Document of

The World Bank FI CQPYFOR OFFICIAL USE ONLY

Report No. 3362-KE

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

STAFF APPRAISAL REPORT

April 28, 1981

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

CURRENCY EQUIVALENTS

Currency Units - Kenya Shillings (K Sh)or US$1.00 - K Sh 7.5 1/

K Sh 1.00 - US$0.133

WEIGHTS AND MEASURES

Metric British Equivalents

1 meter (m) - 3.28 feet1 hectare (ha) - 2.47 acres1 kilometer (km) 2 - 0.62 mile1 square kilometer (km ) - 0.39 square mile (sq. mi)1 kilogram (kg) - 2.2 pounds (lb)1 liter (1) - 0.26 US gallon (gal)

- 0.22 British gallon (imp. gal)1 metric ton (m ton) - 2,205 pounds (lb)

ABBREVIATIONS

ADC - Agricultural Development CorporationAFC - Agricultural Finance CorporationCBK - Co-operative Bank of Kenya Ltd.CSFC - Cereals and Sugar Finance CorporationDAO - District Agricultural OfficerFAO - Food and Agriculture OrganizationGMR - Guaranteed Minimum Return SchemeIADP - Integrated Agricultural Development ProgramJG - Job GroupKFA - Kenya Farmers AssociationKFW - Kreditanstalt fuer WiederaufbauMIS - Management Information SystemMLD - Ministry of Livestock DevelopmentMOA - Ministry of AgricultureMOCD - Ministry of Co-operative DevelopmentPDA - Provincial Director of AgricultureRELS - Revised and Extended Loan SystemUSAID - United States Agency for International Development

FISCAL YEAR

Government - July 1 to June 30AFC - April 1 to March 31

1/ Since October 1975'the Kenya Shilling has been pegged to the SDR at arate of SDR 1 = K Sh 9.66; the rate vis-a-vis the US dollar has fluctuatedsince that time, and US$1.0 = K Sh 7.5, the average rate prevailing at thetime of appraisal, has been used in evaluating this Project.

KENYA FOR OFFICIAL USE ONLY

FOURTH AGRICULTURAL CREDIT PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

I. BACKGROUND ......... 1.. . . ...... ... I

A. The Project.. 1B. The Agricultural Sector . . 1C. The Financial Sector . . 4D. Interest Rates .. 7

II. AGRICULTURAL FINANCE CORPORATION .10

A. Objectives and Roles .10B. Management and Organization .11C. Staffing and Training. 13D. Accounting and Management Reporting Systems 15E. Operating Policies and Procedures .17F. Economic Role and Performance .24

III. THE PROJECT ......................................... 29

A. General Description. 29B. Project Costs .. 30C. Financing . .30D. Detailed Features . .31E. Procurement .. 39F. Disbursements .. 40G. Accounts, Audit, and Reports . .41

IV. AGRICULTURAL PRODUCTION .41

A. Background ............... . . . 41B. Livestock and Cropping Patterns . .42C. Technical Coefficients . .44D. Agricultural Production .............. 45E. Markets and Prices ................ 46

V. PROSPECTS AND JUSTIFICATION .47

VI. AGREEMENTS REACHED AND RECOMMENDATION .50

This report is based on the findings of an appraisal mission which visitedKenya in March-April 1980, composed of Messrs. S. Capoluongo, A. Rioustde Largentaye (Bank), W.H. Edwards, T.G. Roulette, and Mrs. R. Kruthoffer(consultants). Mr. T. Tsui joined the mission part-time. A follow-up missioncomposed of Ms. S. Badgley and Mr. S. Capoluongo visited Kenya in September-October 1980.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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 (1977-1980)lB. AFC 1980 Loan Portfolio Statistics2. Proposed Incremental Staffing for Project Activities -

AFC Regular Staff3. Proposed Staffing - AFC Technical Assistance4. Project Costs Summary5. Estimated Schedule of Disbursements6. Government Cash Flow7. AFC - Actual and Projected Balance Sheets8. AFC - Actual and Projected Income Statements9. AFC - Schedule of Selected Financial Indicators

Chart

1. AFC - Organizational Plan2. Project Timetable for Start-up Activities

Maps

Map 1 Kenya - Ecological ZonesMap 2 AFC - Branch Network,

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

I. BACKGROUND

A. The Project

1.01 The proposed Fourth Agricultural Credit Project would be a continua-tion of three previous agricultural credit projects. These three projectswere 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 Corpora-tion (AFC). AFC, in addition, is the onlending vehicle for a number of BankGroup financed projects, including: Second Livestock Development (Cr. 477-KE),Group Farm Rehabilitation (Ln. 1093/Cr. 537-KE), and Narok Agricultural Devel-opment (Cr. 858-KE). The first two agricultural credit projects in Kenyahelped finance AFC's lending program to small-scale farmers. Funds from theThird Agricultural Credit Project are also financing medium-size commercialfarmers. The main objective of the Fourth Agricultural Credit Project is tostrengthen AFC, to improve its performance and enable it to expand its lendingto 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 wasjudged necessary to place particular emphasis on AFC's management, organiza-tion, and on improving its performance. To this end, an institution-buildingprogram component was added to the Project proposal; it would include theestablishment of a Corporate Planning Department in AFC, a Credit TrainingProgram, and a program for rationalizing the size and location of existingand planned field offices and facilities. At appraisal it was also decidedto exclude three components of the Project which were not directly linked tostrengthening AFC. The excluded components were the expansion of the Ministryof Agriculture extension service, the provision of funds for credit to farminput suppliers, and the establishment of a Government farming enterprise toproduce grade heifers. Other projects under preparation or implementationare 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 greattopographical, climatic and soil contrasts. The altitude varies from sealevel to over 5,000 m and climatic conditions range from very dry in marginalareas of the north to high rainfall in the forests of the southwest. Thesoils 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 littleagricultural potential. Map 1 shows Kenya's six ecological zones classifiedaccording to their potential. Kenya's population is estimated at 15.3 million

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(mid-1980) and is growing at an estimated rate of 3.9% per year, one of thehighest rates in recorded history; about 90% of the population is rural anddepends on agriculture for a livelihood. There are wide variations in popu-lation density, corresponding to traditional settlement patterns and to thepotentyal of the land. Population densities range from over 200 inhabitantsper km in Nyanza and Western Provinces, which have good agricultural poten-tial, 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 theyear 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 48.3billion (US$6.4 billion), or K Sh 2,850 (US$380) per capita.

1i03 Kenya's agricultural sector is characterized by a wide varietyin systems of production which reflects the differences between ecologicalzones and patterns of land tenure and population distribution. A broaddistinction can be drawn between the large-scale farming sector, includingGovernment farms, and the smallholder sector which employs the great majorityof the rural population. The Government defines farms of 20 ha and below assmall. There are about 1.7 million smallholdings in Kenya of an average sizeof slightly over 2 ha, covering about 3.5 million ha; most smallholdings arefarmed by their owners. About 20% of the smallholders are involved in commer-cial farming activities, another 20% are in a transitional stage betweensubsistence and commercial production, and the remaining 60% are subsistencefarmers. Maize is the staple crop, but smallholders also produce beans,coffee, sugar, tea, pyrethrum, cotton, oilseeds, meat, milk, potatoes andfruit. 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 ofthese farms are holdings in excess of 400 ha each; just over 2,000 are lessthan 400 ha. Virtually all production on the large farms is oriented towardcommercial markets and involves a wide range of crops and livestock products.Wheat, maize, tea, coffee, and sisal are the dominant crops on large farms.

1.04 It is estimated that, at Independence, less than 600,000 ha of landhad 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 about500,000 ha per annum. As a result, a land market has been established through-out most of Kenya, and individual titles provide security for financing on-farmdevelopment and the purchase of stock. By December 1979, a total of 5.7 mil-lion ha had been registered. Despite this progress, however, there are stillmany problems associated with the land adjudication and registration process,and the lack of land titles in many areas constitutes a major bottleneck tothe extension of credit programs.

1.05 During the period 1972-78, agricultural production grew at anaverage annual rate cf 2.6% in real terms, lower than the average annualgrowth rate of 4.2% in the period 1964-73, and well below the 3.9% populationgrowth rate. Agricultural output also grew more slowly than the economy (5%)and the industrial sector (8%) during 1972-78. As a result of this, the shareof agriculture in total GDP declined from about 35% in 1972 to 30% in 1978.Poor weather conditions and high prices of inputs after the 1973 oil priceincreases were the main reasons for the slow growth during 1974-76. Thistrend was reversed in 1977 when good weather and the boom in world coffee

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prices boosted agricultural growth to over 9% p.a. However, in 1978 agri-cultural growth was again low (under 2%), and in 1979, agricultural pro-duction actually declined owing largely to poor weather. Agriculturalexports, always the largest sector contributor to total exports, were K Sh5,300 million (US$706 million) or 60% of total exports of K Sh 8,830 million(US$1,177 million) in 1978. Coffee is Kenya's main export crop, but otherprincipal earners of foreign exchange include tea, sisal, pyrethrum, dairyproducts, meat, animal hides and skins, medium staple cotton, wool, nuts,animal feeds, and in some years, maize. In recent years Kenya has importedsignificant quantities of agricultural products, mainly wheat and edible oils,while it was nearly self-sufficient in maize. In 1980, substantially lowerproduction resulted in unusually high imports of maize.

1.06 With little high potential land remaining uncultivated, the growingpopulation is increasing pressure on lower potential areas and forests, makingresource conservation a critical issue. The Government has recently institutedcommunal and individual water and soil conservation measures, such as refores-tation, long-term development planning for marginal areas, and specific schemesfor further intensifying development of high potential land, especially insmall farm areas. In the 1960's and 1970's, agricultural output grew mainlybecause extensive areas of high potential land were being converted fromgrazing to arable use. As population pressure on land continues to increase,agricultural growth in the 1980's and 1990's will increasingly depend onintensified production. To this end, the Government will seek to increaseproductivity by promoting improved technology and farm management. Tointensify production, farmers will require substantial additional financingas well as improved extension services, access to inputs and efficient mar-keting. The planned expansion of agricultural credit under this Project isexpected to provide some of the needed financial resources.

1.07 Bank Group agricultural projects in Kenya have, over the past twentyyears, supported a broad range of objectives identified in the Government'sdevelopment strategy and sought to stimulate the productive potential ofboth the subsistence and commercial farming sectors. A total of twenty-twoagricultural loans and credits has been extended, of which eight are fullydisbursed and fourteen are under implementation, ongoing loans and creditstotal about US$350.0 million, and total project costs were estimated at aboutUS$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 sectorand another 8% supported the development of livestock activities in thepastoralist areas. The export crop sector received about 30% of totalagricultural lending, medium and large-scale farmers about 8%, and theforestry sector about 6%; lending for an irrigation and settlement projectand a fisheries project was about 11% and 2% respectively. Project perfor-mance has been mixed, with some notable successes and some equally problematicoperations; however, certain common institutional, financial, and policyproblems have emerged in almost all agricultural projects financed by the BankGroup. For instance, the institutional capacity of executing agenciesis a commonly cited problem, with staff numbers and training falling shortof program needs; the lack of inter-ministerial coordination has also con-strained project performance in many cases. At the policy level, the con-tinued delay in articulating a national land use policy has seriously impeded

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the achievement of project objectives in the smallholder, livestock, fores-try, and large-farm sectors. The lack of a comprehensive and long-rangepricing policy has dampened the supply of a number of food and cash crops andundermined the financial viability of marketing operations undertaken byparastatal boards. Lastly, the general financial difficulties which theGovernment has been experiencing during the past few years have affectedproject operations across the board and, in some cases, have seriously retardedproject start-up. The Government is aware of these problems, and is takingsteps to improve the management of agricultural projects, including efforts attraining and institutional reform, and evaluation of the development impactof operations. Additional emphasis, however, is required to resolve thesesectoral problems in a satisfactory manner, and the Bank is pursuing neededpolicy reforms and action programs in the context of dicussions on structuraladjustment, sector and project work.

C. The Financial Sector

Environment

1.08 The major developments in the past two years in the financialsector include a decline in external reserves, a slight increase in overallcredit growth in real terms, and a shift from private to Government bankborrowing. The latter was due to a tightening in commercial bank liquiditypositions, restrictive credit guidelines imposed on commercial banks by theCentral Bank, and the availability of attractive investment opportunities inTreasury Bills which diverted resources from the private sector. A slowdownin economic activity coincided with reduced bank lending to enterprises facingfinancial difficulties. Credit to the Government priority sectors of agricul-ture and manufacturing, however, rose substantially during 1978-79. Highliquidity in the banking system in 1977 and 1978 resulted from the boom incoffee prices. However, with the fall in coffee prices after 1978, increasesin fuel costs, and a rising demand for imported raw materials and industrialcomponents, this liquidity dried up rapidly.

1.09 In response to the deterioration of Kenya-s balance of payments andthe increase in domestic prices in the past two years, the Central Bank raisedinterest rates for advances and discounts, required commercial banks to main-tain a cash ratio of at least 3%, and limited the growth of banks lendingto the private sector to a target annual rate of 18%. In addition, theGovernment has imposed restrictions on the repatriation of dividends and onborrowings by foreign companies from local banks.

Agricultural Credit

1.10 Agricultural credit in Kenya is available from a number of insti-tutions in the formal credit market and from individuals operating in aninformal manner. As of June 1980, total institutional credit for agricul-tural purposes was about K Sh 128.8 million (US$17.2 million), or approximately40% of total credit allocation to the private sector. Little is known aboutthe informal market, but significant amounts of money seem to change hands,

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especially within the extended family system. Many family members earn aliving in urban areas and remit regular sums to help maintain their ruralholdings. The main formal sources of agricultural credit are (i) the market-ing boards; (ii) input suppliers; (iii) commercial banks; and (iv) agricul-tural credit institutions.

1.11 Marketing Boards. Smallholders growing tea, pyrethrum, coffee,and cotton may obtain seasonal or medium-term credit from the respectivemonopoly marketing organizations. Cash crop loans constitute most of thesefunds. Farmers growing only subsistence crops have little access to thistype of credit. Semi-commercial farmers can obtain medium-term advances forthe establishment of additional acreage, and short-term advances for thepurchase of fertilizers from the marketing boards.

1.12 Input Suppliers. The Kenya Farmers Association (KFA) providescredit for purchases of agricultural inputs to members in good standing.Generally, such credits must be settled within 30 days of purchase, but thisterm can be extended to 90 days for the most creditworthy members. Creditbalances earn interest at 4% per annum, and overdue items incur a 10% perannum penalty charge. The KFA works closely with AFC in its credit andmarketing activities. The Settlement Fund and Kenya Breweries Ltd. alsoprovide suppliers credit to qualified applicants.

The Institutional Structure

1.13 By regional standards, Kenya has a well developed banking system andfinancial sector consisting of the Central Bank, 16 commercial banks, fivedevelopment banks, 15 non-bank financial institutions, several other financialintermediaries and a securities exchange. The Kenya Government owns 100% ofthe largest commercial bank, three of the development banks, and the spe-cialized institutions lending to agriculture, tourism, and housing. In addi-tion, it owns shares in several commercial banks and two development banks.

1.14 The Central Bank is primarily concerned with monetary and creditpolicy. It supervises operations of commercial banks, accepts depositsfrom banks and Government, and provides inter-bank clearing facilties. TheCentral Bank influences the operations of the financial institutions throughissuance of directives on such matters as sectors to be given priority inlending, interest rates, liquidity and reserve requirements, and lending toforeign companies. While the Central Bank is recognized as the suprememonetary authority, it regulates the financial sector primarily throughmoral suasion rather than by legal enforcement.

1.15 The Commercial Banks. There are 16 commercial banks currentlyoperating in Kenya. The three largest, Kenya Commercial Bank (KCB), Barclay'sBank, and Standard Bank Ltd., dominate the banking system and account forapproximately 90% of total deposits and commercial banking credits and operatevirtually all bank branches outside Nairobi and Mombasa. Combined, theyhave over 250 bank branches, sub-branches and agencies in the country, andseveral mobile bank units which visit a number of smaller towns and villagesat regular intervals. The Government-owned KCB, the largest bank in Kenya,

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has developed significant deposit and lending business in the rural areasand presently obtains 30% of its deposits from 23 rural branches and mobileunits. Barclay's and Standard Bank lend primarily to old and establishedcompanies, largely subsidiaries of foreign companies. While commercial banksoccasionally make medium and long-term loans as well as equity investmentsthrough their subsidiaries, they are primarily engaged in short-term financingto the manufacturing, agriculture, and commerce sectors. The bulk of theirlending to agriculture is to large-scale farmers, farming companies, andagro-industries. However, they also handle an estimated 10,000 to 12,000loans to medium and small-scale farmers. Farmers generally borrow undershort-term lines of credit for specific crops. It is Government policy topromote small farm loans, but the relatively high cost of administering smallloans and the lack of dependable farm management are constraints to increasinglending to small farmers by the commercial banks. The Central Bank requirescommercial banks to set aside at least 17% of their net deposits for lendingto agriculture. At June 30, 1979, commercial bank lending to agriculture wasabout 15% of total net deposits.

1.16 The Development Banks. Four of the five development banks, theIndustrial Development Bank (IDB), the Development Finance Company of Kenya(DFCK), the Kenya Industrial Estates (KIE), and the East African DevelopmentBank (EADB), confine their operations to the industrial sector. The Industrialand Commercial Development Corporation (ICDC) covers both the industrial andcommercial sectors. The EADB was seriously affected by the break-up of theEast African Community, and its future role is being reconsidered. IDB isthe largest single source of development financing in Kenya.

1.17 The Non-Bank Financial Institutions. Although their depositresources are smaller, Kenya's fifteen non-bank financial institutions havebeen growing faster than commercial banks, mostly because they pay higherinterest rates on savings than the commercial banks. They finance homemortgages, sales of consumer goods, and trade receivables. Non-bank financialinstitutions cannot accept checking accounts, but they compete effectivelywith commercial banks in mobilizing private savings and in supplying creditto enterprises and private households.

Agricultural Credit Institutions

1.18 The Agricultural Finance Corporation (AFC) and the Cooperative Bankof Kenya Ltd. (CBK) are the principal agricultural lending institutions inKenya. They are the onlending vehicles for a number of Bank Group financedprojects. Project funds are channelled through AFC under the followingprojects: Second Livestock (Cr. 477-KE), Group Farm Rehabilitation (Ln.1093/Cr 537-KE), Agricultural Credit III (Ln. 1390-KE/ Cr. 692-KE), NarokAgricultural Development (Cr. 858-KE) and the First and Second IntegratedAgricultural Development Projects (Ln 1303-KE/Cr. 650-KE and Cr. 959-KE) (seealso para. 2.53). CBK onlends Bank Group funds under: the Smallholder CoffeeImprovement Project (Cr. 914-KE), the First and Second Integrated AgriculturalDevelopment Projects, and the Fisheries Project (Cr. 1051-KE). AFC would bethe beneficiary of the proposed loan and credit and is described in ChapterII.

1.19 The Cooperative Bank of Kenya Ltd. (CBK). CBK was established tomobilize the financial resources of cooperatives. It was registered as a Co-operative Society in 1965 and as a commercial bank in 1968. About 1,000 cooper-ative unions and societies, representing about 80% of those registered unionsand societies, are members and shareholders of CBK. Only members may keep anaccount at CBK. Under Bank-sponsored projects, CBK finances loans from cooper-ative unions and societies to smallholders. Performance of some of theseprograms has been poor in the past due to weak and inefficient cooperativemanagement. The Government is now taking measures to strengthen cooperatives.

Other Financial Institutions

1.20 There are also several public sector financial intermediaries suchas the National Social Security, the Kenya Post Office Savings Bank, and sev-eral insurance companies. The National Housing Corporation and the HousingFinance Company of Kenya grant construction mortgages, and the Kenya TourismDevelopment Corporation provides financial and technical services for tourismdevelopment projects.

