STAFF APPRAISAL REPORT KINGDOM OF...

Document ofTHE WORLD BANK

FOR OFFICIAL USE ONLY

Report No. 12197-MOR

STAFF APPRAISAL REPORT

KINGDOM OF MOROCCO

NATIONAL RURAL FINANCE PROJECT

October 29, 1993

Middle East and North Africa RegionMaghreb and Iran DepartmentAgriculture Operations 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 authonzation.

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CURRENCY EOUIVALENTS

Currency Unit = Dirham (DH)US$ 1.00 - DH 9.00DH 1.00 = US$0.111

(as of September; 1993)

FISCAL YEAR

January I to December 31

GLOSSARY OF ABBREVIATIONS

ADB African Development Bank

ASAL Agricultural Sector Adjustment Loan

ASIL Agricultural Sector Investment Loan

BAM Bank Al-Maghrib (Central Bank of Morocco)

INDE Banque Nationale de D6veloppement Economique (Industrial Development Bank)

CAS Country Assistance Strategy

CFD Caisse Francaise de Developpement

CIH Credit Immobilier et H6telier (Housing and Tourism Bank)

CPPR Country Portfolio Performance Review

CLCA Caisse Locale de Crddit Agricole

CNCA Caisse Nationale de Cr6dit Agricole (National Agricultural Credit Bank)

CRCA Caisse Regionale de Cre'dit Agricole

EEC European Economic Community

EIB European Investment Bank

FAA Fonds d'Assurance Agricole contre les Calamit6s Naturelles

(Agricultural Insurance Fund for Natural Calamities)

FADES Arab Fund for Economic and Social Development

FDA Fonds de Developpement Agricole

FEC Fonds d'Equipement Communal (Communal Infrastructure Fund)

Fl Fiscal IncomeFSDP Financial Sector Development Project

ICR Implementation Completion Report

IRCA Inspection Regionale de Credit Agricole

KfW Kreditanstalt fur Wiederaufbau of Germany

MARA Ministry of Agriculture and Agrarian Reform

MF Ministry of FinanceMTASAP Medium-Term Agricultural Sector Adjustment Program

OECF Overseas Economic Cooperation Fund of Japan

ORMVA Office Regional de Mise en Valeur Agricole (Regional Irrigation Development

Agency)UNIDO United Nations Industrial Development Organization

USAID United States Agency for International Development

FOR OFFICIAL USE ONLYSAFF APERASAL RWRT

KINGDOM OF MOROCCO

NATONAL RURALFINANCE PROJECT

Loan and &sdric Summarv

Caisse Nationale de Cr6dit Agricole (CNCA)Kingdom of Morocco

Ahoml: US$100.0 million EquivalentTerms: 20 years, including five years of grace, at the Bank's standard variable interest rate.

The proposed Project would assist Morocco and CNCA, for 19941997, to consolidatepomion: and deepen the institutional reform process (initiated under Loan 3088-MOR), and to

develop the sustainable foundations of a financially sound rural finan%e system well-itegrated into a gradually liberalized financial sector. Strategically consistent with theGovernmentis adjustment program and priorities supported by the Bank, in particularthrough the recent Financial Sector Development Project and two successfilly completedAgricultural Sector Adjustment Loans, the Project would help: (a) achieve a key transitionin CNCA's institutioPal development by supporting CNCA's conversion to a morediversified bank with increased managerial autonomy, geared to serve agriculture and toreach small farmers, young entrepreneurs/graduates and non-farm clients (notably women)in poverty-related areas; (b) promote private investment in viable projects, including agro-industries with export potential; (c) increase domestic resource mobilization and secure therural banking system through a pilot drought relief fund/crop insurance system drawing onbest practices worldwide; and (d) develop banking and technical skills needed to managethe changed organization and special features of a sustainable rural finance operation.

Specifically the Project would fund over a four-year implementation period: (a) medium-and long-term credit to private farmers and investors to finane a wide range ofinvestments including water conservation measures in irrigation, farm equipment, tree cropand livestock development, storage facilities, land improvement, greenhouses,agro-processing plants, coastal fisheries, rural housing, forestry -md environmentalprotection, and rural ncn-farm investments, and (b) project-related traiing, consultingservices for the strengtheming of CNCA management and planning and to manage theeffects of drought. A mid-term review will assess progress made during implementation.

Since the Government of Morocco reemphasized the role of CNCA in the development ofthe country's rural sector and the need to transform CNCA into a universal bank so as toimprove its long-term viability, CNCA has the highest political support for its reforms.Thus, the risk of a slower pace than expected in the continued execution of the proposedimprovements is considered reduced. Morocco, however, is vulnerable to droughts, andthese have an immediate adverse impact on farm credit recoveries and rural savingsmobilization. On the basis of past and current experience, iBRD funds are not expectedto be at more than normal risk, if the Government is committed to improving its ability tomanage droughts. CNCA overall operating results are positive and should stay that way,in view of its prudent lending policies, non-drought-related good collection record, thequality of its management, and the adoption of enhanced prudential banking regulations forloan classification and loan loss provisions currently introduced in Morocco, as part of theongoing financial sector reforms.

Thi docment has a rlcted distribuion and may be used by recipients only in the perfonmanc of theirofidl dies.Its contents may not otherwise be disclosed without World Bank authorization.

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Local Foreign Toal(U(S$ million)

Estimated Cost:

CNCA Credit Operations 710.5 437.0 1,147.5(Medium- and long-term)

Institutional Development 0.5 2.0 2.5(Training, consultants,MIS Software)

Total Pjgect Cost Ja 439Q 1150.Q /A

emgd P - :i

IBRD - 100.0 100.0CFD - 30.0 30.0EIB - 60.0 60.0FADES - 60.0 60.0KfW - 34.0 34.0OECF - 95.0 95.0CNCA 371.0 60.0 431.0Sub-borrowers 340.0 - 340.0

TOTAL 711.0 432. 1,150

Fmaed Disbmse_:t

Bank FY 1994 1995 1996 .7(US$ million)

Annual 15.0 30.0 30.0 25.0Cumulative 15.0 45.0 75.0 100.0

EUvhronmeaW Raft: B

Poverb Cwatqorv: Important elements of targeted interventions to respond to the credit demandfor investment at market conditions of rural women, artisans, and smallfarmers.

La Includes US$125 million of taxes and duties.

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STAFF ALM REPORT

EINGDOM OF MOQRCQO

NAT1ONAL RURAL FINANCE PROJECT

Table of Cnen

DEuLIt

I. W IRQQUC ION .1..................... I

H. TIE AGRICULTURAL SECTOR ....................... , 2

A. Economic Outlook. 2

B. Place of Agriculture in the Economy. 2

C. AgricUltural Performnce and Government Strategy. 2

D. Sectoral Issues Relevant to Rural Finace .3E. Bank Role in the Agrcultural Sector. 3

M. THE FNANCAL SECTOR ......................... 4

IV. THE CAMSE NATIONALE DE CREDrr AGRICOLE. 4

A. Organization and Staffing. 4

B. Lending Pojicies and Procedres. 6

C. Lending Operations. 8

D. Financial Situation and Performance .10E. CNCA's Develooment Objecdves and Strategy .14F. CNCA's Projected Leig Program and Financing

Requiements (1993-1996) .15

V. THEQPRJ.T .16

A. Rationale for Bank Involvement and Project Objectives .16B. Summary Project Description .16C. Detailed Features .17D. Project Cost Estimates ..... 19

E. Project Fianing .21F. Procurement .22G. Disbursements .23

VI. PROJECTD4 EM-ATMN ....................................IL EN24

A. Credit Operations .24B. Women's Participation a nd Environmental Aspects .25C. CNCA Institutional Development .26D. Agicultual Risk Management and I.surance Fund 28

E. Monitoring and Evaluation .28F. Supervision, Mid-Term Review and Reporting .28G. Accounts and Audit .28

VII. BENEFT. JUSTFMICATION AND RISKS .29

A. Benefits and Jusdfication .29B. Project Risks .31

VII. AGRUEMENTS REACHED ANDRECOMENDATION . .31

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KINGDOM OF MOROCCO


Table of Contents (Cont'd)

aem No.

1. CNCA Lending Program ...... ............................... 332. Financing of On-Parm Investments and Credit Coverage .363. Project Cost Estimates . 384. Estimated Schedule of Disbursement of Bank Loan .................... 395. Agricultural Sector Performance, Government Strategy and

Sectoral Issues Relevant to Rural Finance .......................... 406. The Financial Sector ........................................ 457. CNCA Financial Position (1988-96) .............................. 488. The Agricultural Development Fund .............................. 649. FSDP Key Policy Area ...................................... 6510. Performance under Previous Agricultural Credit Projects ................. 7311. CNCA's General Policy Statement ............................ 7712. CNCA's Strategic Planning and Management Control ................... 8313. Climatic Risk Management and Agricultural Insurance Fund .... .......... 8514. CNCA's On-lending Appraisal Methods ............................ 9115. Project Implementation and Bank Supervision ........................ 9316. Measurement of CNCA's Dependence on subsidies (1988-1992) .... ......... 9517. Selected Documents and Data Available in the Project file ................ 97

This report was prepared by Mr. B. Dussert (Task Manager) and is based on the findings of a Bank appraisalmission that visited Morocco in April 1993. The other members of the mission were Mr. 0. Sacay (FSD),Messrs. P. Beuzein, J. Tillier (Consultants), Mr. R. Hartel (IUW Representative), and Mr. W. Dick (KfW-funded Consultant in Agricultural Insurance). Ms. Lucie Tran (OPRPG; Investment Models) and Ms. C.Sarvaas (KfW-funded Consultant in WID) also participated in the pre-appraisal mission in November 1992. ThePeer Reviewer is Mr. M. Long (FSD). The Division Chief is Mr. 0. Knudsen (MN1AG) and the CountyDepartment Acting Director is Mr. Mahmood Ayub (MNI). Legal advice was provided by Ms. N. deWitt andMr. J.P. Dupuy (LEGMN). Word Processing assistance was provided by Ms. N. Wong and Ms. C. How.

SfAFIW APPRAISAL RFPORT

KINGDOM OF MOROCCO

NATIONAL RURAL FINANCE PROIECT

I. INTRODUCllON

1.01 The Kingdom of Morocco and the Caisse Nationale de Crddit Agricole (CNCA) have

requested Bank assistance to finance, with other cofinanciers, a National Rural Finance Project. The Project

would consolidate and expand previous successful Bank-financed agricultural credit projects implemented

by CNCA, in particular the innovative National Agricultural Credit Project (Loan 3088-MOR) which has

progressed well and was timely implemented. Compared to agricultural credit institutions in other countries,

including Asia, CNCA's perfornance has been quite good. CNCA has been able to reach small- and

medium-size farms and is considered to be one of the premiere rural financial institutions in developing

countries. It is a well-managed and efficient bink. However, CNCA is lending in a risk-prone environment

that has limited the participation of other Moroccan banks in rural finance. Periodically droughts strike

Moroccan agriculture causing severe hardship for many vulnerable and relatively poor farmers (as has been

the case in the last two years where particularly severe droughts have occurred in Morocco). As a

consequence, loan areas increase and the financial sitution of CNCA is weakened, requiring injections

of capital or direct and indirect drought relief subsidies from the Government. One important objective of

the proposed project is to help farmers in managing severe climatic risk while assisting CNCA to become

a stronger financial institution. A key element of this strategy is to assist the Govermment in building a

climatic risk management and insurance scheme that would not only permit broader risk sharing but reduce

the burden on the budget of periodic droughts. Another element is to support CNCA in becoming an even

more efficient and universal bank, still specialized in rural finance but with a more diversified portfolio.

ITis involves transforming CNCA into an increasingly autonomous and decentralized bank geared to rural

fmance while strengthening its managerial efficiency and financial condition through improved financial

performance and higher margins, increased mobilization of voluntary domestic savings, and adequate

provisioning against risky investments. In addition, the project would improve agricultural productivity by

fiancing on-farm investments, and would generate job and income opportunities in rural areas by increasing

access by creditworthy farmers, women, and young graduates to irstitutional credit and savings services.

The result would be an increasing share of investment in agriculture by the private sector. Also, by building

better risk management mechanisms for agriculture, open to all banks in Morocco, rural finance would

gradually interest other banks.

1.02 The Project would be implemented by CNCA and finance on-farm investments undertaken

by private farmers and farmers' cooperatives, investments for the establishment or expansion of agro-

industries (including working capital and technical assistance), of private coastal fisheries, of artisans (men

and women), of rural non-farm enterprises, for reforestation and environmental protection, and for rural

housing investments. The Project would also finance, training/technical assistance to strengthen CNCA's

organizational and regional structure, and improvement of the planning and control process, including

CNCA's decetalized Management Information Systems (MIS) and of Morocco's crop insurance system.

The Project would be implemented over a four-year period (1994-1997).

1.03 The total cost of the Project is estimated at US$1,150 million, of which US$439 million

(39%) is foreign exchange. A Bank loan of US$100 million to CNCA would finance part of CNCA's

medium- and long-tm lending, and part of its institutional development cost during the Project period. The

remaning investment resources would be mainly provided by CNCA's own resources, sub-

borrowers' contributions, and by loans from the Kreditanstalt fur Wiederaufbau (KfW) of Germany (KfW

loan to Government to be passed on to CNCA as a capital increase), the European Investment Bank (EIB),

the Overseas Economic Cooperation Fund (OECF) of the Government of Japan, the Arab Fund for Economic

and Social Development (FADES), and the Caisse Francaise de Developpement (CFD).

1.04 The Project was identified and prepared by CNCA with the assistance of Bank missions

supervising the National Agricultural Credit Project (Loan 3088-MOR). The Project was appraised in April

1993 by a Bank mission (joint appraisal with KfW), in coordination with other cofinanciers and in closecooperation with the Moroccan authorities.

II. TE AGRICULT-URAL SECTOR

A. Economic Outlook

2.01 Background on the Moroccan economy, past economic performance, recent economic trendsand the Government's adjustment efforts, as well as social indicators are fully described in a report on aStructural Adjustment Loan to the Kingdom of Morocco (Report No. P-5637-MOR) which was signed onApril 30, 1992. Current economic, financial, and social priorities are highlighted in the Country AssisancStal.gy (CAS) for Morocco, attached to the Memorandum of the President for this project. Agriculture isa major sector priority for development in Morocco.

2.02 The Bank and the iM!I have supported the economic adjustment process in Morocco tofoster sustainable and equitable growth. Morocco has made substantial progress on macro-economicstabilization this past decade. The piesent Project would help the Government meet its reform objectivesof private sector investment, progress in development and employment in poor rural areas, export promodonand domesdc resource mobilization while reducing pressure for public expenditures.

B. }lace of Agricuire in the Economy

^.03 Agriculture plays a crucial role in the nation's economy. It accounts for about 18% ofGDP, provides about 40% of employment, and 30% of export earnings. During 198-89, agriculurerecorded an impressive average annual growth of 6.7%; the average GDP growth during the same periodwas 4.1%. Together with phosphates and tourism, agricultural export is the leading source of foreignexcange earings in the economy. However, the contribution of agriculture to the economy variedconsiderably between the 1960s and the early 1990s:

% of GDP % Employment %

1960. rapid expansion 29 44 381970s decline 17 42 331980/84 drought peiod 14 39 281965191 ined growth 18 40 321991f93 drought 17 39 31

Of Morocco's toal land area of 60 million ha, 8 million ha or 13 % is suitable for agriculture. 'he dominantcrops are cereals and pulses. Of the cultivated land, about 50% receives good but inconsistent rainfall.About I million ha are irrigated to grow fruits, vegetables, forage and industrial crops.

C. Agdrta Sector Perform and Government S pM

2.04 Pad Perf . Ihe agricultural sector has played a dynamic role in the growth ofMorocco's economy despite periodic droughts as shown in the table of para. 2.03. After a period of slowgrowth in the 1970s (2.4% p.a.), the growth rate increased during the 1980s to 6.7% p.a. mainly due tofavorable weather conditions since 1985. Farm productivity is low except in irrigated areas but the sectorhas considerable untapped growth potential (Annex 5).

2.05 Govmmen Sate. Growth through private sector investments in rural areas withconsideration to the poverty that exists in certain regions of the country is the balanced approach to

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agriculture and rural development being sought by the Government and the Bank. This principal objective

is being pursued within the framework of the Mediun.-Term Agricultural Sector Adjustment Program

(MTASAP). The components of this strategy are detailed in Annex 5.

2.06 Ubstjgi.nal Credit and .yM nvisimet. A key element in the Government's strategy

is to shift emphasis to private investment channelled through institutional credit, and away from public sector

investment. The Project would be an important provider of funds for the implementation of this strategy,

in particular to finance investments in on-farm and market level storage, farm mechanization, field irrigation

facilities and agro-industfy.

11). Secdoral -ues Relevant to Rural FINce

2.07 Sectoral issues that affect the design of rural finance operations are the following: (a)

poverty among rural families, which results in low debt service capacity (a poverty assessment is available

on Morocco - Bank Report No. 11918-MOR of July 1993); (O) the need to mobilize deposits and savings

at. market conditions; (c) financing of agro-industrial development to complement primary agricultural.produStion (this sub-sector is fully described in Bank Report No. 11727-MOR of June 30, 1993); (d)

!alleviation of land tenmre constraints to investment incentives, productivity and access to credit; and (e) high

climatic risk faced by agricultural production. To reduce this risk, it is proposed to create an agricultural

insurance Fund involving private insurance companies (pira. 5.15). Tlese sectoral f.atures are more fully

discssed in Annex 5, paras. 8to 14.

E. Bank-Rol in the AnroimWlua Sector

-2.08 The Bank Group has provided considerable support to Morocco. As of June 30, 1993, 105

loans (including S IDA Credits) have been made, supported by US$9,714 million Bank/IDA funds (US$45.2

million of IDA Credits), net of cancellations. Total IFC net commitments in Morocco amount to US$184.2

million. In agriculture, the Bank plays an important role. To date, 21 projects and two adjustment loans

(ASAL I and U) have been completed and five projects and one sector investment loan (ASIL) are at various

stages of implementation, with a total sum of US$1,765 million Bank Group lending (see details by project

in Annex 5, para. 15). As part of the Bank's recent portfolio managemet initiative, a Country Portfolio

Performance Review (CPPR) took place in Morocco in FY93. There is currendy no candidate projects for

restucturing or loan cancellation in the agriculture portfolio.

2.09 Lmo Leaned from Past gic ral Credit Pre . Performance of the

Agricultura Credit Projects has been good. OED reports stress the contribution made by the projects to

agricultral development, their success in mobilizing capital for private sector investment in Morocco, and

in introducing institution building measures (CNCA) and the successful expansion of credit to small farmers.

One important lesson learned from past projects is that a financially viable farm credit system can be

maintned with a positive interest rate strucure (para. 4.20). Experience has also shown that CNCA needs

to be strengthened to provide more competitive banking services to its diversified clientele (para. 6.09(e)),

and to improve domestic resource mobilization (para. 4.29). Increased private sector lending by CNCA in

Morocco provides a major source of growth for Moroccan agriculture. A more detailed description of the

projects' performance and development impact is given in Annex 10.

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m. TM EM-4-a

3.01 isttutiona &Ift. Morocco has a well-developed financial sector. It consists of theCental Bank-Bank Al-Maghrib (BAM)-, 15 commercial banks, five specialized credit institutions, amongthem: the Agriculttiral Credit Bank (CNCA); the Housing and Tourism Bank (CIH); and the IndustrialDovelopment Bank (BNDE). Tbere is also a capital market (Casablanca stock exchange) where stocks andbonds of private companies are listed and traded. It has, until now, played a limited role in mobilizingequity finance. At the end of 1992, the total banking system provided about DH 104.0 billion to theeconomy, about 63% of which (DH 65.0 billion) were short-term. There are also two savings banks, sixleasing companies, mostly owned by the banks, and several insurance companies. Agricultural insuranceis in its infancy in Morocco and needs to be further developed. The Treasury of the Ministry of Finance(MF) plays an important role in defining financial sector policies (para. 3.02). The Government is al.sopromoting, under a new law and with Bank's assistance, the role of the Communal Infrastructure Fund(FEC). FEC will be both a financial institution subject to the supervision of BAM and a public sectorenterprise controiled by the MF. FEC's basic mission, is to finance local investments to enhance the qualityof communal infrastructes ncluding in rural areas. Details are in Annex 6.

Jina Sector Policies and Reforms

3.02 In the mid 1980s, the Government started to implement a program of progressive eliminationof direct monetary controls, to increase the efficiency and responsiveness of financiW intermediation. In1990, improved macroeconomic stability and the projected decline in the need for domestic fiancing of thebudget deficit encouraged authorities to move to a second phase of reforms. These reforms are supportedby the Financial Sector Development joect (FSDP) for which a Bank loan of US$235 million was approvedin 1991. Reforms include: (a) the transition towards indirect instruments of monetary management; (b)the development of domestic financial markets, in particular for government securities; (c) the liberalizationof most interest rates and the elimination of directed credit policies; and (d) the strengthening of banksupvision and prudential regulations. Details are in Annex 9.

IV. THE CALSSE NATIONALE bE CREDIT AGRICOLE

A. Oa on and Stffn

4.01 CNCA was established by the State in 1961 as the institution responsible for financing thedevelopment of the agricultural sector. It fulfilled that function very effectively and, in 25 years, becameone of the largest and most important financial institutions in Morocco. In 1987, the Government decidedthat, while continuing to play a leading role in agriculture, CNCA should broaden its activities into rural andcommercial banking to become a multipurpose bank (a universal bank). Its mission is still enhanced by thehigher priority being given to rural development and to the activities expected of CNCA in the future:expansion of credit, especially to small farmers; prudent diversification of operations, especially into agro-industries, fisheries, artisanal industries and other rural activities (notably women clients); increasedmobilization of voluntary deposits and savings in particular rural savings; continuedregionalizationldecentralization of credit and banking activities; and enhanced financial autonomy.

Q _on

4.02 To fulfll effectivel the above functions, CNCA embarked, at the end of 1991, into theimplementation phase of a major r., &cization of its structure. For that purpose, five wdeldgations",equivalent to vice-presidencies, are being created at the Headquarters office: Loau and Portfolio

Management; Branch Network Development and Promotion; Hunan Resources and Logistics; Finance andAccounting; and Planning, Management Control and Internal Audit. The Inspection Directorates (para. 4.09)will also be strengthened.

4.03 The Loan and Portfolio Management is responsible for providing support to the 'CaissesRegionales" (Regional Branch Offices) in the appraisal of lending operations, ensuring the technical qualityof operaions, and processing the loans that are beyond the approval limits of regional branches. The BranchNetwork Development and Promotion is mainly responsible for providing pro-active marketing support toCNCA's branch offies and for assisting in the expansion of the branch network.

4.04 The new structure will include an International Opemions Departnent ([OD) and a DataProcessing Department (DPD). The main responsibilities of the OI) will be to help CNCA develop itscommercial activities in import-export prefinancing. This is a relatively new field of operations for CNCAwhich will require a great deal of staff training. To ensure e success of this activity, CNCA has recruiteda commercial banker with experience in international trade financing. The other department, DPD, is incharge of developing CNCA's data processing capabilities which need to be rapidly upgraded. The neworganization structure took effect in May 1993.

4.05 In addition to these organization changes at CNCA's Headquarters. a significant innovationis being introduced in CNCA's field organization. It consists of the creation of eight Regional Delegations,that is one,for each new economic region of the country with the region of Casablanca having twodelegations becamse of its size and economic weight. The main functions of the regional delegation are tocoordinate, support and monitor the operations of the various regional and local branches established withinthe region.

4.06 The long-maturing sew organization has merits because it consolidates various activitiesunder the authority of a limited number of managers and provides CNCA with a structure needed for theexpansion and the diversification of its operations. In the long run, the regional delegations are expectedto evolve towards increased line authority and responsibility in their respective region.

