Document of The World Bank FI CQPY FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FI CQPY FOR OFFICIAL USE ONLY KENYA FOURTH AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT April 28, 1981 Report No KE This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 KENYA FOURTH AGRICULTURAL CREDIT PROJECT CURRENCY EQUIVALENTS Currency Units - Kenya Shillings (K Sh) or US$ K Sh 7.5 1/ K Sh US$0.133 WEIGHTS AND MEASURES Metric British Equivalents 1 meter (m) feet 1 hectare (ha) acres 1 kilometer (km) mile 1 square kilometer (km ) square mile (sq. mi) 1 kilogram (kg) pounds (lb) 1 liter (1) US gallon (gal) British gallon (imp. gal) 1 metric ton (m ton) - 2,205 pounds (lb) ABBREVIATIONS ADC - Agricultural Development Corporation AFC - Agricultural Finance Corporation CBK - Co-operative Bank of Kenya Ltd. CSFC - Cereals and Sugar Finance Corporation DAO - District Agricultural Officer FAO - Food and Agriculture Organization GMR - Guaranteed Minimum Return Scheme IADP - Integrated Agricultural Development Program JG - Job Group KFA - Kenya Farmers Association KFW - Kreditanstalt fuer Wiederaufbau MIS - Management Information System MLD - Ministry of Livestock Development MOA - Ministry of Agriculture MOCD - Ministry of Co-operative Development PDA - Provincial Director of Agriculture RELS - Revised and Extended Loan System USAID - United States Agency for International Development FISCAL YEAR Government - July 1 to June 30 AFC - April 1 to March 31 1/ Since October 1975'the Kenya Shilling has been pegged to the SDR at a rate of SDR 1 = K Sh 9.66; the rate vis-a-vis the US dollar has fluctuated since that time, and US$1.0 = K Sh 7.5, the average rate prevailing at the time of appraisal, has been used in evaluating this Project.

3 KENYA FOR OFFICIAL USE ONLY FOURTH AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. BACKGROUND I A. The Project.. 1 B. The Agricultural Sector.. 1 C. The Financial Sector.. 4 D. Interest Rates.. 7 II. AGRICULTURAL FINANCE CORPORATION.10 A. Objectives and Roles.10 B. Management and Organization.11 C. Staffing and Training. 13 D. Accounting and Management Reporting Systems 15 E. Operating Policies and Procedures.17 F. Economic Role and Performance.24 III. THE PROJECT A. General Description. 29 B. Project Costs.. 30 C. Financing..30 D. Detailed Features..31 E. Procurement.. 39 F. Disbursements.. 40 G. Accounts, Audit, and Reports..41 IV. AGRICULTURAL PRODUCTION.41 A. Background B. Livestock and Cropping Patterns..42 C. Technical Coefficients..44 D. Agricultural Production E. Markets and Prices V. PROSPECTS AND JUSTIFICATION.47 VI. AGREEMENTS REACHED AND RECOMMENDATION.50 This report is based on the findings of an appraisal mission which visited Kenya in March-April 1980, composed of Messrs. S. Capoluongo, A. Rioust de Largentaye (Bank), W.H. Edwards, T.G. Roulette, and Mrs. R. Kruthoffer (consultants). Mr. T. Tsui joined the mission part-time. A follow-up mission composed of Ms. S. Badgley and Mr. S. Capoluongo visited Kenya in September- October This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 Supporting Schedule, Annexes, Tables, Charts and Maps Schedule I - AFC Annual Plans Annex 1. AFC Policy Statement Annex 2. List of Materials and Working Papers available in Project File Annex 3. AFC Loan Processing Cycle Annex 4. Draft Terms of Reference for AFC Technical Assistance Tables 1A. Summary of AFC Loan Portfolio ( ) lb. AFC 1980 Loan Portfolio Statistics 2. Proposed Incremental Staffing for Project Activities - AFC Regular Staff 3. Proposed Staffing - AFC Technical Assistance 4. Project Costs Summary 5. Estimated Schedule of Disbursements 6. Government Cash Flow 7. AFC - Actual and Projected Balance Sheets 8. AFC - Actual and Projected Income Statements 9. AFC - Schedule of Selected Financial Indicators Chart 1. AFC - Organizational Plan 2. Project Timetable for Start-up Activities Maps Map 1 Kenya - Ecological Zones Map 2 AFC - Branch Network,

5 KENYA FOURTH AGRICULTURAL CREDIT PROJECT I. BACKGROUND A. The Project 1.01 The proposed Fourth Agricultural Credit Project would be a continuation of three previous agricultural credit projects. These three projects were financed by the Bank Group in 1967 (Cr. 105-KE), in 1972 (Cr. 344-KE), and in 1977 (Ln. 1390T/Cr. 692-KE), through the Agricultural Finance Corporation (AFC). AFC, in addition, is the onlending vehicle for a number of Bank Group financed projects, including: Second Livestock Development (Cr. 477-KE), Group Farm Rehabilitation (Ln. 1093/Cr. 537-KE), and Narok Agricultural Development (Cr. 858-KE). The first two agricultural credit projects in Kenya helped finance AFC's lending program to small-scale farmers. Funds from the Third Agricultural Credit Project are also financing medium-size commercial farmers. The main objective of the Fourth Agricultural Credit Project is to strengthen AFC, to improve its performance and enable it to expand its lending to farmers. The Development Planning Division of the Ministry of Agriculture, together with the Regional Mission of the World Bank in Eastern Africa (RMEA), prepared the Project, working closely with AFC. During appraisal, it was judged necessary to place particular emphasis on AFC's management, organization, and on improving its performance. To this end, an institution-building program component was added to the Project proposal; it would include the establishment of a Corporate Planning Department in AFC, a Credit Training Program, and a program for rationalizing the size and location of existing and planned field offices and facilities. At appraisal it was also decided to exclude three components of the Project which were not directly linked to strengthening AFC. The excluded components were the expansion of the Ministry of Agriculture extension service, the provision of funds for credit to farm input suppliers, and the establishment of a Government farming enterprise to produce grade heifers. Other projects under preparation or implementation are expected to satisfy the needs for these activities. B. The Agricultural Sector 1.02 Kenya, with a total land area of 569,250 km, is a country of great topographical, climatic and soil contrasts. The altitude varies from sea level to over 5,000 m and climatic conditions range from very dry in marginal areas of the north to high rainfall in the forests of the southwest. The soils of Kenya's Central Plateau area are among the most fertile in Africa, while those of the semi-desert, which cover half the country, have little agricultural potential. Map 1 shows Kenya's six ecological zones classified according to their potential. Kenya's population is estimated at 15.3 million

6 2 - (mid-1980) and is growing at an estimated rate of 3.9% per year, one of the highest rates in recorded history; about 90% of the population is rural and depends on agriculture for a livelihood. There are wide variations in population density, corresponding to traditional settlement patterns and to the potentyal of the land. Population densities range from over 200 inhabitants per km in Nyanza and Western Provinces, which have good agricultural potential, to under five in the dry and semi-desert North Eastern Province (Map 1). In 1963, Kenva had about two acres of high potential land per person; in the year 2000 there will be only half an acre of high potential land per person. Kenya's 1979 GDP in current market prices was estimated at about K Sh 48.3 billion (US$6.4 billion), or K Sh 2,850 (US$380) per capita. 1i03 Kenya's agricultural sector is characterized by a wide variety in systems of production which reflects the differences between ecological zones and patterns of land tenure and population distribution. A broad distinction can be drawn between the large-scale farming sector, including Government farms, and the smallholder sector which employs the great majority of the rural population. The Government defines farms of 20 ha and below as small. There are about 1.7 million smallholdings in Kenya of an average size of slightly over 2 ha, covering about 3.5 million ha; most smallholdings are farmed by their owners. About 20% of the smallholders are involved in commercial farming activities, another 20% are in a transitional stage between subsistence and commercial production, and the remaining 60% are subsistence farmers. Maize is the staple crop, but smallholders also produce beans, coffee, sugar, tea, pyrethrum, cotton, oilseeds, meat, milk, potatoes and fruit. Before Independence in 1963, most large farms were owned by expatriates. About 2.7 million ha are farmed in holdings of 20 ha or more. About 1,200 of these farms are holdings in excess of 400 ha each; just over 2,000 are less than 400 ha. Virtually all production on the large farms is oriented toward commercial markets and involves a wide range of crops and livestock products. Wheat, maize, tea, coffee, and sisal are the dominant crops on large farms It is estimated that, at Independence, less than 600,000 ha of land had been registered (i.e. the owners had received a title deed). In the mid- 1960s, registration proceeded rather slowly, but towards the end of the 1960's, it accelerated and has been proceeding in recent years at the rate of about 500,000 ha per annum. As a result, a land market has been established throughout most of Kenya, and individual titles provide security for financing on-farm development and the purchase of stock. By December 1979, a total of 5.7 million ha had been registered. Despite this progress, however, there are still many problems associated with the land adjudication and registration process, and the lack of land titles in many areas constitutes a major bottleneck to the extension of credit programs During the period , agricultural production grew at an average annual rate cf 2.6% in real terms, lower than the average annual growth rate of 4.2% in the period , and well below the 3.9% population growth rate. Agricultural output also grew more slowly than the economy (5%) and the industrial sector (8%) during As a result of this, the share of agriculture in total GDP declined from about 35% in 1972 to 30% in Poor weather conditions and high prices of inputs after the 1973 oil price increases were the main reasons for the slow growth during This trend was reversed in 1977 when good weather and the boom in world coffee

7 - 3 - prices boosted agricultural growth to over 9% p.a. However, in 1978 agricultural growth was again low (under 2%), and in 1979, agricultural production actually declined owing largely to poor weather. Agricultural exports, always the largest sector contributor to total exports, were K Sh 5,300 million (US$706 million) or 60% of total exports of K Sh 8,830 million (US$1,177 million) in Coffee is Kenya's main export crop, but other principal earners of foreign exchange include tea, sisal, pyrethrum, dairy products, meat, animal hides and skins, medium staple cotton, wool, nuts, animal feeds, and in some years, maize. In recent years Kenya has imported significant quantities of agricultural products, mainly wheat and edible oils, while it was nearly self-sufficient in maize. In 1980, substantially lower production resulted in unusually high imports of maize With little high potential land remaining uncultivated, the growing population is increasing pressure on lower potential areas and forests, making resource conservation a critical issue. The Government has recently instituted communal and individual water and soil conservation measures, such as reforestation, long-term development planning for marginal areas, and specific schemes for further intensifying development of high potential land, especially in small farm areas. In the 1960's and 1970's, agricultural output grew mainly because extensive areas of high potential land were being converted from grazing to arable use. As population pressure on land continues to increase, agricultural growth in the 1980's and 1990's will increasingly depend on intensified production. To this end, the Government will seek to increase productivity by promoting improved technology and farm management. To intensify production, farmers will require substantial additional financing as well as improved extension services, access to inputs and efficient marketing. The planned expansion of agricultural credit under this Project is expected to provide some of the needed financial resources Bank Group agricultural projects in Kenya have, over the past twenty years, supported a broad range of objectives identified in the Government's development strategy and sought to stimulate the productive potential of both the subsistence and commercial farming sectors. A total of twenty-two agricultural loans and credits has been extended, of which eight are fully disbursed and fourteen are under implementation, ongoing loans and credits total about US$350.0 million, and total project costs were estimated at about US$740.0 million at appraisal. A breakdown of lending shows that about 35% of the total loan and credit value was directed to the smallholder sector and another 8% supported the development of livestock activities in the pastoralist areas. The export crop sector received about 30% of total agricultural lending, medium and large-scale farmers about 8%, and the forestry sector about 6%; lending for an irrigation and settlement project and a fisheries project was about 11% and 2% respectively. Project performance has been mixed, with some notable successes and some equally problematic operations; however, certain common institutional, financial, and policy problems have emerged in almost all agricultural projects financed by the Bank Group. For instance, the institutional capacity of executing agencies is a commonly cited problem, with staff numbers and training falling short of program needs; the lack of inter-ministerial coordination has also constrained project performance in many cases. At the policy level, the continued delay in articulating a national land use policy has seriously impeded

8 - 4 - the achievement of project objectives in the smallholder, livestock, forestry, and large-farm sectors. The lack of a comprehensive and long-range pricing policy has dampened the supply of a number of food and cash crops and undermined the financial viability of marketing operations undertaken by parastatal boards. Lastly, the general financial difficulties which the Government has been experiencing during the past few years have affected project operations across the board and, in some cases, have seriously retarded project start-up. The Government is aware of these problems, and is taking steps to improve the management of agricultural projects, including efforts at training and institutional reform, and evaluation of the development impact of operations. Additional emphasis, however, is required to resolve these sectoral problems in a satisfactory manner, and the Bank is pursuing needed policy reforms and action programs in the context of dicussions on structural adjustment, sector and project work. C. The Financial Sector Environment 1.08 The major developments in the past two years in the financial sector include a decline in external reserves, a slight increase in overall credit growth in real terms, and a shift from private to Government bank borrowing. The latter was due to a tightening in commercial bank liquidity positions, restrictive credit guidelines imposed on commercial banks by the Central Bank, and the availability of attractive investment opportunities in Treasury Bills which diverted resources from the private sector. A slowdown in economic activity coincided with reduced bank lending to enterprises facing financial difficulties. Credit to the Government priority sectors of agriculture and manufacturing, however, rose substantially during High liquidity in the banking system in 1977 and 1978 resulted from the boom in coffee prices. However, with the fall in coffee prices after 1978, increases in fuel costs, and a rising demand for imported raw materials and industrial components, this liquidity dried up rapidly In response to the deterioration of Kenya-s balance of payments and the increase in domestic prices in the past two years, the Central Bank raised interest rates for advances and discounts, required commercial banks to maintain a cash ratio of at least 3%, and limited the growth of banks lending to the private sector to a target annual rate of 18%. In addition, the Government has imposed restrictions on the repatriation of dividends and on borrowings by foreign companies from local banks. Agricultural Credit 1.10 Agricultural credit in Kenya is available from a number of institutions in the formal credit market and from individuals operating in an informal manner. As of June 1980, total institutional credit for agricultural purposes was about K Sh million (US$17.2 million), or approximately 40% of total credit allocation to the private sector. Little is known about the informal market, but significant amounts of money seem to change hands,

9 - 5 - especially within the extended family system. Many family members earn a living in urban areas and remit regular sums to help maintain their rural holdings. The main formal sources of agricultural credit are (i) the marketing boards; (ii) input suppliers; (iii) commercial banks; and (iv) agricultural credit institutions Marketing Boards. Smallholders growing tea, pyrethrum, coffee, and cotton may obtain seasonal or medium-term credit from the respective monopoly marketing organizations. Cash crop loans constitute most of these funds. Farmers growing only subsistence crops have little access to this type of credit. Semi-commercial farmers can obtain medium-term advances for the establishment of additional acreage, and short-term advances for the purchase of fertilizers from the marketing boards Input Suppliers. The Kenya Farmers Association (KFA) provides credit for purchases of agricultural inputs to members in good standing. Generally, such credits must be settled within 30 days of purchase, but this term can be extended to 90 days for the most creditworthy members. Credit balances earn interest at 4% per annum, and overdue items incur a 10% per annum penalty charge. The KFA works closely with AFC in its credit and marketing activities. The Settlement Fund and Kenya Breweries Ltd. also provide suppliers credit to qualified applicants. The Institutional Structure 1.13 By regional standards, Kenya has a well developed banking system and financial sector consisting of the Central Bank, 16 commercial banks, five development banks, 15 non-bank financial institutions, several other financial intermediaries and a securities exchange. The Kenya Government owns 100% of the largest commercial bank, three of the development banks, and the specialized institutions lending to agriculture, tourism, and housing. In addition, it owns shares in several commercial banks and two development banks The Central Bank is primarily concerned with monetary and credit policy. It supervises operations of commercial banks, accepts deposits from banks and Government, and provides inter-bank clearing facilties. The Central Bank influences the operations of the financial institutions through issuance of directives on such matters as sectors to be given priority in lending, interest rates, liquidity and reserve requirements, and lending to foreign companies. While the Central Bank is recognized as the supreme monetary authority, it regulates the financial sector primarily through moral suasion rather than by legal enforcement The Commercial Banks. There are 16 commercial banks currently operating in Kenya. The three largest, Kenya Commercial Bank (KCB), Barclay's Bank, and Standard Bank Ltd., dominate the banking system and account for approximately 90% of total deposits and commercial banking credits and operate virtually all bank branches outside Nairobi and Mombasa. Combined, they have over 250 bank branches, sub-branches and agencies in the country, and several mobile bank units which visit a number of smaller towns and villages at regular intervals. The Government-owned KCB, the largest bank in Kenya,

10 - 6 - has developed significant deposit and lending business in the rural areas and presently obtains 30% of its deposits from 23 rural branches and mobile units. Barclay's and Standard Bank lend primarily to old and established companies, largely subsidiaries of foreign companies. While commercial banks occasionally make medium and long-term loans as well as equity investments through their subsidiaries, they are primarily engaged in short-term financing to the manufacturing, agriculture, and commerce sectors. The bulk of their lending to agriculture is to large-scale farmers, farming companies, and agro-industries. However, they also handle an estimated 10,000 to 12,000 loans to medium and small-scale farmers. Farmers generally borrow under short-term lines of credit for specific crops. It is Government policy to promote small farm loans, but the relatively high cost of administering small loans and the lack of dependable farm management are constraints to increasing lending to small farmers by the commercial banks. The Central Bank requires commercial banks to set aside at least 17% of their net deposits for lending to agriculture. At June 30, 1979, commercial bank lending to agriculture was about 15% of total net deposits The Development Banks. Four of the five development banks, the Industrial Development Bank (IDB), the Development Finance Company of Kenya (DFCK), the Kenya Industrial Estates (KIE), and the East African Development Bank (EADB), confine their operations to the industrial sector. The Industrial and Commercial Development Corporation (ICDC) covers both the industrial and commercial sectors. The EADB was seriously affected by the break-up of the East African Community, and its future role is being reconsidered. IDB is the largest single source of development financing in Kenya The Non-Bank Financial Institutions. Although their deposit resources are smaller, Kenya's fifteen non-bank financial institutions have been growing faster than commercial banks, mostly because they pay higher interest rates on savings than the commercial banks. They finance home mortgages, sales of consumer goods, and trade receivables. Non-bank financial institutions cannot accept checking accounts, but they compete effectively with commercial banks in mobilizing private savings and in supplying credit to enterprises and private households. Agricultural Credit Institutions 1.18 The Agricultural Finance Corporation (AFC) and the Cooperative Bank of Kenya Ltd. (CBK) are the principal agricultural lending institutions in Kenya. They are the onlending vehicles for a number of Bank Group financed projects. Project funds are channelled through AFC under the following projects: Second Livestock (Cr. 477-KE), Group Farm Rehabilitation (Ln. 1093/Cr 537-KE), Agricultural Credit III (Ln KE/ Cr. 692-KE), Narok Agricultural Development (Cr. 858-KE) and the First and Second Integrated Agricultural Development Projects (Ln 1303-KE/Cr. 650-KE and Cr. 959-KE) (see also para. 2.53). CBK onlends Bank Group funds under: the Smallholder Coffee Improvement Project (Cr. 914-KE), the First and Second Integrated Agricultural Development Projects, and the Fisheries Project (Cr KE). AFC would be the beneficiary of the proposed loan and credit and is described in Chapter II.

