is also mixed, for even when thereturn on equity (in Kwacha terms) was within expectations, in real tenns, the return has been smaller ornegative.
In the year 1998/99, the recovery rate was 78% and 84% on seasonal and business loans,respectively. Total income was MK 357 milliod2 and, after a provision for doubtful debts of MK 143million, MRFC made a profit after tax of MK 14 million on shareholders funds of MK 170 million. Asimilar result is forecast for 1999/2000 where the recovery rate is budgeted at 80%. At the close of theproject, lending rates to MRFC clients were in the range 48% to 51 %, and returms on Treasury Billsaround 40%. This season's income from investment operations will exceed that from lending operations.With a reduction in lending activities, the net income from investment activities (net of cost of funds) isforecast at MK 190 million, compared with net income from lending activities of MK 51 million.
In the future, MRFC can be expected to achieve small annual increments in its loan portfolio sizeand outreach over the average levels achieved during the last three years. It will be able to break-even orearn a very small profit, provided that it maintains or exceeds its average loan recovery rate of 85%,maintains very tight cost management, and that nominal margins on lending and investment operationsremain at around 20% and 10%, respectively. Adverse changes to these parameters would force theCompany into a loss position. Further large devaluation's of the Kwacha could undermine MRFC'slending capacity, unless the Company is permitted to implement a currency risk management strategy(such as extending US Dollar-linked loans to finance export-oriented crops). The Company's operationswill continue to face climatic and agricultural price-related risks.
What were the main factors that explain the past sustainability of MRFC and how likely are theseto continue in the future? The main factors that have contributed to the commercial viability of MRFCover the past six years are: (i) a results-oriented corporate culture, free from political interference, and acompetent and politically astute Board of Directors; (ii) a favorable GOM monetary policy whichallowed high financial retums on Treasury Bills, combined with a strong management and informationsystem and effective financial management; (iii) profitable cash cropping opportunities for borrowerswith strong demand for loans, combined with a reasonably well functioning tobacco marketing and stop-order system; and (iv) close IDA oversight and advice of MRFC operations, and broader IDA policy-related pressure and support for MRFC's interests. Factors (i) and (ii) are likely to continue; (iii) issomewhat uncertain and risky, as the prospects for significant crop diversification by smallholders arepoor; and (iv) it will be indirect and considerably less intensive.
What is the likely future for MRFC? In the absence of a major devaluation, MRFC should haveadequate resources (from the retained resources from this project and from the on-going IFAD-supportedMudzi Project) to continue and expand its operations over the next year or two. The project's short-termsustainability is rated as likely. However, the longer-term sustainability of MFRC is more uncertain dueto the factors set out below and contingent on the operating experience of the companiy in the next twelvemonths and decisions to be taken during this time on its future.
12 US$ I =M 46 as at February, 2000.
10
6.2 Transition Arrangementsfor Regular Operation:The future sustainability of MRFC will depend on the impact on the company of: (i) the
continued macro-economic instability; (ii) the vulnerability of the company's loan portfolio and financialassets to climatic, price, or exchange rate shocks; (iii) the increased competition which the company isfacing, primarily from publicly-backed subsidy and grant programs in agriculture: (iv) its ability to meetoperation costs in the event of falling general interest rates, and hence reduced lending margins; (v) itsreduced lending capacity through the repayment of the subsidiary loan starting in 2003; and (vi) an
examination of the options for its future.
MRFC needs to implement an effective strategy to increase loan recovery from the present 78%-80% level towards 90%, to further diversify its loan portfolio, and to ensure that any increase in businessis of the highest quality possible. However, to improve administration of its loans in the field, MRFCwould need to increase its costs, both investment costs in field and branch office capacity (staff training,loan product development work, improved market understanding, etc.) and operational costs. At present,MRFC has a considerably lower (7.6) staff expense/total loan portfolio ratio than comparable peerrural/micro-finance institutions (14) so some expansion may be feasible.
Under the terms of the subsidiary loan agreement between MRFC and the Reserve Bank ofMalawi, repayments of capital would commence in 2003 for a period of five years. The amount ofprincipal and interest outstanding under the subsidiary loan agreement at Febmtary, 2000 is MK 710million (US$ 15.4 million). These repayments would represent a heavv drain on the cash flow of MRFC,and would result in a significantly reduced lending capacity by the end of the repayment period and in
reduced investment income. It is likely that Government will agree to renegotiate the terms of thissubsidiary loan agreement, for keeping these as they are would result in a significant reduction in theamount of loanable funds to smalHholders. A comparison with other nrral or microfinance institutionsshows that MRFC's asset base is comparatively low as a direct result of operating on borrowed equity.Most microfinance institutions in developing countries, especially NGOs, receive a significantproportion, or all, of their equity as a grant. Also, this feature of the financial structure of MRFC willhave a more immediate bearing on the assessments made of MRFC by any potential strategic partner, andwould need to be renegotiated with the Ministry of Finance or refinanced to ensure the maintenance of a
capital lending base.
It is recognized that the business of seasonal agricultural finance to small farmers is high cost and
high risk, and not inherently profitable, and therefore some degree of external "public" financial supportwill be required to maintain MRFC in the medium to longer term. Therefore, the future of MRFC willdepend on an analysis of future options, and actions on the part of the Board and management to activelyseek strategic partnerships.
It was envisioned that, by the closure of the project, options for MRFC's future govemnance andfinancing would have been explored and that the new governance/ownership structure would be in placeor at least be decided upon. There has been a delay in carrying out the Options Study and thus the projectcloses with question marks about future institutional development arranigements. While some fomi ofstrategic partnership-involving an injection of new lending resources, some re-negotiation of thesubsidiary loan agreement, and some further technical support-is envisioned, the details have yet to beworked out. The development of rural financial intemiediation is a high Govemment priority, and will beincluded in the future general dialogue between the Bank and the Goven-ment in both a sectoral andmacroeconomic context.
11
7. Bank and Borrower Performance
Bank
7.1 Lending:As identified by the Quality Assurance Group, the Bank was deficient in the design and
appraisal of the project since the objectives were unrealistic and the project was not ready forimplementation.
7.2 Supervision:The Bank supervised this project very closely, and provided valuable guidance to MRFC in the
absence of supervision from the Reserve Bank of Malawi. Intensive supervision was required to overcomedesign limitations, to maintain effbrts towards reaching unrealistic objectives and, when these wererecognized as unattainable, to assist MRFC and Government to adjust to new targets and strategies.
The future supervision of MRFC as a financial institution is unclear. The withdrawal of directBank supervision has left a vacuum (see footnote 7 above).
7.3 Overall Bank Performance:Overall, the Bank's performance is rated as marginally satisfactory.
Borrower
7.4 Preparation:Rated satisfactory. Govemment made significant contributions in the original design of the
project, leading a consultative process with key stakeholders.
7.5 Government Implementation Performance:The Govemment made available the remaining SACA funds ($3 million) as its contribution to
the project cost. The Borrower completed its contribution to the ICR. There has been general compliancewith legal covenants, although with some delays. However, it was slow in meeting the conditions ofeffectiveness, and has shown only moderate commitment to the project.
7.6 ImplementingAgency:MRFC's performance in implementing the project has been satisfactory with the Board and
management demonstrating commitment to the project, and to implementing the principles of commercialoperations and autonomy in the Company.
7.7 Overall Borrower Performance:Overall, the borrower's performance was marginally satisfactory.
8. Lessons Learned
The lessons to be learned from this project are:
Commercial banking and microfinance, though different, can be complementary. The vision offeredby the original design of the project required the creation of a microfinance institution and itsdevelopment into a full service commercial bank within the spate of three or four years which provedto be impossible. In addition, MRFC was to adopt a business strategy that focused on small farmerand small business clients-with the application of a core set of commercial principles. Theimplementation of this strategy created significant contradictions and trade-offs as credit demandoutgrew MRFC's potential outreach.
12
* Support to rural and agricultural finance institutions requires a relatively long-term commitment onthe part of donor organizations. At least a five- to ten-year time horizon may be necessary toadequately build institutional capacity and enable the piloting of products and outreach before scalingup. Under volatile economic conditions, the institutions need to develop strategies and copingmechanisms for which external support may be necessary. Regardless of the quality of its servicesand staff, rural/agricultural finance institutions will periodically experience bad years in line with thefluctuating fortunes of their clientele. This should be assumed in project design and, its occurrenceshould not (necessarily) imply that either the project or the institution is 'at risk'.
* Flexibility is critical in the design of rural finance components and it is ill-advised to ex-ante restrictthe types of clientele and types of activities which the financial institution cani lend to. Marketcircumstances will certainly change over the course of the project and new opportunities and newcompetition will arise.
* Large scale institutional seasonal lending to smallholder rain-fed agriculture is a costly and riskyundertaking. Some degree of subsidy, underwriting part of the initial and possibly some of theoperation's administrative and technical assistance costs, may be required if the expected developmentalimpact of such an enterprise justifies the costs. This is a good example that is fully consistent with theprovisions contained in Operational Policy 8.30, "Financial Intermediary Lending", which allow forinstitution-building grants, provided these are given as part of an agreed institutional development plan.In addition, the risk element needs to be mitigated by (i) some sort of drought- (or other weather ormarket-induced shock) relief insurance mechanism, and (ii) significant portfolio diversification withstrong urban links to offset the high co-variance of risk-exposure among rural borrowers. The projectwas successful in providing for the development of an institution which operates according to soundbusiness principles ("its commercial objective"). It also played a major role in the emergence of a largeexport-oriented and commercially-viable smallholder class of farmers ("its developmental objective").However, the project did not succeed in establishing appropriate risk-mitigation mechanisms to ensurethe long-term sustainability of the institution.
* Agricultural/rural finance should not, generally, form the basis for stand-alone projects. Agriculturalfinance is intimately tied up with broader developments in agricultural market development and theregulations of agricultural markets. The institutional solutions for agricultural credit may well derivefrom structural changes in agricultural marketing (either for inputs or commodities) and the dominantsuppliers of agricultural finance may not be financial institutions themselves. This should be carefullyassessed at the early stages of project preparation. In the particular case of MRFC, there were few, ifany, acceptable delivery channels for crop finance in the early 1990s. However, the agriculturalmarket context of its operations did not feature, explicitly, in project design.
* High loan recoveries for smallholder farmers can be obtained provided that there is (i) a profitablelead crop/livestock enterprise, (ii) there is a reliable quasi- or non-market institutional mechanism forloan collection (i.e., an auction stop order; a contracting organization), and (iii) loan repaymentdiscipline is not undermined by parallel quasi-credit programs which apply subsidized interest ratesand other preferential terms.
* In an agriculturally-based economy, rural and agricultural credit will always certainly be highlypoliticized. Managing political relationships is therefore critical to credit and institutionalsustainability. It is vital for rural financial institutions to build effective alliances and open channelsof communication with key policy-makers, farmer organizations, local officials, and the media.MRFC fell somewhat short in nurturing its extemal relationships. As a result, the World Bankbecame far greater involved in problem-solving and inter-institutional relations than would beconsidered optimal.
* Savings mobilization lies at the center of much of the 'best practice' literature on rural finance. Thereare, however, circumstances where significant attention to savings mobilization may not be
13
appropriate. In MRFC's case, the bulk of its clientele is resource-poor small farmers. Their farmingsystem and virtually all of their incomes is based upon rainfed agriculture, involving a single shortseason of rain and wide inter-seasonal climatic variability. Incomes are very low and little cashsavings are carried from one season to another. Carrying cash in rural Malawi is risky. Also, there isvery limited urban-rural flow of remittances. Were MRFC to promote savings and increasingly relyupon those savings for its lending resources, it would be amnplifying the effects of periodic drought onits operations. Drought results in reduced loan repayments and would also result in the simultaneouswithdrawal of deposit savings from its clientele. Mobilizing savings from other types of clients-i.e.urban residents-would have side-stepped this risk problem, yet would have diverted MRFC'sattention and resources toward urban areas, infrastructure development, etc.
* In circumstances of high inflation and risk of currency devaluation, it may be necessary to move toforeign currency (-linked) lending in order to preserve the capital of the financial institution and inorder to provide reasonable interest rates to borrowers. This can most easily be applied whenfinancing the production of exported commodities, especially those already priced in (or whose priceis linked to) foreign exchange.
* The capacity of rural financial institutions or agencies needs to be built with a heavy emphasis at fieldlevel, in the areas of physical infrastructure, field staff training, development of information and controlsystems, development of branches as profit centers and payment of staff incentives based on loanrecovery, loan portfolio diversification and savings promotion. Cost efficiency is crucial to success, andthis may increase the importance of information and communication technology in the future.
- The group joint liability principle has a positive impact on loan recovery, but its contribution to this isunclear. Perhaps the overriding influence on an individual's or group's motivation for repayment is toensure qualification for credit for the following season. Automatic loan recovery mechanisms through acontracting, marketing or processing organization, such as the stop-order mechanism for tobacco, makecredit schemes for cash and industrial crops far more justifiable in terms of sustainability than for foodand other subsistence crops, but provides reduced incentives to broaden the lending base;
* Short-term loan financing (by way of the subsidiary loan agreement) does not create a long-termcapital base for lending operations of a financial institution;
* Financial Institutions should be licensed under the banking legislation of the country from the beginningto enable continuing and consistent supervision in accordance with the prevailing regulations.