4.07 CNCA is administered by a board of directors and a Director General who is the chiefexecutive officer (CEO). The board includes representatives from the ministries of Agriculture, Finance,Planning, and Interior, of the Bank AI-Magbrib and of local farmers/institutions. Its role is being reorientedtoward the normal and appropriate board functions of strategy and policy making, budget approval, overallsupervision and evaluation of performance, and approval of audited accounts. The Director General isappointed by Royal Decree and is in charge of the overall management of the bank and of overseeing itsperformance.

4.08 To implement CNCA's change In strategic direction, the King of Morocco appointed a newDirector General in January 1987. The Director General appoints CNCA's staff with the exception of thefinancial controller who is appointed by the Ministry of Finance. The Controller is required to report toGovenment on CNCA's compliance with pertinent laws. An independent private auditor is hired by CNCAto perform an amnal audit of the bank's financial s emets before they are approved by the Board at theannual meeting. CNCA's top management is experienced and capable. The Project will support CNCA'sinstitional strengthening by providing funds for training, data processing and consultant services (paras.5.12 to 5.14).

4.09 CNCA's credit is extended from its Headquarlers office in Rabat, 51 Regional Branches(CRCAs)' and 126 Local Branches (CLCAs)1 , about 50% of which offer banking services. In addition,

1V Caises REgionales do Crdi AVicole.yI Ca].. Locaes do Crt Agrico.

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155 seasonal credit outlets attached to CLCAs are operational as well as 16 deposit branches in major urbancenters. There are siX Inspection Directorates (IRCAs)' in charge of banking inipection, coordination ofcredit activities, and undertaking special surveys and studies. Due to the rapid ewvansion of the lendingprogram and other banking services, CNCA needs additional and more modem office space.

atmn ad NW iIflin

4.10 At the end of 1992, CNCA staff numbered 3,385, 27% of whom were located atheadquarters and 73% in the field. The distribution of staff between Headquarters and field offices (CRCAsand CLCAs) at the end of 1987, i.e five years earlier when staff totaled 2,474, was 33% at Headquartersand 67% in the field. This evolution is favorable.

4.11 Staff productivity is fairly high. Between 1987 and 1992, CNCA's total staff increased atan average annual rate of about 6% while the volume of lending increased at an annual rate of about 11%.The volume of annual lending per staff is about DH 1.6 million for Headquarters and the CRCAs (about 230loans processed per staff per year) and about DH 1.2 million for the CLCAs (500 loans processed per staffper year). CNCA's staff is relatively well educated. Most support staff are high school graduates or havea professional training diploma. Middle and higher management staff (22% of total) are universitygraduates. Every newly appointed employee receives induction training of from one to six months dependingon his or her position.

4.12 CNCA has made considerable effort under Loan 3088-MOR to upgrade the trainingprovided in its in-house center. Results have been quite encouraging in terms of the number of staffattending training programs and also in terms of the variety of programs being offered. While in 1988 35%of the staff received training, the proportion increased to 41 % in 1989 and to 48% in 1990. Furthermore,the center developed programs that are in line with CNCA's objective of becoming a multi-purpose bank.These include seminars on commercial banking operations, marketing, data processing, human resourcesmanagement, resource mobilization, import-export, pre-financing, appraisal of agro-industry lendingincluding enviromental impact. Emphasis was also placed on improving the quality of the training itself.

B. MI PoLcies and P 1oedures

4.13 CNCA's lending policies are spelled out in its statement of policies approved by the Boardof directors in 1989 (Annex 11). The forms of services are very diverse: short-, medium- and long-termloans; all banking operations; leasing schemes; underwriting of equity investments; assistance to enterprisesto mobilize resources; management of public finds or loans for the account of the State. The policystatement also indicates that CNCA will finance only projects that meet specific criteria of technical,environmental, economic and financial viability; and that it will not finance more than 80% of the total costof an investment program, including leasing schemes. These policies are sound and satisfactorilyimplemented.

4.14 Simplification of procedures and expansion of the range of investment financed have beenthe main feaures of CNCA's credit policies. Lending operations are governed by 'Credit Guidelines"'which are revised periodically. A major oveaul of these guidelines was done in 1990-91 to incorporateCNCA diversified operations and recent elements of financial sector liberalization. They are comprehensiveand cover types of credit available for each activity, appraisal criteria, financing norms, sub-borrowercontributions, inerest rates, maturities, loan approval authorities, security for loans and maximum creditceilings available to borrowers. Lending procedures are different for commercial farmers, clients ofHeadquarters or CRCAs, and for small farmers who are clients of CLCAs. Loans from Headquarters and

2/ lIpons Rfgiondes de C6dit Agicole.i/ Normes et conditios p6cifiques de fiancament.

CRCAs are subject to considerably more stringent appraisal criteria than loans from CLCAs, for which

procedures are streamlined. Short-term loans are usually granted for periods of 3 months (harvest loan) to

12 months and finance farm inputs and produce marketing; medium- and long-term loans extend from 2 to

20 years (up to 25 years for rural housing) and finance a wide range of on-farm and other investments.

CNCA is servicing about one million clients nationwide.

Headquarters OMce and CRCAs

4.15 The Headquarters office lends to about 18,000 clients, essentially large farmers whose

borrowings exceed the CRCAs' loan approval authority, irrigation development agencies (ORMVAs), and

private agro-industrial enterprises. CRCAs lend to about 300,000 clients. This includes individual farmers

with a fiscal income (Fl)s above DH 6,000 (actual net farm income of at least IH 12,000 or US$1,500),

Agrarian Reform Cooperatives, agricultural and agro-industrial enterprises and exporters. Loan approval

authority is below DH 650,000 (US$72,000).

4.16 CNCA has achieved an acceptable balance between thoroughness of appraisal and the

objective of reaching a large number of farmers with limited staff resources and operating costs. Field

appraisal is systematically undertaken for investments in land improvement, irrigation, purebred livestock,

plantations, poultry farming, rural housing, coastal fishing and for all loans disbursed by installments.

On-farm appraisal is also carried out for other purposes when considered necessary. Loans made for the

purchase of equipment can represent up to 70% of investment costs.

4.17 Loan applications are reviewed and approved by the CRCAs' credit committee which meets

weeldy. It is chaired by the CRCA director. The type of guarantee required from borrowers is based on

CRCA staff judgment of credit risk. Short-term loans to individuals are generally secured by crop liens and

sureties and medium- and long-term loans by a chattel mortgage on equipment. Loans for land

improvement, irrigation and construction are secured by a mortgage.

4.18 CLCAs process 65% of all CNCA loans (but about 18% only of total loan amounts) and

make loans to about 600,000 clients, essentially small farmers, artisans and rural women with a fiscal income

of less than DH 6,000, which corresponds roughly to an annual net farm income of less than DH 12,000

(US$1,500). Comprehensive lists of farmers' Fl are kept with CLCAs and consulted for every loan

application. As in the case of CRCA clients, loan amounts are determined on the basis of norms revised

annually. However, there is a ceiling on maximum borrowings intended to keep borrowing within the

estimated debt capacity of CLCA clients. For farmers having documented title to their land, maximum

short-term borrowing is limited to DH 40,000 (US$5,000) and maximum medium-term loans outstanding

to DH 80,000 (US$10,000). For borrowers without any evidence of ownership, short-term loans are limited

to 200% of thei FI and medium-term loans to 800% of FI. The current trend is towards decentralization,

making local branches more autonomous in their lending decisions.

4.19 The ceiling on borrowing capacity reduces CLCA lending risk. This is important, because

loan appraisal is based on desk review. Systematic field appraisal and supervision of loans made to small

farmers (average loan in 1991 was about DH 5,100 or US$640) would not be administratively or financially

feasible. The FI ceiling is necessarily arbitrary, but it minimizes risk.

Interest Rates

4.20 Current nominal interest rates (1993) on CNCA's loans are presented below (inflation was

5% in 1992 and in the 4-5% range in 1993):

I/ Net income estimated for tax purposes. Depending upon the crops grown, real annual not farm incomes range

from 2 to more than 20 times fiscal incomes.

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Table 4.1: CNCA's NOMINAL INTEREST RATES ON LOANS/d

Per PerHQs and CRCAs Annum (%) CLCAs Annum (%)

Short-term Loans Short-term LoansCrop Marketing 12.5/a Cereals and Pulses 9.5Handicraft 9.0/12.0 Harvest Loans 12.0Export Prefinancing 10.0/11.0 Artisanal/Fishing 11.5Coastal Fishing 11.0 Other 11.5Cereals & Pulses 10.0Other 11.0/14.0

Medium- & Long-term Loans M_dium- and Long-term LoansAgriculture

Over 7 Years/Under 7 years 12.0 Agriculture (5 to 10 yrs) 11.5Coastal Fishing Coastal Fishing 11.0

Over 7 years/Under 7 years 12.0 Rural Housing 12.0Agro-Processing andWood-Processing Loans tb 14.0Rural Housing /c 12.0/14.0Rural Land Acquisition 14.0Handicraft 9.0/14.0

/a Rate fixed by the Govemnment for all banks, increased from 8.0% to 12.5% in June 1993..ib= Maturity periods 5-10 years. Rates of 12% for small-scale enterprises./c With a Govemment 4%-5% rebate fcr a new house if its total cost (social housing) is less than

DIH 150,000/100,000 (US$19.000/12,500). Subloan term : up to 25 years./d Effective interest rates are higher than nominal rates because of additional fees.

4.21 Interest rates on CNCA's loans are compatible with those charged by commercial banks forcomparable loans. Real interest rates are high in Morocco. In addition, an appraisal fee of 0.05% ischarged on CRCA and Headquarters loans6 and a 0.75% commitment fee is charged on the part of the loanthat has not been disbursed six months after the signature of the loan agreement, regardless of the amountof other loans. Medium- and long-term loans are also charged a 1% front-end guarantee commission topartially cover the foreign exchange risk with the exception of loans for rural housing. A life insuramepremium for housing and medium- and long-term credit was introduced in July 1993.

4.22 The domestic rate of inflation, which rose from 3.1% in 1989 to 6.7% in 1990 and 8.2%in 1991, declined to about 5% in 1992 and less than 5% in 1993. As inflation is expected to remain in thisorder of magnitude in coming years, CNCA lending rates would remain positive in real terms during theproject period. Increase in the cost of CNCA's resources would also impact CNCA's financial viability.A mechanism has been established under the Project to enable CNCA to freely adjust its interest rates onits loans so as to protect its financial margins and profitability (para. 6.09 (b)).

C. Lendng Operations

4.23 In 1992, total CNCA lending reached DH 3,343 million (Annex 1, Table 1) down fromDH 4,918.9 million the previous year, only because of the drought. From 1988 to 1991, CNCA achieved

6/ On loans of more than DH 5,000.

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an annual average rate of growth of 15%. Including the year of drought in 1992, the average annual rateof growth was only 3%. In real terms, lending increased at about 10% per normal year.

4.24 Over the 1988-92 period, the share of short-term credit in total credit varied from 55% toabout 60%. In 1992 ( a non-drought year), short-term loans to private farmers primarily financed cropproduction (56%), animal production (14%) and animal feed (5%). Short-term credit to State agriculturalcompanies, which represented 10% of total short-term lending, was used mainly to finance, through theORMVAs, industrial crop production (cotton, sugar beet and sugar cane) in irrigated perimeters. Newprivate sectors of short-term lending activities opened in 1989 now represent 10% of short-term lending.They include handicraft, fisheries and agro-industries. In 1991, about 25% of total medium- and long-termcredit went to CLCA clients (mostly for livestock, including construction7 as for previous years), 55% wentto individual CRCA clients and the balance to Agrarian Reform Cooperatives (2%), State companies (2%),private agro-industries (8.4%), and rural housing (10%). The last two activities and fisheries expanded since1989. Four types of investment (all private) represented about 74% of total lending: livestock (25%), farmand irrigation equipment (25%), rural housing (10%), and agro-industries including green-houses (14%).

Fann Credit Coverafe

4.25 The extent of CNCA's farm credit penetration in rural areas is illustrated in Annex 2, partB, showing tle number of potential and actual CNCA individual farm clients.

4.26 About 70% of potential CRCA clients, but only 35% of potential CLCA clients werereceiving credit in 1991. Very few marginal farmers with an Fl below DH 1,600 (about 5 ha rainfed land)were actual CLCA clients, reflecting their low borrowing capacity and their lack of participation in themonetized economy. The increase in the number of clients has followed the expansion of the network ofCRCA and CLCA offices, but certain upper limit may have been reached. A sharp increase in 1981/82coincided with the opening of 90 seasonal credit outlets to bring credit facilities closer to farmers, whilecontaining distribution costs. Given the already current high coverage level of CRCA clients (70%), onlymodest scope, in particular in the aftermath of a two-year drought, exists to increase coverage of farm clientsin rainfed areas. The diversification of CNCA's banking activities is essential.

4.27 CNCA's recovery procedures are efficient, and repayment performance is good when thecrop season is normal. Arrears accumulate, however, during drought years. At the end of 1992, totalarrears (essentially drought-related and including previous rescheduled loans coming due) amounted to DH3.8 billion, i.e 30% of total outstanding loan portfolio. However, CNCA recovers more than 95% of allits credits, but it takes six to seven years after maturity to reach this target as shown in Annex 7, table 12A,which also summarizes key indicators on CNCA loan recovery for 1985 to 1992. In August 1992, as resultof the drought, CNCA took a series of actions to improve recovery performance due to default (notdelinquency) in particular at CLCAs servicing small-farmers in rainfed areas, and in March 1993, additionalmeasures were ordered to cushion the impact of a second consecutive drought (details are in Annex 7, Table12B). Loan loss provisions are currently covering 100% of arrears of more than 18 months, and are plannedto cover 100% of arrears of more than 12 months in 1996.

7/ Construction is usually of stables for livestock and thus is often part of a total on-farm investment in livestockactivities.

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D. Finandal Situation and Performance

Finnda Condition

4.28 Resores. As of end 1992, CNCA's total balance sheet including provisions (10%)amounted to DH 17,342.2 million (US$1,927 million). This represented a yearly compounded increase ofabout 12% over the 1988-92 period (total 1988 assets: DH 11,093.3 million). Table 4.2 below shows thedistribution of CNCA's resources (liabilities) for 1988 to 1992. CNCA's detailed financial statements arein Annex 7, Tables I to 5.

Table 4.2: CNCA RESOURCES AS OF DECEMBER 31(in DH Million)

---1988-- -1989- -1990 ---- 1991-- - 1---1992-Amounts % Amounts % Amounts % Amounts % Amounts %

Capital 425.6 4 425.6 3 425.6 3 425.6 3 465.6 3Reserves 512.9 5 551.6 5 590.7 5 631.0 4 642.6 4Other /a 137.9 1 138.5 1 138.8 1 139.1 1 139.2 1

Total Equitv 1.076.4 10 1.115.7 9 1.155.1 2 1.195.7 8 1.247.4 8

Provisions 812.3 7 1,079.2 8 1,281.2 9 1,534.8 10 1,808.6 10Deposits 1,316.7 12 1,751.2 14 2,152.5 16 2,709.8 17 2,853.2 17One-year bonds 1,307.0 11 1,447.1 11 1,077.6 8 1,148.2 7 1,256.8 7Other Current Liabilities 623.6 6 682.8 6 812.5 5 832.2 5 873.1 5Current maturities of

LT Borrowings 376.7 3 424.9 3 465.1 3 521.1 3 594.4 3Long-term Liabilities 5,580.5 50 5,877.6 48 6,824.4 50 7,919.7 50 8,708.7 50

Total Liabilitis 10016.8 90 11.262.8 91 12.613.2 91 14.665.8 92 16.4094.8 92

IQThL 11.093.3 100 12.378.5 100 13.768.2 100 15.861.5 100 17.342.2 100

a/ Including CLCAs' quasi equity fund of DH 94 million.

During the 1988-1992 period, the average annual rate of increase of the total balance sheet stabilized at about12% in current terms, but this indicates that CNCA is still growing. At the end of 1992, long-termborrowings (DH 9,303.1 million) net of current maturities falling due in 1993 (DH 594.4 million), i.e, DH8,708.7 million represented 50.2% of CNCA's total resources. About 98% of long-term borrowings wereexternal borrowings, of which DH 3,867.9 million (42%) were from the World Bank, followed by KfW.Domestic long-term borrowings declined from DH 224 million in 1988 to DH 91 million in 1992. Therelative decline in CNCA's capital adequacy as measured by the ratio of total equity to risk assets8 (about13% in 1988 compared to 10% in 1992) is partly due to the new taxation at 40% of net income (down to38% in 1993), and it indicates that the institution is not able to generate internal equity fast enough tocompensate for the increase in lending volume and business development. While capital adequacy duringthe Project period (para. 7.04) is expected to remain above the 8% of risk assets that is generally beingadopted as the international standard for commercial bank capitalization (10% is better for developmentbanks), the trend line would be monitored annually during project implementation (para. 6.09(b)). KfWproposed that its contribution to the project be passed on by Government to CNCA as a capital increase.Over the disbursement period, this would increase CNCA's equity by about 25%.

8/ Loans, and bills discounted.

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4.29 D Recently, CNCA has been relatively successful at mobilizing short-term domesticresources, and the relative share of voluntary deposits in CNCA's total resources increased significantly from12% in 1988 to 17% in 1991. In 1991, deposits increased by 25% over the previous year. In four years,the average annual rate of increase has been nearly 30%. The total amount of deposits increased from DH1,317 million in 1988 to DH 2,853 million in 1992 (+ 117%). Core deposits are primarily sight depositson current accounts (66%), and are mostly mobilized from the CRCAs and zie new "Guichets bancaires"(banking outlets), installed in the main urban areas specially to attract deposits. Deposit collection at CLCAlevel starts to increase even faster (except in 1992), but still represents a small percentage of the total(2.2%). Since 1987, CNCA has been serving new markets including women farmers and artisans and sinceJune 1988, it has also been serving Moroccans working abroad. There is still a large scope for developingsavings deposits at CNCA, which now represent less than 5% of total deposits in the whole banking systemas compared with a market share of 2.2% in 1988.

4.30 One-Year Solidait -Bends. To cushion two past major droughts, and to allow CNCAto meet vastly increased credit demand, commercial banks have accepted, beginning in 1981, to place 3.5%(down to 2% since December 1991) of their deposits in agriculture through CNCA at an interest rate of 3%p.a, then at 4.25% since 1987. These one-year solidarity bonds have decreased from DH 1.4 bilion in 1989to DH 1.2 billion in 1992 and now represent only 79 of total CNCA's resources (11% in 1989).Commercial banks are unlikely to make quick progress in financing small farms because of the high risk andcost involved, and expertise needed. In the poorest rural areas, there is not yet enough business to supporttwo institutions. This is partly why, in an imperfect financial market, CNCA has to be made stronger to meetthe double challenge of:

(a) competition from commercial banks located in urban centers along the coast for attractivebanking activities; and

(b) specialization, to fulfill its basic development mission of financing the rural sector includingin the poorest areas.

Farm incomes dropped sharply in 1992 and 1993 as a result of two consecutive droughts. The Governmentand CNCA, however, decided not to recourse to additional one-year bonds from other banks to cushion theimpact of the drought on CLCA operations (para. 4.33), but to use transitional budget resources instead.With a view to establishing an improved level playing field in the years to come, a sustainable crop insurancescheme (open to all banks) to cushion the effects of future droughts will be established under the project(paras. 5.15, 6.12, 7.06, and Annex 13) in anticipation of the eventual elimination of solidarity bonds as partof the liberalization of the Financial Sector in Morocco.

Lem Portfolio Oualt

4.31 Collection performance and appropriate provisions are good indicators of loan portfolioquality. Overall, CNCA's track record compared to other, rural finance institutions in developing countriesis strong. Collection performance on drought-related arrears, however, has deteriorated these past years(Annex 7, Table 12B) and this has led to a certain degree of uncertainty as to the real value of part ofCNCA's loan portfolio and thus the adequacy of its loan loss provisions and real capital. In July 1988,CNCA made the prudent decisions to convert its current provisions of DH 409.1 million into a specialreserve for unpaid loans, and to introduce an improved approach to calculating new provisions as of 1988,including a climatic risk provision. The improved approach includes a systematic loan evaluation andclassification system for all loans above a certain amount9 to single borrowers or related entities. Eachborrower is reviewed, at least annually, on the occurrence of any change in the credit lines approved orsignificant change in the borrower's condition. A standard classification is applied based on the extent ofpast dues, if any, the financial condition of the borrower, the quality of the documentation, the value of thesecurity held, and the specific loan loss potential identified for the total outstanding to each financially

2/ Initially quite high, but to be lowered progressively to DH 500,000 or DH I million.

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troubled borrower or related group of borrowers. CNCA has defined appropriate loan classification levels,criteria and related risk level guidelines, and set up a monitoring process. According to these new guidelinesand procedures, CNCA increased the overall level of credit risk provisions from DH 612 million in 1988to DH 1,280 million in 1991, a level that the external auditor confirmed to be adequate in normal years i.ewhen the crop season is good. Provisions further increased to DH 1,530 million in 1992. Provisions for baddebts now amount to more than 40% of arrears. Assuming an average real recovery rate of 95%, CNCAshould continue to provision at least 5% of its yearly disbwrsements. This will allow CNCA to maintain inits accounts an adequate level of provision for bad debts that covers 100% of the real risk of default asdetermined by analyzing overdues annually. These steps are essential to establishing CNCA's marketreputation for financial responsibility. Assurances were obtained at negotiations that CNCA would applypolicies and procedures satisfactory to the Bank for loan classification and loan loss provisioning, inaccordance with the prudential regulations and advice of the Central Bank (BAM). Through the gradualimplementation of the climatic risk insurance scheme, provisioning would also be more reflective of normalcredit risk.

Overall Onprn Results. Profitability and Subsdy Dependenc

4.32 CNCA's operating results are positive. CNCA's financial status for 1988-92 is presentedin the summary balance sheets, income statements, and flow of funds statements in Annex 7, Tables I to4. CNCA's net profit in 1992 was DH 11.6 million, compared with DH 23.2 million in 1988, DH 38.6milion in 1989, DH 39.1 million in 1990 and DH 40.2 million in 1991. CNCA's financial performanceduring this period can be summarized as follows:

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Table 4M3: C4A FIACIAL PEREOEl5(DH MUlion)

Interest income 952.0 1,073.4 1,198.2 1,331.3 1,409.5Interest expeose (426.2) (538.3) (606.8) (695.6) (759.1)Qlleratins Income 5=f8 535.1 S91.4 63S 7O650.4

Staff cost 207.8 225.2 270.5 293.2 314.3Depreciation 9.0 10.4 14.1 17.9 21.9Other expenses 42.7 48.5 61.3 63.9 75.6Qemrating Exenses (2,9.5) (284.1) 34i.9) (37S.0) (4.I1.6)

Opering Result /g 266.3 251.0 245.5 260.7 238.6

Other Income 38.4 44.2 45.6 43.8 31.4Provisions for losses (203.2) (232.4) (209.7) (227.5) (249.3)Exchange risk provisions (13.9) (14.6) (15.9) (11.5) (13.5)Other provisions (38.9) (2.8) (2.8) (3.0) (3.0)Prior period adjustments 0.2 20.1 5.2 5.7 15.9

Net Incme before tax /k 4 65.5 67.9 2 Income tax (25.7) (26.9) (28.8) (27.9) (8.5)

Net Profit /I 38.6 39. 40.2 1L6Free Reserves 23.2 38.6 39.1 40.3 11.6

Rt (%):Pretax Return on Equity 5.1 6.0 6.0 5.8 1.8Net Return on Equity 2.4 3.5 3.4 3.4 1.0Pr-x Return on Risk Assets 0.6 0.8 0.7 0.6 0.3

/A Operaing income less operatng expenses./, Since its creation In 1961, CNCA was empt from income tax (till end 1987).Ic As a Government development bank, CNCA does not pay dividends.

