Document of

The World Bank I 3

FOR OFFICIAL USE ONLY

Report No. 4082-RW

RWANDA

STAFF APPRAISAL REPORT

OF A THIRD IDA CREDIT TO THE

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

March 1, 1983

FIllE COPYEastern Africa Projects DepartmentIndustrial Development and Finance Division

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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CURRENCY EQUIVALENTS

US$ 1.0 = RwF 91.91

RwF 1.0 = US$0.010880

RwF 1.0 million = US$ 10,880

GLOSSARY OF ABBREVIATIONS

BNR Banque Nationale du Rwanda - Central BankBRD Banque Rwandaise de D6veloppementCCCE Caisse Centrale de Cooperation EconomiqueCIDA Canadian International Development AgencyCDI Centre de Developpement IndustrielDEG Deutsche EntwicklungsgesellschaftEDF European Development FundKfW Kreditanstalt fur WiederaufbrauMINECOM Ministere de l'Economie et du CommerceMAGERWA Magasins Generaux du RwandaSMEs Small and Medium EnterprisesSOMIRWA Societe des Mines du RwandaSSEs Small Scale Enterprises

FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLYRWANDA

BANQUE RWANDAISE DE DEVELOPPEMENT

(BRD)

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

BASIC DATA

I. THE ENVIRONMENT ...................................... 1

A. The Industrial Sector .. 1............... Characteristics and Past Performance ............. 1Industrial Policy .................. 2Sector Issues ......................... 5IDA's Strategy ........................ 5

B. The Small-Scale Enterprise Sector ................ 6C. The Financial Sector . . 9

II. THE INSTITUTION .......... ........................... 11

A. Institutional Aspects . .................... 11

Background ....................................... 11BRD's Objectives and Role . . 11Share Capital and Ownership . . 12Board of Directors . . 12Management, Organization and Staffing ............ 12Operating Policies and Procedures . . 14BRD and SSEs ..................................... 17

B. Operations ....................................... 19

Portfolio ........................................ 20Financial Results and Conditions . . 21Resources ....................................... .23

C. Prospects ........................................ 23BRD's Strategy ................................... 23Projects Pipeline . . 24Financial Forecasts .............................. 24Resource Requirements ............................ 25

III. THE PROJECT ................................. 26

A. The First Two IDA Credits to BRD .. 26B. Objectives of the Proposed Third IDA Credit .. 27C. Description of the Project. 27

Line of Credit to BRD . .27SSE Study Component . .29

D. Project Costs and Financing . .30E. Project Implementation . . 31F. Benefits and Risks . .32

IV. RECOMMENDATIONS AND AGREEMENTS REACHED ............... 33

This document has a ratricted distibution and may be used by recipients only in the performanceof their ofilcial duties. Its contents may not otherwie be discloed without World bank authorization.

I

RWANDA

BANQUE RWANDAISE DE DEVELOPPEMENT

(BRD)

Annex No. Page No.

1. RWANDA - Structure of Interest Rates . . 34

2. BRD - Distribution of Share Capital December 31, 1981 35

3. BRD - Borrowings as of December 31, 1981 . .36

4. BRD - Summary Income Statements 1977-1981. 37

5. BRD - Summary Balance Sheets 1977-1981 . .38

6. BRD - Past Financial Ratios .. 39

7. BRD - Projected Operations, 1983-1985 . . 40

8. BRD - Projected Income Statements 1983-1985 . . 41

9. BRD - Projected Balance Sheets, 1983-1985 . . 42

10. BRD - Projected Sources and Uses of Funds, 1983-1985 .. 43

11. BRD - Projected Financial Ratios, 1983-1985 . . 44

12. BRD - Schedule of Disbursements . .45

13. BRD - Terms of Reference for the SSE study . .46

This report is based upon the findings of a mission consisting ofMessrs. Emile Sawaya, Chuong Phung and William Whitesell (consultant),which visited Rwanda in April 1982.

I

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BANQUE RWANDAISE DE DEVELOPPEMENT

BASIC DATA

Year of Establishment 1967

Ownership : (as of December 31, 1981)Authorized Capital : RwF 1,000 millionDistribution of Paid-In Capital

RwF million %

Government and Other Public Institutions 539.0 61.6

Domestic Private Sector 129.7 14.8

Foreign Institutions (CCCE, DEG, Belgian 206.2 23.6Government and Bank of Tokyo)

Total 874.9 100.0

Resource Position (as of December 31, 1981)

RwF millionLocal Foreign Total

SourcesShare Capital, Reserves and Special Funds 1,051.5 - 1,051.5Foreign Borrowings 63.0 1,065.0 1,128.0Government and Central Bank 126.2 1,000.0 1,126.2

Total Resources 1,240.7 2,065.0 3,305.7

Uses'Net Fixed Assets 101.1 - 101.1Loan and Equity Portfolio 605.2 769.5 1,374.7

Total Uses 706.3 769.5 1,475.8

Resources Available for Disbursement 534.4 1,295.5 1,829.9Undisbursed Commitments 6.0 756.7 762.7Resources Available for Commitment 528.4 538.8 1,067.2Uncommitted Approvals - 10.0 10.0Construction of the New Building 435.0 - 435.0Resources Available for Approvals 93.4 528.8 622.2

Approvals (RwF million) 1978 1979 1980 1981

Agriculture and Livestock 1.3 93.2 - 1.5Agro-industry 165.2 13.6 211.0 -Manufacturing Industries 195.0 190.8 254.5 8.6Hotels and Tourism 6.0 - 28.5 5.0Transport - - 160.0Commerce - - 160.0 252.0Other - 4.8 - -

Total 367.5 302.4 654.0 427.1

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Operating Results (RwF million) 1978 1979 1980 1981

Gross Income 60.3 88.5 121.5 141.2Administrative Expenses 24.5 31.3 34.9 50.4Financial Charges 10.4 16.8 24.4 26.3Depreciation 5.1 7.1 8.8 8.6Provisions 5.7 15.6 7.3 9.0Net: Profit 14.6 17.7 46.1 46.7Net: Profit/Average Net Worth (%) 4.1 4.0 7.5 5.2Net Profit/Year End Paid-in Share Capital 4.3 4.2 7.6 5.3

Financial Position (RwF million)

Net Worth 387.7 490.9 736.9 1,050.8Total Assets 794.9 1,171.1 1,327.8 1,746.0Term Debt/Equity 1.10 1.30 0.73 0.67

Interest Rates. (These rates were agreed with BRD during negotiations andprevail unless a different rate is specified by lender).

Medium term loans Long term loans(1 to 4 years) (more than 4 years)

Agriculture and Livestock 10% p.a. 11% p.a.Industry and Mining 11% p.a. 12% p.a.Services 12% p.a. 13% p.a.

Commissions and Fees: A commission of 0.75% on loan amount plus acommitment fee of 1% per year on undisbursed amounts.

Status of IDA II (Credit 896-RW)

Credit Account : US$5.2 million, of which US$0.2 million to finance afeasibility study for the establishment of an audit firmin Rwanda.

Date of Effectiveness : January 4, 1980.

Amount Authorized under Credit Component : US$5.0 million.

Amount Committed: (as of January 31, 1983) : US$4.1 million.

Amount Disbursed: (as of January 31, 1983) : US$1.1 million.

Foreign Exchange Risk : Borne by Government.

Closing Date : June 30, 1983.

Free Limit : US$200,000.

I. THE ENVIRONMENT

A. The I]ndustrial Sector

Characteristics and Past Performance

1.01 Industry in Rwanda is the largest sector after agriculture,accounting for 17% of GDP in 1980, but is still small by world or Africanstandards, with value added estimated at US$200 million in 1980. Althoughthe sector includes mining, manufacturing is the dominant activity, with ashare of 90% of the sector's value added. The main production is ofconsumer goods, particularly food and beverages, textiles, shoes and a fewhousehold goods. The processing of such agricultural products as coffeeand tea is also important and contributes a large proportion of thecountry's foreign exchange earnings: 56% of total export receipts in 1980.Mining, which in Rwanda is largely for cassiterite and wolfram is dominatedby one company, SOMIRWA (Societ£ des Mines du Rwanda), which is partlyowned by the Government and includes several thousand artisan miners whosell their production to SOMIRWA (para. 3.02). Until recently theconcentrated ore used to be exported unprocessed. A new tin processingplant has been built, but the start of its production has been hampered bytechnical problems. Cassiterite and wolfram accounted for about 19% oftotal exports in 1980.

1.02 During the period 1976--1980, manufacturing industry experienced agrowth rate of 8.5% p.a. in real terms, as compared to an average 7.1% p.a.projected for the Second Plan (1976-1981), and its share in GDP increasedfrom 12.3% in 1976 to 15.3% in 1980. Except for transport andcommunications, which is a far smaller sector (2.1% of GDP), manufacturingwas the fastest growing sector. During this same period, mining contractedby 2.3% p.a. largely due to decreasing productivity resulting fromincreasing difficulties because of dwindling surface deposits and the olderequipment which needs to be replaced. As can be seen from the above, theperformance of the manufacturing sector relative to other sectors isimpressive when one considers the border problems that Rwanda faced,particularly in 1979, which affected the manufacturing sector especiallyadversely because of the interruption of inputs, spare parts, and othersupplies.

1.03 The characteristics of the manufacturing sector remainessentially the same as those of a few earlier years. Manufacturingactivity has become somewhat more diversified with the establishment ofsuch new factories as plastic utensils and packaging, corrugated ironsheets, candy and soap, etc. Except for the large brewery, there are about100 relatively small but modern enterprises in Rwanda. Employment inmanufacturing was estimated at about 35,000 in 1980, or 1.3% of the totalactive population, but 18.7% of the total engaged in non-agriculturalactivity. About one-third of those engaged in manufacturing are salariedemployees and the remainder are either independent artisans or familyunits. Food manufacturing continues to dominate industrial activity,accounting for about two-thirds of the value added in 1980. Thissub-sector remains largely traditional and artisanal although there have

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been some attempts to modernize some traditional processes such as theproduction of banana beer and wine. Manufacturing of such products astextiles, shoes, and other consumer items accounted for about one-fourth ofthe value added in 1980. Most manufacturing activity is centered aroundKigali, the capital, although some towns in the regions are becoming moreactive and important. Most manufacturing enterprises are privately owned,with foreign ownership limited to some modern enterprises. Governmentownership is significant only in a few large enterprises.

1.04 Available data indicate that annual investment in current termsincreased from RwF 800 million in 1977 to about RwF 1200 million in 1980,but: in real terms this increase is minimal. The main factors that continueto favor such investment are the unexploited local opportunities in eitherimport substitution or in processing of local materials for export, therapidly increasing transportation costs that give locally produced goods anadvantage, Rwanda's political stability relative to its neighbors, and arelatively open economy.

1.05 The growth of industry in general and of manufacturing industryin particular continues to be affected by long existing constraints.Firstly, the domestic market is small, the per capita income is low and thepossibility of exporting to neighboring countries is limited, but isimproving slowly. Secondly, investment costs are high, largely due to thehigh transportation costs and the long time required for imports to arrivewhich necessitates holding large stocks of inputs and spare parts.Finally, the shortage of skilled manpower and the deficiencies of theinfrastructure discourage investors.

Industrial Policy

1.06 Rwanda's industrial policy attempted over the years to establisha framework within which the somewhat limited potential of the sector canbe achieved, mainly through the efforts of the private sector. The policygives priority to those industries that use local raw materials, some ofwhicah for export, are labor intensive, and substitute for imports. Exceptfor a few large projects, where the required resources are relativelylarge, the Government has not actively invested in this sector, but hasadopted measures that were intended to encourage and facilitate privateinvestment (para. 1.09). However, when it has invested, the Government hasgenerally made good decisions on projects, often with private sectorparticipation. Because Rwanda's land-locked location and the hightransport costs provide significant advantages to domestic industry,particularly that which is based on local resources, the Government did nothave to resort to a deliberate protection policy. Quantitative importrestrictions are not generally used; the structure of tariffs, which aimsprimarily at generating revenues, does not provide unusually highprotection and the trade and foreign exchange regulations do not functionas a barrier.