9. Partner Comments
(a) Borrower/Implementing Agency: none(b) Cofinanciers: none(c) Other Partners (NGOs/Private sector): none
10. Additional informationnone
14
Annex 1Key Performance Indicators
Table l: Outreach Indicators
Indicator .rigiial. 19.9419 -1995/96 1996197 1997.t9.: 1J998/99
# of Smallholder Clubs for 14,000 2,904 6,009 4,606 4,079 5,452seasonal loans (Mudzi in Clubs (614) (945) (639) (1,722)parentheses)# of Smallholder Club member 400,000 43,560 90,135 69,090 61,185 81,780beneficiaries (Mudzi in (9,210) (14,175) (9,585) (25,830)parentheses)% of Club Member No 36 37 37 39 41beneficiaries who are women specific
target# of Small Estate seasonal loan 7,100 3,310 7,930 6,414 7,449 6,918borrowers# of Business Loan clients 800 N.A. 817 1,190 1,834 1,567(Mudzi in parentheses) (678) (1,991) (4,796) (6,234)Total# of beneficiary 56,800 132,560 112,102 107,196 143,173households *# of Deposit Accounts No 10,056 19,709 28,899 51,843 61,783
specifictarget
- Based on the number of club members and business borrowers plus an estimated four beneficiaries perestate client given the onward financing of tenant households. The total beneficiary figure does notinclude recipients of personal loans. These latter have numbered 5,000 to 10,000 in recent years.
Table 2: Sustainability Indicators
tridicatbr.OrignlTre .~41994 , 1995196. 19961.. 19971~ 1998199:
95 . 97Loan repayment rate on >90% 95 75 89 90 79seasonal loansProportion of business loans <10% n.a. 37 30 25 10past maturityGross Margin (Lending rate No specific target 10 17 24 31 25- cost of funds)Staff costs/total loan No target. Peer 16 5 11 9 7.6portfolio group of 'fully
sustainableinstitutions' is 14%
Pre-tax Profit (K million) 5.0 0.1 9.6 25.0 24.6Return on Equity >5% 5 0 5 10 12Autonomy No political OK Mudzi OK OK OK
interference in lendinglending operations Affected
Shareholding Restructuring GOM to be reduced to Not yetminority shareholder achieved
15
Annex 2a
Project Costs and Financing
Project Costs by Component (in US$ million Equivalent)(see also Table S4)
Institution-Building $16.7 $11.4 68%Line of Credit $20.0 $20.6 102%
Total $36.7 $32.0 87%
Annex 2b
Project Costs and Financing
Project Costs by Procurement Arrangements (in US$ Million Equivalent)(see also Table S4)
_ :~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Z.~G 4ods - l 0.247 0.637 0.405 1.289
4.M..cX~~ 0.936 4.792 5.7280.247 1.573 5.197 7.017
Note: NBF= Not Bank Financed (includes elements provided under parallel co-financing procedures.Consultants under trust funds, any reserved procurement and any other miscellaneous items).The procurement arrangements for items listed under "Other" and details of the items listed as NBF.
Annex 2c
Project Costs and Financing
Project Financing by Component (in US$ million equivalent)(see also Table S4)
Institution 8.0 8.7 7.2 4. 2 90% 48%BuildingI
Line of Credit 17.0 3.0 17.6 3.0 104% 100%1 ITOTAL 27.0 11.7 24.8 7.2 99%1 62%
16
Annex 3
Cost - Benerit Analysis Not calculated at Seete| AppraisalI
tEW 2 2 d W~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
~~~~~~~~ IM
17
Annex 4a
Bank Inputs: Site Visits
June/July 1992 FA (2).
~ ?~. ~ B~ ? March 1994 FA, Ec, C Not effective_ n5 ?B g g 2 July, 1994 Fa, Ec, Cr Not effective
October, 1994 Ec (2) U Sr. , 4> February, 1995 Ec (2) U S
~ 3 gB % gJune, 1995 Ec(2) U S1UN 1.1. p November, 1995 Ec (2) S S
MU0 B, July, 1996 Ec (2), FA S S_~i4Tcp. ... November, 1996 Ec (2), FA (2), S
May 1997 Ec rA ) , F<J>&~ .'> > January, 1998 Ec, FA S S
June, 1998 Ec (3), FA S SMarch, 1999 Ec (2), FA S S
2. .2 | g September, 1999 Ec, FA S S1CR -7. E March, 2000 Ec, Ruiral SS
UNMEMM __1~~Fiane p._________* Key to Specialized staff skills:
FA - Financial AnalystEc - Economist
Cr - Credit Specialist _
* * Key to status as shown on PSR/Supervision Form 590
Annex 4b
Bank Inputs: Staff *
"~~~~~ ~
3 ~~~~~~~~n/a=ppi~aVN~g0t~trok n/a 361
Supen4sian ~~~~. n/a 515ICR<2aggg s s¢BB ss sassBBB, 8 40TotaL5. g: gat:gB%.8E:tx8B¢:.~2BB: 916* Also includes Bank-financed and trust fund consultants
3 Subject to qualification and review
18
Annex 5
Ratings for Achievement of Objectives * / Outputs by Components* *
* Relates to the objectives specified in the SARS */Relates to the outputs specified in thePADx
1.1, O W1 xm m ~~~~~~~~~~~~~~~~~~x
X t ~~~~~x
*Relates to the ob~jectives specified in the SAR**Relates to the outputs specified in the PAD
19
Annex 6
Ratings of Bank and Borrower Performance
Bank P sfformance:
Borrower Performance:
(1I) Marginally satisfactory.
20
Annex 7
Supplementary Tables
Table Si: Seasonal loan portfolio status of outreach and recovery as at the end of November each year
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 **
Loans, MK 35 241 166 191 480 373millionNo. of Loan 6,197 13,934 11,003 11,698 12,503 10,065accountsNo. of clients* 51,058 121,692 94,414 92,247 110,435 83,567
Loan recovery, 92 74 88 89 77 80
* Based on estates (4), tobacco and other clubs (15)** Estimated (Source: MRFC)
Table S2: Commercial loan portfolios in MK million (and numbers of loans) consolidated for all MRFCbranches as at 29 February, 2000.
Type of loans 1995/96 1996/97 1997/98 1998/99 1999/2000Personal - 1 (183) 73 (12,078) 34 (4,258) 15 (1,786)loansBusiness 13 (817) 20 (1,190) 37 (1,834) 32 (1,567) 14 (557)loansMUDZI 1 (678) 4 (1,991) 12 (4,796) 21 (6,234) 13 (2,671)loansTotal 14 (1,495) 25 (3,364) 122 (18,708) 87 (12,059) 42 (5,014)
Table S3: Quality of the commercial loan portfolio in the period 1995/96-1998/99 in terms of loans pastmaturity expressed in MK million (as well as percentage of the disbursed loanis) as at 30 September ofeach year.
Type of loans 1995/96 1996/97 1997/98 1998/99Personal - 0.5 (4) 9.0 (12) 0.6 (2)Business 4.60 (37) 5.7 (30) 9.1 (25) 2.7 (10)MUDZI 0.16 (10) 0.5 (14) 2.6 (28) 1.5 (7)Total 4.76 (33) 6.7 (27) 20.7 (16) 4.8 (5)
21
Table S4: Calculation of Project Costs
Actual Costs in MK 000
Goods 5,455 0 5,713 3,617 14,198 28,983Training 1,632 756 908 347 2,477 6,120Technical Assistance 1,083 4,342 4,146 8,736 10,573 28,880
Credit 30,000 180,000 15,501 0 244,722 470,223Salaries 3,501 8,742 14,502 18,970 27,689 73,404Operating Costs 8,871 13,509 21,070 32,335 62,163 137,948Total 50,542 207,349 61,840 64,005 361,822 745,558
Approx. Exchange 15.04 15.135 15.156 25.989 43.346Rate
Costs in US$ 000equivalent
902-04/j52 i:95/9640 96/v70 0 it9A71987 19999 9ToGoods 363 - 377 139 328 1,206Training 109 50 60 13 57 289Technical Assistance 72 287 274 336 244 1,213Credit 1,995 11,893 1,023 - 5,646 20,556Salaries 233 578 957 730 639 3,136Operating Costs 590 893 1,390 1,244 1,434 5,551Total 3,361 13,700 4,080 2,463 8,347 31,951
Source: MRFC
22
Annex 8
FOOD AND AGRICULTURE ORGANIZATION
OF THE UNITED NATIONSInvestment Centre Division
MALAWIRural Financial Services Project (RFSP)
(IDA Cr. 2513-MAI)Implementation Completion Report Mission
Aide-memoire
Introduction
1. A missionl from the Investment Centre Division of FAO visited Malawi during the period 2 0thto 3 1st March, 2000 to prepare the Implementation Completion Report (ICR) for the aboveproject. The mission worked closely with the Malawi Rural Finance Company (MRFC) and helddiscussions with officials of the Ministry of Agriculture and Irrigation (MOAI), the Ministry ofFinance (MOF) and the Reserve Bank of Malawi (RBM). The mission met with staff of donorsand NGOs who have been involved with agricultural credit or inputs supply programs in Malawi,and with staff from private input suppliers. The Mission visited Kasungu ADD and haddiscussions with staff from the MRFC branch and two field offices, and visited fanner clubs thatare clients of MRFC.
2. The mission would like to express its appreciation for the support and assistance given by all officialsand staff of the Govenmment and all interested agencies with whom the mission has been working.
3 . This aide-memoire was the subject of a discussion at a wrap-up meeting of the Mission held on Friday,3 Ist March, 2000, chaired by a representative of the Permanent Secretary, MOAI. Comments made byparticipants and agreed with the mission at that meeting have been incorporated into this final version.
Assessment of Development Objective and Design, and of Quality at Entry
Project Objectives
4. The development objective of the project was to improve the access to financial services for the ruralsector, including women, on a sustainable basis. The overall strategy was to corporatize and convert theexisting Smallholder Agricultural Credit Administration (SACA) into a limited liability financecompany as a first step to its subsequent conversion into a private rural bank. The other stated objectivewas to improve the policy and institutional framework for financial intermediation by supporting thedevelopment of linkages between the formal and informal financial sectors, and strengthening relatednon-financial institutions serving the rural sector.
5 The main objective was clear, concentrated on securing sustainabiity of rural financial services, andbuilt on the experience of previous rural credit projectg. The objective was relevant to continuing
'Tim Lamrock, Economist, Investment Centre Division, FAO/World Bank Co-Operative Programme, Rome and Anthon Slangen, RuralFinance Officer, Agicultural Marketing and Rural Finance Service, FAO, Rome.In particular the Bank-supported Smaliholder Agricultural Credit Project (Cr I 5 I-MAI)
I
efforts in Malawi to find a way to assist farmers in achieving increased farm incomes through the use ofpurchased inputs, and to enable a diversification of income in rural areas by financing the start-up and
expansion of micro and small non-fann business activities. The design of the project was based on thesatisfactory experience of SACA, under which the design and management of loan operations throughclubs enabled a large outreach and average recovery rates of about 90%. However, SACA was notcommercially run and was heavily dependent on the Governnent, especially through its support fromthe extension service. There was a need to transform SACA into a private rural bank to ensure itssustainability. The project anticipated that this transfornation would take three years..
6. The second objective was not as clear and was too broad. The improvement of the policy andinstitutional framework for rural financial interTnediation was a valid objective, but falls in the publicdomain and therefore should have been the responsibility of the Government. However, thisresponsibility was given to a Business Development Unit within MRFC on the asstm1ption that it could
recover its costs through charging for its services. There was no identified demand for these services andthis unit could only be expected to concentrate on MRFC's clients and business operations. Any publicrole was inconsistent with the activities of the Company working its way to privatization.
Components
7. The project had three components:
(i) an institution building component (US$ 16.7 million with US$ 8 millionIDA financing) tocorporatise anid convert SACA into MRFC, and to use the Development of Malawi Traders Trust(DEMATf) to assist in preparing investmenit proposals for agricultural, small and micro-enterprisesand to provide related training and advisory services;(ii) a line of credit component (US$ 20 million with US$ 17 million withlDA financing) to finance theshort-temi loan requirements of farm and non-farm rual activities; and(iii) a pilot program component3 to support innovative approaches to providing financial services torural women entrepreneurs.
8. During the project's implementation period, MRFC was also the implementing agency for the IFAD-financed Mudzi Financial Services Project (MFSP). This project was designed to provide credit to bothfarm and non-farm activities in a manner similar to RFSP, but to poorer groups for whom therequirement of collateral was waived. MRFC managed this portfolio on an agency basis for a fee, andtherefore the assets and liabilities of the Mudzi project do not form part of those of MRFC. In addition,the Mudzi project has provided support to building the institutional capacity of MRFC in terms oftechnical assistance, equipment and systems development.
xThe cost was not identified in SAR.
2
Assessment of Project Design
9. The components, activities and scale of the project were logical on face value. However, the underlyingassumptions concerning the environment in which the project would be implemented were not realistic,and the basis for confidence that the good repayment experience under SACA would continue did nottake into account other factors that could reasonably be expected to change.
10. The challenge of converting MRFC into a viable private rural bank was a highly ambitious one for anewly fomied company to achieve in a short time given that MRFC was formed in a time of majorpolitical change, and macro-economic reform. A smooth passage and higlh political commitment of theGovernment to enable and assist MRFC in establishing itself was required.
11. The SAR pointed to the group approach to lending, through the formation of fanner or business clubs,as the main factor underpinning the loan recovery success of SACA. However, the harsh, politically-motivated loan recovery methods that werein place during the period up to 1991/92 were also a stronginfluence on loan recovery. The assumption in the SAR that MRFC would take over a valuable andwell-performing siiallliolder loan portfolio as a start to its business activities was undermined in1993/94 with the collapse of SACA due to widespread non-repayment with the advent of marketliberalization and a major political change in the country.