CNCA's average cost of funds in 1992 was roughly 5.5%, compared with 5.0% in 1988. The profit and lossdata in Table 4.3 above shows that the gross interest margin (operating income) over the 1988-92 period hasdeclined from 55% of interest income in 1988 to 46% in 1992. During the 1988-91 period, CNCA earneda net return on equity of 3.4% (5.8% before tax) in 1991 but it declined significandy in 1992 where the netreturn on equity was only 1.0% (1.8% before tax) as the result of declining margins (due in part to theimpact of the drought on recovery performance) and increased provisioning. Clearly, the profitability ofCNCA is bighly sensitiveto policy and procedures applied to provisioning for loan losses. Once its statutshave bej lified (placing formally CNCA under the Central Bank regulations and supervision), CNCAwill be under the guidance of the Central Bank, to the same banking law and prudential regulationsthat will >. - ,licable to other bankm as of 1995. CNCA's projected provisions for loan losses for 1993-1996 are consistent with the prudential regulations stipulated under the new banking law (Annex 7 Table 11).On economic subsidies, CNCA and the Government of Morocco have reduced between 1988-91 farmers'and CNCA's implicit and explicit subsidies as measured by a Subsidy Dependency Index. However, for

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1992, this index increased as a consequence of drought-related impacts on the growth of profits(Annex 16)10.

4.33 CLCA Operatons. When they are not adversely affected by droughts, the CLCAoperations can generate sufficient income to cover costs and to generate a small profit (e.g. about DH 0.9million per year between 1988 an 1991), despite the higher administrative cost involved in lending to smallfarmers. This cost represents 3.4% of risk assets for CLCA operations, as compared to 2.9 % for CRCA'sand headquarter's operations. The CLCAs currently represent a highly efficient, relatively low-cost ruralfinance window whose development impact is also positive in poor rural areas. In 1992, however, CLCAoperations decreased sharply as the result of the drought and higher risk of default. It will be difficult tomake improvements without increasing costs further until the climatic risk Insurance Fund is in place. Themanagers and staff of CLCAs are highly productive in credit operations. They need to maintain their overallfinancial viability and improve their performance in deposit mobilization, portfolio diversification, and farmcredit recoveries in particular in the three regions (Sud, Tensift, Oriental) chronically affected by droughts.

E. CNCA's Development Objectives and Straterv

4.34 The year 1987 marked a turning point for CNCA when the Government of Morocco, at thehighest level, reemphasized the role of CNCA in the development of the country's rural sector. Neworientations for CNCA include:

(a) its transformation into a universal, full-service bank with a qualified and responsible Boardof Directors, while maintaining its farm credit specificity;

(b) expansion of CNCA's credit operations, to serve a larger number of farmers, particularlysmall farmers, the diversification of lending and banking activities to other subsectors,including fisheries, agro-industries, forestry, land consolidation, rural housing, artisanal andother rural activities; and

(c) assurance of CNCA's managerial autonomy and financial viability.

In line with these orientations, CNCA's management has defined the following medium-term developmentobjectives which are consistent with its charter (para. 4.01) and its sound policy statement (Annex 11):

(a) assure the sustainability of CNCA and its financial viability by implementing adequatepolicies of work organization, staffing, business development, and relations withGovernment, borrowers, depositors, and financiers;

(b) improve its future resource position to meet the currently planned levels of agricultural,commercial and other diversified lending, by mobilizing demand, time and savings deposits,as well as new external funds during the Project period;

(c) develop long-term plans to strengthen and diversify its business base and its asset andliability structure, and ensure that CNCA continues to have an effective role as the leadbank in the financing of the agricultural sector;

(d) pursue the decentralization of its credit and other banking operations by setting annualobjectives at decentralized levels of operations for the use of funds, deposits and savings,and loan recovery, by restructuring its branch network in the major regions of the country(regionalization of CNCA), and by opening new full service branches in nrual areas; and

10/ Considerable pmdence should be maintained ;n the interpretation of this subsidy dependency index. See Annex16 for the assumptions on its calculations.

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(e) improve its operational efficiency by simplifying management tasks and procedures forsome of its banking products, developing new banking services, improving the processingand supervision of loans and operations, and modernizing its management information,accounting and control systems (MIS).

To help CNCA achieve these objectives the Project will support the institution to:

(a) implement a long-term strategic and operational planning system (para. 6.09(c) and Annex12);

(b) implement its new internal organization and its executive decision-making informationsystem developed under Loan 3088-MOR, and further develop the computerization plan ofits banking activities and basic Management Information System (MIS), to allow for moreefficient planning, budgeting, accounting, risk asset and liability management, branchnetwork coordination, control function management, and personnel management; and

(c) continue to implement its pluri-annual training program for CNCA's managers and staff(para. 6.10).

The Project includes financing for technical assistance in the strengthening of CNCA's management,software, computer maintenance, staff training and small equipment (para. 5.12).

F. CNCA's ProJected Lending Proggand F-lmdw Reafrements (1993-1996

4.35 Based on past trends, the Government's priorities and objectives, the private sector demandfor credit to finance agricultural investments, and on CNCA's own business development plan anddiversification strategy, CNCA's total lending (Annex 1), after growing at 15% p.a. from 1988 to 1991 (butdecreasing in 1992) is projected to increase again during the coming years, but at a smaller growth rate of7% to 8% (assuming that 1993 lending reaches the level of 1991). This projection takes into account therisks involved by lending too much at a time when loan rescheduling is still necessary to spread the impactof the 1991-92 and 1992-93 droughts and possible future droughts. Under these reasonable conditions, totallending would reach as much as DH 5,800 million (US$650 million) in 1995 with a ratio of short-term tomedium-term credit of about 1.4:1. Pending revision of the business plan at the end of 1994, projectionsfor 1996 and 1997 are based on the same assumption for growth. The resources necessary to finance sucha lending program will primarily come from domestic sources through: (a) the repayment of outstandingsubloans; (b) increased deposit mobilization; and (c) financial revenues. The remaining financing needs willbe financed from external sources. The Project's cofinanciers would provide the external financing necessary.The expected increase in deposits (mostly sight deposits) would provide CNCA with the resources necessaryto finance close to 90% of its short-term lending program as of 1996 (67% in 1992). The Project wouldprovide CNCA with long-term resources to finance its medium- and long-term lending program.

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V. THE PROJECT

A. Rationale for Bank Involvement and Project Objectives

5.01 Rationale for Bank Involvement. Bank involvement would consolidate and deepen theinstitutional reform process (initiated under Loan 3088-MOR) to develop a financially sound rural finmzesystem well-integrated into a gradually liberalized financial sector strategically linked to the FSDP. InMorocco, CNCA is a key institution, and its dual role as a bank and as a specialized financial institution inrural credit/savings is essential. Through CNCA, the Project would fulfill fundamental social and economicneeds in the country for progress in rural development, banking efficiency in financial intermediation,including the need to separate normal credit risk from climatic risk, and private sector growth. In thiscontext, the project would be integral to the strategy articulated in the Morocco Country Assistance Strategyby supporting Government efforts to alleviate rural poverty and to further develop the rural private sector.The Bank support would also assist CNCA's efforts to raise about US$279 million of additional cofinancingfor investments in the sector and to implement, with Government's support, longer term technical assistanceon drought management.

5.02 Project Objectives. Consistent with the Government's adjustment program and priorities,the objectives of the project are to assist Morocco in promoting private investment in rural areas and indeveloping the sustainable foundations of a financially sound rural finance system well integrated into agradually liberalized financial system. The project would aim at:

(a) financing demand-driven, private sector investments in rural areas and in agro-industriesthrough CNCA;

(-b) consolidating the institutional transformation of CNCA into a competitive, universal bank,in a prudent manner, through clientele and resource diversification;

(c) increasing domestic resource mobilization and securing the banking system through asustainable drought relief fund/crop insurance system;

(d) providing a full range of competitive banking services and products to rural farm and non-farm clients (notably women), enterprises and young entrepreneurs/graduates; and

(e) developing viable credit/savings schemes to reach the rural poor and make them bothproductive and creditworthy.

B. S_usM Project Description

5.03 To achieve the above objectives, the Project would support over a four-year implementationperiod (1994-1997) the following activities:

(a) CNCA Credit Program. First, the Project would continue financing CNCA's coreactivities and also support its diversification program: (i) on-farm and forestry investmentsby private farmers, enterprises and cooperatives, including water conservation measures;(ii) agro-indus,ry investments including working capital requirements and technicalassistance wi#i UNIDO support; (iii) investments in rural housing constructien; (iv) privatecoastal fisheries; (v) private artisans (notably women) and rural non-farm enterprises; and(v) land consolidation. Second, as new elements of the proposed credit program, theProject would support CNCA financing of: (i) an expanding program of women's activitiesin rural areas; and (ii) young entrepreneurs/graduates.

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(b) Stergh of CNCA and Institutional Development. Consistent with CNCA's policy

statement and change in strategic direction, the Project would support and fund: (i) thetraining program, MIS software and office technology equipment and maintenance neededto better manage CNCA as a universal bank, assist CNCA's clientele, and promoteexport-related operations and lending to women; (ii) training specialists; (iii) professionalvisits overseas for local trainers and managers; and (iv) consulting services required for thestrengthening of CNCA management and to support Project implementation, includingtechnical assistance for agricultural insurance development and drought management.

C. EDetsled Featwur

C-NCA Credit PQ

5.04 Investment Lending to Small Farmers. This component would finance about 267,000

subloans for on-farm investment by small private farmer clients of CLCAs. Beneficiaries include both men

and women. Investment would mainly be for livestock, draft animals, stables, wells and pumps, land

improvement, small mechanization and on-farm storage. This component (US$278 million) would represent

about 27% of total investment under the Project.

5.05 Investmnt Lending to Medium and lAMe Fames. This component would finance

about 48,000 subloans to larger commercial clients of CRCAs or CNCA Headquarters (including

cooperatives) for on-farm investments in response to market demand. Lending would be mainly for

agricultural machinery such as tractors and harvesters, transport, wells and irrigation, greenhouse

construction and equipment, plantations, livestock and land improvement. In addition, CNCA would finance

maintance operations undertaken by smallholders in large irrigation perimeters under the supervision of

ORMVAs, including water conservation measures. This component (US$452 million) would represent about

43% of total investment under the Project.

5.06 Lending to Agindusties. This component would mainly finance investment in working

capital and technical assistance needs of private small- and medium-size enterprises. The bulk of the market

demand is for investments in fruit and vegetable packing and processing, olive oil processing and dairy

production, flour milling, meat and fish processing, poultry, animal feed and storage. It also includes wood

processing and other activities. This component (US$105 million for about 310 investment projects) would

represent about 10% of total investment. Bank loan proceeds allocated to agro-industry represents only

US$15 million.

5.07 Lfndiuf for the OCtr uction of Rural Housing. The main objective of this component

is to provide well-targeted credit for construction of individual and collective .ural housing for farm families,

agricultural laborers, rural women, and other rural families in order to reduce migration io urban areas.

This component (US$90 million) will finance about 12,500 loans, mainly for low- and medium-income

families and would represent about 9% of total investment under this project.

5.08 Lending to Private Coastal _in. Lending under this component, which is a recent

activity for CNCA (since 1989), will be highly selective. Priorities are for the supply of fishing gear and

equipment, major repair and the renewal of engines and boats to private fishermen, in particular coastal

fishermen, who have a demonstrated record of fishing performance and creditworthiness in Morocco. This

component (US$41 million for about 660 operations) would represent about 4% of total investment under

the Project.

5.09 Lendinf to Artisanal and Women Activities in Rural Areas. CNCA has developed

experintal saving and lending products for artisanal and non-farm rural clients. These products are

particularly successful with women clients in the Khemisset and Rommani areas. The Project would further

develop these promising activities and finance women borrowers, cooperatives and pre-cooperatives in new

selected areas nationwide. The main objective of this program is to help women located in rural areas to

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start and develop their own entrepreneurial activities in handicrafts and cottage industries. This componentis expected to finance about 14,400 loans. This component (US$37 million) would represent about 3% oftotal investment under the Project.

5.10 Land Consolidation Credit Program. The objective of this program, recently launchedby CNCA, is to give private farmers access to credit to purchase land as part of the Government adjustmentprogram for land policy initially supported by ASAL 11. The rationale for this is to promote theestablishment of economically viable production units through land consolidation and prevention of landfragmentation. This program, which is not funded by the Bank (local cost component), would representabout I % of total investment under the Project (US$7 million).

5.11 Lending to Youn Entrepreneurs/Graduattis This component is designed to providefinancing to young entrepreneurs/graduates to help them start their own enterprises. The component willprovide funds for farm and rural non-farm enterprises consisting of private small-scale enterprises/youngprofessionals (men and women) engaged or willing and capable to engage in farm or off-farm activities inrural areas. This includes service cooperatives and trading services, crop transport, food processing, tractorrepairs and maintenance, input and spare parts supply, forest exploitation/reforestation and environmentalprotection, and construction. CNCA will carefully select both farm and non-farm enterprises to be financed.Tlis component (US$30 million) will finance about 435 loans and would represent 3% of total investmentunder the project.

sdioU nsioImw

5.12 Improvement of CNCA's Oraanitional Structure. inandal Performance. PlanningProcess and MIS. The Project would provide for:

(a) strengthening the organizational and regional structure of CNCA (para. 4.02) and itsfinancial performance (para. 4.32);

(b) making fully operational the planning and management control unit reporting to CNCA'sChief Executive Officer, and responsible for elaborating corporate objectives with the CEO,communicating them to lower levels within the organization for implementation, managingthe planning process, and controlling results (Annex 12); and

(c) further improvement of CNCA's MIS and accounting and expansion of computerizaion.

The Project would finance: (i) MIS softwares, data processing and office technology maintenance during athree-year period at CNCA's Headquarters and branch level; and (ii) the related training needs (para. 5.13)and consulting services as necessary (para. 5.14).

5.13 Lroject-Related Training. The Project would fund training by CNCA's Training Centerwith the assistance of consultants. The pluri-annual training program already includes all the elements likelyto ease CNCA's institutional transition, i.e., courses in human resources management, marketing anddevelopment, banking products and services, and applied technologies. Training will also include coursesin credit appraisal, environmental planning, and portfolio management for credit staff; accounting for middlelevel and operational staff; planning, programming, MIS, management control, and communication skillsfor senior staff; electronic data processing for computer staff and computer users; banking services forbranch managers and selected support staff; and risk management. The Project would also finance smallequipment, professional visits overseas for senior managers, and as necessary the recruitment of appropriatetraining specialists (para. 5.14). A total of about 1,000 staff would be trained under the Project. Detailsof the training objectives, plan and activities are available in Project working document No. 5.

5.14 Technical Assistane. Technical assistance could be of considerable help in speeding upCNCA's refnrms and in training CNCA's top staff. This is particularly true for the planning process andother organizational/MIS aspects, for CNCA's new banking services and for the launching of the pilot

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climatic risk Insurance Fund. The Project would finance the expertise necessary to support CNCA'sreforms, Project implementation and training, up to a total of 15 man/months of consultants/ trainingspecialists. The total cost of consultants is estimated at US$0.5 million. Cofinancing funds (CFD) will alsobe available.

5.15 Climaffc RNsk Moannent and Agricultural Insurnce Fund (not for Bank financing).The project wouid assist the Government in establishing a climatic risk Insurance Fund (Fonds d'AssuranceAgricole contre les Calamites Naturelles - FAA) for the protection of farmers, and an agricultural insurancescheme. The establishment of the proposed scheme would take place at the end of 1996 after two years ofpilot implementation in 1995 and 1996. An action plan for the Insurance Fund and its pilot implementationwould be presented to the Bank by October 1994 and would be based on the results of the technical studyand actuarial analysis prepared in May 1993 and reviewed in September and November 1993 usingworkshops to build commitment. Assurances were obtained at negotiations that the Government would putin place the Insurance Fund during project implementation and promote private agricultural insurance (paras.6.12 and 6.14).

D. Project Cost Eslimates

5.16 ESmted Cost. The total Project cost is estimated at US$1,150 million equivalent,including US$439 million equivalent (or about 39%) in foreign exchange and US$125 million equivalent inrelated taxes and duties (11 %). Baseline estimates are expressed in 1994-96 current prices for the creditcomponent, and in September 1993 prices for the institutional development component. The creditcomponent is based on financial projections that take account of past lending and the increase in lendingexpected under: (a) normal weather conditions (para. 4.35); (b) improved lending procedures (paras. 6.03to 6.05), and (c) the expansion and diversification of CNCA's activities (para. 4.34). Subsectoral allocationof fimds within CNCA lending programs is market-determined through an annual planning process andscbeme approvals. The institutional component includes price and physical contingencies (the latter estimatedat 10% for office technology, computer maintenance and software), consultant and training costs. Detailedcost estimates are presented in Annex 3 and are summarized in Table 5.1.

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TIa I.1: SUMMARY OF PFROECT CO / /

Locad Foreign Totd Loca Foregn Totd Forign TowaDH Milion - - USS Millon - Exchange Cost

% s

1. CREDIT COMPONe NT. 3,63. g4. 7. 437.1 1.14.S 22 92

FARMERSCoasUuci.on 352.0 62.0 414.0 42.4 7.5 49.9 IS 4Equipmntd 1,362.0 1,S63.0 2,92S.0 164.1 188.3 352.4 53 31Livetock 1,886.0 220.0 2,106.0 227.2 26.5 253.7 10 22Land Conldwaion 398.0 60.0 4St.0 48.0 7.2 55.2 13 SPlasations 473.0 316.0 '89.0 57.0 38.1 95.1 40 a

AGRO-INDUSTRIES 332.0 618.0 950.0 40 74.5 114.5 65 10

RURAL HOUSDNG 492.0 329.0 821.0 59.3 39.6 98.9 40 9

COASTIUL FMEtl]UIES 186.0 185.0 371.0 22.4 22.3 44.7 50 4

ARTSANS AND RURAL I/WOMEN AC_IV1TIESI 324.0 283.0 607.0 39.0 34.1 73.1 47 6

2. aJ TOADVELO l g 22 16.8 21.2 QS 20 & 78 1

Tranlwcomutant 0.8 3.2 4.0 0.1 0.4 0.5 80Dafa proceing 3.0 12.0 15.0 0.4 1.A 1.8 80 -

Physda otngences 0.4 1.5 1.9 0.0 0.2 0.2 80 -

Price coningencies 0.0 0.1 0.3 0.0 0.0 0.0 25 -

3. TOTAL PROJECT COST 3. +?a 53652.8 9.462.2 711.9 4d 1J15& lS 3 1of whbib:

Tot Base Cot 5,808.8 3,651.2 9,460.0 711.9 438.9 1,149.8 39 -

ContiuMngnies 0.4 1.6 2.2 0.0 0.2 0.3 73

I/ Inludes taxs and dubes estimded at DH 1,120 mirlon (US$125 milion equivakga) and coningnces in USS.k' Iudes financing of young profesalWgra&utms.*- Does not icludoe Headquarxws and branch network consaucon financed by CNCA.

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E. Irolject i_WU

5.17 FinagLhn. Financing of dhe Prject would be as folows:

Table S.2: PROJECT FINANCING PLAN(US$ Million)

Total TotalSub- Sub- Project

Borowers CNCA IBRD CFD KfW BIB FADES OECF Lending Costs

A. Small Farmas 101 / 154 2S 14 7 13 - 213 314B. Medium & Lar FarmFers 48 150 35 - 7 45 34 75 346 494C. Agro-induaties 34 35 IS - 10 10 10 80 114D. Rurl Housing 30 St 10 - - - 8 - 69 99

E. Coastl Fisheries 13 2.5 10 10 ^ 5 - 5 32.5 45.5P. Artisans and Rural Women

Acdvities/nepris 12 33 4 5 10 - 5 5 62 74G. LandConsoldation 2 5 - - - - - 5 7

H. Intion Development - 0.5 I 1 - - - - - 2.5

TOTAL 340 431 10O 3 3 60 60 95 807.5 1.15030 37 9 3 3 5 5 8 (70) 100

I& Of which 10% from the Agricultral Development Fund created January 1, 1986, and supported by the ASIL I

to promote investments aiming at the intensification of production and improved technology on farms inaccordance with the Agricultural Investment Code.

5.18 The proposed Bank Loan of US$100.0 million would be made to CNCA to finance part of:(a) CNCA's lending operations (US$99 million); (b) office technology software and the maintenance of dataprocessing facilities (US$0.5 million); and (c) training programs and consultant services (US$0.5 million).The Government would guarantee repayment, and foreign exchang, risk in accordance with a formulaestablished by the Government (para. 5.20). The Bank loan would be for 20 years, including five years ofgrace, at the standard variable interest rate. Repayments of subloans not needed to service the Bank loanwoouid be recycled by CNCA for additional subloans.

5.19 The balance of foreign exchange requirements (US$339 million) would be provided in thefollowing manner: CFD (US$30 million), KfW (US$34 million), OECF (US$95 million), FADES (US$60million), and EIB (US$60 million). The remainder (US$60 million) would come from CNCA's funds. ADBis also interested in CNCA. Local currency costs would be financed by sub-borrowers' equity contribution(US$340 million equivalent) and by CNCA's own resources (US$371 million equivalent). With regard tothe Project credit component, Table 5.3 provides a summary of the cofinanciers' lending terms andconditions as well as their indiv contribution to each of CNCA's sublendinu categories:

Table 5.3: FOREIGN COFINANCING BY SUBLENDING CATEGORY

CNCA's Sublending ShareGrace Intest by Category and Source La

Amount Maui Period Rate A B C D B P G(USSM) (Years) (Years) (% p-a.) X

IBRD 99 20 5 7.4/h 12 10 19 14 30 7 -CFD 29 15 5 4.0 7 - - - 30 8 -

KfW 34 30 10 1c 3 2 12 - - 16 -

BIB Ld 60 18 5 8.0 /_ - 13 12 - 15 - -

PADES 60 15 5 4.0 6 10 - 12 - 8 -

OCP /f 9S 30 10 3.0 /e 22 12 - 15 8 -

TOTAL 377 /g 28 57 55 26 90 47 0

*1 For definion of categoxy see Table 5.2. bJ Variable rate. S/ As CNCA equity. 41 ECU 50 million./ Indicative. fi Possibly a higher amount (loan is in Yens). .g Tota CNCA lending US$807.5 million.

.22 -

Foreign cofinancing of the Project credit component including the Bank loan would amount to the equivalentof US$377 million and would cover 86% of the foreign exchange requirements. The Bank loan would alsofinance computer services and training. The OECF, FADES, EIB and CFD loan agreements were concludedin 1993. Conclusion of the KfW loan agreement would be required before June 30, 1994.

5.20 Treatme_ of Forfn Exduae sk. In Morocco, foreign exchange risk coveragesystems were revised several times this past decade: 1973, 1985, 1989 and 1991. The 1991 system wouldbe applicable to CNCA for its new loan (see Annex 6 paras. 6 and 7). Assurances were obtained atnegotiations that the Government woald ensure that CNCA remains financially viable (para. 7.04) andcompetitive as the result of the application of the 1991 foreign exchange risk coverage system.

F. Prowument

5.21 Procurement arrangements under the Project are summarized in Table 5.4 and described inparas. 5.22 to 5.24.

Tole 5A: SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS(UJS$ million equivalent) /n,

ProcurementMethodICB LCB Other /b NBF/f Total Cost

1. Farm machinery, fiam and - - 1,140.5 7.0 Le 1,147.5non-farm equipment and (99-0) (99-0)implements, livestoOk,fishing gear, civil worksand workmg capta undersuboans

2. Consuta/ts - - 0.5 - 0.5(0.5) (0-5)

3. Software, computer - - 0.5 - 0.5maintance, taning programn (0.5) (0.5)

4. Data processing1/ - - - 1.5 1.5

TOTAL - - 1,141.5 8.5 1,150.0(100.0) (100.0)

/I Figur in parentheses represt Bank loan financing. /1 See pares 5.22,5.23 & 5.24. Le Landconsolidation credit program. /_ Includes training spcialists. /g Paid out of CNCA's and CFD's funds.

/f NBF: Non Bank-fimced.