1.07 To encourage industry, the Government has decided upon severalmeasures, the most important of which are:

(i) The investment code, first adopted in 1964, was revised in 1977to extend the provisions to Rwandese investors. The revisedcode provides firms, whose share capital is RwF 10 million ormore, under certain conditions, with an exemption from orreduction in the rates of customs duties and taxes, on importedcapital goods, spare parts and inputs, as well as from taxes onprofits for at least five years. It also permits thebeneficiary enterprises to open bank accounts in foreignexchange either in Rwanda or overseas, and gives them the rightto repatriate profits and capital. The Code also includesprovisions that would extend to certain priority enterprisesprotection in the form of either higher tariffs or quantiyrestrictions on competing imports, or reserves a certain shareof public sector contracts to eligible firms. The incentiveprovisions of the code have been granted to a few firms, butthe protection provision has reportedly been granted only toone firm. Apart from the procedures which the Governmentintends to streamline and improve (para. 1.10) and the limitedapplicability of the investment code to SSEs (para. 1.18), theinvestment code appears to be satisfactory and suitable as aninstrument for promoting industrial investment in Rwanda.

(ii) An industrial park on a site close to Kigali that providesserviced land to industrialists was completed in 1978. Thispark which was financed by FED contains about 10 enterprisesand is likely to be fully occupied soon;

(iii) A bureau for the promotion of industry under a UNDP/UNIDOproject was established in 1977. This project has been revisedseveral times and the bureau was fully staffed only recently.One of the bureau's main objectives is the development ofindustrial projects in Rwanda;

(iv) A special guarantee fund was started in 1978 to provide specialguarantees to small enterprises on loans they obtain fromparticipating financial institutions. The problems that thisfund is suffering from are described in paragraphs 1.19 and1.20; and

(v) Regional cooperation, which includes a joint commission withBurundi that has not operated effectively, and the EconomicCommunity of the Great Lakes which provides a framework foreconomic cooperation between Rwanda, Burundi and Zaire throughregional bodies such as the regional development bank.

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1.08 The industrial sector is also subject to the Government's pricecontrol policy, which aims at regulating price movements through control ofprofit margins, whose maximum is set at 15% at the wholesale level and at25% at the retail level for both imported and locally produced goods.Since transportation costs are added to either the f.o.b. price of imports

or to the cost of locally produced goods, the differences between thecontrol prices of any commodity in the various parts of the countryreflects the differences in transportation costs. The success of the pricecontrol system in containing increases in consumer prices has been limited,because of the limited number of price inspectors (one per region). Sincethere has been no reports of the Government denying any justified priceincreases to domestic industry, this system does not appear to be anobstacle to the development of this sector. The systems of foreignexchange control and trade regulations are operated less for controlpurposes and more for ensuring that the country's foreign exchange earningsare allocated in accordance with priorities, which emphasize essentialimports and the needs of development projects and as such they do notconstitute impediments to the development of industry.

1.09 The third plan (1982-1986) recommends pursuing the same policies,objectives, and strategy as the second plan. The objectives for theindustrial sector will be to increase the production of basic goods eitherfor consumption by the population or for use in agriculture and to processfurther and more of the agricultural and mineral products to provide themaximum possible employment to compensate for the limited opportunities inthe rural sector. The projected rates of growth are 6.7% p.a. formanufacturing industry and 5.6% p.a. for mining. The strategy would aim at(i) integrating as closely as possible industrial investment with thenatural resources and agricultural products of the country; (ii)decentralizing industry to reduce rural emigration and to better utilizeresource endowments; and (iii) further promoting regional cooperation, inthe context of the Great Lakes Economic Community. The third plan does nothowever provide a specific program for promoting industrial development inRwanda. It places special emphasis upon the initiative of the privatedomestic sector for the development of what by necessity should be largelysmall-scale industrial investments. Most of the proposals included in theplan are institutional in nature and relate to areas where the plan hasidentified the need for either reforms or modifications such as the reformof the special guarantee fund (para. 1.20), the rejuvenation of the Chamberof Commerce and Industry, the organization of the artisans intocooperatives, and the creation of a national technology center. Othermeasures include: (i) the promotion of medium- and small-scale industrythrough various means, including a more responsive financial system;(ii) the creation of new industrial zones, starting with the main one nearthe airport in Kigali; (iii) the training of the necessary manpower,including skilled workers, technicians, professionals and managers;(iv) the preparation of a project pipeline (para. 1.07); and (v) thesimplification of procedures relating to the investment code. Thesepolicies, apart from those affecting SSEs which are discussed later,appear to be largely suitable in view of the present situation in Rwanda.

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Sector Issues

1.10 There are two issues that need to be addressed if the developmentof the industrial sector is not to be hampered. Firstly, the proceduresthat govern applications under the investment code and the granting ofincentives that are provided under it should be simplified. Also, given

the role that SSEs are expected to play in the development of industry inRwanda, the code should be reviewed to determine what incentives could and

should be provided to SSEs. A full review of the investment code isplanned by the Government and will be carried out by its agencies. Thetechnical assistance included in this project will help in the partrelating to SSEs. Secondly, there is need to strengthen and improve the

capacity to prepare projects. The Bureau for Industrial Promotion (para.1.07[iii]) will help in this regard. It is starting to develop someprojects, but it is too early to judge the usefulness of its work. Theeffort to identify and develop projects is also likely to benefit from theIDA-financed technical assistance project, as well as in some instancesfrom the BUNEP, the autonomous Bureau for projects set up under theauspices of the Ministry of Plan.

IDA's Strategy

1.11 IDA's strategy in the industrial sector has evolved gradually overthe years, from a purely institution-building effort to the establishmentof a basis for a meaningful policy dialogue with the Government on issueswhich influence overall sector performance. Under the first two IDAcredits, the main objective was to help BRD develop into a strong financialinstitution. That objective is now largely achieved. BRD is strongfinancially and has relatively experienced staff. With this third IDAcredit, a new phase begins whereby IDA will assist BRD and Government instarting a concerted effort to assist SSEs, while continuing tostrengthen BRD under a new management. An IDA consultant has provided BRDand the Government with help in preparing the SSE component of this projectand a mission under the World Bank - UNIDO Cooperative program undertook areview of the SSE/artisan sector. These form the basis for efforts toreorient BRD's operations and increase its lending to SSEs, and for theassistance provided under the project to help Government develop a national

SSE development program that could possibly be assisted by a future SSEproject. Finally, IDA will be joining efforts with other UN Agencies inhelping Government establish regional institutions and define more clearly

the potential for regional cooperation in the field of industry. First,IDA is the executing agency for the technical assistance provided by UNDPto the Development Bank of the Great Lakes Community (Burundi, Rwanda and

Zaire). Second, through several sector missions IDA will help assessthe possibilities of regional markets and the problems and prospects ofindustrial development in Rwanda, Burundi and Eastern Zaire. The first of

these missions will cover Rwanda and Burundi and will complement a

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study planned by UNCTAD on harmonization of tariffs and fiscal policy amongcountries of the Great Lakes Community. It will also attempt to assess therole and contribution of industry to the long term development of Rwanda,given the need for diversification to reduce the economy's extremedependence on coffee and the high and increasing level of unemployment.The sector mission has been scheduled to follow the publication of Rwanda'sThird Development Plan (1982-1986). This will provide an opportunity forassessing the implications of the proposed industrial investment programand its impact on Rwanda's economic and financial prospects during thisperiod.

B. The Small-Scale Enterprise Sector

1.1L2 Rwanda has no reliable or consistent data about the number ofSSEs and their employment, investment, output, etc. Generally, SSEscan be found in fishing, dairy, poultry, grain milling, bakeries,garment-making, brick-and tile-making, wood and metal products as well assuch services as auto repair.

1.13 Before an appropriate nationwide SSE development program can bedevised there is need for gathering more reliable information on thissector, through a comprehensive survey. As the Government may not possessthe necessary resources to undertake such a task, the proposed project willhelp in this respect by providing the necessary funds to finance consultantservices and the local costs of the survey.

1.14 There are several institutions assisting and dealing with SSEsand artisans in Rwanda. The Ministry of National Economy (MINECON) is theprimary Government agency and its Directorate of Artisanat has the mainresponsibility. The Director has a total staff of six in Kigali and threein each of seven regional centers. There are plans to open new centers inthe three remaining regions of the country. The headquarters staff dealwith policy and organizational matters, while the regional staff assistSSEs and artisans with marketing and management. This Directorate willhave the services of an expert from the UNIDO team (para. 1.07[iii]) tohelp develop investment proposals and provide technical assistance in fourpriority areas initially: brick-making, carpentry, agriculture andblacksmithing.

1.15 MINECON and the Ministry of Social Affairs and Cooperativeshave sponsored a marketing agency -- ASPAR (Association pour la Promotionde l'Artisanat Rwandais), which began operations in 1977, but has not shownsigns of success. ASPAR collects the products from throughout the country,with the assistance of the above-mentioned regional centers. ASPAR seemsbetter suited for artisans than for SSEs.

1 .16 Training in management for SSEs is provided by TRAFIPRO, aparastatal; the Ecole d'Art at Nyundo trains in painting and sculpture;the Centre National de Petit Elevage in raising poultry, pigs, and rabbits;and the Ecole Technique de Kicukiro in technical areas. There is noeffective training in accounting for SSEs.

1.17 Access to credit for SSEs in Rwanda is not well organized ordeveloped. Short-term credit to SSEs, mainly for commerce, transport andconstruction is provided to a limited extent by the commercial banks andthe parastatal Caisse d'Epargne. Term loans are provided mainly by BRD andthe Banques Populaires, a decentralized cooperative rural banking program,more akin to credit unions, which began in 1975 with Swiss aid (para.1.26). In addition, there is a Fonds de Developpement Communal (FDC),under the Ministry of Interior, which was established in 1977 to providegrants, loans, and guarantees to local Governments (Communes), of whichthere are 143 in Rwanda. The FDC has financed a few projects such asbrick-making, carpentry, metal workshops, garages, and bakeries. FDC'sresources amount to about RwF 100 million. It has already paid RwF 33million on guarantees it has issued.

1.18 Aside from the special guarantee fund (para. 1.19), SSEs appearto be at a disadvantage relative to larger enterprises. To have access tothe advantages offered by the Investment Code, a firm must have a sharecapital of at least RwF 10 million, which in the case of Rwanda impliesthat the vast majority if not all SSEs would in practice be excluded.Government's procurement policies and practices do not favor SSEs throughpreferences, reserved shares or products, or partitioning of largecontracts into smaller lots which could be handled by SSEs. There are noreliable studies or information about the impact of protection and pricecontrols on SSEs.

1.19 The special guarantee fund was the major measure that Governmenthas adopted to favor SSEs in the last few years. This fund was set up in1978 to help enterprises which are unable to meet normal securityrequirements to obtain bank loans. Contributions to the Fund come from a10% levy on the pre-tax profits of participating institutions. Untilrecently, only the two commercial banks have been participating and thetotal of the resources that they have contributed is about RwF 100 million,which should allow the issuance of guarantees totalling about RwF Ibillion. The guarantee is limited to 80% of the loan. To obtain aguarantee, a request must be submitted, accompanied with a substantialamount of documentation to an interministerial committee, chaired by theDirector General of Industry at MINECON. This fund has not been effective

because of its demanding and cumbersome procedures. The commercial bankshave not used it often because of their reluctance to carry the residualrisk and the high administrative costs associated with small loans. Partlybecause this fund has been ineffective, with only a handful of guaranteesissued in four years, the Ministry of Agriculture has set up a separateguarantee scheme to be run by the Banques Populaires. BRD recentlyjoined the fund but also established its own scheme (para. 2.23) toguarantee small projects of less than RwF 500,000 which it does not intendto submit to the special fund.

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1.20 While there may be merit in these separate schemes, there is needto ensure that an effective SSE guarantee program is available to allfinancial institutions. The resources already set aside should not remainidle as at present. The Government is now attempting to revitalize thespecial guarantee fund and is envisaging to introduce a number of measuresto ensure that: (i) all participants have equal access to the funds and tothe same extent; (ii) access to the fund's guarantee is close to automaticby better and clearer criteria that define and describe applicants;(iii) documentation is simple and easy for SSEs to provide (iv) claims onlyare subject to review by a high-level committee; and (v) payment of claimsare limited to a given percentage (e.g., 80%) of the amount outstanding, orup to a maximum of the value of the guarantee issued to keep participatinginstitutions interested in pursuing recovery of arrears.