11 1.19 The Cooperative Bank of Kenya Ltd. (CBK). CBK was established to mobilize the financial resources of cooperatives. It was registered as a Cooperative Society in 1965 and as a commercial bank in About 1,000 cooperative unions and societies, representing about 80% of those registered unions and societies, are members and shareholders of CBK. Only members may keep an account at CBK. Under Bank-sponsored projects, CBK finances loans from cooperative unions and societies to smallholders. Performance of some of these programs has been poor in the past due to weak and inefficient cooperative management. The Government is now taking measures to strengthen cooperatives. Other Financial Institutions 1.20 There are also several public sector financial intermediaries such as the National Social Security, the Kenya Post Office Savings Bank, and several insurance companies. The National Housing Corporation and the Housing Finance Company of Kenya grant construction mortgages, and the Kenya Tourism Development Corporation provides financial and technical services for tourism development projects. The Stock Exchange 1.21 The Nairobi Stock Exchange has five members and 58 registered companies, of which, the securities of about half are traded regularly. Most issues are common shares, but several preference and debenture issues are also traded. The index of share prices on the stock market (January 1974 = 100) rose rapidly from 227 in June 1977 to a peak of 440 by September 1978 due to the coffee boom, but levelled off at about 350 in Although active and well developed, the Stock Exchange is still small and is not considered a significant source of capital for agriculture. D. Interest Rates 1.22 The tightening of liquidity and the rise of domestic prices have put upward pressure on interest rates which had been virtually unchanged for some time. As part of the Budget, the Government announced increases in the interest rates charged by various financial institutions effective July 1, The following table shows the principal prevailing interest rates:

12 Principal Interest Rates, (% p.a.) December 31 July Central Bank of Kenya Discount Rate for Treasury Bills Advances against Treasury Bills Bills and Notes under Crop Finance Scheme: - Discounts Advances Other Bills and Notes: - Discounts Advances Kenya Commercial Banks Time Deposits: - Minimum 30 days (7 days notice) months (K Sh 100, ,000) Savings Deposits Loans and Advances (Maximum) a/ Other Financial Institutions Kenya Post Office Savings Bank Deposits Agricultural Finance Corporation: - Seasonal Loans Term Loans Hire-Purchase Companies and Industrial Development Bank: - Foreign Exchange Loans b/ Local Currency Loans Merchant Banks: - Deposits (time) Loans Building Societies: - Deposits Loans Cooperative Societies: - Deposits Loans Inflation (Average annual change in consumer price index) a/ Loans and Advances for less than 3 years. b/ In 1979, the commitment fee was increased from 1% to 1-1/4%.

13 In May 1979, the Government conducted a review of the current level and structure of interest rates, in particular those related to lending in the agricultural sector. Following this review and the recommendations that resulted, the Government interest rate policy was outlined in Sessional Paper No. 4 of 1980 on Economic Prospects and Policies. The Paper was approved by Cabinet in April and by Parliament in May. This document states that "an excessively low and inflexible interest rate structure" has resulted in a disequilibrium in the financial system and stresses the importance of an upward adjustment in the level and structure of interest rates to stimulate savings and induce a more rational allocation of resources in the economy. Regarding agriculture, while the Sessional Paper did not specify the degree of upward adjustment, it established the principle of comparability of interest rates between sectors as an underlying condition for increasing credit to agricultural activities. The Paper also indicated that other measures would be taken to strengthen existing procedures for channelling credit to target groups within the sector The resulting policy measures introduced with the Budget included: (i) an increase in the minimum interest rates payable by commercial banks on savings deposits from 5% to 6%, and an increase in the maximum commercial bank lending rate from 10% to 11%; (ii) a limitation of the maximum lending rates for non-bank financial institutions to 14%; (iii) a reduction of the maximum interest rate chargeable by money-lenders to 24%; and (iv) the establishment of a joint quarterly review of interest rates by the Central Bank and Treasury More specifically regarding agriculture, the actions announced in the Budget Message were: (i) commercial banks are required to direct credits to the agricultural sector amounting to at least 17% of their deposit liabilities; this quota must be fulfilled by no later than June 30, 1981; (ii) non-bank financial intermediaries are required to direct credits to the agricultural sector equal to at least 10% of their deposit liabilities within the same time frame; and (iii) the Central Bank is to give favorable treatment to banking system agricultural loan portfolios in order to assure adequate liquidity and profitability It is also Government policy to maintain healthy competition between the commercial banks and non-bank financial intermediaries in their agricultural lending activities, and also between private financial institutions and parastatal agricultural credit institutions. In this latter connection, it is intended that institutions channelling Government funds, whether derived from budgetary or foreign assistance sources, will be allowed approximately the same spread between the cost of their funds and their on-lending rates as exists between the deposit and lending rates of the commerical banks The interest rate dialogue between the Government and the Bank Group in the context of the Structural Adjustment Credit (Cr. 999-KE) has centered around two issues; the level of interest rates, which was consideredi too low, and more fundamentally, the lack of a rationale for the Government-s interest rate policy. Progress in both areas was a condition for the release of the second tranche of the Structural Adjustment Credit. The release was approved by the Bank in September 1980.

14 Regarding agricultural interest rates, and AFC in particular, the broad guiding principles have now been established, and they are satisfactory. The detailed implementation of Government's interest rate policy as it affects AFC's rates to farmers has been the subject of extensive discussions between Government and the Bank Group. Recent policy developments, were discussed at negotiations. The Government informed the Bank Group that procedures for monthly reviews of overall interest rate structure and levels between the Central Bank and Treasury had been established. Assurances were obtained that AFC would charge at least 12% p.a. on medium-term loans to farmers and that the adequacy of AFC's rates and their consistency with overall Government interest rate policy would be reviewed on an annual basis in the context of the Annual Plan (para ). II. THE AGRICULTURAL FINANCE CORPORATION A. Objectives and Role 2.01 The Agricultural Finance Corporation (AFC) was established in It took over the duties of the two Boards of Agriculture which served the "scheduled" (i.e. expatriate settled) and "non-scheduled" areas, and worked in close cooperation with the Land and Agricultural Bank established in In 1969, under the Agricultural Finance Corporation Act, AFC was reconstituted with wider powers and assumed the responsibilities of the Land and Agricultural Bank. The functions of the present Corporation are, as stated in the Act, "to assist in the development of agriculture and agricultural industries by making loans to farmers, cooperative societies, incorporated group representatives, private companies, public bodies, local authorities and other persons engaging in agriculture or agricultural industries". As the primary agricultural credit institution in Kenya, AFC provides long, medium, and short-term credit to both small and large-scale farmers. Long-term loans are primarily for land acquisition, medium-term loans for on-farm development, and short-term loans for seasonal crop inputs. It is Government policy, as stated in Kenya's current Development Plan, that "the AFC will become increasingly involved in small farm credit." 2.02 AFC is a statutory body owned by the Kenya Government. According to the AFC Act, the Board of Directors is AFC's supreme policy-making body. There must be at least four directors and no more than eight, and these are appointed by the Minister of Agriculture (MOA). The Act specifies the two Permanent Secretaries of the Ministries of Agriculture and of Finance and Treasury as permanent Board members. The Permanent Secretary of the recently created Ministry of Livestock Development also holds a seat on the Board. The Act also states that two more Board members must be appointed by reason of their knowledge of banking and finance. The Board, historically, has exercised little initiative with respect to setting corporate objectives or developing

15 overall policy, and has been more actively involved in day-to-day operations such as the loan-making process. All loans above K Sh 100,000 for example, are considered by the Board. This practice was criticized by the Presidential Commission for Review of Statutory Boards (also known as the Ndegwa Committee) which recommended in May 1979 that the Boards of all parastatal organizations remove themselves from involvement in line operations and focus more on providing leadership in policy matters There are currently eight directors on the AFC Board. For many years, the Chairman of the Board has been the Permanent Secretary of the Ministry of Finance, but in July 1980, the President appointed a Chairman from outside the Civil Service. This is a positive development since the former Chairman was not able to devote sufficient time to AFC business The provisions of the AFC Act structure the Board in such a manner that it serves as an auxiliary of the Ministry of Agriculture. Recognizing the need to seek a balance between agricultural priorities and credit principles, the AFC Act specifies that at least two directors must be appointed by virtue of their expertise in financial or banking matters. However, the strong influence and leadership of MOA has often resulted in MOA priorities predominating over considerations more strictly related to AFC's longerterm financial objectives as a credit institution. B. Management and Organization 2.05 The General Manager is the Chief Executive of the Corporation. He is appointed by the Board with the consent of the Ministers for Agriculture and Finance, attends all Board meetings and participates in discussions, but cannot vote. The Ndegwa Committee recommended that the Chief Executives of all parastatals become deliberative and voting Board members with the title of "Managing Director", but this recommendation has not yet been implemented. AFC-s present General Manager was appointed in June 1973, after having served as Deputy General Manager for eight years. The position of Deputy General Manager remained vacant for several years and was then abolished. This decision was contrary to the advice of external financing agencies, including the Bank Group, which recommended that a Deputy General Manager be appointed to manage AFC day-to-day operations so that the General Manager could better concentrate on implementation of policy. While there has been no move to reestablish this position, recent actions, including the appointment of an AFC Board Chairman from outside the Civil Service and the decision to establish a Corporate Planning Department and to build up the Finance Department will greatly facilitate the job of the General Manager and provide a more systematic framework for decision-making. These measures represent a strong step toward improving AFC management capacity at the higher levels and are satisfactory There are three major divisions at AFC, each headed by Assistant General Managers: (a) the Technical Services Division, (b) the Finance Division and (c) the Administrative Services Division (for Organizational Plan see Chart 1). The Technical Services Division is responsible for

16 all loan operations and is currently staffed with 20 professionals and 13 clerical personnel. The Division Head administers and coordinates all credit activities. The Division provides technical support to Area and Branch Managers. Its four departments are: (a) The Credit Appraisal Department, comprising a Farms Loan Section and a Ranch Loans Section; (b) The Farm Management Department, whose objective is to provide farm management service to borrowers such as group farms (c) The Credit Review Department which advises on loan quality and the effectiveness of loan policies and procedures; and (d) The Credit Control Department which follows up on delinquent loans and advises Branches on collection strategies The Finance Division is responsible for corporate finance, accounting, and data processing. The division is currently composed of 21 professionals and 59 clerical personnel. Its three departments are: (a) The Finance Department (to be renamed, the Financial Services Department) which handles funding, budgeting, and costing and whose main function is corporate funds management; (b) The Accounts Department which maintains the loan accounts of the Corporation using an IBM System 3 computer; and (c) The Electronic Data Processing Department which handles all computer processing requirements including the use of the computer to keep accounts and information pertaining to farm cash-flows for the Loan Committee and branches The Administrative Services Division assists the General Manager in the overall administration of the Corporation. It is currently composed of 10 professionals and 25 clerical personnel. In addition, the five Area Managers report administratively, but not on technical credit matters, to the Division Head. The division's four departments are: (a) The Legal Department; (b) The Personnel Department; (c) The Business Services Department, responsible for all corporate procurement and the management and maintenance of corporate properties; and (d) The Training Department, established in late 1979, which is responsible for coordinating the internal and overseas training programs of AFC; it is presently staffed with one professional, but technical support for expansion is being provided by USAID (para 3.22) Two departments report directly to the General Manager. The Internal Audit Department, composed of six professionals and two clerical staff, is responsible for corporate auditing. The Corporate Development and Research Department, composed of four professional and five clerical staff, is responsible for the standardization of AFC operations, systems, development and execution of studies for management, such as the appraisal, monitoring and evaluation of lending schemes. It also prepares new projects, maintains a data bank and library, produces manuals and bulletins, and is in charge of AFC's publications. Under the Project, this latter department would be absorbed by the new Corporate Planning Department (para. 3.07) The heart of AFC operations is its network of 34 branch offices grouped into five geographical and administrative areas (Map 2). The number of branches in each area ranges from five to eight. Total staffing of the branch and area offices is 271, or approximately three-fifths of AFC staff. The five Area Managers report on administrative matters to the General Manager through the Head of the Administrative Services Division. Similarly, branch managers report to their Area Managers on administrative matters, but deal

17 directly with the appropriate credit and finance departments and divisions on specific technical matters. They are responsible for appraising, disbursing, supervising and collecting loans under the supervision of their respective Area Managers AFC branch offices, whose loan portfolios vary widely in size and type, have several problem areas in common. Branch staff generally have little understanding of the near or long-term objectives of their specific branch. Consequently, efforts often appear directionless or in reaction to perceived policy of the Head Office. Branch Managers have often shown reluctance to accept the responsibilities delegated to them, particularly regarding collection and foreclosure problems. Branch managers have tended to see their roles as that of loan officers with additional administrative duties rather than that of office managers'. The skill level of professional field staff is also very uneven. However, in general, field staff appear to be aware of their limitations, particularly in the area of credit, and seem eager to receive appropriate training Since AFC must have personal contact with prospective and existing clients, travel time is a major constraint in the effectiveness of branch operations. Estimates of the amount of time loan officers spend traveling on AFC business range from 40% to 60% of their weekly time. This large amount of unproductive time, added to the rising cost of fuel, is a tremendous burden on AFC's operating costs. The Administrative Services Division is concerned with this and is trying to promote more effective use of time through more careful planning of loan officers routes. A more fundamental problem concerns AFC's marketing approach and the suitability of AFC branch location. In order to address these problems, a credit marketing specialist will be recruited for the Corporate Planning Department and short-term consultants would be hired to study credit demand and optimum branch and mini-branch locations (para 3.18). C. Staffing and Training 2.13 AFC currently employs about 470 people; approximately three-fifths are in the field and the rest at headquarters. One-third of the staff are professionals, managerial and technical; two-thirds are clerks, drivers, and messengers. About 30% of the professional staff have been with AFC for more than ten years; 30%, between five and ten; and 40%, five years or less. A low proportion of the professional staff have extensive work experience outside AFC, and most of those who do have outside experience are from the Ministry of Agriculture Virtually all loan officers, branch managers, and area managers have an educational background in agriculture. Finance Division staff generally have formal training and experience in accounting. Few AFC staff have any formal training or experience in banking and finance. This deficiency reflects the circumstances and the environment prevailing at the time of AFC's establishment and during its early years of operation. It reflects AFC-s close association with the Ministry of Agriculture, and the often oversimplified view among policy-makers throughout much of the 1960's and 70's

18 about the role of credit as an agricultural input. The experience of the past several years indicates that efforts to orient farmers' investments through credit incentives alone can often be frustrated. From early development as an appendix of the agricultural extension service, AFC has evolved into one of Kenya's major credit institutions. It now needs to convert a work force consisting mainly of agricultural staff into a more financially and creditoriented staff AFC works within the general framework of the "Job Group System" of structuring and classifying jobs used by the Kenyan Civil Service. Under this system jobs are classified and paid according to 15 lettered Job Groups (JG) ranging from "A", the lowest, to "P", the highest. The professional level begins generally at the "G" level, although employees who lack the minimum educational requirements for professional positions may be initially classified in lower grades and then advance as they acquire experience on the job. Clerical staff may advance to JGs above the G level upon achieving specified proficiency and experience. Certain deviations from conventional job evaluation and wage administration practices are apparent from an inspection of the JG classification of present incumbents. Several staff at Headquarters are of equal or higher level than their superiors; some secretaries, for instance, have a JG rank above that of the senior professional they work for Salary structure, and its effect on the retention of AFC personnel, has been a problem inhibiting staff effectiveness over the past several years. Salary scales of governmental and parastatal organizations have fallen increasingly behind those of the private sector. However, this imbalance has had an uneven effect on the ability of AFC to attract and retain personnel. Because AFC staff have a strong agricultural orientation, their skills are not in high demand in the private sector. Competition for such skills comes mainly from the public sector, particularly the Ministries of Agriculture and Livestock Development, but within the public sector, AFC has a relatively attractive compensation package. Appraisal review of the Terms of Service for AFC staff suggests that benefits and allowances for staff within Job Groups A through F actually account for as much as 50% of the base salary, up to 75% for G through L levels and up to 100% for the M through P levels. A potential problem still exists, however, in those areas involving accounting, financial, and data processing skills. These skills are in short supply nationally, and the private sector enjoys a substantial wage advantage over the public sector. Recently Civil Service wages have been increased about 15%, and AFC has submitted a proposal for increases in the AFC salary levels by about 50%. However, even substantial salary increases will not completely alleviate AFC's staffing problems in certain critical skill areas, and other solutions need to be developed to compensate employees, including employee training and development programs combined with a system of promotion incentives linked to performance evaluation At present, AFC does not have a system of performance standards against which the actual performance of individuals and groups can be evaluated and training needs appropriately identified. Job descriptions are technically poor, consisting of a collection of functional responsibility statements and some educational or loosely described experience qualifications. Similarly, the performance review system is poor, touching on only generalities about

19 job performance and offering no provision for feedback of the evaluation to the employee Training. The recently established Training Department (para 2.08) proposed an ambitious in-house/in-country training program for 1980, with 18 training sessions scheduled, covering an estimated 100 to 150 AFC employees. Of these sessions, eight are to be in-house and 12 in conjunction with other training institutes, including the Kenya Institute of Administration and the Kenya Institute of Management. AFC has also started an inventory of the training history of all AFC staff to identify more precisely AFC training needs AFC also has a limited overseas training program. Since 1976, AFC has sent about 30 of its staff overseas for training, mainly to the U.S. Sixteen more employees were scheduled for such training in 1980, with three seeking degrees in Agricultural Economics. While these training programs may be generally useful to the participating individuals, the programs have not been sufficiently geared to specific institutional objectives. AFC is now attempting to link both formal and informal training efforts to more systematically identified needs in specific operational functions AFC is an organization in transition. Since Independence in 1963, its staff has increased five-fold to nearly 500. At the same time, Government's direct involvement in agriculture through a host of development projects, general crop support schemes and extension services programs has stimulated credit demands and also complicated AFC's job of implementing Government policies within the financial and operating constraints of a credit institution. The present level of AFC's operations has clearly strained institutional resources to their limit. AFC's operating policies need to be more clearly defined, management needs greater depth and direction, and line staff need strengthening in credit and financial skills. D. Accounting and Management Information System Accounting System 2.21 On April 1, 1980, AFC introduced a new computerized accounting system developed with bilateral assistance from the Federal Republic of Germany. Improperly named Management Information System (MIS), the new system is, in fact, a sophisticated automated information system. As of January 1981, the system was working fairly smoothly although a number of problems remain to be worked out and the programming of special reporting functions needs further work. Staff also need further training to supply required information in the correct format, and likewise, management has to become familiar with the tool in order to extract and use the information efficiently and strategically. Under the Project, the staffing of the Accounts Department and the Electronic Data Processing Department will be strengthened to complete the necessary design and programming work required (paras ) The long and expensive conversion from AFCGs prior automated accounting system to its new "MIS" was justified by a number of inadequacies in the old system. It was also necessary to support AFC-s efforts to decentralize

20 operations to the branches. The previous Revised and Extended Loans System (RELS), introduced in February 1974, also with bilateral technical assistance, was based on individual loan schemes rather than the individual agricultural borrower, reflecting, in part, donors insistence on separate accounting for particular projects. Updates were processed on a schematic basis, and each of the 17 loan schemes administered by AFC was associated with a specific bank account and bank statement. Reconciliation was a long and often futile process. Receipts were sent to Head Office from the branches by borrower name, which often led to misposting, and all disbursements were made from Head Office. All these factors contributed to serious delays of at least two to three months in information output and branches had no overall view of their collections and arrears situation. The new system will permit much more flexibility than RELS did. Information concerning each loan will be gathered on an appropriate input form and then maintained in a data bank within the computer. Primary organization of records will be made on a borrower basis, rather than as previously, on a scheme basis. Under the new system, it will be possible, for example, to ascertain the total indebtedness of any particular borrower and to examine the extent of repayments in arrears. Management Reporting System 2.23 The new accounting system, and in particular the General Ledger Reporting sub-system, designed to produce about 100 different reports based on current and historical information on all accounts, has the potential to become an important management tool, since reports can be designed on request by management. The design of management reports will be the joint task of the Corporate Planning Department and the Finance Division. Some of the potential uses of the system are described below Arrears Reporting. Regular and accurate information concerning arrears of loan repayments is vital to efficient management. The old accounting system, RELS, produced monthly computerized reports showing the arrears position of each scheme, analyzed by branch and providing a total for the scheme. This form of report was of limited use to AFC management and was probably more useful to external funding agencies interested in the financing of individual projects. In many instances, schemes have been designed to coincide exactly with externally-financed projects, and in these cases, the external funding agencies can obtain arrears information concerning their projects by examining the relevant reports. However, from an internal management point of view, it is more useful to structure the management reports in such a way that the overall position of each branch is shown separately AFC's principal activity is making loans to farmers, and therefore its management's main concern should be the systems and principles to be adopted in order to ensure loan recovery. In order to control recoveries effectively, management must have access to relevant, accurate, and timely information on loans. The most fundamental information required includes details of all loans in arrears, how far they have fallen into arrears, and the relative proportion of loans in arrears to total outstanding loans. Until April 1980, AFC did not have information on the age of its receivables from: (i) small-scale loans which were in arrears 12 months and over; (ii) all large-scale loans; and (iii) all crop loans. The MIS has the capacity to produce regular reports on the ageing of arrears in summary format, and the appropriate programs to retrieve this information are under preparation.