5.22 Inrestmet fllanced by CNCA's loans. The goods and civil works to be financed underthe Project for on-farm and non-farm investments would not be suitable for bulk proement because oftheir variety, the small size of individual investments, and the wide dispersion of contracts both in locationand time. Private dealers in Morocco sell and service a large variety of tractor makes and other farmequipment and implements. Both the international suppliers market and private contractors and suppliersare well represented. Competition is keen and prices competitive. Sub-borrowers would therefore purchase,under CNCA supervision (para. 6.06), farm machinery and equipment from eligible sources of their choiceand commit civil works through existing local channds. As in the case of the Bank-financed FSDP whichsupports the financing of the private enterprise sector in Morocco, procurement for the agro-industrycomponent would also be undertaken through existing local channels and according to normal commercialpractices in Morocco, where the inherent self-intrest of eligible competing companies has led to almostuniversal competitive bidding or shopping.

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5.23 ConsWQ a. Consultants and training specialists totalling about 15 man-months (US$0.5million) would be appointed in accordance with Bank guidelines.

5.24 Other Procedures. MIS software, computer maintenance, and goods for training programs(US$0.5 million) would be procured through local shopping involving quotations from at least threesuppliers, in accordance with Bank guidelines. These procedures are appropriate for the specialized natureof the goods and services involved.

G. Disbursements

5.25 Disburs-ement Schedule. The proposed Bank ioan of US$100 million would be disbursedover a period of about four Bank fiscal years. This is consistent with the historical disbursement profile foragricultural credit projects in Morocco. A schedule of estimated disbursements under the proposed Bankloan is summarized below and detailed in Annex 4:

_ESTMATED DISBURSEMENT

Bank Fiscal Year

1884 1885 1996 1997

- ~ US$ million- -

Annual 15.0 30.0 30.0 25.0

Cumulative 15.0 45.0 75.0 100.0

5.26 Disbursement Procedures. As the actual financing of subloans would be demand driven, theallocation categories are only indicative for financial planning and cofinancing allocations. With thisprovision, disbursement categories and the share of expenditures to be financed would be as follows:

DISBURSEMENT PROCEDURES

Category Amount of the Loan % of Expenditures toAllocated be Financed

(US$ million)

1. Subloans to small,medium & large farmers,enterprises and cooperatives(a) Greenhouses 10.0 75% of amounts paid by CNCA(b) Other Investments 45.0 40% of amounts paid by CNCA

2. Subloans to agro-processingand wood-processingenterprises(a) Agro-industry 15.0 50% of amounts paid by CNCA(b) (ither Investments 10.0 50% of amounts paid by CNCA

3. Subloans for Rural Housing 10.0 35% of amounts paid by CNCA4. Subloans to fishermen 5.0 30% of amounts paid by CNCA5. Subloans to artisans and

rural women activities/ 4.0 50% of amounts paid by CNCA. enterprises and young professionals

6. Computer maintenance and 0.5 100% of total expendituressoftware (80% for goods procured locally)

7. Training and Consultants 0.5 100% of total expenditures

TOTAL 100.0

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5.27 All disbursements (for computer/equipment maintenance, software, training costs and subloansin categories 1-5) would be against certified Statements of Expenditures (SOEs). Full documentation for SOEswould be retained by CNCA for review by Bank supervision missions and would be reviewed and checked bythe external auditors (para. 6.15). Retroactive financing up to US$10 million (10% of loan amount) isrecommended for paymer.ts made for eligible expenditures approved by CNCA after April 1, 1993 (signing dateis expected by end December 1993). The amount retroactively financed would permit continuous contractingfor subloans, and training/consulting services so as to fill part of the financing gap between Loan 3088-MORand this operation. The loan closing date is March 31, 1998.

5.28 Bank Approval of CNCA Subloans. Subloans to agro-processing and fishery investors ofabove DH 20 million (about US$2.2 million) would require Bank approval before financing.

5.29 The Revolving -Fnd. To facilitate the efficient and timely implementation of the Project, theBank would deposit, after loan effectiveness and at CNCA's request, an initial sum of US$10 million (aboutfour months estimated disbursements by CNCA) to set up a revolving fund in accordance with Bank guidelines.The deposit would be made into a Special Account at a financial institution and under terms and conditionsacceptable to the Bank.

VI. PROJECT IMPLEMIENTATION

6.01 CNCA will be responsible for the implementation of the Project, and the Government willprovide its full support to CNCA and be accountable for the launching, on a pilot basis, of the climatic riskInsurance Fund and agricultural insurrnce scheme.

A. Credit Onerations

Lending Proedures and Terms

6.02 Credit Guidelines. Purpose of CNCA subloans, subloan size and terms, interest and spread,sub-borrower's contribution, collateral, appraisal and approval methods are detailed in the CNCA CreditGuidelines (para. 4.14), which are available in the Project file.

6.03 Appraisal of Subloans to Farmers. Fishermen, Rural Women. Artisans and Othe RuralQpgaor. Investment lending to these categories of clients are subject to a technical-econouc, and financialappraisal carried out by CNCA's field staff under the guidance of CNCA's Headquarters. Details are in Annex14.

6.04 Appraisal of Subloans to Agro-Industrial Investors. CNCA uses an appraisal methodology(Annex 14 para. 2) that is specifically designed for investment decisions in this sector, and conductsenvironmental assessments.

6.05 Lendina for Rural Housinig. Through its CLCA offices, CNCA is well placed to finance thehousing needs of rural clients including women. Since 1987, CNCA is employing an engineer and an architect,whose qualifications and experience are satisfactory to the Bank, to assist in appraising and supervising theinvestments (see Annex 14).

6.06 Disbursement and Supervision of Subloans. Disbursement and supervision of subloans willbe handled by CNCA and its branch network as in previous projects (Annex 14, para. 4).

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B. Women's Participation and Environmental Aspecs

6.07 Women's Paiciaton in Credit Aclivities. CNCA lends to women without prejudice, andemploys women on an equal footing with men. However, traditional family attitudes in some rural areas arestill a limiting factor for women's access to credit. As part of the preparation of the previous credit Project,CNCA carried out a study in 1987 financed by USAID, on a CNCA pilot credit operation in the Province ofKhemisset to expand savings and credit for women clients. Study findings demonstrated that rural savings area key factor in improving women's access to credit. As a result, the Bank prepared a report in January 1988to incorporate a rural women pilot project as part of Loan 3088-MOR to CNCA. The pilot project in Khemissetwas designed keeping in sight the main findings of this report:

(a) women in Morocco perform a large part of agricultural, industrial and services work;

(b) important conditions, besides access to credit, such as markets for their products and services,access to technology and modern skills, group organization and networking are influencing thescope of women's production; and

(c) women in Morocco are showing a strong interest in credit and savings facilities despite severalconstraints of a legal and financial nature, such as lack of collateral, land ownership, fiscalincome and identity card.

To implement the project, CNCA has assigned a few dedicated and highly qualified staff to develop its femaleclientele and to make direct contacts with the target population. The artisanal industries are a particularlymportant source of employment and income for women and are well developed in both rural and urban areas.CNCA is now the only bank in Morocco that has disaggregated its clientele by sex, and the Khemisset projecthas been successful in developing deposits and savings tenfold in the area from 1987 to 1989 and in triplingthem from 1989 to 1992. In addition, women receive high marks for loan recoveries. Under the Project, actionto promote rural savings and loan packages for women clients (para. 5.09) would be expanded in severalselected areas to help develop a combination of farm and non-farm activities which have shown a promisingtrend in Khemisset (and in Rommani). The program will then be expanded nationwide. Details are given inthe Project working documents No 4. A sector report (No. 8536-MOR, September 1990) "Towards theIncreased Participation of Women in Societv" comments favorably on CNCA action to improve access of ruralwomen to credit. Building on the Morocco experience, the Bank is currently carrying out a sector study on therole of rural women in Development in Maghreb, starting with Morocco, to enhance government strategiesaiming at improving the participation of rural women in the economic development process.

6.08 Environmental Aspects. Some regulations for environmental protection exist in Morocco andprovide for a certain degree of protection of the environment. The Moroccan authorities are also fully awareof the Environmental Program for the Mediterranean, and understand the need to promote environmentalpolicies. Government, however, despite its enthusiasm for environmental considerations, does not yet have theinstitutional capacity to catalogue, prioritize, and solve the environmental problems facing Morocco, frompotential locust invasion and desertification to industrial and urban pollution. After the Rio de Janeiro summiton Environment and Development in 1991, the Government of Morocco moved forward by creating a Deputy-Ministry for the Protection of the Environment within the powerful Ministry of Interior and Information. Underthe Project, CNCA would continue to pay special attention in its subloan appraisal to assessing the impact ofagriculturalagro- processing pollution and forestry degradation for the proposed investments that are likely toraise major environmental issues. CNCA's experience shows that no major issues arose these past years. InMorocco, in particular since 1988, it is current practice that agricultural products destined for export are subjectto EEC quality standards. No pesticides would be purchased under the proposed loan and CNCA advisesfarmers to use only those chemicals considered safe under present conditions. Assurances were obtained atnegotiations that CNCA staff in the agro-processing units are trained in properly evaluating the environmentalimpact statements submitted as part of the subloan documentation when applicable.

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C. CNCA Institutional Development

6.09 Implementation of CNCA's Organiational SrucuLre. Financial Performance, PlanningProcess and MIS. The following set of actions and measures have been taken and others would be taken underthe Project to make it possible for CNCA to become a multi-purpose bank geared to rural finance:

(a) Orgaization and Branch Network Regional Structure. Since the beginning of 1992, CNCAhas been implementing a new organization structure (see paras. 4.02 to 4.06). In addition,CNCA is in the process of putting in place eight regional delegations (para. 4.05). Duringproject implementation, the Bank would supervise closely the setting-up of the eight regionaldelegations so that at the end of the project period, (September 1997) they are all operational.

(b) CNCA's Finanial Viability. CNCA 'as provided a financial performance development letter,satisfactory to the Bank, with monitorable indicators aiming at maintaining minimum standardsas follows: (i) CNCA's capital adequacy as measured by the ratio of equity to risk assets toremain at or above the 8% international standard"1 for commercial bank capitalization (para.4.28); (ii) CNCA's liquidity as measured by the ratio of current assets to current liabilities12

to be maintained at not less than 1.2 to 1; (iii) CNCA annual profits to be sufficient to protectthe value of CNCA's net equity from inflationary erosion and to earn at least an average realreturn on equity of 3% after the climatic risk Insurance Fund is operational; (iv) CNCA toensure that its CLCA branch offices maintain separate cost accounts and continue to produce,globally each year, total revenues that cover at least the CLCA's total operating cost;(v) CNCA's annual financial margin (interest income as a percentage of average net portfoliooutstanding minus interest expenses as a percentage of average borrowing outstanding anddeposits) to be maintained at not less than 2% as measured before June 30 in each fiscal year;in addition, to protect CNCA's financial performance and viability, assurances were obtainedat negotiations that (vi) CNCA would maintain annually a maximum level of debt (over 18months) to equity 13 of 10 to 1; and (vii) CNCA would maintain, at a minimum, positive realinterest rates (the rate of inflation would be measured by the annual producer price indexpublished by BAM). Interest rates and spreads would be monitored on an annual basis to verifythat CNCA's financial margin remains at not less than 2% (see para. 6.14 on Mid-Term Reviewand para. 7.04, Table 7.1 on CNCA's financial indicators for 1992-96). The Government hasalso provided a letter (viii) on financial measures as of beginning of 1994 in favor of drought-stricken farmers and to maintain CNCA's financial viability as a consequence of the two-yeardrought of 1992 and 1993 (transparent budget transfer of DH 150 million p.a. up to acumulated maximum of DH 1 billion). CNCA's annual profits, equity, and related financialratios would be calculated while ensuring that provisions against loan losses adequately reflectrisks with its loan portfolio and are in accordance with prudential regulations and advice ofBAM. However, since CNCA lends in an environment of periodic drought, the financialindicators of this rural financial institution will be vulnerable to periods of downturn until afully implemented climatic risk sharing mechanism can be put in place (see para. 4.31).

(c) Strategic and Operational Plann and Manaemnt Control. In recent years CNCA hasdemonstrated a good sense of overall direction and good operational and financial performance.It needs to make fully operational appropriate mechanisms to carry out, on a systematic basis,its strategic objectives, a corporate long-range development plan and its annual business plans.The executive decision-making information and management control system being currentlydeveloped (since March 1992) with the assistance of a reputable consulting firm, is an importantfirst step in the right direction. However, to be fully implemented, the process will need to be

11/ In 1992, CNCA's equity to risk assets ratio was 10%.12/ In 1992, CNCA's current ratio was 1.8.13/ In 1992, Debt/Equity ratio was 6.9.

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institutionalized and CNCA-owned. Under the Project, CNCA would make fully operational,by June 30, 1994, its Planning and Management Control system within a formally establishedplanning unit, which will be responsible for the following: (i) articulating corporate objectivesdeveloped by Executive Management; (ii) making sure that the operational Departments andDivisions and regional delegations are codtmitted to achieving planned results; (iii) ensuring thatplan requirements are met; (iv) managing the review process; (v) developing balance sheet andearning forecasts and coordinating contingency planning; and (vi) controlling results includingthe measurement of all aspects of CNCA's financial performance and condition includingsubsidization. Details are in Annexes 11 and 12, and in working document no. 15.

(d) Basic MES. Account and EDP Systems. CNCA's present management information systemdoes not provide prompt feedback on operations. CNCA is well aware of the deficiencies inits present accounting and information system, and of the magnitude of the task facing it to geta sound MIS coherent with modern banking practices so that its activities and new products canbecome fully competitive on a basis of quality of service and operating cost. Under Loan 3088-MOR, CNCA management has started to overhaul the entire management infbrmation system.Under the Project, CNCA would take further action to upgrade its data processing capability,keeping in mind a potential client base of some 1.5 million. CNCA practical experience inEDP should be used for managing the installation in its new Headquarters building of apurchased MIS/EDP system (contract with an international consulting firm, specialized in dataprocessing for banks). Putting in place a new banking accounting plan and enhancing operatingprocedures at CNCA is planned for January 1, 1995, in harmony with the new banking lawadopted by the Moroccan authorities as part of the FSDP. Under the proposed CNCA Project,the Bank will closely supervise the process, so that by January 1997, the banking accountingplan is fully operational at CNCA.

(e) New Banking Services/Products and Diversificaton of Activitie. Since 1988, Governmenthas authorized CNCA to compete with the commercial banks for non-agricultural lending underthe same terms and conditions as those applied by commercW banks. This is an important stepin transforming CNCA into a full-service bank and in establishing a level playing field in thebanking sector in Morocco. In addition to loans, CNCA already offers deposit products in theform of checking accounts, savings accounts (super carnets verts), fixed-term deposits, moneytransfers, cashing of cheques and commercial bills, payment orders, addressing services, foreignexchange and documentary credits. Marketing efforts are being undertaken to reposition CNCAas a bank that specializes in rural finance as opposed to the past image of aGovernment-sponsored farm credit institution. During Project implementation, the Bank wouldcarefully monitor the institutional strengthening undertaken by CNCA to introduce the tools andtechniques needed to carry out its expanded role, and to improve the operational and controlbases of current and anticipated activities.

6.10 Project-Rdated Taining. CNCA will be responsible for project-related training and woulduse its own facilities and/or any other appropriate facilities that would be necessary to hold seminars in Rabator in other cities of the country. CNCA will also draw from its qualified trainers, and from its experience inorganizing training courses. As part of its proposed staff development program, CNCA would also organizerelevant training programs overseas for its most qualified staff and trainers, or would enter into a twinningarrangement with a similar but more mature agricultural credit bank in another country. CNCA's pluri-annualtraining plan for 1992-1995 and the 1993 program are acceptable to the Bank. Assurances were obtained atnegotiations that CNCA will prepare, by October 31 of each year, an annual training program for the followingyear acceptable to the Bank.

6.11 Construton of eada_rters (not for Bank financing). At present, CNCA's Headquartersstaff is housed in ten different buildings scattered in various parts of Rabat. The lack of a modern Headquartersoffice regrouping staff results in costly problems of communication among organizational units, waste of time,managerial inefficiencies and makes it difficult to build up an adequate team spirit and sharp inmage of theinstitution. CNCA has already obtained the land to build up its Headquarters and architectural plans have been

-28 -

drawn up. For the reasons above, the construction of the Headquarters is to be considered as a necessity andnot a luxury.

D. Agiutua Risk Mment ad bM hind

6.12 The technical study on Agricultural Risk Management and Insurance Fund (Working DocumentNo.3B and Annex 13) will serve as the basis to develop and establish the proposed climatic risk Insurance Fund.A workshop in Morocco during project launching with all agencies concerned will enable to discuss therecommendations of the technical study and reach a consensus on the actions and details of the insuranceprogram to be launched on a pilot basis during project implementation in 1995 and 1996. On i ow and to whatextent the insurance program is implemented will be closely reviewed in connection with the nmid-term reviewof the Project (para. 6.14).

E. hMoitoring and Evaluation

6.13 CNCA is in the process of implementing a comprehensive executive decision-makinginformation and management control system. Monitoring will become an integral part of the day-to-dayoperational management of CNCA's activities at Headquarters and branch levels. CNCA's monitoring andevaluation unit at Headquarters will collect and consolidate the data on commitments and disbursements undersubloans, physical achievements under selected subprojects, operational results of representative investmentoperations, recovery performance, transaction costs, subsidies, financial ratios, and progress in depositmobilization. In turn, these data and the corresponding evaluation reports will enable CNCA to take actionsto remedy project implementation constraints, and to upgrade subloan appraisal, delivery, supervision andrepayment, assets/liabilities management, and financial results.

F. ision Mid-Term Review and Reportifg

6.14 Bank strategy for the spegrvision of project implementation and performance is spelled out inAnnex 15. As part of this strategy, the Government, CNCA and the Bank will carry out a joint Mid-TerimReview of the project around May-June 1996. The review would: (i) monitor progress on implementationperformance of agreed objectives, financial indicators, and legal covenants; (ii) examine key actions taken bythe Government to launch and support implementation of the climatic risk management mechanism andAgricultural Insurance Fund; (iii) evaluate CNCA's uses and sources of funding; (iv) assess CNCA's strategin light of its policy statement and the likely development impact and sustainability of the project at mid-temof its implementation; and (v) update, as necessary the implementation program of the project until completion.Assurances were obtained at negotiations on the purpose and content of the mid-term review. On rporting,CNCA wi'l provide to the Bank: (a) semi-annual progtess reports, within three months of the end of eachsemester; these will include commitments, disbursements, subloan maturities and actual collections by categoryof beneficiaries, CNCA's financial statements and results, changes in lending policies and procedures, andprogress being achieved in the implementation of the institution-building activities including the crop insuranceprogram; and (b) an annual evaluation report, within three months of the end of each calendar year. Inaddition, CNCA wiil prepare its part of a combined Inplemenation Completion Report (ICR) on Loan 3088-MOR and this loan, to be submitted to the Bank within three months of the closing date of this loan.

G. Accounts and Audit

6.15 CNCA has a relatively reliable accounting system involving: (a) a centralized accountingsystem; (b) an internal audit unit; (c) a stable and qualified work force in terms of key financial staff; (d)separation of incompatible tasks; (e) defined procedures; (1) timeliness in producing annual financial statementsof satisfactory quality; and (g) few external audit adjustments. During Project implementation, CNCA willfurther improve and modernize its system by: (a) implementing, as of January lst, 1995, a new chart of

-29 -

account4 incorporatig improved standards for bank accounting consistent with the now banking law; and(b) developing decentralized MIS and EDP applications, in particular for detaied cost accountig purposes atbranh level. In the past, CNCA accounts and financial statements have been audited annually by independetauditors (Price Watewhouse) acceptable to the Bank and this includes the audit of CNCA 1992 accounts and ofLoan 3088&MOR. This practice would continue under the Project. CNCA will send to the Bank, within sixmontis of the close of each fiscal year, a full audit report. This will incorporate in one document with theauditors' opinions: (a) a management letter; and (b) a long-form report on CNCA's overal financl statemntsand project accounts with four specific auditors' opinions on (i) CNCA accounts, (ii) project accounts, (iii)Statemets of Expendiures (SOEs), and (iv) the revolving fund (Special Account), if applicable. CNCA willsewd to the Bank audit reports of adequate international standards. Report contents will be discussed withCNCA and the auditors during Bank supervision missions.

VU. B . QEiCAlO AND RIS

A. Bnefits and Justifiaton

7.01 The proposed Project would provide part of the financing and institutional framework necessaryfor the private sector (m particular small- and medium-scale farmers) to respond to the improving policyenvironment, including the opening of external markets. It would help achieve a vital transition in CNCA'sinsttional development and ongoing conversion into a full-service bank while promoting entry of other banlsito rural finance by improving conditions for a level playing field. This would improve Morocco's instiutionalabilities to promote private sector investment in rural areas, and increase domesdc savings nationwide. Throughprovision of investment credit to private farmers, agro-industries, and other oprators, the Project would alsocontribute to increased production and productivity, exports, and rural employment while increasing competitionamong banks and reducing pressure for public investment. By developing crop insurance and building thefoundations for an Agricultural Insurance Fund, it would assist farmers in managing risk and reduce thehardship and budgetary costs of periodic droughts. This, in turn, would impact favorably on Morocco'secowmic and social goals.

7.02 FJ lpona Beneiciaries. The projected impact of the Project on farmers' andinvestors' incomes would be substantial at full development. Under the best conditions, fiancial rates of return(FRR) vary from 25% to 50% for the seven investments models analyzed: five farm models, one fishinginvestment and one ardsanal industry. These FRRs, however, are very sensitive to decreasing profits orincreasing costs. Detailed analysis and results are in Working Document No. 11.

7.03 Edc . Similarly, an economic rate of return (ERR) has also been calculated foreach typical investment model. ERRs also vary from 25% to 50% but with some differences with the FRRsdepending on the model analyzed. The results have not been aggregated into an overall ERR for the Projectas a whole, because the distribution of loans among these types of investment or among variations of the modelswUi depend on changing relative prices, attractiveness of alternative inestments, land use, and market forces.Details are in Working Document No. 11.

7.04 Fna l Impact on CNCA. Projected financial statements for 1993-1996, with keyassumptions, are given in Annex 7, Tables 6 to 12. Key ratios reflecdng CNCA's projected financial conditionare presented inTable 7.1:

IV Plan comptable bmncati.

- 30 -

Table 7.1: CNCA'S PROJECTED FINANCIAL INDICATORS 1993-1996

1991 1992 1993 1994 1995 1-(Actual)- --- (P jcted)

Total Debt-to Equity (Leverage) 10.9 11.3 10.9 10.5 10.1 10.0Pro-Tax Return on Equity % 5.8 1.8 5.2 8.5 8.4 7.2Net Return on Equity % 3.4 1.0 3.2 5.3 5.2 4.5Equity to Risk Assets /a (Capital Adequacy) 10.1 10.0 9.6 9.9 10.6 10.6Cumeat AssetslCurrent Liabilities 1.8 1.8 1.7 1.7 1.7 1.7LT Debt to Equity 6.6 6.9 6.5 6.0 5.7 5.3Provisiaos /k as % of Risk Assets

For CLCAs 16.2 19.7 21.1 22.7 24.1 25.7For CRCAs and CNCA (HQ) 9.1 9.9 10.7 11.7 12.8 14.0

Deposits Le I Risk Assets % 22.9 22.6 23.4 26.3 29.7 33.4Deposits/Short-term Loans % 62.8 66.6 62.4 69.4 78.3 88.6Finanial Margin % 4.8 4.3 5.0 5.2 5.0 5.0Growth Equity % 3.5 5.4 6.9 12.3 14.6 6.7

A/ Intrnational standard is at least 8% for commercial bank capalization.b/ Consistent with the new baning law prudentia regulations.g/ Voluntay deposits, including romittances from Moroccan workers abroad.