1.21 SSE Potential and Development Strategy. The constraints on SSEdevelopment in Rwanda include limitations in available technical andmanagement know-how, insufficient knowledge of the available resources andopportunities and, the lack of active support by financial institutions.The limited size of the local market is not as much of a constraint forSSEs as for larger industries. There are indications that the potentialmay be considerable. A mission under the World Bank/UNIDO cooperativeprogram and the resident UNIDO team working at MINECON have identifiedseveral areas for further investigation of investment potential. Theseinclude improved bricks, concrete blocks and tiles, agricultural tools,food production and processing, etc. Also, BRD has received in recentyears requests for financing many SSEs which it did not look into forvarious reasons, including shortage of staff. The range of activities isas dliverse as the one cited above. These requests have averaged aboutRwF100 million per year, or more than three times the average level ofBRD's SSE loan approvals in recent years. If BRD had been moreforithcoming, it is likely that the level of requests may have beensubstantially higher. Thus, though there are several obstacles tosurmount, the development potential for SSEs in Rwanda is significant.

1.22 The Government has not developed a coherent plan for thepromotion -f SSEs. There are several expressions of support for SSEs, asin the third plan but because of the lack of resources there are nospecific policy or strategy recommendations. The most concreterecommendation, that of building industrial estates for SSEs is of doubtfulvalue, since SSEs' need for centralized locations and their capacity to payeconomic rents for such facilities have not been established.Consequently, BRD's attempt to launch a new intensive effort to promote andfinance SSEs promises to be a breakthrough, which both Government and IDAcould use to lay the foundation for a nationwide program (paras.2.18-2.25). IDA could assist Goverment in carrying out the study that hasbeen identified as a priority (paras. 1.13 and 1.18). The objective of thestudy should be the identification of the institutional and policyframework of an SSE development program. It should include:

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(i) preparation of a thorough survey of SSEs to be carried out byGovernment;

(ii) review of Government policy affecting SSEs as manifested inthe investment code, procurement policies and procedures,product standards, price controls, company law, etc., with theobjective of recommending changes in those areas unfavorable to

SSEs; and

(iii) assessment of the adequacy of existing training facilities andextension services (technical assistance) available to SSEsin technical, accounting, marketing and management, anddetermination of additional requirements.

C. The Financial Sector

1.23 Rwanda's financial system consists of the following institutions:the central bank, two commercial banks, the development bank (BRD), the

Banques Populaires, the Savings Association, and the Caisse Hypoth6caire.The headquarters of these institutions are in Kigali but some of them havebranches in a few other locations, particularly some of the regional towns.There is also the regional development bank of the Great Lake countries,which is responsible for financing regional-type projects in many sectors.

1.24 The central bank (Banque Nationale du Rwanda - BNR) supervisesthe country's financial institutions, formulates the monetary and creditpolicies, and manages the country's international reserves. BNR has at itsdisposal several tools to influence credit and monetary developments. In

the past, it frequently used credit ceilings either on an overall basis orby sector, but recently it has more actively manipulated the structure andthe level of interest rates (para. 1.29), the intention being to redirectinvestment awny from such sectors as housing to directly productive sectors

such as industry. BNR also requires that financial institutions grantingcertain types of credit obtain its prior approval. BNR is also theGovernment's main banker and had prior to 1979 actively extended credit toit. However, since then the Government's net position has improved and asof December 31, 1981 was positive vis-a-vis the banking system. BNR alsocontinues to administer a flexible system of import licensing which permitsits selective control over the use of foreign exchange.

1.25 The two commercial banks (Banque Commerciale du Rwanda and Banquede K4 ali, established in 1963 and 1966, respectively), are majorityforeign owned and managed. Together they had total assets of about RwF 9.7billion at the end of 1981, of which RwF 7.8 billion were in deposits ofvarious types. Term deposits of one month or more at both banks accounted

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for RwF 680 million, or about 9% of total deposits. The commercial banksfinance exports, particularly coffee, and imports, which is the main reasonwhy they accounted for 86% of the short-term credit. Their combinedmedium- and long-term lending accounted for only 20% of the totaloutstanding at December 31, 1981.

1.26 The development bank (Banque Rwandaise de Development - BRD) isthe most important term lending institution, accounting for 43% of thetotal outstanding term credit at the end of 1981. BRD will be described inmore detail in the following chapters. The Savings Association is next inimportance; it provided 24% of total term credit at December 1981, ascompared to less than 5% in 1977. The Caisse Hypothgcaire, the mortgageassociation which is supposed to be responsible for financing all housingand building construction in Rwanda of a value of RwF 0.5 million or more,is still relatively inactive. As a result commercial banks continue tofinance housing loans, with tacit official approval. The BanquesPopulaires, a network of cooperative banks similar to credit unions, thatstarted operations in 1975 have increased rapidly in number and areactively providing term credit in the rural areas; their combined share ofthe total term credit was 4% in 1981. These banks have been verysuccessful in mobilizing savings from the rural areas. The total of theirdeposits amounted to about RwF 700 million at the end of 1981.

1.27 Inflation. Rwanda does not have a price index that would reflectprice movements on a country-wide basis, but rather an index for the cityof Kigali that reflects price developments, including those of imports.Another index that includes price movements of local goods only in Kigaliis available, but is less meaningful. Most consumer prices arecontrolled through maximum profit margins (para. 1.08). The enforcement ofprice controls is reportedly not very effective because Government does nothave either the staff or the procedures to check on ro pliance.

1.28 In recent years, prices in Rwanda have been most influenced bythe seasonal fluctuations of crops, the frequent border closings withUganda, Rwanda's main transport link, which affected supplies, and themovement of the Rwandese franc, which is linked to the US dollar,vis-A-vis European currencies, where most of Rwanda's imports originate.Thus after increasing by 7% in 1976, the general consumer price indexincreased by an average of 13.5% p.a. in 1977 and 1978 and jumped to 15.8%in 1979, a year in which there was a prolonged border closing with Ugandaand poor food crop harvests. In 1980, inflation fell to 7.2% p.a.,largely because of better harvests and the lack of transport problems,combined with some appreciation in the US dollar. Continued good crops andappreciation of the US dollar contributed to a continuation of a lowinflation trend in 1981, when the general price index is estimated to haveincreased by about 7%. This situation is expected to deteriorate somewhatover the next few years because lower coffee prices and expanded budgetswil:L lead Government to incur deficits which it will finance from bankswith obvious pressure on prices. It is expected that inflation wouldaverage about 9.5-10% over the next few years.

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1.29 Interest rates are fixed by BNR, which put into effect asubstantial upward revision in November 1979. These rates remainunchanged, with the exception of some minor modifications such as theintroduction of penalty interest on defaulters (Annex 1). This structureof interest rates appears to be adequate now and the increase does not seem

to have had an adverse effect on the level of investment in Rwanda. Themaximum term deposit rates for periods between one month and one year varyfrom 6% to 7% and range from 8% to 9.5% for savings of longer than one yearin duration. The lending rate for productive investments approved by BNRis 11%. Other term loans carry rates of about 12% for medium-term loansand 13% for long-term ones. In view of the inflation projected over thenext few years, this structure of interest rates, if maintained, should beconsidered generally suitable for Rwanda.

II. THE INSTITUTION

A. Institutional Aspects

Background

2.01 The Banque Rwandaise de Developpement (BRD) was established in1967 as a limited liability company to encourage the creation anddevelopment of enterprises in Rwanda. In 1976, IDA granted BRD a credit ofUS$4.0 million (Cr. 655-RW), which was followed by a second credit ofUS$5.2 million in 1979 (Cr. 896-RW). IDA's main objectives have been tohelp BRD become a strong development institution and to provide termfinancing for sound productive investments. As of September 30, 1982,about US$3.9 million had been committed under the second IDA credit.Projects financed were essentially new operations as the country is stillat an early stage of development and were distributed over several economicsectors. They were all judged to be viable, with financial rates of returnin most cases in excess of 15%. As the first credit has just been fullydisbursed, a Project Completion Report will be prepared in 1983.

BRD's Objectives and Role

2.02 BRD's main objectives are to finance the development of Rwandeseenterprises and promote the diversification of the country's economicstructure and a balanced regional distribution of investments. Infulfilling its mission, BRD is authorized to grant term loans or guaranteesand make equity participation in enterprises. It can receive deposits fromenterprises it assists, administer any funds, issue notes, and borrow inRwanda or abroad. BRD is autonomous and its decisions are made on thebasis of the results of its own appraisal of the technical, financial andeconomic merits of projects.

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Share Capital and Ownership (Annex 2).

2.03 BRD's share capital consists of A" shares which must account forat least 55% of the total, and are reserved for the Government and publicRwandese agencies and institutions, and B" shares for private and foreignshareholders. There are no differences between the rights and privilegesof either category of shareholders. BRD has been very successful inconvincing its shareholders to put up new resources to strengthen itscapital base. In November 1980, the Board approved a fourth increase inBRD's authorized capital from RwF 416 million to RwF 1 billion. RwF 37.1million of the increase consisted of a stock dividend, while RwF 546.9million was in new subscriptions, of which RwF 365.2 million (including aRwF 75 million Government loan which was converted into equity) wassubscribed by "A" shareholders; the remaining RwF 181.7 million wassubscribed by "B" shareholders. As of January 31, 1983, RwF 488 million ofthe increase of RwF 584 million was fully paid in. BRD expects the balanceto be paid in shortly. Ownership of. BRD's share capital is presentlydistributed as follows: public sector 64.7%, domestic private sector14.0%, and foreign institutions 21.3%.

Board of Directors

2.04 BRD's Board of Directors consists of 11 members, of whom sixrepresent the "A" shareholders (public sector), and five the "B"shareholders. The President of the Republic appoints the Chairman of theBoard. The five directors for the "B" shareholders represent CCCE, DEG,the Belgian Government, the two commercial banks, and SONARWA, the RwandeseInsurance Company. The Board meets on a regular basis to determine BRD'spolicy and to approve equity participations, guarantees and loans exceedingRwF 3 million (para. 2.22). It also takes an active interest in seeingthat: BRD evolve as a sound development institution. Overall the Board'sperformance is satisfactory.

Management, Organization and Staffing

2.05 Management. In mid-July 1982, the Government appointed a newManaging Director for BRD when the incumbent's third three-year termexpired. The New Managing Director is young, dynamic and competent.Before coming to BRD he was Advisor to the President for Economic andSocial Affairs. He is also well known in the business and bankingcommunity for having served as the chairman of the board of one of Rwanda'stwo commercial banks. To manage BRD, he will be helped by two competentexpatriate experts: a Burundi national, who has been with BRD since 1973,and a German national, who joined in 1975 under the auspices of Germanassistance. The latter is in charge of investments and project

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evaluation. Until May 1982, BRD had two other expatriate experts: atechnical/engineering advisor, also under German bilateral assistance, andan economist/financial analyst financed by the Belgian Government. Bothleft at the expiration of their contract; the Belgian expert is expected tobe replaced shortly. Recently, BRD has approached the Centre deDeveloppement Industriel (CDI) for assistance in preparation and evaluationof SSE projects. CDI is, reportedly, favorable to the request.

2.06 Staffing and Training. BRD's staff totals 67, of whom 23 areprofessionals, including two expatriates. The Rwandese professional stafftypically have formal training in economics, finance, businessadministration, or social sciences. Most of them are university graduatesand have been with B1RD for some years. The staff is generally dedicatedand hard working.

2.07 BRD's training program relies mainly upon practical on-the-jobtraining although a number of professional staff has also benefitted fromspecialized courses in project evaluation and financial managementorganized by the Centre d'Etudes FinanciVres Economiques et Bancaires inFrance (CEFEB) and EDI. BRD has a staffing plan based upon its ownprojections of operations up to 1985. In 1983-84, it plans to recruit 6new professionals to (i) reinforce the supervision service and the loancollection unit which has been separated from the accounting services; and(iii) staff the newly created SSE Division (para. 2.08).