12. The majority of staff of MRFC came initially from the SACA program of the Ministry of Agriculture,and a corporate culture change was needed to refocus staff towards commercial pmctices and attitudes.This was a high risk factor for the company's development, and the calibre and vision of themanagement of the company would be crucial in this challenging role. In addition, there was noprovision in the project to establish new branch and field offices sepamte from those of the Ministry ofAgriculture. This would have been a desirable feature for two reasons (i) to create the perception in hieminds of the borrowers that MRFC was not a continuation of SACA, and that strict repaymentdiscipline and full commercial principles would be employed; and (ii) to create identifiable "assets" thatcotuld be valued in the context of a shift to private ownership.
Quality at Entry
13. An assessment carried out in 1999 by the Bank's internal Quality Assurance Group concluded that thequality at entry for this project was poor. The reasons for this assessment were that the design of theproject was not sound due to unrealistic expectations regarding the future privatization of MRFC, andthat the project was not ready for implementation which led to a gap of 15 moitlhs between projectapproval and effectiveness.
Overview of Project Implementation
Implementation Experience
General
14. The project was appraised in June/July, 1992, approved in June, 1993 and signed on Pt October, 1993.Project implementation was initially delayed due to the non-fuilfillment of the conditions ofeffectiveness for the appointment of senior staff of MRFC and the finalization of a subsidiary loanagreement between RBM and MRFC for the line of credit. A March 1994 review mission
3
identified the collapse of SACA as a major obstacle regarding the effectiveness of the project butfollowing a public awareness campaign that encouraged repayment of SACA loans, andassurances from the then Minister of Agriculture that all efforts would be made to recover theamounts outstanding, effectiveness was declared in September, 1994 when the other conditions ofeffectiveness were met.
15. The original closing date was 3 Ist December, 1996, but there were three extensions to the project'sclosing date and the project finally closed on 3 st December, 1999. The first extension was to allow forthe delayed effectiveness date, and the two further extensions were granted to allow more time for theproject to pursue the privatization process ofMRFC. There were a total of 13 supervision missions,including the mid-term review which took place in November, 1996.
Institutional Development
MAFC
16. The project was instrumental in creating the Malawi Rural Finance Company as a private limitedliability company registered under the Companies Act. The net value of SACA's assets and liabilitiesthat wvere transferred as a Government contribution to the project was MK 45 million. MRFCcommenced business in October, 1994 with expatriate technical assistance in tvo key positions -General Manager and Financial Controller. The project supported MRFC witlh vehicles, equipment andsupplies, and start-up costs for MRFC branch and satellite offices. A Board of Directors was appointedwhich enabled MRFC to operate and take decisions independently of Governmenit. However, thereremained inevitable ties with Govemment, particularly as the Government remained the 100%shareholder, and as there was a reliance on the Ministry of Agriculture for operational co-operation atfield level. MRFC relied on the activities of Field Assistants to create awareness of MRFC's services, tofonii clubs and to provide basic training for MRFC's clients. In addition, MRFC set up business inADD offices with many of the branch and field office staff being fonier employees of the Governmentunder SACA.
17. Overall, with Bank support, and later with support from the Institutional Development componlent ofthe IFAD Mudzi Financial Services Project, significant investment was made in creating themanagement and systems capacity of MRFC, and the project was successful in creating the Companyas a commercially run institution.
18. The project provided funds forthe Development of Malawi Traders Trst (DEMATT) to undertake thepreparation of investmnent proposals for potential clients of MRFC. DEMATT did undertake sometraining for MRFC staff, but no investment proposals were prepared.
Policy and Institutional Linkages
19. The project was designed to improve policy and institutional linkages in rural financial intennediation.This was to be done through a Business Development Unit set up within MRFC which was expected to
serve all financial institutions in Malawi and charge for its services. However, this was a public role, andinconsistenit with MRFC's vision of operating as a private company. In the end, the BDU existed withthe expatriate TA for two years and concentrated on developing internal systems and procedures forMRFC. It was then closed. There has been little impact on overall policy and institutional linkagesthrough this componenlt. The representatives ofMRFC at the wrap-up meeting indicated that there hasbeen a difference of interpretation at effectiveness placed on this comiponent (i.e. that its purpose was
4
more limited), and that the BDU was wrongly placed in MRFC to achieve the broader objective ofimproved policy and institLtional framework for the rural financial services sector.
Line of Crelit
20. Seasonal lending operations started in the crop season October 1994/September 1995. Seasonial loansare provided to fanners clubs (tobacco clubs and other clubs mainly for maize and cash crops) andsmall estates. Moreover, the MRFC administers loans provided to MUDZI clubs under the IFADMUDZI Financial Services Project. The following table simmarises the seasonal loan portfolio statusof outreach and recovery as at the end of November each year when most outstanding loans for theprevious season should have been recovered.
_ 1994/95 1995/96 1996/97 1997/98 1998/99Loans, MN { 35 241 166 191 480million _ ___-
No. of Loali 6,197 13,934 11,003 11,698 12,503accounts
No.ofclientsI 1 51,058 121,692 94,414 92,247 110,435Loan recovery, 92 74 88 89 77
1/ Based on estates (4), tobacco and other clubs (15); excluding MUDZI
21. A comparison between 1997/98 and 1998/99 shows that:
* Seasonal loans to tobacco clubs increased from MK 81 million to MK 241 million at the cost of adeterioration of the loan recovery from 95% to 79%
* Seasonal loans to other clubs increased from MK 16 million to MK 50 million with a reduction in therecovery rate from 92% to 63%
* Seasonal loans to estates increased from MK 93 million to MK 189 million witli a reduction in therecovery rate from 84% to 78%
• MUDZI seasonal loans increased from MK 14 million to Mk 67 million witli a fall in the recovery ratefrom 77% to 49%.
22. In times where MRFC attempted to expand its lending operations, recovery fell. These periodscoincided Nvith increases in interest rates, which would have had a negative effect on loan recovery.Also, capacity shortcomings in loan administration at field level negatively affected loan recovery,particularly in 1998/99 when Field Assistance Nvere also involved in the administration of theAgricultural Productivity Inprovement Programme and the Starter Pack scheme. For the 1999/2000crop season it had been planned to disburse MK 545 million seasonal loans, but as at 17 March, 2000MK 418 million loans had been approved and disbursed.
23. The commercial loan portfolio consists of personal loans to employees whereby loan recoveries arededucted at the source from the salaries paid for by the employers; individual business loans (approvedat MRFC branch and headquarters levels; at branch level they are now only continiued for repeatborrowers), group-based business loans (started in July 1999); and MUDZI group-based business loansadministered under the IFAD Loan.
24. The following table summarises the expansion of the commercial loans in MK million (and numbers ofloans) consolidated for all MRFC branches as at 29 February, 2000.
5
Type of loans 1995/96 1996/97 1997/98 1998/99 1999/2000Personal loans - i ( 183) 73(12,078) 34( 4,258) 15( 1,786)
Business loans 13 (817) 20 (1,190) 37( 1,834) 32( 1,567) 14 ( 557)
MllDZI loans I (678) 4 (1,991) 12(4,796) 21( 6,234) 13( 2,671)
Total 14 (1,495) 25 (3,364) 122(18,708) 87(12,059) 42( 5,014)
25. In 1998/99 emphasis has been put on strengthening the lending capacities and procedures of MRFC
instead of expanding its commercial loans. Although this has improved the quality of the commercial
loan portfolio, at the same time it has not contributed to a highly needed diversification of the overall
loan portfolio. Seasonal loans constituted in 1998/99 85% of the MRFC total loan portfolio. For the
year 1999/2000 MK 180 million commercial loans had been planned, out of whlich at the end of
February, 2000, however, only MK 42 million had been disbursed. While the business season is mainly
concentrated in the period February-July it is clear that the target figure for commercial loans and
further diversification of the loan portfolio will not be reached.
26. The next table summarises the quality of the commercial loan portfolio in the period 1995/96-1998/99
in temis of loans past maturity expressed in MK million (as well as percentage of the disbursed loans)
as at 30 September of each year.
Type of loans 1995/96 1996/97 1997/98 1998/99
Personal - 0.5(4) 9.0 (12) 0.6 (2)
Business 4.6 (37) 5.7 (30) 9.1 (25) 2.7 (10)
M[JDZI 0.16(10) 0.5 (14) 2.6 (28) 1.5 (7)
Total 4.76(33) 6.7 (27) 20.7 (16) 4.8 (5)
Pilot Program for Women Entrepreneurs
27. The activities for this component were subsumed under the Muzdi project to develop lending
approaches to the majority of Mudzi clients who are women. A study was financed by the project late in1999, but there has been little impact of this study to date.
Achievement of Objectives and Outputs
General
28. The project went a long way to restoring the access to rural credit following the collapse of SACAjust before effectiveness. The existence of MRFC was crucial in enabling the development ofsmallholder burley tobacco production by providing the essential start-up working capitalrequired, and was therefore a significant contributor to improving the incomes of thesebeneficiaries. At the time of closure of the project, MRFC is providing a service to a share of thenmral population which could not be filled by other existing institutions, agencies or companies inMalawi.
6
Plolicy and Institutional Linkages
29. There was little impact on overall policy and institutional linkages for the niral finaiice sector as awhole through the project. The emphasis of the project was on commercially-based operations andit was not appropriate that MRFC would undertake activities in the public interest. The wholepolicy and planning area for rural financial services within the Govemment is weak, and currentlymany different credit/finance schemes are in place which have different tenrs anid conditions,which place at risk the effort to create a strict repayment discipline in rural areas. The AgriculturalProductivity Investment Programme (APIP) and the Agro Inputs Fund both operate under a largemeasure of Government guarantee for loan default. This puts the private sector input supplycompanies who manage the credit at an advantage over MRFC, in addition to the advantage that isafforded by the lower thani commercial interest rate structures of these schemes. The creditactivities of the companies involved in the schemes are also to some extent supported by their corebusiness -- inputs supply and distribution. APIP is neither institutionally or financially sustainableand a major revision of the program is under way.
MRFC as a private rural bank
30 Thne original objective of tuming MRFC into a private bank by December 1996 was formallymaintained dtroughout the project. However, in the last two years of the project, it was clear that thetarget for MRFC to operate as a private bank with registration and supervision under the Banking Act of1989 was not achievable, that the best that could be achieved was that MRFC would continue as a non-bank financial institution, that privatization was not feasible and that some strategic partnership wouldneed to be forned witlh one or more intemational development/ microfinance institutions and theGovernment. In this way, further injections of capital and technical assistance could be found. Optionsfor the future of MRFC will be examined after the closure of the project.
IARFC Financial Position
3 1. In the year 1998/99, the recovery rate was 78% and 84% on seasonal and business loans respectively.Total income was MK 357 million and after a provision for doubtful debts of MK 143 million, MRFCmade a profit after tax of MK 14 million on shareholders funds of MK 170 million. For 1999/2000, therecovery rate is budgeted at 80%. Income will reach MK 380 million with a budgeted net profit again ofaround MK 14 million after provision for doubtful debts. With a reduction in lending activities, the netincome from investment activities (net of cost of funds) will be MK 190 million, compared with netincome from lending activities of MK 51 million. As at the end of February, 2000, the amount held inTreasury Bills is MK 428 million witlh loans outstanding of MK 667 million with a provision for loss atMK 241 million.
Outreach
32. Whilst the stated objectives of the project remained constant, the appraisal targets were scaled down dueto the fact that the portfolio anid outreach that was assumed to be taken over from SACA was far lessthan that assumed at appraisal. The targets and actual achievements against these targets for the keyindicators of outreach are set out in the following table.
7
Indicator Original Target Revised Target for Achievement fir Target for 1999/00
1998/99 1998/99
Outreach Indicator
Year-to year expansion of MK 158 million, 14,000 MK 1 95m 7,800 clubs MX 290m, 5,500 clubs. MK 200m, 3,800 clubs,
season loan porttblio for clubs, 400,000 and 156,000 beneficiaries 82,000 beneficiaries 57,000 beneficiaries
smalUholder clubs beneficiaries
Year-to-year expansion in MK 8 million with 7,700 MK 94m, 10,000 estates NM 189m; 7,000 estates MK 173m; 6,100 estates
seasonal and medium beneficiaries
term loan portfolio for
small estates
Year-to-year expansion hi MK 3.2 million with MK 60m with 1,500 MK 6(m Currently MK 40m with
business loan portfolio 7,700 beneficiaries beneficiaries MK 120m expected
Savings services Increasing percentage of 20% of the loan portfolio 14% of the loan portfolio
loan portfolio, reaching
25% of the loan portfolio .
33. 'nhe outreach targets were revised substantially downwards following the collapse of SACA, but the
indicators show that the revised targets for outreach have not been achieved - more worrying is the fact
that outreach is in decline for the year 1999/2000. The appraisal targets for outreach were 400,000 club
beneficiaries and 7,700 estates, but were revised to 156,000 club beneficiaries and 10,000 estates. In
1999/2000, MRFC will have some 3,800 clubs with 57,000 beneficiaries, and 6,100 estates totaling ani
amount of MK 370 m. The appraisal target for business loans was MK 100 m. Business loans of MK 40
m are currently effective, but there are plans to increase to this over MK 15Omn, but will more
realistically reach MK 100 m in nominal terms. The conclusion is that revised outreach targets were not
met, and that business loans will not reach targets in real tenns.