The table shows that CNCA is expected to maintain its underlying financial health and earnings capacity oncondition that there is no major change in foreseen domestic inflation rates, real interest rates or foreignexchange rates. While aital adgeqacy would remain above the 8% of risk assets that is generally beingadopted as the international standard for commercial bank capitalization, the trend line could be worrisome ifCNCA's capital base is not increased. Not increasing the capital could force a reduction in CNCA's supportfor rural finance. Under the Project, financial objectives have been proposed to maintain CNCA's financialsoundness (para. 6.09 (b)j and to increase its capital. Regarding retumn on qity, performance dipped sharplyin 1992-consistent with a rural institution undergoing major itrnal change at a time of adverse cdimaticconditions-but then is expected to rise again in the years to come. Liuidt, defined as current assets dividedby current liabilities (with current assets equal to liquid assets plus short-term risk assets minus provisions onshort-term risk assets), is expected to remain constant at about 1.7 which is adequate. In terms of growth,CNCA would amply benefit from the support of the international financial community, and CNCA finacialimprovements would stem from the combined results of: (a) sharper increases in interest incomes than ininterest expenses; (b) improved quality of portfolio (collections and adequate provisions); and (c) continuedincreases in deposits as reflected in the improving trends in the ratios of deposits to loans. This projectedgrowth of deposits is achievable because (i) the total deposit market in Morocco is expanding; (ii) CNCA'smarket share in 1992 was still low (about 5% of the total deposit market), and (iii) CNCA is authorized since1988 to compete with other banks to raise off-shore deposits. For CNCA to implement the Project is thereforefinancially justified. CNCA's financial indicators, in particular the liquidity, debt to equity, and capitaladequacy ratios (para. 6.09(b)) will have to be closely monitored during Project implementation and the mid-term review to prevent or correct any deteriorating trends.

7.05 Financal Implications for Government'5 . The impact of the Project on the Government'sfinances would come from: (a) capital subsidies paid to small farmers clients of CNCA to finance 3% of thecost of selected on-farm investments in accordance with the Agricultural Investment Code (Annex 8); (b) interestrebates on social rural housing loans; (c) taxes and duties on imports, farm assets, fishing boats andagro-processing equipment; (d) budget transfers to compensate CNCA for the foreign exchange risk losses

II/ The remaining dependence of CNCA on direct and indirect subsidies would be monitored durnng projectimplementation (pam. 6.09 (c)) usig a Subsidy Dependence Index developed by the Bank, and to be custom-tailored to CNCA (Annex 16).

- 31 -

resulting from the application to CNCA of the 1991 risk coverage system (para. 5.20); and (e) part of theadministrative costs of the climatic risk Insurance Fund (FAA). Investment subsidies under the Project for (a)above are estimated to equal US$11.0 million and are partly financed out of the ASIL and of an EEC grant tothe Agricultural Development Fund (FDA). Interest rebates on social housing in rural areas are estimated atUS$0.3 million p.a. during three years. Import duties and other taxes are estimated to amount to about US$125million equivalent, or about 11% of the total Project cost. Budget transfers for exchange risk losses areestimated at US$20 million covering a three-year period. Administrative costs for the FAA are estimated atabout DH 10 million p.a. (US$1.1 million for premium subsidy, and at DH 1.3 million p.a. (US$145,000) foradministration (Annex 13). These costs are cheaper than facing a financial crisis each time a major droughtoccurs in Morocco. For example, 1993 budget allocations to cushion the impact of recent droughts on farmersclients of CNCA amounted to DH 650 million or US$70 million. It is also worth noting that the Project, bysupporting rural finance development has a positive indirect impact on the export revenues of Morocco onagricultural and food products, which represented about US$1,100 million and 31% of total exports in 1991.The Project, which is also encouraging exports, is expected therefore to have a positive impact on theGovernment's finances in the long run.

B. Proect Risks

7.06 Agicultural Risk Manafement. The major risk in this Project is the threat of severe droughtand/or sustained drought conditions such as those Morocco has experienced these past years, in 1980-81 and1983-84 in particular and again in 1991-92 and 1992-93. Adverse weather conditions translate into decreasedyields and livestock output, reduced demand for agricultural investments and services, reduced production ofraw materials for processing or conditioning, lower farm incomes, reduced ability to repay loans, and decreasingamounts of rural savings collected. These droughts seem to occur every five years or so. Droughts createproblems in credit recoveries and might warrant writing off arrears or rescheduling farmers' debts. On the basisof past and current experience this risk has not adversely affected CNCA long-term viability, partly becauseof CNCA's prudent lending policies, collection methods, provisions for bad debts and the support of theinternational donor community. For example, USAID and EEC provided CNCA with financial assistance in1984-85 to cushion the effect of the drought with the injection of fresh cash (US$13.5 million and an equivalentUS$29 million, respectively). This has allowed CNCA to roll over the short-term debt into a medium-termrescheduled repayment for those farmers most affected by the drought (in certain geographic areas). For the1992 drought, CNCA and the Government took measures in August 1992 to cushion its impact (Annex 7, Table12B). For the 1993 drought, strong measures were authorized in March 1993 to stabilize rural income andemployment and to maintain CNCA's financial viability. The Project will set the stage for a long-term approachto drought management as the Government has agreed to establish the FAA.

7.07 Other Risks. Another important risk in this Project is associated with the currenttransformation of CNCA from an agricultural credit institution into a universal, full service bank. The successof this endeavor depends upon CNCA's ability to provide its clients with services of a quality at least equal tothe one of its new competitors, mainly the commercial banks. This implies substantial changes in the workhabits and the attitude of all CNCA's staff. It also requires significant organizational changes which are nowin progress. The financial strengthening of CNCA must also succeed for CNCA to become a sustainableinstitution. These risks are currently under control because of the quality of CNCA's current management.However, it is important that this quality and continuity in the management of CNCA be maintained, so thatreforms can succeed and open the door, in the long run to some elements of possible privatization when theregionalization process of CNCA is more advanced.

VIII. AGREEME1S REACHED AND RECOMMENDATION

8.01 The Guarantor has provided two letters, satisfactory to the Bank (a) on foreign exchange riskcoverage (para. 5.20), and (b) on the implementation of {he financial measures officially authorized on March27, 1993 to be applied as of beginning 1994 in favor of drought-stricken farm families and to maintain CNCA'sfinancial viability as a consequence of the two-year drought (para. 6.09 (b) (viii)). The Guarantor also

- 32 -

commited itself to establishing an agricultural insurance scheme and climatic risk Insurance Fund by th endof 1996 aRer two years of pilot implementation in 1995 and 1996 (para. 5.15).

8.02 CNCA has provided (a) a letter defining its procedures for loan clusification and loan lossprovisioning (paras. 4.31 and 4.32); and (b) a financial performance development letter with monitorableindicators aiming at maintaining minimum standards of capital adequacy, liquidity, profitability and financialmargin (para. 6.09 (b) (i) to (v)). These letters are satisfactory to the Bank.

8.03 Agreement was reached during negotiations on the following:

(a) CNCA would obtain Bank approval for individual subloans to agro-prcessing and fisheryinvestors of above DH 20 million (US$2.2 million equivalent) (paras 5.28);

(b) CNCA would adopt the banking accounting plan as of January 1, 1995 and upgrade itsprocedures in agreement with the recommendations of the Central Bank, i.e., Bank ofAl-Maghrib (BAM) (para. 6.09 (d);

(c) CNCA would maintain a maximum level of debt to equity of 10 to I (para. 6.09 (b) (vi), and,at a minimum, positive real interest rates, as measured before June 30 in each year, andmonitor interest rates and spreads on an annual basis to verify that CNCA's financial marginremains at no less than 2% (para. 6.09 (b) (vii));

(d) CNCA would send to the Bank annual audit reports of adequate international standards(para. 6.15);

(e) CNCA would prepare by October 31 each year, as part of its five-year strategic plan fortraining, an annual training program for the following year acceptable to the Bank (parm 6.10)including training in environmental matters (para. 6.08);

(f) CNCA would take satisfactory actions during project implemention to implement its bankingdiversification and regionalization plan (paras. 6.09 (e) and 6.09 (a);

(g) CNCA would further develop and implement its new strategic and management control tool (byJune 30, 1994) introduced under Loan 3088-MOR (para 6.09 (c);

(h) CNCA and the Govermment would carry out a comprehensive mid-term review (according toagreed terms of reference) with the Bank in June 1996 to assess progress on implemention(para 6.14); and

(i) fulfillment by CNCA of conditions of effectiveness of all cofinanciers' loans by June 30, 1994(para. 5.19).

8.04 In view of the above agreements, the Project is suitable for a loan to CNCA, with the Guaranteeof the Kingdom of Morocco, for US$100 million equivalent with a term of 20 years, including a five-year graceperiod. Tbe Project is expected to be completed by September 30, 1997.

- 33 -

ANNEXITable 1

STAFF APPRAISAL REPR

KINGDOM OF MOROCCO


CNCA Actual Lendin; 1988-1992

(Disbusementsl

1988 1989 1990 1991 1992 1990/91- - (DH'000) - (%)

Crop Producfon 1,020,243 783,667 845,901 1,659,917 883,744 56

Indudsrl Crops 271,025 582,010 572,003 272,640 416,489 9

livestock Production 553,912 494,289 510,703 553,775 285,070 19

Agro-Industties 25,036 0 33,533 137,253 115,392 5

AztisanalRuns Activities /a 67,431 0 241,122 160,316 4,955 7

Odters 23,245 61,013 20,208 172,797 180,744 4

TOTAL SHORT-TERM 1.960.892 1.920.979 2.223.470 2956698 1.886.394 JD0of which CLCAs 242,844 237,389 316,918 383,558 115,723

Shae of ClCAs 12.4% 12.4% 14.3% 13.0% 6.1%

2. MEIUM- AND LONG-

On-farm constuction 82,950 69,521 66,342 61,386 34,238 3

Rural Housing 34,889 141,548 151,197 142,060 167,658 8

Land Purcas 3,996 8,916 112,268 151,613 113,743 7

On-Fam Equipment /h 482,287 448,087 486,659 586,512 347,003 30

Livesock 593,543 487,485 560,164 555,497 219,903 28

Plantations 36,405 45,829 51,028 107,420 63,618 5

Agro-Industries 87,776 73,944 127,216 163,953 244,259 8

Artisds and other activities /a 34,559 122,377 227,421 193,807 266,160 11

TOTLY W MrIIUlONG 1,356.405 1.397.707 1.782.295 1.962.248 1456.582 10

of which CLCAs 500,706 454,043 525,168 505,281 191,972

Share of CLCAs 37.0% 32.5% 29.5% 25.8% 13.2%

3. TOTALLaw= 3.317.297 3,318.686 4.005.765 4918 3.342.976/c (10

of which CLCAs 743,550 691,432 842,086 888,839 307,695

Share of CLCAs 22.4% 20.8% 21.0% 18.1% 9.2%

l madily womnn's activities.h/ includes greenhouse equpment.g/ sharp drop in lending by CLCAs in 1992 is due to drought

- 34 -

ANNEX 1Table 2


KINGDOM OF MOROCCO


CNCA roJie-ed Leanding 193- 1995/#(Disbursements)

Total Period1993 1994 1995 1993-1995

- -- - -(DH'000) --- %

1. SHORT-TERM LENDING (9

Agriculture 2,381,000 2,591,000 2,800,000 7,772,000 82- Crop production 1,123,000 1,174,000 1,241,000 3,538,000 37- iivestock production 678,000 732,000 780,000 2,190,000 23- dutidral crops 580,000 685,000 779,000 2,044,000 22Agro-Industries 146,000 155,000 166,000 467,000 5Artisnal and Rural Activities /b 175,000 190,000 210,000 575,000 6Other sectors 208,000 214,000 224,000 646,000 7

TOTAL SHORT-TERM 2.910.000 3150 3.400.000 9460 100Of which CLCAs 378,300 409,500 442,000 1,229,800 13

Percent CLCAs 13% 13% 13% 13%

2. MlDIUM- AND LONG-TERM LENDING

On-fam construction 90,000 97,000 103,000 290,000 4Rural Housing 180,000 190,000 205,000 575,000 9Land Purchass/Improvement 103,000 105,000 112,000 320,000 5On-farm Equipment Ic 614,000 678,000 756,000 2,048,000 31Livestock 510,000 494,000 471,000 1,475,000 22Plantations 145,000 174,000 212,000 531,000 8Agro-ladustries 200,000 220,000 245,000 665,000 10Arisana and other Activities /b 228,000 262,000 296,000 786,000 12

TOTAL MEDIUM/LONG-TERM 2.070.000 2.220.0 2.400 6.690.000 100of which CLCAs 514,000 582,000 670,000 1,766,000 26

Percent CLCAs 24.8% 26.2% 27.9% 26.4%

3. TOTAL LENDING 4.980.000. 5370. 58 16.150.000 (10)of which CLCAs 892,300 991,500 1,112,000 2,995,800 19

Percent CLCAs 18% 18% 19% 18.5%4. Total Growth (% p.a.): short-term 35%/4 8% 7%

medium/long-term 30%1d 7% 8%

p/ These are projected lending levels expected to be driven by demand and are not allocations or directedcredit amounts. Lending projections for 1996 can be esimated by using a growth rate of 8% on 1995 figures.

k/ mainly women's activities.c/ includes greenhouse equipment.4/ but 0% growth if compared with 1991 lending.

- 35 -ANNEX I

Table 3


KINGDOM OF MOROCCO

MTIONAL RURAL FINANCE PROJECT

%ndicative Proiect Lending Progm

(Medium- and Lone-Term Credit)

AverageUnit Cost Nri'oer % of CNCA Lendins

of Investment of Sub- Total Investments Total Million Million(DH) (US$)/b Projects (DH '000) (JS$ '00O)Cost (DH) % (USS)

1. Small Farmers (CLCA) 9,457 1,041 266,901 2,525,000 277,851 27 1,766 70 1962. MediumLage Farmers (CRCA) 84,948 9,351 48,312 4,104,000 451,783 43 2,874 70 3193. Agro-Industfies 3,0U4,416 339,544 308 950,000 104,579 10 665 70 744. Rural Housing 65,470 7,207 12,540 821,000 90,379 9 575 70 64S. Coastal Fisheries 562,121 61,880 660 371,000 40,841 4 260 70 296. Artisans and other

Rural Women Activities 23,441 2,581 14,419 338,000 37,209 3 263 80 297. Young Entrepreneurs/

Graduates 616,972 67,919 436 269,000 29,613 3 242 80 278. Land Consolidation /a 542,373 59,706 118 64,000 7,045 1 45 70 5

9. I cotalC g/d1f 343.694 9.442.000 1.039.300 IO 6.690 743Less:Sub-borrowers minimnum contribution 2,752,000 296,300 29

10. Total Credit Pro_ m 6,690,000 743,000

W/ Not financed by the Bank.k/ Exchange ate DH 9.00 = US$1 as of September 1993.gf With 10% contingencies, totd cost in US$ is about 1,147,500.4/ Reprenting three years of lending commitments.

- 36 -

ANNEX 2A

STAFF APRAISAL REPORT

KIDQM OF MQROCCO


A. Financine of On-Farm Investmengt

1993 1994 1 9 9 5 /a Total------------- (DH '000)-

1. CNCA Loans 1.450,463 1,540.767 1.648.570 4.639.800

Construction 90,304 97,304 102,204 289,812

Land Improvement 85,404 90,304 100,104 275,812

Irrigation Equipment 224,010 263,211 297,513 784,734

Farm Machinery 298,213 338,815 382,917 1,019,945

Draft Animals 68,603 64,403 51,802 184,808

Livestock 441,019 429,119 419,318 1,289,456

Plantations 144,906 .174,308 212,109 531,323

Greenhouses 91,704 76,303 74,903 242,910

Forestry 6,300 7,000 7,700 21,000

2. Sub-Borrowers' Eauitv 621,692 660.398 706,605 1.988.695

3. Total Investments 2072,155 2.201.165 2 355175 6.628.495

of Which:Taxes (11.5%) 242,442 257,536 275,555 775,534

/a 1996 figures are obtained by using a growth rate of 8 on 1995 figures.

- 37 -ANNEX2B


KINGDOM OF MOCQQ


B. Farm Credit Coverage

NUMBER OP POlENTIAL AND ACrUAL CNCA INDIVIDUAL FARM CLIENTS la

No. of Actual Clients as %

Individual Farmers Potential Actual CNCA Clients of Potential Clients

Farm Size Fiscal Income Clients 1973 1987 1991 1973 1987 1991

(1a) (DH) - (number) --- - --

Leas then 1S CLCACLet

1 to 7 DH S0-DH 1,600 1,082,800 n.a. 168,926 n.a. n.a. 15.6 n.a.

7 to 10 DR 1,600-DH 2,800 133,000 n.a. 111,887 n.a. n.a. 83.9 n.a.

10 to IS DH 2,800-DH 6,000 162. aa 142.236 na n.a. 87.8 n.a.

Subtotal 1,387,800 64,988 422,749 499,869 4.7 30.5 36.0

Mre tbha 1S HO/CRCA Clide 90,000 42,790 61,562 64,582 47.3 68.2 71.7

(more than DH 6,000)

TOTAL 1,477,800 107,779 484,111 564,561 8.1 32.8 38.2

&l Excluding women farmers and artisans and clients reached through Agarnan Reform Cooperatives and

ORMVAs.

1. Of the approximately 1.9 million farms in Morocco, 480,000 (24%) have a fiscal income of less

thn DR 50' and only about 9% of them are eligible for credit. In 1991, about 564,S00 individual farmers had

an active file with CNCA. This correspotds to 38.2% of the total number of CNCA's potential farm clients. In

addition, it is estimated that another 100,000 farmers were receiving credit through Agraian Reform Cooperatives

and ORMVAs. Between 1988 and 1991, the number of credit applications for both CLCA and CRCA clients

declined from 236 930 to 217 765 p.a Total lending, however, has increased substantially. Average loan amounts

increased by 24% to DH 5,088 for CLCA clients and by 200% to DH 93,549 for CRCA and other clients.

Compared to -ny other coumnties, firm credit coverWe for small farmers is high in Morocco, but not yet at fill

potential.

2. About 70% of potential CRCA clients, but only 35f% potential CLCA clients were receiving credit

in 1991. A 2% increase since 1987 for CRCA clients, and an 8% inrease for CLCAs. For the latter, CNCA

penetration was relativey high for farns having an Fl in the DH 1,600-6,000 range (which corresponds to

approximately 5 ha to 15 ha of rainfed land). However, very few marginal farmers with an Fl below DH 1,600

(about 5 ha rainfed land) were actual CNCA clients, reflecting their low borrowing capacity and their lack of

participation in the monetized economy. The increase in the number of CNCA clients has followed the expansion

of the network of CRCA and CLCA offices, but certain upper limit may have been reached. In 1973, there were

21 CRCAs and 54 CLCAs; in 1977, 24 and 88 respectively; in 1987, 44 and 108; in 1991, 50 and 122. During

this period the number of CLCA clients has increased at an average rate of 15% p.a.

jV Corresponding to less than one hectare of merginatty productive land or two sheep.

- 38 -ANNEX 3


KINGDOM OF MOROCCO

NATNAL RURAL FINANCE PROJ

Project Cost Estimats

1994 1995 1996 1994-1996Loa Foreign Tota Forign

Exchange(DH '000)

1. SMALL FARMERS (CLCA 735.0S0 832.000 7000 1.948. 577.000 225 23-Contuction 63,000 69,000 75,000 176,000 31,000 207,000 is,- Land Inpoventm 56,000 73,000 90,000 186,000 33,000 219,000 1S- WeIls aNd Punps 117,000 147,000 184,000 246,000 202,000 448,000 45- Farm Equipment 69,000 93,000 136,000 178,000 120,000 298,000 40- Draft Animals 64,000 61,000 57,000 183,000 - 183,000 0- ivestock 330,000 329,000 329,000 870,000 118,000 988,000 12- Planttons 36,000 60,000 86,000 109,000 73,000 182,000 40

2. MEDIUM A)ND LARGE ERMEIRS 1.337 .000 19 1.398. 2.459.0S0 1.645.0S0 4.104.00 - Construction 66,000 70,000 71,000 176,000 31,000 207,000 1S- Land hIprovement 66,000 56,000 53,000 148,000 27,000 175,000 1S- Wels and Pbuns 203,000 229,000 241,000 370,000 303,000 673,000 45- Farm Equpment 357,000 391,000 411,000 464,000 695,000 1,159,000 60- Draft Animads 34,000 31,000 17,000 82,000 - 82,000 0- Livestock 300,000 284,000 270,000 751,000 103,000 854,000 12- Phlanons 171,000 189,000 217,000 346,000 231,000 577,000 40- Greenhouses 131,000 109,000 107,000 104,000 243,000 347,000 70* Foresty 9,000 10,000 11,000 18,000 12,000 30,000 40

3. SPECIFIC SUB SEC0RS 8 .00 9 1.02A000 1.398.000 1.415.000 2813 SO- Agro-Induastries 286,000 314,000 350,000 332,000 618,000 950,000 65- Rural Housing 257,000 271,000 293,000 492,000 329,000 821,000 40- COsta Fishefies 114,000 123,000 134,000 186,000 185,000 371,000 50- Young Ebflr%mmauraGraduates 64,000 89,000 116,000 108,000 161,000 269,000 60-Rutnd Wona anW Artbsans 110,000 114,000 114,000 216,000 122,000 338,000 36- Land Consolidation 26,000 21,000 17,000 64,000 64,000 0

4. SUB TOTAL LENDNG929000 3.133.000 3.379.000 5.805.000 3.637.000 9.442.000

5. INST4 TUTIONAL DEVELOPMENT 17.930 1.547 1.759 4.167 16.668 21.Z36 78- TraininlConsultat Servicms 1,300 1,300 1,400 800 3,200 4,000 80- Conputr Maintenae and Sofiwase 5,000 - 1,000 4,000 5,000 80- Ohers /4 10,000 - - 2,000 8,000 10,000 75-Base Costs B/ 16,300 1,300 1,400 3,800 15,200 19,000 78- Physical Co _ es 1,630 130 140 300 1,200 1,900 80-Priboe niiesl9 - 117 219 67 268 336 80

6. TOTAL PROJEC`r COST L2946.923 3.134.547 3.380.759 5.809.167 3.653.668 9.463.236 39

7. TTrAL COSTIN USS'000 35S.S2 377.6S6 4073j20 699.900 440.201 1.149.028 _(with 10% continencies)

h/ 10% an equpmete nounIawnce omultutsand swvibes.I See main text, pam. 5.10, footnt 13.4V Offce tochnoogy fianced by CNCA with CFD's asaisnce.If In 1994-96 cnt pufe se amption in pam 5.16 (an 4.35) of main texL

- 39 -ANNEX 4


KINGDOM OF MOROCCO


Estimated Schedule of Disbursement of Bank Loan /a

Bank Disbursements /b Relevant Profiles /cIBRD By End of Cumulative Bankwide Morocco Devel.Fiscal Quarter Quarter Cumulative Disbursed Agr. Credit FinanceYear Ending -- US$ million ---- % %(Cumulative) %

1994 Sept. 1993 10 4Dec. 1993 15 6March 1994 10.0 /d 10.0 10 19 10June 1994 5.0 15.0 15 24 14

1995 Sept. 1994 7.5 22.5 22 29 19Dec. 1994 7.5 30.0 30 35 24March 1995 7.5 37.5 37 40 29June 1995 7.5 45.0 45 46 34



1998 Sept. 1997 85 77Dec. 1997 88 82March 1998 91 87June 1998 93 92

1999 Sept. 1998 95 96Dec. 1998 98 100March 1999 100

&I Expected Signing Date December 1993Expected Effectiveness Date January 1994Expected Completion Date September 1997Expected Closing Date March 1998

I/ For a three-year commitment period (instead of the usual four to five years under relevant profiles)./j Taking into account that retroactive financing is recommended after April 1, 1993.d/ Initial disbursement under Special Account.

- 40 -

ANNEX SPage I of S


KINGDOM OF MOROCCO


ALnicultural Sector Performance. Goverment Stt andSectora! Iss Relevant to Rural Flnance

1. Background. Of Morocco's total land area of 60 million ha, 8 million ha or 13% issuitable for agriculture. Of the cultivated land, about 50% receives good but inconsistent rainfall, andrainfed cultivation remains largely traditional with cereals and pulses as the dominant crops. About Imillion ha or 12% of the cultivated land are irrigated growing mostly cereals, fruits, vegetables, forageand industrial crops. The remaining half of the cultivated land receives an erratic rainfall of less than400 mm and can only be put under low value crops and fallow. About 20 million ha in semi-arid ormountain regions of the country is only suitable for grazing and forests. Given the high variability inrainfall and periodic droughts, the Government concentrated its efforts on developing a modern irrigatedsector. Considerable progress has been made in farming techniques and yields in this sector, and thecurrent emphasis is on water conservation measures.