2.08 Organization. Since its establishment BRD's organization hasremained basically unchanged. It consists mainly of two Departments: (i)The Investment Department which is responsible for project evaluation inall its aspects, supervision, and provision of technical assistance toenterprises assisted by BRD; and (ii) the Administration and FinanceDepartment which is responsible for disbursement and loan collection, aswell as for maintaining BRD's accounts and administering the local andforeign resources. Until recently, these two departments did not havemanagers so that all the staff reported directly to the Managing Director.In the past, when BRD was small this fluid organization was suitable andefficient, but with the rapid increase in the volume and complexity ofoperations, BRD has become aware of the need to strengthen the top-levelmanagement of the institution and equip it to better handle an increasinglevel of more complex operations. In July 1982, therefore, BRD made thefollowing organizational changes:

(a) It created an SSE Division in the Investment Departmentto be in charge of both appraisal and supervision of SSEprojects. This Division consists of two units, one foragricultural projects and one for other small projects; atpresent it has four professional staff but two more willbe recruited in the near future;

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(b) It created a separate Disbursement and Loan CollectionUnit in the Administration and Finance Department. Untilnow these functions were entrusted to the AccountingDivision; and

(c) It appointed managers for the Investment andAdministration and Finance Departments;

The above changes are timely and contribute to greater efficiency inmanagement and administration.

Operating Policies and Procedures

2.09 Policy Statement. BRD's policy statement is satisfactory. Withthe changes proposed in paras. 2.10, 2.16 and 2.22 below to strengthen theanalysis of the economic impact of projects, to simplify the interest ratestructure, and to adapt some policies to SSEs, this statement wouldconstitute a sound basis for BRD's operations.

2.10 Appraisal. BRD has made significant progress in improving thequality and standard of its appraisal work, particularly the financial andtechnical aspects. Projects are thoroughly analyzed and, in some cases,redesigned during appraisal to make them more suitable to the Rwandeseeconomic and financial conditions. BRD's appraisal procedures have alsobeen reinforced and systematized. Appraisal reports prepared by the staffare first reviewed and discussed within the Investment Department at theProfessional Staff Meeting (Reunion des Cadres), then presented to theStudies Committee (Comite d'Etudes), which is chaired by the ManagingDirector and composed of all the bank's senior staff, before beingsubmitted to the Board. In contrast, the economic analysis of subprojectsis relatively weak and needs to be strengthened. Calculation of netforeign exchange earnings/savings or the incremental value added is done inan inconsistent way, while the economic rate of return is only estimatedfor large import substitution projects. BRD has been asked to calculatethe economic rate of return for all non-service sector projects aboveUS$200,000 in the future. At negotiations, assurances have been obtainedfrom BRD that it will amend its Policy Statement to reflect thisrequLirement. Such an amendment is a condition of effectiveness.

2.11 Supervision. BRD's supervision procedures are satisfactory. BRDstaff normally visit each project under supervision twice a year. Thoseunder construction are systematically visited after the first disbursementand at completion. Projects encountering difficulties receive additionalvisits. Following each visit, a supervision letter is sent to the promotersummarizing the findings and, if necessary, recommending actions to betaken to redress any problem. BRD also requires client companies to submit

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annual reports and financial statements as well as quarterly reports andreviews them thoroughly. However, due to the lack of auditors in Rwanda,these accounts are not audited by outside auditors and are often delayedand incomplete. At present, the supervision unit has five professionalsworking full time on project follow-up and assistance to enterprises.Efforts are underway to replace them as soon as possible. In view of theexpanding portfolio and greater involvement in the more risky SSE sector,BRD intends to further reinforce this unit by increasing its staff to sevenin the next three years.

2.12 Promotion. BRD has been very active in project promotion and hassuccessfully identified a large number of investment opportunities tofinance in industry, agriculture, as well as in the service sectors andthus has grown at a rapid pace in the last several years. It now intendsto devote efforts to the promotion of small projects and has alreadyinitiated studies in a number of subsectors (woodworking, windmills,garages, tea-growing, quinquina) to assess the market and investmentopportunities.

2.13 Procurement and Disbursement. While the responsibility forselecting suppliers rests with the project promoters, BRD ensures that theitems to be purchased are at the lowest possible cost and suitable to theplanned operation. For larger projects, several quotations are obtainedduring appraisal, and in cases where substantial construction is involved,BRD usually requires competitive bidding. Since projects financed by BRDonly involve procurement packages of a relatively modest size,International Competitive Bidding (ICB) would not be suitable. BRDrequires equity funds to be paid first, then disburses against presentationof invoices or relevant documentation. These procedures are adequate.

2.14 Auditors. Since 1976, when it was agreed under the first IDAcredit that an independent auditing firm would verify BRD's accounts, theNairobi based firm of Pannell, Kerr, Forster and Co., which has Frenchspeaking staff, has been auditing BRD's accounts. The audits have beengenerally satisfactory and in line with IDA's requirements. Under theproposed credit, BRD will continue to have its accounts and financialstatements audited by Pannell, Kerr, Forster and Co. or by otherindependent auditors acceptable to IDA and will furnish to IDA certifiedcopies of its audited financial statements and its annual report within sixmonths after the end of the fiscal year.

2.15 Interest Rates. Following a general readjustment of interestrates in November 1979, BRD revised its interest rate policy and adopted a

system whereby the rates charged to clients depend on three factors:(i) the maturity of the loan (medium or long-term); (ii) the sector; and(iii) BRD's own calculation of the project's financial rate of return(FROR). The "basic" rate varies from 8% to 10% for medium-term loans, and

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from 9% to 11% for long-term loans, depending on the profitability of theproject: the lowest rate is for projects with a FROR of 15% or less and forprojects below RwF 1 million for which FROR is not calculated; the middlerate for projects with FROR of 15% to 20%; and the highest rate forprojects with FROR over 20%. Except for agriculture which is exempted,sector differentials are then added to the "basic" rate as follows:commerce: 2% p.a., industry and other sectors: 1%i p.a. In addition, a flatfee of 0.75% of the loan amount should be paid at signature and acommission of 1% is charged on undisbursed funds. This interest ratestructure applies to all local and foreign currency loans with theexception of two foreign lines of credit which have specific onlendingcornditions (Annex 3).

2.16 This system is too complex and administratively very cumbersomeas there are 18 possible interest rates. The categories are also arbitraryand the criteria too easily manipulated so that it might confuse clientsand make them suspicious of possible favoritism by BRD. As the cost of itsresources as well as the cost of loan processing the larger projects arethe same, there is no reason for BRD to maintain so many different interestrates. Such a policy penalizes good projects, is arbitrary and results ina relatively low average interest rate, which is now between 10% and 11%p.a. on the portfolio. Financial forecasts (para.2.42) indicate that BRDwould need to earn a spread of about 5.5% on its lending activities tocover increasing operating costs and earn a minimum profit. To achievethis objective in the face of higher inflation and higher borrowing costs,both locally and abroad, there is no other alternative than to increaseonlending rates. At negotiations, BRD agreed (i) to simplify its interestrate structure by eliminating FROR as a criterion for determining interestrates; (ii) not to give any interest rate preferential to SSEs, with theexception of very small loans of less than US$11,000 for which no detailedevaluation is made; (iii) to increase the rates by 1 to 2 percentagepoints; (iv) to set interest rates at positive levels in real terms and toreview the level and structure of interest rates with IDA at least one ayear; and (v) to carry out a study on interest rates in Rwanda to see howthe system could be further rationalized and better contribute to theachievement of the Government's development objectives. The terms ofreference as well as the timetable for this study which if requested couldbe financed from the study component of the proposed credit, have beenagreed with Government during negotiations. BRD's new interest ratestructure is given in the table below:

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BRD's interest rate structure(in percent per year)

Medium term loans Long term loans(up to 4 years) (more than 4 years)

Agriculture and livestock 10 11Industry and Mining 11 12Services 12 13

Commissions and Fees: a flat fee of 0.75% of the loan amount payable atsignature plus a commitment fee of 1% on undisbursed amounts.

With this new interest rate structure, BRD should be able to earn anaverage interest rate of about 12.5% per year as most of the projectsincluded in its pipeline are in the industrial and service sectors forwhich BRD intends to give long term loans carrying higher interest rates.

2.17 Foreign Exchange Risk Coverage. As a small, relativelyunsophisticated development bank, BRD cannot bear the foreign exchangerisk, nor can it pass it on to its borrowers because: (i) many of them aresmall entrepreneurs inexperienced in foreign exchange dealings and BRDwould have to establish very cumbersome procedures; and (ii) at presentother term lenders for productive purposes in Rwanda charge 11% and theirborrowers can obtain foreign exchange at the central bank. So far, thesecommercial banks have not been very active in term lending for productiveenterprises as they consider BRD - in which they have a share - as thenatural and well equipped institution for this type of activity. Also, BRDand commercial banks' term rates have been at about the same level. Nowthat BRD has increased its lending rates (para. 2.16), to request that itpasses on the foreign exchange risk to its clients would run the risk ofdiverting part of BRD's business toward commercial banks, with theresulting adverse effects on its business and profitability, and thequality of term lending in Rwanda. Charging a fee on top of the new rateswould run the same risk. Finally, it is not considered advisable orjustified to ask BRD to assume such a fee as it is an already well run andcost effective institutions and absorbing the fee would reduce its spreadto a level which would impair its profitability and long term viability.Under the first two IDA credits, the Government assumed this risk at no feeand has agreed to continue to do so under this project.

BRD and SSEs

2.18 BRD recently undertook a review and analysis of its past andpotential role in financing SSEs. Its definition for study purposes was thetotal assets of an enterprise, although sales volume and number ofemployees were also considered. Small enterprises were those with maximumfixed assets of RwF 15 million. On this basis, in the seven years endingDecember 31, 1981, 44% of BRD's 73 loan approvals were for small

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enterprises (SSEs). The proportion of total loans approved for SSEs byamount was of course much lower (3.1%). This level of approval was farless than the actual demand for loans. Because of staffing constraints anda higher priority given to processing large loans, BRD did not investigatean average of more than 40 SSE loan applications per year, representingaggregate annual loan requests exceeding RwF 100 million.

2.19 BRD's past reluctance to finance SSEs was due to the higheradministrative costs and bad debt losses associated with such lending.None of BRD's 13 large enterprise clients had arrears of over three monthsat March 31, 1982, while two of eleven medium-size clients and 11 of 25small enterprise clients were in arrears at that date. Also, excluded fromthe figures given in para. 2.18 was a program of 38 small loans forpi,ck-up trucks, granted without sufficient appraisal or security in the mid1970s, most of which BRD has since written off. Given the lack ofGovernment extension or management training services to SSEs, they arelikely to continue to require more intensive follow-up assistance by BRD.

2.20 On the positive side, BRD analysis shows that several factorscould alleviate the negative financial impact of SSE lending. Firstly,more experience in the sector should lead to improved repayment performancethrough better criteria to select better projects and promoters. Secondly,the current streamlining of loan processing procedures for SSEs should holddown administrative costs. Thirdly, an increase in BRD lending ratesshould help improve its average spread. Fourth, access by BRD to aneffective guarantee scheme could help minimize the financial impact on BRDof bad debts on SSE loans (para. 2.22). On the basis of the above, BRDestimates it should be able to break even on SSE lending with a spread ofabout 8%. If this proves insufficient, BRD nevertheless enjoys sufficientprofitability on lending to large enterprises that it could absorb some ofthe costs of a modestly expanded program for SSEs.

2.21 However, given the risks involved, the lack of a coherentGovernment plan for the promotion of small entrepreneurs and the need formore experience with this type of lending, BRD decided to proceed withcaution and has developed a two phase program to assist the SSE sector. Inthe first phase, the main emphasis will be put on (i) selecting andfinancing the large number of unsatisfied SSE loan applications which havenot been processed in the past because of the shortage of staff and the lowpriority that was accorded to them, and (ii) adapting BRD1s loan processingprocedures and organizational structure to facilitate SSE lending (paras.2.22 to 2.25). In the second phase, which is expected to begin in 1984-85when more experience and knowledge about the sector would have beenaccumulated, BRD intends to take a more active, promotional role with theemplhasis put on assisting and training small entrepreneurs.