The Stock Exchange

1.21 The Nairobi Stock Exchange has five members and 58 registered com-panies, of which, the securities of about half are traded regularly. Mostissues are common shares, but several preference and debenture issues are alsotraded. 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 tothe coffee boom, but levelled off at about 350 in 1980. Although active andwell developed, the Stock Exchange is still small and is not considered asignificant source of capital for agriculture.

D. Interest Rates

1.22 The tightening of liquidity and the rise of domestic prices have putupward pressure on interest rates which had been virtually unchanged for sometime. As part of the 1980-81 Budget, the Government announced increases inthe interest rates charged by various financial institutions effective July 1,1980. The following table shows the principal prevailing interest rates:

Principal Interest Rates, 1977-1980 (% p.a.)

December 31 July 11977 1978 1979 1980

Central Bank of KenyaDiscount Rate for Treasury Bills 1.52 6.80 4.60 5.74

Advances against Treasury Bills 6.50 7.50 7.50 8.00Bills and Notes under Crop

Finance Scheme:- Discounts 6.00 7.00 7.00 8.00- Advances 6.00 6.00 6.00 7.00

Other Bills and Notes:- Discounts 6.50 7.50 7.50 8.50- Advances 6.50 7.50 7.50 8.50

Kenya Commercial BanksTime Deposits:- Minimum 30 days (7 days notice) 5.125 5.125 5.125 5.125- 12 months (K Sh 100,000-250,000) 5.875 5.875 5.875 5.875Savings Deposits 5.00 5.00 5.00 6.00Loans and Advances (Maximum) a/ 10.00 10.00 10.00 11.00

Other Financial Institutions

Kenya Post Office Savings BankDeposits 5.00 5.00 5.00 6.00

Agricultural Finance Corporation:- Seasonal Loans 9.00-11.00 9.00-11.00 9.00-11.00 9.00-11.00- Term Loans 7.5-9.00 9.00-10.00 9.00-10.00 9.00-10.00Hire-Purchase Companies andIndustrial Development Bank:- Foreign Exchange Loans b/ 11.0 11.0 12.5 12.5- Local Currency Loans 12.0 12.0 13.0 13.0Merchant Banks:- Deposits (time) 5.00- 8.00 5.00- 8.00 5.00- 8.00 6.00-8.00- Loans 10.00-12.00 10.00-12.00 10.00-12.00 10.00-14.00Building Societies:- Deposits 6.00- 8.00 6.00- 8.50 6.00- 8.50 6.00-8.50- Loans 8.00-12.00 8.00-12.00 8.00-12.00 8.00-14.00Cooperative Societies:- Deposits 6.00- 8.50 6.00- 8.50 6.00- 8.50 6.00-8.50- Loans 8.00-12.00 8.00-12.00 8.00-12.00 8.00-12.00

Inflation(Average annual change in consumerprice index) 13.0 12.5 10.8 12.0

a/ Loans and Advances for less than 3 years.b/ In 1979, the commitment fee was increased from 1% to 1-1/4%.

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1.23 In May 1979, the Government conducted a review of the currentlevel and structure of interest rates, in particular those related tolending in the agricultural sector. Following this review and the recom-mendations that resulted, the Government interest rate policy was outlined inSessional Paper No. 4 of 1980 on Economic Prospects and Policies. The Paperwas approved by Cabinet in April and by Parliament in May. This documentstates that "an excessively low and inflexible interest rate structure" hasresulted in a disequilibrium in the financial system and stresses the impor-tance of an upward adjustment in the level and structure of interest rates tostimulate savings and induce a more rational allocation of resources in theeconomy. Regarding agriculture, while the Sessional Paper did not specify thedegree of upward adjustment, it established the principle of comparability ofinterest rates between sectors as an underlying condition for increasingcredit to agricultural activities. The Paper also indicated that othermeasures would be taken to strengthen existing procedures for channellingcredit to target groups within the sector.

1.24 The resulting policy measures introduced with the 1980-81 Budgetincluded: (i) an increase in the minimum interest rates payable by commercialbanks on savings deposits from 5% to 6%, and an increase in the maximumcommercial bank lending rate from 10% to 11%; (ii) a limitation of the maximumlending rates for non-bank financial institutions to 14%; (iii) a reductionof the maximum interest rate chargeable by money-lenders to 24%; and (iv) theestablishment of a joint quarterly review of interest rates by the CentralBank and Treasury.

1.25 More specifically regarding agriculture, the actions announcedin the 1980-81 Budget Message were: (i) commercial banks are required todirect credits to the agricultural sector amounting to at least 17% of theirdeposit liabilities; this quota must be fulfilled by no later than June 30,1981; (ii) non-bank financial intermediaries are required to direct creditsto the agricultural sector equal to at least 10% of their deposit liabilitieswithin the same time frame; and (iii) the Central Bank is to give favorabletreatment to banking system agricultural loan portfolios in order to assureadequate liquidity and profitability.

1.26 It is also Government policy to maintain healthy competitionbetween the commercial banks and non-bank financial intermediaries in theiragricultural lending activities, and also between private financial institu-tions and parastatal agricultural credit institutions. In this latter connec-tion, it is intended that institutions channelling Government funds, whetherderived from budgetary or foreign assistance sources, will be allowed approxi-mately the same spread between the cost of their funds and their on-lendingrates as exists between the deposit and lending rates of the commericalbanks.

1.27 The interest rate dialogue between the Government and the BankGroup in the context of the Structural Adjustment Credit (Cr. 999-KE) hascentered around two issues; the level of interest rates, which was considereditoo low, and more fundamentally, the lack of a rationale for the Government-sinterest rate policy. Progress in both areas was a condition for the releaseof the second tranche of the Structural Adjustment Credit. The release wasapproved by the Bank in September 1980.

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1.28 Regarding agricultural interest rates, and AFC in particular,the broad guiding principles have now been established, and they are satis-factory. The detailed implementation of Government's interest rate policy asit affects AFC's rates to farmers has been the subject of extensive discus-sions between Government and the Bank Group. Recent policy developments,were discussed at negotiations. The Government informed the Bank Group thatprocedures for monthly reviews of overall interest rate structure and levelsbetween the Central Bank and Treasury had been established. Assurances wereobtained that AFC would charge at least 12% p.a. on medium-term loans tofarmers and that the adequacy of AFC's rates and their consistency withoverall Government interest rate policy would be reviewed on an annual basisin the context of the Annual Plan (para. 3.08-3.09).

II. THE AGRICULTURAL FINANCE CORPORATION

A. Objectives and Role

2.01 The Agricultural Finance Corporation (AFC) was established in 1963.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 inclose cooperation with the Land and Agricultural Bank established in 1931. In1969, under the Agricultural Finance Corporation Act, AFC was reconstitutedwith wider powers and assumed the responsibilities of the Land and AgriculturalBank. The functions of the present Corporation are, as stated in the Act, "toassist in the development of agriculture and agricultural industries by makingloans to farmers, cooperative societies, incorporated group representatives,private companies, public bodies, local authorities and other persons engagingin agriculture or agricultural industries". As the primary agriculturalcredit institution in Kenya, AFC provides long, medium, and short-term creditto both small and large-scale farmers. Long-term loans are primarily for landacquisition, medium-term loans for on-farm development, and short-term loansfor seasonal crop inputs. It is Government policy, as stated in Kenya'scurrent 1979-83 Development Plan, that "the AFC will become increasinglyinvolved in small farm credit."

2.02 AFC is a statutory body owned by the Kenya Government. Accordingto 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 areappointed by the Minister of Agriculture (MOA). The Act specifies the twoPermanent Secretaries of the Ministries of Agriculture and of Finance andTreasury as permanent Board members. The Permanent Secretary of the recentlycreated Ministry of Livestock Development also holds a seat on the Board. TheAct also states that two more Board members must be appointed by reason oftheir knowledge of banking and finance. The Board, historically, has exercisedlittle initiative with respect to setting corporate objectives or developing

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overall policy, and has been more actively involved in day-to-day operationssuch 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 PresidentialCommission for Review of Statutory Boards (also known as the Ndegwa Committee)which recommended in May 1979 that the Boards of all parastatal organizationsremove themselves from involvement in line operations and focus more on pro-viding leadership in policy matters.

2.03 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 ofFinance, but in July 1980, the President appointed a Chairman from outside theCivil Service. This is a positive development since the former Chairman wasnot able to devote sufficient time to AFC business.

2.04 The provisions of the AFC Act structure the Board in such a mannerthat it serves as an auxiliary of the Ministry of Agriculture. Recognizingthe need to seek a balance between agricultural priorities and credit prin-ciples, the AFC Act specifies that at least two directors must be appointed byvirtue of their expertise in financial or banking matters. However, thestrong influence and leadership of MOA has often resulted in MOA prioritiespredominating over considerations more strictly related to AFC's longer-term financial objectives as a credit institution.

B. Management and Organization

2.05 The General Manager is the Chief Executive of the Corporation. Heis appointed by the Board with the consent of the Ministers for Agricultureand Finance, attends all Board meetings and participates in discussions, butcannot vote. The Ndegwa Committee recommended that the Chief Executivesof all parastatals become deliberative and voting Board members with thetitle of "Managing Director", but this recommendation has not yet beenimplemented. AFC-s present General Manager was appointed in June 1973,after having served as Deputy General Manager for eight years. The positionof Deputy General Manager remained vacant for several years and was thenabolished. This decision was contrary to the advice of external financ-ing agencies, including the Bank Group, which recommended that a DeputyGeneral Manager be appointed to manage AFC day-to-day operations so that theGeneral Manager could better concentrate on implementation of policy. Whilethere has been no move to reestablish this position, recent actions, includingthe appointment of an AFC Board Chairman from outside the Civil Service andthe decision to establish a Corporate Planning Department and to build up theFinance Department will greatly facilitate the job of the General Manager andprovide a more systematic framework for decision-making. These measuresrepresent a strong step toward improving AFC management capacity at the higherlevels and are satisfactory.

2.06 There are three major divisions at AFC, each headed by AssistantGeneral Managers: (a) the Technical Services Division, (b) the FinanceDivision and (c) the Administrative Services Division (for OrganizationalPlan see Chart 1). The Technical Services Division is responsible for

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all loan operations and is currently staffed with 20 professionals and 13clerical personnel. The Division Head administers and coordinates all creditactivities. The Division provides technical support to Area and BranchManagers. Its four departments are: (a) The Credit Appraisal Department,comprising a Farms Loan Section and a Ranch Loans Section; (b) The FarmManagement Department, whose objective is to provide farm management serviceto borrowers such as group farms (c) The Credit Review Department whichadvises on loan quality and the effectiveness of loan policies and procedures;and (d) The Credit Control Department which follows up on delinquent loansand advises Branches on collection strategies.

2.07 The Finance Division is responsible for corporate finance, account-ing, and data processing. The division is currently composed of 21 profes-sionals and 59 clerical personnel. Its three departments are: (a) TheFinance Department (to be renamed, the Financial Services Department) whichhandles funding, budgeting, and costing and whose main function is corporatefunds management; (b) The Accounts Department which maintains the loan accountsof the Corporation using an IBM System 3 computer; and (c) The Electronic DataProcessing Department which handles all computer processing requirementsincluding the use of the computer to keep accounts and information pertainingto farm cash-flows for the Loan Committee and branches.

2.08 The Administrative Services Division assists the General Managerin the overall administration of the Corporation. It is currently composedof 10 professionals and 25 clerical personnel. In addition, the five AreaManagers report administratively, but not on technical credit matters, to theDivision Head. The division's four departments are: (a) The Legal Department;(b) The Personnel Department; (c) The Business Services Department, responsiblefor all corporate procurement and the management and maintenance of corporateproperties; and (d) The Training Department, established in late 1979, whichis responsible for coordinating the internal and overseas training programsof AFC; it is presently staffed with one professional, but technical supportfor expansion is being provided by USAID (para 3.22).

2.09 Two departments report directly to the General Manager. TheInternal Audit Department, composed of six professionals and two clericalstaff, is responsible for corporate auditing. The Corporate Developmentand Research Department, composed of four professional and five clericalstaff, 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 isin charge of AFC's publications. Under the Project, this latter departmentwould be absorbed by the new Corporate Planning Department (para. 3.07).

2.10 The heart of AFC operations is its network of 34 branch officesgrouped into five geographical and administrative areas (Map 2). The numberof branches in each area ranges from five to eight. Total staffing of thebranch and area offices is 271, or approximately three-fifths of AFC staff.The five Area Managers report on administrative matters to the General Managerthrough the Head of the Administrative Services Division. Similarly, branchmanagers report to their Area Managers on administrative matters, but deal

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directly with the appropriate credit and finance departments and divisions onspecific technical matters. They are responsible for appraising, disbursing,supervising and collecting loans under the supervision of their respectiveArea Managers.

2.11 AFC branch offices, whose loan portfolios vary widely in size andtype, have several problem areas in common. Branch staff generally havelittle understanding of the near or long-term objectives of their specificbranch. Consequently, efforts often appear directionless or in reaction toperceived policy of the Head Office. Branch Managers have often shownreluctance to accept the responsibilities delegated to them, particularlyregarding collection and foreclosure problems. Branch managers have tendedto see their roles as that of loan officers with additional administrativeduties rather than that of office managers'. The skill level of professionalfield staff is also very uneven. However, in general, field staff appear tobe aware of their limitations, particularly in the area of credit, and seemeager to receive appropriate training.

2.12 Since AFC must have personal contact with prospective and existingclients, travel time is a major constraint in the effectiveness of branchoperations. Estimates of the amount of time loan officers spend travelingon AFC business range from 40% to 60% of their weekly time. This large amountof unproductive time, added to the rising cost of fuel, is a tremendous burdenon AFC's operating costs. The Administrative Services Division is concernedwith this and is trying to promote more effective use of time through morecareful planning of loan officers routes. A more fundamental problem concernsAFC's marketing approach and the suitability of AFC branch location. In orderto address these problems, a credit marketing specialist will be recruited forthe Corporate Planning Department and short-term consultants would be hired tostudy 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-fifthsare in the field and the rest at headquarters. One-third of the staff areprofessionals, managerial and technical; two-thirds are clerks, drivers,and messengers. About 30% of the professional staff have been with AFC formore than ten years; 30%, between five and ten; and 40%, five years or less.A low proportion of the professional staff have extensive work experienceoutside AFC, and most of those who do have outside experience are from theMinistry of Agriculture.

2.14 Virtually all loan officers, branch managers, and area managershave an educational background in agriculture. Finance Division staff gener-ally have formal training and experience in accounting. Few AFC staff haveany formal training or experience in banking and finance. This deficiencyreflects the circumstances and the environment prevailing at the time of AFC'sestablishment and during its early years of operation. It reflects AFC-sclose association with the Ministry of Agriculture, and the often over-simplified view among policy-makers throughout much of the 1960's and 70's

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about the role of credit as an agricultural input. The experience of the pastseveral years indicates that efforts to orient farmers' investments throughcredit incentives alone can often be frustrated. From early development as anappendix of the agricultural extension service, AFC has evolved into one ofKenya's major credit institutions. It now needs to convert a work forceconsisting mainly of agricultural staff into a more financially and credit-oriented staff.

2.15 AFC works within the general framework of the "Job Group System"of structuring and classifying jobs used by the Kenyan Civil Service. Underthis system jobs are classified and paid according to 15 lettered Job Groups(JG) ranging from "A", the lowest, to "P", the highest. The professionallevel begins generally at the "G" level, although employees who lack theminimum educational requirements for professional positions may be initiallyclassified in lower grades and then advance as they acquire experience onthe job. Clerical staff may advance to JGs above the G level upon achievingspecified proficiency and experience. Certain deviations from conventionaljob evaluation and wage administration practices are apparent from an inspec-tion of the JG classification of present incumbents. Several staff at Head-quarters are of equal or higher level than their superiors; some secretaries,for instance, have a JG rank above that of the senior professional they workfor.

2.16 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 in-creasingly behind those of the private sector. However, this imbalance hashad an uneven effect on the ability of AFC to attract and retain personnel.Because AFC staff have a strong agricultural orientation, their skills are notin high demand in the private sector. Competition for such skills comesmainly from the public sector, particularly the Ministries of Agriculture andLivestock Development, but within the public sector, AFC has a relativelyattractive compensation package. Appraisal review of the Terms of Service forAFC staff suggests that benefits and allowances for staff within Job Groups Athrough 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 potentialproblem still exists, however, in those areas involving accounting, financial,and data processing skills. These skills are in short supply nationally, andthe private sector enjoys a substantial wage advantage over the public sector.Recently Civil Service wages have been increased about 15%, and AFC hassubmitted a proposal for increases in the AFC salary levels by about 50%.However, even substantial salary increases will not completely alleviate AFC'sstaffing problems in certain critical skill areas, and other solutions need tobe developed to compensate employees, including employee training and develop-ment programs combined with a system of promotion incentives linked to per-formance evaluation.

2.17 At present, AFC does not have a system of performance standardsagainst which the actual performance of individuals and groups can be evaluatedand training needs appropriately identified. Job descriptions are technicallypoor, consisting of a collection of functional responsibility statements andsome educational or loosely described experience qualifications. Similarly,the performance review system is poor, touching on only generalities about

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job performance and offering no provision for feedback of the evaluation tothe employee.

2.18 Training. The recently established Training Department (para 2.08)proposed an ambitious in-house/in-country training program for 1980, with18 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 othertraining institutes, including the Kenya Institute of Administration and theKenya Institute of Management. AFC has also started an inventory of the train-ing history of all AFC staff to identify more precisely AFC training needs.

2.19 AFC also has a limited overseas training program. Since 1976, AFChas 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 threeseeking degrees in Agricultural Economics. While these training programs maybe generally useful to the participating individuals, the programs have notbeen sufficiently geared to specific institutional objectives. AFC is nowattempting to link both formal and informal training efforts to more system-atically identified needs in specific operational functions.

2.20 AFC is an organization in transition. Since Independence in 1963,its staff has increased five-fold to nearly 500. At the same time, Govern-ment's direct involvement in agriculture through a host of development projects,general crop support schemes and extension services programs has stimulatedcredit demands and also complicated AFC's job of implementing Governmentpolicies within the financial and operating constraints of a credit institu-tion. The present level of AFC's operations has clearly strained institutionalresources to their limit. AFC's operating policies need to be more clearlydefined, management needs greater depth and direction, and line staff needstrengthening in credit and financial skills.

D. Accounting and Management Information System

Accounting System

2.21 On April 1, 1980, AFC introduced a new computerized accountingsystem developed with bilateral assistance from the Federal Republic ofGermany. Improperly named Management Information System (MIS), the new systemis, in fact, a sophisticated automated information system. As of January1981, the system was working fairly smoothly although a number of problemsremain to be worked out and the programming of special reporting functionsneeds further work. Staff also need further training to supply requiredinformation in the correct format, and likewise, management has to becomefamiliar with the tool in order to extract and use the information efficientlyand strategically. Under the Project, the staffing of the Accounts Departmentand the Electronic Data Processing Department will be strengthened to completethe necessary design and programming work required (paras. 3.11-3.12).

2.22 The long and expensive conversion from AFCGs prior automated account-ing system to its new "MIS" was justified by a number of inadequacies in theold system. It was also necessary to support AFC-s efforts to decentralize

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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 agriculturalborrower, reflecting, in part, donors insistence on separate accounting forparticular projects. Updates were processed on a schematic basis, and each ofthe 17 loan schemes administered by AFC was associated with a specific bankaccount and bank statement. Reconciliation was a long and often futileprocess. Receipts were sent to Head Office from the branches by borrowername, which often led to misposting, and all disbursements were made fromHead Office. All these factors contributed to serious delays of at least twoto three months in information output and branches had no overall view oftheir collections and arrears situation. The new system will permit muchmore flexibility than RELS did. Information concerning each loan will begathered on an appropriate input form and then maintained in a data bankwithin the computer. Primary organization of records will be made on aborrower basis, rather than as previously, on a scheme basis. Under the newsystem, it will be possible, for example, to ascertain the total indebtednessof 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 LedgerReporting sub-system, designed to produce about 100 different reports based oncurrent and historical information on all accounts, has the potential tobecome an important management tool, since reports can be designed on requestby management. The design of management reports will be the joint task of theCorporate Planning Department and the Finance Division. Some of the potentialuses of the system are described below.