Sustainability
34. The indicators and achievemenits were as follows:
SustainabiSlhy Indicator Original Target Revised Target for Achievement for Target for 1999/00
1998/98 1998/99
Loan repayments on Exceed 90% with a target Unalterd 78% 80%
seasonal loans of 95%
After-tax profit; retrni on Profit each year, (real) Unaltered 6% 6%
investment return on equity greater
than 5%
Dependence on subsidies Year-to-year reduction, Unaltered Partially achieved; the
both technical and futuLre would rely on
financial further injections of
capital and teclinical
expertise from a
development partner but
on commercial terms.
However, future
profitability is uncetain if
operating conditions
.__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ change.8
Shareholding GOM reduced to a Unaltered Not achieved;
minority shareholding by privatization not feasible.
1998
35. These indicators show that objective of sustainability of rural financial services, as measured byloan recovery rates, profitability of operations and future dependence on subsidies, was also notachieved.
Major Factors Affecting Implementation and Outcome
Factors outside the control of Government or the Implementing Agency
With smallholders entering burley production, the stop order system operated by Auction HoldingsLimited provided a mechanism for loan recovery which had a major positive impact on the feasibility ofadvancing credit to smallholders. The group joint liability principle also had an impact on recovery, butits contribution to this is unclear;
'The molnopolistic tobacco marketing system results in lower than equivalent world prices being offered,and high charges for sales commissions and stop order fees. There are inefficiencies in the collection,grading, baling and transport systems that often downgrade tobacco, resulting in lower prices tofarmers. There are incentives for farmers to sell to intermediate buyers which results in increasing loandefault where a stop order woould otherwise have been effective hi recovering outstanding loans.
- Farm margins and profitability have reduced, particularly for food crops. With the deterioratingexchange rate, fertilisers have risen in price, up more than double in 1998. Food and cash crop priceshave not shown the same relative increases and therefore financial margins on agricultural productionhave been reduced, which in tum reduced the feasibility of using purchased inputs on credit, especiallyat high interest rates.
Factors generally subject to Government control
= Collapse of SACA;* Delays in project effectiveness;* Macro-economic instability with high inflation, devaluation of the Kwacha and lending rates reaching a
high of 50%. This negatively affected the interest rates charged to customers with a flow-on increaseddefault rate, and undermined the lending base of MRFC;
* Weak political commitment of Government to support MRFC to become a viable niral financialinstitution, and lack of a clear policy for rural financial sector intennediation. There was a proliferationof different input supply/inputs credit schemes implemented by Government and donors during the -project, adding to confusion in the minds of borrowers as to tenns and condition of such schemes, anddiminution of the strict repayment discipline being promoted by MRFC;
* Failure to adhere to time-bound action plans for examining and working towards strategic fuitureoptions for MRFC in the context of the privatization process;
* Political interference in the lead up to elections conceming the expectation of faniers in participating,and the repayment obligations of borrowers.
Factors generally suibject to Implementing Agency control
9
There was a commitment of the Board and management of MRFC to pursue the corporate strategy ofMRFC but there was not sufficienit effort put into building extemal relationships with key policy-makers, fanler organizations, local officials, and the media. MRFC also fell short in nurturing acorporate team effort in staff at all levels.
Sustainability
36. Sustainability of rural financial services is the core of this project, and it is therefore the majoraspect that need to be assessed in determining the rating of the outcome of the project. Theunderlying original target for sustainability of the project was that MRFC would become a privatebank. This was an unrealistic target in the time frame and business environment in which theproject was implemented. The indicated targets for sustainability were not achieved.
37. MRFC can be expected to maintain a portfolio of the size and outreach budgeted for 1999/2000. andmake a marginal profit after allowing for 80% loan recovery rates provided operating conditionsremain. This implies firstly that the cost structure of the company is maintained and that nominalmargins on lending and investment operations remain at around 20% aid 10% respectively. Anyadverse change to these parameters would force the Company into a loss position. Also, since theportfolio is largely lent for tobacco inputs, the climatic, agricultural and price risks are such that thecompany could not survive any major set backs in these areas. If and when overall macro-economicconditions improve, with reduced inflation and lowering of interest rates, this would result in reducednominal lending margins which would force a review of the cost structure of the company.
38. There needs to be ani effective strategy for making attempts to increase loan recovery from the present78%-80% levels towards 90%, to further diversify the loan portfolio, and to ensure that any increase inbusiness is of the highest quality possible. However to improve administration of its loans in the fieldwould require additional cost, both investment costs in field and branch office capacity (infrastructure,systems, training etc) and operational costs.
39. It is recognised that the business of seasonal agricultural finance to small farmers is high cost, and highrisk, and not inherently profitable, and therefore some degree of extemal "public" financial support willbe required to maintain MRFC in the medium to longer termn. Therefore the fiture of MRFC willdepend on an analysis of future options, and actions on the part of the Board and manlagement toactively seek strategic partnerships. As mentioned above, options for the futtLre will be consideredfollowing the closure of the project.
Bank and Borrower Performance
Bank
40. The Bank was deficient in the design anid appraisal of the project since the objectives wereunrealistic and the project was not ready for implementation. The Bank supervised this project veryclosely, and provided valuable guidance to MRFC in the absence of supervision from the Reserve Bankof Malawi. Intensive supervision was required to overcome the design limitations, to maintain effortstowards reaching unrealistic objectives and, when these were recognized as unattainable, to then assistthe MRFC and Government to adjust to new targets and strategies.
10
41. This supervision was perhaps too close, in that Bank supervision missions were involved in resolvingissues that should have been handled by the Board and management. This close supervision increased aperception that MRFC was a 'World Bank" agencyThe future supervision of MRFC as a financial
institution is unclear. The withdrawal of the Bank has left a vacuum. and this responsibility forthis role needs to be assumed by the Reserve Bank of Malawi under the Banking Act.
Borrower
42. The Govemment was slow in meeting the condition of effectiveness, and has shown onlymoderate commitment to the project. The Govemment made available the remaining SACA funds($4.5 million) as its contribution to the project cost. There has been general compliance with legalcovenants, although with some delays. MRFC's demonstrated commitmenit to the project and itsperformance in implementinlg the project has been satisfactory.
Observations on Credit Methodologies
Group lending methodology versus stop-orders
43. The effects of joint and several liability and peer pressure of group members are not clear, in particularunder the current conditions of high inflation with lending rates that have increased to about 50% anddeclining crop profitability for faniers. While close loan follow-up by MRFC field staff and stronggroup leadership are considered essential, it is felt the stop-order system used on the tobacco auction forthe MRFC loan recovery is a greater contributing factor to loan recovery. The recovery rates for lastyear for clubs and estates are similar. On the other hand, small farmers can avoid the long delays andhigh costs of the auction system by side-selling to intermediaries and a secure system of identity cardsshould be introduced together with the development of individual client infomiation (Credit bureau).
44. In the long term, viable rural lending can be only secured by investing in a decentralised bankinginfrastructure of the MRFC at field level and by adequately training and supervisin-g field staff. Paymentof loan officers should be made dependent on their loan recovery perfomianice and MRFC branchesshould be treated as full profit centres (with loan loss provision taken as a cost) witlh an incentives-basedstaff salary svstem.
Loan collateral versus equity contribution
45. Thlere is often some confusion between the sound financing practice that a loan shotuld cover only part
of the total investmnent costs with the borrower contributing the remaining capital, and the insistence bylending institutions on loan collateral as a mandatory saving deposit. Banks often accept as collateralonlv real property that should have a sales value equal to or higlher than the loan amount. In grouplending, the joinit and several responsibility of the members constitutes a so-called social collateral,while in addition the MRFC demands an up-front cash collateral deposit of 15% of the loan. This willnever protect MRFC frilly in the event of default. Borrowers are paid lower rates on their mandatorycollateral savings than on the amrount borrowed and it appears fair to substitute the collateral depositwith an equity contribution to the investment costs, and instead to accept voluntary deposits that can bewithdrawn in time of liquidity need and receive a market interest rate.
11
Credit in kind versus in cash
46. Currently the MRFC seasonal borrowers receive inputs in kind against input supplier vouchers, whilecommercial loans are provided in cash. Rural financial institutions that operate under free marketconditions and provide fuill inter-mediation services of both savings and credit facilities nomially do notrestrict their borrowers to only certain lending purposes. Flexibility in lending terns, short- and tern-lending, and conditions is in particular critical when competition and new profitable investmentopportunities arise.
Savings
47. There was considerable debate during the project conceming savingsmiobilisation, and this was a poinltof disagreement between the Board ofMRFC and Bank supervision missions. Access to safe depositfacilities and easy witlhdrawal of rural household savings for liquidity and emergency purposes is asimportant, and often more in demand, than-the availability of complementary lending resources forviable investment purposes. At the same time, a financial institLtion that mobilises savings uses arelative stable and economic source of lending resources. Deposit taking financial institutions are moredemand-oriented and conscious of costs and have a better infonnation on their clients, but at the sametime require higher capabilities of staff and management in maintaining client relationships andfinancial and risk management. The diversification of savings and loan portfolios to reduce risk iscrucial, but this could divert attention and resources toward urban areas. infrastnictuLre development, etc,a.way from a rural focus.
Lessons Learned
48. The lessons to be leamed from this project are:
- When the project was first extended in December, 1997 and it was evident that the vision ofMRFC as a private bank was not attainable, the project should have been formally restructured atthat time with revised objectives in line with current environment. This would have perhaps giventhe opportunity for the project to tun its attention towards assisting the Govemient in pursuingthe project's other objective of an improved policy and institutional framzework, rather thani onlvpursuing the elusive objective of MRFC as a privatised bank;
• Rural finance in an agriculturally-based economy such as Malawi is highly politically sensitive.Considerable effort needs to be made to nurture strong relations with the govenmient and its agencies.as well as with the donor community and the private sector.MRFC felt limited in this since it was seenas a World Bank project;
* A stable and enabling macroeconomic environment is essential for efforts to develop in Malawi acommercially-mn and cost-effective financiat institution tllat provides viable financial services, thatinclude both savings and credit facilities, to the rural population. Under the current conditions of highinflation and lending rates, the potential for profitable investment opportunities both in farm and non-farm production activities will be extremely limited. This equallv applies to the assessment of potentialequity partners/investors in the financial institution itself;
* The capacity of rural financial institutions or agencies needs to be built with a heavy emphasis at fieldlevel. In general, much more emphasis should be given to field staff training, development ofinfomiation and control systems, development of branches as profit centres and payment of staffincentives based on loan recovery, loan portfolio diversification and savings promotion.
12
* Whilst the group liability principle contributed to loan recovery, the existence of the stop-ordermechanism for tobacco was crucial in ensuring high loan recoveries for smallholder farmers underliberalized market conditions. Automatic loan recovery mechanisms through a contracting, marketingor processing organization make credit schemes for cash and industrial crops far more justifiable intenms of sustainability that for food and other stubsistence crops;
• Efficient marketing systems are essential to the financial viability of agricultural production, witlh aflow-on effect on the ability to service agricultural finance;
* Seasonal agricultural finance centered on small farner clients is not inherenitly profitable no matter howeffective the financial institution is managed. A subsidy element, underwriting part of the operation'sadministrative and technical costs will almost certainly be necessary, regardless of the institution'seffectiveness in loan recoveries;
* Risk strategies need to be considered by financial institutions in circumstances of macro-economicinstability to preserve the lending base of the institution;
* A diversified portfolio is also a prerequisite for sustainability, and this implies both farm and non-farmlending for rural clients, and a measure of rural and urban lending as well. There is always a major riskwith climate failure with agriculture, and this is compounded with many other marketing risks whenthere is a large exposure to a single crop. Financial institutions lending for agricultural purposes need tocreate reserves for default resulting from climatic risks;
* Where the Govemment supports the development of a commercially-based company or activity, thereneeds to be a consistent approach to all such activities and companies through clear policy andguidelines;
* Financial Institutions should be licensed under the banking legislation of the country from thebeginning to enable continuing and consistent supervision in accordance with the prevailingregulations.
Next Steps
49. The mission will submit a draft ICR to the Bank within three weeks. At this time, the document will beintemally reviewed by the Bank, and will also be submitted to the Government in draft form forcomment.
Lilongwe, 3 lst March, 2000.