21 Budgetary Control. The new MIS can also expedite the budgeting process. The 1980/81 budget exercise was the first to involve Area and Branch management. Previous budgets had been made on a corporate-wide basis, while the current budget has been split into Cost and Income Centers. The Income Centers include all field branches and two departments in Head Office, the Accounting Department, and the Business Services Department. The General Manager's Office, other Head Office divisions and departments, and Area Offices are Cost Centers. Unallocated costs such as depreciation, interest on loans and capital expenditures are included in a "Corporate Overheads" Cost Center. In preparing the 1980/81 Budget Paper for AFC Board presentation, emphasis was placed on the involvement of Branch and Area personnel in the budgeting exercise as well as on future efforts to relate actual to budgeted performance. An automated budget system would facilitate such performance appraisal, and allocate income and costs to the relevant centers Cash Management. Although a monthly funds flow statement is prepared on an historical basis, there are no projected statements of cash-flow for future periods. This has been a serious drawback to AFC's operations over the past few years. Loan approvals have been made on the basis of general policy directives combined with historical, and often outdated, information. As a result of this practice, branch lending was often slowed down and sometimes halted. AFC surplus cash rarely falls below K Sh 30 million, but occasionally loan approvals are curtailed because of apparent cash shortages. Better information on projected loan repayments would allow AFC to estimate its short-term cash flow and to plan disbursements and lending more effectively Credit Reports. Much of the information required to complete the above reports would automatically be available from the computer statements. However, mechanically produced figures, such as those generated by the computer, tend to be less valuable than those which have been prepared or reviewed by an experienced analyst. The act of transferring data from mechanized reports to manually prepared documents involves the examination and consideration of each figure and usually results in a document which is more readily assimilated. The human analytical input is particularly important with regard to credit, because decisions depend on qualitative judgment and experience. For example, arrears reporting to management should be accompanied by a short and simple written analysis of significant trends, possible reasons, and recommendations for improvement. E. Operating Policies and Procedures Credit Policies 2.29 According to the 1969 Act (para 2.01), AFC's mandate is to make loans to farmers to enable them to engage more effectively in agriculture. The specific lending terms and conditions as to interest, repayment, security and other lending policies to carry out this objective are to be determined by the Board. The Act also provides that the Board may delegate its powers to the General Manager. In practice, the Board has exercised little leadership and independent judgment in setting corporate operating policies. It would

22 appear that existing policies have been defined largely during negotiations between the Government and external donors who have financed a large share of AFC's operations. In preparing and implementing credit projects to be channelled through AFC, the Government and the donors have tended to focus more on project-specific objectives than on overall institutional policies. With a strong institution-building emphasis, the proposed Project will assist AFC management to move away from this schematic and disjointed approach to planning and portfolio management. An AFC Statement of Policy, recently prepared in conjunction with the Ministries of Agriculture, discussed during negotiations and approved by the AFC Board, defines AFC's general objectives and the policies and strategies by which it will attempt to achieve these objectives (para 3.08 and Annex 1) AFC operates "large" and "small" scale lending programs. This distinction, however, refers to the size of the loans rather than to the size of the farms or the income levels of the borrowers. Therefore, while "large" scale loans are virtually all granted to medium and large-scale farmers, "small" scale loans are not necessarily made to smallholders alone. All loans under K Sh 20,000 are considered small-scale; over K Sh 20,000, large. AFC has no explicit policy objectives regarding the relative volume of small versus large-scale loans. Historically the ratio of large-scale to small-scale loan volume has been 3: A number of factors serve to determine the loan amount. One of these is the technical specifications relating to the purpose of the loan. The extension staff of the Ministry of Agriculture often plays an important role in determining the loan amount requested, because they are active in identifying potential borrowers and assisting them to prepare loan applications, particularly for investment activities which the Ministry is promoting. Other factors influencing the loan amount are conditions and restrictions agreed upon with the donor agencies financing the scheme under which a particular loan is made (paras ). Although AFC requires a farm-budget for all of its loans, and loan officers attempt to determine each loan amount on the basis of the technical and financial features of the individual investments being considered, in practice, the most important factor in determining loan size has been the appraised value of the security pledged as collateral, in most cases, land While this practice of using the collateral criterion to determine loan size may be financially prudent, it results in a situation where intended farmer investments are often inadequately financed. The failure to mobilize required funds can affect the profitability of the investment, and in turn, the ability of the farmer to repay the loan. In the past, neither AEC nor the Ministry extension services have had adequate resources to monitor actual use of loan proceeds against the original farm plan. Lack of supervision and follow-up, coupled with the problem of insufficient financing, has increased the risk of bad debts and use of loan proceeds for other than agreed purposes. No comprehensive survey has been completed, but some evidence suggests that over one-half of AFC small scale loans are diverted to non-agricultural purposes. The strengthening of both AFC field staff capability and timely information systems should assist AFC in monitoring loan use more carefully in the future.

23 AFC makes short, medium and long-term loans. Short-term loans have final maturities of up to two years and finance mainly seasonal crop production, poultry stock and feed, pig feed, and steer fattening. Medium-term loans are repayable in two to 10 years and finance primarily farm development, including dairy and beef livestock development and perennial crops. Long-term loans normally mature in 10 to 20 years, but may be extended up to 30 years; they generally finance land purchases. At appraisal, the interest rate charged on seasonal crop loans was 11% p.a., land purchase loans, mainly long-term, carried a rate of 9% p.a., and all other loans a rate of 10% p.a. As of March 1981, AFC interest rates on medium- and long-term loans had been increased to 12% p.a As loan security, AFC usually requires the title deed to a farmer's land; exceptions are ranch loans where chattel mortgages are sometimes accepted and machinery loans where the machinery is pledged as security. In the smallholder credit projects financed from AFC's own resources, unsecured loans are made in some exceptional cases to known, reliable farmers with an undertaking that the farmer will surrender the title to AFC once it is issued. In general, AFC requires that the value of the pledged security exceed the size of the loan by 50%; however, a loan application with good repayment prospects may be approved if the value of the land pledged is at least equal to the amount of the loan Annex 3 outlines the AFC loan processing cycle from identification to repayment, or, in case of default, to sale of collateral. Branch managers may approve loans up to K Sh 10,000; the General Manager, up to K Sh 100,000; and the Board, above K Sh 100,000. In addition, the General Manager has authority to approve all farm machinery loans. The General Manager has sometimes approved -overdrafts' in excess of K Sh 100,000. These are advances on loans pending formal presentation to the Board Coordination of AFC's field operations with the agricultural extension service is encouraged by two means. First, the field extension officer draws up the farm plan and farm budget of the applicant. Second, the District Agricultural Officer (DAO) chairs the district Loan Advisory Committee which assists AFC Branch staff in screening applicants. However, the involvement of the extension staff in the identification of potential borrowers varies greatly from one area to the next depending on the particular skills of the extension officer and the number of farmers within the officer's area of responsibility. Improved coordination of extension services and AFC branch operations would be fostered under the Project by upgrading AFC branch staff and by reinforcing the concept of the branch as a "profit center." 2.37 Interest and principal amortization on AFC loans are generally due in annual payments. Tractor loans are repayable semi-annually, after each plowing season. The first installment on loans for dairy cows is due after 15 months; seasonal crop loans, six months, and most other loans, 12 months. Because of the long period that elapses before the first installment is paid, AFC has inadequate early warning of possible defaulters. Except for crop loans, which should be repayable in full immediately after harvest, loan repayments should be more frequent than as at present. In this way the Branch Manager could be warned of certain farmers likely to default, allowing prompt action to remedy the problem.

24 Responsibility for collecting from borrowers rests initially with Branch Managers. In cases where Branch Managers are unsuccessful, they may request that the Credit Control Department at the head office assume responsibility for recovering the debt; alternatively, responsibility for recovery can be placed in the hands of the Legal Department. The Legal Department may either take action through a court of law or inform the borrower directly that the farm can be sold to recover both the loan and the cost of selling the farm. In the latter case, the borrower has the opportunity to repay part or all of the loan in order to avoid the sale of his farm. The system is clearly designed to provide farmers with every possible opportunity to pay back at least part of the amount outstanding. However, the procedure still has the weakness that it permits a delinquent farmer to repay a small portion of the amount outstanding and thereby defer immediate repayment of the rest by means of a technicality. Moreover, it encourages the practice of debt rescheduling, with an ensuing distortion of collection rates, and an adverse effect on portfolio liquidity. AFC management is taking measures to analyse these problems and to revise and strengthen credit policies and loan collection procedures. Technical assistance provided under the Project and through USAID's Agricultural Sector Services Support Loan will further reinforce AFC-s efforts to redefine and improve its lending strategy and procedures AFC's foreclosure procedures need to be more clearly defined. AFC management maintains that a foreclosure threat or an auction notice is usually enough to ensure loan recovery. In 1979, 652 farms were advertised for sale, 36 were sold by public auction, and 69 were bought by AFC because there were no bidders at the auction. While details of the remaining 547 cases were not available from AFC's Legal Department during appraisal, management reported that the owners paid for the farms. In several communities, particularly in parts of western Kenya, there is strong social pressure to boycott public land auctions. The members of those communities hold the traditional belief that only certain families and ethnic groups have a right to own land in certain locations and any outsider who "buys in" is considered an intruder. Accounting Policies 2.40 A number of problems have been identified related to AFC's accounting policies. AFC-s balance sheet for the fiscal year ending March 31, 1979, showed K Sh 900,000 as having been spent on the acquisition of 11 farms. However, AFC auditors were given a list from the Legal Department indicating that there were about 90 farms which the Corporation had acquired by the year end. The balances relating to the extra farms were included in the ordinary loan account balances. Farm properties in possession were valued at the total of principal and interest due at the date of foreclosure, less subsequent recoveries. In respect of the acquired properties, no provision for a loss of value on these assets was made, as AFC management believes that the security would realize more than the outstanding loan balances. In order to exercise control over all acquired properties and also to have ready information at all times, the auditors recommended that the Legal Department maintain a memorandum register in which all acquired farms are entered with details such as date acquired, reference number, description of properties acquired, amount due at the time of acquisition, location of the property, and date of sale. It was also recommended that this register should be reconciled regularly with the list in the computer printouts on acquired properties and that each such

25 acquired property be examined with regard to the marketability of the property. As a result of these recommendations, AFC has revised its accounting procedures for farm properties in possession; however, it is still reviewing the need to provide for potential losses in value of these properties AFC management believes that the current provisions for bad debts are adequate, especially since virtually all loans are secured by land. Management's position on this matter is consistent with their reluctance to write off loans which could reasonably be considered uncollectable. When loans are written off, the implicit criteria appear to be lack of collateral, death of the borrower, and the small loan amount. These problems are presently being addressed by AFC management as a result of recent auditors' reports and recommendations. Furthermore, the refinement and increased use of the new accounts system and management information reports will serve to clarify where revision of AFC accounting policies is necessary. During negotiations, these critical accounting policies were reviewed. AFC indicated that they plan to conduct a review of the adequacy of its bad debt provisions and formulate a write-off policy based on an analysis of arrears. Assessment of progress in these areas would be an important element in the review and approval of the AFC Annual Plans (para. 3.08). Lending Programs 2.42 AFC's lending operations have been financed by bilateral and multilateral sources as well as by the Treasury and AFC's own funds. Reflecting the fact that financing sources have been linked to specific lending programs, AFC has, in effect, been administering a variety of specialized loan schemes each with different terms, conditions, and reporting requirements. This schematic approach has burdened AFC administratively and contributed to its difficulties in establishing general policies and appraising total financing needs. However, with the development of increased planning capacity under the proposed Project, AFC will establish overall policy objectives, formulate a long-term strategy for major lending activities and seek to secure financing on a global rather than schematic basis. At present, AFCs "large-scale" (para 2.30) lending programs include the following (see also Table 1): (a) Land Purchase and Development Loans. AFC extends credit for purchase of large-scale farms and for development and working capital on such farms. This program is supported by AFC's own resources, supplemented by funds provided under the British Land Transfer Program (BLTP). The BLTP is designed to assist Kenyans with the acquisition of large, mixed farms owned by British citizens on a "willing seller - willing buyer" basis; in general, this scheme is short of funds because the demand for land purchase loans far exceeds available funds. Total volume of lending for land purchases has declined significantly in recent years. (b) The Kreditanstalt fuer Wiederaufbau (KfW) of the Federal Republic of Germany provides funds for "the rationalization of African-owned farms in Trans Nzoia". This involves injecting capital into those farms newly purchased by African owners for whom shortage of capital is a constraint to good performance. Typically, finance is provided for:

26 cash crop production, land clearing to develop pasture, purchase of agricultural equipment and machines, pasture fencing, fodder establishment, watering facilities, soil conservation, and pig-raising. The loan also provides funds for the establishment of Government-owned animal breeding farms through the Agricultural Development Corporation (ADC). (c) The Group Farms Rehabilitation Project - (Cr. 537-KE): This Project began in 1975, and is partly financed by IBRD/IDA. It aims at assisting coffee estates and mixed farms under group ownership which are run-down and require a package of management and technical assistance together with long-term and seasonal credit. The project has encountered serious difficulties related both to uncertainty about the Government-s policy towards sub-division of large farms (including Group-owned farms) and financial difficulties facing many of the farms. (d) Ranch Loans have been extended under livestock development projects financed partially by the Bank Group (para 1.17). Volume of ranch loans has been lower than anticipated and the project faces serious difficulties AFC's "small-scale" (para 2.30) lending programs include (see also Table 1): (a) IDA Smallholder Credits: The first line of credit from IDA (105-KE) approved in 1967 was intended to assist smallholders establish or improve crop and livestock enterprises. About 10,000 farmers borrowed K Sh 34 million for grade cattle and related items, and for crop establishment and tractor purchases. A second credit project (344-KE), approved in 1972, included: the financing of agricultural loans over a three-year period for the production of foodcrops, oilseeds and industrial crops, fruit, dairy and poultry development, and purchase of farm machinery and equipment. This credit also provided technical services, vehicles and office equipment for AFC and the Ministry of Agriculture. By December 31, 1976, some 13,290 farmers had borrowed K Sh 82.0 million, mostly for livestock development. A further K Sh 12.1 million has been spent on machinery, tractors and related equipment. (b) The Third Agricultural Credit Project (CR 692-KE/Ln 1390-KE), approved in 1977, finances a three-year year time slice of AFC's general lending program for commercial farmers, small and large-scale. The small-scale lending program is a continuation of the two previous smallholder credit projects; the large-scale lending program financed mainly land development (see also para 2.57). (c) KfW Smallholder Credit. This line of credit is similar to the IDA credits, but is limited to the Kisii and Kericho districts.

27 The main objective is to assist farmers to commercialize their agricultural activities through participation in dairy cattle farming and diversification of crop enterprises. Some 3,700 farmers have borrowed about K Sh 14.3 million. The program has been assisted by a team of German extension officers. (d) AFC Smallholder Credit. This program is financed out of AFC's own resources, and operates in areas where land adjudication has not yet been completed AFC lending for seasonal crop inputs has been carried out primarily under two schemes: the Smallholder Production, Services and Credit Project (SPSCP), and the Guaranteed Minimum Return (GMR) scheme. (a) The Smallholder Production, Services and Credit Project (SPSCP). Funded under the 1975 USAID sector loan, this scheme was designed to make seasonal credit available to both large and small-scale farmers. AFC was one of the recipients of this credit, together wth CBK and KFA. The AFC portion of the loan was K Sh 18 million for largescale farms and K Sh 10 million for small-scale farms. Mainly clients with title deeds already pledged to AFC are eligible for financing under this scheme. (b) Until 1979, the Guaranteed Minimum Return (GMR) scheme provided crop insurance and seasonal credit up to a maximum of K Sh 1,250 per ha to growers of maize or wheat with a minimum of 15 acres under either crop. It was originally introduced in 1942 as a war-time measure to encourage largescale cereal production, and until 1966, it applied only to holdings of over 50 acres. With the lowering of the minimum holding size eligible for participation, thousands of small farmers were brought into the scheme. Under GMR, the Government, through AFC, approved planting of a certain acreage which entitled the farmer to compensation in the case of crop failure. The security provided by GMR created the basis for seasonal crop production credit in the form of advances on GMR. GMR was funded by the Government through the Cereals and Sugar Finance Corporation and by the sale of AFC promissory notes guaranteed by Cereals and Sugar. AFC acted as an agent of the Government for the disbursement and collection of GMR. A number of problems affecting the financial viability of the scheme finally resulted in the GMR being suspended in Some of these problems included the inability of AFC to supervise the growing number of participants, which led to participants cheating on the amount of acreage registered; a decline of cultivation practices resulting from attempts of farmers to finance crop cultivation entirely on the basis of GMR advances, the inadequacy of the single official produce marketing channel to absorb crop surpluses efficiently, and the difficulty of loan recovery through AFC and the official marketing channels. By the end of 1978, the GMR scheme had substantial arrears, K Sh 192,356,000, involving

28 ,451 borrowers. New seasonal crop loans were introduced by the Government in 1980 to replace GMR. The Cereals and Sugar Finance Corporation provided K Sh 100 million for AFC's 1980 seasonal lending; however, funds were released late in the season, and it is too early to judge the impact of this program Stockist Loans. In some areas, particularly in Western Kenya, potential borrowers cannot get farm inputs because suppliers will not deliver goods against an invoice or because they do not have the required inputs. AFC management believes that this problem can be solved by selecting suitable suppliers in need of assistance, and providing them with credit. However, it remains to be demonstrated that demand for this type of credit exists. Moreover, the AFC Act appears to limit AFC lending to farmers only. Under the Third Agricultural Credit Project (para 2.57), K Sh 14.3 million was available to finance inventories of farm input suppliers; however, none of these funds went to stockists, due to continued restrictions in the AFC Act. The level of demand for stockist credit and changes in the Act to accommodate this demand will be addressed more systematically in the context of AFC's Annual Plan preparation. F. Economic Role and Performance Operations 2.46 Profitability. AFC's net loan portfolio grew from K Sh 301 million at the end of fiscal 1975 to K Sh 678 million at the end of fiscal 1980 (Table 7). This represents an average annual growth rate of 18% which resulted from new loan disbursements of approximately K Sh 727 million and portfolio liquidations of approximately K Sh 370 million over the five-year period. This growth of operations has had a gradually increasing beneficial effect on AFC-s profitability. After experiencing a net loss of K Sh 3.4 million in fiscal 1975, AFC reported net income increases for five consecutive years from a modest level of K Sh 0.3 million in 1976 to K Sh 14.0 million in 1980 (Table 8). The gradual increase of net return on total assets to 2.5% over the same period reflects a gradual improvement in profitability (Table 9). Two factors explain this trend: administrative expenses have grown at a lower rate than the loan portfolio and AFC's net interest margin increased from about 4% in fiscal 1976 to about 6% in fiscal 1980 (Table 9) Collections. The ultimate performance test of a financial institution must be conducted on the basis of cash transactions. A conclusive cashflow analysis, however, has not been possible for two reasons: AFC lacks detailed historical collection data on its portfolio; and furthermore, AFC accrues interest on virtually all loans without regard to quality. AFC's new accounting system (para. 2.21) is expected to fill the information gap beginning April 1st, 1980, while discussions are underway between AFC's management and auditors to revise this as well as other accounting policies (para. 3.35). There is some evidence that actual interest collections in the past five years have averaged about 80% of interest accrued. This would imply that AFC almost broke even on a cash basis, excluding loan disbursements and repayments. This would be a minimum acceptable standard, but there is also some evidence to suggest a negative trend in interest collection rates, down