2. Past Performance. After a period of slow growth in the 1970's when agriculture grewat only an average of 2.4% p.a., the growth rate increased considerably during the 80's to 6.7% p.a.This acceleration in growth was largely due to favorable weather conditions since 1985 and policychanges brought about as part of the Medium-Term Agricultural Sector Adjustment Program (MTASAP).Food production, however, has not kept pace with the increased domestic demand generated by acombination of rapid population growth (2.6% p.a) and a high rate of urbanization (4.5% p.a.), and foodinports have increased.

3. Although the agricultural sector in general is still characterized by a low farmproductivity, it has considerable untapped growth potential. It can play a key and dynamic role in thegrowth of Morocco's economy. A major proportion of this growth will be generated through privatesector investments largely through improvements in on-farm water use efficiency and additional publicinvestment in basic irrigation infrastructure. It is essential that the Government follows a growth strategywhich stimulates private on-farm investment and cost effective public investment in infrastructure andagricultural services. At the same time, the Goverment is mindful of the dual nature of Moroccanagriculture with relatively prosperous areas of high technology agriculture contrasting with poorer rainfedareas practicing traditional forms of cultivation. Growthwith consideration to the poverty that exists incertain regions of the country is the balanced approach to agriculture and rural development being soughtby the Government and the Bank.

- 41 -

ANNEX 5Page 2 of 5

4. Government Strategy. The Government's objective in the agricultural sector is to promoteefficiency in the sector by encouraging a more active involvement of the private sector in input supply,support services, marketing and agro-processing, streamlining the use of public resources and reducingthe burden of agricultural price policies on the Government's budget. The Government's AgriculturalSector Adjustment Program, the MTASAP, was supported by the Bank through two Agricultural SectorAdjustment Loans (ASAL I and 11). Certain reforms are still being supported under an AgriculturalSector Investment Loan (ASIL) and a second ASIL is under preparation.

5. The key objectives of the Government's medium-term adjustment program in agricultureare to:

(a) restructure the public investment and expenditure programs towards high returninvestments, provide adequate funds for the operation and mainitenance of the existingproductive infrastructure, and increase private sector financing through increased lendingby CNCA;

(b) strengthen agricultural support services needed to be provided by the Government whileprivatizing others;

(c) improve productivity of land use and management of the country's natural resources;

(d) build up institutional capacity for agricultural policy planning and analysis and improvecapability in monitoring and evaluation of sector performance; and

(e) improve resource allocation and re-orient the prices and incentives structure to encourageshifts towards the production of crops and livestock products for which Morocco has acomparative advantage.

6. Despite impressive achievements, more needs to be done to ensure the sustainabilityof sector performance, and further Bank support will be needed to reach the final objectives set out inthe MTASAP.

7. Institutional Credit and Private Investment. In agriculture, private investment nowaccounts for about 59% of total investment, of which 70% is financed by CNCA'. CNCA lending istargeted to both irrigated and rainfed areas. To carry out its strategy of gradual privatization of theeconomy, Government plans to reduce its own investments in agriculture. Private investors areturning chiefly to CNCA to finance their investments in on-farm and market level storage, farmmechanization, field irrigation facilities and agro-industry.

J/ The rest is mainly self-financing by investors with some lending by commercial banks, Which isprimarily short-term and to agro-industries. The commercial banks in Morocco, despite record profits, arenot willing to take the risk of lending to farmers and are not organized for financing on-farm investments-.---. 4g 1

- 42 -

ANNEX SPage 3 of 5

8. Poverty and LOw Debt Service Capacity of Rural Families. Some constraints existto expanding CNCA credit to farmers. One is the limited savings and debt service capacity of manyrural families with rainfed farms of less than 7 ha, which represent about 75% of the total number offarmers eligible for credit. A majority of these rural families operate at or near subsistence level,generate very few financial surpluses, and cannot accumulate significant savings and invest withoutcredit. But their debt capacity is minimal and prevents them from having full access to institutionalcredit. The village level branch network of CNCA, "Caisses Locales de Cr6dit Agricole (CLCAs)"serve smaller scale farmers, with fiscal income DH 50 - 6,000. In term of credit coverage, the extentof CNCA's penetration in rural areas is relatively high for farms of more than 7 ha (75% of potentialclients), but only 30% of potential smaller farms are receiving credit. In addition, because manyfarmers do not hold documented title to their land, CNCA's established lending criteria have beenbased on a notion of fiscal income (i.e., income estimated to be derived from existing land holdingsplus livestock) and have resulted in credit extension to only a limited proportion of small farmers andfor smaller than requested amounts. To increase accessibility of farmers to credit, particularly inrainfed areas, CNCA has begun to expand its branch network, to open seasonal credit outlets, and todevelop a new credit policy on eligibility, based on the direct assessment of farmers' credit needs andcreditworthiness. CNCA will implement this credit policy, while making sure that it does not addmore risk to the CNCA portfolio. Efforts are also underway to assess the savings capacity of smallfarm families. With the 1992 and 199 droughts, however, farmers face additional liquiditydifficulties that have a negative impa, on their debt service and savings capacity.

9. Deposits and Savings Mobilization. CNCA has started to implement a medium- andlong-term strategy to increase voluntary savings mobilization under Loan 3088-MOR for 1989-92 andthis strategy would be further supported under the follow-up Project (paras. 4.29 and 6.09 (e) of mainreport).

10. AMroindustrial Development2 . In recent years agroindustries, complementary toprimary agricultural productions, have developed at a rapid pace in Morocco. Between 1986 and1990, investments by enterprises in the sector rose at an annual tate of 21.5% and, in 1990, reachedDH 2 billion or 31 % of total industrial investment. Most investments were carried out for theextension of existing activities rather than for the creation of new enterprises. The sugar agro-industry and the processing of fruits and vegetables predominate in terms of gross capital formation.

11. Banking services to agroindustries are provided by CNCA, and by commercial andother banks currently supported by a Bank loan (FSDP). Lending interest rates have been virtuallyliberalized with two exceptions, the first one being export pre-financing. The second exception isrediscounting in

> ff~~~~~~~~~~Ii ' .ft'; ,t t i,* a ' L. t t-{

- 43 -

ANNEX 5Page 4 of 5

favor of commercial banks only, on direct medium-term investment loans at 12% to small-scaleenterprises. Other interest rates are freely determined within a ceiling which is set at 2.5 percentagepoints above the weighted average interest rate on six and twelve-month bank deposits and is adjustedby the Central Bank every six months.

12. As of December 31, 1991, outstanding short-term and investment credit toagroindustrial enterptises amounted to DH 4.2 billion, excluding small loans of less than DH 100,000each, mostly made by CNCA. Until 1987, CNCA's lending to agroindustrial enterprises was rathersmall at DH 145 million. However, in 1988 credit approval increased almost six-fold to about DH900 million. This significant increase was largely due to CNCA's move into the competitive marketof short-term financing of enterprises doing business in the marketing of cereals. By 1991, the annualvolume of loans approved to the agroindustrial sector, including the cereals subsector, exceeded DH 2billion (UJS$241 million). In 1991-92, about 80% of these CNCA's loans were short-term creditsfinanced at market terms and conditions out of CNCA's own resources, mainly for thecommercialization of cereals, the sugar subsector and the grain mill and bakery subsector. UnderLoan 3088-MOR, CNCA committed US$ 25 million to finance medium- and long-term investmentsfor agro-processing and wood-processing enterprises. As of December 1992, CNCA used 100% ofthat amount to finance a total of 35 projects.

13. Land Tenum. Major land tenure issues in Morocco include:

(a) fragmentation of farms which reduces the efficiency of operation of the larger onesand contributes to the reduced viability of smaller ones;

tJb) lack of clear land titles which inhibit many farmers from seeking long-term credit,and discourage investment in land improvements;

(c) insecurity of land tenure for tenant farmers reducing their incentive to invest in farmassets and to conserve the soil; and

(d) absentee land ownership resulting in under-use of resources and the tendency for theland collectively owned to be poorly managed and over-exploited causing lowproductivity.

The Government has taken measures to correct these problems, by on-going programs of landconsolidation and issuance of land titles. CNCA is providing credit for land acquisition, landconsolidation and improvements, and land registration operations.

14. Clhc Rislc. Agricultural production is faced with high risk due to the variabilityof rainfall. Cereals produced under rainfed conditions are the most sensitive to the onset of drought.A vast majority of farmers grow cereals and there has been a significant increase in the area grown tocereal during the five good years before the 1992 drought. Of the total area

- 44 -

ANNEX SPage 5 of 5

of agricultural land of 8,944,100 ha (including fallow of 1,906,800 ha), 5,490,800 ha or 59% is

grown to cereal. Of the total cereal area, 4,243,000 ha or 77% are predominantly rainfed. Some of

these areas are the most sensitive to drought. National cereal average yields have fluctated from as

low as four quintals to as high as 15 quintals per ha. As a result, total annual production has ranged

from as low as 16.4 million quintals to as high as 85.3 quintals. Other crops grown under rainfed

conditions are at risk of being affected in a similar fashion. This variability in production has major

implications on financial stability and on the capacity of farmers to service their debt. This has in

turn a direct impact on the financial performance of banking institutions serving agriculture,principally CNCA. To correct this, the Government will create an agricultural insurance fund (para.

5.15 of main report).

15. Bank ProjectS in AgXriculure (29 Projects). Bank group lending in agriculture

include nine irrigation projects: Sidi Slimane (FY65), Sebou (FY70), Souss Groundwater (Y75),

Doukkala I (FY76) and n (FY77); Small- and Medium-Scale Irrigation Projects (FY83, FY88) and

Large-Scale Irrigation Improvement I (FY86) and n (FY93); seven agricultural credit irolecs and

five rainfed agricultural development projects, in the Meknes (FY75), Loukkos (FY80), Fes-Karia-

Tissa (FY79), Middle-Atlas (FY82) and Oulmes Rommani (FY83) areas; an aro-industrial and flood

control project (Sebou nI FY74); a Vegeble and Marketing Project (FY80); and a FQrggiarojiect(FY82), all completed. An Ariculturad Research and Extension (FY89) and a Erey.ProEject(FY90) are on-going.

- 45 -

aANNEX 6Page I of 3


KINGDOM OF MOROCCO

NAflONAL RURAL FINANCE PROJECT

The mnanial Sector

1. Commercial and SaM Banks. At the end of 1991, the assets of the fifteen commercialbanks totalled DH 131.8 billion (US$14.6 billion equivalent). The three largest commercial banksaccount for 60% of total assets. The assets of the four medium-size banks represents 29% of total bankassets and eight smaller banks account for 11 % of total assets. The commercial banks have a combinednetwork of 936 branches which are unevenly distributed geographically: 25% of all branches are locatedin Casablanca where about one third of all deposits are collected and another 50% of the branches arein cities along the Atlantic coast.

2. In 1991, commercial banks extended DH 54.2 billion in credits to the economy (or 58% oftotal credit), of which about 79% were short-term. In spite of Government encouragement, banks havebeen cautious in extending investment credit, partly because of the possibility of making higher profitsat lower risk on short-term lending. However, in recent years they have increased their investmentlending activities, in particular in the profitable urban housing and industry sectors. At the end of 1991,the commercial banks' medium- and long-term lending (DH 11.7 billion) represented (a) 30% of totalmedium- and long-term credits to the economy, (b) 19% of their sight deposits (DH 61.8 billion), and(c) 39% of their term deposits (DH 30.4 billion). By comparison, at the end of 1987 their medium- andlong-term lending accounted for: (a) only 12% of total tmedium- and long-term credits to the economy,(b) 11 % of their sight deposits, and (c) 25% of their term deposits. About 30% of all commercial bankdeposits originated from Moroccan immigrant workers with the Banque Populaire taking the lead on thisactivity.

3. Commercial banks participate, under the control of the MF in the syndicated financing of theproduction and marketing operations of state-owned agricultural enterprises. In principle, they also offerseasonal and investment credit to individual farmers. However, their agricultural lending to individualfarmers is minimal because:

(a) their branches are mostly located in urban centers along the coast;

(b) they avoid making small loans with relatively high processing costs;

- 46 -

ANNE 6Page 2 of 3

(c) they lack adequately trained agricultural staff; and

(d) their lending is usually restricted to bortowers who also keep sizeable deposit balances andoffer sufficient guarantees.

Further details are in working document no. 16.

4. pCredit hS. Specialized credit institutions account for the bulk ofmedium- and long-term lending. In 1991, they provided about DH 26 billion or 70% of all medium- andlong-term credit to the economy (DH 37 billion). CNCA's share in total credit distributed by specializedfinancial institutions was about 16% in 1991 (DH 5 billion, out of which DH 2.0 billion medium- andlong-term lending). Since 1984, credit extended by these institutions has grown at an average annual rateof about 12% (in current terms), at the same rate as total credit to the economy. CNCA's annual growth,after levelling in 1988 and 1989 peaked at above 20% in 1990, and 1991, but fell in 1992 as the resultof recent droughts. CNCA is expected to grow again from 1993-96.

5. unancial Sector Policies and Reforms. Details are in Annexes 9A and 9B.

6. Treatment of Foreign Exchange Risk. Under Loan 3088-MOR to CNCA with the guaranteeof the Gov_rnment, a foreign exchange risk scheme was established under the letter No. 3/3789 datedMay 9, 1989 from the Minister of Finance to the CEO of CNCA, establishing the level of participationof CNCA in foreign exchange losses. Under this 1989 system, the risk is shared in the manner describedbelow:

(a) CNCA bears full cost of the foreign exchange losses incurred from variations of up to 2% inthe foreign exchange rate on its non concessionary foreign borrowings contracted beforeDecember 31, 1988;

(b) a Foreign Exchange Risk Fund in the name of the Treasury is maintained on CNCA's booksinto which CNCA deposits: (i) the proceeds of a commission of 1 % charged, as of January1, 1989, on medium- and long-term loans with the exception of loans for rural housing andof all loans made by the CLCAs; and (ii) the excess of CNCA's average lending rate (10.5 to11.5%) over the non concessionary interest rates on foreign borrowings plus a margin toassure adequate profitability. This margin is 3 % for the non concessionary borrowings, exceptthose for CLCAs, contracted before January 1, 1989, and 2% after January 1, 1989, includingCLCAs. Any losses on non concessionary lending in excess of those covered by the Risk Fundwould be borne by the Government;

- 47 -

ANNEX6Page 3 of 3

(c) the exchange risk generated by the ongoing concessionary borrowings (KfW, EEC andUSAID) and those to be contracted, would be covered 100% by CNCA. CNCA will makeall necessary provisions for risk to this effect.

In September and November 1992, Government settled its 1990 and 1991 foreign exchange arrears toCNCA.

7. In 1991, the Government established a new foreign exchange risk coverage scheme pursuantto the letter dated May 30, 1991 from the Ministry of Finance, for the Moroccan banks to protectthemselves against the risk of foreign exchange losses. The system introduces a reference rate to equatethe cost of domestic and foreign capital which is the difference between the weighted average cost ofcommercial banks' 6 and 12-month deposit rates (11.7% end 1992) plus 0.75% fee and, for example,the Bank variable rate. The 1991 system has been incorporated into the loan documents of the FSDPwhich were signed in November 1991 by BNDE and seven participating commercial banks.

- 48 -

ANNEXTable I


KINGDOM OF MOROCCO

NATIONAL RURAL FINANCE PROJECI

=CA 1a-& Postin 1988-199(Du Million)

-- FY Throug DecemberBALANCE SWEET /a 1988 1989 1990 1991 1992

A-SsEISUquid Assets

Cash and Banks 861.1 834.8 125.9 308.8 505.5Tresury Bills IS, 1.000. 1.452.0 l.W.o 1.350.0

Total liquid Assets 1,041.1 1,834.8 1,577.9 1,558.8 1,855.5

Short-Term Risk AssetsBills Disounted 3.3 . 26.8 33.6 37.9 11.7HQ and CRCAs 2,083.8 2,349.6 2,872.4 3,802.3 3,835.5CLCAs 383.6 378.4 445.7 515.3 449.5

Total Short-Term Risk Assets 2,470.7 2,754.8 3,351.7 4,355.5 4,296.7

Accounts Receivable 543 627 610 808 723

Medium/Long-Term Risk AssetsHQ and CRCAs 3,238.3 3,647.8 4,310.6 5,123.7 5,910.2CLCAs 2.366. 2.315. 2371.2 2.391.8 2448.Total Medium/

Long-Term Risk Assets 5,604.9 5,963.4 6,681.8 7,515.5 8,358.7

InvestmentsFmancial Investments 249.6 214.6 185.7 178.0 152.2Fixed Assets 77.9 95.2 153.6 200.6 284.9

Exchange Rate Variation 1.106.6 888.7 1.207.0 1.244.5 1.671.4

Total Asssets 11.093.4 12.378.5 13.768.0 15.861.1 17.342.2

Amer. at End of Year 2,040.5 2,538.1 2,824.0 3,333.4 3,803.4of which:

Short-Term Loans 625.5 795.4 805.5 1,090.4 1,337.2Medium/Long-Term Leas 1,415.0 1,742.7 2,018.5 2,243.0 2,466.0

In % of Loan PortfolioOn Short-Term Los 0.25 0.29 0.24 0.25 0.31On MediumlLong-Termn Ls 0.25 0.29 0.30 0.30 0.30

Loas Recovered Next Year 2,699.8 2,697.0 3,085.9 2,532.4 3,519.0On Short-Term Loas 1,660.6 1,633.3 1,957.2 1,919.1 1,901.1On Medium/Long-Term Loans 1,039.2 1,063.7 1,128.7 613.5 1,618.0

1/ Audited

- 49 -

ANNEX 7Table 2


KINGDOM OF MOROCCO


CNCA Financial Position 1988-1992(DH Million)

-------------- FY hrough December- ----

BALANCE SHEET /a 1988 1989 1990 1991 1992

IABILITIES

Short-Term liabilitiesDeposits 1,316.7 1,751.2 2,152.5 2,709.8 2,853.2One-Year Bonds 1,307.0 1,447.1 1,077.6 1,148.2 1,256.8Other 623.6 682.8 812.5 832.2 873.1Cufrent Maturities of Long-Term Borrowings 376.7 424.9 465.1 521.1 594.4

Total Short-Term liabilities 3,624.0 4,306.0 4,307.7 5,211.3 5,577.6

Long-Term BorrowingsIBRD 2,542.2 2,485.5 2,972.9 3,380.5 3,867.9Other Foreign 3,190.8 3,611.8 4-,153.8 4,935.8 5,344.4Domestic 224.2 205.2 162.8 124.5 90.8Current Maturities of Long-Term Borrowings (376.7 (424.9) (465.11 (521.1 (594.4)

Total Long-Term Liabilities 5,580.5 5,877.6 6,824.4 7,919.7 8,708.7

Total Uabilities 9,224.5 10.183.6 11332.1 13.131.0 14.286.2

ProvisionsExchange Risk 97.0 107.6 109.2 114.3 122.1Climatic Risk 27.9 27.9 27.9 27.9 31.0Credit Risks:

CLCA Loans 216.3- 272.3 367.3 469.6 569.6Other Lans 396.1 572.4 687.2 812.4 961.6

Other RiskKfW Equipment Subsidy 2.0 3.3 4.6 7.6 12.7USAID Provision 12.0 14.8 17.6 20.4 23.1KfW Reserved Interests 61.0 80.9 67.2 82.6 88.5

Total Provisions 812.3 1,079.2 1,281.0 1,534.8 1,808.6

Equity FundsEquity 425.6 425.6 425.6 425.6 465.6Quasi Equity Funds (CLCAs) 94.0 94.0 94.0 94.0 94.0General Reserves 489.8 513.0 551.6 590.7 631.0Other Funds 43.9 44.5 44.8 45.1 45.2

Current Period Eamings 2.1 38.6 39.1 40.3 11.6

Total Equity Funds 1,076.4 1,115.7 1,155.1 1,195.7 1,247.4

Total Liabilities & Euity 11.093.3 12.378.5 13.768.2 15.861.5 17.342.2

.q Audited

- 50 -ANNEX 7

Table 3,STAFf APPRAISAL REPORT

KINGDOM OF MRQOCCO

NATIO'NAL RURAL FINANCE PROJECT

CNCA limncala Position 1988-1992(DH Mion)

FY Through DecemberINCOME AND PROFIT/LOSS STATEMENT /, 1988 1989 1990 1991 1992

INCOMEInterest Income

Short-Term Loans 210.3 243.7 330.3 366.7 406.2Medium/Long-Term Loans 600.8. 645.2 694.4 778.7 799.0Other Interest Income 140.9 184.5 173.5 185.9 204.3

952.0 1,073.4 1,198.2 1,331.3 1,409.5Other Income 34.8 ,44.42 45.6 43.8 31.4

Total Income 986.8 1.117.6 1.243.8 1.375.1 1.440.9

EXPENSESInterest Expenses 426.2 538.3 606.8 695.6 759.1Administrative Expenses

Staff Expenses 207.8 225.2 270.5 293.2 314.3Depreciation 9.0 10.4 14.1 17.9 21.9Other Expenses 42.7 48.6 61.3 63.9 75.6

259.5 284.2 345.9 375.0 411.8Total Exmpeses 685.7 822.5 952.7 1.070.6 1170.9

Net Qperating Income 301.1 295.1 291.1 304.5 270.0

Provisions for Bad Debt 203.2 232.4 209.7 227.5 249.3Provisions for Exchange Risks 13.9 14.6 15.9 11.5 13.5Special Provisions 38.9 2.8 2.8 2.8 2.8

Income Net of Provisions 45.1 45.3 627 62.7 4.4

Prior Period Adjustment (3.9) (9.9) (19.7) (10.7)(8.3)Exceptional/Other Income 7.7 -21 29 16.1 24.0

Net Income Before Taxes 48.9 65.5 67.9 68.1 20.1Income Tax (40%)/k 25.7 26.9 28.8 27.9 8.5

NET P&QEi 23.2 38.6 39.1 40.2 11.6

A/ Auditedb/ Since its creation in 1961, CNCA was exempted from income tax (till end 1987). As a Government

development bank, it does not pay dividends.