2.24 Arrears Reporting. Regular and accurate information concerningarrears of loan repayments is vital to efficient management. The old account-ing system, RELS, produced monthly computerized reports showing the arrearsposition of each scheme, analyzed by branch and providing a total for thescheme. This form of report was of limited use to AFC management and wasprobably more useful to external funding agencies interested in the financingof individual projects. In many instances, schemes have been designed tocoincide exactly with externally-financed projects, and in these cases, theexternal funding agencies can obtain arrears information concerning theirprojects by examining the relevant reports. However, from an internal manage-ment point of view, it is more useful to structure the management reports insuch a way that the overall position of each branch is shown separately.

2.25 AFC's principal activity is making loans to farmers, and thereforeits management's main concern should be the systems and principles to beadopted in order to ensure loan recovery. In order to control recoverieseffectively, management must have access to relevant, accurate, and timelyinformation on loans. The most fundamental information required includesdetails 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 receivablesfrom: (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 toproduce regular reports on the ageing of arrears in summary format, and theappropriate programs to retrieve this information are under preparation.

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2.26 Budgetary Control. The new MIS can also expedite the budgetingprocess. The 1980/81 budget exercise was the first to involve Area andBranch management. Previous budgets had been made on a corporate-wide basis,while the current budget has been split into Cost and Income Centers. TheIncome Centers include all field branches and two departments in Head Office,the Accounting Department, and the Business Services Department. The GeneralManager's Office, other Head Office divisions and departments, and AreaOffices are Cost Centers. Unallocated costs such as depreciation, intereston loans and capital expenditures are included in a "Corporate Overheads"Cost Center. In preparing the 1980/81 Budget Paper for AFC Board presenta-tion, emphasis was placed on the involvement of Branch and Area personnelin the budgeting exercise as well as on future efforts to relate actualto budgeted performance. An automated budget system would facilitate suchperformance appraisal, and allocate income and costs to the relevant centers.

2.27 Cash Management. Although a monthly funds flow statement is pre-pared on an historical basis, there are no projected statements of cash-flowfor future periods. This has been a serious drawback to AFC's operations overthe past few years. Loan approvals have been made on the basis of generalpolicy directives combined with historical, and often outdated, information.As a result of this practice, branch lending was often slowed down and some-times halted. AFC surplus cash rarely falls below K Sh 30 million, butoccasionally loan approvals are curtailed because of apparent cash short-ages. Better information on projected loan repayments would allow AFC toestimate its short-term cash flow and to plan disbursements and lending moreeffectively.

2.28 Credit Reports. Much of the information required to complete theabove reports would automatically be available from the computer statements.However, mechanically produced figures, such as those generated by the com-puter, tend to be less valuable than those which have been prepared orreviewed by an experienced analyst. The act of transferring data frommechanized reports to manually prepared documents involves the examinationand consideration of each figure and usually results in a document whichis more readily assimilated. The human analytical input is particularlyimportant with regard to credit, because decisions depend on qualitativejudgment and experience. For example, arrears reporting to managementshould be accompanied by a short and simple written analysis of significanttrends, 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 makeloans to farmers to enable them to engage more effectively in agriculture.The specific lending terms and conditions as to interest, repayment, securityand other lending policies to carry out this objective are to be determined bythe Board. The Act also provides that the Board may delegate its powers tothe General Manager. In practice, the Board has exercised little leadershipand independent judgment in setting corporate operating policies. It would

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appear that existing policies have been defined largely during negotiationsbetween the Government and external donors who have financed a large share ofAFC's operations. In preparing and implementing credit projects to bechannelled through AFC, the Government and the donors have tended to focusmore on project-specific objectives than on overall institutional policies.With a strong institution-building emphasis, the proposed Project will assistAFC management to move away from this schematic and disjointed approach toplanning and portfolio management. An AFC Statement of Policy, recentlyprepared in conjunction with the Ministries of Agriculture, discussed duringnegotiations and approved by the AFC Board, defines AFC's general objectivesand the policies and strategies by which it will attempt to achieve theseobjectives (para 3.08 and Annex 1).

2.30 AFC operates "large" and "small" scale lending programs. Thisdistinction, however, refers to the size of the loans rather than to thesize of the farms or the income levels of the borrowers. Therefore, while"large" scale loans are virtually all granted to medium and large-scalefarmers, "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 ofsmall versus large-scale loans. Historically the ratio of large-scale tosmall-scale loan volume has been 3:1.

2.31 A number of factors serve to determine the loan amount. One ofthese is the technical specifications relating to the purpose of the loan.The extension staff of the Ministry of Agriculture often plays an importantrole in determining the loan amount requested, because they are active inidentifying potential borrowers and assisting them to prepare loan applica-tions, particularly for investment activities which the Ministry is promoting.Other factors influencing the loan amount are conditions and restrictionsagreed upon with the donor agencies financing the scheme under which a par-ticular loan is made (paras 2.42-2.43). Although AFC requires a farm-budgetfor all of its loans, and loan officers attempt to determine each loan amounton the basis of the technical and financial features of the individual invest-ments being considered, in practice, the most important factor in determiningloan size has been the appraised value of the security pledged as collateral,in most cases, land.

2.32 While this practice of using the collateral criterion to determineloan size may be financially prudent, it results in a situation where intendedfarmer investments are often inadequately financed. The failure to mobilizerequired 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 theMinistry extension services have had adequate resources to monitor actual useof loan proceeds against the original farm plan. Lack of supervision andfollow-up, coupled with the problem of insufficient financing, has increasedthe risk of bad debts and use of loan proceeds for other than agreed purposes.No comprehensive survey has been completed, but some evidence suggests thatover one-half of AFC small scale loans are diverted to non-agriculturalpurposes. The strengthening of both AFC field staff capability and timelyinformation systems should assist AFC in monitoring loan use more carefully inthe future.

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2.33 AFC makes short, medium and long-term loans. Short-term loans havefinal maturities of up to two years and finance mainly seasonal crop produc-tion, poultry stock and feed, pig feed, and steer fattening. Medium-termloans are repayable in two to 10 years and finance primarily farm development,including dairy and beef livestock development and perennial crops. Long-termloans normally mature in 10 to 20 years, but may be extended up to 30 years;they generally finance land purchases. At appraisal, the interest ratecharged on seasonal crop loans was 11% p.a., land purchase loans, mainlylong-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 beenincreased to 12% p.a.

2.34 As loan security, AFC usually requires the title deed to a farmer'sland; exceptions are ranch loans where chattel mortgages are sometimes acceptedand machinery loans where the machinery is pledged as security. In thesmallholder credit projects financed from AFC's own resources, unsecured loansare made in some exceptional cases to known, reliable farmers with an under-taking that the farmer will surrender the title to AFC once it is issued. Ingeneral, AFC requires that the value of the pledged security exceed the sizeof the loan by 50%; however, a loan application with good repayment prospectsmay be approved if the value of the land pledged is at least equal to theamount of the loan.

2.35 Annex 3 outlines the AFC loan processing cycle from identificationto repayment, or, in case of default, to sale of collateral. Branch managersmay 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 hasauthority to approve all farm machinery loans. The General Manager has some-times approved -overdrafts' in excess of K Sh 100,000. These are advances onloans pending formal presentation to the Board.

2.36 Coordination of AFC's field operations with the agricultural exten-sion service is encouraged by two means. First, the field extension officerdraws up the farm plan and farm budget of the applicant. Second, the DistrictAgricultural Officer (DAO) chairs the district Loan Advisory Committee whichassists AFC Branch staff in screening applicants. However, the involvementof the extension staff in the identification of potential borrowers variesgreatly from one area to the next depending on the particular skills of theextension officer and the number of farmers within the officer's area ofresponsibility. Improved coordination of extension services and AFC branchoperations would be fostered under the Project by upgrading AFC branch staffand by reinforcing the concept of the branch as a "profit center."

2.37 Interest and principal amortization on AFC loans are generally duein annual payments. Tractor loans are repayable semi-annually, after eachplowing season. The first installment on loans for dairy cows is due after15 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 croploans, which should be repayable in full immediately after harvest, loanrepayments should be more frequent than as at present. In this way theBranch Manager could be warned of certain farmers likely to default, allowingprompt action to remedy the problem.

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2.38 Responsibility for collecting from borrowers rests initially withBranch Managers. In cases where Branch Managers are unsuccessful, they mayrequest that the Credit Control Department at the head office assume responsi-bility for recovering the debt; alternatively, responsibility for recoverycan be placed in the hands of the Legal Department. The Legal Departmentmay either take action through a court of law or inform the borrower directlythat the farm can be sold to recover both the loan and the cost of selling thefarm. In the latter case, the borrower has the opportunity to repay part orall of the loan in order to avoid the sale of his farm. The system is clearlydesigned to provide farmers with every possible opportunity to pay back atleast part of the amount outstanding. However, the procedure still has theweakness that it permits a delinquent farmer to repay a small portion of theamount outstanding and thereby defer immediate repayment of the rest by meansof a technicality. Moreover, it encourages the practice of debt rescheduling,with an ensuing distortion of collection rates, and an adverse effect on port-folio liquidity. AFC management is taking measures to analyse these problemsand to revise and strengthen credit policies and loan collection procedures.Technical assistance provided under the Project and through USAID's Agricul-tural Sector Services Support Loan will further reinforce AFC-s efforts toredefine and improve its lending strategy and procedures.

2.39 AFC's foreclosure procedures need to be more clearly defined. AFCmanagement maintains that a foreclosure threat or an auction notice is usuallyenough 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 wereno bidders at the auction. While details of the remaining 547 cases were notavailable from AFC's Legal Department during appraisal, management reportedthat the owners paid for the farms. In several communities, particularly inparts of western Kenya, there is strong social pressure to boycott public landauctions. The members of those communities hold the traditional belief thatonly certain families and ethnic groups have a right to own land in certainlocations 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 account-ing 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 indicatingthat there were about 90 farms which the Corporation had acquired by the yearend. The balances relating to the extra farms were included in the ordinaryloan account balances. Farm properties in possession were valued at the totalof principal and interest due at the date of foreclosure, less subsequentrecoveries. In respect of the acquired properties, no provision for a loss ofvalue on these assets was made, as AFC management believes that the securitywould realize more than the outstanding loan balances. In order to exercisecontrol over all acquired properties and also to have ready information at alltimes, the auditors recommended that the Legal Department maintain a memorandumregister in which all acquired farms are entered with details such as dateacquired, reference number, description of properties acquired, amount due atthe time of acquisition, location of the property, and date of sale. It wasalso recommended that this register should be reconciled regularly with thelist in the computer printouts on acquired properties and that each such

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acquired property be examined with regard to the marketability of the property.As a result of these recommendations, AFC has revised its accounting proceduresfor farm properties in possession; however, it is still reviewing the need toprovide for potential losses in value of these properties.

2.41 AFC management believes that the current provisions for bad debtsare adequate, especially since virtually all loans are secured by land.Management's position on this matter is consistent with their reluctance towrite off loans which could reasonably be considered uncollectable. Whenloans are written off, the implicit criteria appear to be lack of collateral,death of the borrower, and the small loan amount. These problems are presentlybeing addressed by AFC management as a result of recent auditors' reports andrecommendations. Furthermore, the refinement and increased use of the newaccounts system and management information reports will serve to clarify whererevision of AFC accounting policies is necessary. During negotiations, thesecritical accounting policies were reviewed. AFC indicated that they planto conduct a review of the adequacy of its bad debt provisions and formulate awrite-off policy based on an analysis of arrears. Assessment of progress inthese areas would be an important element in the review and approval of theAFC Annual Plans (para. 3.08).

Lending Programs

2.42 AFC's lending operations have been financed by bilateral and multi-lateral sources as well as by the Treasury and AFC's own funds. Reflectingthe fact that financing sources have been linked to specific lending programs,AFC has, in effect, been administering a variety of specialized loan schemeseach with different terms, conditions, and reporting requirements. Thisschematic approach has burdened AFC administratively and contributed to itsdifficulties in establishing general policies and appraising total financingneeds. However, with the development of increased planning capacity under theproposed Project, AFC will establish overall policy objectives, formulate along-term strategy for major lending activities and seek to secure financingon 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 creditfor purchase of large-scale farms and for development andworking capital on such farms. This program is supportedby AFC's own resources, supplemented by funds providedunder the British Land Transfer Program (BLTP). The BLTPis 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 offunds because the demand for land purchase loans far exceedsavailable funds. Total volume of lending for land purchaseshas declined significantly in recent years.

(b) The Kreditanstalt fuer Wiederaufbau (KfW) of the FederalRepublic of Germany provides funds for "the rationalizationof African-owned farms in Trans Nzoia". This involvesinjecting capital into those farms newly purchased byAfrican owners for whom shortage of capital is a constraintto good performance. Typically, finance is provided for:

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cash crop production, land clearing to develop pasture,purchase of agricultural equipment and machines, pasturefencing, fodder establishment, watering facilities, soilconservation, and pig-raising. The loan also providesfunds for the establishment of Government-owned animalbreeding farms through the Agricultural DevelopmentCorporation (ADC).

(c) The Group Farms Rehabilitation Project - (Cr. 537-KE): ThisProject began in 1975, and is partly financed by IBRD/IDA.It aims at assisting coffee estates and mixed farms undergroup ownership which are run-down and require apackage of management and technical assistance togetherwith long-term and seasonal credit. The project has encoun-tered serious difficulties related both to uncertainty aboutthe Government-s policy towards sub-division of large farms(including Group-owned farms) and financial difficultiesfacing many of the farms.

(d) Ranch Loans have been extended under livestock developmentprojects financed partially by the Bank Group (para 1.17).Volume of ranch loans has been lower than anticipated and theproject faces serious difficulties.

2.43 AFC's "small-scale" (para 2.30) lending programs include (see alsoTable 1):

(a) IDA Smallholder Credits: The first line of credit from IDA(105-KE) approved in 1967 was intended to assist smallholdersestablish or improve crop and livestock enterprises. About10,000 farmers borrowed K Sh 34 million for grade cattle andrelated 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 periodfor the production of foodcrops, oilseeds and industrial crops,fruit, dairy and poultry development, and purchase of farmmachinery and equipment. This credit also provided technicalservices, vehicles and office equipment for AFC and the Ministryof Agriculture. By December 31, 1976, some 13,290 farmers hadborrowed K Sh 82.0 million, mostly for livestock development.A further K Sh 12.1 million has been spent on machinery, trac-tors 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 ofAFC's general lending program for commercial farmers, smalland large-scale. The small-scale lending program is a continua-tion of the two previous smallholder credit projects; thelarge-scale lending program financed mainly land development(see also para 2.57).

(c) KfW Smallholder Credit. This line of credit is similar to theIDA credits, but is limited to the Kisii and Kericho districts.

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The main objective is to assist farmers to commercialize their

agricultural activities through participation in dairy cattlefarming and diversification of crop enterprises. Some 3,700farmers have borrowed about K Sh 14.3 million. The programhas been assisted by a team of German extension officers.

(d) AFC Smallholder Credit. This program is financed out ofAFC's own resources, and operates in areas where landadjudication has not yet been completed.

2.44 AFC lending for seasonal crop inputs has been carried out primarilyunder 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, thisscheme was designed to make seasonal credit available toboth large and small-scale farmers. AFC was one of therecipients of this credit, together wth CBK and KFA. TheAFC portion of the loan was K Sh 18 million for large-scale farms and K Sh 10 million for small-scale farms.Mainly clients with title deeds already pledged to AFCare eligible for financing under this scheme.

(b) Until 1979, the Guaranteed Minimum Return (GMR) schemeprovided crop insurance and seasonal credit up to a maximumof K Sh 1,250 per ha to growers of maize or wheat with aminimum of 15 acres under either crop. It was originallyintroduced in 1942 as a war-time measure to encourage large-scale cereal production, and until 1966, it applied only toholdings of over 50 acres. With the lowering of the minimumholding size eligible for participation, thousands of smallfarmers were brought into the scheme. Under GMR, the Govern-ment, through AFC, approved planting of a certain acreagewhich entitled the farmer to compensation in the case ofcrop failure. The security provided by GMR created thebasis for seasonal crop production credit in the formof advances on GMR. GMR was funded by the Government through theCereals and Sugar Finance Corporation and by the sale of AFCpromissory notes guaranteed by Cereals and Sugar. AFC acted as anagent of the Government for the disbursement and collectionof GMR. A number of problems affecting the financial viabil-ity of the scheme finally resulted in the GMR being suspendedin 1979. Some of these problems included the inability ofAFC to supervise the growing number of participants, whichled to participants cheating on the amount of acreage regis-tered; a decline of cultivation practices resulting fromattempts of farmers to finance crop cultivation entirelyon the basis of GMR advances, the inadequacy of the singleofficial produce marketing channel to absorb crop surplusesefficiently, and the difficulty of loan recovery through AFCand the official marketing channels. By the end of 1978, theGMR scheme had substantial arrears, K Sh 192,356,000, involving

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37,451 borrowers. New seasonal crop loans were introduced bythe Government in 1980 to replace GMR. The Cereals and SugarFinance Corporation provided K Sh 100 million for AFC's 1980seasonal lending; however, funds were released late in theseason, and it is too early to judge the impact of this program.

2.45 Stockist Loans. In some areas, particularly in Western Kenya,potential borrowers cannot get farm inputs because suppliers will not delivergoods against an invoice or because they do not have the required inputs.AFC management believes that this problem can be solved by selecting suitablesuppliers 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 theThird Agricultural Credit Project (para 2.57), K Sh 14.3 million was availableto finance inventories of farm input suppliers; however, none of these fundswent to stockists, due to continued restrictions in the AFC Act. The level ofdemand for stockist credit and changes in the Act to accommodate this demandwill be addressed more systematically in the context of AFC's Annual Planpreparation.

F. Economic Role and Performance

Operations

2.46 Profitability. AFC's net loan portfolio grew from K Sh 301 millionat the end of fiscal 1975 to K Sh 678 million at the end of fiscal 1980 (Table7). This represents an average annual growth rate of 18% which resulted fromnew loan disbursements of approximately K Sh 727 million and portfolio liquida-tions of approximately K Sh 370 million over the five-year period. This growthof operations has had a gradually increasing beneficial effect on AFC-s pro-fitability. 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 modestlevel of K Sh 0.3 million in 1976 to K Sh 14.0 million in 1980 (Table 8). Thegradual increase of net return on total assets to 2.5% over the same periodreflects a gradual improvement in profitability (Table 9). Two factorsexplain this trend: administrative expenses have grown at a lower rate thanthe loan portfolio and AFC's net interest margin increased from about 4% infiscal 1976 to about 6% in fiscal 1980 (Table 9).

2.47 Collections. The ultimate performance test of a financial institu-tion must be conducted on the basis of cash transactions. A conclusive cash-flow analysis, however, has not been possible for two reasons: AFC lacksdetailed historical collection data on its portfolio; and furthermore, AFCaccrues interest on virtually all loans without regard to quality. AFC'snew accounting system (para. 2.21) is expected to fill the information gapbeginning April 1st, 1980, while discussions are underway between AFC'smanagement and auditors to revise this as well as other accounting policies(para. 3.35). There is some evidence that actual interest collections in thepast five years have averaged about 80% of interest accrued. This would implythat AFC almost broke even on a cash basis, excluding loan disbursements andrepayments. This would be a minimum acceptable standard, but there is alsosome evidence to suggest a negative trend in interest collection rates, down

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from over 90% in 1975 to 70% in 1979. The need for improvement in AFC's loancollection was discussed during negotiations, and AFC indicated that they aretaking a number of measures to improve collections, including timely introduc-tion of the Credit Training Program and recruitment of additional loan andaccounts officers. It was agreed that annual targets and an outline ofprocedures for improvement of collections would be among the criteria forGovernment and Bank Group approval of AFC's Annual Plans.