29 from over 90% in 1975 to 70% in The need for improvement in AFC's loan collection was discussed during negotiations, and AFC indicated that they are taking a number of measures to improve collections, including timely introduction of the Credit Training Program and recruitment of additional loan and accounts officers. It was agreed that annual targets and an outline of procedures for improvement of collections would be among the criteria for Government and Bank Group approval of AFC's Annual Plans. Financial Condition 2.48 Liquidity. On installments of the relative amounts involved, the collection rate of principal instalments due and payable is even more important than the collection rate of interest receivable. The necessary information for this analysis is also unavailable for all accounts of loans granted prior to April 1, Moreover, AFC's practice of rescheduling original contractual maturities diminishes the validity of the incomplete data available on collection experience. As mentioned, weaknesses are being corrected, but the new system and policies cannot be introduced retroactively, and therefore the benefits to AFC management in terms of improved information and control will be gradual as they will only apply to future transactions It is estimated that AFC collected approximately K Sh 336 million on its outstanding loan portfolio in the five years ended March 31, Annual collections more than doubled from about K Sh 41 million in fiscal 1975 to about K Sh 93 million in fiscal The liquidation ratio which expresses total repayments as a percentage of the loan portfolio averaged about 15% during the five-year period. This relatively low liquidation ratio probably reflects somewhat low collection rates, but the precise level cannot be determined. It also reflects the fact that a substantial and growing portion of AFC's portfolio is long-term loans Financial Resources. AFC-s annual loan disbursements increased about 75% from K Sh 101 million in fiscal 1975 to K Sh 175 million in fiscal Total loan disbursements in the five years ended March 31, 1979, were about K Sh 727 million. About one half of these funds, or K Sh 314 million, were raised from the Treasury, either directly or through the Cereals and Sugar Finance Corporation. The remaining half, or K Sh 313 million, came from portfolio amortization. The Government funds AFC through redeemable and irredeemable loans, and through interest free grants. The Treasury is AFC's only external source of funds. To fuel AFC-s growth, Treasury's disbursements to AFC have exceeded interest and amortization payments from AFC every year since it was first organized in AFC's capitalization is adequate to support its existing portfolio, but substantial additional funds will be required for continued substained growth. Table 9 shows actual changes in financial leverage from 1975 to Economic Impact of AFC's Operations 2.51 The economic impact of AFC's credit activities at the national level is difficult to measure given the poor quality of data and the difficulty in monitoring and evaluation of individual loans. Even at the farm enterprise level, the lack of information about economic behavior of small and large farms, coupled with the fungibility of credit, makes it virtually impossible

30 to quantify the benefits of increased farmer access to credit through AFC. Despite the fact that AFC assists in developing farm models for its clients, it has not had the manpower or the systems capacity to inspect farmer investments and measure productive output and other benefits. The paucity of basic data for evaluating the impact of project activities was underscored by the Project Performance Audit Report (PPAR) and the Project Impact Evaluation Report (PIER) of the First Smallholder Agricultural Credit Project (para 2.55). To the extent that AFC loan performance can be improved by supervision and follow-up, this responsibility should be jointly shared by AFC and the Ministry of Agriculture. Responsibility for monitoring and evaluation of economic impact will be better defined and coordinated through the annual planning and review process to be established under the proposed Project (paras ) For lack of a comprehensive record of AFC's lending operations by type of loan and farmer financed, the following breakdown of AFC's disbursements to date under the Third Agricultural Credit Project (para. 2.57) provides a profile of the activities financed and an indication of the potential impact of AFC's general lending program on the sectors where most of the credit activities have been concentrated. Livestock and related loans account for about K Sh 76 million or about 79% of the total disbursed during This includes 29% for grade cows, 10% for water development, 11% for fencing, 7.5% for pig development, and 6% for dairy equipment. With an average loan per grade cow of K Sh 1,500, the disbursements in this category are estimated to have financed 18,300 cows, or about 6,100 annually. This amount represents 9.5% of the estimated annual increase in herd size during this period. Crop related loans over the same period account for about K Sh 19 million, or 20% of total disbursements: 10% for sugarcane, 3% for pyrethrum, 2% for potatoes, and about 1% for each of maize, tea, and coffee. The total area financed under various types of crop loans was approximately 4,360 ha or 1,450 ha per year. This annual coverage represents about 0.05% of the total cropped area under small farms in Performance under Previous Loans 2.53 AFC is the primary agricultural credit institution in Kenya. The Bank Group has been involved with the institution since a 1960 economic report on Kenya endorsed the establishment of an agricultural credit agency. By the mid-1970-s, the Bank Group had become the primary source of new funds for AFC lending. AFC is currently serving as the vehicle for Government onlending of Bank Group funds, a total of $70.75 million, for six ongoing projects (funds provided for onlending to farmers in parentheses): Cr. 959-KE, Integrated Agricultural Development Project II ($0.5 million) Cr. 858-KE, Narok Mixed Farming Project ($7.3 million) Cr. 692-KE/Ln KE, Third Agricultural Credit Project ($23.5 million) Cr. 650-KE/Ln KE, Integrated Agricultural Development Project 1 ($2.75 million) Cr. 537-KE/LN KE, Group Farms Rehabilitation Project ($18.7 million) Cr. 477-KE, Second Livestock Development Project ($18 million)

31 AFC performance under these projects has been mixed, reflecting a combination of institutional constraints and other environmental, legal and often sociological factors beyond AFC's direct control. The last decade has seen a fivefold increase in AFC-s lending operations and a correspondingly rapid evolution of its role in the agricultural sector. This expansion, accompanied by a growing government emphasis on smallholders, has tended to proceed faster than AFC's capacity to cope effectively. The most important institutional constraints include: limited manpower resources, particularly in financial skills, lack of adequate branch facilities to service a dispersed clientele, and restrictions in the AFC Act. The proposed Project has a strong institutional building component which was designed to correct these problems AFC's shortcomings must also be seen in the broader context of policy constraints and the slow and difficult process of sociological change and institutional adaptability. The development of a viable agricultural credit institution depends on the coordination of a number of factors, most importantly, the support of an effective agricultural extension service and the education of traditional farmers in the efficient use of credit, the progress of land adjudication (farmers require land title deeds to borrow from AFC), the timely provision of agricultural inputs, and the establishment of progressive pricing policies and effective marketing channels. Although marked progress has been made in all of these areas, the implementation of Bank-Group projects still faces substantial obstacles. The Group Farms Rehabilitation Project, which aimed to provide improved farm management for group-owned coffee and mixed farms, has largely failed (farm participation has only been 24% of the appraisal estimate) due to the lack of ownerscommitment to collective farming. The interest of the participating farmers is primarily in using project management to help repay outstanding AFC loans, after which the large farms can be legally subdivided. Seasonal and mediumterm credit commitments under the Narok Agricultural Development Project have been delayed as a result of difficulties in developing effective credit programs adapted to the special circumstances of the Masai farmers of the district. The impact of the Second Integrated Agricultural Development Project (IADP II) will depend largely on institutional strengthening of the Ministry of Cooperative Development and the successful overhauling of the financial management of participating cooperatives unions and societies. In sum, the performance of AFC with regard to the Bank Group funded projects depends not only on building up the institutional and managerial capacity of AFC, but also on the resolution of certain policy issues and the gradual elimination of other constraints mentioned The Project Performance Audit Report (PPAR) of the First Smallholder Agricultural Credit Project (Cr. 105-KE), which was issued in August 1975, and the Project Impact Evaluation Report (PIER) for the same project (May 1980) elaborate on a number of the general problems mentioned above, and conclude that the project had only a marginal economic impact at the farm level and possibly even a slightly negative financial impact on AFC. On the organizational side, the reports cited staffing problems, divergence in the project lending emphasis (from financing crop loans to dairy cow loans), and the low level of subborrower supervision by AFC and the agricultural extension services among the reasons for poor project performance. On the technical side, the compounded effect of more credit funds going for purchase of grade cattle, the lack of adequate staffing of livestock extension services, and an

32 unusually high rate of animal mortality led to substantially lower returns to sub-borrowers in addition to loan collection problems and losses for AFC. The PIER for this project questioned the economic impact of project investments in grade cattle, since the popularity of this activity in the project area would probably have occurred without the project. The report concluded, however, that a proper evaluation of the incremental productivity of dairy investments and the impact of the substitution effect was not possible due to the lack of data (para 4.04) The IDA Credit for US$6.0 million for the Second Smallholder Credit Project (Credit 344-KE) was fully disbursed in June 1976, and a PPAR was circulated to the Executive Directors in July 1979 (Sec M79-506). The report concluded that AFC performance improved under the second project. Financial management was improved and loan administration was simplified. Loans were extended to more farmers than anticipated at appraisal; total loans under the project were 13,552 and loan volume K Sh 94.8 million. The composition of loan approvals by loan type was much closer to appraisal projections than under the first project. The PPAR concluded that an important issue arising from the review of the project was the lack of integration of AFC's institutional objectives with objectives more specifically related to on-farm development, food production and income distribution. Specifically, it considered the problems of monitoring of investments, management information systems and institution-building, and the financial impact of the project on AFC. The PPAR concluded that the objectives relating to institutional development and the financial condition of the credit institution merited a more concerted and systematic approach in lending to AFC The Third Agricultural Credit Project (Cr. 693-KE/Ln KE) for US$25 million was approved in 1977 to finance a three-year time slice of AFC's lending program for smallholders, medium-scale commercial farms and retail agricultural input suppliers. Project implementation has encountered moderate problems related to cutbacks in budgetary allocations from Treasury, delays in implementing an improved accounting system for AFC, and the continued need to upgrade the credit skills of AFC loan officers. The closing date of the project has been extended to December 31, 1981, to accommodate the reallocation of unused credit funds for stockists and medium-scale farmers to the smallholder loan category, where AFC commitments far exceeded original allocations. The balance of funds for AFC onlending, about US$3.2 million as of February 1981, should be drawn down by June 1981, and fully disbursed by about September 1981, taking into consideration normal delays for Government processing of reimbursement requests. A balance of about US$364,000 provided for salaries, vehicles and equipment for AFC, will be used to finance start-up costs of hiring technical assistance for the proposed Project The proposed Project has been explicitly designed to address concerns about the impact of previous lending operations on AFC and continued institutional weaknesses of AFC. The Project specifically focuses on efforts to support the development of AFC as a viable financial institution for agricultural development by upgrading credit and accounting skills of branch officers, establishing an overall corporate planning capacity and strengthening information collection and analyses and financial control.

33 III. THE PROJECT A. General Description 3.01 The main purpose of the Project is to strengthen AFC, improve its performance, and enable it to serve more effectively the growing credit needs of Kenya's farmers. AFC target clients would be commercial farmers who can demonstrate their ability to increase the productivity of their farm and to meet the related financial obligations, including farmers who have not yet had access to other sources of institutional credit. The Project would consist of technical services to improve and expand AFC's operating capacity and a line of credit to assist in financing AFC's lending program. Specifically the Project's components would be: (a) Strengthening AFC's general management and administrative capabilities by: (i) establishing a Corporate Planning Department; (ii) reorganizing the Finance Division; (iii) increasing the number of loan officers; (iv) appointing an accounts officer in each branch; and (v) rationalizing the location, number, and size of AFC's branch facilities. (b) Improving AFC training and staff development by introducing programs for: (i) credit training; (ii) staff performance improvement; (iii) career development; and (iv) continuing training; (c) Providing credit for AFC's lending program. Two priorities rank highest among the proposed Project activities: (i) the establishment of a Corporate Planning Department (para 3.07), because the planning process must exist before expenditures for the lending program can be approved and (ii) the design of the Credit Training Program, because the quality of loans is expected to improve along with the credit skills of loan officers.

34 B. Project Costs 3.02 Total Project costs are estimated at about K Sh 375 million (about US$50 million). Of this, about K Sh 225 million (US$30.0 million), or 60%, represents foreign exchange costs. Details of Project costs are presented in Table 4, and are summarized below: --- K Sh Million US$ Million % of Project Component Local Foreign Total Local Foreign Total Total (a) Organization (b) Training (c) Credit Line Total Base Cost Physical Contingencies Price Contingencies Total Contingencies Total Project Cost / 3.03 Project costs, with the exception of credit funds, were estimated at prices expected to prevail in March A physical contingency of 10% was applied to all Project costs except credit to reflect a measure of uncertainty about the quantities required. Project costs related to credit were calculated on the basis of financial projections in current terms (Tables 7-8), and therefore include the estimated impact of price increases over the Project period. Price contingencies for foreign exchange costs were applied at 9% for 1981, 8.5% for 1982, and 7.5% p.a. for Price contingencies for local costs were applied at the rate of 10% p.a. for and at 8% p.a. for (Table 4). These rates reflect current estimates of price increases in Kenya and worldwide. Taxes and duties on Project goods and services are estimated at K Sh 22 million (US$3 million). This represents import taxes and duties on goods and services not eligible for exemption from customs, plus taxes and duties on fuel and other operating costs. C. Financing 3.04 The financing of Project costs would be shared as follows: K Sh US$ % -million-- Government of Kenya IBRD IDA Net Project Cost (excluding taxes and duties) Taxes and Duties 22 3 Total Project Cost / Total figures rounded.

35 The proposed IDA Credit of SDR 8.2 million (US$10 million equivalent) and Bank Loan of US$25 million to the Government of Kenya would finance 74% of the net Project cost, including 100% of foreign exchange costs (US$30.0 million), and 25% of local costs (US$5.0 million out of total local costs of US$20.0 million). Project costs were calculated on the basis of net financial expenditures (Tables 7 and 8) The proceeds under the proposed Credit and Loan used for institutionbuilding components (parts a and b, para 3.01) would be provided in the form of a grant from the Treasury to AFC. The balance of Project expenditures would be financed by the Treasury under a line of credit to be maintained by Treasury for AFC. It is estimated that AFC would draw down a total of K Sh 330 million (US$44 million) during the Project period; however, the annual amount of the commitment would be determined by the AFC Board of Directors in consultation with the Treasury. This amount would be reflected in the AFC Annual Plan (paras ), which would be approved by the Bank Group. Each fiscal year, AFC would draw down funds under the line of credit up to the amount of the commitment agreed in the Annual Plan for that year. AFC would pay Treasury 7% p.a. on Project funds drawn down for onlending to farmers in AFC fiscal years 1982 and 1983 and 8% on funds drawn down thereafter. AFC would charge farmers at least 12% on medium- and long-term loans. Each year, the onlending rates to farmers and AFC-s required spread will be reviewed by AFC, Government and the Bank Group in the context of the Annual Plan proposals. Upon expiration of the draw down period on March 31, 1985, all outstanding advances would be converted into a term loan with a final maturity of sixteen years, including a grace period of three years. The interest rate on the term loan would be 8% p.a. The Bank Loan and IDA Credit would finance virtually the entire grant of US$6 million from the Treasury to AFC, and approximately 70% of the line of credit, or US$29 million. The terms of the Bank Loan of US$25 million would be twenty years including five years of grace at an interest rate of 9.6% p.a. Government ratification of the Subsidiary Financing Agreements between Government and AFC reflecting the above terms would be a condition of Credit and Loan effectiveness. D. Detailed Features (a) Strengthening AFC 3.07 (i) Corporate Planning Department. This Department would be established under the Project to formulate AFC's overall long-range objectives, policies, and programs. It would be staffed with a Department Head, one planning analyst, two financial analysts, one credit marketing analyst, one agricultural economist, three statistical assistants, and four clerical staff. The Department Head and the planning analyst would be recruited internationally to complement the skills and experience of the Kenyan staff. The terms of reference and qualifications of all professional staff of this Department were discussed at negotiations (Annex 4), and assurances were obtained that these

36 would be approved by the Bank Group, and that the Bank Group would be consulted on appointments of the two locally recruited financial analysts and would approve the appointments of the Department Head and planning analyst. The appointment of the Head of Corporate Planning is a condition of Loan and Credit effectiveness. The Department Head would report to the General Manager of AFC and the Department would provide technical assistance on policy matters. The Department would have overall responsibility for designing and coordinating the annual planning process and for conducting systematic performance reviews on a regular basis. In carrying out these functions, the Department Head would work closely with the General Manager and the division heads in developing an Annual Plan and five-year projections and in all aspects of the plan and operations performance reviews. In addition, the new Department would absorb the functions and staff of the existing Corporate Development and Research Department The Department would have specific responsibility for developing AFC s strategic and financial objectives as a framework for preparation of the Annual Plan and five-year projections. The Annual Plan would have particular importance since it would serve as the principle vehicle for an ongoing review of AFC lending activities and institutional development. AFC's financing needs and projected growth would be determined as part of the Annual Plan review. The Annual Plan would contain AFC's detailed budget for the following fiscal year, including programs for lending, capital expenditures, recruiting, training, and funding. It would reflect the operating requirements of AFC based on the inputs of both branch and headquarters management. Five-year projections for AFC would be revised annually and presented along with the Annual Plan to the Board of Directors for approval. The Annual Plan would specifically reflect the objectives of the institution as set out in the AFC Statement of Policy (para 2.29 and Annex 1). A draft Statement was discussed at negotiations and has recently been approved by AFC-s Board. Assurances were obtained that significant changes in the Statement of Policy would not be made without prior consultation with and approval by the Bank Group The Annual Plan document would include, in addition to a detailed budget for AFC, a discussion of the assumptions and strategies built into the annual operating, investment and lending programs and five-year projections, including the financial justification of typical loan activities to be financed, and reports on performance in key areas such as loan collections and write-offs, foreclosures, administrative costs, staffing and performance evaluation, overall progress of training programs, and construction of physical facilities. After the Annual Plan and five-year projections have been approved by AFC's Board, they would be submitted to the Bank Group for review and approval. In assessing the Plan, which would include a proposed allocation of Bank Group funds for onlending, consideration would be given to the previous year's performance and progress on management development programs, in an effort to ascertain that the proposed budget, particularly with regard to lending volume, is reasonable. The content of the Annual Plan, supporting documentation to be presented, criteria for review, and timing of preparation, review and approval of the Plans, and coordination with the Government budgeting process have been agreed with the Bank Group (Schedule 1). Bank Group approval of each Annual Plan would be a condition of disbursement for eligible expenditures.