13
Annex 9
DRAFT REPORT
MINISTRY OF AGRICULTURE GOVERNMENT OF MALAWIAND IRRIGATION
PROJECT COMPLETION REPORT [PCRJ FOR THE MALAWI RURAL FINANCIALSERVICES PROJECT Cr. 2513 - MAI
MINISTRY OF AGRICULTURE AND IRRIGATIONPLANNING DIVISIONP.O. BOX 30134,LILONGWE 3. MARCH, 2000
TABLE OF CONTENTS
Currency 3Weights 3Fiscal Year 3Abbreviations and Acronyms 4List of Tables in Text 5List of Tables in Annex 5Preface 6
1.0 Introduction and Background of Project 92.0 Project Objectives 103.0 Project Targets 104.0 Loan Conditions 10
5.0 Project Cost and Financing 105.1 Project Cost 105.2 Project Financing 125.3 Project Financial Progress 14
6.0 Project Implementation 166.1 MRFC Activities and Organizational Structure 166.2 Procurement Component 176.3 Line Credit 19
6.3.1 Planned Activities and Achievements 196.4 Beneficiary Impact Assessment Survey (BIAS) 206.5 General Problems Faced 226.6 Study Findings under RFSP 236.7 Banks and Borrowers Performance 23
7.0 Critique 247.1 Collateral 247.2 Interest Rates (%) 247.3 Farm gate prices 247.4 Quality of Inputs (fertilizer) 247.5 Staff Training Opportunity and Upgrading 24
8.0 Project Sustainability and Future Operations 259.0 Key Lessons Leamed10.0 Comments and Conclusion 2511.0 Recommendations 2812.0 Annexes 29
2
CURRENCY EQUIVALENTS
Currency Unit: MK1.00 = 100 Tambalas
Exchange Equivalents of MK to US$ during the Project Appraisal and Implementation period:
1992 US$1.00 = MK 3.601993 US$1.00= MK4.001994 US$1.00 = MK 7.901995 US$1.00= MK15.001996 US$1.00= MK15.301997 US$1.00= MK15.501998 US$1.00= MK30.001999 US$1.00= MK44.00
WEIGHTS AND MEASURES
Metric System
FISCAL YEAR OF BORROWER
Ist Oct. - 30th Sept
3
ABBREVIATIONS AND ACRONYMS
ADD Agricultural Development DivisionADMARC Agricultural Development and Marketing CorporationAPIP Agricultural Productivity Investment ProgrammeBDU Business Development UnitBIAS Beneficiary Impact Assessment SurveyCBM Commercial Bank of MalawiCMEU Central Monitoring and Evaluation UnitCSR Center for Social ResearchDCA Development Credit AgreementDEMATJT Development of Malawi Traders TrustEU European UnionFAs Field AssistantsGB Grameen BankGOM Government of MalawiIDA Intemational Development AssociationIFAD Intemational Fund for Agricultural DevelopmentIDA International Development AgencyIMF International Monetary FundLCB Local Competitive BiddingME1\F Malawi Mudzi FundMOAI Ministry of Agriculture and IrrigationMOF Ministry of FinanceMRFC Malawi Rural Finance CompanyNBM National Bank of MalawiNGO Non Governmental OrganizationsNRDP National Rural Development ProgrammeODA Overseas Development AdministrationOPC Office of the President and CabinetPSAR Project Staff Appraisal ReportPCR Project Completion ReportPO Portfolio OfficerPPF Project Preparation FacilityRBM Reserve Bank of MalawiRDP Rural Development ProjectRFSP Rural Financial Services ProjectSACA Smallholder Agricultural Credit AdministrationSACP Smallholder Agricultural Credit ProjectSDR Special Drawing RightsUSAID United States agency for Intemational DevelopmentWB World Bank
4
LIST OF TABLES IN TEXT
Table 1.0 Loan Conditions under RFSP 11
Table 2.0 Project Financing Plan 12
Table 3.0 Estimated Project Costs 13
Table 4.0 Flow of RFSP funds in Mk 14
Table 5.0 Profit and Loss Amount Analysis for RFSP 15
Table 6.0 Funds Allocation Schedule For RFSP - IDA (SDR million) 17
Table 7.0 Loan Repayments against loan Disbursement in Mk and % 20
Table 8.0 National Production for some Food and Cash Crops 28
LIST OF TABLES IN ANNEX
Annex 1.0 Related Bank loans/credit 31
Annex 2.0 Interest Rates charged by MIRFC compared to CBM 32
Annex 3.0 List of RFSP supervision Missions 33
Annex 4.Oa Actual Allocated Funds Vs Expenditure to Project Closing Date 34
Annex 4.Ob Reallocated Funds Vs Expenditure to Project Closing Date 34
5
PREFACE
This Project Completion Report (PCR) is for the Rural Financial Services Project (RFSP) Credit2513 -MAI which was approved in 1993 with assistance from World Bank. The total amount of theproject was US$ 36.7 million at a base exchange rate of MK 4.0 to US$ 1.0 for cost estimatespurposes. This project was planned after implementation of the Smallholder Agricultural CreditProject (SACP) activities through Ministry of Agriculture of Irrigation (MOAI) failed to attain itsobjectives and collapsed as the project closed in 1992 due to poor repayment rates by beneficiaries(smallholder farmers).
The Agricultural Credit System in Malawi dates back to 1973 before the Grameen Bank was created.This system was owned by the government and acted as a source of institutional credit for the ruralpopulation of Malawi since its introduction. This credit system was implemented through theAgricultural Development Divisions (ADDs) and later by the Smallholder Agricultural CreditAdministration (SACA) from 1973 to 1992. The overall objective was to improve the rural standardof living as it was recognized that agricultural production can be improved, through proper use offarn inputs. These inputs contributed to an improved standard of living, through increased cropyields, increased household food security, and increased income. The credit system became anexample in Africa of a successful govemment - supported credit program because of its loanrepayment rates which was at an average of 97 %. As repayment rates reduced to 25 % due to severalfactors which included severe droughts and political liberalization SACA collapsed in 1992.
It was reported during the findings of the Smallholder Agricultural Credit Repayment Crisis studycarried out by Center for Social Research in 1994 that the exceptionally high repayment ratesachieved during the early years of the project were to a large extent the results of the draconian andcoercive loan recovery methods employed by Youth Leaguers of the then ruling party - MalawiCongress Party (Msukwa et. al, 1994; Mawaya, 1994).
It is due to these problems and failures that the GOM with funding from Intemational DevelopmentAgency (IDA)- World Bank established the Malawi Rural Finance Company (MRFC) to take overoperations of SACA. MRFC opened its doors for the first time to customers offering different type ofloans on 1st October, 1994 through funding under the RFSP. The total project cost of US$ 36.7million includes:- US$ 25.1 million from IDA, US$ 4.0 million from the Government of Malawi(GOM), US$ 4.7 million financed by MIRFC earnings through SACA remaining funds, and US$ 3.0million from sub borrowers. This credit facility closed on 31st December, 1999 after two extensions.
The company maintained the joint liability lending approach followed by SACA but to operate undercommercial principles with a board of directors independent from the GOM and later to betransformed into a licensed Rural Bank in the near future (GOM, 1994, and World Bank, 1993).
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This report covers RFSP activities and their fundamental objectives were: a) easy access to financialservices for the rural sector, including women, on sustainable basis; b) assist the government towardsimproving the policy and institutional framework for rural financial intermnediation by supporting thedevelopment of linkages between the fornal and informal financial sectors, and strengthening relatednon-financial institutions serving the rural sector.
The project aim was to reach all farmers who benefited from SACA focusing on improving theiraccessibility to financial services in groups or individuals with an aim of improving their incomelevels and food security through the provision of credit by MRFC and extension services by MOAIsfield staff.
The loan was made effective after GOM and MIRFC fulfilled the tied conditions. Risks feared toaffect the implementation of the project included:- increase in default, removal of subsidy leading toincrease in price of fertilizer, and inflation. The project implementation was affected by thedevaluation of the Malawi Kwacha in 1998 which led to revision of interest rates time and again.
Flow of IDA funds was quite substantial throughout the project period. Utilization of funds as theproject closed on 31st December, 1999 was 94.80 % of the total project cost. The breakdown percomponent is as follows:
Equipment and Vehicles = 48.62 %Technical Assistance = 101.99 %Studies and Training = 110.91 %Operating Costs = 91.70 %Project Preparation Facility = 100.00 %Medium loans = 316.93 %Seasonal loans = 84.35 %
Af'ter the lending capacity of MIRFC was affected due to the devaluation of NMk in 1998 led to thereallocation of funds within the RFSP in order to allow the company to continue with its lendingprograms as it lending capacity was reduced (details of the reallocation of funds is attached in theAnnex). The utilization % of the Credit Line was so high {316.93 % and 84.35 % respectively) dueto the reallocation of funds. This did not affect the activities of the other components. Though MRFCexperienced some losses it still made some profits as indicated in the Profit and Loss AccountAnalysis from 1994/95 to 1998/99 season varying from Mk 0.1 to Mk 25.0 million.
MRFC being a profit making company has 8 branches, 27 satellite offices, 163 field offices with atotal of 316 staff throughout the country as it follows the institutional framework of MOAI. Commonloans lent to smallholder farmers were Agricultural Seasonal Loans. In 1994/95 MIRFC disbursed MK34.9 million worthy of loans to smallholder farmers and this increased to MK 547.3 million duringthe 1998/99 season.
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Most equipment and vehicles under the project were procured during the first years of the projectthough the procedure took long as IDA had to approve first. Several training programs were made toboth MRFC headquarters and field staff in various areas such as credit management, group dynamicsand micro finance. Farners were also trained for them to qualify for loan service.
As from 1994/95 season about 2,893 clubs benefited from MRFC seasonal loans and this increased to5,490 clubs in 1998/99 season. Loan repayments varied during the project period from 75 % to 95 %.This was due to the high interest rates caused by fluctuations in value of Mk and low farn gate priceswhich reduced farmers gross margins. Defaulters were charged with a penalty of 15 % of the loan,denied loans in future seasons, and the last resort was to bring them to the court of law.
Though other lending institutions were available in most areas where MRFC is operating competitionwas so minimal due to the fixed amount of loans offered and lack of proper procedures followedduring loan repayment.
Results of the Beneficiary Impact Assessment Survey (BIAS) carried out on impact of RFSP onbeneficiaries indicated that farmers were happy with loans from MRFC though they complained ofcollateral and high interest rate. Though the project implementation was successful it had someproblems which included:- late distribution of inputs and poor quality of fertilizer during early yearsof the project, devaluation of Mk and delays in processing of farmers payment between AuctionFloors and MRFC Headquarters. Overall, the Donor and Borrowers (GOM and MIRFC) performancewas satisfactory.
Data collection and report writing for this PCR was done from 29th February to 13th March, 2000 inthree selected Agricultural Development Divisions (ADDs) namely Salima, Machinga and MzuzuADDs. The findings from this report will be used by the donor consultants (FAO / World BankCooperative Programme) to come up with the donors report. The team involved in this workcomprised of Ms. M.J. Nyekanyeka, Mr. R Mchenga and Mr. G. Chande from the CentralMonitoring and Evaluation Unit (CMEU), Planning Division - MOAI. Funds for this exercise wasprovided by MRFC.
Many thanks go to MRFC members of staff namely: the Acting General Manager of MRFC, Mr.Murotho; the Operations Managers, Field Supervisors, and Portfolio Officers of Salima, Machingaand Mzuzu MRFC Branches; ADD staff namely the Divisional Crops Officers from Salima,Machinga, and Mzuzu ADDs, Project Officers from Salima, Bwanje, Zomba, Balaka, and RumphiRDPs, Section Agricultural staff, and club members from the areas visited who benefited fromMRFC agricultural loans. Their support and assistance rendered has greatly contributed to thecompilation of this PCR.
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1.0 INTRODUCTION AND BACKGROUND OF PROJECT
Before Malawi Rural Finance Company (MRFC) was setup World Bank had assisted theGovernment of Malawi (GOM) in several development programs in agriculture which includedcredits and loans to develop the agricultural sector. Most of these funds were targeted to smallholdersub sectors.
The GOM throughout the 1970s and 1980s benefited from several multi donor assistance whereremarkable investments in physical agricultural infrastructure was made and was characterized byestablishment of research, extension, credit systems and increase in staffing levels'.
Though all these development assistance were made in the agricultural sector, not much had beendone as proliferation of these establishments did not trickle downAto the smallholder farmers as theyhave been constrained by a number of factors which included lack of capital or access to credit topurchase agricultural inputs. The setting up of Blocks and formation of farmer groups or clubs wasencouraged to expand the coverage of extension services and promoting low cost technologies andaccess to credit. However this fell short of addressing some of the underlying institutional and policyissues. These projects including SACA were implemented to set effective growth and incomeincreases among smallholder farmers. The Rural Financial Services Project (RFSP) was identifiedwhen the Smallholder Agricultural Credit Administration (SACA) closed in 1992. This led the GOMthrough the assistance from IDA -World Bank to setup MIRFC to take over SACA responsibilities inorder to achieve and improve the accessibility of credit to smallholder farmers while operating on acommercial basis.
Malawi Rural Finance Company (MRFC) began its operations on 1st October, 1994, and was meantto become a major financial institution with the widest network providing a full range of financialservices in the form of loans and savings facilities to rural households and micro, small and mediumentrepreneurs on a competitive and sustainable basis. The RFSP was established to assist inimproving access of smaliholder farmers in financial services on sustainable basis and assist thegovernment towards improving the policy and institutional framework for rural financialintermediation by supporting the development of linkages between the formal and informal financialsectors, and strengthening related non-financial institutions serving the rural sector.
Several studies under this project were commissioned with an objective of improving MRFC services.These were done by several consultants which included International Food Policy Research Institute(IFPRI). These studies were to help policy makers and rural banking practitioners in Malawi andelsewhere to better design and support sustainable rural financial institutions that meet the needs ofpoor rural households.
' List of related credit/loans that World Bank has assisted Malawi in developing Agriculture inthe country is in Annex 1.0 in the Annexes.
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2.0 PROJECT OBJECTIVES
The project's principal objectives were to:-
a) Provide financial services and credit facility in the rural areas of Malawi.b) Provide credits to micro, small and medium enterprises in the country.c) Offering Banking Services
The type of loans offered included:-
- Seasonal Agricultural loans - Collateralised (RFSP)- Business loans - Collateralised (RFSP)
Interest Rates charged on these loans were market determined.
3.0 PROJECT TARGETS
1. Provide credit to more than half a million (500,000) smallholder farmers opposed to 330,000during SACA.
Hi. Improve accessibility of financial services to smallholders and improve repayment loan %through proper company repayment channels.
iii. Increase farmer level of food production through increase in cultivated area and adoption ofhybrid maize and use of fertilizer.
iv. Increase farmer incomes through growing of cash crops i.e. tobacco, cotton etc.v. Increase in employmentvi Reduce rural poverty while enhancing and accelerating economic development of rural areas
of Malawi.
4.0 LOAN CONDITIONS.
In order for RFSP to become effective, several critical conditions were laid down according to IDArequirements to be fulfilled by both GOM and MRFC. These are indicated in Table l.0.