Financial Condition

2.48 Liquidity. On installments of the relative amounts involved, thecollection rate of principal instalments due and payable is even more importantthan the collection rate of interest receivable. The necessary information forthis analysis is also unavailable for all accounts of loans granted prior toApril 1, 1980. Moreover, AFC's practice of rescheduling original contractualmaturities diminishes the validity of the incomplete data available on collec-tion experience. As mentioned, weaknesses are being corrected, but the newsystem and policies cannot be introduced retroactively, and therefore thebenefits to AFC management in terms of improved information and control willbe gradual as they will only apply to future transactions.

2.49 It is estimated that AFC collected approximately K Sh 336 million onits outstanding loan portfolio in the five years ended March 31, 1979. Annualcollections more than doubled from about K Sh 41 million in fiscal 1975 toabout K Sh 93 million in fiscal 1979. The liquidation ratio which expressestotal repayments as a percentage of the loan portfolio averaged about 15%during the five-year period. This relatively low liquidation ratio probablyreflects somewhat low collection rates, but the precise level cannot bedetermined. It also reflects the fact that a substantial and growing portionof AFC's portfolio is long-term loans.

2.50 Financial Resources. AFC-s annual loan disbursements increasedabout 75% from K Sh 101 million in fiscal 1975 to K Sh 175 million in fiscal1979. Total loan disbursements in the five years ended March 31, 1979, wereabout 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 andSugar Finance Corporation. The remaining half, or K Sh 313 million, camefrom portfolio amortization. The Government funds AFC through redeemable andirredeemable loans, and through interest free grants. The Treasury is AFC'sonly external source of funds. To fuel AFC-s growth, Treasury's disbursementsto AFC have exceeded interest and amortization payments from AFC every yearsince it was first organized in 1963. AFC's capitalization is adequate tosupport its existing portfolio, but substantial additional funds will berequired for continued substained growth. Table 9 shows actual changes infinancial leverage from 1975 to 1980.

Economic Impact of AFC's Operations

2.51 The economic impact of AFC's credit activities at the national levelis difficult to measure given the poor quality of data and the difficulty inmonitoring and evaluation of individual loans. Even at the farm enterpriselevel, the lack of information about economic behavior of small and largefarms, coupled with the fungibility of credit, makes it virtually impossible

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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 invest-ments and measure productive output and other benefits. The paucity of basicdata for evaluating the impact of project activities was underscored by theProject Performance Audit Report (PPAR) and the Project Impact EvaluationReport (PIER) of the First Smallholder Agricultural Credit Project (para2.55). To the extent that AFC loan performance can be improved by supervisionand follow-up, this responsibility should be jointly shared by AFC and theMinistry of Agriculture. Responsibility for monitoring and evaluation ofeconomic impact will be better defined and coordinated through the annualplanning and review process to be established under the proposed Project(paras. 3.08-3.09).

2.52 For lack of a comprehensive record of AFC's lending operations bytype of loan and farmer financed, the following breakdown of AFC's disburse-ments to date under the Third Agricultural Credit Project (para. 2.57) pro-vides a profile of the activities financed and an indication of the potentialimpact of AFC's general lending program on the sectors where most of thecredit activities have been concentrated. Livestock and related loans accountfor about K Sh 76 million or about 79% of the total disbursed during 1977-1979.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 pergrade cow of K Sh 1,500, the disbursements in this category are estimated tohave financed 18,300 cows, or about 6,100 annually. This amount represents9.5% of the estimated annual increase in herd size during this period. Croprelated 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 undervarious 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 undersmall farms in 1978.

Performance under Previous Loans

2.53 AFC is the primary agricultural credit institution in Kenya. TheBank Group has been involved with the institution since a 1960 economic reporton Kenya endorsed the establishment of an agricultural credit agency. By themid-1970-s, the Bank Group had become the primary source of new funds for AFClending. AFC is currently serving as the vehicle for Government onlending ofBank Group funds, a total of $70.75 million, for six ongoing projects (fundsprovided for onlending to farmers in parentheses):

Cr. 959-KE, 1979 - Integrated Agricultural DevelopmentProject II ($0.5 million)

Cr. 858-KE, 1978 - Narok Mixed Farming Project ($7.3 million)Cr. 692-KE/Ln. 1390-KE, 1977 - Third Agricultural Credit

Project ($23.5 million)Cr. 650-KE/Ln. 1303-KE, 1976 - Integrated Agricultural

Development Project 1 ($2.75 million)Cr. 537-KE/LN. 1093-KE, 1975 - Group Farms Rehabilitation

Project ($18.7 million)Cr. 477-KE, 1974 - Second Livestock Development Project ($18 million)

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AFC performance under these projects has been mixed, reflecting a combinationof institutional constraints and other environmental, legal and often socio-logical factors beyond AFC's direct control. The last decade has seen a five-fold increase in AFC-s lending operations and a correspondingly rapid evolutionof its role in the agricultural sector. This expansion, accompanied by agrowing government emphasis on smallholders, has tended to proceed faster thanAFC's capacity to cope effectively. The most important institutional con-straints include: limited manpower resources, particularly in financialskills, lack of adequate branch facilities to service a dispersed clientele,and restrictions in the AFC Act. The proposed Project has a strong institu-tional building component which was designed to correct these problems.

2.54 AFC's shortcomings must also be seen in the broader context ofpolicy constraints and the slow and difficult process of sociological changeand institutional adaptability. The development of a viable agriculturalcredit institution depends on the coordination of a number of factors, mostimportantly, the support of an effective agricultural extension service andthe education of traditional farmers in the efficient use of credit, theprogress of land adjudication (farmers require land title deeds to borrowfrom AFC), the timely provision of agricultural inputs, and the establishmentof progressive pricing policies and effective marketing channels. Althoughmarked progress has been made in all of these areas, the implementation ofBank-Group projects still faces substantial obstacles. The Group FarmsRehabilitation Project, which aimed to provide improved farm management forgroup-owned coffee and mixed farms, has largely failed (farm participationhas only been 24% of the appraisal estimate) due to the lack of owners-commitment to collective farming. The interest of the participating farmersis primarily in using project management to help repay outstanding AFC loans,after which the large farms can be legally subdivided. Seasonal and medium-term credit commitments under the Narok Agricultural Development Projecthave been delayed as a result of difficulties in developing effective creditprograms adapted to the special circumstances of the Masai farmers of thedistrict. The impact of the Second Integrated Agricultural DevelopmentProject (IADP II) will depend largely on institutional strengthening of theMinistry of Cooperative Development and the successful overhauling of thefinancial management of participating cooperatives unions and societies. Insum, the performance of AFC with regard to the Bank Group funded projectsdepends not only on building up the institutional and managerial capacity ofAFC, but also on the resolution of certain policy issues and the gradualelimination of other constraints mentioned.

2.55 The Project Performance Audit Report (PPAR) of the First SmallholderAgricultural Credit Project (Cr. 105-KE), which was issued in August 1975, andthe Project Impact Evaluation Report (PIER) for the same project (May 1980)elaborate on a number of the general problems mentioned above, and concludethat the project had only a marginal economic impact at the farm level andpossibly even a slightly negative financial impact on AFC. On the organiza-tional side, the reports cited staffing problems, divergence in the projectlending emphasis (from financing crop loans to dairy cow loans), and the lowlevel of subborrower supervision by AFC and the agricultural extension servicesamong the reasons for poor project performance. On the technical side, thecompounded effect of more credit funds going for purchase of grade cattle,the lack of adequate staffing of livestock extension services, and an

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unusually high rate of animal mortality led to substantially lower returnsto sub-borrowers in addition to loan collection problems and losses for AFC.The PIER for this project questioned the economic impact of project invest-ments in grade cattle, since the popularity of this activity in the projectarea would probably have occurred without the project. The report concluded,however, that a proper evaluation of the incremental productivity of dairyinvestments and the impact of the substitution effect was not possible due tothe lack of data (para 4.04).

2.56 The IDA Credit for US$6.0 million for the Second Smallholder CreditProject (Credit 344-KE) was fully disbursed in June 1976, and a PPAR wascirculated to the Executive Directors in July 1979 (Sec M79-506). The reportconcluded that AFC performance improved under the second project. Financialmanagement was improved and loan administration was simplified. Loans wereextended to more farmers than anticipated at appraisal; total loans under theproject were 13,552 and loan volume K Sh 94.8 million. The composition of loanapprovals by loan type was much closer to appraisal projections than under thefirst project. The PPAR concluded that an important issue arising from thereview of the project was the lack of integration of AFC's institutionalobjectives with objectives more specifically related to on-farm development,food production and income distribution. Specifically, it considered theproblems of monitoring of investments, management information systems andinstitution-building, and the financial impact of the project on AFC. ThePPAR concluded that the objectives relating to institutional development andthe financial condition of the credit institution merited a more concertedand systematic approach in lending to AFC.

2.57 The Third Agricultural Credit Project (Cr. 693-KE/Ln. 1390-KE) forUS$25 million was approved in 1977 to finance a three-year time slice ofAFC's lending program for smallholders, medium-scale commercial farms andretail agricultural input suppliers. Project implementation has encounteredmoderate problems related to cutbacks in budgetary allocations from Treasury,delays in implementing an improved accounting system for AFC, and the con-tinued need to upgrade the credit skills of AFC loan officers. The closingdate of the project has been extended to December 31, 1981, to accommodate thereallocation of unused credit funds for stockists and medium-scale farmers tothe smallholder loan category, where AFC commitments far exceeded originalallocations. The balance of funds for AFC onlending, about US$3.2 million asof February 1981, should be drawn down by June 1981, and fully disbursed byabout September 1981, taking into consideration normal delays for Governmentprocessing of reimbursement requests. A balance of about US$364,000 providedfor salaries, vehicles and equipment for AFC, will be used to finance start-upcosts of hiring technical assistance for the proposed Project.

2.58 The proposed Project has been explicitly designed to address concernsabout the impact of previous lending operations on AFC and continued institu-tional weaknesses of AFC. The Project specifically focuses on efforts tosupport the development of AFC as a viable financial institution for agricul-tural development by upgrading credit and accounting skills of branch officers,establishing an overall corporate planning capacity and strengthening informa-tion collection and analyses and financial control.

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III. THE PROJECT

A. General Description

3.01 The main purpose of the Project is to strengthen AFC, improve itsperformance, and enable it to serve more effectively the growing credit needsof Kenya's farmers. AFC target clients would be commercial farmers who candemonstrate their ability to increase the productivity of their farm and tomeet the related financial obligations, including farmers who have not yet hadaccess to other sources of institutional credit. The Project would consist oftechnical services to improve and expand AFC's operating capacity and a lineof credit to assist in financing AFC's lending program. Specifically theProject's components would be:

(a) Strengthening AFC's general management and administrativecapabilities 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 eachbranch; and

(v) rationalizing the location, number, and sizeof AFC's branch facilities.

(b) Improving AFC training and staff development by introducingprograms 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) theestablishment of a Corporate Planning Department (para 3.07), because theplanning process must exist before expenditures for the lending program canbe approved and (ii) the design of the Credit Training Program, because thequality of loans is expected to improve along with the credit skills ofloan officers.

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B. Project Costs

3.02 Total Project costs are estimated at about K Sh 375 million (aboutUS$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 inTable 4, and are summarized below:

--- K Sh Million ---- --- US$ Million ----- % ofProject Component Local Foreign Total Local Foreign Total Total

(a) Organization 7 11 18 1.0 1.5 2.5 5(b) Training 8 7 15 1.0 1.0 2.0 4(c) Credit Line 132 198 330 17.6 26.4 44.0 91

Total Base Cost 147 216 363 19.6 28.9 48.5 100Physical Contingencies 1 2 3 0.2 0.2 0.4Price Contingencies 4 5 9 0.5 0.7 1.2

Total Contingencies 5 7 12 0.7 0.9 1.6Total Project Cost 152 223 375 20.3 29.8 50.0 1/

3.03 Project costs, with the exception of credit funds, were estimated atprices expected to prevail in March 1981. A physical contingency of 10% wasapplied to all Project costs except credit to reflect a measure of uncertaintyabout the quantities required. Project costs related to credit were calcu-lated on the basis of financial projections in current terms (Tables 7-8), andtherefore include the estimated impact of price increases over the Projectperiod. Price contingencies for foreign exchange costs were applied at 9%for 1981, 8.5% for 1982, and 7.5% p.a. for 1983-85. Price contingencies forlocal costs were applied at the rate of 10% p.a. for 1981-82 and at 8% p.a.for 1983-85 (Table 4). These rates reflect current estimates of priceincreases in Kenya and worldwide. Taxes and duties on Project goods andservices are estimated at K Sh 22 million (US$3 million). This representsimport taxes and duties on goods and services not eligible for exemption fromcustoms, 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 89 12 26IBRD 189 25 53IDA 75 10 21Net Project Cost (excluding taxes and duties) 353 47 100

Taxes and Duties 22 3

Total Project Cost 375 50

1/ Total figures rounded.

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3.05 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% ofthe net Project cost, including 100% of foreign exchange costs (US$30.0million), and 25% of local costs (US$5.0 million out of total local costs ofUS$20.0 million). Project costs were calculated on the basis of net financialexpenditures (Tables 7 and 8).

3.06 The proceeds under the proposed Credit and Loan used for institution-building components (parts a and b, para 3.01) would be provided in the formof a grant from the Treasury to AFC. The balance of Project expenditureswould be financed by the Treasury under a line of credit to be maintained byTreasury for AFC. It is estimated that AFC would draw down a total of K Sh330 million (US$44 million) during the Project period; however, the annualamount of the commitment would be determined by the AFC Board of Directors inconsultation with the Treasury. This amount would be reflected in the AFCAnnual Plan (paras 3.08-09), which would be approved by the Bank Group. Eachfiscal year, AFC would draw down funds under the line of credit up to theamount of the commitment agreed in the Annual Plan for that year. AFC wouldpay Treasury 7% p.a. on Project funds drawn down for onlending to farmers inAFC fiscal years 1982 and 1983 and 8% on funds drawn down thereafter. AFCwould 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 byAFC, 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 outstandingadvances would be converted into a term loan with a final maturity of sixteenyears, including a grace period of three years. The interest rate on the termloan would be 8% p.a. The Bank Loan and IDA Credit would finance virtuallythe entire grant of US$6 million from the Treasury to AFC, and approximately70% of the line of credit, or US$29 million. The terms of the Bank Loan ofUS$25 million would be twenty years including five years of grace at aninterest rate of 9.6% p.a. Government ratification of the Subsidiary FinancingAgreements between Government and AFC reflecting the above terms would be acondition of Credit and Loan effectiveness.

D. Detailed Features

(a) Strengthening AFC

3.07 (i) Corporate Planning Department. This Department would be estab-lished under the Project to formulate AFC's overall long-range objectives,policies, and programs. It would be staffed with a Department Head, oneplanning analyst, two financial analysts, one credit marketing analyst, oneagricultural economist, three statistical assistants, and four clerical staff.The Department Head and the planning analyst would be recruited internationallyto complement the skills and experience of the Kenyan staff. The terms ofreference and qualifications of all professional staff of this Department werediscussed at negotiations (Annex 4), and assurances were obtained that these

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would be approved by the Bank Group, and that the Bank Group would be con-sulted on appointments of the two locally recruited financial analysts andwould approve the appointments of the Department Head and planning analyst.The appointment of the Head of Corporate Planning is a condition of Loan andCredit effectiveness. The Department Head would report to the General Managerof AFC and the Department would provide technical assistance on policy matters.The Department would have overall responsibility for designing and coordinat-ing the annual planning process and for conducting systematic performancereviews on a regular basis. In carrying out these functions, the DepartmentHead would work closely with the General Manager and the division heads indeveloping an Annual Plan and five-year projections and in all aspects of theplan and operations performance reviews. In addition, the new Departmentwould absorb the functions and staff of the existing Corporate Development andResearch Department.

3.08 The Department would have specific responsibility for developingAFC s strategic and financial objectives as a framework for preparation of theAnnual Plan and five-year projections. The Annual Plan would have particularimportance since it would serve as the principle vehicle for an ongoing reviewof AFC lending activities and institutional development. AFC's financingneeds and projected growth would be determined as part of the Annual Planreview. The Annual Plan would contain AFC's detailed budget for the followingfiscal year, including programs for lending, capital expenditures, recruiting,training, and funding. It would reflect the operating requirements of AFCbased on the inputs of both branch and headquarters management. Five-yearprojections for AFC would be revised annually and presented along with theAnnual Plan to the Board of Directors for approval. The Annual Plan wouldspecifically reflect the objectives of the institution as set out in the AFCStatement of Policy (para 2.29 and Annex 1). A draft Statement was discussedat negotiations and has recently been approved by AFC-s Board. Assuranceswere obtained that significant changes in the Statement of Policy would not bemade without prior consultation with and approval by the Bank Group.

3.09 The Annual Plan document would include, in addition to a detailedbudget for AFC, a discussion of the assumptions and strategies built into theannual operating, investment and lending programs and five-year projections,including the financial justification of typical loan activities to befinanced, and reports on performance in key areas such as loan collectionsand write-offs, foreclosures, administrative costs, staffing and performanceevaluation, overall progress of training programs, and construction ofphysical facilities. After the Annual Plan and five-year projections havebeen approved by AFC's Board, they would be submitted to the Bank Group forreview and approval. In assessing the Plan, which would include a proposedallocation of Bank Group funds for onlending, consideration would be given tothe previous year's performance and progress on management development pro-grams, in an effort to ascertain that the proposed budget, particularly withregard to lending volume, is reasonable. The content of the Annual Plan,supporting documentation to be presented, criteria for review, and timing ofpreparation, review and approval of the Plans, and coordination with theGovernment budgeting process have been agreed with the Bank Group (Schedule1). Bank Group approval of each Annual Plan would be a condition of disburse-ment for eligible expenditures.

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3.10 The planning process would require inputs from AFC managers at alllevels. In order to ensure effective participation in the process, the newCorporate Planning Department would issue a planning instruction explainingits objectives and outlining the kind of information which branch officeswill need to provide as inputs to the five-year projections and Annual Plan.These instructions would also set out a process for reviewing the performanceof income and cost centers (para 2.26), as well as serve as a guide for develop-ing plans for Systems and Human Resources as part of the Annual Plan. Oncethe objectives have been determined and the strategy and process for the firstAnnual Plan proposed, the Corporate Planning Department would have the follow-ing responsibilities: (i) establish a timetable for implementation; (ii)review all divisional strategies, action plans and budgets prior to revie% 1yGeneral Manager; (iii) review these plans with the General Manager; (iv)analyze the Budget prepared by the Finance Department (to be renamed theFinancial Services Department) for consistency with AFC's financial objectivei.and coordinate required changes; (v) coordinate the Annual Plan presenf-tlr-to the Board; (vi) conduct quarterly reviews with the General Manager OIl tlh~:Budget-and Action Plans; (vii) conduct monthly meetings with Division andDepartment heads on major divisional projects; (viii) follow up with Div1sienHeads on progress of major objectives; and (ix) forecast expected finrnc-n-uresults for the current calendar year against the Plan in order to developcontingency plans where necessary. Investments under this component wouldinclude principally technical assistance support and incremental operatingcosts for the new Department.

3.11 (ii) Finance Division. The existing Finance Department (para 2.O0),within the Finance Division, is responsible for funding and budgeting, two keyareas which require reorganization and strengthening. In order for AFC tomake better use of its funds, it needs to prepare short- and medium-term cashflow projections and monitor more closely the flow of funds at branch level.With the introduction of MIS (para 2.21), improved financial control of thebranches and Head Office will be possible by setting up a budgetary controlsystem (para 2.26). To carry out these two tasks, the renamed FinancialServices Department would be split into two sections: a Cash ManagementSection responsible for cash management, and a Budgeting Section respon7-b_Jfor the new budgetary control system. Under the Project, a Chief FinancialAnalyst would be recruited locally to head the Department and two financialanalysts would be recruited locally for the Budgeting Section. Assuranceswere obtained at negotiations that the terms of reference and qualificationsof the Chief Financial Analyst would be submitted to the Bank Group for reviewand approval, and the Bank Group would be consulted on future appointments tothe position. An internationally recruited fiscal planning specialist pro-vided by USAID would serve as the advisor to the head of the Financial ServicesDepartment.