37 The planning process would require inputs from AFC managers at all levels. In order to ensure effective participation in the process, the new Corporate Planning Department would issue a planning instruction explaining its objectives and outlining the kind of information which branch offices will need to provide as inputs to the five-year projections and Annual Plan. These instructions would also set out a process for reviewing the performance of income and cost centers (para 2.26), as well as serve as a guide for developing plans for Systems and Human Resources as part of the Annual Plan. Once the objectives have been determined and the strategy and process for the first Annual Plan proposed, the Corporate Planning Department would have the following responsibilities: (i) establish a timetable for implementation; (ii) review all divisional strategies, action plans and budgets prior to revie% 1y General Manager; (iii) review these plans with the General Manager; (iv) analyze the Budget prepared by the Finance Department (to be renamed the Financial Services Department) for consistency with AFC's financial objectivei. and coordinate required changes; (v) coordinate the Annual Plan presenf-tlrto the Board; (vi) conduct quarterly reviews with the General Manager OIl tlh~: Budget-and Action Plans; (vii) conduct monthly meetings with Division and Department heads on major divisional projects; (viii) follow up with Div1sien Heads on progress of major objectives; and (ix) forecast expected finrnc-n-u results for the current calendar year against the Plan in order to develop contingency plans where necessary. Investments under this component would include principally technical assistance support and incremental operating costs for the new Department (ii) Finance Division. The existing Finance Department (para 2.O0), within the Finance Division, is responsible for funding and budgeting, two key areas which require reorganization and strengthening. In order for AFC to make better use of its funds, it needs to prepare short- and medium-term cash flow projections and monitor more closely the flow of funds at branch level. With the introduction of MIS (para 2.21), improved financial control of the branches and Head Office will be possible by setting up a budgetary control system (para 2.26). To carry out these two tasks, the renamed Financial Services Department would be split into two sections: a Cash Management Section responsible for cash management, and a Budgeting Section respon 7 -b_j for the new budgetary control system. Under the Project, a Chief Financial Analyst would be recruited locally to head the Department and two financial analysts would be recruited locally for the Budgeting Section. Assurances were obtained at negotiations that the terms of reference and qualifications of the Chief Financial Analyst would be submitted to the Bank Group for review and approval, and the Bank Group would be consulted on future appointments to the position. An internationally recruited fiscal planning specialist provided by USAID would serve as the advisor to the head of the Financial Services Department The revised accounting system and the new management reporting system are expected to streamline and improve financial control of AFC. Under the Project, two accountants will be added to the Accounts Department to deal specifically with the preparation of management reports. The Project will also include financing for one year of additional technical assistance for the Data Processing Department to complete the adaptation of the new computer system to AFC's reporting requirements. This additional staff should enable the Financial Controller to manage the new accounting and information systems more effectively.

38 (iii) Loan Officers. In order to appraise, supervise, and monitor the projected increase in loan volume, AFC would recruit about 50 additional loan officers during the Project period. This addition would represent an average annual increase of just under 10% for the Project period. The number of loan officers to be recruited each year would be specified in the Annual Plan (para 3.08), and would take into account turnover rates, projected number and size of loans, and the capacity of the Credit Training Program (para 3.19). The appointment of newly-recruited loan officers would be confirmed after they have successfully completed the Credit Training Program (iv) Accounts Officers. About 40 new accounts officer positions would be created under the project, one for each AFC branch. These 40 positions, however, are equivalent to a net increment of only 30 positions, since about 10 accountants will no longer be needed at headquarters after the introduction of MIS and therefore would be reassigned to the branch level. Under the direct supervision of the Branch Manager, the accounts officer would be responsible for general branch administration including disbursements, routine collections, branch reporting, budgeting and operations analysis, but excluding credit appraisal and follow-up, which are the responsibility of the loan officers. Accounts officers would coordinate their work with branch loan officers and manage branch clerical and supporting staff. The main skills required of accounts officers would include: knowledge of AFC policy and administrative procedures for loan disbursement and collection; ability to design and prepare basic statistical and analytical reports on all aspects of branch operations; and familiarity with basic principles of office administration. Their performance would be assessed according to the following main indicators: (a) proper and prompt disbursement of branch loans; (b) prompt initiation of steps to ensure loan repayments and collections; and (c) quality, quantity, and promptness of branch reports. Acceptable standards would be determined by establishing performance norms for each branch Most accounts officers would initially be recruited from three groups: junior loan officers, junior accountants, and senior clerical officers. Candidates from the loan officer and accounts officer groups with less than three years related work experience would be considered for direct appointment to this position if they have a bachelor's degree in Commerce, Economics, Management or Public Administration. Loan officers with a bachelor-s degree in agriculture or range management would be considered for this position only if they have served for two or more years with AFC in a related function. Candidates from the loan officer, accounts officer, and clerical officer groups who lack formal educational qualifications would be considered for appointment by promotion, provided that they have at least five years of experience in accounting or office management, including at least three years of above average performance with AFC. Each accounts officer would be required to complete the training program satisfactorily before being confirmed in the new position (v) Branch Facilities. In order to support the projected expansion of lending operations and line staff, AFC needs to expand its branch facilities and field support services. Before appraisal, AFC was

39 planning to open six additional branch offices in districts which have good agricultural potential and which are currently served by branches located as far away as 200 km. Map 2 shows the location of existing and proposed branches. In addition, AFC has been considering the use of mobile branch units and experimenting with mini-branches to serve distant farm areas, where the potential clientele does not warrant the establishment of permanent facilities Estimates of loan officer travel time range from 40% to 60% of total time available (para 2.12). This relatively high proportion of unproductive time has important marketing and financial implications, because it limits the number of clients each loan officer can serve and results in high operating costs per loan. Productive time and unit operating costs are directly linked to the location of a branch officer vis-a-vis the system of clients AFC's new Corporate Planning Department would include in the fiveyear projections (para 3.08) provisions for branch investments and divestitures, reflecting agreed policy objectives. However, the technical criteria for opening new offices, and closing, relocating, or expanding existing ones, would first be developed with the assistance of consultants employed under the Project. The terms of reference for this branch location study would include an analysis of current travel patterns and time utilizatiorn of loan officers, a marketing survey of credit demand in areas for potential AFC expansion, and a cost analysis of alternative means of servicing these areas. At negotiations, assurances were obtained that the Bank Group would approve the terms of reference, requisite qualifications, proposed contracts, and the appointments of the consultants. Disbursement for specific investments would be approved by the Bank Group under AFC Annual Plans (para. 3.08), taking into account the recommendations of the branch location study. Project investment cost estimates include provision for construction of new branch offices and other facilities and procurement of equipment (sub-branches, mobile units, etc.). (b) Training and Staff Development 3.19 (i) Credit Training Program. The Credit Training Program financed under the Project would be designed to provide the maximum scope for credit analysis and problem-solving by the participants using case studies from actual projects financed by AFC. Field visits by the participants to borrowers would be made with the objective of collecting the basic information needed for proper evaluation. Similarly, participants would make independent supervision visits to AFC clients to report on implementation progress, problems and possible solutions. This program would give participants a better understanding of AFC as a credit institution, clients credit needs, procedures to be followed in making and collecting loans, the rights and obligations of lenders and borrowers, and other points of general branch operations Courses would initially be six weeks long, but would be gradually expanded to three months once the training of existing staff is completed. Over a period of about two years, most of the line staff would participate in the program. Priority participants would include all loan officers and branch and area managers, but participation of other qualified staff would be encouraged depending on space availability and the individual's development potential.

40 Each course would consist of three parts: the first two parts would deal with financial and operational matters and would be attended by accounting officers as well as loan officers; the third part would deal with credit analysis and evaluation, and only loan officers would be required to attend. Performance of each participant in the Credit Training Program would be evaluated as an indicator of career development potential. It is vital for the success of this program that AFC integrate the training program as an ongoing operation. Over time, Area and Branch Managers and senior loan officers would take part in developing course materials, as well as in actual training The Credit Training Program would be carried out by the recently established Training Department in the Administrative Services Division. The Training Department, currently staffed with only one person, will be expanded to include a Department Head, a Training Advisor, a Loan Appraisal Instructor and clerical support staff. The Training Advisor and Loan Appraisal Instructor have been provided for two years each under USAID's Agricultural Sector Services Support Loan, and short-term consultants would be hired under the Project to assist in developing the curriculum and teaching materials for the credit course. The scope and staffing plan for the Credit Training Program were discussed at negotiations, and it was agreed that a detailed outline and staffing proposal for the training program would be prepared with the assistance of the USAID financed personnel, who are expected to take up their positions at AFC in April Terms of reference, qualifications, proposed contracts and appointments of credit training specialists would be approved by the Bank Group. Terms of reference for credit training specialists would include preparation of curricula, teaching and evaluation of course effectiveness and follow-up requirements. At negotiations, assurances were obtained that AFC would submit, for Bank Group review and comment, a timetable for the employment by AFC of credit training specialists and an implementation schedule for the Credit Training Program as a condition of Loan and Credit effectiveness (ii) Staff Performance Improvement Program. At present, AFC staff performance review is not conducted systematically. Staff are seldom given clear directives or feedback on their work (para. 2.17). In order to deal effectively with the identified weaknesses, a performance improvement program would be developed and implemented. It would consist of two phases: Job Analysis and Evaluation, and Staff Performance Review and Appraisal. The Job Analysis and Evaluation phase would establish standards of performance for AFC staff and determine training needs on a systematic and continuing basis. The program would include the preparation of a personnel policy statement, training for supervisors, and the development of performance appraisal forms and procedures. A Job Analysis and Evaluation specialist would be recruited on a short-term basis to develop this program and the Administrative Services Division would be responsibile for its implementation. The Corporate Planning Department would monitor the program. A timetable for implementation of these programs was discussed during negotiations, and progress under the program would be specifically reviewed as part of the AFC Annual Plan review (para 3.08).

41 The Staff Performance Review and Appraisal would be the second phase of the Performance Improvement Program. A Performance Review and Appraisal System would be developed to ensure a periodic review of the quality and quantity of each employee's work by his supervisor, and to provide a record of each employee's progress which will serve as a basis for recommendations on salary increases, promotions, disciplinary actions, career development and replacement planning. A specialist would be employed as a consultant to advise management on appropriate policies, set up the review system, and train supervisory and subordinate staff of the Personnel Department who will be responsible for implementing the review. Later, once the program is in place, the consultant would conduct a follow-up study to evaluate its impact and to identify areas for further refinement (iii) Career Development Program. This program would aim to establish an orderly system of succession planning for key positions in AFC. It would ensure that all such positions are periodically reviewed to determine that they are adequately staffed, and that potential replacements are either fully developed or being developed. Specific plans would be formulated, steps identified, and actions implemented to develop and prepare employees for key management positions. As a result of this program, AFC would be better able to determine areas of management weakness and take appropriate measures to strengthen these, through either specific training efforts or external recruitment A Human Resources Development specialist would be recruited on a short-term basis to assist AFC senior management in identifying key managerial, supervisory and professional positions within the organization. The specialist would identify the critical skills, knowledge, and performance of each key position, using available job analysis data (para 3.23), supplemented by interviews as appropriate. The consultant would then design AFC's replacement planning and career development system, including the preparation of the policies, procedures and required forms. In addition, the consultant would design and conduct a series of workshops to coach senior and middle managers in the use of the career development planning system. Finally, the consultant would assist the Training Department in preparing a series of specialized courses addressing staff development needs (iv) Continuing Training Program. Following on the recommendations of the Career Development and Performance Improvement Programs, the main objectives of a Continuing Training Program would be: (a) to ensure that all AFC staff receive some form of training, re-training, or refresher training at least once every four years; (b) to establish a corporate value system that considers staff training and development a regular role of management and supervision; (c) to develop from the data generated by the Performance Improvement Program an ongoing system for reviewing and identifying the training needs of all AFC staff; and (d) to develop a set of in-house, national, and overseas training programs to meet the training and development needs of AFC staff The Training Department would carry out this program and be adequately staffed with additional technical assistance from USAID (para 3.22). It is estimated that during the Project period, about 125 staff would be

42 trained each year. Of these, about 80 would be trained in-house, about 25 in other institutions in Kenya, and about 20 overseas. Domestic courses would last about three weeks; overseas, four months. Training activities under this Project would be coordinated with related activities under other ongoing Government programs supported by bilateral donors (e.g., overseas scholarships offered by the US Government). Investments under the Project are intended to supplement ongoing programs and have been estimated to cover, inter alia, teaching materials and equipment, tuition fees, transportation and subsistence costs. Annual disbursements for this component would be proposed by AFC and agreed upon by the Bank Group as part of the AFC Annual Plan. (c) Credit for AFC's Lending Program 3.29 Funds would be provided under the Project to assist in financing AFC's overall lending program during the Project period. This would include loans to large, medium and small-scale farmers under existing facilities (e.g. development loans, mechanization loans, ranch loans, etc.), as well as new types of loans, but excluding seasonal crop loans financed directly by the Government and administered by AFC. This approach represents a departure from past Bank Group and other donor agency practice in Kenya of tying credit funds to particular development schemes or categories of borrowers (paras and ). Under these previous projects, the specific types of loans to be financed and the terms and conditions applicable to each were specified in project legal agreements. The rationale for the approach adopted under the proposed Project is to assist AFC management in unifying its lending program under the framework of an overall corporate strategy. The structure of the annual lending program by types of loans and borrowers would be determined through a systematic planning and review process involving AFC management at all levels, in cooperation with the Ministries of Agriculture and Livestock Development, and consistent with AFC's Policy Statement (para 3.08). AFC would charge interest rates on medium- and long-term loans of at least 12% p.a. Interest rates would be reviewed periodically in accordance with Government policy guidelines and adjusted in accordance with the structure of overall interest rates (para 1.28). Decisions regarding AFC-s lending strategy would be reflected in the Annual Plan and five-year projections. Annual Plans would include information on any changes in procedures for appraising and reviewing loans and for ensuring the financial viability of proposed types of loans and the economic viability of AFC's overall lending program (Schedule 1) The approximate amount of credit funds that AFC's operational and lending programs will require over the Project period has been estimated by projecting AFC financial statements, as shown in Tables 7 and 8. Specific allocations required to support the lending program would be proposed and agreed upon as part of each Annual Plan review, and funds would be provided under a line of credit with Treasury (para 3.06). Annual disbursements, determined on the basis of AFC Annual Plans, would be subject to Bank Group approval (paras and 3.33). The proposed line of credit would finance approximately 22,000 loans with an average size of 15,000 over the Project

43 period. As indicated in the financial projections (para 5.05), it is estimated that funds for onlending under the line of credit would be drawndown beginning in AFC fiscal year 1982/83 (Project Year 2), at which time it is considered that AFC will have completed its first Annual Plan exercise. If a satisfactory Annual Plan is submitted and approved earlier than expected, some credit funds could be drawndown during AFC FY1981/82. The proposed line of credit would allow AFC's total portfolio (Table 7) to grow at an annual rate of about 13% in current terms, beginning in AFC fiscal year 1982/83. While this rate appears modest in comparison with the historical average of about 18% p.a. from 1975 to 1980, the projected expansion under the Project is considered conservative and reasonable, viewed in the context of a number of factors. First, the current AFC loan portfolio is inflated with a number of irrecoverable loans and interest which continues to accrue on dubious loans. The value of the current portfolio also includes loans currently financed under special project arrangements, for which future credit demand is uncertain (including the Bank Group financed Group Farms and Livestock Projects, paras ). Second, rapid growth of the portfolio in recent years has clearly strained AFC's operational effectiveness in areas such as loan appraisal, loan supervision and collection, accounting and internal control systems. Third, the uneven quality of loan data available and the lack of a systematic cash flow analysis made more detailed projections of loan disbursements and reflows impossible, and clarification is essential before AFC undertakes new loan expansion. Fourth, the more efficient turnover of AFC's existing portfolio through loan collection improvement could provide scope for additional loan volume. Fifth, AFC needs to undertake a more systematic review of demand for credit, by loan type and branch, which would follow from the planning process, credit training and branch strengthening programs under the Project. The estimated level of portfolio growth under the Project, while indicative, is consistent with the appraisal's judgment of the rate at which AFC can strengthen its branch services and overall institutional capacity to handle a modest expansion of credit business more efficiently and effectively than in the past. In this connection, assurances were obtained at negotiations that all new long-term borrowings by AFC would be approved by the Bank Group. The ongoing review of AFC-s accounting policies, the introduction of the MIS, and the Annual Plan preparation and review process are expected to clarify a number of uncertainties about the current portfolio and to enable AFC and the Bank Group to better assess the growth potential of AFC's lending programs. E. Procurement 3.31 Goods and services to be procured by AFC and sub-borrowers under the Project would not be likely to attract international bidding competition, because of their nature and the low value of individual orders. Consultants and technical assistance personnel would be contracted in accordance with Bank Group guidelines. Technical assistance personnel to be employed are listed in Table 3. Assurances were obtained that the terms of reference and requisite qualifications and contractual arrangements would be submitted to the Bank Group for approval, and the Bank Group would approve appointments to all positions. Average cost per staff month would be between US$6,000 and US$9,000,

44 including all costs (Table 3). Orders for office equipment, vehicles, furniture, and training materials would be bulked to the extent possible and procured following AFC procurement procedures, which are satisfactory to the Bank Group. Civil works contracts for branch buildings would be procured in a manner to be decided, in consultation with the Bank Group, after the branch location study is completed (para 3.18). Purchases for agricultural developments by sub-borrowers under AFC's lending program would be through normal commercial channels; given the diverse representation of commercial interests and competition among suppliers, this procedure is satisfactory. F. Disbursements 3.32 With the exception of funds required for start-up costs estimated to be incurred prior to the approval of the first Annual Plan, about US$745 thousand, Project funds would be retained in an "uncommitted" Loan and Credit account and allocated to appropriate disbursement categories following Bank Group approval of each Annual Plan. An indicative allocation of funds is provided in the following schedule: -----US$ Million---- (a) 100% of expenditures for technical assistance 1.0 (b) 90% of civil works (AFC branch office construction) 1.0 (c) 100% of foreign or 80% of local expenditures for office equipment, vehicles, furniture and training materials 1.0 (d) 100% of local expenditures for incremental staff salaries and related operating expendi- 3.0 tures of AFC under the Project, as defined under AFC Annual Plans (para 3.08) (e) up to 70% of expenditures for subloans, eligibility to be defined under AFC Annual Plans 29.0 Total Disbursement against (a), (b) and (c) would be fully documented. Disbursements against (d) and (e) would be made against statements of expenditure certified by the General Manager of AFC and retained by AFC for inspection by Bank Group supervision missions. During negotiations, satisfactory procedures for auditing these statements of expenditure were agreed.

45 G. Accounts, Audit and Reports 3.34 AFC's audited financial statements for fiscal years up to March 31, 1980, have been submitted to the Bank. In fiscal 1979, AFC changed auditors from Coopers & Lybrand to Githongo & Company. Both firms are acceptable to the Bank Group. The 1979 audit was qualified mainly because AFC income included an amount of K Sh 6.8 million of commission receivable for operating the Guaranteed Minimum Return Scheme on behalf of the Kenya Government. The commission reflects the unaudited accounts of GMR advances. Similarly, in the 1980 accounts, the auditors noted an AFC commission receivable of K Sh 8.3 million for AFC operation of the Government's Seasonal Credit Scheme As part of the 1979 audit, the auditors reviewed and assessed AFC's internal control systems and made recommendations for their improvement which were discussed and agreed with management. In September 1979, Price Waterhouse & Co. reviewed AFC's existing and planned accounting systems and developed a financial reporting system appropriate for AFC management's use and for standardized reporting requirements in connection with Bank funded projects. The new MIS accounting system is expected to facilitate the recommended improvements in the internal control systems and the proposed financial reporting system. The integration of the new MIS accounting system is almost complete, giving AFC management the capacity to analyze the Corporation's financial position on any given day. Management is in the process of deciding which additional reports should be programmed for regular retrieval of financial information. AFC has largely accepted the suggestions of the Price Waterhouse Study on management information reporting, and under the Project, AFC's planning, programming and monitoring capacity will be strengthened through the development and use of the information generated through the new accounting and reporting system. Early in Project start-up, the Bank Group will assist AFC to standardize reporting requirements and formats under all Bank Group financed projects implemented by AFC At negotiations, assurances were obtained that AFC accounts would continue to be audited by independent auditors acceptable to the Bank Group and that the accounts and the auditors' report would be submitted to the Bank Group within six months of the end of AFC's fiscal year. Assurances were also obtained that the auditors' report would include the 'Long Form Audit' and agreed schedules of information. AFC would prepare and submit to the Bank Group a Project Completion Report. IV. AGRICULTURAL PRODUCTION A. Background 4.01 The Development Plan states that Government activities in the agricultural sector will increasingly aim at intensifying production. Expenditures for livestock development will focus on increasing grass and fodder crop production in the medium and high potential areas. Investments for crop development and farm management services will be directed towards land use intensification. Growth in output and income projected in the Development Plan are based mainly on increases in yields and livestock numbers.