2.22 In March 1982, BRD's Board approved the SSE program andauthorized revisions of policies for SSE lending. It lowered BRD's minimumloan level from RwF 500,000 to RwF 200,000. Also, to speed up loanprocessing, BRD's management had been previously given authority to approve

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loans of up to RwF 3 million, subject to a maximum annual aggregate of RwF20 million. Further, while BRD normally lends up to 50% of total projectcosts, it will now finance up to 65% of costs for medium-size projects, andup to 80% for small projects. BRD also proposed to finance up to 100% ofextension projects; this would be inappropriate, however, for extensionsthat are very large in relation to existing assets of an enterprise. Ithas agreed to modify its policy to permit financing of up to 100% ofextensions only where total financing does not exceed 50%, 65%, or 80% oftotal assets of large, medium or small enterprises, respectively.

2.23 Because many promoters of small enterprises have insufficientassets to offer as security for loans, BRD believes a guarantee schemewould be an important complement to an expanded SSE lending role because itwould reduce the provision costs, which are much higher for this type oflending than for larger projects. Recently, BRD has become a participantin the Government's Special Guarantee Fund which will be revised to makeSSE financing more attractive for financial institutions (paras. 1.19 and1.20). It has also established a guarantee fund of its own for very smallprojects, using the counterpart resources under KfW lines of credit tocomplement the guarantees received under the Special Guarantee Fund.

2.24 Starting with the first phase of its SSE lending program, BRD hascreated a small enterprise lending division within its investmentdepartment to streamline procedures, and to expand lending by being moreresponsive to SSE loan requests. Within the SSE Division, two projectanalysts will be responsible for agricultural lending (primarily, tree cropplantations and livestock), while four analysts will be assigned to othersmall loans. The Division has now four professionals transferred fromBRD's Investment Department; BRD is now seeking to recruit two new Rwandeseuniversity graduates. Medium size loans will be processed with the sameprocedures and staff as for large loans.

2.25 With regard to procedures, BRD plans to introduce simplifiedapplication forms, appraisal reports, and loan contracts. To facilitatefuture appraisal of individual SSE loans, BRD will complete studies ofpriority sectors, such as grain milling, carpentry, auto-repair, livestock,tourism, tea, and cinchona. Compared to average SSE loan approvals of onlyRwF 35 million annually over the last eight years, BRD has set a target ofRwF 105 million of approvals/year in 1983 to 1985. These targets appearachievable based on BRD's analysis of past and present SSE loanapplications.

B. Operations

2.26 As of December 31, 1981, BRD has approved loans and equityinvestments amounting to RwF 2.4 billion. While most of the equityparticipations were made before the mid-1970's, loan approvals started tobecome important only in 1974 when they amounted to RwF 163 million. Since

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then, they have expanded rapidly to reach RwF 427 million in 1981. 1/This growth in approvals has essentially taken place in long-term lendingfor relatively few large projects. Medium-term loans, which in 1979accounted for 74% of total approvals, represented 2% in 1981.

2.27 With the increase in activities, the sectoral mix of BRD-financedprojects has also changed significantly. In the early 1970s, the transportand tourism sectors were the main focus of BRD's lending. Over the lastthree years, however, industry became predominant, accounting for about 48%of total approvals. Other sectors of importance included services such asgarages and storage. The rate of commitments and disbursements havegenerally kept pace with the rate of approvals.

2.28 Because BRD is the only source of foreign exchange term loans inRwanda, it has been involved in financing all sizes of projects from theMAGERWA storage and distribution project requiring a loan of RwF 240million (US$2.6 million) to small-scale projects amounting to RwF 0.5million. Generally, BRD keeps the size of its investment within 20% of networth in order to spread the risks over its portfolio. On a few projectsfor which its intervention exceeded the 20% exposure limit, it has obtainedadequate supplementary guarantees mostly from Government. During 1979-81,BRD approved 39 projects with a total cost of RwF 4.0 billion; it financedRwF 1.4 billion and thus, helped mobilize an additional RwF 2.6 billionworth of investments. The projects typically have financial rates ofreturn in excess of 15% and an estimated investment (including initialworking capital) per job created in the range of US$2,500-3,000 for smallprojects and US$25,000-30,000 for medium and large projects.

Portfolio

2.29 Loan Portfolio. As of December 31, 1981, BRD's loan portfolioamounted to RwF 1,172 million and is distributed as follows: industry,inc:Luding mining 73%, transport 16%, tourism 3%, agriculture 1% and othersectors 7%. Long-term loans accounted for RwF 1,074 million (92% of theportfolio) and debts considered doubtful or bad for RwF 21 million, or lessthan 2% of the portfolio. A large number of projects (46%) are totallyowned by Rwandese entrepreneurs, although Government or foreign-controlledenterprises have also been assisted by BRD. As most of the projects havebeen approved recently, the portfolio is relatively young with manyprojects still under execution or just starting operations. Those whichare in operation are quite profitable.

1/ According to preliminary data, loan approvals fell in 1982 to aboutRwF 250 million as a result of slippage of a very large project to1983.

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2.30 Total arrears of more than three months at the end of March 1982amounted to RwF 10.2 million, i.e., less than 1% of the portfolio, andaffected 13 projects, accounting for about 5% of the overall outstandingportfolio. Of these projects, 12 were small and medium enterpriseprojects, mostly carpentry. This subsector was severely affected by theslowdown in construction, particularly housing construction for rentalpurposes, which decreased the demand for furniture and carpentry work. BRDhas stopped processing carpentry projects and is making efforts to help itsclients find orders and improve the quality of their products. Of the RwF21.2 million in loans considered doubtful or bad, BRD has made specificprovisions for RwF 8.6 million, which is adequate as some loans areguaranteed by the Government. In addition, there is a reserve for generalrisks amounting to RwF 41.0 million (3.6% of loans outstanding). Thequality of BRD's loan portfolio is good, and generous provisions/reserveshave been set aside for possible losses.

2.31 Equity Portfolio. As of December 31, 1981, BRD's equityportfolio amounted to RwF 211.5 million and included investments in 12companies, all of which have public sector participation. In accordancewith its Policy Statement (which limits equity participation to a maximumof 50% of the company's share capital unless the Board of Directorsunanimously decides otherwise), BRD only has minority holdings ranging from4.4% to 25.2%, except for a large storage project, MAGERWA, where it holds68.7% of the capital. This project is also BRD's largest equity investment(RwF 82.5 million) and has been providing BRD with significant and secureincome. Over the last four years, total cash dividends received fromMAGERWA (RwF 85.5 million) exceeded the investment made in 1969. Fiveother projects have paid cash and/or stock dividends. Of the six remaininginvestments, one is still under construction, two are in difficulties andthe last three only started operating recently.

Financial Results and Conditions

2.32 Financial Results. BRD's income statements and balance sheetsfor 1977-81 and the relevant financial ratios are shown in Annexes 4-6.The 1981 unaudited statements indicate a profit of RwF 41.8 million, asubstantial decrease from RwF 52.3 million in 1980. This was mainly due toa large bonus granted to staff in 1980, an exceptionally good year, butpaid in 1981, together with the 1981 bonus 2/. Revenues from the loanportfolio (RwF 118.7 million) showed an increase of 21.3% over the previousyear, but dividends earned on the equity portfolio decreased slightly toRwF 21.2 million, as compared to RwF 22.8 million in 1980. As in the past,

2/ For a number of years, it has been BRD's tradition to grant staff abonus at the end of the fiscal year. The importance of the bonusdepends on staff performance and BRD's financial results and isdecided by the Director General.

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most of the dividend income has come from the MAGERWA project. In 1981,income from loans as a percentage of average portfolio was 9.2% and thatfrom dividends was 1.6% as compared to 8.9% and 2.0% in 1980, respectively.Compared to average total assets, however, income from loans decreased from8.1% in 1980 to 7.7% in 1981, and that from dividends, from 1.8% to 1.4%,mainly as a result of the increase in net fixed assets in 1981 due to theconstruction of the new building. 3/

2.33 Total expenses rose from RwF 77.2 million in 1980 to RwF 103.0million in 1981. Financial charges as a percent of average total portfoliodecreased slightly in 1981 but administrative expenses jumped from 3.2% to4.6% as a result of the double bonus paid to staff mentioned in para.2.32. The number of staff only increased slightly, from 63 in 1980 to 65in 1981.

2.34 Following a long standing provisions policy, an amount equivalentto 3% of the increase in the annual outstanding loan portfolio was chargedagainst income to maintain a reserve account for general risks. InaddLition, RwF 4.6 million was set aside to increase specific provisions fordoubtful and bad loans. This total charge of RwF 9.0 million, togetherwith higher personnel costs and the increase in the paid-in share capitalduring the year resulted in a decline in the 1981 return on average networth to 4.9%, as against 9.0% in 1980.

2.35 Financial Condition. BRD is a sound and creditworthyinstitution. In 1981, its term debt/equity ratio was about 0.7:1.0, wellwithin the 3:1 limit, while its debt service coverage ratio was 2:2. Ofthe medium- and long-term debt totalling RwF 677.8 million, RwF 551.6million was in foreign exchange on which the Government carries the foreignexchange risk. The remainder was local currency borrowings from theGovernment and the Central Bank. Given its conservative provisions policy(para. 2.34), BRD is adequately protected against losses on the portfolio.Its liquidity position is very strong and is expected to remain so as aresult of substantial loan repayments by clients in the next three to fouryears.

3/ At present, BRD is occupying rented premises, which have becomeinadequate for the increasing staff. Due to the shortage of officespace in Kigali, BRD has decided to construct an office building, whichwould adequately meet its needs until about 1990. After completion ofthe building in 1983-84, BRD will occupy about two thirds of theavailable space and will rent out the remainder. The total cost of thebuilding, excluding studies, amounts to RwF 400 million and will bedepreciated over a 20-year period at a rate of 5% p.a. The financialforecasts have also taken into account the net additional incomeresulting from rents which are estimated at RwF 10 million in 1984 and1985.

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Resources

2.36 BRD's resource position as of December 31, 1981 is included in

the Basic Data. At that date, BRD's resources available for new approvalsamounted to RwF 622.2 million, of which RwF 528.8 million was in foreignexchange and RwF 93.4 million in local currency. The relatively low levelof local currency resources, which is due to the construction of the newbuilding (for which RwF 435 million has been set aside), will not be a

constraint on BRD's future operations as substantial inflows of localresources are expected in the next few years from loan repayments and thepaying-in of the remaining part of the share capital increase authorized in

1980. Besides its share capital, BRD's local resources include retainedearnings, two special investment funds 4/, and two loans from theGovernment and the Central Bank at very concessionary terms.

2.37 BRD's foreign exchange resources consist of seven loans/creditsfrom three different donors (CCCE, IDA and KfW) and a large line of creditprovided by the Central Bank out of the proceeds of an IMF Trust Fundloan (Annex 3). The foreign loans carry interest rates between 0.75% and6% and have maturities ranging from 11 to 50 years. The two CCCE loans aretied to French procurement and one of them has been granted for financing aspecific project at an interest rate of 9% p.a. On the other loans, thereare no conditions attached to restrict BRD's flexibility of operation. TheGovernment carries the foreign exchange risk on all loans. The BNR line ofcredit has specific on-lending conditions depending on the maturity of thesubloans and the sector. They are generally about 1.0%-1.5% lower than theon-lending rates agreed under other lines of credit.

C. Prospects

BRD's Strategy

2.38 As the major term lending institution, BRD plays an importantrole in the economic development of Rwanda by financing much of theinvestments needed in industry, transport or other sectors. Typically, itsprojects are promoted by private entrepreneurs and are relatively large.

This was a reflection of BRD's determination, as a young development bank,to build up experience and a solid financial structure. Now that bothobjectives have been largely achieved, BRD intends to devote more effortsand resources to the development of smaller projects and has prepared a

4/ The resources of the "KfW Investment Fund" come from a 4% spread on

two loans granted by KfW, while those of the "Special Investment Fund"come from the proceeds of a loan given to TRAFIPRO by the Governmentout of a Swiss grant. This Fund is managed by BRD for the Government.