3.12 The revised accounting system and the new management reportingsystem are expected to streamline and improve financial control of AFC. Underthe Project, two accountants will be added to the Accounts Department to dealspecifically with the preparation of management reports. The Project willalso include financing for one year of additional technical assistance for theData Processing Department to complete the adaptation of the new computersystem to AFC's reporting requirements. This additional staff should enablethe Financial Controller to manage the new accounting and information systemsmore effectively.

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3.13 (iii) Loan Officers. In order to appraise, supervise, and monitorthe projected increase in loan volume, AFC would recruit about 50 additionalloan officers during the Project period. This addition would represent anaverage annual increase of just under 10% for the Project period. The numberof loan officers to be recruited each year would be specified in the AnnualPlan (para 3.08), and would take into account turnover rates, projected numberand size of loans, and the capacity of the Credit Training Program (para3.19). The appointment of newly-recruited loan officers would be confirmedafter they have successfully completed the Credit Training Program.

3.14 (iv) Accounts Officers. About 40 new accounts officer positionswould be created under the project, one for each AFC branch. These 40 posi-tions, however, are equivalent to a net increment of only 30 positions, sinceabout 10 accountants will no longer be needed at headquarters after theintroduction of MIS and therefore would be reassigned to the branch level.Under the direct supervision of the Branch Manager, the accounts officer wouldbe responsible for general branch administration including disbursements,routine collections, branch reporting, budgeting and operations analysis, butexcluding credit appraisal and follow-up, which are the responsibility of theloan officers. Accounts officers would coordinate their work with branch loanofficers and manage branch clerical and supporting staff. The main skillsrequired of accounts officers would include: knowledge of AFC policy andadministrative procedures for loan disbursement and collection; ability todesign and prepare basic statistical and analytical reports on all aspects ofbranch operations; and familiarity with basic principles of office administra-tion. Their performance would be assessed according to the following mainindicators: (a) proper and prompt disbursement of branch loans; (b) promptinitiation of steps to ensure loan repayments and collections; and (c) quality,quantity, and promptness of branch reports. Acceptable standards would bedetermined by establishing performance norms for each branch.

3.15 Most accounts officers would initially be recruited from threegroups: junior loan officers, junior accountants, and senior clericalofficers. Candidates from the loan officer and accounts officer groups withless than three years related work experience would be considered for directappointment to this position if they have a bachelor's degree in Commerce, Eco-nomics, Management or Public Administration. Loan officers with a bachelor-sdegree in agriculture or range management would be considered for this positiononly if they have served for two or more years with AFC in a related function.Candidates from the loan officer, accounts officer, and clerical officergroups who lack formal educational qualifications would be considered forappointment by promotion, provided that they have at least five years ofexperience in accounting or office management, including at least three yearsof above average performance with AFC. Each accounts officer would be re-quired to complete the training program satisfactorily before being confirmedin the new position.

3.16 (v) Branch Facilities. In order to support the projectedexpansion of lending operations and line staff, AFC needs to expand itsbranch facilities and field support services. Before appraisal, AFC was

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planning to open six additional branch offices in districts which have goodagricultural potential and which are currently served by branches locatedas far away as 200 km. Map 2 shows the location of existing and proposedbranches. In addition, AFC has been considering the use of mobile branchunits and experimenting with mini-branches to serve distant farm areas, wherethe potential clientele does not warrant the establishment of permanentfacilities.

3.17 Estimates of loan officer travel time range from 40% to 60% of totaltime available (para 2.12). This relatively high proportion of unproductivetime has important marketing and financial implications, because it limits thenumber of clients each loan officer can serve and results in high operatingcosts per loan. Productive time and unit operating costs are directly linkedto the location of a branch officer vis-a-vis the system of clients.

3.18 AFC's new Corporate Planning Department would include in the five-year projections (para 3.08) provisions for branch investments and divestitures,reflecting agreed policy objectives. However, the technical criteria foropening new offices, and closing, relocating, or expanding existing ones,would first be developed with the assistance of consultants employed under theProject. The terms of reference for this branch location study would includean analysis of current travel patterns and time utilizatiorn of loan officers,a marketing survey of credit demand in areas for potential AFC expansion, anda cost analysis of alternative means of servicing these areas. At negotia-tions, assurances were obtained that the Bank Group would approve the terms ofreference, requisite qualifications, proposed contracts, and the appointmentsof the consultants. Disbursement for specific investments would be approvedby the Bank Group under AFC Annual Plans (para. 3.08), taking into account therecommendations of the branch location study. Project investment cost esti-mates include provision for construction of new branch offices and otherfacilities and procurement of equipment (sub-branches, mobile units, etc.).

(b) Training and Staff Development

3.19 (i) Credit Training Program. The Credit Training Programfinanced under the Project would be designed to provide the maximum scope forcredit analysis and problem-solving by the participants using case studiesfrom actual projects financed by AFC. Field visits by the participants toborrowers would be made with the objective of collecting the basic informationneeded for proper evaluation. Similarly, participants would make independentsupervision visits to AFC clients to report on implementation progress, prob-lems and possible solutions. This program would give participants a betterunderstanding of AFC as a credit institution, clients credit needs, proceduresto be followed in making and collecting loans, the rights and obligations oflenders and borrowers, and other points of general branch operations.

3.20 Courses would initially be six weeks long, but would be graduallyexpanded 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 inthe program. Priority participants would include all loan officers and branchand area managers, but participation of other qualified staff would beencouraged depending on space availability and the individual's developmentpotential.

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3.21 Each course would consist of three parts: the first two partswould deal with financial and operational matters and would be attendedby accounting officers as well as loan officers; the third part would dealwith credit analysis and evaluation, and only loan officers would be requiredto attend. Performance of each participant in the Credit Training Programwould be evaluated as an indicator of career development potential. It isvital for the success of this program that AFC integrate the training programas an ongoing operation. Over time, Area and Branch Managers and senior loanofficers would take part in developing course materials, as well as in actualtraining.

3.22 The Credit Training Program would be carried out by the recentlyestablished Training Department in the Administrative Services Division.The Training Department, currently staffed with only one person, will beexpanded to include a Department Head, a Training Advisor, a Loan AppraisalInstructor and clerical support staff. The Training Advisor and Loan AppraisalInstructor have been provided for two years each under USAID's AgriculturalSector Services Support Loan, and short-term consultants would be hired underthe Project to assist in developing the curriculum and teaching materialsfor the credit course. The scope and staffing plan for the Credit TrainingProgram were discussed at negotiations, and it was agreed that a detailedoutline and staffing proposal for the training program would be prepared withthe assistance of the USAID financed personnel, who are expected to take uptheir positions at AFC in April 1981. Terms of reference, qualifications,proposed contracts and appointments of credit training specialists would beapproved by the Bank Group. Terms of reference for credit training specialistswould include preparation of curricula, teaching and evaluation of courseeffectiveness and follow-up requirements. At negotiations, assurances wereobtained that AFC would submit, for Bank Group review and comment, a timetablefor the employment by AFC of credit training specialists and an implementationschedule for the Credit Training Program as a condition of Loan and Crediteffectiveness.

3.23 (ii) Staff Performance Improvement Program. At present, AFC staffperformance review is not conducted systematically. Staff are seldom givenclear directives or feedback on their work (para. 2.17). In order to dealeffectively with the identified weaknesses, a performance improvement programwould be developed and implemented. It would consist of two phases: JobAnalysis and Evaluation, and Staff Performance Review and Appraisal. The JobAnalysis and Evaluation phase would establish standards of performance for AFCstaff and determine training needs on a systematic and continuing basis. Theprogram would include the preparation of a personnel policy statement, train-ing for supervisors, and the development of performance appraisal forms andprocedures. A Job Analysis and Evaluation specialist would be recruited on ashort-term basis to develop this program and the Administrative ServicesDivision would be responsibile for its implementation. The Corporate PlanningDepartment would monitor the program. A timetable for implementation of theseprograms was discussed during negotiations, and progress under the programwould be specifically reviewed as part of the AFC Annual Plan review (para3.08).

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3.24 The Staff Performance Review and Appraisal would be the secondphase of the Performance Improvement Program. A Performance Review andAppraisal System would be developed to ensure a periodic review of the qualityand quantity of each employee's work by his supervisor, and to provide arecord of each employee's progress which will serve as a basis for recom-mendations on salary increases, promotions, disciplinary actions, careerdevelopment and replacement planning. A specialist would be employed as aconsultant to advise management on appropriate policies, set up the reviewsystem, and train supervisory and subordinate staff of the Personnel Departmentwho will be responsible for implementing the review. Later, once the programis in place, the consultant would conduct a follow-up study to evaluate itsimpact and to identify areas for further refinement.

3.25 (iii) Career Development Program. This program would aim toestablish an orderly system of succession planning for key positions in AFC.It would ensure that all such positions are periodically reviewed to determinethat they are adequately staffed, and that potential replacements are eitherfully developed or being developed. Specific plans would be formulated, stepsidentified, and actions implemented to develop and prepare employees forkey management positions. As a result of this program, AFC would be betterable to determine areas of management weakness and take appropriate measuresto strengthen these, through either specific training efforts or externalrecruitment.

3.26 A Human Resources Development specialist would be recruited on ashort-term basis to assist AFC senior management in identifying key managerial,supervisory and professional positions within the organization. The specialistwould identify the critical skills, knowledge, and performance of each keyposition, using available job analysis data (para 3.23), supplemented byinterviews as appropriate. The consultant would then design AFC's replacementplanning and career development system, including the preparation of thepolicies, procedures and required forms. In addition, the consultant woulddesign and conduct a series of workshops to coach senior and middle managersin the use of the career development planning system. Finally, the consultantwould assist the Training Department in preparing a series of specializedcourses addressing staff development needs.

3.27 (iv) Continuing Training Program. Following on the recommenda-tions of the Career Development and Performance Improvement Programs, the mainobjectives of a Continuing Training Program would be: (a) to ensure thatall AFC staff receive some form of training, re-training, or refresher train-ing at least once every four years; (b) to establish a corporate valuesystem that considers staff training and development a regular role of man-agement and supervision; (c) to develop from the data generated by the Per-formance Improvement Program an ongoing system for reviewing and identify-ing 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 developmentneeds of AFC staff.

3.28 The Training Department would carry out this program and be ade-quately staffed with additional technical assistance from USAID (para 3.22).It is estimated that during the Project period, about 125 staff would be

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trained each year. Of these, about 80 would be trained in-house, about 25 inother institutions in Kenya, and about 20 overseas. Domestic courses wouldlast about three weeks; overseas, four months. Training activities under thisProject would be coordinated with related activities under other ongoingGovernment programs supported by bilateral donors (e.g., overseas scholarshipsoffered by the US Government). Investments under the Project are intended tosupplement ongoing programs and have been estimated to cover, inter alia,teaching materials and equipment, tuition fees, transportation and subsistencecosts. Annual disbursements for this component would be proposed by AFC andagreed 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 financingAFC's overall lending program during the Project period. This would includeloans to large, medium and small-scale farmers under existing facilities (e.g.development loans, mechanization loans, ranch loans, etc.), as well as newtypes of loans, but excluding seasonal crop loans financed directly by theGovernment and administered by AFC. This approach represents a departure frompast Bank Group and other donor agency practice in Kenya of tying credit fundsto particular development schemes or categories of borrowers (paras 2.42-2.43and 2.55-57). Under these previous projects, the specific types of loans tobe financed and the terms and conditions applicable to each were specified inproject legal agreements. The rationale for the approach adopted under theproposed Project is to assist AFC management in unifying its lending programunder the framework of an overall corporate strategy. The structure of theannual lending program by types of loans and borrowers would be determinedthrough a systematic planning and review process involving AFC management atall levels, in cooperation with the Ministries of Agriculture and LivestockDevelopment, and consistent with AFC's Policy Statement (para 3.08). AFCwould charge interest rates on medium- and long-term loans of at least 12%p.a. Interest rates would be reviewed periodically in accordance with Govern-ment policy guidelines and adjusted in accordance with the structure ofoverall interest rates (para 1.28). Decisions regarding AFC-s lending strategywould be reflected in the Annual Plan and five-year projections. Annual Planswould include information on any changes in procedures for appraising andreviewing loans and for ensuring the financial viability of proposed types ofloans and the economic viability of AFC's overall lending program (Schedule 1).

3.30 The approximate amount of credit funds that AFC's operational andlending programs will require over the Project period has been estimated byprojecting AFC financial statements, as shown in Tables 7 and 8. Specificallocations required to support the lending program would be proposed andagreed upon as part of each Annual Plan review, and funds would be providedunder a line of credit with Treasury (para 3.06). Annual disbursements,determined on the basis of AFC Annual Plans, would be subject to Bank Groupapproval (paras. 3.09 and 3.33). The proposed line of credit would financeapproximately 22,000 loans with an average size of 15,000 over the Project

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period. As indicated in the financial projections (para 5.05), it is esti-mated that funds for onlending under the line of credit would be drawndownbeginning in AFC fiscal year 1982/83 (Project Year 2), at which time it isconsidered that AFC will have completed its first Annual Plan exercise. If asatisfactory Annual Plan is submitted and approved earlier than expected, somecredit funds could be drawndown during AFC FY1981/82. The proposed line ofcredit would allow AFC's total portfolio (Table 7) to grow at an annual rateof about 13% in current terms, beginning in AFC fiscal year 1982/83. Whilethis rate appears modest in comparison with the historical average of about18% p.a. from 1975 to 1980, the projected expansion under the Project isconsidered conservative and reasonable, viewed in the context of a number offactors. First, the current AFC loan portfolio is inflated with a number ofirrecoverable loans and interest which continues to accrue on dubious loans.The value of the current portfolio also includes loans currently financedunder special project arrangements, for which future credit demand is uncertain(including the Bank Group financed Group Farms and Livestock Projects, paras.2.42-2.43). Second, rapid growth of the portfolio in recent years has clearlystrained AFC's operational effectiveness in areas such as loan appraisal, loansupervision and collection, accounting and internal control systems. Third,the uneven quality of loan data available and the lack of a systematic cashflow analysis made more detailed projections of loan disbursements and reflowsimpossible, and clarification is essential before AFC undertakes new loanexpansion. Fourth, the more efficient turnover of AFC's existing portfoliothrough loan collection improvement could provide scope for additional loanvolume. Fifth, AFC needs to undertake a more systematic review of demand forcredit, by loan type and branch, which would follow from the planning process,credit training and branch strengthening programs under the Project. The esti-mated level of portfolio growth under the Project, while indicative, is con-sistent with the appraisal's judgment of the rate at which AFC can strengthenits branch services and overall institutional capacity to handle a modest ex-pansion of credit business more efficiently and effectively than in the past.In this connection, assurances were obtained at negotiations that all newlong-term borrowings by AFC would be approved by the Bank Group. The ongoingreview of AFC-s accounting policies, the introduction of the MIS, and theAnnual Plan preparation and review process are expected to clarify a number ofuncertainties about the current portfolio and to enable AFC and the Bank Groupto 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 theProject would not be likely to attract international bidding competition,because of their nature and the low value of individual orders. Consultantsand technical assistance personnel would be contracted in accordance with BankGroup guidelines. Technical assistance personnel to be employed are listed inTable 3. Assurances were obtained that the terms of reference and requisitequalifications and contractual arrangements would be submitted to the BankGroup for approval, and the Bank Group would approve appointments to allpositions. Average cost per staff month would be between US$6,000 and US$9,000,

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including all costs (Table 3). Orders for office equipment, vehicles, furni-ture, and training materials would be bulked to the extent possible andprocured following AFC procurement procedures, which are satisfactory to theBank Group. Civil works contracts for branch buildings would be procured in amanner to be decided, in consultation with the Bank Group, after the branchlocation study is completed (para 3.18). Purchases for agricultural develop-ments by sub-borrowers under AFC's lending program would be through normalcommercial channels; given the diverse representation of commercial interestsand competition among suppliers, this procedure is satisfactory.

F. Disbursements

3.32 With the exception of funds required for start-up costs estimatedto be incurred prior to the approval of the first Annual Plan, about US$745thousand, Project funds would be retained in an "uncommitted" Loan and Creditaccount and allocated to appropriate disbursement categories following BankGroup approval of each Annual Plan. An indicative allocation of funds isprovided in the following schedule:

-----US$ Million----

(a) 100% of expenditures for technicalassistance 1.0

(b) 90% of civil works (AFC branchoffice construction) 1.0

(c) 100% of foreign or 80% of local expendi-tures for office equipment, vehicles,furniture and training materials 1.0

(d) 100% of local expenditures for incrementalstaff salaries and related operating expendi- 3.0tures of AFC under the Project, as definedunder 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 35.0

3.33 Disbursement against (a), (b) and (c) would be fully documented.Disbursements against (d) and (e) would be made against statements of expendi-ture certified by the General Manager of AFC and retained by AFC for inspec-tion by Bank Group supervision missions. During negotiations, satisfactoryprocedures for auditing these statements of expenditure were agreed.

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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 auditorsfrom Coopers & Lybrand to Githongo & Company. Both firms are acceptable tothe Bank Group. The 1979 audit was qualified mainly because AFC incomeincluded an amount of K Sh 6.8 million of commission receivable for operatingthe Guaranteed Minimum Return Scheme on behalf of the Kenya Government. Thecommission reflects the unaudited accounts of GMR advances. Similarly, in the1980 accounts, the auditors noted an AFC commission receivable of K Sh 8.3million for AFC operation of the Government's Seasonal Credit Scheme.

3.35 As part of the 1979 audit, the auditors reviewed and assessedAFC's internal control systems and made recommendations for their improvementwhich were discussed and agreed with management. In September 1979, PriceWaterhouse & Co. reviewed AFC's existing and planned accounting systemsand developed a financial reporting system appropriate for AFC management'suse and for standardized reporting requirements in connection with Bankfunded projects. The new MIS accounting system is expected to facilitate therecommended improvements in the internal control systems and the proposedfinancial reporting system. The integration of the new MIS accounting systemis almost complete, giving AFC management the capacity to analyze the Corpora-tion's financial position on any given day. Management is in the process ofdeciding which additional reports should be programmed for regular retrievalof financial information. AFC has largely accepted the suggestions of thePrice Waterhouse Study on management information reporting, and under theProject, AFC's planning, programming and monitoring capacity will be strength-ened through the development and use of the information generated through thenew accounting and reporting system. Early in Project start-up, the BankGroup will assist AFC to standardize reporting requirements and formats underall Bank Group financed projects implemented by AFC.

3.36 At negotiations, assurances were obtained that AFC accounts wouldcontinue to be audited by independent auditors acceptable to the Bank Groupand that the accounts and the auditors' report would be submitted to the BankGroup within six months of the end of AFC's fiscal year. Assurances were alsoobtained that the auditors' report would include the 'Long Form Audit' andagreed schedules of information. AFC would prepare and submit to the BankGroup a Project Completion Report.

IV. AGRICULTURAL PRODUCTION

A. Background

4.01 The 1979-1983 Development Plan states that Government activitiesin the agricultural sector will increasingly aim at intensifying production.Expenditures for livestock development will focus on increasing grass andfodder crop production in the medium and high potential areas. Investmentsfor crop development and farm management services will be directed towardsland use intensification. Growth in output and income projected in theDevelopment Plan are based mainly on increases in yields and livestock numbers.

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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 farmsystems at the expense of extensive ones is projected.