46 Crop land is expected to increase by only about 6% during the Plan period, mainly at the expense of grassland, but the expansion of intensive farm systems at the expense of extensive ones is projected To achieve the targeted production increases, the Government is implementing a wide range of development programs in agriculture, many of which include the provision of credit to farmers. These programs fall into two broad categories. Some aim to promote increased production of individual cash crops such as tea and sugar cane. Others, such as IADP (paras 1.07, 2.53), aim to alleviate poverty of smallholders who are not yet full participants in the cash economy. Although AFC is one of the agencies implementing IADP, its role has been limited since it finances only about 5% of participating farmers. The main reason for this is that the semi-subsistence farmers IADP is attempting to reach are relatively poor credit risks; they generally lack a registered title to their land, and their farms are located in remote areas, usually far from an AFC branch. While it is the Government s long-term objective to alleviate these constraints, its mediumrterm strategy is for AFC to concentrate its lending on commercial farmers who have title deeds to the land they farm and who have access to improved technology and the ability to apply it. However, within this category of commercial farmers, AFC seeks to assist those who do not have access to other forms of institutional credit. Economic and social considerations will guide the AFC Board in allocating different amounts of lending by type and size of farms, geographic area, and productive activities to be financed according to Annual Plans and five-year projections (para 3.08). The following paragraphs contain an outline of the likely demand for investment credit of AFC-s potential clients. Several livestock crop budgets have been prepared to show various possible farm investment patterns and the technical coefficients associated with them. It should be understood, however, that during Project implementation, individual loan applications would be processed according to established credit criteria, provided that they are consistent with the AFC lending program as approved in the Annual Plan, and technically feasible in the opinion of the AFC loan officer who may consult with the extension officer. B. Livestock and Cropping Patterns 4.03 Submission of a detailed farm plan showing the development activities to be financed is a prerequisite of each AFC loan. The farm plan must demonstrate that the borrower would benefit financially from the loan after full repayment. Planned livestock and crop activities must also include Government required soil and water conservation measures. Livestock 4.04 Kenya's ecological zones II and III (para and Map 1) are ideally suited for dairy production. Milk is produced mainly in smallholder areas and is a major source of animal protein in the diet of the rural population. In order to increase milk yields, local Zebu cows must be replaced with high yielding breeds. The investment required for the purchase of a grade cow is substantial, and very few smallholders can afford it without credit assistance. This partly explains the high demand for dairy loans under the Third Agricultural Credit Project (para 2.52). Associated investments include water, pasture and fodder crop development, chaffcutters, fencing and building

47 materials. It has been noted that the PIER of the First Smallholder Agricultural Credit Project (Cr. 105-KE) concluded that the impact of dairy loans on overall productivity was probably marginal (para 2.55). Although this conclusion was qualified by the fact of poor data, it is suggested that much of the investment facilitated by project credit would have occurred anyway; thus, the major production impact would have had to result from changes in husbandry practices and management of grade cattle transferred from the large farm subsector to the small farm subsector. However, given the growing demand for dairy products and the rising price of grade cattle and the continued improvement of dairy extension and other farm services throughout the 1970s, it is likely that the provision of additional credit facilities for dairy investments will have a larger impact on production today than it did in the early 1960s. At that time, small farmer dairy investments were still relatively few and credit demand did not spur a marked increase in national herd size and when the adoption of improved husbandry practices was still low. The provision of credit under the proposed Project is expected to enable small farmers who would not otherwise have adequate financial resources to purchase a grade cow and to encourage farmers to make the necessary farm improvements to increase dairy productivity A sufficient supply of water is necessary to achieve high milk yields. In ecological zones II and III (Map 1), a minimum of 100 liters of water per cow per day is required for body maintenance, a daily milk yield of about 15 liters and for washing udders and utensils. WIater is in short supply on many farms, and rain water is still not effectively conserved. Investments in guttering and galvanized water tanks would enable farmers to collect rain water. In addition, by installing guttering, farmers would prevent soil erosion now caused by rainwater pouring off their roofs. More intensive use of the land can also be achieved by developing forage crops for zero grazing. Napier grass (Pennisetum purpureum) and Bana (a Sorghum cross) have done well in Kenya and can yield up to 8,500 kg of digestible nutrients per ha per year. These grasses can also be planted along terraces or bunds to prevent soil erosion. Surplus grasses can also be used for mulching coffee and other crops. Fibrous materials such as sugar cane leaves, maize stover, and banana stems can be processed by cattle more efficiently if chopped before feeding. Small, cheap, hand operated chaffcutters are just being introduced in Kenya and have been popular for some time in countries such as India and Pakistan where zero grazing is common Opportunities for intensive poultry and pig keeping are relatively limited because these enterprises are financially risky and require sophisticated management. However, the number of farmers financially and technically capable of undertaking such operations is gradually increasing, and it is likely that AFC loans to finance such operations will also increase. Shortage of water is a major cause of death of layers and broilers, and AFC is likely to receive loan applications for water development investments from farmers already engaging in poultry activities. Crops 4.07 Although most of the high and medium potential land in Kenya has been developed, there is still much scope for improving the productivity of existing cash crops, such as coffee and tea, and commercial foodcrops and for developing new crops. Yield increases can be achieved by better pruning,

48 application of fertilizer, mulching, and, as in the case of coffee, more selective picking in order to improve the grade. Pyrethrum and potatoes are being promoted by the extension service in the high altitude areas The area planted under maize is not expected to increase significantly, but there is still room to improve yields by adopting better cultural practices and by applying fertilizer. The extension staff are encouraging farmers to interplant maize with beans and other pulses in order to increase land productivity. Some of the beans and other pulses could be used to supplement livestock feed as a substitute for expensive concentrates. Every year, post-harvest losses account for a significant portion of the total crop (estimates range from 15 to 30% of total crop production). Existing commercial drying and storage facilities (mainly National Cereals and Produce Board stores) cannot accommodate more than about one quarter of the total maize crop in a bumper year. The remaining portion, most of which is normally retained on the farm for domestic consumption, is stored under inadequate conditions, accounting for a large percentage of post-harvest losses. As a result of increasing Government efforts to prevent food losses, inexpensive, verminproof on-farm storage facilities are being developed and promoted by the agricultural extension services. The investments required for these activities would consist of relatively low cost farm inputs and farmers may be able to purchase them out of their pockets. AFC, however, would encourage technically and financially strong farmers to borrow for such farm improvements in order to increase their liquidity in anticipation of future harvest and sale The yield of horticultural crops can be improved substantially through irrigation. Demand for irrigation equipment is high, but dieselfuelled pumps are expensive to operate and maintain. Scarcity of adequate service facilities, limited availability of spare parts, and pilferage may reduce their utilization. Financing for this equipment should be limited to experienced and sophisticated farmers who have access to proper service facilities. Several models of sun, wind, and gravity-powered pumps are being introduced locally. AFC would promote financing of some of these pumps on a trial basis provided that the models are technically proven and that the borrowers are willing and able to bear the financial risk In the intensely cultivated areas, shortage of agricultural machinery often constrains timely land preparation for seasonal crops. Timely land preparation and planting is an important factor of high productivity, and contractual plowing is a growing business. The current utilization rate is about 150 ha per tractor per year. Tractors are also used to transport produce and farm inputs and during the off-season, they are often employed to clear land. Demand for tractors is high in many areas, providing AFC with opportunities for lending to farmer-contractors for the purchase of tractors and to farmers to finance land preparation expenditures. C. Technical Coefficients 4.11 The following table shows the estimated productivity increases associated with the carrying out of possible investments described in the preceding section:

49 Without Investment With Investment % - -- Yield Assumptions Increase Livestock Milk (Kg per cow per year) 600 2,000-2, Beef calves 1/ Heifer calves 1/ Pork 2/ Eggs 3/ Crops (Kg per ha) Coffee 600 1, Tea 1,500 1, Pyrethrum Potatoes 10,000 15, Maize 1,800 2, Pulses / Liveweight (kg) 2/ Piglets per sow per year 3/ Eggs per hen per year These estimates provide an indication of the productivity increases which could be achieved by progressive farmers with present know-how if they had the necessary financing. The main objective of this Project is to increase these farmers access to credit for these purposes. Strengthening agricultural extension services, introducing new technology, and improving the application of existing know-how are correspondingly important development objectives. Several Government programs currently underway, many of them with Bank Group support, are focusing on these areas. The AFC planning process, to be strengthened under this Project, will assist Government in coordinating its efforts directed towards agricultural production and credit. D. Production 4.12 The proposed Project is expected to have a substantial favorable impact on agricultural production. This statement rests on the critical assumption that the investment opportunities outlined in the preceding sections far exceed the financial resources necessary to exploit those opportunities. Because AFC-s lending program will be defined during Project implementation, incremental production targets cannot be precisely determined now. These targets would be a function of the specific sub-projects financed, which in turn would be determined through the AFC planning process, taking into account Government objectives and market forces, including farmers preferences The following table shows a range of total production increases which could result from investments financed by AFC under this Project.

50 Incremental Production Current National Increase Percentage with Project Production of National Production tons/year % High Low High Low Milk 25,000 15,000 1,286, Beef 1, , Pork 1, , Eggs 1, , Coffee 7,000 5,000 95, Tea 1, , Pyrethrum 8,000 5,000 14, Potatoes 50,000 30, , Maize 12,000 8,000 2,160, Pulses 1,500 1, , These estimates are consistent with the technical coefficients presented in the preceeding section of this Chapter, and AFC financial projections shown in Tables 7-9. In addition, the estimates reflect livestock and cropping patterns observed by the mission in farm areas currently served by AFC, estimates of types of credit demand, and they assume about 22,000 loans to farmers averaging K Sh 15,000 each. E. Markets and Prices Livestock Products 4.14 Incremental meat and milk production would be sold primarily on the local market, as is a large proportion of present production. Farmgate prices for both meat and milk on local markets are higher than those offered by Kenya Cooperative Creameries (KCC) and by the Kenya Meat Commission (KMC), whose producer prices are regulated by the Government. The farmgate price for milk sold on the local market is often as high as K Sh 2.40/kg, whereas the farmgate price for milk delivered to KCC is only K Sh 1.85/kg, recently increased in October 1980 from K Sh 1.16/kg. Private butchers pay up to K Sh 6 per kg liveweight of high quality beef, whereas KMC only offers K Sh 5. The current shortage of meat and milk (KCC is estimating a shortfall in milk requirements of about 145 million liters for 1980/81), is expected to continue in the medium-term future, forcing local prices upward and inducing gradual, but substantial official price increases over the next five-year period. However, including greater supplies of these products will not only depend on increasing producer price incentives. Grade dairy heifers are in short supply, and more emphasis needs to be placed on upgrading traditional zebu stock through intensified artificial inscmination. In addition, marketing channels for products need to be expanded, and the marketing communication between would-be suppliers of heifers from ranging areas and would-be buyers from dairy areas needs to be improved.

51 Crops 4.15 Maize, wheat, beans and oil seed crops would be marketed either on the local market or through the National Cereals and Produce Board (NCPB). The NCPB exercises an official monopoly over the purchase and sale of grains and oil seed crops not traded on local markets in the producer area. Through the control of interdistrict crop movements and the regulation of producer and retail prices, the NCPB attempts to guarantee minimum producer prices while protecting retail clients and ensuring adequate national distribution of staple fooderops. The official producer prices for maize, the most important foodcrop, is K Sh 90 per 90 kilo bag (as of July 1980); however, recent shortages both in Kenya and neighboring countries have driven local market prices upwards to as much as double in maize deficit areas As recognized by Government in the current Development Plan and in a Food Policy Paper under preparation, producer incentives have not always been adequate and will require attention in order to alleviate current shortages and avoid a future food crisis. Elements of the larger problem which need to be addressed include: establishing producer prices which properly reflect the cost of farmer inputs as well as import parity price levels, developing extension capacity to promote increased land productivity, and ensuring an efficient marketing system, which may mean increased utilization of private sector channels as a complement to official price supports, storage and marketing services. These issues are currently under review between the Government and the Bank in the context of the overall agricultural sector dialogue and discussions of structural adjustment lending. V. PROSPECTS AND JUSTIFICATION Background 5.01 As AFC is a primary source of medium and long-term credit for commercial farmers, it is charged with a major role in the development of rural communities. So far AFC has been acting as a conduit for external aid aimed at specific agricultural development activities. In preparing and implementing projects with AFC, the Government and the donors have tended to focus more on production than on institutional matters. Moreover, major decisions affecting AFC's operations have been made largely outside this institution, as AFC has functioned largely as an institutional extension of the Ministry of Agriculture. Recognizing that past projects have contributed little to AFC-s future viability, the Government considers the proposed Project as an opportunity to expand and increase the impact of agricultural lending by investing substantial resources in institution building. Economic Analysis 5.02 This Project does not lend itself to a precise calculation of an overall economic rate of return, in part because it will be implemented according to flexible Annual Plans and five-year projections, the contents of which will be determined on an annual basis (para 3.08). Each Annual Plan, however, will contain an analysis of the estimated economic benefits and costs of AFC's overall lending program (Schedule 1).

52 If AFC's lending program were to finance the investments outlined in Chapter IV, the principal economic benefit of this Project would be the incremental livestock and crop production estimated in paragraph The economic value of annual incremental production would range from K Sh 150 million (US$20 million) to K Sh 80 million (US$11 million). Correspondingly, the overall economic rate of return resulting from farmers investments financed under this Project would range from 30% to 17%, with a mid-point estimate of 24%. Cost and benefit calculations are based on prices expected to prevail in March 1981, and are presented for purposes of illustration only. Financial Projections 5.04 AFC's financial statements were projected for five years, FY , (Tables 7 and 8) based on the following major assumptions: (a) AFC's total loan portfolio would grow at 13% per year in current prices in Project years two, three, and four, but would remain constant in Project year one, AEC FY1981/82; (b) The average life of AFC's loan portfolio would be about seven years; (c) An interest rate on all new loans of 12% p.a. and a spread of 5% between cost of borrowed funds and loans; (d) Administrative costs, including incremental operating costs, would increase at the estimated rate of local inflation; (e) AFC would write-off 10% of its 1980 portfolio over the next five years; and (f) AFC would not accrue interest on 5% of its loan portfolio Using these assumptions as a basis for financial projections, it is estimated that AFC's net loan portfolio would grow 44% to K Sh 978 million (US$130 million) from 1980 to 1985, an average annual growth rate of about 9% p.a. It is assumed that there would be no growth in AFC's portfolio in Project year one, AFC FY1981/82, and that new volume during that year would be financed primarily by reflows from the outstanding portfolio. During Project years two through four (AFC FY 1983, 1984, 1985), the portfolio would grow at 13% p.a. This rate is lower than the historical growth rate of 18% p.a. (para. 2.46) but it is consistent with estimated availability of human and physical resources during the Project period. The number, experience, and skills of operational staff are the principal constraints to more rapid expansion of AFC's lending volume (paras ), and the estimated rate of growth and resulting external financing requirements are considered reasonable and consistent with the program of institution building proposed under the Project (para 3.30) The proposed Government financing of AFC, a combination of grant and loan (para. 3.06), would preserve AFC's current capitalization which appears adequate. AFC's debt to equity ratio would change only slightly

53 during the -roject period. AFC-s net interest margin (para. 2.46) would also change slightly during the Project period, because the increasing yield on loans would be accompanied by an increasing cost of funds reflecting recent changes in Government interest rate policies (paras ). Details of selected financial indicators are provided in Table 9. Risk 5.07 The principal Project risk would be a deterioration of the portfolio resulting from a failure of AFC to improve loan collections. The principal portion of outstanding loans in arrears is largely protected by the value of the collateral, and it is recommended that AFC continue to require that loans be secured by land. Table 8 shows that portfolio growth and net margin improvements would enable AFC to report net income of K Sh 30 million (US$4.0 million) if it accrued interest on 95% of its portfolio, equal to K Sh 107 million (US$14.3 million), in fiscal Therefore, if AFC collected interest on at least 70% of its portfolio, it would be able to break even. Project investments in staff development and training, improved loan appraisal and monitoring, corporate planning and review processes are aimed at improving AFC's collection rate and overall financial performance. It was agreed during negotiations that AFC would propose annual collection targets under the Annual Plan, and that progress in this area would be among the criteria for the Bank Group review and approval of AFC's lending program Another risk of the Project is that productivity increases might not be attained. Achieving targeted output depends on a number of factors, including timeliness of land preparation, availability of required inputs, progress in land adjudication (for new AFC clients), and good rainfall. Due to the current food shortages in Kenya, and the upward trend in prices of agricultural products, it is unlikely that market prices for incremental production will adversely affect value of the output. Furthermore, food shortages have prompted increasing Government efforts to alleviate marketing, legal and administrative constraints, and to improve other farmer services. The proposed Project would contribute to an improvement of farmer credit services by providing expanded credit facilities and strengthening AFC's credit appraisal and management procedures. Government Budget 5.09 The Government would contribute about K Sh 89 million (US$12 million) to Project expenditures. At full development in Project year four, 1985, average annual incremental Project expenditures would be about K Sh 50 million or about US$6.7 million (Table 8). AFC would incur those expenditures and finance them out of its own revenues. During the four-year Project period, the Treasury's outflows would exceed inflows, but thereafter, the net cash flow to the Treasury would be positive (Table 6). It is estimated that the Government would recover all Project costs in 20 years. The principal source of cost recovery would be the amortization of the term loan from the Treasury to AFC (para 3.06). It should be noted, however, that continuing financial support from Government will be needed to sustain additional growth of AFC.

54 VI. AGL.EEMENTS REACHED AND RECOMMENDATION 6.01 During negotiations, draft Subsidiary Financing Agreements between the Government and AFC were discussed and agreed with the Bank Group. AFC's Statement of Policy was also reviewed and agreed during negotiations and subsequently approved by AFC's Board of Directors on April 15, Assurances were obtained at negotiations: (a) on AFC interest rate levels and mechanisms for periodic review; AFC would periodically review its onlending rates to ensure an adequate spread while maintaining consistency with Government policies and the results of Government's quarterly review of overall interest rates (para 1.28); (b) that the Bank Group would approve terms of reference and requisite qualifications for all professional staff of the Corporate Planning Department, be consulted on the appointments of the two locally-recruited financial analysts, and approve the appointments of the Department Head and the Planning Analyst (para 3.07). (c) that the Bank Group would approve terms of reference and requisite qualifications, proposed contracts for and the appointment of technical assistance personnel listed in Table 3 (para 3.31 and Annex 4); (d) that significant changes in AFC's Statement of Policy would not be made without prior consultation with and approval by the Bank Group (para. 3.08); (e) that any new long-term borrowings by AFC would be approved by the Bank Group (para. 3.30); (f) that the Bank Group would approve terms of reference and requisite qualifications and be consulted on the appointment of the Chief Financial Analyst, Head of the new Financial Services Department (para 3.11); (g) on satisfactory procedures for audit of statements of expenditure (para 3.33); and (h) that AFC accounts would continue to be audited by independent auditors acceptable to the Bank Group, that the audited accounts and the auditor's report would be submitted to the Bank Group within six months of the end of AFC's fiscal year; and that AFC would prepare a Project Completion Report (para. 3.36) Conditions of effectiveness would be the ratification of the Subsidiary Financing Agreements on behalf of the Government and AFC (para. 3.06), the appointment of the Department Head, Corporate Planning (para. 3.07), and

55 an agreed timetable for the employment of credit training specialists and implementation of the Credit Training Program (para. 3.22) The proposed Project would be implemented in accordance with Annual Plans, which would include five-year projections revised on a yearly basis (para and Schedule 1). Bank Group approval of the Annual Plan would be a condition of disbursement for expenditures incurred during the Project period (para. 3.09), with the exception of agreed start-up expenditures under the institution-building components (para. 3.32) Subject to the above conditions, this Project is suitable for a Bank Loan of US$25 million to the Government of Kenya with a term of 20 years including 5 years of grace and an IDA Credit of SDR 8.2 million (US$10 million equivalent) on standard terms.