5.0 PROJECT COST AND FINANCING
5.1 Project Costs
The Total Project Cost was estimated to be US$ 36.7 million (MIK 146.90 million) at the mid-1993exchange rate of MK 4.00: US$ 1.00 including physical and price contingencies and base cost. The
I0
foreign exchange component was about US$ 13.1 million (36.0 %) of the project cost. Table 2.0shows the Project Financing Plan for the RFSP.
TABLE 1.0 LOAN CONDITIONS UNDER THE RURAL FINANCIALSERVICES PROJECT (RFSP)
CONDITIONS FULFELM[ENTDS
Conditionsfor Loan Effectiveness
Establishment of a company to operate the credit Malawi Rural Finance Company (MRFC)activities at a profitable margin. established in 1993
Company to be registered as stipulated by the GOM Registration of MRFC done as a limitedregulations liability company according to GOM
regulations and satisfactory to IDA
The transfer of the activities, assets and liabilities of MRFC took over all the assets andSACA from GOM to MRFC (par. 4.7); liabilities of SACA which were worthy
US$ 4.7 million.
Appointment of MRFC's General Manager, BDU Positions fulfilled by the time the companyManager and Financial Controller with qualifications began operating on 1st Oct. 1994satisfactory to the Bank ( as stipulated in ProjectStaff Appraisal par. 4.8);
A receipt by IDA of satisfactory subsidiary Signing of subsidiary agreement andagreement between the RBM and MRFC (par. 4.15). forwarded to IDA.
The finalization of MRFC's organizational structure MRFC organizational structure developedsatisfactory to IDA (par. 5.2); to IDA satisfaction
The preparation and adoption by MRFC of manual Development and adoption of policies andof operating policy, guidelines and implementation operations done to IDA satisfactionprocedures acceptance to IDA (par. 5.5);
The establishment by MRFC of guidelines for credit Done according to IDA satisfactionprocessing and administration acceptance to IDA(par. 5.11).
Establishment of a business development unit to the Done according to IDA satisfactionacceptance to IDA (par. 5.4)
.~~~~~~~~~~~~~~I
TABLE 2.0 PROJECT FINANCING PLAN
Local Foreign Total
US$ Million
IDA 11.9 13.1 25.0
Government 4.0 4.0
MRFC 4.7 4.7
Sub-borrowers 3.0 3.0
Total 23.6 13.1 36.7
Table 3.0 indicates an estimated Investment and Recurrent cost of the project which included pricecontingencies for both local and foreign cost added, based on March, 1993 price.
5.2 PROJECT FINANCING
The RFSP was financed by World Bank (IDA), GOM and other eamings from SACA balances andsub-borrowers. The IDA credit of US$ 25.00 million covered 100 % of foreign costs and 51.0 % oflocal costs, which when combined, constituted 68.0 % of total project costs. The GOM contributionof US$ 4.00 million was expected to cover 17 % of local cost, representing I I % of total project cost.The remaining Sub borrowers and SACA balances of US$ 3.0 million and US$ 4.7 million covered13 % and 20% of local costs representing 8 % and 13 % respectively of total project cost.
There were two credit lines available to MIRFC. One under IDA funding as indicated in Table 2 and 3above; and the other one of US US$ 12.0 million from IFAD under Mudzi Financial Services Project(MESP). The financing of the RFSP was done in tranches to MIRFC through RBM at a reference rate.The activities that were carried out under this project were in general affected by devaluation whichreached up to 70 % in 1998 which reduced MRFC lending capacity. Hence this led to the GOM andWorld Bank to reallocate RFSP resources from other components to the lending component to enablethe company to proceed with the program. These macroeconomic shocks are still being felt by thecompany up to the time the project phased out.
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Table 3.0 ESTIMATED PROJECT COSTS
Local Foreign Total Local Foreign Total
MK 000 US$ 000
A. INVESTMENTCOSTS
I. Goods 0.00 25143.30 25143.30 0.00 6285.80 6285.80(Matri/Vehic/Equip)
2. Training 2039.80 226.60 2266.50 510.00 56.70 566.60
3. Technical Assistance 0.00 - 7820.00 7820.00 0.00 1955.00 1955.00
4. Line of Credit 72000.00 8000.00 8000.00 18000.00 2000.00 20000.00
TOTAL 74039.80 41189.90 115229.80 18510.00 10297.50 28807.40INVESTMENT COSTS
B. RECURRENTCOSTS
1. Salaries 13754.80 0.00 13754.80 3438.70 0.00 3438.70
2. Other operating Costs 3994.40 9320.20 13314.50 998.60 2330.00 3328.60
TOTAL RECURRENT 17749.20 9320.20 27069.30 4437.30 2330.00 6767.30COSTS
TOTAL BASELINE 91789.00 50510.10 142299.10 22947.30 12627.50 35574.80COSTS
Physical Contingencies 0.00 1257.20 1257.20 0.00 314.30 314.30
Price Contingencies 2451.70 821.50 3273.20 612.90 205.40 818.30
TOTAL PROJECT 94240.70 52588.80 146829.50 23560.20 13147.20 36707.40COSTS
5.3 PROJECT FINANCIAL PROGRESS
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The flow of EDA funds was quite substantial throughout the project period though it was affected bysome macroeconomic shock (devaluation) which led to the company to seek for reallocation offunding in order to continue with the program to expand its customer outreach. Table 4.0 shows theflow of RFSP - IDA funds under Investment and Recurrent costs over the project life period of five(5) years.
TABLE 4.0 FLOW OF RFSP - IDA FUNDS IN (Mk)
Allocated and Actual Expenditure to Project Closing Date
Category Amount Allocated Amount i'/o Fund(SDR) Disbursed (SDR) Balance (SDR) Utilization
Credit Line
Medium Term 888,478.00 2,815,813.35 (1,927,335.35) 316.93 %Loans
Seasonal Loans 13,586,522.00 11,459,589.98 2,126,932.02 84.35 %
l 14,475,000.00 14,275,403.33 199,596.67 98.62 %Institutional Development ComponentEquipment and 1,3632,558.00 662,988.43 700,569.57 48.62 %VehiclesTechnical 1,072,848.00 1,094,181.37 (21,333.37) 101.99 %AssistanceStudies and 50,853.00 56,402.17 (5,549.17) 110.91 %Training I
Operating Costs 764,956.00 701,423.21 63,532.79 91.70 %PPF 272,785.00 272,785.97 (0.97) 100.00%Sub Total 3,525,000.00 2,787,781.15 737,218.85 79.09 %Total 18,000,000.00 17,063,184.48 936,815.52 94.80 %
* PPF = Project Preparation Facility
As indicated above the % for the Credit Line is so high {316.93 % and 84.35 % respectively}. This isbecause funds from some components under Institutional Development were reallocated to the CreditLine after holding discussions with GOM and World Bank when the lending capacity was affected bythe devaluation of Mk which occurred in 1998. This reallocation of funds under RFSP had no effecton the activities of the components under Institutional Development.
Though MRFC experienced some losses it still made some profits after considering the loan loss
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provisions and provisions against irrecoverable deposits and after meeting staff and operating costs.This was because loan loss provisioning policy requires that 100 % provision be made against allseasonal loans which go past their maturity dates. Under this policy full (100 %) provision is madethe day after a loan goes past its maturity date. This policy for business loans is similarly veryconservative and stringent. Such profit outcome would assist the company to be able to sustain itsactivities.
Table 5.0 below show the Profit and Loss Account Analysis of MRFC from 1994/95 to 1998/99seasons.
Table 5.0 PROFIT AND LOSS ACCOUNT ANALYSIS
MK 000 million _1994/95 1995/96 1996/97 1997/98 1998/99
Overall loan 42.1m 277.1m 218.4m 362.4m 567.0mPortfolio(Seasonal andBusiness)
Interest Income 27.7m 161.2m 115.1m 158.4m 357.6m
Interest Expense 4.6m 51.7m 25.5m 27.4m 101. lm
Staff Cost 6.9m 14.9m 23. lm 34.3m 48.4m
Operating Costs 8.6m 12.3m 17.4m 26.0m 54.5m
Loan Loss 2.5m 81.9m 23.2m 45.3m 128.9mProvisions
Net profit before 5.Om 0.1m 9.6m 25.Om 24.7mTax but afterLoan Losses
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6.0 PROJECT IMPLEMENTATION
6.1 Malawi Rural Finance Company (MRFC) Activities and Organizational Structure:
Malawi Rural Finance Company Limited (MRFC) was established in 1993 under the Companies Act1984 as a private limited liability company. It was established as a new Finance company by theGovernment of Malawi (GOM) under financial and technical assistance from the World Bank.
The company started its operations on 1 S October, 1994 and presently operates as a FinanceCompany. The shareholders, the Board and the management are fully committed to transform thecompany into full Bank status.
The GOM owns 100% of the Issued and Paid Up share capital of the Company through the Ministryof Finance. Currently the fully paid up share capital of the Company stands at MK 101 million.MRFC has been given a special exemption by the Reserve Bank of Malawi (RBM) to accept depositsfrom the public. This exemption is however conditional to the effect that 'the company can not use thefunds raised from its depositors to fund its lending activities.
The company has currently eight (8) branches, 27 Satellite Offices, 163 Field Offices spreadthroughout the rural areas of Malawi with a total number of staff of 316 compared to 255 in 1994/95.NiRFC customers fall in diverse categories and these are:- Resource Poor Subsistence Farmers andEntrepreneurs, Smallholder Farmers' Clubs, Owners of Small & Medium Estates, and Micro & SmallEntrepreneurs. The loan services MIRFC offers include:-
i) Seasonal Agricultural loans - Collateralised (RFSP)ii) Business loans - Collateralised (RFSP)iii) Small Business Loans without upfront Collateral (Mudzi Small Business Loans Scheme)iv) Seasonal Agricultural loans without upfront collateral ( Mudzi Tikolore Scheme) andv) Banking Services
The first two loans (i & ii) under RFSP involve payment of 10 to 20 % up front cash collateral toboth rural and urban customers. The other two loans (iii & iv) under Mudzi are offered to resourcepoor farmers and entrepreneurs who can not afford MRFC's regular upfront 10 % cash collateral.Service (v) is offered to villagers where transactions are done right at the village level.
Interest Rate charged to MRFC customers is done at market rate calculated by considering cost offunds MRFC operating expenses, loan loss provision and a small margin. Interest Rate % chargedfrom 1995 to 1999 varied from 34 % to 54 % (RBM Reference Rate and, MRFC %) compared to 29% to 51 % of Commercial Bank of Malawi (CBM Base + 3 %. Details for each years Interest Rate(%) are indicated in Annex 2.0. A three tier Interest Rates structure is offered by MIRFC where PrimeCustomers attract the lowest rates, Repeat Customers pay 2 % higher rates than prime and First Timecustomers pay 3 % above the Prime Customer Rates.
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Malawi Rural Finance Company (MRFC) is known to beneficiaries through Agricultural and MRFCfield Staff and production of brochures which are usually distributed to the people. The 1998/99overall loan portfolio (Seasonal + Business) is MK 547.30 million compared to MK 34.9 million in1994/95.
6.2 PROCUREMENT COMPONENT
As MRFC was a new company there was need to procure alot of equipment hence there was anincrease in operating cost in 1994/95 season. This included procurement of computers, officeequipment, vehicles, motorcycles etc. Table 6.0 shows the IDA funds allocation schedule for eachcomponent under RFSP.
TABLE 6.0 FUNDS ALLOCATION SCHEDULE FOR RFSP - IDA (SDR MILLION)
Category Amount Allocated {SDR} '%, of Expenditures to be Financed
1.0 Goods & ServicesA Sub-projects under Part A 1,450,000.00 100 % of foreign Expenditure and 90 %
{i)of the Project of local expenditures.B Eligible Expenditures for 10,100,000.00 100 % of foreign Expenditures and 90 %/o
Incremental seasonal of local expenditurescredit under Part A {ii}ofthe Project
2.0 Equipment and vehicles 3,250,000.00 100 % of foreign expenditures and 80 %Under Part B. l of the of local expendituresproject
3.0 Technical Assistance 850,000.00 100%Under Part B of theproject
4.0 Studies and Training 375,000.00 100 %under Parts B and C ofthe Project
5.0 Operating Costs under 375,000.00 90 %Part B of the Project
6.0 Refunding of Project 375,000.00 Amount due pursuant to Section 2.02 {d}Preparation Advance of this agreement
7.0 Unallocated 1,225,000.00
Total 18,000,000.00
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Procurement of project equipment was done by MRFC management as the General Manager andFinancial Controller were trained in IDA procurement procedures. Major procurement activities werefirst to be approved by the donor, and in most of the times this led to delays in procurement of someitems. The reports for procurement for each category is as follows:
a) Vehicle and Equipment
Vehicles and equipment were procured during the first and second years with somereplacements or additions in the remaining years while other goods and services, supplies andspare parts were to be procured through out the project life.
b) Technical Assistance
Several Technical Assistance were recruited and these were the General Manager, FinancialController and Manager Business Development Unit was part of the conditions to be metbefore the company began operating. Several short Consultants were hired to carry outseveral studies under the project.
c) Training
Several Training opportunities were offered to both MRFC staff (Headquarters and Field) andbeneficiaries (farmers and others). Most field staff were trained in credit management, groupdynamics and micro finance. Some staff from M:RFC Head office and some supervisors weretrained on Micro banker Computer systems. These training's enabled MRFC staff toimplement the projects activities effectively and efficiently.
d) Operating Cost of MRFC
Operating cost was met locally as it mostly covered staff salaries, maintenance costs of bothvehicles and other equipment, accommodation and other office expenses, stationery, andProject Preparation Facility (PPF) {costs incurred during the preparatory phase of establishingthe company}. These expenses have been highlighted in Table 5.0 above.
e) Line of Credit
These were the funds to be lent to different categories of MRFC beneficiaries as indicated inTable 6.0 above. The Line of Credit was affected in 1998 due to devaluation and reallocationof funds was done within the project after holding discussions with GOM and World Bank.Details of the performance of this Line of Credit component will be discussed in detail in thefollowing sub heading.