4.02 To achieve the targeted production increases, the Government isimplementing a wide range of development programs in agriculture, many ofwhich include the provision of credit to farmers. These programs fall intotwo broad categories. Some aim to promote increased production of individualcash 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 parti-cipants in the cash economy. Although AFC is one of the agencies implementingIADP, its role has been limited since it finances only about 5% of participat-ing farmers. The main reason for this is that the semi-subsistence farmersIADP is attempting to reach are relatively poor credit risks; they generallylack a registered title to their land, and their farms are located in remoteareas, usually far from an AFC branch. While it is the Government s long-termobjective to alleviate these constraints, its mediumrterm strategy is for AFCto concentrate its lending on commercial farmers who have title deeds to theland they farm and who have access to improved technology and the ability toapply it. However, within this category of commercial farmers, AFC seeks toassist those who do not have access to other forms of institutional credit.Economic and social considerations will guide the AFC Board in allocatingdifferent amounts of lending by type and size of farms, geographic area, andproductive activities to be financed according to Annual Plans and five-yearprojections (para 3.08). The following paragraphs contain an outline ofthe likely demand for investment credit of AFC-s potential clients. Severallivestock crop budgets have been prepared to show various possible farminvestment patterns and the technical coefficients associated with them.It should be understood, however, that during Project implementation, indi-vidual loan applications would be processed according to established creditcriteria, provided that they are consistent with the AFC lending program asapproved in the Annual Plan, and technically feasible in the opinion of theAFC 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 activitiesto be financed is a prerequisite of each AFC loan. The farm plan must demon-strate that the borrower would benefit financially from the loan after fullrepayment. Planned livestock and crop activities must also include Governmentrequired soil and water conservation measures.

Livestock

4.04 Kenya's ecological zones II and III (para. 1.02 and Map 1) areideally suited for dairy production. Milk is produced mainly in smallholderareas and is a major source of animal protein in the diet of the rural popula-tion. In order to increase milk yields, local Zebu cows must be replaced withhigh yielding breeds. The investment required for the purchase of a gradecow is substantial, and very few smallholders can afford it without creditassistance. This partly explains the high demand for dairy loans under theThird Agricultural Credit Project (para 2.52). Associated investments includewater, pasture and fodder crop development, chaffcutters, fencing and building

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materials. It has been noted that the PIER of the First Smallholder Agri-cultural Credit Project (Cr. 105-KE) concluded that the impact of dairy loanson overall productivity was probably marginal (para 2.55). Although thisconclusion was qualified by the fact of poor data, it is suggested that muchof the investment facilitated by project credit would have occurred anyway;thus, the major production impact would have had to result from changes inhusbandry practices and management of grade cattle transferred from the largefarm subsector to the small farm subsector. However, given the growing demandfor dairy products and the rising price of grade cattle and the continuedimprovement of dairy extension and other farm services throughout the 1970s,it is likely that the provision of additional credit facilities for dairyinvestments will have a larger impact on production today than it did in theearly 1960s. At that time, small farmer dairy investments were still rela-tively few and credit demand did not spur a marked increase in national herdsize and when the adoption of improved husbandry practices was still low.The provision of credit under the proposed Project is expected to enablesmall farmers who would not otherwise have adequate financial resources topurchase a grade cow and to encourage farmers to make the necessary farmimprovements to increase dairy productivity.

4.05 A sufficient supply of water is necessary to achieve high milkyields. In ecological zones II and III (Map 1), a minimum of 100 liters ofwater per cow per day is required for body maintenance, a daily milk yield ofabout 15 liters and for washing udders and utensils. WIater is in short supplyon many farms, and rain water is still not effectively conserved. Investmentsin guttering and galvanized water tanks would enable farmers to collect rainwater. In addition, by installing guttering, farmers would prevent soilerosion now caused by rainwater pouring off their roofs. More intensive useof the land can also be achieved by developing forage crops for zero grazing.Napier grass (Pennisetum purpureum) and Bana (a Sorghum cross) have done wellin Kenya and can yield up to 8,500 kg of digestible nutrients per ha peryear. These grasses can also be planted along terraces or bunds to preventsoil erosion. Surplus grasses can also be used for mulching coffee and othercrops. Fibrous materials such as sugar cane leaves, maize stover, and bananastems can be processed by cattle more efficiently if chopped before feeding.Small, cheap, hand operated chaffcutters are just being introduced in Kenyaand have been popular for some time in countries such as India and Pakistanwhere zero grazing is common.

4.06 Opportunities for intensive poultry and pig keeping are relativelylimited because these enterprises are financially risky and require sophis-ticated management. However, the number of farmers financially and technicallycapable of undertaking such operations is gradually increasing, and it islikely that AFC loans to finance such operations will also increase. Shortageof water is a major cause of death of layers and broilers, and AFC is likelyto receive loan applications for water development investments from farmersalready engaging in poultry activities.

Crops

4.07 Although most of the high and medium potential land in Kenya hasbeen developed, there is still much scope for improving the productivity ofexisting cash crops, such as coffee and tea, and commercial foodcrops and fordeveloping new crops. Yield increases can be achieved by better pruning,

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application of fertilizer, mulching, and, as in the case of coffee, more selec-tive picking in order to improve the grade. Pyrethrum and potatoes are beingpromoted by the extension service in the high altitude areas.

4.08 The area planted under maize is not expected to increase signifi-cantly, but there is still room to improve yields by adopting better culturalpractices and by applying fertilizer. The extension staff are encouragingfarmers to interplant maize with beans and other pulses in order to increaseland productivity. Some of the beans and other pulses could be used tosupplement livestock feed as a substitute for expensive concentrates. Everyyear, post-harvest losses account for a significant portion of the total crop(estimates range from 15 to 30% of total crop production). Existing commer-cial drying and storage facilities (mainly National Cereals and Produce Boardstores) cannot accommodate more than about one quarter of the total maize cropin a bumper year. The remaining portion, most of which is normally retainedon the farm for domestic consumption, is stored under inadequate conditions,accounting for a large percentage of post-harvest losses. As a result ofincreasing Government efforts to prevent food losses, inexpensive, vermin-proof on-farm storage facilities are being developed and promoted by theagricultural extension services. The investments required for these activi-ties would consist of relatively low cost farm inputs and farmers may be ableto purchase them out of their pockets. AFC, however, would encourage techni-cally and financially strong farmers to borrow for such farm improvements inorder to increase their liquidity in anticipation of future harvest and sale.

4.09 The yield of horticultural crops can be improved substantiallythrough irrigation. Demand for irrigation equipment is high, but diesel-fuelled pumps are expensive to operate and maintain. Scarcity of adequateservice facilities, limited availability of spare parts, and pilferage mayreduce their utilization. Financing for this equipment should be limitedto experienced and sophisticated farmers who have access to proper servicefacilities. Several models of sun, wind, and gravity-powered pumps arebeing introduced locally. AFC would promote financing of some of these pumpson a trial basis provided that the models are technically proven and thatthe borrowers are willing and able to bear the financial risk.

4.10 In the intensely cultivated areas, shortage of agricultural machineryoften constrains timely land preparation for seasonal crops. Timely landpreparation and planting is an important factor of high productivity, andcontractual plowing is a growing business. The current utilization rateis about 150 ha per tractor per year. Tractors are also used to transportproduce and farm inputs and during the off-season, they are often employedto clear land. Demand for tractors is high in many areas, providing AFC withopportunities for lending to farmer-contractors for the purchase of tractorsand to farmers to finance land preparation expenditures.

C. Technical Coefficients

4.11 The following table shows the estimated productivity increasesassociated with the carrying out of possible investments described in thepreceding section:

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Without Investment With Investment %- -- Yield Assumptions ----- …- Increase

Livestock

Milk (Kg per cow per year) 600 2,000-2,500 275Beef calves 1/ 60-80 120-160 100Heifer calves 1/ 50-70 100-140 100Pork 2/ 12-14 18-22 54Eggs 3/ 100-120 180-200 73

Crops (Kg per ha)

Coffee 600 1,000 67Tea 1,500 1,800 20Pyrethrum 250 600 140Potatoes 10,000 15,000 50Maize 1,800 2,400 33Pulses 400 700 75

1/ Liveweight (kg)2/ Piglets per sow per year3/ Eggs per hen per year

These estimates provide an indication of the productivity increases whichcould be achieved by progressive farmers with present know-how if they had thenecessary financing. The main objective of this Project is to increase thesefarmers access to credit for these purposes. Strengthening agriculturalextension services, introducing new technology, and improving the applicationof existing know-how are correspondingly important development objectives.Several Government programs currently underway, many of them with Bank Groupsupport, are focusing on these areas. The AFC planning process, to bestrengthened under this Project, will assist Government in coordinating itsefforts directed towards agricultural production and credit.

D. Production

4.12 The proposed Project is expected to have a substantial favorableimpact on agricultural production. This statement rests on the criticalassumption that the investment opportunities outlined in the preceding sectionsfar 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. Thesetargets would be a function of the specific sub-projects financed, which inturn would be determined through the AFC planning process, taking into accountGovernment objectives and market forces, including farmers preferences.

4.13 The following table shows a range of total production increaseswhich could result from investments financed by AFC under this Project.

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Incremental Production Current National Increase Percentagewith Project Production of National Production

…-------…tons/year---------------- -…--------%

High Low High Low

Milk 25,000 15,000 1,286,000 1.9 1.2Beef 1,250 750 137,000 0.9 0.6Pork 1,000 500 3,400 29.4 14.7Eggs 1,000 400 23,000 4.4 1.7Coffee 7,000 5,000 95,000 7.4 5.3Tea 1,000 500 87,000 1.2 0.6Pyrethrum 8,000 5,000 14,000 57.1 35.7Potatoes 50,000 30,000 444,000 11.3 6.8Maize 12,000 8,000 2,160,000 0.6 0.4Pulses 1,500 1,000 322,000 0.5 0.3

These estimates are consistent with the technical coefficients presented inthe preceeding section of this Chapter, and AFC financial projections shownin Tables 7-9. In addition, the estimates reflect livestock and croppingpatterns observed by the mission in farm areas currently served by AFC,estimates of types of credit demand, and they assume about 22,000 loans tofarmers averaging K Sh 15,000 each.

E. Markets and Prices

Livestock Products

4.14 Incremental meat and milk production would be sold primarily onthe local market, as is a large proportion of present production. Farmgateprices for both meat and milk on local markets are higher than those offeredby Kenya Cooperative Creameries (KCC) and by the Kenya Meat Commission (KMC),whose producer prices are regulated by the Government. The farmgate price formilk sold on the local market is often as high as K Sh 2.40/kg, whereas thefarmgate price for milk delivered to KCC is only K Sh 1.85/kg, recentlyincreased in October 1980 from K Sh 1.16/kg. Private butchers pay up toK 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 milkrequirements of about 145 million liters for 1980/81), is expected to continuein the medium-term future, forcing local prices upward and inducing gradual,but substantial official price increases over the next five-year period. How-ever, including greater supplies of these products will not only depend onincreasing producer price incentives. Grade dairy heifers are in shortsupply, and more emphasis needs to be placed on upgrading traditional zebustock through intensified artificial inscmination. In addition, marketingchannels for products need to be expanded, and the marketing communicationbetween would-be suppliers of heifers from ranging areas and would-be buyersfrom dairy areas needs to be improved.

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Crops

4.15 Maize, wheat, beans and oil seed crops would be marketed eitheron the local market or through the National Cereals and Produce Board (NCPB).The NCPB exercises an official monopoly over the purchase and sale of grainsand oil seed crops not traded on local markets in the producer area. Throughthe control of interdistrict crop movements and the regulation of producer andretail prices, the NCPB attempts to guarantee minimum producer prices whileprotecting retail clients and ensuring adequate national distribution ofstaple fooderops. The official producer prices for maize, the most importantfoodcrop, is K Sh 90 per 90 kilo bag (as of July 1980); however, recentshortages both in Kenya and neighboring countries have driven local marketprices upwards to as much as double in maize deficit areas.

4.16 As recognized by Government in the current Development Plan and ina Food Policy Paper under preparation, producer incentives have not alwaysbeen adequate and will require attention in order to alleviate current short-ages and avoid a future food crisis. Elements of the larger problem whichneed to be addressed include: establishing producer prices which properlyreflect the cost of farmer inputs as well as import parity price levels,developing extension capacity to promote increased land productivity, andensuring an efficient marketing system, which may mean increased utilizationof private sector channels as a complement to official price supports, storageand marketing services. These issues are currently under review between theGovernment and the Bank in the context of the overall agricultural sectordialogue 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 forcommercial farmers, it is charged with a major role in the development ofrural communities. So far AFC has been acting as a conduit for external aidaimed at specific agricultural development activities. In preparing andimplementing projects with AFC, the Government and the donors have tended tofocus more on production than on institutional matters. Moreover, majordecisions affecting AFC's operations have been made largely outside thisinstitution, as AFC has functioned largely as an institutional extension ofthe Ministry of Agriculture. Recognizing that past projects have contributedlittle to AFC-s future viability, the Government considers the proposedProject as an opportunity to expand and increase the impact of agriculturallending by investing substantial resources in institution building.

Economic Analysis

5.02 This Project does not lend itself to a precise calculation of anoverall economic rate of return, in part because it will be implementedaccording to flexible Annual Plans and five-year projections, the contents ofwhich will be determined on an annual basis (para 3.08). Each Annual Plan,however, will contain an analysis of the estimated economic benefits and costsof AFC's overall lending program (Schedule 1).

- 48 -

5.03 If AFC's lending program were to finance the investments outlined inChapter IV, the principal economic benefit of this Project would be theincremental livestock and crop production estimated in paragraph 4.13. Theeconomic value of annual incremental production would range from K Sh 150million (US$20 million) to K Sh 80 million (US$11 million). Correspondingly,the overall economic rate of return resulting from farmers investmentsfinanced under this Project would range from 30% to 17%, with a mid-pointestimate of 24%. Cost and benefit calculations are based on prices expectedto prevail in March 1981, and are presented for purposes of illustrationonly.

Financial Projections

5.04 AFC's financial statements were projected for five years, FY1981-1985,(Tables 7 and 8) based on the following major assumptions:

(a) AFC's total loan portfolio would grow at 13% per year in currentprices in Project years two, three, and four, but would remainconstant in Project year one, AEC FY1981/82;

(b) The average life of AFC's loan portfolio would be about sevenyears;

(c) An interest rate on all new loans of 12% p.a. and a spread of5% 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 nextfive years; and

(f) AFC would not accrue interest on 5% of its loan portfolio.

5.05 Using these assumptions as a basis for financial projections, it isestimated 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 inProject year one, AFC FY1981/82, and that new volume during that year would befinanced primarily by reflows from the outstanding portfolio. During Projectyears two through four (AFC FY 1983, 1984, 1985), the portfolio would grow at13% 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 andphysical resources during the Project period. The number, experience, andskills of operational staff are the principal constraints to more rapidexpansion of AFC's lending volume (paras 3.13-15), and the estimated rate ofgrowth and resulting external financing requirements are considered reasonableand consistent with the program of institution building proposed under theProject (para 3.30).

5.06 The proposed Government financing of AFC, a combination of grantand loan (para. 3.06), would preserve AFC's current capitalization whichappears adequate. AFC's debt to equity ratio would change only slightly

- 49 -

during the -roject period. AFC-s net interest margin (para. 2.46) would alsochange slightly during the Project period, because the increasing yield onloans would be accompanied by an increasing cost of funds reflecting recentchanges in Government interest rate policies (paras. 1.23-1.28). Details ofselected financial indicators are provided in Table 9.

Risk

5.07 The principal Project risk would be a deterioration of the portfolioresulting from a failure of AFC to improve loan collections. The principalportion of outstanding loans in arrears is largely protected by the value ofthe collateral, and it is recommended that AFC continue to require that loansbe secured by land. Table 8 shows that portfolio growth and net marginimprovements would enable AFC to report net income of K Sh 30 million (US$4.0million) if it accrued interest on 95% of its portfolio, equal to K Sh 107million (US$14.3 million), in fiscal 1985. Therefore, if AFC collectedinterest on at least 70% of its portfolio, it would be able to break even.Project investments in staff development and training, improved loan appraisaland monitoring, corporate planning and review processes are aimed at improvingAFC's collection rate and overall financial performance. It was agreed duringnegotiations that AFC would propose annual collection targets under the AnnualPlan, and that progress in this area would be among the criteria for the BankGroup review and approval of AFC's lending program.

5.08 Another risk of the Project is that productivity increases might notbe attained. Achieving targeted output depends on a number of factors, includ-ing timeliness of land preparation, availability of required inputs, progressin land adjudication (for new AFC clients), and good rainfall. Due to thecurrent food shortages in Kenya, and the upward trend in prices of agriculturalproducts, it is unlikely that market prices for incremental production willadversely affect value of the output. Furthermore, food shortages haveprompted increasing Government efforts to alleviate marketing, legal andadministrative constraints, and to improve other farmer services. The pro-posed Project would contribute to an improvement of farmer credit services byproviding expanded credit facilities and strengthening AFC's credit appraisaland 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 millionor about US$6.7 million (Table 8). AFC would incur those expenditures andfinance them out of its own revenues. During the four-year Project period,the Treasury's outflows would exceed inflows, but thereafter, the net cashflow to the Treasury would be positive (Table 6). It is estimated that theGovernment would recover all Project costs in 20 years. The principal sourceof cost recovery would be the amortization of the term loan from the Treasuryto AFC (para 3.06). It should be noted, however, that continuing financialsupport from Government will be needed to sustain additional growth of AFC.

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VI. AGL.EEMENTS REACHED AND RECOMMENDATION

6.01 During negotiations, draft Subsidiary Financing Agreements betweenthe Government and AFC were discussed and agreed with the Bank Group. AFC'sStatement of Policy was also reviewed and agreed during negotiations andsubsequently approved by AFC's Board of Directors on April 15, 1981.

6.02 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 anadequate spread while maintaining consistency with Governmentpolicies and the results of Government's quarterly review ofoverall interest rates (para 1.28);

(b) that the Bank Group would approve terms of reference andrequisite qualifications for all professional staff of theCorporate Planning Department, be consulted on the appoint-ments of the two locally-recruited financial analysts, andapprove the appointments of the Department Head and thePlanning Analyst (para 3.07).

(c) that the Bank Group would approve terms of reference and requisitequalifications, proposed contracts for and the appointment oftechnical assistance personnel listed in Table 3 (para 3.31 andAnnex 4);

(d) that significant changes in AFC's Statement of Policy would not bemade without prior consultation with and approval by the BankGroup (para. 3.08);

(e) that any new long-term borrowings by AFC would be approved by theBank Group (para. 3.30);

(f) that the Bank Group would approve terms of reference and requisitequalifications and be consulted on the appointment of the ChiefFinancial 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 independentauditors acceptable to the Bank Group, that the audited accountsand the auditor's report would be submitted to the Bank Group withinsix months of the end of AFC's fiscal year; and that AFCwould prepare a Project Completion Report (para. 3.36).

6.03 Conditions of effectiveness would be the ratification of the Sub-sidiary Financing Agreements on behalf of the Government and AFC (para. 3.06),the appointment of the Department Head, Corporate Planning (para. 3.07), and

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an agreed timetable for the employment of credit training specialists andimplementation of the Credit Training Program (para. 3.22).

6.04 The proposed Project would be implemented in accordance with AnnualPlans, which would include five-year projections revised on a yearly basis(para. 3.08 and Schedule 1). Bank Group approval of the Annual Plan would bea condition of disbursement for expenditures incurred during the Projectperiod (para. 3.09), with the exception of agreed start-up expendituresunder the institution-building components (para. 3.32).

6.05 Subject to the above conditions, this Project is suitablefor a Bank Loan of US$25 million to the Government of Kenya with a term of20 years including 5 years of grace and an IDA Credit of SDR 8.2 million(US$10 million equivalent) on standard terms.

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SCHEDULE 1

AFC Annual Plans

Part A: Contents of Annual Plans

(1) Statement of Objectives: Statement explaining the relationshipbetween the overall lending program of AFC for five years andplanned expansion of agricultural production and credit for theRepublic of Kenya for the period, including specific targets,policy measures, and resources to be utilized. AFC's role inrelation 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 andbranches;

(b) all proposed recurrent expenditures on salaries,materials, fuel, repairs and maintenance;

(c) a list of all staff whose salaries would be financedthrough the Project;

(d) proposed expenditures for technical assistance,studies and training; and

(e) detailed financial projections and cash flow for yearunder consideration, including estimate of financingrequirement under the line of credit.

(3) Proposed terms of reference as appropriate for new staff or anychanges in agreed terms of reference.