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program to assist small-scale enterprises (paras. 2.18-2.25). Tofacilitate the implementation of this program, BRD has introduced a numberof changes in its Policy Statement and procedures. These changes areconsidered appropriate given the nature of SSE projects and will not affectthe quality of BRD's projects and portfolio.

Projects Pipeline

2.39 As the major institution in Rwanda providing term finance fordevelopment projects, BRD has a very strong pipeline which by far exceedsits resources availability for the next 2-3 years. It has thereforeselected a limited number of projects which it plans to study morethoroughly and hopefully finance. This list consists of about 60 projectswith a total investment cost of about US$45 million, for which assistanceof about US$20 million has been sought from BRD, Small- and medium-sizeprojects account for almost 80% of the number of projects and for 20% ofthe amount. The promoters are for the most part Rwandese entrepreneurs orlocally-based foreign groups, and, in a few cases, the Government. Themajority of these projects are in the industrial and agricultural sectorsand include manufacture of insecticide, soap, acetylene, textiles, softdrinks, tea plantations, foodcrop production and livestock development.BRD's intervention in these projects will be predominantly foreign exchangefinancing. Based on the above list of projects and additional projectsarising from the draft Third Development Plan which is being finalized, BRDis forecasting a steady growth in approvals of about 30% per annum, withtotal approvals increasing from RwF 845 million in 1983 to RwF 1,029million in 1985. On current estimates of inflation (9.5%-10% per annum inthe period 1983-85), the forecasts show a significant growth in BRD'slending in real terms, although part of it results from a low level ofoperations in 1982 due to slippage of a few large projects to 1983/84.

Financial Forecasts

2.40 Forecasts of BRD's operations and financial results for theperiod 1983-85 appear in Annexes 7-11. They show that despite continuedfast growth of activities, BRD's net income tends to be depressed by higherfinancial and administrative charges and a relative stagnation of interestrevenue. Financial charges as a percentage of average total portfolio areforecast to rise from 2.0% in 1981 to 3.0% in 1985, while the share ofdepreciation will more than double during the same period as a result ofthe investment in the new office building. In contrast, income frominterests and dividends will decrease from about 11% of average totalportfolio in 1981 to about 10% in 1985, if no upward adjustment is made inthe interest rates charged to clients. As a result, net income as apercentage of average total portfolio will gradually decline from 3.3% in1981 to 2.2% in 1985, despite efforts to hold down administrative costs.

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This is why BRD has agreed to increase its lending rates, the major sourceof its revenues in the future (para. 2.16). 5/

2.41 Concurrently with the increase in lending rates, BRD would alsohave to make every effort to reduce administrative costs. Such reductionsshould be feasible as there appears to be ample room for increasing staffproductivity, which measured in terms of number of projects approved, seemsto have deteriorated over the last three years, although projects havebecome somewhat more complex. It should be possible for -BRD to processmore projects, particularly the larger ones, without a substantial increasein staff. BRD essentially agrees with this analysis and despite asubstantial increase in projected operations for the next few years, itplans to add only one more professional to its large-project evaluationunit. Most of the new recruitments will be for the SSE Division which, by1985 will have six professionals. This should be sufficient to carry outBRD's planned SSE lending program.

2.42 However, even assuming that BRD succeeds in maintainingadministrative costs to about 3.0%-3.5% of the total portfolio (which wouldrepresent a substantial productivity increase in the supervision of largeprojects and quite an efficient processing of SSE operations) it wouldstill need a spread of about 5.5% to operate profitably and continue makingwhat is considered an adequate level of provisions. Despite the projectedstrong growth in lending operations, long-term debt to equity would onlyrise to 1.6:1.0 in 1985, which is well within BRD's present debt/equitylimit in the legal agreements with IDA.

Resource Requirements

2.43 According to provisional figures, BRD had foreign exchangeresources available for commitments amounting to RwF 455 million (US$5.0million) at the end of December 1982. Foreign exchange commitments by BRDduring the period 1983-85 are estimated at about RwF 1,575 million (US$17.1million). Thus BRD has a foreign exchange resource gap during this periodamounting to US$12.1 million. The investment component of the proposedcredit (US$6.9 million) would help meet about 57% of BRD's foreign exchangegap during 1983-1985. BRD is in the final stage of negotiating with theEuropean Development Fund (EDF) a line of credit in the amount equivalentto US$1.0 million and hopes that these funds will be available forcommitment during 1983. It is also actively pursuing other sources offunds such as KfW and CIDA to cover the remaining gap (US$4.2 million).

5/ Dividend revenues are expected to remain at about the same levelas in the past because the growth in the equity portfolio will be ineither investments that would not produce dividends quickly, or if theydo, the rate would be modest compared to MAGERWA.

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2.44 In local currency, BRD is not likely to have any resourceconstraint during 1983-85. It is, in fact, expecting large inflows oflocal currency resources coming from loan repayments by clients and thepaying-in of the remaining part of the share capital increase authorized in1980, which together with the net cash generation would be more thansufficient to finance the construction of the new building, loan repaymentsand the local currency component of projects.

III. THE PROJECT

A. The First Two IDA Credits to BRD

3.01 BRD has benefitted so far from two IDA credits. 6/ The firstcredit is now fully disbursed, while the second credit is about 80%committed and about 25% disbursed., as of January 31, 1983. The second IDAcredit included $0.2 million to finance a feasibility study on theestalblishment of an audit firm in Rwanda. This study was done and itsconclusions are presently reviewed by the government and IDA.

3.02 The subprojects financed by IDA under those two credits as ofJanuary 31, 1983 numbered 13, of which three were below the free limit.They were well designed and fully justified on technical, financial, andeconomic grounds. The largest subproject (US$3.5 million, of which US$1.2million were refinanced by IDA) was to help SOMIRWA rehabilitate its miningoperations and implement its first five-year development program whichended in 1981. The company now employs about 8,500 workers and providesliveLihood for some 2,000 artisan miners who extract and sell the ores toSOMIRWA. The second largest subproject (subloan of US$1.2 million) was toassist MAGERWA, a company in which BRD is the main shareholder (para.2.31), in renewing and expanding its storage facilities which had becomeinsufficient to meet the country's needs. Of the remaining 11 subprojects,six were for industry and assisted firms in developing/expanding theirproduction line (plastic products, corrugated iron sheets, textile) ordiversifying their operations into new activities, and five were fortourism development, purchase of printing equipment and materials andfinancing of equipment for automobile and truck repair. In terms ofgeographical distribution, the subprojects tended to be concentrated inKigali and its vicinity because of the importance of the capital as acenter of economic activity. They all have high financial rates of return,often in excess of 15% and those which are in operation show returnscomparable to appraisal estimates. Although the economic rate of returnhas not been calculated for all the projects, available data showthat import substitution projects generally operate without specialprotection, are competitive with imports and in some cases have saved thecountry sizeable amounts of foreign exchange.

6/ Cr. 655-RW: US$4.0 million, approved in July 1976 and became effectivein March 1977; and Cr. 896-RW: US$5.2 million, approved in April1979 and became effective in January 1980.

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B. Objectives of the Proposed Third IDA Credit

3.03 The proposed credit would represent IDA's continued support to aneffective financial intermediary to help it continue to contribute to thedevelopment of the productive sectors of the economy in line with thestrategy of the draft Third Five-Year Development Plan (para. 1.09). Morespecifically, the objectives of the proposed project are:

(a) to provide the needed foreign exchange resources forpriority capital investments;

(b) to assist in the development of SSEs in Rwanda by helpingBRD implement a pilot program for financing SSE projects andby financing the cost of a study necessary to develop anationwide SSE development program; and

(c) to help BRD continue developing its capabilities and evolveinto a strong and mature financial institution.

C. Description of the Project

3.04 The proposed project would have two components:

(a) A line of credit to BRD which would have two parts:

(i) at most US$4.4 million to help BRD finance largerprojects;

(ii) at least US$2.5 million for BRD's proposed SSEprogram. At BRD's request and with IDA's content,funds reserved for larger projects could bereallocated to finance small enterprises;

(b) US$0.1 million to help Government and BRD carry out studiesand develop an SSE program.

The first component of US$6.9 million would be passed on by Government toBRD as a line of credit under terms and conditions specified below. Thestudy component (US$0.1 million) would be administered by the FinanceMinistry (para. 3.09).

Line of Credit to BRD

3.05 During negotiations, the following terms and conditions wereagreed with the Government and BRD:

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(a) Eligibility. All subprojects in the sectors that are withinBRD's scope of operations would be eligible for financing. The largerprojects will have to be of high economic priority, be selected by BRD inaccordance with its investment strategy and be justified on the basis of afull economic analysis, including calculation of the economic rate ofreturn for all non-service sector projects above US$200,000. SSE projectswill be selected and appraised according to a simplified format agreed withIDA during appraisal.

(b) Free Limit. The free limit for an individual subprojectwould be US$200,000, and the aggregate free limit US$2.5 million. As allSSE projects would be below the free limit, IDA will review in detail thefirst ten SSE subprojects submitted by BRD to ensure that the simplifiedformat agreed upon is used effectively.

(c) On-Lending Rate, Commitment Fee, and Re-Lending Rate. Thecost of resources to BRD will have a major impact upon its profitability,particularly over the next 2-3 years when the first phase of BRD's SSEprogram is being implemented. In addition, since IDA would be providingabout 57% of BRD's foreign exchange gap during 1982-84, the on-lendingrate of the proposed credit would have a major impact on BRD's futureprofitability. It was agreed that:

(i) BRD would raise its lending rates to levels which should permitit to earn an average interest rate of about 12.5% (para. 2.16).

(ii) IDA funds for financing SSEs (US$2.5 million) would be passedon to BRD by the Government at an interest rate of 5%, giventhe much larger administrative costs and risks associated withthis type of operations, while funds for lending to largerenterprises (US$4.4 million) would carry a higher rate of 8%.This would result in an average onlending rate from governmentof 6.9% (as compared with 6% for the second IDA credit) andwould give BRD an average spread of about 5.6% as its lendingrate will be about 12.5% on average.

(iii) BRD would pay to Government the commitment charge of 0.75% onlyfrom the respective dates of subproject approval by IDA.

(iv) BRD would be exempt from the recently instituted IDA commitmentfee, which will be borne by the Government.

(d) Foreign Exchange Risk. The arrangements agreed under thefirst two IDA credits whereby the Government, without any fee, would assumethe foreign exchange risk would be continued (para. 2.17).

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(e) Amortization Schedule. In conformity with the normalIBRD/IDA lending policy to DFCs, funds for lending to medium and large

enterprises (US$4.4 million) would have a flexible amortization schedulethat would substantially conform with the aggregate of the amortization

schedules of the subloans approved by BRD and financed under the proposed

credit, subject to a maximum of 15 years, including a grace period not to

exceed five years. Given the large number of small loans expected to be

financed under the SSE component, the portion of the credit relent to BRD

for this purpose (US$2.5 million) would have a fixed amortization schedule

of 15 years, including 5 years of grace, starting from the date of credit

effectiveness.

(f) Commitment Period. The funds would be available for

commitment by BRD until December 1985.

(g) Debt/Equity Ratio. The limit on BRD's debt/equity ratio

would remain at 3:1.

SSE Study Component

3.06 The Government recognizes the importance of developing SSEs and

has agreed to carry out a study of the issues related to the development of

an SSE program in Rwanda which could lead to a future SSE project.

However, the Government does not have the necessary resources to undertake

such a task. During negotiations, it was therefore agreed that:

(i) BRD would take the lead in organizing and establishing in Rwandaa working group, which will carry out this study for the

Government. BRD will supervise the work of this group and willcoordinate its activities with the different ministries concerned

(Plan, Economy and Commerce, and Finance).

(ii) US$100,000 would be included in this project to help cover the

foreign and local cost of this study _/.