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6.3 LINE CREDIT
6.3.1 Planned Activities and Achievements
In general, the objective of providing credit to smallholder farmers was substantially achieved asnumber of farmers benefiting from MIRFC Seasonal Loans increased during the project period.Farmers got the loans through clubs which were selected by MRFC staff after being trained by theAgricultural staff. More Women clubs benefited from MRFC loans to grow cash crops i.e. cotton andtobacco under the project..
Clubs were trained in group dynamic and credit management by Agricultural staff in 8 sessionstaking 2 hours per session using the materials produced by MRFC and the clubs were later screenedby MRFC staff to test if they qualify for MRFC Seasonal Loans. These Seasonal Loans included:fertilizer, hybrid maize seed and chemicals for cotton growers.
Since MRFC started operating on 1 st October, 1994 to date number of clubs benefiting from MRFCloans has increased despite the company facing other problems which included defaulters, loss of cashand devaluation. Details of numbers of clubs benefiting from the project were as follows:
Season 1994- 1995 1995- 1996 1996 - 1997 1997- 1998 1998 - 1999
Clubs 2,893 6,010 4,777 4,086 5,490
The amounts of money lent to smallholder farmers during 1998/99 was MK 547.3 million comparedto MK 34.9 in 1994/95 season. During the project period loan repayments for these Seasonal Loansvaried from 75 % to 95 %. Table 7.0 shows Loan Repayment Percentages (%).
The variations in loan repayments was due to some factors which included:- drought, floods, lowfarm-gate price for some crops i.e. cotton, maize, and at times the lower prices being offered at theAuction Floor affected the farmers gross margins. The devaluation of Nk also affected the grossmargins for the crops.
Clubs that fail to repay their loans have been charged with a default penalty of 15 % of the loan anddeclared defaulters and never to be given loans unless they repay their previous loans. The last resortwas to take them to the court of law.
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Table 7.0 LOAN REPAYMENT AGAINST LOAN DISBURSEMENT IN Mk AND %
SEASON SEASONAL AMOUNT AMOUNT NOT RECOVERYLOANS REPAID in (Mk REPAID (Mk in RATESDISBURSED in million) million)(Mk in million)
1994/95 34.9 33.2 (1.7) 95%
1995/96 249.6 187.2 (62.4) 75 %
1996/97 174.1 154.9 (19.2) 89%
1997/98 204.2 183.8 (20.4) 90 %
1998/99 547.3 421.4 (125.9) 77 %
1999/2000
Total 1,210.1 980.5 (229.6) 81 %
In general the projects activities were not seriously affected by competition from other lendinginstitutions though they offered their loans at a lower interest rate than that of MNRFC. There wasslight competition with ADMARC, Farmers Finance Company (FFC), Tobacco Association ofMalawi (TAMA) and the Commercial Banks in general. This was due to the fact that theorganizations offered fixed amount of loans unlike MRFC loans which were flexible.
Coordination between MRFC and MOAI was said to be satisfactory though agricultural staff rated itunsatisfactory due to some differences in coordination of other issues under the project or that theyexpected too much. Supervision Missions from the donors side were very useful as they gaveguidance to MRFC management.
6.4 Beneficiary Impact Assessment Survey (BIAS)
The objective of this survey was to assess the impact of the RFSP on its beneficiaries (Smallholderfarmers). The survey was carried out in March, 2000 following the closing of the project on 31stDecember, 1999 and was done by MOAI- Planning Division's - CMIEU as part of the preparatorywork for the Project Completion Report (PCR). A total number of 25 farmers' clubs, 10 MRFC staffand 12 Agricultural staff who were interviewed from Salima, Machinga, Mzuzu ADDs and MRFCBranches.
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Most of the clubs interviewed were engaged in tobacco, cotton and maize growing. The mostcommon farm inputs issued to farmers was fertilizer for tobacco and maize production whilefor cotton they were given pesticides.
Most of the clubs were formed during 1994/95 and 1995/96 season. This gives an impressionthat most of the clubs became organized soon after the inception of MRFC.
Almost all the clubs were basically formed with an aim of acquiring agricultural loan in orderto increase production of food and cash crops inorder to improve their food security levelsand income status hence improve their living standards.
Membership level was between 15 to 20 members as stipulated by MRFC selectionprocedures. All clubs indicated having a functional committee which coordinates the clubactivities.
Most of the farmers reported that they were informed by the Field Assistant (FA) about theexistence of the MRFC although most of these clubs could not give or spell out clearly theobjectives of MRFC apart from issuing credit to smallholder farmers.
There is a very strong indication that farmers have been getting technical advice both fromMRFC staff and Agricultural Staff on agronomic activities in their gardens and how to servicethe loan. They indicated that this has improved their club performance in club managementand increase in food and cash crop production.
The timeliness in input delivery was indicated to be done on time despite delays during theearly years of the project implementation (1994/95 and 1995/96. The quality of the inputsespecially fertilizer has been good except one or two seasons where some clubs complained offertilizer which had lots of sand and stones.
Though there were other lending institutions within the ADD visited most clubs did notbenefit from their loans as they were so fixed though their interest rates were lower than thoseof MRFC.
Most clubs knew about SACA though only a few benefited from it. This was because most ofthe clubs were formed after SACA had closed. Those who knew about SACA indicated thatMRFC loans are better off than SACA ones as these were basically for food crops and fixedwhile for MRFC it included cash crops and very flexible.
Most MRFC staff knew about RFSP and its objectives. Same with Agriculture staff thoughthey had no access of the Project Appraisal Document.
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Implementation of project activities by MIRFC were done in collaboration withAgriculture staff especially in training farmner clubs in group dynamics and creditmanagement while MRFC staff did the screening test.
Common loans offered were Agriculture Seasonal Loans. Their interest rates varied from34% - 54% during the project period.
Other lending institutions operating in ADDS were TAMA, ADMARC, Farmers FinancingCompany (FFC), Norsk Hydro, and Commercial Banks etc.
Monitoring project activities was done through field visits, reports and meetings at Branch,Satellite and Field offices.
Problems faced included:- reduction in size of portfolios due to default and political pressure,floods, erratic rains, and low farm gate prices.
Quality and timeliness of the implementation of project activities improved over the projectperiod.
Overall the project objectives were substantially met though they were some macroeconomicshocks which affected the implementation of the project activities.
6.5 General Problems faced
A few problems were faced during the project period from both MRFC and the beneficiaries(smallholder farmers). The company had problems such as:- late distribution of inputs and in somecases poor quality of inputs (fertilizer which had sand and stones), loan recovery was poor and in1998 the company was greatly affected by devaluation which went up to 70 %. Seeking for a noobjection from donor to procure certain items led to delays in the project activities. Frequent changesof Task Managers has affected the implementation of some of the project activities.
For the beneficiaries (smallholder farmers) their main problem under RFSP activities were as follows:Collateral affected the number of farmers to benefit from MRFC loans as farmers did not have thecash for the up front payment, high interest rates which kept on changing during the season, lack ofAgricultural Staff in some areas which led to farmers lacking some Technical Advice, delays inprocessing payment between Auction Floor and MRFC headquarters etc.
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6.6 Study Findings under RFSP
Several studies have been commissioned by several organizations under the RFSP. These studiesincluded those done by IFPRI2 . IPFRI were given a short consultancy after they completed a twoyear study on Rural Financial Markets in Malawi in collaboration with Bunda College of Agriculture.The principal aim of this study/research was to provide information which could help policy makersand rural banking practitioners in Malawi and elsewhere to better design and support sustainable ruralfinancial institutions that meet the needs of poor rural households.
Findings of this study indicated that:-
Microfinance institutions targeted to poor people can operate successfully and achievehigh loan recovery rates.Peer selection, monitoring, and pressure are taking place in credit groups in Malawi.There are some institutional and socio-cultural constraints that put limitations to theextent to which the benefits to the lender from these incentives can be realized. Theseat times rise due to culture being defined as what is acceptable. These might affect theperformance of a lending program.The ability of MRFC to reach and monitor a large number of borrowers scatteredthroughout the country is due to the institutional framework of MOAI networkthroughout the country though it has also some problems.
6.7 Banks and Borrowers Performance
S,ince the project was approved in 1993 by the donor IDA - World Bank and implementation ofproject activities began there were sixteen (16) supervision missions3 came to supervise the projectactivities and one of these was a Mid Term Review for RFSP. Several task plans were drawn to speedup the implementation of the project activities. Action plans were drawn by donor on how projectcomponents should be implemented and how recovery should be done and improved. In generalsupervision missions inputs were useful and guiding both technically, and administratively leading tothe success performance of the company.
The GOM and the project implementers [MRFC] performance was also satisfactory. The governmentmade available the SACA remaining funds (US$ 4.7 million) and its contribution of US$ 4.0 million.Almost all conditions were met by the government and the implementer MRFC. Goods and servicesprocured under the project were done according to IDA procuring procedures.
2 Fourth Semi-Annual Report prepared by Aliou Diagne, dec. 1999 - Design and SustainabilityIssues of rural Credit and Savings Programs for the poor in Malawi: An action-oriented ResearchProj ect.List of these supervision mission is attached in the Annex 3.0.
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7.0 Critique
As the previous chapters have evaluated the implementation of the RFSP activities beingimplemented by MRFC in collaboration with Agricultural Staff, discussions on achievements as wellas failures and reasons have been highlighted. This chapter is to critique and evaluate the manner ofexecution of RFSP activities.
7.1 Collateral
The charging of the 10 to 20 % collateral needs to be reconsidered as many farmers fail to getseasonal loans from MFC due to lack of cash for the upfront payment.
7.2 Interest Rates
The devaluation of Mk in 1998 affected the lending capacity of MIRFC leading to interest ratesincreasing and varying within a season. The cause of these variations in interest rates were not propertransmitted by Portfolio Officers to farmers so that they understand why the rates vary at times. Thisvariations in interest rates affected the gross margins for the farmers.
7.3 Farm gate prices
The low farm gate prices for some of the crops i.e. maize and cotton has affected the gross margin ofthe farmers leading to some farmers defaulting. There is need to peg most of these crops prices to USdollar just as the case with tobacco. Tobacco is affected too by the lower prices being offered at thefloor.
7.4 Quality of inputs (fertilizer)
The quality of inputs especially fertilizer was reported to be very poor during the early years of theproject. The fertilizer had sand and stones which affected the yield output. Though trading ofagricultural inputs has been liberalized there is need for the GOM and MRFC to be testing the qualityof the inputs to ensure farmers get good quality fertilizer.
7.5 Staff Training Opportunity and Upgrading
Though it was reported that some training was done for MRFC staff most of it was On the JobTraining. Though this is appreciated there is still need for future professional training for some of thestaff which will act as an incentive and lead to upgrading them staff from one level to the other.
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8.0 PROJECT SUSTAINABELITY AND FUTURE OPEERATIONS
The objectives of at least by reaching most of the smallholder farmers throughout the country. MRFChas been able to make profits though some losses were incurred. Though the projects' activities werecarried out at a macro level, its objectives were substantially achieved leading to project sustainabilitybeing likely as long as some factors would be adjusted i.e. additional funding would be available tocontinue implementing these project activities.
MRFC financial projections of the coming financial year shows that operating costs, including staffcosts, are likely to out grow the growth in income. These increases will affect the gross margin of thecompany thereby reducing the projected profitability for the coming season unless the company willbe able to improve their lending margins or expand their lending volume. Since lending margins aremarket driven it is felt that increase in lending volume should be encouraged and proposed. MIRFCthen through GOM will seek for additional credit lines from World Bank in order for RFSP activitiesto be sustainable. The company too ought to look for ways of reducing loan losses.
As Malawi's economy is agro-based and mainly lies on tobacco as its major export source the futureprospects of MIRFC remains tied to the future of the tobacco industry, and the exchange and interestrate movements in the economy. It is due to this that the company proposes to be offering its tobaccocustomers US dollar denominated loans. This will assist in reducing losses of the company capital aswas the case in 1998. This proposal has been tabled to GOM and a decision has not yet been made.Once this would be approved it is to be taken on board and launched from 2000/2001 season.
9.0 KEY LESSONS LEARNED
* Rural and agricultural credit are always politicized. Managing political relationshipsis therefore critical to credit and institutional sustainability. MRFC fell short innurturing its extemal relationships which resulted in World Bank to be more involvedin problem- solving and inter-institutional relations than would be considered optimal.Its over dependence on this 'intermediation' was disadvantageous to the company asit strives to sustain its operations following the closure of the RFSP.
* Credit institutions should be able to operate free from political interventions.
* Since MIRFC was registered as a company and not a financial institution it fell outsidethe supervisory arm of the Reserve Bank of Malawi. It was mostly supervised byWorld Bank missions and its extemal auditors. A special arrangement might havebeen sought to extend RBM supervisory activity to MRFC.
Microfinance and agricultural finance involve quite different challenges. They
25
require different skills, and different types of loan appraisals, monitoringarrangements, record-keeping, etc. MNRFC has struggled to manage and marry thetwo, especially on its microfinance dimension.