(4) Proposed AFC lending program for the period to be covered, includinga breakdown of expected loans by purpose, size of loan, type ofenterprise, and AFC branch, including terms and conditions oflending. Brief analysis showing financial viability of proposedloan 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 reimburse-ment and proposed allocations of funds to relevant disbursementcategories.

(7) A1l external or government financial resources available orproposed.

(8) Proposed annual target and procedures for improving loancollections.

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Part B: Supporting Information to be Furnished in the Annual Plan tothe Bank Group

(1) Review of previous years lending activities of AFC, includingfull breakdown of loans by purpose, size of loan, type of loan andAFC branch and including terms and conditions of lending. Performancewith collections, by category of loan and by branch, should bespecifically described.

(2) Full staffing position of AFC at date of preparation of plan.

(3) Information on any modifications in appraisal procedures forproposed 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 debtprovision, 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 proposedAnnual Plan will be based

The suitability and volume of proposed for AFC lending and reimburse-ment 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'sStatement of Policy, with objectives of the National DevelopmentPlan, and with five-year projections;

(b) Experience with performance of various types of loans by branchconcerned, including historical collection record;

(c) Impact of proposed lending programs on AFC's financialposition;

(d) Relevant changes in lending and accounting policies and procedures;and

(e) Financial viability of proposed types of loans and economicviability of overall lending program.

(2) Adequacy of interest rates and consistency of levels with Governmentinterest rate policy.

- 54 -

(3) AFC administrative and managerial capability as measured by trainingprogram progress, collection rates for various activities and branches,administrative costs for various lending activities, progress withdevelopment and use of management information systems, ratio of LoanOfficers to number of proposed loans, and adequacy of appraisalprocedures.

(4) AFC-s financial performance as measured by appropriate indicators,including, inter alia, return on equity defined as the sum of AFC-sirredeemable loans, grants and reserves and other profitabilityindicators.

(5) Progress by AFC in improving the monitoring of use of funds under sub-loans and the economic impact of its lending operations.

(6) Training: Suitability of proposed training programs for AFC staff andprogress with training and staff development programs.

(7) Eligibility of proposed list of Group expenditures of drawdowns fortypes of lending inconsistent with Bank policies; i.e. exclusion ofland purchase loans and loans covered under other Bank Group andexternal agency financed operations.

(8) Improvement in AFC loan collection rate in accordance withagreed targets.

(9) Other sources of funds available to finance AFC operations.

- 55 -

ANNEX I

AGRICULTURAL FINANCE CORPORATION

STATEMENT OF POLICY

This statement, as amended from time to time defines the policywhich shall apply to the activities and operations of the AgriculturalFinance corporation (hereinafter referred to as the Corporation).

I. Objectives

1. The Corporation is a parastatal finance institution established bythe Government of Kenya under the Agricultural Finance Corporation Act (Cap323, Laws of Kenya), for the purpose of assisting the development of agri-culture and agricultural industries. In pursuance of this objective, theCorporation will assist the development of agriculture by making short-term,medium and long-term loans to eligible farmers, cooperative societies, in-corporated group representatives, private companies, public bodies, localauthorities and other persons engaged in agriculture or agriculturalindustries.

2. In its credit and management operations, the Corporation will beguided by the principle of extending credit on a financially, economically,and technically sound basis and will at all times strive to operate at acost 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 purchaseof inputs, harvesting, transportation and marketingexpenses;

(b) general farm development including fencing, constructionof farm buildings, dips, dams, boreholes, irrigation,livestock and livestock facilities, establishment ofpermanent and semi-permanent crops, bush clearing, fire-breaks and establishment and maintenance of pastures;

(c) farm machinery and equipment, including but not limitedto tractors, combine harvesters, farm trucks and pickups,etc.;

(d) farm and farm business purchases including improvementsand moveables; and

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ANNEX IPage 2

(e) other items or operations that could be establishedas relating to farming or agricultural industries.

2. Loan applications will be appraised by loan officers at the Corpora-tion's Branch Offices, in cooperation wherever and whenever practicable withthe extension staff of the Ministries of Agriculture and Livestock Develop-ment. The acceptability of an application will be determined on the basis ofthe financial viability of the proposed investment, the managerial ability ofthe borrower, and accessability of the necessary technical advisory supportand market for the end product.

3. To determine economic soundness, financial viability and technicalfeasibility of any project or investment for which credit assistance issought from the Corporation, a thorough investigation of applicants will beundertaken to analyse their current business records and operations and theproposed plan of operation, managerial ability, credit requirement, type andquality of collateral available. Together with the applicant the Corporationwill aim at developing farm plans which would be mutually acceptable and onthe basis of which staff would monitor implementation. Where there are norecords to evaluate a prospective borrower s current operations, attemptwill be made to study and analyse similar or related enterprises or operationsin the same area or similar ecological zone and to use the data so acquiredto develop an operational investment plan.

4. The Corporation's financing of any single project will not normallyexceed 80% of the investment cost.

5. The total amount of loans provided by the Corporation, togetherwith any other financial commitments in favor of any single borrower shallnot normally exceed 3.5% of the Corporation's capital (defined as irredeem-able loans, grants and reserves).

6. The Corporation will normally require suitable and marketablesecurities for its loans.

7. Loan Officers at Branch level will be delegated loan approvalauthority up to a level predetermined by the General Manager and approvedby the Board. At Headquarters, a technical committee of Senior CreditOfficers will review all loan applications prior to the approval/rejectionby the Board.

III. Financial Policy

1. The Corporation shall aim at all times to honour its obligationswhen due and to achieve an income adequate to meet operating costs, toprovide for doubtful debts, to maintain adequate reserves and to providefor sustained growth.

- 57 -ANNEX IPage 3

2. The interest charged on Corporation loans shall be set by the Boardand shall be consistent with the overall Government interest rate policy forthe agricultural sector as adjusted from time to time. The Corporation shallaim to secure an interest rate structure which will enable the Corporation tomeet its financial objectives.

3. The Corporation shall determine the level of adequate provisionsagainst potential losses in accordance with prudent accounting policies andshall build up its reserves to a level consistent with sound financialpractices. Subject to the limitations provided under the law, annual netincome shall be appropriated to the Corporation's general reserve.

4. The Corporation shall maintain a satisfactory relationship betweenthe maturities of its obligations and those of the loans it provides, andshall not incur any long-term debts where the result would be that totalindebtedness (whether present or contingent) would exceed the sum of Kenyapounds fifty million or such amount as may from time to time be determinedin accordance with sub-section 2 of section 14 of section 14 of the Agricul-tural 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 willreview periodically its loan making, loan disbursement, accounting andadministrative procedures to ensure proper information collection andanalysis and timeliness of loan disbursements and collections. Every effortwill be made to increase the loan officer/borrower ratio for effectivecredit supervision.

2. Borrowers shall be required to meet their obligations when due.They shall be required to keep in repair and good working condition, insureand keep insured, the assets constituting security for the Corporation'sloans.

3. For supervisory, loan monitoring and evaluation purposes, theCorporation shall, at all times, be at liberty by itself, its agents orservants, to enter into the borrower's land to view the assets and improve-ments mortgaged to the Corporation.

V. Management, Organization, Staffing and Training.

1. The Corporation shall endeavor to develop and maintain a well-balanced staff and management team capable fo evaluating the financingplans/proposals put before it, assisting enterprises in the formulationof their projects or farm plans and supervising their execution.

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ANNEX IPage 4

2. To improve the quality and collectability of loans, and to supportsustained improvements on credit advisory services, the Corporation shallmaintain a credit training programme necessary to ensure adequate staffcapabilities. Such training will include all levels of Corporation staff.The Corporation will also pay special attention to the development of aproject planning, credit appraisal and farm management capacity whose majorrole 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 guidelineson terms and conditions of employment, job performance criteria and evalua-tion procedures, promotion incentives and career development programmes.

April 15, 1981

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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 ActBanking ActDairy Industry ActReview of Statutory Boards ("Ndegwa Report")

II. Kenya - General Economics

Kenya Development Plan 1978-1983Economic Survey 1979Sessional Paper #4 of 1980 on Economic Prospects and PoliciesBudget Speeches for the Fiscal Years 1979/80 and 1980/81Interest 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 1978Quarterly Statistical DigestBrief Statistical Analysis (Census of Large Farms)Review of Land Use ChangesYields Costs Prices 1980 (MOA)Crop BudgetsEconomic and Financial Review - Central Bank of KenyaIBRD Commodity Markets and Prices Prospects

IV. Ministry of Agriculture - Annual Reports

1968 Department of Agriculture-2 VolumesAnnual Reports 1978 of Various Districts and ProvincesOrganization Chart

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ANNEX 2Page 2

V. Ministry of Livestock Development

1978 Annual ReportStotz - Doctoral ThesisStotz - Paper on Heifer RequirementsOrganization Chart

VI. Ministry of Cooperative Development

Memorandum to the Civil Service Review Committee

VII. Annual Reports

Central BankCommercial Bank of KenyaKenya Cooperative Creameries (KCC)Agricultural Development Corporation

VIII. USAID - Sponsored Studies and Report

Agricultural Credit in KenyaMultinational Agribusiness Systems Inc.

Agricultural Manpower in KenyaGeneral Research Corporation

AFC Management StudyResearch Triangle Institute

AID Request for Proposals

IX. Agricultural Finance Corporation

Audit Reports and Financial StatementsFinancial Projections (Preparation Report)Price Waterhouse Financial Projections and TablesCredit Review - Annual Report 1978Procedures Manuals

- Loan Procedures- Financial- Administrative Procedures

Credit ManualSystem Design ManualMIS Users ManualApplication FormsAppraisal Staffing Costs TablesAFC Budget 1980-1981 and Annual Plan 1980-81Structure of Portfolio and Loan StatisticsAppraisal AFC Training InformationDevelopment and Training Programme

- 61 -

ANNEX 2Page 3

AFC Loan Processing Time SurveysPrice Waterhouse Report on Review of Management ReportingFunction of AFC

Organization ChartOther Appraisal Mission Working Documents

X. Personnel

Study on AFC by Directorate of PersonnelKenya Civil Service Salary ScaleEducation Sector Memorandum (IBRD, March 11, 1980)

XI. Other

ILCA Paper on Trypanotolerant CattleSolar Electric International PaperNote on Economics of Maize Production for Export inEast Africa

Tractor FileKenya Seed CompanyExpansion of Faculty of Agriculture

February 10, 1981

- 62 -ANNEX 3

AFC - LOAN PROCESSING CYCLE

Loan processing generally follows:

1. Preparation

1. identification of the potential borrower by the extensionservices of the Ministry of Agriculture (or the Ministryof 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 fromextension officer;

4. inspection of farm and appraisal of project by the AFC fieldofficers;

2. Approval

i. examination of application by the district Loans AdvisoryCommittee, consisting of:

ii. approval or rejection of loan by AFC Branch Manager forLoans under Ksh 10,000 or by AFC Head Office for loansover K Sh 10,000;

iii. farmer registration of security documents with the Land Office;

iv. 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 monthsin advance of instalment due date;

ii. arrears notices is sent to borrowers 2 weeks prior toinstalment due date;

iii. paying accounts are credited, 2-week delinquent accountsare issued a call notice to report to AFC branch office;

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ANNEX 3Page 2

iv. unsuccessful attempts to collect on delinquent loan resultsin farm inspection by AFC branch loan officer 4-6 weeksfollowing instalment due date;

v. continual failure of farmers to make payment results ininitiation of foreclosure procedures;

vi. advertisement of farm auction placed in newspapers;

vii. sale of farm.

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ANNEX 4

KENYA

Fourth Agricultural Credit Project

Draft Terms of Reference

Corporate Planning Department

1. Department Head2. Planning Analyst3. Financial Analysts4. Credit Marketing Analyst5. Agricultural Economist6. Branch Location Study

Finance Division

7. Chief Financial Analyst8. Systems analyst/Programmer

Personnel Training and Development

9. Personnel Management Consultant (Job Analysisand Performance Review Specialist)

10. Staff Development Specialist11. Short-Term Credit Training Specialists

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ANNEX 4Page 2

1. Corporate Planning Department Head

General

The Corporate Planning Department Head would be recruited interna-tionally for a period of 36 months.

Job Description

The Annual Plan

The Annual Plan will describe AFC's AFC's operating strategy andfinancial objectives and serve as the principal vehicle for an ongoing reviewof AFC lending activities and institutional development. The Department Headwill be an advisor to the General Manager and will work closely with thethree division heads of AFC in developing the Annual Plan and five-year pro-jections 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 alllevels. In order to ensure effective participation in the process, theCorporate Planning Department Head will prepare, in collaboration with AFC'sdivision 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 forthe five-year projections and the Annual Plan; and

- design appropriate operating and financial performancestandards and establish management reviews.

Implementation of Planning Process

Once the objectives have been determined and the strategy andprocess for the first Annual Plan proposed, the Corporate Planning DepartmentHead will have th following responsibilities:

(i) establish a timetable for preparation of the Annual Plan;

(ii) review all divisional objectives and strategies with theGeneral Manager;

- 66 -ANNEX 4Page 3

(iii) analyse the budget prepared by the Finance Departmentfor consistency with AFC's financial objectives andcoordinate required changes;

(iv) prepare the Annual Plan;

(v) conduct quarterly revisions with the General Manageron progress of the Annual Plan;

(vi) conduct monthly meetings with division and departmentheads on major divisional projects;

(vii) follow up with division heads on progress of majorobjectives; and

(viii) forecast expected financial results for the currentfiscal 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 forAFC staff.

Reporting Relationship

The Department Head will report to the General Manager of AFC.

Replacement

The Department Head will be responsible for the informal trainingof all department staff and will ensure that after 24 months his successorhas been identified within the department and properly trained to assume theleadership of the department. During his last 12 months the expatriateDepartment Head will serve as advisor to his designated successor.

Qualifications and Experience

Chartered Accountant and Master's Degree in Busikness Administra-tion or equivalent. At least eight years experience in a financial insti-tution including management responsibilities. Demonstrated capactities incorporate planning and budgeting, banking, credit and financial managementand planning, experience with computerized financial and budgetary reportingsystems. Overseas experience. Minimum age: 35 years.

Salary Level

Net $45,000 to 50,000 year plus housing and other benefits.

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ANNEX 4Page 4

2. Planning Analyst

Corporate Planning Department

General

The Planning Analyst will be recruited internationally to staff theCorporate Planning Department for a period of 36 months. He will be a closeassistant to the Department Head.

Job Description

Strategic and Financial Objectives of AFC

As a framework for preparation fo theAnnual Plan and five-yearprojections, the Planning Analyst will develop AFC's strategic and financialobjectives resulting from:

(i) planned expansion of agricultural production and creditfor 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 IBRDreimbursement; and

- recruiting, training and staff development.

Preparation of Planning Process

The Planning Analyst will assist the Department Head in preparingthe planaing process as stated in theDepartment Head's terms of reference.In particular, the Planning analyst will review MIS 1/ reports with theFinanr-e Division to ensure that they respond to management requirements in apractica' nd work4ble -anner.

1/ Mamog.i,tc Informaticn System.

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ANNEX 4Page 5

Monitoring of Planning Process

The Planning analyst will:

(i) prepare quarterly review with the General Manager onprogress of the Annual Plan;

(ii) assist in arranging and conducting monthly meetingswith division and department heads on major divisionalprojects;

(iii) follow up with division heads on progress of majorobjectives; and

(iv) forecast expected financial results for the currentfiscal year against the plan in order to develop con-tingency plans where necessary.

Reporting Relationship

The Planning Analyst shall report to the Corporate Planning Depart-ment Head and will supervise the work of the Financial Analysts, CreditMarketing Analyst and Agricultural Economist of the Department.

Replacement and Training

In agreement with his hierarchical superors, the planning analystwill, within the staff of the Corporate Planning Department, develop areplacement fully capable fo performing. the relinquished functions. ThePlanning analyst will review and participate in AFC's training programs.

Qualifications and Experience

Chartered Accountant or equivalent. Four to five years- experiencein government planning function at middle management level with strong back-ground in financial analysis, and familiarity with computerized managementinformation systems. Minimum age: 30 years.

Salary Level

$30,000 to $40,000 plus housing and other benefits.

- 69 -ANNEX 4Page 6

3. Financial Analysts

Corporate Planning Department

Recruitment

The Corporate Planning Department will be staffed with two financialanalysts, recruited locally.

Job Description

The Financial Analysts will assist the Department Head and thePlanning 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 Depart-ment for the following fiscal year to ensure consistency withAFC's financial objectives, and identifying required changes;

- reviewing detailed financial projections and cash flow for thefiscal year under consideration, including estimates of financ-ing required, comparing financial projections with the AnnualPlan 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 willbe under direct supervision of the Planning Analyst.

Qualification and Experience

Bachelor's Degree in Business with strong financial background andthree years' experience in corporate finance and accounting function.

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ANNEX 4Page 7

4. Credit Marketing Analysts

Corporate Planning Department

General

The Corporate Planning Department will be staffed with a CreditMarketing Analyst, recruited locally.

Job Description

1. On basis of inputs from AFC branches, Ministry of Agriculture andMinistry of Livestock Development extension officers, determine potentialagricultural credit demand, relate to planned expansion of agriculturalproduction and credit for Kenya, and develop with the Planning Analyst thelending program for the fiscal year, including a breakdown of expected loansby purpose, type, size of loan and AFC branch.

2. Prepare Branch Location Study (with assistance of consultant) (seedescription).

3. In relation with Branch Location Study, develop AFC strategy forincreasing clientele in existing or new areas, operating requirements of AFCbranches, in terms of staff, equipment and vehicles for improving branchservices.

4. Assist the Planning Analysts in setting out a process for analysingand reviewing the administrative costs per loan in each AFC branch and follow-up on progress of major objectives at AFC branch level (number and volume ofloans, by purpose and type).

5. Participate in training program for branch loan officers.

Reporting Relationship

Reports to Corporate Planning Department Head an dis under directsupervision of Planning Analyst.

Qualification and Experience

Bachelor's Degree in Economics or Business. Three year s experiencein corporate planning or financial function.

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ANNEX 4Page 8

5. Agricultural Economist

Corporate Planning Department

The Corporate Planning Department will be staffed with an Agri-cultural Economist, recruited locally.

Job Description

1. In light of Government priorities, as stated in particular in theNational Plan, the Agricultural Economist will determine the economic viabilityof agricultural lending in general and of different loan types in particular.

2. In collaboration with the departments responsible for planning inthe Ministries of Agriculture, Livestock Development, Cooperative Developmentand the MEPD, he will review the planned expansion of agricultural productionand determine the implication for agricultural credit.

3. The Agricultural Economist will review computerized farm models andbudgets to determine the financial viability of proposed loan types drawing oninformation 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 Headand is under direct supervision of Planning Analyst.

Qualification and Experience

Bachelor's Degree in Economics or Agriculture. Three years' experi-ence in government or corporate planning function. Familiarity with computer-ized farm models.

- 72 -

ANNEX 4Page 9

6. Branch Location Study

The IBRD mission which appraised the IVth Agricultural CreditProject found that the front line loan officers serving in the 34 branches ofAFC spent too much time travelling. The Project also provides for establish-ing six new branch offices. Hence the IBRD has recommended a Branch LocationStudy to determine:

(1) At the national level, whether the existing AFC branch networkcorresponds to the areas of most concentrated agriculturalcredit demand, where the six new branches should be opened andwhether branches should be closed or relocated.

(2) At the local level, whether the branch offices are located theoptimal way to minimize loan officer travelling to clients andadministrative (district or provincial) headquarters, whereregistration and similar functions must be executed. Failing asatisfactory "one branch office" solution to the problem ofoptimal location, the consultant will devise and cost alterna-tive approaches to providing branch office services, e.g. useof mobile branch office units, requiring loan officers to makeovernight trips to certain areas, establishing and manningbranch sub-offices, establishing branch sub-offices as physicalentities, but manning them on a scheduled basis.

- 73 -

ANNEX 4Page 10

7. Chief Financial Analyst

Financial Services Department

A Chief Financial Analyst will be recruited locally to head theFinancial Services Department.