The study to be financed under this component will address specific policyissues which are hindering the development of the SSE sector, such as

investment incentives, the procurement system or the credit guaranteescheme (para. 1.22). Detailed terms of reference for this component have

been discussed and agreed with the Government and BRD (annex 13) atnegotiations. This study is expected to be completed by March 31, 1984,

and unused funds, if any, would be transferred at the request of the

Government, with IDA's consent, to the line of credit under the terms and

conditions applicable to that component. The above study would lay the

basis for drawing up an SSE development program in Rwanda, to be prepared

by Government and BRD for an exchange of views with IDA by December 31,

1984 at the latest.

7/ The cost of this study is expected to be mainly in local currencyalthough some external consultancy services may be needed.

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D. Project Costs and Financing

3.07 Total commitments under this project are estimated atUS$26.3 million during 1983-85, of which the foreign exchange component isUS$17.2 million. A summary is shown in Table 1 below:

Table 1: Project Commitments

RwF million US$ million

Local Foreign Total Local Foreign Total

BRI) Operations 845 1,575 2,420 9.2 17.1 26.3SSE: study 1/ 2 2 11 0.1 neg. 0.1

Total 854 1,577 2,431 9.3 17.1 26.4

7T Including contingencies.

In the past BRD financed on average about a third of the investment costs.Thus, the US$26.3 million forecast commitments would result in about US$80million of investments. As in the past, projects financed under thisproposed line of credit are expected to show high economic and financialrates of return.

3.08 The financing plan for BRD's operations in the period 1983-85 isshown in Table 2 below:

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Table 2: Financing Plan for BRD's Operations 1982-84

US$ millionLocal Foreign Total

Total Commitments 9.2 17.1 26.3Resources Available for Commitment 6.6 5.0 11.6Resource Gap 2.6 12.1 14.7

Financed by:Net Cash Generation 2.6 - 2.6Third IDA Line of Credit - 6.9 6.9Other Foreign Exchange Sources - 5.2 5.2

(including EDF)TOTAL 2.6 12.1 14.7

IDA would thus cover about 57% of BRD's foreign resource gap, or about 40%of its total foreign resource requirements for the period 1983-85. BRD hasalready approached other foreign donors to raise the balance of its needs.

E. Project Implementation

3.09 BRD would be responsible for implementing the line of creditcomponent and the Ministry of Finance for the SSE study.

3.10 Reporting Requirements. BRD will submit to IDA quarterlyreports which would include inter alia the following: financial statements,arrears and resources position statements, progress of operations, andnotes on major projects in difficulty, including the conclusions andrecommendations of BRD's supervision staff. Audited accounts prepared byqualified accountants acceptable to IDA in accordance with the IllustrativeForm for DFCs will be submitted to IDA along with the annual report withinsix months after the end of the year. Government and BRD will also submita report to IDA when the project is completed.

3.11 Consultants. In the case that external consultants are needed tocarry out the SSE study, their selection, qualifications, experience andterms and conditions of employment will be in accordance with principlesand procedures satisfactory to IDA.

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3.12 Procurement. Procurement for the subprojects refinanced underthe credit will be in accordance with BRD's procedures which are adequatefor the size of procurement packages expected (para. 2.13).

3.13 Disbursement. The proceeds of the proposed credit would bedisbursed as follows:

(a) SSE study: 100% of foreign and local costs.

(b) BRD subloans: (i) 100% of c.i.f. cost of goods andservices imported for eligible subprojects;(ii) 80% of the cost of locally purchased goods;and (iii) 65% of the total cost of constructionand civil works, representing the foreign exchangecomponent.

The projected disbursement schedule is shown in Annex 12 and is based onthe disbursement profile for IDF projects in East Africa but modified totake into account the experience under the first credit to BRD which was

disbursed at a relatively fast pace. Disbursements are expected to becompleted over 6 years, or by December 1988.

F. Benefits and Risks

3.14 Although traditionally low, investment has recently registered asignificant growth in Rwanda in both the private and public sectors. Thistrend is expected to continue with the implementation of the ThirdDevelopment Plan. This is therefore a particularly appropriate time toassist BRD, not only in its efforts to become an efficient and independentallocator of resources but also to finance the development of the Rwandeseeconomy. Under this project, IDA will seek to continue strengthening andimproving BRD's capabilities and procedures and support its orientationtoward assistance to SSEs. As BRD is the major source of term finance andcooperates closely with the Government, it can have a significant impact onthe design and development of projects.

3.15 There is no major risk associated with this project. Ahtough arelatively small and young development bank, BRD is a solid and wellmanaged institution with a substantial pipeline of projects, which shouldbe sufficient to support the forecast level of operations. Its volume ofoperation has fluctuated in the past because of its dependence on arelatively small number of large projects, and the same phenomenon mayhappen again in the future as large projects in Rwanda will continue to berelatively few and thus affect BRD's overall activity. Nevertheless, it isexpected that the rates of commitments and disbursements for this projectwill be achieved as anticipated.

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IV. RECOMMENDATIONS AND AGREEMENTS REACHED

4.01 This report recommends an IDA credit of SDR 6.5 million (US$7.0million), of which US$6.9 million onlent to BRD for subloans to productiveenterprises, including $2.5 million for SSEs, and US$0.1 million to theFinance Ministry for a study on SSE development. During negotiations thefollowing agreements have been reached:

(a) From the Government that:

(i) the study for the development of an SSE program(paras. 1.22 and 3.06; Annex 13) and the study oninterest rates in Rwanda will be carried out; and

(ii) the line of credit component will be onlent to BRDunder the conditions specified in para. 3.05.

(b) As a condition of effectiveness: BRD's Policy Statement will beamended to include BRD's new structure of interest rates (paras. 2.15and 2.16) and to require the calculation of the economic rate ofreturn for all non-service sector projects above US$200,000(para. 2.10).

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ANNEX I

RWANDA - Structure of Interest Rates 1/(In per cent per annum)

Before Effective sinceNov. 1979 Nov. 12, 1979

National Bank of Rwanda

1. Direct operations with the private sectora. Exports credits 4.0 4.0b. Imports of equipment goods and other

essential commodities 5.0 7.0c. Other credits 7.0 9.0d. Penalty rate on credit not repaid

by maturity date 9.0 12.0

2. Operations with banksa. Advances against coffee paper at the

processing stage 3.5 3.5b. Advances against export paper (coffee

paper only up to 25 per cent of value) 3.5 3.5c. Coffee export paper above 25 per cent

of value 4.5 3.5d. Advances against Treasury bills 4.0 8.0e. Rediscount of Treasury bills with

one month to maturity and developmentbonds with 90 days to maturity 5.0 9.0

Deposit money banks

1. Deposit ratea. Term deposits 2/

1 month 1.0 6.03 months 2.0 6.256 months 2.5 6.59 months 3.0 6.75

12 months 3.5 7.0b. Savings bonds (certificates of deposit)

6 months 3.0 -9 months 3.5 -

12 months 4.25 7.02 years - 8.03 years - 8.54 years - 9.05 years - 9.5

2. Lending rates 3/a. Coffee financing

Collection (6 months) 8.0 9.0Processing (15 days)storage (60 days) )RwF 3.0 per kilo) RwF 3.3 per kiloExport (90 days)

b. Tea and pyrethrumStorage (30 days) 6.0 -

Exports (120 to 180 days) 4.0 4.0c. Mining operations

Exports (120 to 280 days) 4.5 5.0d. Other credit operations

Imports of essential commodities(one year) 9.0 9.0

Construction under RwF4 millionin cost 9.0 9.0

Other construction and current acountadvances (one year) 9.0 14.0

e. Investment approved by National Bankof Rwanda - 11.0 4/

f. Other credit with 5 years's maturity 9.0 - 13.0 13.0 max.g. Other credit with maturity greater

than 5 years - 13.5 max.h. Penalty rate on loans that are not

repaid on schedule 5/ - additional 2 per centduring first 15 days ofdefault;

- and additional 4 percent for delays beyond15 days.

Source: IMF and BNR.1/ Net of commissions.2/ The interest rates on deposits that require prior notice before withdrawal are

0.25 percentage points higher than those on regular fixed term.3/ A minimum charge of 0.75 per cent is levied on all financial operations that

require repayments by installments.4/ Maximum.5/ Introduced in 1980.

EAPIDFebruary 1983

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Annex 2

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Distribution of Share Capital December 31, 1981

(RwF million)

Paid-in Capital Amounts to be paid-in Authorized Capital

Public Sector 539.0 107.7 646.7

Government 453.3 102.7 556.0OCIR-CAFE 44.6 - 44.6OCIR-THE 5.1 5.0 10.1Caisse Sociale du Rwanda 36.0 - 36.0

Domestic Private Sector 129.7 10.0 139.7

Banque Commerciale du Rwanda 30.0 - 30.0Banque de Kigali 30.0 - 30.0SOMIRWA 12.7 - 12.7

BRALIRWA 9.0 - 9.0

RWANTEX 1.8 - 1.8

SULFO-RWANDA 1.4 - 1.4

SONARWA 40.0 10.0 1/ 50.0Other 4.8 - 4.8

Foreign Institutions 206.2 7.4 213.6

CCCE 100.0 - 100.0Belgian Government 52.6 7.4 60.0DEG 44.7 - 44.7

Bank of Tokyo 8.9 - 8.9

TOTAL 874.9 125.1 1,000.0

1/ Paid-in during the first quarter of 1982.

EAPIDFebruary 1983

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Borrowings as of December 31, 1981

Date of Currency Amount 1/ Maturity Grace Period Interest Rate Commitment Amount Disbursed Amount Outstanding BRD onlending rateLending Institution Loan Agreement of Borrowing (RwF million) (years) (years) p..) fee (X p.a.) (RwF million) (RwF million) (% p.a.)

A. Local Currency Resources

BNR line of credit Feb. 2, 1971 RwF 100.0 30 - _ 88.5 33.4 BRD ratesGovernment of Rwanda March 7, 1975 RwF 92.8 25 11 3.0 - 92.8 92.8 BRD rates(Arab league)

B. Foreign Exchange Resources

ENR (Trust Fund) 1980 - 1,00.0 9 5 3.5 - 60.0 60.0 Agricultural ProjectsMedium Term: 8.0 - 8.5%Long Term: 9.0 - 9.5%

industrial ProjectsMedium Term: 9.0 - 10.0%

Long Tens: 10.0 - 11.5%Commercial Projects

Medium Term; 10.0 - 11.5%Long Term: 11.0 - 12.5%

KfW I Feb. 22, 1974 D.M. 20.2 50 10 0.75 0.25 18.6 18.6 BRD ratesKfW II Sept. 14, 1976 D.M. 80.9 50 10 medium term: 1.5 0.25 77.9 77.9 BRD rates

long term: 4.0KfW III 1980 D.M. 161.8 50 10 BRD rates less - 40.1 40.1 BRD rates

4% 5

IDA I August 20, 1976 US$ 367.6 variable variable 4.0 - 349.4 225.8 BRD ratesIDA II Sept. 13, 1979 US$ 459.5 variable variable 6.0 - 43.3 43.3 BRD ratesCCCE I Sept. 6, 1976 FF 80.0 15 6 4.0 0.5 85.5 85.5 BRD ratesCCCE II Dec. 1980 FF 84.0 11 4 6.0 0.5 - - 9%

I/ Conver-ted nto RaP using exchange rate of December 31, 1981.