NMRFC is also offering Savings Banking facilities. The services should be encouragedand sustained as most smallholder farmers who are MRFC clientele are benefitingfrom this facility as it dose not only provide resources to the farmers/ groups but alsobuilds up risk funds for them in case of defaulting.
Competition is not necessarily beneficial when it comes to administration ofsubsidized development-oriented finance. There is a relative small market for ruraland agriculture finance in Malawi and hence the need for competition to followacceptable micro-finance best practice in order to reduce confusion being potrayed topotential clients
Though microfinance literature indicates whether or not (high) interest rates mattersor whether the key issue is simply providing access to effective services MRFC, didnot experience any of this though some beneficiaries still complained about this.Currently MRFC is negotiating with GOM through MOAI on how interest rates couldbe reduced assuming GOM will agree to consider reducing the cost of funds to thecompany or remove the reference rate altogether.
Seasonal agricultural finance centered on small farner clients is not inherentlyprofitable no matter how effective the financial institution is managed. A subsidyelement, underwriting part of the operation's administrative and technical costs willalmost certainly be necessary, regardless of the institution's effectiveness in loanrecovenes.
High loan recoveries for smallholder farmers can be obtai ned provided that there is a(a) a profitable lead crop/livestock enterprise, (b) mechanism for loan collection (i.e.an auction stop order, a contracting organization), and (c) loan repayment discipline isnot undermnined by parallel quasi-credit programs which apply subsidized interestrates and other preferential terms.
In circumstances of high inflation and currency devaluation, it may be necessary tomove to foreign currency (-linked) lending in order to preserve the capital of thefinancial institution and in order to provide reasonable interest rates to borrowers.This can easily be applied when financing the production of exported commodities,especially those already priced in ( or whose price is linked to) foreign exchange.Flexibility is critical in the design of rural finance components and it is ill-advised torestrict the clientele and types of activities which the financial institution can lend to.Market circumstances will certainly change over the course of the project and new
26
opportunities and new competition will arise.
Agricultural/rural finance should not, generally, form the basis for stand-aloneprojects. Agricultural finance is untimely tied up with broader developments inagricultural market development and the regulations of agricultural markets. Theinstitutional solutions for agricultural credit may well derived from structural changesin agricultural marketing (either for inputs or commodities). The dominant suppliersof agricultural finance may not be financial institutions themselves. This should becarefully assessed at the early stages of project preparation.
Though application of the joint and several liability principle is said to have improvedloan repayment rates over the years in Malawi, there is still some evidence that attimes it induces non-payment by individual members who observed other 'freeriders'.
Legal enforcement of financial contracts (with borrowers) proved largely to beineffective and expensive. Taking borrowers to court may have had a limiteddemonstration effect, although actual direct recoveries from legal procedures probablydid not exceed the legal costs.
The economic and political environment facing MRFC has been one of unusualturbulence as Malawi has been undergoing a major transition toward democracy andmarket liberalization, involving substantial social and even psychological change.This has affected all facets of MRFC's operations. Considering the prevailingturbulent environment, together with the underlying high risk of its focal operation,MRFC's performance (and even survival) is rather remarkable.
Repayment through stop order at the Auction floors for the tobacco growers hasshown to be effective as it reduces chances for defaulting. There is need to identify a
market point for the other crops so that loan deductions be done directly. This wouldreduce the percentage of defaulters.
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10.0 COMMENTS AND CONCLUSION
All loan conditions set under RFSP were fulfilled by both GOM and MRFC for the project to beeffective. These conditions included the recruitment of a General Manager, Manager BDU andFinancial Controller. In general most of the projects objectives have been achieved though they wereaffected by several factors.
Recommendations made by Supervision Missions were so helpful and guiding as it contributed to thesuccess of the implementation of the project activities.
Most of the projects' target have been met substantially. The project was able to offer credit to moresmallholder farmners through clubs and accessibility of the financial services to smallholder farmerswas met due to the fact that MIRFC network falls in line with MOAI institutional framework whichcovers all areas throughout the country. Loan repayment has in general improved under MRFCoperation as it varied from 75 % to 95%. This was because most of the seasonal loans issued tosmallholder farners who grow tobacco were deducted directly at the Auction Floors hence reducingdefaulting attempts.
In general food security levels has improved at household levels as indicated in production andhectarage in the National Crop Estimate Figures produced by MOAI. Same with cash crops i.e.tobacco, cotton etc the number of growers had increased same with production (mt) and hectarage(ha) though this can not only be attributed to MRFC loans alone but also to other factors whichincluded good seasons, other line credits offered by other lending institutions and usage of newtechnologies i.e. adoption of usage of hybrid maize [MH 18 etc] and use of fertilizer. Table 8.0indicates the increase in production and hectarage for a few selected crops.
TABLE 8.0 NATIONAL PRODUCTION FOR SOME FOOD AND CASH CROP
CROP 1994/95 199596 1996/97 1997/98 1998/99
lilt Ha lilt Iha ML lt Mt. laa lilt, haNMaize 1,327.865 1,225,580 1,793,461 1.242,588 1,226,478 1.233.538 1.772.392 1 391,365 2.479.406 1,446,773
S/beans 15,011 23,266 42,374 53.611 28,425 39,9604 3(0 170 42.976 40.K11 65,704
Tobacco 20,659 244.412 49,786 46,277 65,781 66.547 8 81,181 89,961 71,690 90,205
Cotton 25,197 52,237 82,591 79,073 45,122 70,734 36,381 45,077 51.321 53,766
* Source: National Crop Estimate Figures by MoAI.
As more farmers were engaged in growing of cash crops due to Crop liberalization in 1994,smallholder farmers income levels has improved leading to improved living standards throughbuilding of houses, acquisition of several household goods including bicycles etc.
Partially there has been an increase in employment rate as some people were employed under MIRFCto implement RFSP activities, and even farmers were able to employ people to assist them in theirfields activities as casual laborers.
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The project activities have also assisted in reducing the rural poverty while enhancing andaccelerating economic development of rural areas of Malawi. This can be seen through the improvedliving standard of the rural people and the increase in per capita for some of the households thoughthey still lack some services like public infrastructure etc.
Though it can be said that the project has been a success there is still more to be done to improve theliving standard of the rural people in Malawi. These are indicated in the following chapter to beconsidered by both the donor, GOM and the implementing company MRFC inorder to make futurecredit projects in the country a success.
11.0 RECOMM\ENDATIONS
The following are Recommendations put forward for consideration in future credit projects in thecountry:-
* There is need to streamline the scope of future projects inorder to facilitate easy implementationand monitoring.
* Need for the govemment to increase number of lending institutions and diversify loan schemes inthe country. i.e. farmers should be empowered to form their own village banks and include otheragriculture implements in their loan packages.
- There is need to shorten the procedures when implementing projects i.e. instead of having aSpecial Account abroad open one locally. Procurement procedures need to be reconsidered ascurrent situation leads to delays in procuring some of the required items as no objection has to beseeked from IDA.
* Need for donors to use local personnel or government staff when supervising projects and whencarry out some studies i.e. impact studies etc.
* Need for the GOM to assess performance of Technical Assistance recruited under projects in thecountry. This will help to check if the specialist is performing according to standards spelt out intheir Terms of Reference [TORs].
* Collateral should be either reduced or removed as many smallholder farmers fail to get a loanfrom MRFC due to lack of cash for the up front payment.
. Timeliness in the disbursement of loans should be improved. Same with quality of inputsespecially fertilizer.
* Information sharing among all concemed stakeholders should be improvedC Infrastructure at all levels should be improved for smooth implementation of project activities.* Flexibility in procedure and policy changes should be encouraged in order to cope up with-the
surfacing of competition* Farm produce should be considered as a form of loan repayment apart from cash.
* MIRFC should consider extending the loan to cater for other very important garden operations.This should be in form of cash so that farmers don't work as casual laborers in other peoplesgardens seeking for cash.
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* Payment process from Auction Floors to MRFC should be improved.* Need for staff motivation and incentives to be set in order to encourage staff to work efficiently
and effectively. Staff development is required through upgrading by offering upgrading courses.* Need to reduce interest rates charged on loans. The current ones are too high.
Need for MOAI to fill in the vacant sections as in most of the ADDs some of the sections havenot been manned for some seasons leading to farmers not benefiting from agronomic technicaladvices.
* There is need for Public Relation drive between participating agencies and the local community.* Coordination between MRFC headquarters, branches and MOAI, and the ADDs should be
strengthened.* Politicians should maintain their non interference in the project activities but should provide an
enabling environment.
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12.0 ANNEXES
ANNEX 1.0 RELATED BANK LOANS/CREDIT.
LOAN/CREDIT TITLE PURPOSE YEAR STATUSOFAPPROVAL
1. National Rural Development To assist GOM to implement Nov. Closed 30 June 1985Programme - NRDP Phase I the first 5-year phase of the 1978 PCR dated June 1987
program. Completion ofLilongwe Land DevelopmentProgramme (LLDP)
2. National Rural Development Similar components to NRDP Oct. Closed September 1988Programme - NRDP Phase III IV. Main objectives to 1981 PCR dated May 1990(Cr. I 183-MAI) increase agricultural
production, income andwelfare of the smallholdersector.
3. National Rural Development The project included April Closed April 1991 PCR- NRDP Phase IV (Cr.1343- components to strengthen and 1983 dated April 1991MAI) support extension services,
training and adoptive researchand made provision forimproved credit and
.___________________________ marketing facilities.4. Smallholder Fertilizer (Cr. Assist the smallholder sector April Closed 31 March 19881352-MAI) in the procurement of inputs, 1983
mainly fertilizer. I
5. Agricultural Services Project Designed to help formulate June Closed on 30th(Cr.2514-MAI) and implement institution and 1993 September, 1999
management reforms inresearch, extension and inputsupply system. l
6. Rural Financial Services To improve the assess to June Closed on 31stProject (Cr.2513-MAI) financial services for rural 1993 December, 1999
sector
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ANNEX 2.0 INTEREST RATES CHARGED BY MRFC COMPARED TO CBM
Year RM MRFC CBM
Reference Rate Prome Rate Base + 30/,l
February, 1995 24 .38 % 40 % 35 + 3May, 1996 34.89 % 54 % 48 + 3July, 1996 26.65 % 54 % 48 + 3September, 1996 20.90 % 54 % 37 + 3November, 1996 10.59 % 34 % 29 + 3March, 1997 9.18 % 34 % 26 + 3April, 1998 11.53 % 43 % 35 + 3September, 1998 16.30 % 43 % 35 + 3December, 1998 19.97 % 47 % 31 + 3
March, 1999 26.28 % 49 % 48 + 3September, 1999 26.28 % 45 % 48 + 3November, 1999 29.24 45 % 45 + 3
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Annex 3.0 LIST OF RFSP SUPERVISION MISSIONS
DONOR MNSSIONS DATE i MONTH YEARReview Mission 31st March 1994it _i 13th July 1994I to 14th October 1994
Supervision Mission 15th November 1994'I ,, - ,,27th February 1995If _ I 10th April 1995
LX 24th July 1995,,____________________ _ ,,25th January 1996
June 199612th July 199619th August 1996
Mid Term Review 2nd December 1996Supervision Mission 5th June 1997
13th JanuaryIi I ll 26th March 1999II 9 24th September 1999
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Annex 4.Oa Actual Allocated Funds Vs Expenditure to Project Closing Date
Category Amount Allocated Amount Disbursed Balance t Fund Utilization(SDR) (SDR (SDR)
Credit LineMedium Term Loans 1,450,000.00 2,815,813.35 (1,365,813.35) 194.19 %Seasonal Loans 10,100,000.00 11,459,589.98 (1,359,589.98) 113.46 %
15,550,000.00 14,275,403.33 (2,725,403.33) 123.60 %Institutional DevelopmentComponentEquipment and Vehicles 3,250,000.00 662,988.43 2,587,011.57 20.40 %Technical Assistance 850,000.00 1,094,181.37 (244,181.37) 128.73 %Studies and Training 375,000.00 56,402.17 (318,597.83) 15.04 %Operating Costs 375,000.00 701,423.21 (326.423.21) 187.05 %PPF- 375,000.00 272,785.97 102,214.03) 72.74 %Sub Total 6,450,000.00 2,787,781.15 2,437,218.85 43.22 %Unallocated _Revolving FundTotal 18,000,000.00 17,063,184.48 (288,184.48) 94.80 %
PPF = Project Preparation Facility
Annex 4.Ob Reallocated Funds Vs Expenditure to Project Closing Date
Category Amount Amount Disbursed BBalance '%t, FundAllocated (SDR (SDR) Utilization
(SDR)
Credit Line |Medium Term Loans 888,478.00 2,815,813.35 (1.927,335.35) 316.93 %Seasonal Loans 13.586,522.00 11,459,589.98 2.126,932.02 84.35 %
14,475,000.00 14,275,403.33 199,596.67 98.62 %Institutional DevelopmentComponentEquipment and Vehicles 1,3632,558.00 662,988.43 700,569.57 48.62 %Technical Assistance 1,072,848.00 1,094,181.37 (21,333.37) 101.99 %Studies and Training 50,853.00 56,402.17 (5,549.17) 110.91 %Operating Costs 764,956.00 701,423.21 63,532.79 91.70 %PPF' 272,785.00 272,785.97 (0.97) 100.00 %Sub Total 3,525,000.00 2,787,781.15 737,218.85 79.09 %Unallocated __lRevolving Fund l
Total 18,000,000.00 17,0f63,184.48 936,815.52 94.80 %
34
PPF = Project Preparation Facility
35
MAP SECTION
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