Job Description

- prepare annual budget, coordinate with Corporate PlanningDepartment for presentation in Annual Plan, ensure ongoingreview and report on actual performance against budget;

- responsible for financial control of branches and head officeusing budgetary control system derived from MIS (ManagementInformation System), report on adequacy of these systems andany implementation problems;

- responsible for the cash management function including manage-ment and transfer of branch collections, liquidity requirementsof the Corporation including short-term deposits, preparationand review of cash flow projections and monitoring of the moneymarket;

- make claims on project expenditures and follow up with relevantministries 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. Hewill be assisted during two years by the USAID Fiscal Planning Advisor andwill collaborate with the Corporate Planning Department to ensure the effi-ciency of corporate annual planning.

Qualification

Bachelor's Degree in Business or Economics or equivalent. Workingexperience: at least five years with responsibility in corporate finance andbudgeting, and experience with computerized financial reporting systems.

- 74 -

ANNEX 4Page 11

8. Systems Analyst/Programmer

Electronic Data Processing Department

General

AFC will recruit internationally a Systems Analyst/Programmer for aperiod of 12 months to ensure a proper follow-up and completion of the computersystem 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 Depart-ment, the management information requirements are properlyidentified, and translated into a practical and workableaccounting system.

(2) Amending, completing and ensuring proper implementation ofcomputer reporting system accordingly.

(3) Ensuring proper training of staff involved, to understandsystem and provide the necessary data input.

(4) Ensure that EDP department head is fully capable of managingand amending the computerized management information system.

- 75 -

ANNEX 4Page 12

9. Personnel Management Consultant

A Personnel Management Consultant, specialist in job analysis andperformance evaluation, will be recruited internationally for a period of 24months.

Job Description

On the basis of the staff job analysis conducted by the TrainingAdvisor, the Personnel Management consultant will:

(a) Prepare and submit to General Manager and Corporate PlanningDepartment Head:

(i) a personnel policy statement including statement of keyskills and qualifications required for each position orjob category;

(ii) design of performance appraisal forms and proceduralinstructions; and

(iii) a consolidated report on specific training needs acrossAFC, within departments and by individual employee.

(b) Develop, in collaboration with the Training Advisor, threetraining courses designed to achieve the following objectives:

(i) introduce and explain the objectives of the performanceappraisal system to all AFC employees, in order to maximizeemployee understanding and acceptance of the program;

(ii) train supervisors and managers in the basic techniques forconducting an effective performance appraisal internviewand for identifying training opportunities for the improve-ment of employee performance; and

(iii) train the Personnel Department to operate and maintain theperformance appraisal system on an ongoing basis.

(c) Conduct the training courses described in the precedingparagraph.

(d) Establish follow up procedures for reviewing the impact of theperformance appraisal system, and report on findings to theGeneral Manager and Corporate Planning Department Head.

- 76 -

ANNEX 4Page 13

10. Staff Development Specialist

A Staff Development Specialist will be recruited for (three) monthsto assist the Personnel Department in identifying key managerial, supervisoryand professional positions within AFC and in planning for their adequatestaffing.

Job Description

Using job analysis data collected by the Training Advisor, supple-mented by interviews as appropriate, the consultant will:

- prepare and submit to the Corporate Planning Department Head areplacement planning and career development system, includingthe preparation of the required forms, policies and procedures;

- design and conduct a series of workshops to coach senior andmiddle managers in the understanding and use of the careerdeveloping planning system; and

- assist the Training Department in preparing a series of special-ized courses addressing staff development needs.

- 77 -

ANNEX 4Page 14

11. Short-Term Credit Training Consultants

According to timetable agreed with the IBRD, short-term CreditTraining Specialists will be recruited internationally for a total of 36man-months.

Job Description

The short-term Credit Training Specialists will assist the CreditTraining Department, the Training Advisor and the Loan Appraisal Instructionin:

(1) preparing curricula and training materials (work sheets, casestudies) and preliminary evaluation systems;

(2) determining the right balance of lectures, study, simulationand practise;

(3) conducting training courses tailored to the institution-s needsand designed to lead to improved staff performance of theirduties (rather than simply increase their knowledge);

(4) recruiting credit training officers;

(5) assessing performance of local training officers and effective-ness of locally-conducted training courses; and

(6) instituting a system of follow-up and feedback which wouldassist the Training Department to adapt its course work tochanging conditions.

Experience and Qualification

The short-term Credit Training Specialists will have experience inorganizing successful credit training programs in developing countries.

- 78 -

Table I AKENYA

FOURTH AGRICULTURAL CREDIT PROJECT

AFC Loan Portfolio as of March 31

(K Sh '000)

1977 1978 1979 1980

AFC Loan Schemes 2/

Small Scale Loans 3/

AFC Small Scale 25,508 25,492 26,201 32,258IDA 105/344/692 72,120 91,260 104,246 118,020KFW 9,660 9,660 9,176 9,392Vihiga/N. Tetu 240 220 222 212ICA 940 920 917 916USAID CUop 2,980 2,780 1,019 800Tobacco 5,880 8,480 6,108 6,108IADP 4/ - - 1,354 1,202

Sub-total 117,328 138,812 149,243 168,908

Large Scale Loans 5/

AFC Large Scale 249,560 259,800 300,924 364,230Livestock (IDA 129/477) 69,600 81,880 105,957 126,348KFW 1,880 1,660 1,289 1,088Group Farm Rehabilitation 6/ 8,720 17,720 35,569 56,932USAID Crop 10,580 2,580 2,337 2,134

Sub-total 340,340 363,640 446,076 550,732

Total Portfolio 7/ 457,668 502.452 595,319 719,654

1/ All figures in current terms2/ Description of Loan Schemes, (see Report, paras. 2.42-2.43)I Loan amounts of less than K sh 20,0004/ 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 more6/ Funds onlent under Cr. 537-KE/Ln. 1093-KE7/ Excludes Government seasonal crop scheme (GMR, New Seasonal Credit Scheme)

March 30, 1981

KEYA

FOURTH AGRICULTURAL CREDIT PROJECT

AFC Loan Portfolio (March 31, 1980) -/(KSH'000)

Number ofLoan Loans

AFC LOAN SCHEME Balance Arrears Disbursements, Outstanding

Small-Scale Loans:

AFC Small Scale 32,258 8,180 11,040 7,111IDA 105/344/692 118,020 27,540 42,620 34,078KfW 9,392 3,160 1,500 4,165Vihiga/N. Tetu 212 200 -0-ICA 916 840 -0-USAID Crop 800 -0- 80 1,420Tobacco 6,108 -0- 3,580IADP 1,202 -0- 360 746

Sub-Total 168,916 39,920 59,180

Large Scale Loans:

AFC Large Scale 364,230 4o,74o 98,120 9,423Livestock (IDA 129/477) 126,348 50,580 40,940 1,317KfW 1,088 900 -0- 53Group Farms Rehabilitation 56,932 3,580 42,080 131USAID Crop 2,134 -0- 200 87

Sub-Total 550,738 95,800 181,340

TOTAL 719,654 135,720 .240,520 100,603 g.

tb

1/ Figures in current terms. AFC audited Statements, 1979/80

March 30, 1981

-80-

Table 2

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

Proposed Incremental Staffing for Project Activities

AFC

Regular Staff

Job Groups

Corporate Planning Department

1 Department Head N. A. /12 Financial Analysts J-K-L1 Planning Analyst N.A. /11 Marketing Analyst J-K-]L1 Agricultural Economist J-K-L3 Statistical Assistants G-H

Finance Division

1 Chief Financial Analyst M-N2 Budget Analysts H-J2 Accountants H-J

Administrative Services Division

50 Loan Officers J30 Accounts Officers J

2 Credit Training Officers K-L

/1 Internationally recruited.

March 30, 1981

-81-

Table 3

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

Proposed Staffing

AFC

Technical Assistance

StaffMonth

Staff Cost Total CostMonths --------US$-----------

1. Corporate Planning Head 36 9,000 324,000

2. Planning Analyst 36 6,500 234,000

3. Branch Location Study Consultant 6 6,000 36,000

4. Job Analysis Specialist 12 6,000 72,000

5. Performance Review Specialist 12 6,000 72,000

6. Staff Development Specialist 3 6,000 18,000

7. Credit Training Specialists 36 6,000 216,000

8. Systems Analyst/Programmer 12 7,000 84,000

1,056,000

March 19, 1981

-82-

Table 4

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

Pro,;ect Costs Summary(K Sh Million)

1, -ForeignYear l- Year 2 Year 3 Year 4 Total Exchange %

Organization

Corporate Planning Department 1.50 2.00 2.00 0.50 6.oo 63Finance Division 0.35 0.50 0.50 0.50 1.85 60Loan Officers 0.20 0.50 0.50 0.50 1.70 -

Accounting Officers 0.10 0.30 0.40 0.30 1.20 -Branch facilities 1.50 3.00 2.00 1.00 7.50 86

Training 375 T.40 5.40 2.80 18.25 70

Credit Training 2.00 3.00 0.50 - 5.50 69Staff Performance Improvement 0.50 0.50 0.50 - 1.50 40Career Development - 0.25 0.25 - 0.50 40Continuing Training - 2.00 2.50 3.00 7.50 40

2.50 5.75 3.75 3.00 15.00 50

Credit Program -1 - 76.oo 103.00 151.00 330.00 60

'Total Base Cost 3/ 6.15 88.15 112.15 156.80 363.25 60

Physical Contingencies 0.75 1.00 0.60 0.50 2.85 56Price Contingencies 5/ o.58 2.30 2.50 3.50 8.88 60Total Contingencies 1.33 3.30 3.10 4.00 11.73 60

Total Project Cost 7.48 91.45 115.25 160.80 374.98 60

1/ Project Years correspond approximately withAFC fiscal years (April 1 - March 31)

,P/ From Line of Credit, Table 7

3/ Base costs are estimated at prices expected to prevailin March 1981

4/ 10% physical contingencies applied to branch facilities andoffice equipment and vehicles

l/ Price contingencies applied to Organization and Training Components

only, were estimated as follows:

Foreign Exchange Local

1981 9.0 101982 8.5 101983-85 7.5 8

March 19, 1981

-83- Table 5S

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

Estimated Schedule of Disbursements

IDA/BANK Fiscal Year Cumulative Disbursementand Quarter at Quarter End

--------- US$ thousand ---------

1981-82

September 30, 1981 a/ 150December 31, 1981 300March 31, 1982 800June 30, 1982 1,200

1982-83

September 30, 1982 2,000December 31, 1982 4,000March 31, 1983 6,oooJune 30, 1983 8,000

1983-84

September 30, 1983 10,000December 31, 1983 13,000March 31, 1984 16,oooJune 30, 1984 20,000

1984-85

September 30, 1984 23,000December 31, 1984 27,000March 31, 1985 b/ 30,000June 30, 1985 33,000

1985-86

September 30, 1985 34,000December 31, 1985 c/ 35,000

a/ Expected Date of Effectiveness - August 31, 1981b/ Expected Date of Project Completion.c/ Closing Date.

March 23, 1981

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

Government Cash Flow -

(R Sh Million)

--------------------------------- Project Year -- - - - -- - - - - -- - - - - -- - - - - -- - - - - - _-- ___- ----------

1 2 3 4 5 6 7 8 9 10 11 12

Sources of Funds

IDA Credit 6.0 39.0 30.0 - - _ _ _ _ _ _ _

Bank Loan - - 45.0 105.0 37.5 - - _ _ - -_

Taxes and Duties 3/ 1.4 5.0 6.8 9.4 8.1 8.7 9.3 10.0 10.8 11.6 12.5 13.4

APC 4/- Amortization - - - - - - - 25.4 25.4 25.4 25.4 25-4

- Interest - 2.7 9.4 20.3 25.6 25.6 25.6 24.8 22.3 20.3 18.4 16.2

Total Sources 7.4 46.7 91.2 134.7 65.9 34.3 34.9 60.2 58.5 57.3 56.3 55.0

Uses of Funds

Project Expenditures 7.5 91.4 115.3 160.8 - - - - - -

IDA Service Charge - 0.3 0.6 0.6 0.6 0.6 0.6 0,6 0.6 0.6 0.6 0.6

Bank Loan 5/- Amortization -- - - - 6.3 12.5 12.5 12.5 12.5 12.5 12.5

- Interest - - 2.2 9.4 16.2 12.4 16.2 15.0 13.8 12.6 11.9 10.8

- Commitment Fee 1.4 1.4 1.2 0.7 0.2 _ - -

Total Uses 8.9 93.1 119.3 171.5 17.0 24.3 29.3 28.1 26.9 25.7 23.1 23.9

Net Cash Flow (1.5) (46.4) (28.1) (36.8) 48.9 10.0 5.6 32.1 31.6 31,6 33.2 31.1

Cumulative Net Cash Flow (1.5) (47.9) (76.D) (112.8) (63.9) (53.9) (48.3) (16.2) 15.4 47.0 80.2 111.3

1| In current prices

2/ Corresponds approximately with AFC FY (April 1 - March 31)

I 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

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

AFC - Actual and Projected Balance Sheet at March 31st I/(K Sh. Million)

1975 1976 1977 1978 1979 19 191 1982 1983 1984 1985

ASSERTSLoans to Farmers 321.7 413.1 457.6 502.1 594.3 725 725 725 819 926 1.046Less Valuation Reserve (21.0) (26 6) (30.2) (32.5) (38-9) ( 47 ) (4i) 4(53 ) (6o) t68)

300.7 8.5 427.4 9 57P7 766 86 978

Other Loans and Deposits 23.1 18.6 36.6 43.7 53.6 58 58 58 66 74 84

Cash 7.1 7.6 25.8 11.0 14.7 (14) 11 12 14 15 17

Other Current Assets 3.8 6.8 7.9 5.5 5.7 12 6 6 7 8 10

Fixed Assets 2/ 6.4 6.7 7.3 8.2 13.9 23 21 20 20 20 20

Total Assets 341.1 426.2 505.0 538.0 643.3 757 779 780 873 983 1,109

LIABILITIESCurrent Liabilities 11.9 12.1 13.1 13.2 17.5 52 65 30 31 17 19

BorrowingsLine of Credit - - - - - - 76 179 330Redeemable Loans 199.3 282.9 352.8 374.3 462.2 416 404 392 380 368 306Irredeemable Loans 80.1 80 1 80.1 80.1 80.1 188 188 188 188 188 188

279 436 432.9 4 542,3 -*07 592 644 735 t24

CapitalGrants 47.4 48.3 48.2 48.3 49.8 50 53 73 84 90 95Retained Earnings 2.4 2.8 10.8 22.1 33.7 51 69 97 114 141 171

49,87 - 51.1 59.0 70, 4 8 101 122 170 T231

Total Liabilities & Capital 341.1 426.2 505.0 538.0 643.3 757 779 780 873 983 1,109

1/ All figures in current termsU/ mnaudited Statements

3/ Includes Development House Phase II, Farm Properties in Possession

January 9, 1981

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

AFC - Actual and Projected Income Statement for

The Years Ended March 31st 1/

(K Sh. million)

1975 1976 1977 1978 1979 1980 2/ 1981 1982 1983 1984 1985

Total Interest Earned 22.0 28.1 38.5 39.5 50.2 62.0 70.0 74.0 83.0 94.0 107.0

Interest Expense

Line of Credit - - - - - - - - 2.0 7.0 13.0

Redeemable Loans 6.9 8.4 10.8 12.0 12.9 15.2 12.0 12.0 11.0 11.0 11.0 IIrredemable Loans 4.2 4.2 4.1 4.2 4.1 4.0 10.0 10.0 10.0 10.0 10.0 m

Total Interest Expense 11.1 12.6 14.9 16.2 17.0 19.2 22.0 22.0 23.0 28.0 34.0

Net Interest Income 10.9 15.5 23..6 23.3 33.0 42.8 48.0 52.0 60.0 66.0 73.0

Other Income 4.8 6.6 6.8 10.4 10.3 12.4 12.0 12.0 12.0 12.0 12.0

Operating Expense

Administrative Expense 13.2 14.7 16.9 18.8 23.1 24.2 44.0 37.0 40.0 41.0 44.0Provision for bad debts 4.8 6.0 3.9 2.1 6.4 10.4 10.0 14.0 27.0 22.0 23.0Bad debts written offs - - 0.3 - 0.3 0.1 (15) (15) (15) (15) (15)Depreciation 1.1 1.1 1.3 1.6 2.0 2.8 3.0 3.0 3.0 3.0 3.0

Total Operating Expense 19.1 21.8 22.4 22.5 31.8 37.5 42.0 39.0 55.0 51.0 55.0

Net Income (3.4) 8.0 11.2 17.7 18.0 25.0 17.0 27.0 30.0

F-3

1/ All figures in current terms2/ Unaudited statement

January 9, 1981

KENYA

FOURTH AGRICULTURAL CREDIT PROJECT

AFC - Schedule of Selected Financial Indicators(K Sh Million)

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

PROFITABILITY

Return on Assets-- - (0.65%) 1.727 2.15% 1.98% 2.49% 2.34% 3.59% 2.05% 2.91/ 2. 87/

2/Net Interest Margin- - 3.97% 5.21% 4.587 5.537 5.987% 6.627 7.17% 7.787 7.56% 7.40%

LIQUIDITY

Loans to Senior Porrowing 3 'l - 1.53 1.20 1.32 1.31 1.50 1.77 1.82 1.82 1.74 1.67

Quick Ratio 0.60 0.63 1.97 0.83 0.95 (0.27) 0.17 0.40 0.45 0.88 o.89

LEVERAGE

Asset Leverage- 2.63 3.25 3.63 3.57 3.93 2.62 2.51 2.18 2.26 2.35 2,44

Debt to EquSty- 0.60 0.68 0.84 0.71 0.74 0.59 0.54 0.52 0.54 0.57 p.58

Lending to Borrowing7/ 0.98 1.00 0.95 1.00 1.00 1.11 1.12 1.11 1.13 1.12 1.14

1/ Return on Assets = Net Income * Average Total Assets2/ Net Interest Margin = (Interest on Loans - Interest Paid ) + Average'Loans to Farmers3/ Loans to Senior Borrowings = Average Loans * (Average redeemable Loans + Line of Credit)4/ Quick Ratio = Cash + Current Liabilities5/ 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 Credit7/ Lending to Borrowing = Loans to Farmers + Loans and Grants !

March 30, 1981

KENYAFOURTH AGRICULTURAL CREDIT PROJECTAGRICULTURAL FINANCE CORPORATION

ORGANIZATION CHART

I BOARD OF DIRECTORS j,Z I

GENERALMANAGER

INTERNAL AUDIT CORPORATE

DEPARTMENT PLANNING

TECHNICAL IADMINISTRATIVE FINANCESERVICSIO SERVICES DIVISION DIVISIONDIVISION ~ ~ ~ ~ ERICSDIISO

CREDIT APPRAISAL I ACCOUNTS- DEPARTMENT DEPARTMENT

CREDIT REVIEW PERSONNEL I TRAININGELECTRONIC DATADEPARTMENT DEPARTMENT I DEPARTMENT PROCESSING

_____ J DEPARTMENT

I BUSINESS I I FINANCIALCREDIT CONTROL LEGAL I BSRIESSR

DEPARTMENT DEPARTMENT ISERVICES SERVICESDEPARTMENT DEPARTMENT

MANAGEMENT | AREA MANAGERS BANKINGDEPARTMENT (5) SECTION

BRANCH MANAGERS MANAGEMENT(34) SECTION

March 1981 World Bank-22776

KENYAFOURTH AGRICULTURAL CREDIT PROJECT

PROJECT IMPLEMENTATION SCHEDULE (YEAR 1)

1981 1982

MARCH APRIL MAY JUNE JULY AUGUST SEPT OCT NOV DEC JANUARY FEE MARCH

IBRO L.an Proess ig/Finalization

Negotiations

GOK/AFC Ratification of SubsidiaryFinancing Agreenment

AFC Board Approvai of AFCPolicy Statement

IBRD Board Presentation *AFC Appointment of Corporate

Pianning Head

AFC Submission of CreditTraining Program Timetable _ -

GOK Submission of Project LegalOpinion -

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 24. 1981 World Bak - 22777

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