ANNEX7Table 4

STAFF APPRAISAL REPORTKINGDOM OF MOROCCO


CNCA Finandal PositionSources and AppUcationm of Funds 198S-92

(DR Millon)

As of Dec. 31 1988 1989 1990 1991 1992

SOURCESNet Income 23.2 38.6 39.1 40.2 11.6Depreciations and Provisions 256.0 266.9 201.8 253.8 261.1Cash Flow Generated 279.2 305.5 240.9 294.0 272.7

Increase in:Deposits 284.6 434.5 401.3 557.3 143.4One-Year Bonds 174.9 140.1 (369.5) 70.6 108.6Managed Funds 32.3 0.6 0.3 0.3 12.8Other liabilities 109.4 59.2 129.7 19.7 40.9Equity - - - - 40.0Long Term Borrowings 1,024.3 833.9 966.4 1,472.0 940.0Loan Repayments 2.568.0 2.699.5 2.697.3 3.085.7 2.532.6

TOTAL SOURCES 4.472.7 4.473.3 4.091.0

APFICATnONS

Loan Disbursements 3,317.3 3,318.7 4,005.7 4,918.9 3,343.0

Investments 23.1 27.7 72.5 65.0 106.1Loan Repayments 509.3 366.1 423.0 490.0 500.8

Increase in:Financial Investments 241.3 (35.0) (28.9) (7.7) (25.8)Receivable (165.0) 84.4 (16.5) 197.8 (85.4)Liquid Assets 492.5 817.2 (250.1) (14.5) 270.5Other Assetb 54.2 (105.8) (139.3) (149.6) (18.2)

TOTAL APPUCATIONS 4.472. 4.473.3 4.6 4.091.0

- 52 -ANNEX 7

Table 5STAFF APPRAISAL REPORT

KINGDOM OF MOROCCONATIONAL RURAL FINANCE PROJECT

CNCA Finaniad Position 19881992(DH Million)

RATIOS 1988 1989 1990 1991 1992

PROFITABIUTIY RAIIOSGrowth Rate of CNCA's Equity 3.6% 3.7% 3.5% 3.5% 5.4%Rate of Inflation 2.3% 3.1% 6.7% 8.2% 4.9%Real Growth Rate 1.3% 0.5% -3.0% -4.3% 0.0%Pre-Tax Return on Avenage Equity 5.1% 6.0% 6.0% 5.8% 1.8%Net Return on Average Equity 2.4% 3.5% 3.4% 3.4% 1.0%Net Profit Marin 2.4% 3.5% 3.1% 2.9% 0.8%

BALANCE SHEET RATIOSUquidity Ratio/l 1.62 1.69 1.79 1.83 1.79Quick Asset Ratio 0.40 0.58 0.50 0.41 0.45EquitytoRiskAssets / 13.3% 12.8% 11.6% 10.1% 10.0%Long-Term Debt/Equity 5.18 5.27 5.91 6.62 6.97Total Debt/Equity 8.55 9.13 9.81 10.98 11.34Deposits/Risk Asset 16.3% 20.1% 21.5% 22.9% 22.6%Deeposits/Short-Term Lons 53.4% 64.2% 64.9% 62.8% 66.6%Extemal Funds/aLiabilities 62.3% 59.9% 62.9% 63.3% 64.5%Provisions/Risk Assets

CLCAs 7.9% 10.1% 13.0% 16.2% 19.7%CRCAs and CNCA 7.4% 9.5% 9.6% 9.1% 9.9%

Provisions/Arrears 30.0% 33.3% 37.3% 38.5% 40.3%

OPERATING ACCOUNT RATIOSGross Revenues/Risk Assets 10.5% 10.6% 11.0% 10.5% 9.8%Retun on Financial Assets 10.9% 10.9% 9.0% 10.4% 10.8%Average Retumn 10.5% 11.1% 11.0% 10.8% 10.2%Interest Cost/Average Liabilities 5.0% 5.6% 5.6% 5.7% 5.5%Financial Margin 5.5% 5.1% 5.3% 4.8% 4.3%Non-Interest Cost/Risk Assets 3.4% 3.4% 3.7% 3.4% 3.4%Pre-Tax Retrn on Risk Assets 0.6% 0.8% 0.7% 0.6% 0.3%After-Tax Return on Risk Assets 0.3% 0.5% 0.4% 0.4% 0.2%Annual Provisions/Risk Assets 2.5% 2.7% 2.1% 1.9% 2.0%Annual Provisions/Disbursements 6.1% 7.0% 5.2% 4.6% 7.5%Annual Provisions/Arrears 10.0% 9.2% 7.4% 6.8% 6.6%

sI Defined as current assets divided by current liabilities, with current assets including liquid and short-termrisk assets minus provisions for short-term risk assets.

b/ Capital Adequacy (Cooke Ratio).

- 53 -

ANNEX 7Table 6

Page I of 3


INGDOM OF MOROCCOQ


ASSUMPTIONS FOR CNCA PROJECTED FINANCIAL STATEMENTS

A. INCOME STATEMENTS

1. Interest Income (Short- and Medium-Term Loans)

It is computed on the basis of average portfolio at the following nominal a interest rates, exclusiveof fees and commissions:

CLCA CCA

Short-Term Loans 11.2% 11.0%Medium-Term Loans 11.5% 11.8%Rescheduled Loans 6.0% 10.5%

No interest are computed on arrears of more than 14 months.

Interest income on average cash reserve and financa investments is computed at current interest rate of10.8%.

2. Iserest

They include:

(a) Interest on Foreign Loans. They are computed on the basis of actual lending rates, afterdeducting foreign exchange cost borne by Government on loans contracted before end 1992.

1993 1924 l.9S 1996DH Million --

Total InerestsOn Existing Loans 617.9 583.3 543.3 505.0On New Loans 10.2 47.0 108.5 159.1

less:Government contribution 65.4 61.6 56.4 51.5

Not Interests 562.7 571.8 595.4 610.6

- 54 -

ANNEX 7Table 6

Page 2 of 3

(b) Interest on Deposits. They are based on current cost of 5.2% in 1993 and 5.5% thereafter toreflect current increase of these funds.

(c) One- year Solidarity Bonds subscribed by comnmercial banks at current rate of 4.25% a year.

(d) Othe Financial Co include commitment fee on foreign loans, commissions on bankingtransactions and payments to Government on the basis of current foreign exchange risk coverageregulations. The latter are as follows, on the basis of early 1993 exchange rates.

123 1994 1995 1996DH Millior.

On Existing Loans 61.2 55.2 51.9 49.4On New Loans 6.9 28.0 56.0 6.6

Total 68.1 83.2 107.9 119.0

3. AdministrativeExpenses

A yearly increase of 12% per year over 1992 expenses is assumed. This is consistent with past jrend andreflects the cost of diversifying CNCA activities and efforts to attract local depositors, modernize dataprocessing and services to customers.

4. Provision for Credit Risk

It is assumed that CNCA would continue to build provisions for credit risk at the same rate as previousyears to comply with new banking law regulations. In 1996, provisions would cover arrears at 50%instead of 40% today. Arrears of more than one year would therefore be covered at 100%. Yearlyprovisions would amount to 7% of yearly disbursement, thus fully covering credit risks on the basis ofpast experience over the last eight years.

B. SOURCES AND APPLICATIONS OF FUNDS

(a) Increase in Deposits. Figures for 1992 and 1993 were affected by the drought years. As from1994, increase in deposits are assumed to increase at the rate experienced before drought years.

(b) Increase in Equity. It is the result of the proposed injection of the KfW's new loan toGovernment into CNCA's equity.

- 55 -

ANNEX 7Table 6

Page 3 of 3

(c) KfW Reserved Interests. The yearly increase reflects the difference between reserved interestsaccrued each year and the use of that funding to cover exchange rate differences on KfW funds.

(d) Foreign Exchange Risk Incremental Cost. Government committed itself in March 1993 tocompensate by a budget transfer (subsidy to farmers) the increase of CNCA cost of funds dueto the application to CNCA as of 1993 of the 1991 system for foreign exchange risk coverageso as to maintain CNCA's nominal on-lending rates to farmers at their current (relatively high)level. A payment of DH 190 milliois over a three-year period is planned and would be used from1993 to 1996.

(e) Subsidy on a Portion of Rescheduled Loans. Government also committed itself to financeexpected losses (DH 110 million) on loans to small farmers rescheduled in 1992.

(f) Foreign Exchange Loss Sharng. This line represents the amounts to be received fromGovernment and farmers according to the existing regulations (1989 scheme) applicable on pastCNCA borrowings.

(g) Sub-Loans Repayments. This line has been computed on the basis of previous years sub-loanrepayment pattern of CNCA. Cumulative recovery rates are as follows (in %):

Year O Year 1 Year 2 Year 3 Year 4 Year 5

CLCAShort-term 73 86 91 94 - -Medium-term 58 76 79 81 84 89

CRCA and CNCAShort-term 88 94 95 97 - -

Medium-term 49 84 85 86 89 93

- 56 -

ANNEX 7Table 7

STAFF APPRAISAL REPORTKINGDOM OF MOROCCO


CNCA ProLected Financial Position 1993-96{DH Millon

BALANCE SHEET 1992 1993 1994 1996(As of Dec. 31) Actual -

ASSETS

UQUID ASSETSCash and Banks 505.5 790.5 1,261.5 2,180.5 2,448.9Treasmy Notes 1,350.0 632.0 632.0 632.0 632.0Drafts 11.7 11.7 11.7 11.7 11.7

1,867.2 1,434.2 1,905.2 2,824.2 3,092.6SHORT-TERM RISK ASSETS

HQ & CRCAs 3,835.5 4,641.6 5,030.8 5,387.1 5,721.5CLCAs 449.5 652.3 740.9 812.2 885.8

4,284.9 5,293.9 5,771.8 6,199.3 6,607.3

ACCOUNTS RECEIVABLE 722.9 722.9 722.9 722.9 722.9

MEDIUM/LONG-TERM RISK ASSETSHQ & CRCAs 5,910.2 6,280.5 6,747.0 7,244.3 7,797.8CLCAs 2.448.5 Z.530.2 2.700.5 2.92i. 3.127.

8,358.7 8,810.7 9,447.5 10,166.0 10,925.0INVESTMENTS

Finmancial 152.2 152.2 152.2 152.2 152.2Fixed Assets 284.9 470.0 648.0 831.1 993.4

EXCHANGE RATE VARIATIONS 1.671.4 1.594.6 1.510.7 1.422.0 1328.9

TOTAL ASSETS 17.342.2 18,478.4 20.158.3 22.317.6 3

ARREARS AT END OF YEAR: 3,803.4 4,162.5 4,731.6 5,246.0 5,754.5of which

On Short-Term Loans 1,337.2 1,366.5 1,528.0 1,677.8 1,830.2On Medium/Long-Term Loans 2,466.0 2,796.0 3,203.6 3,568.2 3,924.3

IN PERCENT OF LOAN PORTFOUOOn Short-Term Loans 0.3 0.3 0.3 0.3 0.3On Medium/Long-Term Las 0.3 0.3 0.3 0.4 0.4

LOANS RECOVERED NEXT YEAR 3,519.0 4,255.3 4,654.0 5,039.0 5,400.0On Short-Term Loans 1,901.1 2,672.1 2,972.5 3,230.0 3,400.0On Medium/Long-Term Loans 1,618.0 1,583.2 1,681.5 1,809.0 2,000.0

- 57 -

ANNIE7Table 9

STAFF APPRAISAL REPORTKINGDOM 0 MOROCCO

NATIONAL RURAL FINANCE PRO.ECT

CNCA Projected hIome Statenents 1993-96(DH Miioi)

(As of Dec. 31) 1992 1993 1994 1995 1996Actul -- - - ----------- Projected - ------ - ----

INTEREST INCOMEShort-term Loans 406.2 493.4 571.6 618.8 662.4Medium/Long-term Loans 799.0 901.8 1,039.6 1,104.3 1,180.4Other Interest Income 204.3 187.7 189.6 262.0 323.8

1,409.5 1,582.9 1,800.9 1,985.1 2,166.5OTH3ER OPERATING INCOME 31.4 68.0 73.0 80.0 80.0

TOTAL INCOME 1.440.9 1 1.873.9 2.065.1 2.246.5

INTEREST EXPENSES 759.1 791.1 894.1 983.0 1,059.2Less FE Subsidy to Farmers - (7.0) (28.0) (56.0) (70.0)

ADMINISTRATIVE EXPENSESStaffing Cost 314.3 352.0 394.3 441.6 494.6Depfeciation 21.9 39.9 62.0 76.9 97.7Other Expenses 75.6 84.7 94.8 106.2 119.0

411.8 476.6 551.1 624.7 711.2

TOTAL EXPENSES .170.9 16 1,417.2 1.551.7 1.700.4

NET OPERATING INCOME 270.0 390.2 456.7 513.4 546.1

PROVISIONS FORCredit Risk 249.3 310.0 320.0 360.0 400.0Foreign Exchange Risk 13.5 12.0 13.0 13.0 13.0Other Risks . . .*

INCOME NET OF PROVISIONS 4.4 68.2 123.7 140.4 133.1

Prior Period Adjustments (8.3) (8.6) (9-1) (9.7) (10.1)Provisions Used - 8.0 7.0 6.0 6.0Other/Exceptional Income 24.0 I 0

NET INCOME BEFORE TAXES 20.1 67.6 121.6 136.7 129.0Income Tax (38 %)la 8.S 25.7 46.2 51.9 49.0

NET PROFIT 11.6 5.4 8480.0

FREE RESERVES/b 11.6 41.9 75.4 84.7 80.0

g/ 40% in 1992h/ Net Profit is incorporated into reserves as CNCA does not distribute dividends.

- 58 -

ANNEX 7Table 9

STAFF APPRAISAL REPORTKINGDOM 0 MOROCCO


CNCA Prolected bIcome Statements 1993-96(DH Million)

(As of De. 31) 1992 1993 1994 1995 1996Actual --- Projected --

INTEREST INCOMEShort-term Loans 406.2 493.4 571.6 618.8 662.4Medium/Long-term Loans 799.0 901.8 1,039.6 1,104.3 1,180.4Other Interest Income 204.3 187.7 189.6 262.0 323.8

1,409.5 1,582.9 1,800.9 1,985.1 2,166.5OTHER OPERATING INCOME 31.4 68.0 73.0 80.0 0.

TOTAL INCOME 440.9 1.650.9 ,.873.9 2,065.1 2.246.5

INTEREST EXPENSES 759.1 791.1 894.1 983.0 1,059.2Ls FE Subsidy to Farmers - (7.0) (28.0) (56.0) (70.0)

ADMINISTRATIVE EXPENSESStaffing Cost 314.3 352.0 394.3 441.6 494.6Depreciation 21.9 39.9 62.0 76.9 97.7Other Expenses 75.6 84.7 94.8 106.2 119.0

411.8 476.6 551.1 624.7 711.2

TOTAL EXPENSES 1.170.9 . 1.417.2 1.551.7 1.700.4

NET OPERAllNG INCOME 270.0 390.2 456.7 513.4 546.1

PROVISIONS FORCredit Risk 249.3 310.0 320.0 360.0 400.0Foreign Exchange Risk 13.5 12.0 13.0 13.0 13.0Other Risks

INCOME NET OF PROVISIONS 4.4 68.2 123.7 140.4 133.1

Prior Period Adjustments (8.3) (8.6) (9-1) (9.7) (10.1)Provisions Used - 8.0 7.0 6.0 6.0Other/Exceptional Income 24.0

NET INCOME BEFORE TAXES 20.1 67.6 121.6 136.7 129.0Income Tax (38%)/a 8.5 25.7 46.2 51.9 49.0

NET PROFIT 41.9 75. 84.7 80.0

FREIE RESERVES./ 11.6 41.9 75.4 84.7 80.0

_I 40% in 1992b/ Net Profit is incorported into reserves as CNCA does not distribute dividends.

- 59 -

ANNEX 7Table 10

SUAFF APPRAISAL REPORTKIGDOM OF MdROCCO

NATIONAL RURAL FINANCE PRO.IECT

CNCA Finanial SituationSourmes and Applicatlops of Funds 1992-96

(DH Million)

(As of Dec. 31) 1992 1993 1994 1995 1996Actual -- Projected -------------

SOURCESNet Income 11.6 41.9 75.4 84.7 80.0Depreciations and Provisions 261.1 353.9 388.0 443.9 504.7Cash Plow Generated 272.7 395.8 463.4 528.6 584.7

Icrease in:Deposits 143.4 450.0 700.0 850.0 1,000.0One-year Bonds 108.6 50.0 60.0 80.0 100.0Managed Funds 12.8 - - - -

Other Uabilities 40.9 (24.1) 25.0 - -

Equity 40.0 45.4 90.9 136.3 36.4KfW Reserved Interests - 9.5 1.9 2.2 (1.0)

Borrowings 940.0 444.4 963.0 1,253.7 526.9Uan Repayments 2,532.6 3,159.0 4,255.3 4,654.0 5,039.0

1991 Foreign Exchange Risk - 183.0 (28.0) (56.0) (70.0)1989 Foreign Exchange Sharing - 124.9 120.2 119.3 115.0Subsidy on rescheduled loans - 110.0 - - -

TOTAL SOURCES 4.091.0 5.307.9 6.651.7 7.6. 7.330.9

APPLICATIONSLoan Disbursements 3,343.0 4,980.0 5,370.0 5,800.0 6,206.0Investments 106.1 225.0 240.0 260.0 260.0Foreign Loan Repayments 500.8 457.7 507.3 534.6 564.7Local Loan Repayments - 30.0 27.0 24.0 9.8F.E. Difference 48.2 36.3 30.5 21.8

Increase in:Financial Investments (25.8) - - -

Receivables (85.4) - - - -

Liquid Assets 270.5 (433.0) 471.1 919.0 268.6Other Assets (18.2) . . _

TOTAL APPLICATIONS 4.091.0 5.307.9 6.651.7 ?568-1 7.330-9

-60-

ANNli 7Table 11

KINGDOM OF MOROCCQNATIONAL RURAL FINANCE PROJECT

CNCA lbalm Rft"

192 1993 19 994 1996Actual Projected

A. PROlfTABIUllTY TIOS

GROWTH RATE OF CNCA'S EQUITY 5.4% 6.9% 12.3% 14.6% 6.7%RATE OF INFLATION 4.9% 4.5% 3.5% 5.6% 6.2%REAL GROWTH RATE 0.0% 2.3% 8.5% 8.5% 0.5%

PRE-TAX RETURN ON AVERAGE EQUITY 1.8% 5.2% 8.5% 8.4% 7.2%NET RETURN ON AVERAGE EQUITY 1.0% 3.2% 5.3% 5.2% 4.5%

NET PROFIT MARGIN 0.8% 2.5% 4.0% 4.1% 3.6%

B. BALANCE SHEET RATIOS

UQUIDITY RATIO/a 1.79 1.76 1.73 1.74 1.69QUICK ASSET RATIO 0.45 0.31 0.35 0.45 0.42EQUITY TO RISK ASSETS /1 10.0% 9.6% 9.9% 10.6% 10.6%LONG-TERM DEBT/EQUITY 6.97 6.50 6.05 5.66 5.28TOTAL DEBT/EQUITY 11.34 10.92 10.53 10.12 10.06

DEPOSITS/RISK ASSETS 22.6% 23.4% 26.3% 29.7% 33.4%DEPOSITS/SHORT-TERM LOANS 66.6% 62.4% 69.4% 78.3% 88.6%

EXTERNAL FUNDS/LILABIL[TIES 64.5% 62.5% 60.6% 59.1% 55.5%CREDIT RISK PROVISIONS/RISK ASSETS

CLCAs 19.7% 21.1% 22.7% 24.1% 25.7%CRCAs AND CNCA 9.9% 10.7% 11.7% 12.8% 14.0%

PROVISIONS/ARREARS 40.3% 44.2% 45.7% 48.1% 50.8%

C. OPERATING ACCOUNT RATIQS

GROSS REVENUES/RISK ASSETS 9.8% 10.4% 11.0% 10.9% 10.9%INTERESTS/NVESTMENTS 10.8% 10.8% 10.8% 10.8% 10.8%GROSS REVENUES/TOTAL 10.2% 10.9% 11.4% 11.3% 11.2%INTEREST COST/AVG. 1AB1IIITES 5.5% 5.5% 5.8% 5.9% 5.9%

FINANCIAL MARGIN 4.3% 5.0% 5.2% 5.0% 5.0%

NON-INTEREST COST/RISK ASSETS 3.4% 3.6% 3.8% 4.0% 4.2%

PRE-TAX RETURN ON RISK ASSETS 0.3% 0.5% 0.8% 0.9% 0.8%AFTER-TAX RETURN ON RISK ASSETS 0.2% 0.3% 0.5% 0.5% 0.5%

ANNUAL PROVISIONS/RISK ASSETS 2.0% 2.2% 2.1% 2.2% 2.3%ANNUAL PROVISIONS/DISBURSEMENTS 7.5% 6.2% 6.0% 6.2% 6.4%ANNUAL PROVISIONS/ARREARS 6.6% 7.4% 6.8% 6.9% 7.0%

a/ Defined as current assets divided by curmt liabilities (cufent assets = liquid + short-term riskassets - Provisions).

hi Capital Adequacy (Cooke Ratio). Intemational standard is at least 8% for commercial bankcapitalization.

- 61 -

A£N'ZEN. 7

M O R O C C O Tab le 12A


EVOLUTION OF RECOVERY RATES AT CNCA(Principal + Interest)

100% / L

80%/_ _-

60%

40%

20%

0% _ _1- -- _

1992 1991 1990 1989 1988 86/87 85/86 85/84

N+5fl - - - - 2% - 1%

N+4f- - - 1% -%

N+3E 2% 1% 2% 1% 3%N+20 3% 4% 3% 4% 7% 7%N+1E F 14% 12% 11% 112% 13% 118% 20% NO El 67% 173% 76% 72% 73% 71% 66% 64%TOTAL 67% 187% 191 % 89% 90% 92% 193% 95%_

- 62 -

ANNEX7Table 121

Page 1 of 2

AFF APmASAL BEIZpR

KINGDOM OF MQKOCC

NMAL1 RURAL NANE PROIECT

B. RECOVERIES AT MNCA - DETAILED ANALYSIS

1. Key indicators on CNCA loan recovery for 1985 to 1992 are summarized below:

CNCA YEARLY RECOVERY RATES (1985-1992)

85/86I 868 8 2 90 21 9

Headquarers 75 70 95 82 96 90 91CRCAs 66 65 62 59 60 58 58CLCAs 57 52 51 52 50 50 41

Average Recovery Rate 66 62 70 64 69 66 63/h

Of Which:Due )uring Year 72 68 77 71 66Due Previous Years 43 46 28 29 20

Reel Recovery Rate /q 93 92 90 89 91 87 67

Al On principal due and overdue after payment of interest due.h/ As of end December 1992 Arears/Loans ratio is about 30%, with provisions covering 40% of

arrears (100% of arrears of more than 18 months).g/ As computed in May 1993 for .11 past yeats, with a recoveiy rats reahing 95% for 198485.

2. These figures do not mean that CNCA is lax and this Is proven by the average 95% realrecovery rate in 1984/85 and 93% in 1985/86. They include the balance of every loan graned sinceCNCA's creation in 1961 and even previous loans inherited from agencies active before 1961. CNCArecognizes its risk at DH 1.8 billion set aside in dubious debtor accounts. Measures to increase loancollection-after writing off uncollectible arrears if necessary and rescheduling certain debts in case ofdrought, like in 1985 and 1992 - include the application of the "Privilege dEtat"1 which has beenrevitalized by CNCA in 1987/88, deducting loan repayments from crop payments, denying fiter credkto borrowers in arrears, and realization of security.

},/ The "Privil#ge d'Ntat" or "Privilege du TrGsor" is a forceful measureenforced by law, which has been granted to CNCA on a permanent basis tohelp recorery of loans from farm clients in delinquency.

* 63 -

ANNEX 7Table 12B

Page 2 of 2

3. Short-term loans are recovered faster but it takes three years to recover 93% of amountsdue. The loans the most difficult to recover are those granted by CLCAs: there is a lag of two years toreach the level of CRCAs recovery rates. Yearly recovery rates have deteriorated due to the massiverescheduling of end 1985 due to previous droughts (1982-1984). The 1991-92 crop season, again, wasstruck by a drought of unseen magnitude, and this has affected current recovery rates (66% of amountsdue in 1992 and 20% of overdues). A second drought hit Morocco in 1992-93.

4. In August 1992, CNCA took a series of actions to improve the situation. Erst CNCAadvertized widely a plan to induce the repayment of arrears by cancelling penalties and interest surchargesdue on old arrears by farmers who reimiburse them by December 31,1992. Preliminary results at the endof October 1992 were encouraging, antd CNCA has extended the measure up to June 30, 1993. CNCAestimates that it would recover this way about DH 0.5 billion of arrears due since the end of 1991 (15%).Second, selective rescheduling is contemplated only for farmers affected by the drought, i.e. those whohad seasonal and medium-term credit for rainfed production (mainly cereals). Rescheduling would begranted to all CLCA clients, with the provision that those not affected by the drought would repay at least50% of amounts due in 1992. For CRCA clients, only seasonal credits for rainfed production in non-irrigated areas would be carried forward. Medium- and long-term credits would be rescheduled on a caseby case basis provided that farmers repay at least 15% of amounts due in 1992 in the twelve drought-stricken provinces and 35% in other provinces.