56 SCHEDULE 1 AFC Annual Plans Part A: Contents of Annual Plans (1) Statement of Objectives: Statement explaining the relationship between the overall lending program of AFC for five years and planned expansion of agricultural production and credit for the Republic of Kenya for the period, including specific targets, policy measures, and resources to be utilized. AFC's role in relation to other banks and lending programs should be discussed. (2) Annual budget for AFC including: (a) proposed capital expenditures (e. g. on vehicles, equipment, and civil works), for headquarters and branches; (b) all proposed recurrent expenditures on salaries, materials, fuel, repairs and maintenance; (c) a list of all staff whose salaries would be financed through the Project; (d) proposed expenditures for technical assistance, studies and training; and (e) detailed financial projections and cash flow for year under consideration, including estimate of financing requirement under the line of credit. (3) Proposed terms of reference as appropriate for new staff or any changes in agreed terms of reference. (4) Proposed AFC lending program for the period to be covered, including a breakdown of expected loans by purpose, size of loan, type of enterprise, and AFC branch, including terms and conditions of lending. Brief analysis showing financial viability of proposed loan types and economic viability of overall lending program. (5) Revised projections of AFC for five-year period. (6) Proposed list of eligible expenditures for Bank Group reimbursement and proposed allocations of funds to relevant disbursement categories. (7) A1l external or government financial resources available or proposed. (8) Proposed annual target and procedures for improving loan collections.

57 Part B: Supporting Information to be Furnished in the Annual Plan to the Bank Group (1) Review of previous years lending activities of AFC, including full breakdown of loans by purpose, size of loan, type of loan and AFC branch and including terms and conditions of lending. Performance with collections, by category of loan and by branch, should be specifically described. (2) Full staffing position of AFC at date of preparation of plan. (3) Information on any modifications in appraisal procedures for proposed types of lending activities. (4) Report on progress with staff development and training programs. (5) Statement of position of AFC accounts. (6) Statement of AFC's accounting policies for loan write-offs, bad debt provision, loan interest accrual, and farm properties in possession. Report on all changes in accounting policies and procedures. (7) Written statement on assumptions utilized in financial projections. Part C: Criteria and conditions on which Bank Group approval of proposed Annual Plan will be based The suitability and volume of proposed for AFC lending and reimbursement by the Bank Group will be assessed on the following basis: (1) Types of lending activity: (a) Conformity of proposed types of lending activity with AFC's Statement of Policy, with objectives of the National Development Plan, and with five-year projections; (b) Experience with performance of various types of loans by branch concerned, including historical collection record; (c) Impact of proposed lending programs on AFC's financial position; (d) Relevant changes in lending and accounting policies and procedures; and (e) Financial viability of proposed types of loans and economic viability of overall lending program. (2) Adequacy of interest rates and consistency of levels with Government interest rate policy.

58 (3) AFC administrative and managerial capability as measured by training program progress, collection rates for various activities and branches, administrative costs for various lending activities, progress with development and use of management information systems, ratio of Loan Officers to number of proposed loans, and adequacy of appraisal procedures. (4) AFC-s financial performance as measured by appropriate indicators, including, inter alia, return on equity defined as the sum of AFC-s irredeemable loans, grants and reserves and other profitability indicators. (5) Progress by AFC in improving the monitoring of use of funds under subloans and the economic impact of its lending operations. (6) Training: Suitability of proposed training programs for AFC staff and progress with training and staff development programs. (7) Eligibility of proposed list of Group expenditures of drawdowns for types of lending inconsistent with Bank policies; i.e. exclusion of land purchase loans and loans covered under other Bank Group and external agency financed operations. (8) Improvement in AFC loan collection rate in accordance with agreed targets. (9) Other sources of funds available to finance AFC operations.

59 ANNEX I AGRICULTURAL FINANCE CORPORATION STATEMENT OF POLICY This statement, as amended from time to time defines the policy which shall apply to the activities and operations of the Agricultural Finance corporation (hereinafter referred to as the Corporation). I. Objectives 1. The Corporation is a parastatal finance institution established by the Government of Kenya under the Agricultural Finance Corporation Act (Cap 323, Laws of Kenya), for the purpose of assisting the development of agriculture and agricultural industries. In pursuance of this objective, the Corporation will assist the development of agriculture by making short-term, medium and long-term loans to eligible farmers, cooperative societies, incorporated group representatives, private companies, public bodies, local authorities and other persons engaged in agriculture or agricultural industries. 2. In its credit and management operations, the Corporation will be guided by the principle of extending credit on a financially, economically, and technically sound basis and will at all times strive to operate at a cost consistent with efficient business and management practices. II. Loans 1. Loans shall be made for the purpose of: (a) crop production including land preparation, the purchase of inputs, harvesting, transportation and marketing expenses; (b) general farm development including fencing, construction of farm buildings, dips, dams, boreholes, irrigation, livestock and livestock facilities, establishment of permanent and semi-permanent crops, bush clearing, firebreaks and establishment and maintenance of pastures; (c) farm machinery and equipment, including but not limited to tractors, combine harvesters, farm trucks and pickups, etc.; (d) farm and farm business purchases including improvements and moveables; and

60 ANNEX I Page 2 (e) other items or operations that could be established as relating to farming or agricultural industries. 2. Loan applications will be appraised by loan officers at the Corporation's Branch Offices, in cooperation wherever and whenever practicable with the extension staff of the Ministries of Agriculture and Livestock Development. The acceptability of an application will be determined on the basis of the financial viability of the proposed investment, the managerial ability of the borrower, and accessability of the necessary technical advisory support and market for the end product. 3. To determine economic soundness, financial viability and technical feasibility of any project or investment for which credit assistance is sought from the Corporation, a thorough investigation of applicants will be undertaken to analyse their current business records and operations and the proposed plan of operation, managerial ability, credit requirement, type and quality of collateral available. Together with the applicant the Corporation will aim at developing farm plans which would be mutually acceptable and on the basis of which staff would monitor implementation. Where there are no records to evaluate a prospective borrower s current operations, attempt will be made to study and analyse similar or related enterprises or operations in the same area or similar ecological zone and to use the data so acquired to develop an operational investment plan. 4. The Corporation's financing of any single project will not normally exceed 80% of the investment cost. 5. The total amount of loans provided by the Corporation, together with any other financial commitments in favor of any single borrower shall not normally exceed 3.5% of the Corporation's capital (defined as irredeemable loans, grants and reserves). 6. The Corporation will normally require suitable and marketable securities for its loans. 7. Loan Officers at Branch level will be delegated loan approval authority up to a level predetermined by the General Manager and approved by the Board. At Headquarters, a technical committee of Senior Credit Officers will review all loan applications prior to the approval/rejection by the Board. III. Financial Policy 1. The Corporation shall aim at all times to honour its obligations when due and to achieve an income adequate to meet operating costs, to provide for doubtful debts, to maintain adequate reserves and to provide for sustained growth.

61 ANNEX I Page 3 2. The interest charged on Corporation loans shall be set by the Board and shall be consistent with the overall Government interest rate policy for the agricultural sector as adjusted from time to time. The Corporation shall aim to secure an interest rate structure which will enable the Corporation to meet its financial objectives. 3. The Corporation shall determine the level of adequate provisions against potential losses in accordance with prudent accounting policies and shall build up its reserves to a level consistent with sound financial practices. Subject to the limitations provided under the law, annual net income shall be appropriated to the Corporation's general reserve. 4. The Corporation shall maintain a satisfactory relationship between the maturities of its obligations and those of the loans it provides, and shall not incur any long-term debts where the result would be that total indebtedness (whether present or contingent) would exceed the sum of Kenya pounds fifty million or such amount as may from time to time be determined in accordance with sub-section 2 of section 14 of section 14 of the Agricultural Financial Corporation Act (Cap. 323) of the Laws of Kenya. IV. Quality of Service, Lender and Borrower Obligations 1. In the interest of improving efficiency, the Corporation will review periodically its loan making, loan disbursement, accounting and administrative procedures to ensure proper information collection and analysis and timeliness of loan disbursements and collections. Every effort will be made to increase the loan officer/borrowe ratio for effective credit supervision. 2. Borrowers shall be required to meet their obligations when due. They shall be required to keep in repair and good working condition, insure and keep insured, the assets constituting security for the Corporation's loans. 3. For supervisory, loan monitoring and evaluation purposes, the Corporation shall, at all times, be at liberty by itself, its agents or servants, to enter into the borrower's land to view the assets and improvements mortgaged to the Corporation. V. Management, Organization, Staffing and Training. 1. The Corporation shall endeavor to develop and maintain a wellbalanced staff and management team capable fo evaluating the financing plans/proposals put before it, assisting enterprises in the formulation of their projects or farm plans and supervising their execution.

62 ANNEX I Page 4 2. To improve the quality and collectability of loans, and to support sustained improvements on credit advisory services, the Corporation shall maintain a credit training programme necessary to ensure adequate staff capabilities. Such training will include all levels of Corporation staff. The Corporation will also pay special attention to the development of a project planning, credit appraisal and farm management capacity whose major role will be to provide technical support to credit officers at branch level. 3. In support of its general staff development and promotion policy, the Corporation will be guided by a personnel policy setting out guidelines on terms and conditions of employment, job performance criteria and evaluation procedures, promotion incentives and career development programmes. April 15, 1981

63 ANNEX 2 KENYA FOURTH AGRICULTURAL CREDIT PROJECT List of Materials and Working Papers Available in Project File I. Acts and Related Documents AFC Act (1969) Agricultural Act Banking Act Dairy Industry Act Review of Statutory Boards ("Ndegwa Report") II. Kenya - General Economics Kenya Development Plan Economic Survey 1979 Sessional Paper #4 of 1980 on Economic Prospects and Policies Budget Speeches for the Fiscal Years 1979/80 and 1980/81 Interest Rate Structure (G.W. Coleman) Monetary Policy in Kenya (G.S. DORRANGE) Draft Food Policy Paper (July and October 1980 versions) IBRD Kenya-Economic Analysis and Outlook 1979/80 III. Statistics and Specific Economic Data on Kenya Statistical Abstract 1978 Quarterly Statistical Digest Brief Statistical Analysis (Census of Large Farms) Review of Land Use Changes Yields Costs Prices 1980 (MOA) Crop Budgets Economic and Financial Review - Central Bank of Kenya IBRD Commodity Markets and Prices Prospects IV. Ministry of Agriculture - Annual Reports 1968 Department of Agriculture-2 Volumes Annual Reports 1978 of Various Districts and Provinces Organization Chart

64 ANNEX 2 Page 2 V. Ministry of Livestock Development 1978 Annual Report Stotz - Doctoral Thesis Stotz - Paper on Heifer Requirements Organization Chart VI. Ministry of Cooperative Development Memorandum to the Civil Service Review Committee VII. Annual Reports Central Bank Commercial Bank of Kenya Kenya Cooperative Creameries (KCC) Agricultural Development Corporation VIII. USAID - Sponsored Studies and Report Agricultural Credit in Kenya Multinational Agribusiness Systems Inc. Agricultural Manpower in Kenya General Research Corporation AFC Management Study Research Triangle Institute AID Request for Proposals IX. Agricultural Finance Corporation Audit Reports and Financial Statements Financial Projections (Preparation Report) Price Waterhouse Financial Projections and Tables Credit Review - Annual Report 1978 Procedures Manuals - Loan Procedures - Financial - Administrative Procedures Credit Manual System Design Manual MIS Users Manual Application Forms Appraisal Staffing Costs Tables AFC Budget and Annual Plan Structure of Portfolio and Loan Statistics Appraisal AFC Training Information Development and Training Programme

65 ANNEX 2 Page 3 X. Personnel XI. Other AFC Loan Processing Time Surveys Price Waterhouse Report on Review of Management Reporting Function of AFC Organization Chart Other Appraisal Mission Working Documents Study on AFC by Directorate of Personnel Kenya Civil Service Salary Scale Education Sector Memorandum (IBRD, March 11, 1980) ILCA Paper on Trypanotolerant Cattle Solar Electric International Paper Note on Economics of Maize Production for Export in East Africa Tractor File Kenya Seed Company Expansion of Faculty of Agriculture February 10, 1981

66 ANNEX 3 AFC - LOAN PROCESSING CYCLE 1. Preparation Loan processing generally follows: 1. identification of the potential borrower by the extension services of the Ministry of Agriculture (or the Ministry of Livestock Development) or AFC field officers; 2. purchase of an application form (fee: K Sh 10) by the farmer; 3. farmer preparation of the farm budget with assistance from extension officer; 4. inspection of farm and appraisal of project by the AFC field officers; 2. Approval i. examination of application by the district Loans Advisory Committee, consisting of: ii. iii. iv. approval or rejection of loan by AFC Branch Manager for Loans under Ksh 10,000 or by AFC Head Office for loans over K Sh 10,000; farmer registration of security documents with the Land Office; AFC letter of approval issued to the borrower; 3. Disbursement i. disbursement by AFC Branch Manager (procedure adopted April 1, 1980); ii. farm visit by AFC loan officer; 4. Collection or Default Procedures i. instalment reminder sent by mail to farmer 1 and 2 months in advance of instalment due date; ii. iii. arrears notices is sent to borrowers 2 weeks prior to instalment due date; paying accounts are credited, 2-week delinquent accounts are issued a call notice to report to AFC branch office;

67 ANNEX 3 Page 2 iv. unsuccessful attempts to collect on delinquent loan results in farm inspection by AFC branch loan officer 4-6 weeks following instalment due date; v. continual failure of farmers to make payment results in initiation of foreclosure procedures; vi. vii. advertisement of farm auction placed in newspapers; sale of farm.

68 ANNEX 4 KENYA Fourth Agricultural Credit Project Draft Terms of Reference Corporate Planning Department 1. Department Head 2. Planning Analyst 3. Financial Analysts 4. Credit Marketing Analyst 5. Agricultural Economist 6. Branch Location Study Finance Division 7. Chief Financial Analyst 8. Systems analyst/programmer Personnel Training and Development 9. Personnel Management Consultant (Job Analysis and Performance Review Specialist) 10. Staff Development Specialist 11. Short-Term Credit Training Specialists

69 ANNEX 4 Page 2 1. Corporate Planning Department Head General The Corporate Planning Department Head would be recruited internationally for a period of 36 months. Job Description The Annual Plan The Annual Plan will describe AFC's AFC's operating strategy and financial objectives and serve as the principal vehicle for an ongoing review of AFC lending activities and institutional development. The Department Head will be an advisor to the General Manager and will work closely with the three division heads of AFC in developing the Annual Plan and five-year projections and in all aspects of the plan and operations performance reviews. Preparation of the Planning Process The Planning process will require inputs from AFC managers at all levels. In order to ensure effective participation in the process, the Corporate Planning Department Head will prepare, in collaboration with AFC's division heads, a planning instruction designed to: - determine annual targets for lending, financial operations, budgeting and staff development; - define strategies to achieve these targets; - outline information to be provided by branch offices for the five-year projections and the Annual Plan; and - design appropriate operating and financial performance standards and establish management reviews. Implementation of Planning Process Once the objectives have been determined and the strategy and process for the first Annual Plan proposed, the Corporate Planning Department Head will have th following responsibilities: (i) establish a timetable for preparation of the Annual Plan; (ii) review all divisional objectives and strategies with the General Manager;

70 ANNEX 4 Page 3 (iii) analyse the budget prepared by the Finance Department for consistency with AFC's financial objectives and coordinate required changes; (iv) prepare the Annual Plan; (v) conduct quarterly revisions with the General Manager on progress of the Annual Plan; (vi) conduct monthly meetings with division and department heads on major divisional projects; (vii) follow up with division heads on progress of major objectives; and (viii) forecast expected financial results for the current fiscal year against the plan in order to develop+ contingency plans where necessary. Participation in Training Courses The Department Head will participate in formal training courses for AFC staff. Reporting Relationship The Department Head will report to the General Manager of AFC. Replacement The Department Head will be responsible for the informal training of all department staff and will ensure that after 24 months his successor has been identified within the department and properly trained to assume the leadership of the department. During his last 12 months the expatriate Department Head will serve as advisor to his designated successor. Qualifications and Experience Chartered Accountant and Master's Degree in Busikness Administration or equivalent. At least eight years experience in a financial institution including management responsibilities. Demonstrated capactities in corporate planning and budgeting, banking, credit and financial management and planning, experience with computerized financial and budgetary reporting systems. Overseas experience. Minimum age: 35 years. Salary Level Net $45,000 to 50,000 year plus housing and other benefits.

71 ANNEX 4 Page 4 2. Planning Analyst Corporate Planning Department General The Planning Analyst will be recruited internationally to staff the Corporate Planning Department for a period of 36 months. He will be a close assistant to the Department Head. Job Description Strategic and Financial Objectives of AFC As a framework for preparation fo theannual Plan and five-year projections, the Planning Analyst will develop AFC's strategic and financial objectives resulting from: (i) planned expansion of agricultural production and credit for Kenya; (ii) external and Government financial resources available; and (iii) lending programs of othr banks to agriculture. The strategic and financial objectives of AFC will include: - projected growth and programs for lending; - collection rates and procedures; - operating and capital expenditures; - financing needs and eligible expenditures for IBRD reimbursement; and - recruiting, training and staff development. Preparation of Planning Process The Planning Analyst will assist the Department Head in preparing the planaing process as stated in thedepartment Head's terms of reference. In particular, the Planning analyst will review MIS 1/ reports with the Finanr-e Division to ensure that they respond to management requirements in a practica' nd work4ble -anner. 1/ Mamog.i,tc Informaticn System.

72 ANNEX 4 Page 5 Monitoring of Planning Process The Planning analyst will: (i) prepare quarterly review with the General Manager on progress of the Annual Plan; (ii) assist in arranging and conducting monthly meetings with division and department heads on major divisional projects; (iii) follow up with division heads on progress of major objectives; and (iv) forecast expected financial results for the current fiscal year against the plan in order to develop contingency plans where necessary. Reporting Relationship The Planning Analyst shall report to the Corporate Planning Department Head and will supervise the work of the Financial Analysts, Credit Marketing Analyst and Agricultural Economist of the Department. Replacement and Training In agreement with his hierarchical superors, the planning analyst will, within the staff of the Corporate Planning Department, develop a replacement fully capable fo performing. the relinquished functions. The Planning analyst will review and participate in AFC's training programs. Qualifications and Experience Chartered Accountant or equivalent. Four to five years- experience in government planning function at middle management level with strong background in financial analysis, and familiarity with computerized management information systems. Minimum age: 30 years. Salary Level $30,000 to $40,000 plus housing and other benefits.