EAPID

February 1983

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Annex 4

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Summary Income Statements 1977-81

(RwF million)

1977 1978 1979 1980 1981

INCOME

Interests and commissions on Loans(incl. Loan Income from PreviousYears) 32.2 40.5 67.6 100.7 118.7

Dividends 23.2 22.4 23.2 22.8 21.2Other Income 1.2 1.7 2.3 6.0 4.9

Total Income 56.6 64.6 93.1 129.5 144.8

CHARGES

Administrative Expenses 17.3 24.5 31.5 36.7 59.1Financial Charges 7.8 10.4 16.8 24.4 26.3Depreciation 1.7 5.1 7.1 8.8 8.6Provisions 11.4 5.7 15.6 7.3 9.0

Total Charges 38.2 45.7 71.0 77.2 103.0

NET PROFIT 18.4 18.7 22.1 52.3 41.8

EAPIDFebruary 1983

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Annex 5

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Summary Balance Sheets, 1977-81

(RwF million)

1977 1978 1979 1980 1981

ASSETS

Current. Assets 45.5 67.6 65.4 83.6 270.2Portfolio 563.7 693.0 1,069.6 1,203.2 1,374.7Loans for Transport vehicles (6.7) (-) () (-) (-)Medium and Long Term Loans (417.3) (553.2) (926.2) (1,011.7) (1,163.2)Equit:y Investments (139.7) (139.8) (143.4) (191.5) (211.5)

Fixed Assets (net) 26.1 34.3 36.1 41.0 101.1

TOTAL ASSETS 635.3 794.9 1,171.1 1,327.8 1,746.0

LIABILITIES

Current Liabilities 32.5 6.7 86.2 81.3 17.4Term Borrowings 270.2 400.5 594.0 509.6 677.8IDA (16.9) (153.5) (295.1) (268.3) (269.2)BNR (45.4) (40.2) (37.8) (35.6) (93.5)Arab League (Government) (92.8) (92.8) (92.8) (92.8) (92.8)Development Credit (Gov.) (-) (-) (75.0) () ()Swiss Fund (17.9) (-) (-) (-) (-)KfW (62.2) (94.0) (83.8) (93.9) (136.7)CCCE (-) (-) (9.5) (19.0) (85.6)Comme:rcial Banks (35.0) (20.0) (-) () (-)

Provisions 19.0 23.0 34.0 36.6 41.0

Funds for Share Capital increase 50.0 - - -

Equity 263.6 364.7 456.9 700.3 1,009.8Paid-ini Share Capital (208.0) (342.0) (416.0) (604.2) (874.9)Reserves and Retained Earnings (55.6) (22.7) (40.9) (96.1) (134.9)

TOTAL LIABILITIES 635.3 794.9 1,171.1 1,327.8 1,746.0

EAPIDFebruary 1983

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Annex 6

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Past Financial Ratios

1977 1978 1979 1980 1981

Income Statement Elementsas % of Average Total Assets

Total Income 9.1 9.0 9.5 10.4 9.4of which: Interests and Commissionson Loans (5.2) (5.7) (6.9) (8.1) (7.7)

Dividends (3.7) (3.1) (2.4) (1.8) (1.4)Other Income (0.2) (0.2) (0.2) (0.5) (0.3)

Total Charges 6.2 6.4 7.2 6.2 6.7of which: Admin. Expenses (2.8) (3.4) (3.2) (2.9) (3.8)

Interest Payments (1.3) (1.5) (1.7) (2.0) (1.7)Depreciation (0.3) (0.7) (0.7) (0.7) (0.6)Provisions (1.8) (0.8) (1.6) (0.6) (0.6)

Net Profit 2.9 2.6 2.3 4.2 2.7

Profitability Indicators

Net Profit as % of Average 7.3 6.0 5.4 9.0 4.9Equity

Income from loans as % ofAverage Loan Portfolio 7.8 8.3 9.3 10.4 10.9

Cost of Debt as % ofAverage debt 3.1 3.1 3.4 4.4 4.4

Financial Structure Indicators

Term Debt/Year-End Equity 1.0 1.1 1.3 0.7 0.7Debt Service Coverage Ratio 1.8 5.3 1.4 2.2

EAPIDFebruary 1983

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Annex 7

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Projected Operations, 1983-85

(RwF million)

1983 1984 1985

Approvals

Long-Term loans 660 726 799Medium-Term loans 165 182 200Equity Investments 20 25 30

Total 845 933 1,029

Commitments

Long-Term loans 612 706 777Medlium-Term loans 125 177 195Equity Investments 20 25 30

Total 757 908 1,002

Disbursements

Long-Term loans 581 659 741Medium-Term loans 183 150 186Equity Investments 10 22 28

Total 774 831 955

EAPIDFebruar-y 1983

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Annex 8

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Projected Income Statements 1983-85

(RwF million)

1983 1984 1985

INCOME

Interests and Commissions 226 256 287Dividends 23 23 23Other Income - 10 1/ 10 1/

Total Income 249 289 320

CHARGES

Administrative Expenses 79 90 102of which: Personnel (50) (58) (67)

Depreciation 33 44 44Provisions 14 11 11Financial Charges 64 78 94

of which: Existing borrowings (64) (74) (75)New borrowings (-) (4) (19)

Total Charges 190 223 251

NET PROFIT 59 66 69

1/ Income from renting part of the new building.

EAPIDFebruary 1983

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Annex 9

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Projected Balance Sheets, 1983-85

(RwF million)

1983 1984 1985

ASSETS

Current Assets 100 80 80

Loan Portfolio 2,329 2,688 3,055

Equity Portfolio 232 254 282

Net Fixed Assets 443 422 378

Total Assets 3,104 3,444 3,795

LIABILITIES

Current Liabilities 10 10 10

Term Borrowings 1,702 1,974 2,266

Existing Borrowings (1,684) (1,865) (1,745)

New Borrowings (18) (109) (521)

Proviisions 76 87 98

KfW Investment Fund 5 7 7

Rwanclese Gvt. Investment Fund 19 29 39

Share Capital 1,050 1,050 1,050

Reserves and Retained Earnings 242 287 325

Total. Liabilities 3,104 3,444 3,795

EAPIDFebruary 1983

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Annex 10

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Projected Sources and Uses of Funds, 1983-85

(RwF million)

1983 1984 1985

SOURCES

Net Profit 59 56 59Depreciation 33 44 44Provisions 14 11 11Increase in Share Capital - - -KfW Investment Fund 5 6 6Rwandese Govt. Investment Fund 10 10 10Loans Collection 310 450 560Drawing on Loans 460 398 527Existing Borrowings (442) (307) (115)New Borrowings (18) (91) (412)

Total 891 975 1,217

USES

Loan Repayments 136 126 235Short Term Debt - - -Loan Disbursements 764 809 927Equity Disbursements 10 22 28Increase in Fixed Assets 187 23 -Transfer to KfW Guarantee Fund 4 4 6Dividend Payments - 21 21Increase in Net Current Assets (210) (30) -

Total 891 975 1,217

EAPIDFebruary 1983

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Annex 11

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Projected Financial Ratios, 1983-85

1983 1984 1985

Income Statement Elementsas % of Average Total Assets

Total Income 8.6 8.8 8.8of which: Interests & Commissionson Loans (7.8) (7.8) (7.9)

Dividends (0.8) (0.7) (0.6)Other Income (-) (0.3) (0.3)

Total Charges 6.6 6.8 6.9of which: Admin. Expenses (2.7) (2.7) (2.8)

Interest Payments (2.2) (2.4) (2.6)Depreciation (1.2) (1.4) (1.2)Provisions (0.5) (0.3) (0.3)

Net Profit 2.0 2.0 1.9

Profitability Indicators

Net Profit as % of AverageEquity 4.6 4.9 4.9

Income from loans as % ofAverage Loan Portfolio 10.8 10.2 10.0

Cost of Debt as % ofAverage debt 4.2 4.2 4.4

Financial Structure Indicators

Term Debt/Year-End Equity 1.3 1.4 1.6Debt Service Coverage Ratio 3.1 4.0 2.9

EAPIDFebruary 1983

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Annex 12

BANQUE RWANDAISE DE DEVELOPPEMENT (BRD)

Schedule of Disbursements

IDA Fiscal year Cumulative Disbursements (US$000') Total cumulativeand Quarter ending SSE Study Subloans Total Disbursements in %

FY 84September 30, 1983 60 194 254 3.6December 31, 1983 80 345 425 6.1March 31, 1984 100 621 721 10.3

June 30, 1984 100 897 997 14.2

FY 85September 30, 1984 100 1242 1342 19.2December 31, 1984 100 1587 1687 24.1March 31, 1985 100 2001 1101 15.7June 30, 1985 100 2415 2515 35.9

FY 86September 30, 1985 100 2760 2860 40.9December 31, 1985 100 3174 3274 46.8March 31, 1986 100 3588 3688 52.7June 30, 1986 100 3933 4033 57.6

FY 87September 30, 1986 100 4278 4378 62.5December 31, 1986 100 4554 4654 66.5March 31, 1987 100 4899 4999 71.4June 30, 1987 100 5244 5344 76.3

FY 88September 30, 1987 100 5520 5620 80.3December 31, 1987 100 5865 5965 85.2March 31, 1988 100 6141 6241 89.2June 30, 1988 100 6417 6517 93.1

FY 89September 30, 1988 100 6642 6742 96.3December 31, 1988 100 6900 7000 100.0

EAPIDFebruary 1983

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Annex 13page 1 of 3

TERMS OF REFERENCE FOR THE SMALL ENTERPRISES STUDY

Objective

To collect more reliable data on the small enterprises sector andre--examine the measures designed to encourage small enterprises and theregulations governing the sector, with a view to improving the institutionalframework within which small enterprises operate. The study will serveas a basis for a national program to assist small enterprises.

Organization and Execution of the Study

BRD (Banque Rwandaise de Developpement) will be responsible forexecuting the study on the small enterprises sector on behalf of theRwandese Government. To this end, BRD will assist in establishing a teammade up of representatives of the various ministries involved (Plan, NationalEconomy, and Finance) before June 30, 1983 and will take steps to ensure thatthe study is carried out in accordance with the attached timetable.

Scope of the Study

A. Survey of Small Enterprises

The survey will cover small and medium-sized enterprises in Rwanda,but the focus will be on small enterprises, defined as enterprises with netassets of between RwFO.5 million and 15 million and between 3 and 30employees. Special attention will be paid to productive enterprises inthe agroindustrial and manufacturing sectors. The team responsible forthe survey shall:

(i) Ensure that the survey sample covers the main sectors in whichsmall enterprises are active and wherever possible observesregional balance;

(ii) prepare a questionnaire designed to collect essential data onthese enterprises (number of employees, techniques employed,level of education of entrepreneurs, financial structure) andat the same time ascertain their needs in terms of trainingand technical and financial assistance;

(iii) recruit survey workers and supervise their work; and

(iv) analyze and tabulate the results and assist in preparing thereport on small enterprises to be submitted to the Government.

B. Training and Technical Assistance

(i) Evaluate the adequacy of existing arrangements for training andassistance available to small enterprises in the fields oftechnology, bookkeeping, marketing and management;

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Annex 13

page 2 of 3

(ii) on the basis of the information obtained from the survey,determine additional requirements and draw up detailed propo-sals for satisfying those needs; and

(iii) estimate the cost of the proposed solutions.

C. Investment Code

Systematically examineall the provisions of the Investment Code,its procedures and how it functions, and recommend changes with a view tofacilitating access for small enterprises. Special attention should bepaid to:

(i) Administration of the Code and procedures for approval ofapplications, which seem to be slow and cumbersome;

(ii) the need to lower the current minimum investment of RwFlO million,which is too high and excludes most small enterprises.

D. Price Controls

Examine the present system of price controls and recommendchanges if the system is seen to be an obstacle to the development of smallenterpriss.

E. Government Contracts

Examine policy, administrative procedures and legislationregarding government contracts in order to determine whether splittingsome government orders into smaller lots might not open up a significantmarket for small enterprises.

F. Industrial Zones

Examine the organization of the existing industrial zone andevaluate the Government's plans for setting up new zones for small enter-prises, the advantages of such zones and the capacity of small business-men to pay the rents required in such zones.

G. Tax System and Other Administrative and Legal Aspects

Examine the tax system in order to identify and recommend changesin regard to aspects holding back the development of small enterprises,together with other administrative and legal formalities such as proceduresfor obtaining registration in the commercial register, business licenses,construction permits, etc.

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Annex 13page 3 of 3

SCHEDULE FOR EXECUTION OF THE SMALL ENTERPRISES STUDY

Establishment of Organization, Installation ofWorking Group and Allocation of Tasks to bePerformed. April-June 1983

- Preparatory Work (including recruitment ofconsultants, if needed) and Execution of thestudy. July - November 1983

- Analysis of Data and Drafting of Report bythe Working Group. December 1983 - January 1984

- Submission of the Report to the Government. February 1984

- Dispatch of Final Report to IDA for Comments. March 1984

- Preparation of Program for Assistance toSmall Enterprises. April - September 1984

- Submission of Small Enterprises Program tothe Government. October 1984

- Dispatch of Small Enterprises Program to IDA. December 1984