73 ANNEX 4 Page 6 3. Financial Analysts Corporate Planning Department Recruitment The Corporate Planning Department will be staffed with two financial analysts, recruited locally. Job Description The Financial Analysts will assist the Department Head and the Planning Analyst in all the tasks described in their terms of reference. They will be specifically responsible for: - analysing the budget prepared by the Financial Services Department for the following fiscal year to ensure consistency with AFC's financial objectives, and identifying required changes; - reviewing detailed financial projections and cash flow for the fiscal year under consideration, including estimates of financing required, comparing financial projections with the Annual Plan in order to develop contingency plans where necessary; - preparing quarterly reviews of the budget; and - assisting in the training program. Reporting Relationship The Financial Analysts will report to the Department Head and will be under direct supervision of the Planning Analyst. Qualification and Experience Bachelor's Degree in Business with strong financial background and three years' experience in corporate finance and accounting function.

74 ANNEX 4 Page 7 4. Credit Marketing Analysts Corporate Planning Department General The Corporate Planning Department will be staffed with a Credit Marketing Analyst, recruited locally. Job Description 1. On basis of inputs from AFC branches, Ministry of Agriculture and Ministry of Livestock Development extension officers, determine potential agricultural credit demand, relate to planned expansion of agricultural production and credit for Kenya, and develop with the Planning Analyst the lending program for the fiscal year, including a breakdown of expected loans by purpose, type, size of loan and AFC branch. 2. Prepare Branch Location Study (with assistance of consultant) (see description). 3. In relation with Branch Location Study, develop AFC strategy for increasing clientele in existing or new areas, operating requirements of AFC branches, in terms of staff, equipment and vehicles for improving branch services. 4. Assist the Planning Analysts in setting out a process for analysing and reviewing the administrative costs per loan in each AFC branch and followup on progress of major objectives at AFC branch level (number and volume of loans, by purpose and type). 5. Participate in training program for branch loan officers. Reporting Relationship Reports to Corporate Planning Department Head an dis under direct supervision of Planning Analyst. Qualification and Experience Bachelor's Degree in Economics or Business. Three year s experience in corporate planning or financial function.

75 ANNEX 4 Page 8 5. Agricultural Economist Corporate Planning Department The Corporate Planning Department will be staffed with an Agricultural Economist, recruited locally. Job Description 1. In light of Government priorities, as stated in particular in the National Plan, the Agricultural Economist will determine the economic viability of agricultural lending in general and of different loan types in particular. 2. In collaboration with the departments responsible for planning in the Ministries of Agriculture, Livestock Development, Cooperative Development and the MEPD, he will review the planned expansion of agricultural production and determine the implication for agricultural credit. 3. The Agricultural Economist will review computerized farm models and budgets to determine the financial viability of proposed loan types drawing on information from the Ministry of Agriculture and the AFC Credit Appraisal, Credit Review and Farm Management Departments. Reporting Relationship Agricultural Economist reports to Corporate Planning Department Head and is under direct supervision of Planning Analyst. Qualification and Experience Bachelor's Degree in Economics or Agriculture. Three years' experience in government or corporate planning function. Familiarity with computerized farm models.

76 ANNEX 4 Page 9 6. Branch Location Study The IBRD mission which appraised the IVth Agricultural Credit Project found that the front line loan officers serving in the 34 branches of AFC spent too much time travelling. The Project also provides for establishing six new branch offices. Hence the IBRD has recommended a Branch Location Study to determine: (1) At the national level, whether the existing AFC branch network corresponds to the areas of most concentrated agricultural credit demand, where the six new branches should be opened and whether branches should be closed or relocated. (2) At the local level, whether the branch offices are located the optimal way to minimize loan officer travelling to clients and administrative (district or provincial) headquarters, where registration and similar functions must be executed. Failing a satisfactory "one branch office" solution to the problem of optimal location, the consultant will devise and cost alternative approaches to providing branch office services, e.g. use of mobile branch office units, requiring loan officers to make overnight trips to certain areas, establishing and manning branch sub-offices, establishing branch sub-offices as physical entities, but manning them on a scheduled basis.

77 ANNEX 4 Page Chief Financial Analyst Financial Services Department A Chief Financial Analyst will be recruited locally to head the Financial Services Department. Job Description - prepare annual budget, coordinate with Corporate Planning Department for presentation in Annual Plan, ensure ongoing review and report on actual performance against budget; - responsible for financial control of branches and head office using budgetary control system derived from MIS (Management Information System), report on adequacy of these systems and any implementation problems; - responsible for the cash management function including management and transfer of branch collections, liquidity requirements of the Corporation including short-term deposits, preparation and review of cash flow projections and monitoring of the money market; - make claims on project expenditures and follow up with relevant ministries and Government departments; - ensure the Corporation meets its financial obligations on time; and - assist the Head, Financial Division, as necessary. Reporting Relationships Chief Financial Analyst will report to Financial Controller. He will be assisted during two years by the USAID Fiscal Planning Advisor and will collaborate with the Corporate Planning Department to ensure the efficiency of corporate annual planning. Qualification Bachelor's Degree in Business or Economics or equivalent. Working experience: at least five years with responsibility in corporate finance and budgeting, and experience with computerized financial reporting systems.

78 ANNEX 4 Page Systems Analyst/Programmer Electronic Data Processing Department General AFC will recruit internationally a Systems Analyst/Programmer for a period of 12 months to ensure a proper follow-up and completion of the computer system set up by the German technical assistance team on an IBM, Systems 3, Model 15 machine. Job Description Assist head, Electronic Data Processing (EDP) Department in: (1) Ensuring in collaboration with the Corporate Planning Department, the management information requirements are properly identified, and translated into a practical and workable accounting system. (2) Amending, completing and ensuring proper implementation of computer reporting system accordingly. (3) Ensuring proper training of staff involved, to understand system and provide the necessary data input. (4) Ensure that EDP department head is fully capable of managing and amending the computerized management information system.

79 ANNEX 4 Page Personnel Management Consultant A Personnel Management Consultant, specialist in job analysis and performance evaluation, will be recruited internationally for a period of 24 months. Job Description On the basis of the staff job analysis conducted by the Training Advisor, the Personnel Management consultant will: (a) Prepare and submit to General Manager and Corporate Planning Department Head: (i) a personnel policy statement including statement of key skills and qualifications required for each position or job category; (ii) design of performance appraisal forms and procedural instructions; and (iii) a consolidated report on specific training needs across AFC, within departments and by individual employee. (b) Develop, in collaboration with the Training Advisor, three training courses designed to achieve the following objectives: (i) introduce and explain the objectives of the performance appraisal system to all AFC employees, in order to maximize employee understanding and acceptance of the program; (ii) train supervisors and managers in the basic techniques for conducting an effective performance appraisal internview and for identifying training opportunities for the improvement of employee performance; and (iii) train the Personnel Department to operate and maintain the performance appraisal system on an ongoing basis. (c) Conduct the training courses described in the preceding paragraph. (d) Establish follow up procedures for reviewing the impact of the performance appraisal system, and report on findings to the General Manager and Corporate Planning Department Head.

80 ANNEX 4 Page Staff Development Specialist A Staff Development Specialist will be recruited for (three) months to assist the Personnel Department in identifying key managerial, supervisory and professional positions within AFC and in planning for their adequate staffing. Job Description Using job analysis data collected by the Training Advisor, supplemented by interviews as appropriate, the consultant will: - prepare and submit to the Corporate Planning Department Head a replacement planning and career development system, including the preparation of the required forms, policies and procedures; - design and conduct a series of workshops to coach senior and middle managers in the understanding and use of the career developing planning system; and - assist the Training Department in preparing a series of specialized courses addressing staff development needs.

81 ANNEX 4 Page Short-Term Credit Training Consultants According to timetable agreed with the IBRD, short-term Credit Training Specialists will be recruited internationally for a total of 36 man-months. Job Description The short-term Credit Training Specialists will assist the Credit Training Department, the Training Advisor and the Loan Appraisal Instruction in: (1) preparing curricula and training materials (work sheets, case studies) and preliminary evaluation systems; (2) determining the right balance of lectures, study, simulation and practise; (3) conducting training courses tailored to the institution-s needs and designed to lead to improved staff performance of their duties (rather than simply increase their knowledge); (4) recruiting credit training officers; (5) assessing performance of local training officers and effectiveness of locally-conducted training courses; and (6) instituting a system of follow-up and feedback which would assist the Training Department to adapt its course work to changing conditions. Experience and Qualification The short-term Credit Training Specialists will have experience in organizing successful credit training programs in developing countries.

82 KENYA Table I A FOURTH AGRICULTURAL CREDIT PROJECT AFC Loan Portfolio as of March 31 (K Sh '000) AFC Loan Schemes 2/ Small Scale Loans 3/ AFC Small Scale 25,508 25,492 26,201 32,258 IDA 105/344/692 72,120 91, , ,020 KFW 9,660 9,660 9,176 9,392 Vihiga/N. Tetu ICA USAID CUop 2,980 2,780 1, Tobacco 5,880 8,480 6,108 6,108 IADP 4/ - - 1,354 1,202 Large Scale Loans 5/ Sub-total 117, , , ,908 AFC Large Scale 249, , , ,230 Livestock (IDA 129/477) 69,600 81, , ,348 KFW 1,880 1,660 1,289 1,088 Group Farm Rehabilitation 6/ 8,720 17,720 35,569 56,932 USAID Crop 10,580 2,580 2,337 2,134 Sub-total 340, , , ,732 Total Portfolio 7/ 457, , ,654 1/ All figures in current terms 2/ Description of Loan Schemes, (see Report, paras ) I Loan amounts of less than K sh 20,000 4/ Funds onlent under IADP I (Cr. 959-KE) and IADP II (Cr. 650-KE/Ln.1303-KE) 5/ Loan amounts of K Sh 20,000 or more 6/ Funds onlent under Cr. 537-KE/Ln KE 7/ Excludes Government seasonal crop scheme (GMR, New Seasonal Credit Scheme) March 30, 1981

83 KEYA FOURTH AGRICULTURAL CREDIT PROJECT AFC Loan Portfolio (March 31, 1980) -/ (KSH'000) Number of Loan Loans AFC LOAN SCHEME Balance Arrears Disbursements, Outstanding Small-Scale Loans: AFC Small Scale 32,258 8,180 11,040 7,111 IDA 105/344/ ,020 27,540 42,620 34,078 KfW 9,392 3,160 1,500 4,165 Vihiga/N. Tetu ICA USAID Crop ,420 Tobacco 6, ,580 IADP 1, Sub-Total 168,916 39,920 59,180 Large Scale Loans: AFC Large Scale 364,230 4o,74o 98,120 9,423 Livestock (IDA 129/477) 126,348 50,580 40,940 1,317 KfW 1, Group Farms Rehabilitation 56,932 3,580 42, USAID Crop 2, Sub-Total 550,738 95, ,340 TOTAL 719, , , ,603 g. tb 1/ Figures in current terms. AFC audited Statements, 1979/80 March 30, 1981

84 -80- Table 2 KENYA FOURTH AGRICULTURAL CREDIT PROJECT Proposed Incremental Staffing for Project Activities AFC Regular Staff Corporate Planning Department Job Groups 1 Department Head N. A. /1 2 Financial Analysts J-K-L 1 Planning Analyst N.A. /1 1 Marketing Analyst J-K-]L 1 Agricultural Economist J-K-L 3 Statistical Assistants G-H Finance Division 1 Chief Financial Analyst M-N 2 Budget Analysts H-J 2 Accountants H-J Administrative Services Division 50 Loan Officers J 30 Accounts Officers J 2 Credit Training Officers K-L /1 Internationally recruited. March 30, 1981

85 -81- Table 3 KENYA FOURTH AGRICULTURAL CREDIT PROJECT Proposed Staffing AFC Technical Assistance Staff Month Staff Cost Total Cost Months US$ Corporate Planning Head 36 9, , Planning Analyst 36 6, , Branch Location Study Consultant 6 6,000 36, Job Analysis Specialist 12 6,000 72, Performance Review Specialist 12 6,000 72, Staff Development Specialist 3 6,000 18, Credit Training Specialists 36 6, , Systems Analyst/Programmer 12 7,000 84,000 1,056,000 March 19, 1981

86 -82- KENYA Table 4 FOURTH AGRICULTURAL CREDIT PROJECT Pro,;ect Costs Summary (K Sh Million) Organization 1, -Foreign Year l- Year 2 Year 3 Year 4 Total Exchange % Corporate Planning Department oo 63 Finance Division Loan Officers Accounting Officers Branch facilities Training 375 T Credit Training Staff Performance Improvement Career Development Continuing Training Credit Program oo 'Total Base Cost 3/ Physical Contingencies Price Contingencies 5/ o Total Contingencies Total Project Cost / Project Years correspond approximately with AFC fiscal years (April 1 - March 31),P/ From Line of Credit, Table 7 3/ Base costs are estimated at prices expected to prevail in March / 10% physical contingencies applied to branch facilities and office equipment and vehicles l/ Price contingencies applied to Organization and Training Components only, were estimated as follows: Foreign Exchange Local March 19, 1981

87 -83- Table 5S KENYA FOURTH AGRICULTURAL CREDIT PROJECT Estimated Schedule of Disbursements IDA/BANK Fiscal Year and Quarter Cumulative Disbursement at Quarter End US$ thousand September 30, 1981 a/ 150 December 31, March 31, June 30, , September 30, ,000 December 31, ,000 March 31, ,ooo June 30, , September 30, ,000 December 31, ,000 March 31, ,ooo June 30, , September 30, ,000 December 31, ,000 March 31, 1985 b/ 30,000 June 30, , September 30, ,000 December 31, 1985 c/ 35,000 a/ Expected Date of Effectiveness - August 31, 1981 b/ Expected Date of Project Completion. c/ Closing Date. March 23, 1981

88 KENYA FOURTH AGRICULTURAL CREDIT PROJECT Government Cash Flow - (R Sh Million) Project Year _ Sources of Funds IDA Credit _ Bank Loan _ Taxes and Duties 3/ APC 4/ - Amortization Interest Total Sources Uses of Funds Project Expenditures IDA Service Charge , Bank Loan 5/ - Amortization Interest Commitment Fee _ - - Total Uses Net Cash Flow (1.5) (46.4) (28.1) (36.8) , Cumulative Net Cash Flow (1.5) (47.9) (76.D) (112.8) (63.9) (53.9) (48.3) (16.2) In current prices 2/ Corresponds approximately with AFC FY (April 1 - March 31) Includes estimated incremental taxes 4/ Interest on AFC draw downs under line of credit is 77. in year 1 and 2, 8= thereafter; In year 5, line of credit is converted into a term loan of sixteeni years maturity, including 3 years of grace. 5/ The interest on the Bank Loan is 9.6%. The term is 20 years, including 5 years grace. March 30, 1981

89 KENYA FOURTH AGRICULTURAL CREDIT PROJECT AFC - Actual and Projected Balance Sheet at March 31st I/ (K Sh. Million) ASSERTS Loans to Farmers Less Valuation Reserve (21.0) (26 6) (30.2) (32.5) (38-9) ( 47 ) (4i) ) 4(53 (6o) t68) P Other Loans and Deposits Cash (14) Other Current Assets Fixed Assets 2/ Total Assets ,109 LIABILITIES Current Liabilities Borrowings Line of Credit Redeemable Loans Irredeemable Loans ,3 -* t24 Capital Grants Retained Earnings , , T231 Total Liabilities & Capital ,109 1/ All figures in current terms U/ mnaudited Statements 3/ Includes Development House Phase II, Farm Properties in Possession January 9, 1981

90 KENYA FOURTH AGRICULTURAL CREDIT PROJECT AFC - Actual and Projected Income Statement for The Years Ended March 31st 1/ (K Sh. million) / Total Interest Earned Interest Expense Line of Credit Redeemable Loans I Irredemable Loans m Total Interest Expense Net Interest Income Other Income Operating Expense Administrative Expense Provision for bad debts Bad debts written offs (15) (15) (15) (15) (15) Depreciation Total Operating Expense Net Income (3.4) F-3 1/ All figures in current terms 2/ Unaudited statement January 9, 1981

91 KENYA FOURTH AGRICULTURAL CREDIT PROJECT AFC - Schedule of Selected Financial Indicators (K Sh Million) PROFITABILITY Return on Assets-- - (0.65%) % 1.98% 2.49% 2.34% 3.59% 2.05% 2.91/ 2. 87/ 2/ Net Interest Margin % 5.21% % % % 7.40% LIQUIDITY Loans to Senior Porrowing 3 'l Quick Ratio (0.27) o.89 LEVERAGE Asset Leverage ,44 Debt to EquSty p.58 Lending to Borrowing7/ / Return on Assets = Net Income * Average Total Assets 2/ Net Interest Margin = (Interest on Loans - Interest Paid ) + Average'Loans to Farmers 3/ Loans to Senior Borrowings = Average Loans * (Average redeemable Loans + Line of Credit) 4/ Quick Ratio = Cash + Current Liabilities 5/ Asset Leverage = Total Assets + (Irredeemable Loans + Interest Free Grants + Accumulated Surplus) 6/ Debt to Equity = (Redeemable Loans + Line of Credit) + Total Loans, Grants, Surplus and Line of Credit 7/ Lending to Borrowing = Loans to Farmers + Loans and Grants! March 30, 1981

92 KENYA FOURTH AGRICULTURAL CREDIT PROJECT AGRICULTURAL FINANCE CORPORATION ORGANIZATION CHART I j BOARD OF DIRECTORS,Z I GENERAL MANAGER INTERNAL AUDIT DEPARTMENT CORPORATE PLANNING SERVICSIO DIVISION SERVICES DIVISION TECHNICAL IADMINISTRATIVE FINANCE ~ ~ ~ ~ ERICSDIISO DIVISION CREDIT APPRAISAL I ACCOUNTS - DEPARTMENT DEPARTMEN CREDIT REVIEW PERSONNEL I TRAININGELECTRONIC DATA DEPARTMENT DEPARTMENT I DEPARTMENT PROCESSING J DEPARTMENT CREDIT CONTROL LEGAL I I BUSINESS I BSRIESSR I FINANCIAL DEPARTMENT DEPARTMENT ISERVICES DEPARTMENT DEPARTMENT SERVICES MANAGEMENT AREA MANAGERS BANKING DEPARTMENT (5) SECTION BRANCH MANAGERS MANAGEMENT (34) SECTION March 1981 World Bank-22776

93 KENYA FOURTH AGRICULTURAL CREDIT PROJECT PROJECT IMPLEMENTATION SCHEDULE (YEAR 1) MARCH APRIL MAY JUNE JULY AUGUST SEPT OCT NOV DEC JANUARY FEE MARCH IBRO L.an Proess ig/finalization Negotiations GOK/AFC Ratification of Subsidiary Financing Agreenment AFC Board Approvai of AFC Policy Statement IBRD Board Presentation * AFC Appointment of Corporate Pianning Head AFC Submission of Credit Training Program Timetable _ - GOK Submission of Project Legal Opinion - Effectiveness Terms of Reference - Key Staff Corporate Planning Department Finance Division - Cash Management Section gadgeting Section - Electronic Data Processing - Accounts Deoarment Credit Training Program Staff Performance Improvement Program Staff Recruitment Corporate Planning Department Department Head Financial Analysts 12) Planning Analyst Marketing Analyst Agricuitural Economist Statistical Assistants i1_ Finance DOvision Chief Financial Analyst Budget Analysts (2) Accountants 121 Systems Analyst. Administrative Services Divislon Loan Officers Accounts Officers Branch Location Study Recraitment of Consultant Completion and Review of Recommendations Branch Constraction Program Credit Training Program Submission of Implementation Timetable Recraitment of Credit Training Specialists Preparation of Training Curricalum Recraitment of Training ORicers Training of Loan Officers Training of Accounts Officers Continuing Training Needs Report Staff Performance Improvnment Programs Recruitment of Performance Review Specialist Staff Performance Appraisal Career neveiopment Review, March World Bak

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