5. CNCA plans to reschedule medium- and long-term loans for a total of DH 1.9 billion andto carry forward DH 1.7 billion due in 1992. At the end of 1992, a total amount of DH 1.6 billionwould still remain as arrears.

6. In March 1993, the Chief of State of the Kingdom of Morocco took additional measuresto cushion a second consecutive drought. This includes DH 110 million (US$ 12.2 million) ofGovernment subsidies to 120,000 small farmers for loan rescheduling, DH 350 million (US$ 38 million)to stabilize rural income and employment of 350,000 small farm families, and DH 190 million (US$ 20million) to maintain CNCA's financial viability by covering for three years (1993-95) the negative impactof the 1991 foreign exchange risk coverage scheme now applied to CNCA for its new borrowings.

-64-

ANNEX 8


KINGDOM OF MOROCCO

NATIQNAL RURAL FINANCE PROJECT

The Agricultural Development Fund I

1. The Agricultural Development Fund (FDA) was created with the 1986 Law of Financeand its basic text was published in the official Gazette of Morocco (Bulletin Ofriciel no. 3818, issuedJanuary 1, 1986, page 23 Title II, Article 3, Permanent Dispositions for the Creation of a SpecialAccount no. 35-52 called Agricultural Development Fund). Details are in the working document No.8. The FDA Special Account is open at the Ministry of Agriculture and Agrarian Reform (MARA) andthe necessary funds are earmarked in the Government's investment budget. CNCA is responsible foradministering the Fund.

2. The key objective of the FDA is to provide some capital subsidies for selected private on-farm investments in accordance with the Agricultural Investment Code. This code and the FDA aim atencouraging agricultural production, in particular small farm production in disadvantaged rural areas, witha view to increasing farmers' income and reducing rural migration into overpopulated urban centers.Capital subsidies finance about 10% to 30% of the total cost of the investment, but do not eliminate theentirety of the downpayment usually required from farmers to obtain medium- or long-term loans throughCNCA's branch offices. Government funds are channelled to the selected beneficiaries for theirapplicable investments through CNCA's credit operations. Interest rates for these credit operations arenot subsidized.

3. To ensure that CNCA is adequately compensated for the administration of the FDA, theMinistry of Finance agreed in September 1986 to pay to CNCA a fee of a sufficient level to coverCNCA's related administrative costs. This agreement, which is satisfactory to CNCA and to the Bank,is being enforced since end-1986. Under the Project, the amount of capital subsidies to be financed outof the FDA is estimated at DH 99.2 million (US$ 11.0 million equivalent). The EEC is providing a grantto the Government of Morocco to support FDA's operations. The FDA is also supported by the Bankunder the ASIL 1 (Loan 3403-MOR) to promote improved farm technology. It is currently envisaged(under an ASIL 2 and in cooperation with the EEC and the Moroccans) to reorganize the FDA to makeIt an enhanced instrument for rural development (not only agriculture) and to better target its scarceresources towards the rural poor.

1/ Fonds de Developpement Agricole (FDA).

- 65 -ANNEX 9APage I of 2


KINGDOM OF MOROCCO


FSDP Key Policy Areas

A. Kea Features of Finandal Sector Poliies and Reforms

1. Indirect Control of Credit and Money. The financial sector reform programsupported by the Bank (FSDP) includes the elimination of all credit ceilings, to promote competitionin the banking system, and the strengthening of the Central Bank's indirect control instruments. Thefollowing three sets of measures will be used to reinforce the indirect monetary control: (a) theCentral Bank's monetary control capacity will be enhanced through a more effective use of reserverequirements. Specifically, in addition to sight deposits, it will have the authority to extend the baseto include time deposits. Furthermore, the ceilings on the reserve will be raised from 15% to 25%on sight deposits , and they will be set at 10% on time deposits; (b) the control of the monetary basethrough banks' refinancing at the Central Bank will be enhanced by limiting the eligibility to fixedrate rediscounting on direct medium-term investment loans to small scale enterprises; and (c) a single,seven-day interest rate will be applied on all advances at variable rate.

2. Development of Domestic Financial Marke"t. The reforms under the FSDP aim atencouraging the development of an efficient market for government securities which is the firstcritical step towards the development of domestic financial markets. Until recently, banks had beenrequired to invest 35% of sight deposits in Treasury bills at 4.259% per year, thus constraining thedevelopment of a market for govermnent securities. Under the reform programs, these mandatoryplacements are being gradually reduced and replaced by funding through the auction market. As ainitial step, the ratio of sight deposits to be placed in T-bills was reduced to 32% in 1991 and wasfurther reduced to 25 % in 1993. Furthermore, the program includes appropriate measures in order toexpand the auction market to insurance companies and other enterprises; allow banks to underwriteTreasury bond issues; and place long-term bonds through public offerings as opposed to the currentsystem of bilateral placements with institutional investors. The program also includes measures toharmonize the tax treatment of all financial instruments on the basis of a study to be carried out bythe Ministry of Finance, as well as reform the Stock Exchange and to create mutual equity funds.

3. Interest Rate Uberalization. The financial sector reform program includes: (a) theliberalization of interest rates on bank deposits above three months; (b) the liberalization of all lendingrates, with the exceptionof export financing and rediscountable medium-term investment loans to small scale industries whichwould continue to have regulated rates at 8% and 12 % respectively; and the revision of the ceilingon lending rates which will be

- 66 -

ANNEX 9APage 2 of 2

based on the cost of banks' resources. This ceiling was set at I and 1/3 times the weighted averagerate or six and twelve-month bank deposits and adjusted every six months. It was recently revised toa maximum rate of 2.5% above the weighted average rate. Furthermore, emphasis will be given toencouraging variable interest rates where applicable.

4. Regulation and Suervision of the BankingSgstem. Various reforms had alreadybeen introduced to strengthen the prudential regulatory framework and the supervision of banks,including: (a) the modification, in 1986, of the 1967 Banking Law establishing the legal frameworkfor the banking system to include a uniform accounting system; (b) the setting up of a comprehensiveon-site examination system, although its full implementation remains hampered by understaffing; and(c) the institution of prudential ratios requiring: maintenance of a solvency ratio of 5.25% of networth to sight and term deposits, minimum capital and net equity of 100 million DH; provisioningagainst doubtful loans; and risk concentration limited to 10% of net equity to any single borrower.

'. To preserve the stability of the banking system in the context of the liberalization ofthe financial sector, the following additional measures have been taken:

(a) the enactment in July 1993 of a new Banking Law which provides a more rigorousframework for Central Bank supervision and regulation of the banking system;

0) the requirements that external audits of banks fully follow International AuditingStandards;

(c) the adoption of capital adequacy standards in line with the 8% capital to risk-weightedassets ratio of the Basel Committee of Banking Supervision, which all banks will haveto comply with by January 1994. CNCA has already adopted this minimum capitaladequacy standard in 1989 under Loan 3088-MOR;

(d) the revision of prudential ratios and accounting standards so that loans to a singlebeneficiary are limited to 7% of the net equity of the bank as of end 1993, and loansto a single corporate group are limited to 15% of net equity as of end 1994;

(e) the introduction of a new loan classification and provisioning system (Central Bankcirculars dated May 14, 1993) to be fully operational by January 1995 (January 1996for CNCA); and

(f) the harmonization of accounting policies and procedures as between banks and thethree major specialized financial institutions (CNCA, CIH and BNDE).

STAFF APPRAISAL EPORT

IMBDouU OF MOROCCO

AllURA RAIL FINANCE PIOJECT

F8DP In" Poce A

3.PeAs Betel Meftu (I1421

ACTION PLAN

08JECTIVE8 ITERVENTIIR AqE BOARD OF OIRECTORSI ECOONO TRANCHERRST TRANCGE

I. Mwmoresmuu nfmense

Aehe wNi aid mueonomk Aeut ean _ ed m menr Comd sntsfot mecbeasestab o ec e objc ped= a fwloted by a pup of

wel ifed iietes (FSDP Rept No.P5S53, Amex 1,Attoeat 2

n. MiEL c NU

Replace qfat t c e by ODirect cecnu Rem c p_ct~~~~~~~~~~~~~~~~~~~~~~cei cam

_i.M cm of to metelqwpegtos ad strsthsn the

the Centrol Bui

Rem" _nent buc of an Wt by dte Mb ot

o aoIg _ ei B a *b tontoduce a esm eqremnt ofup t 10% en tin udepe

.1 Increalngthe cobsinofthsraw_ quirement ori sti dBpsi

frn the camnt 16 to 25%

Ceit tde mme emellt on anid of te week ad d .the mathbobe

ACTION PLAN

OBJECTIVES II ITER ARfEAS BOARD OF plRECTORSI SECOND TRANCHEflRST TRANCHE

Ceta BMan Inaingbrg Redtion of dth -Peo to rodcouninfor mmumtrm i _nvtmt by 1ith01*lyof _meutmnu inement_m to fbmd mu m _eom to SSIs

a dsWed by a Bank aMsgl brcda

humentat of a _ at onedadnes at v b ro from theCental Bao& IJ days a e rate)

111. TMMamd Deeen ofF a Mebets

Incr the roe of the unet in the Gradual olinlnalln of ths mandtory Reduction of the rato from 35% to 32% Reduction of the aio to 25% xfinacing of the TMau Tsu bonds to siNg dpis rao of sight deposits

Improve exbit mart facilltbs end Openk* of thie actien maket for T-bDs Authzn vn to bari to placedeepen the T bib nm"t to iswance companies and to other with the pubc the ntrh rn ofentrpis Treury stcuites

Place lonterm Tbonds tough publofferings

Do p dMwtic fimancial arbts Sgmetati of fnancial nats Start a sbu to hamoniz thi fiscal Plan of actiom to hmoze the fialtreatmnt of financial intats an the trtment of final trments.baso of tenms of mrence satiactoryto te Bark Rwiew wih the Bank pres to refom

tie Stock Exchag, and to cnramateal fund

iI l,

I! I 1;

I~~~~~~ILIL~~

~ ~,~ittt1i jhg, It 1 '0 ii ,

- 69 -

ACTION PLAN

OBJECTES INTERVEN AREAS OR OF OIRECTORSI SECOND TRANCHE

Rduc ogtatiodo In the ait maket ODected crdit pokbs blna of n sati by the Mitr of Recton Irua on the rductal of bad' 5 to 2.5% Of RULT rtodoy pactnbt fom 5.5% of 5 to 2.5% of houbg rati

deposit in rediucosmtubb m n adtotam loam (RMELT raiol) to 5%; wdfrom 8% of deposb its l to thehoin secto (homg ratio) to 5% E hmint of tbh Govement pant

on CnIW lom to the tdwM sto

spilo#t of a pe adminitrconos eo ttb CNCA by a postoioricontrcl by the Mis of Finance

V. Roadtl nd Sutmts of tta

-4

StROt the bgl and t to Baiti Ljw S*ninnodtde drdt bi* kw toSaewt oad P - CMeM cd at Govout

_ ad'peIdence and l to theCera Bu'dt in con t I rIpiatdsyand supt ioy fmce

Improve capital adquc standards Captal Adequcy sance of (0 an it bW the M tar _sanc o a ckcar, introducing aof Finacaeig thMe nun nm mi r_i o dof % btyn capialof bhs' equiy cital N (ii) a Bork and il rik Wted ase, accrn toAl M*rb circidr estah t a stdcter the am t d tho nambr of thedflaidc of nt eqty Basal Couit. of Baint S9Oavis

The ibmentatof tio of asa wbe mdto for dal hb by 1.1.94

Complmen the raat measurne Rikclosifcet and preisonin se of an atii by the Minister of a of a an Wt by the Manr dby a srngthni of prdn Fnance it Fnoa unti singb b wr ikrmgdtn and prvs _ ndee la to a sie beneiciary con _atratlon to a sing corpoate gop

to 7% d bac not aquiy to 16% of bas' nt oqty

ACTION PLAN

OBJECTIVES INTERVENTION AREAS BOARD OF OIRECTORSI SECOND TRANCHE

RRST TRANCHE

Car out a study on the impact on tba Issuanco of a crcular, introducing as ofbanldng system of a loan classification 3131193 a classification of problm loanssytem based in part on n of snrears based in paticular on the cremXs

fincial situaton and on aging ofanraas. Problm loans wf be classiidin tiusa catagoiis:

* sundard acceunts: paymentoveru by 90 to 180 days

* doubtfu accoumts: paymtntoverdu by 180 to 365 days

* lass accounts: paymnt veby mo than 365 s and oerw

Overdraft proiin* substdard accotri 20%

dh alcrs 50%' lass accu.s 100%

Cessation of inttrest a 'uale onsmdard, dobt, and la lanaccounts

0. Bakmg Supevision Issuance of a Central Batk circular,recoein g to fianciai titaudib of thair financial statemntsa tc to taiondA standards bynP nt xtemal asutor acept

to the Centrl Bae audit rports sholWdbe submitted to the CenWtra Batk

Hmrmeniaen of accounting prcedursbetween baocs and Ss BNlIDE. CIl andCNCA)

- 72 -

MOROCCO - NATIONAL RURAL FINANCE PROJECT

SWWMacroeconomic Indicators

199121993-94 1995-96

Real GDP Growth 4.4 4.7 5.3Current Account/GDP /a -1.9 -0.6 0.9Budget Deficit/GDP /h -2.4 -1.7 -1.4Total Gross Fixed Capital

Formation/GDP 22.6 23.5 24.0Debt Outstanding/GDP 82.0 75.0 65.0Debt Outstanding/XGS 252.0 220.0 185.0Debt Service/XGS 27.0 28.9 25.9Reserves (months of imports) 3.4 4.1 4.5Real Manuf. Export Growth /c 9.0 10.010.0

a/ After debt reliefb/ Payment order basis, before debt reliefc Excludes phosphates and phosphate derivatives, includes re-exports

- 73 -

AN IQPage 1 of 4

STAFlF APPRAISAL REPORT

KINGDOM OF MOROCCO


PREVIOUS AGRICULTURAL CREDIT PROJECTS

A. First and Second Agricultural Credit Projects(Loan 433-MOR, Loan 861-MOR and Credit 338-MOR)

B. Third Agricultural Credit Project (Loan 1361-MOR)C. Fourth Agricultural Credit Project (Loan 1704-MOR)D. Fifth and Sixth Agricultural Credit Projects (Loan 2367-MOR, Loan 2731-

MOR)E. National Agricultural Credit Project (Loan 3088-MOR)

PERFORMANCE UNDER PREVIOUS AGRICULTURAL CREDIT PROJECTS

A. First and Second Agricultural Credit Projects(Loan 433-MOR: Loan 861-MOR and Credit 338-MQRI

1. Under the First Project, a Bank loan US$10.0 million' helped finance CNCA'slending program for the period 1966-69. It financed investments undertaken by about 6,000 mediumand large farmers and farm eouipment purchased by a State company (CGEA)2. The Project wasaudited by the Operations Evaluation Department (OED)' which attributed the Project's mixed resultsto CNCA's shortage of qualified staff and to Government's interference in CNCA operations bydirecting CNCA loans to small farmers, which was not envisaged under the Project. Under theSecond Project, the Bank provided a Loan/Credit of US$34.0 million to CNCA to finance mediumand large farmers' investments over the 1973-76 period. About 17,000, mostly large farmers,benefitted from the project. Based on the experience of the First Project, the Bank's concern relatedto CNCA's institutional problems including: (a) the need to introduce separate accounts for CLCAoperations; (1) the strengthening of CNCA capital structure; (c) the need to increase profitability ofCNCA's operations; and (d) the need to increase the reliability of financial data. According to thePrject Performance Audit Report (PPAR) No. 2543 issued June 12, 1979, results were positive.CLCA accounts were separated in 1972 and the increase in capital was made effective in 1973.Following Bank insistence, interest rates on medium-term loans were increased to 7% forcooperatives and 8.5% for CRCA clients. Auditing of CNCA's accounts was begun by independentexternal auditors.

I/ Date of effectiveness: February 2, 1966.

V Centrale de Gestion des Exploitations Agricoles, managing landconfiscated from foreign settlers.

3/ OED Report on Agricultural Lending Programs; Background Paper No. 4.

- 74 -

ANNEX 10Page 2 of 4

B. Third Agricultual Creit ProJect (Loan 1361-MOR)

2. The Third Agricultural Credit Project, which became effective on August 11, 1977,financed medium and large farmers, farmer pre-cooperative groups, and small farmers, the latter inview of the good results obtained by CNCA. The Bank loan of US$35.0 million was disbursed onschedule. According to PPAR No. 3248 dated December 23, 1980, the Project achieved itsobjectives in terms of expansion of lending activity and farmer coverage, and of financing investmenthaving a positive impact on beneficiaries' income (high financial rates of return), employmentcreation (about 52,000 man-years of employment were created) and the Moroccan economy (higheconomic rates of return).

C. Fourth Agrcultural Credit PMiect (Lan 1704MOR)

3. The Fourth Agricultural Credit Project included all CNCA lending to individualfarmers through Headquarters, CRCAs and CLCAs; to Agrarian Reform Cooperatives and Pre-cooperative Associations; and to small- and medium-scale agro-industries. Also included wastechnica assistance to assist CNCA in improving its monitoring and evaluation system. The Projectcovered CNCA lending over the period September 1979 to August 1982. Total Project costs wereestimated at US$737.2 million equivalent, with the World Bank loan of US$70.0 million, a loan fromKfW of US$50.0 million equivalent and a loan from the International Fund for AgriculturalDevelopment (IFAD) of about US$25.0 million equivalent financing 58% of the project's estimatedfbreign exchange cost (US$250.0 million). The loan was fully disbursed by August 25, 1983. TheOED report No. 5392 of December 28, 1984 described it as a successful operation on account of: (a)substantial increase in the number and amount of lending to small farmers, though maintainingsatisfactory credit recovery rates; and (b) a satisfactory financial performance of CNCA.

D. Wft and Sixth Ag&ricultrl Credit Projects(Loan 2367-MOR and 2731-MOR)

4. The Fifth Agricultural Credit Project gave emphasis to the components of the FourthProject, namely: (a) agro-industrial development through the establishment of a special agro-industrial lending unit at one CRCA (Meknes); (b) institution building through financing the design ofa management information system (MIS); and (c) domestic resource mobilization by encouragingbanking activities in branch offices. Under this project, CNCA maintained the strict financialstandards required under the Loan Agreement and emerged as an expanding financial institutionmaking a major contribution to sectoral development. The Project covered CNCA lending fromSeptember 1983 to August 1986 and was fully disbursed and closed on March 17, 1987, severalmonths ahead of schedule despite the adverse impact of two major droughts (1984-85) on agriculturalproduction which led to farm credit rescheduling. The foreign exchange cost was cofinanced byFADES (US$26.0 milllion), ADB (US$31.0 million), KfW (US$24.0 million) and the Bank loan ofUS$115.4 million equivalent.

- 75 -

ANNEX 10Page 3 of 4

5. The Sixth Agricultural Credit Project (US$120 million) pursued the institutionalbuilding objectives started during the Fifth Project. It wps also designed to be consistent with sectoralobjectives supported by the Bank through ASAL operations, with increased attention to training.The Loan (US$120 million) was fully disbutsed and closed on March 31, 1990 as scheduled.Cofinancing was provided by ADB (US$66.0 million) and KfW (US$35.0 million). USAID wasinvolved in the technical assistance, sector studies and training components.

6. The two projects had considerable positive impact on CNCA's development as aviable farm credit institution and on its emerging ability to compete in the overall financialenvironment in which it operates. Furthermore, the projects have been particularly successful inchanneling resources to agriculture and financing private investments in the sector and in agro-industry, increasing production, improving food security, and upgrading agricultural technology andproductivity. A combined Project Completion Report No. 11492 of December 30, 1992 for bothprojects and OED's Project Performance Audit Report No. 11491 released on January 22, 1993 ratedboth projects as satisfactory, with probable sustainability, and substantial institutional developmentimpact.

E. National AgrculurAl Credit Proiect (Loan 3O88-MOR-

7. Consistent with the Government's adjustment program supported by the Bank, theinnovative National Agricultural Credit Project supported the long-term goal of CNCA's conversionto a full service bank with increased managerial and financial autonomy, and its renewed efforts toadapt its organization and procedures to be responsive to accelerated investments by the private sectorin the rural areas of Morocco. Total project cost is US$1,532.0 million, with financing from theBank (US$190.0 million), KfW (US$38.0 million), ADB ($US70.0 million), EIB (US$60.0 million),and FADES (US$30.0 million). Over a four-year implementation period (1989-93), the projectfunded: (a) medium-and long-term credit to farmers, cooperatives, fishermen, artisans (men andwomen), agro-industries, rural housing and rural enterprises; and (b) CNCA's institutional capacity todevelop competitive banking and saving activities (branch network refurbishing and development,office technology equipment and software, training programs, and consultant services).

8. The project performance has been good. The Loan was 99.5% disbursed at the endof June 1993 (100% of appraisal estimates). CNCA's overall financial results for 1988-1992 were,overall, satisfactory with a downtrend in 1992 as the result of droughts. Priority actions now includethe need for CNCA to improve its planning capacity and to fully computerize its activities (technicalassistance on modern management control started in mid-March 1992). Improved management andtraining will help CNCA compete better with other banks nationwide on profitable activities and ondomestic resources mobilization. One issue in agriculture is the adverse impact of the 1992 and 1993droughts on CNCA's rural savings mobilization and credit recoveries. An

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ANN 10Page 4 of 4

action plan is being implenentad to redress the situation. Increased attention is given to droughtmanagement and to the need to give priority to the setting up of a sound crop insurance system anddrought relief fund to secure the banking system. This has been initiated under Loan 3088-MOR andwill be implemented on a pilot basis under the fbllow-up National Rural Finance Project.

9. ne follow-up project, building on the lessons of experience from previous operations,has been designed to consolidate the sustainable foundations of a high quality, univa andcompetitive Credit Agricole Bank within a gradually liberalized financial sector s gically linked tothe FSDP and financial sector reforms in Morocco. In the evaluation summary of its recentperformance audit report No. 11491, OED highlighted that "the Bank provided valuable assistance inits supervision missions by encouraging appropriate reforms at CNCA'. OED also suggested that"the broadening of rural financial markets needs to be explored", and concluded that 'continmedsupport for CNCA should be assured".

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ANNEX 11Page I of 6


KINGDOM OF MOROCCO


CNCA's Policy Statement

PREAMBLE

Agriculture has always been a key sector of the Morocan economy and as such, hasalways been accorded priority in national development plans.

Agriculture occupies some 8 million hectares. It currently contributes about 18% of GDPand 31% of exports, employs 40% of the active population, and numbers more than 2 million rural farmfatnilies.

The drought period of 1980-84 seriously undermined Morocco's agricultural base. Since1985, however, agriculture has staged a recovery with record production levels, particularly of grains,in 1985/86 and 1987/88, thanks to good climatic conditions.1 '

Food security and rural development are among the major goals of the 1988-92Orientation Plan (Plan d'OrientaIIon).Y As the major bank for financing of the rural sector, CNCA isdestined to play a decisive role in their achievement.

Since it was established in 1961, CNCA has developed steadily, in response to thefarmers' growing financing needs, through expansion of its network, continuous review of its loansystems and augmentation of its resources.

It must be stressed, however, that despite CNCA's important contribution to the financingof agriculture, its operations continue to be inadequate in light of the capital requirements for privateinvestment in the agriculture and rural sector.

Thus, in conformity with the High Directives of His Majesty the King, CNCA, whileremaining firmly committed to its function of a development bank, needs to convert to a universal bank.

It Morocco experienced new severe droughts in 1991-92 and 1992-93.IV These priorities also stand for 1993-97.

- 78 -

ANNEX IIPage 2 of 6

Title I

PIJRPOSE OF THE STATEMENT

The ongoing revision of the dahir governing Agricultural Credit will provide CNCAwith a dynamic legal framework within which it can develop as a "model bank' in conformity withthe Royal High Directives of January 16, 1987. Pending completion of this reform, the purpose ofthe present General Policy Statement is to set forth the main lines of Agricultural Credit'sdevelopment within the context of its basic objectives.

The Statemntnt furnishes the basis for the orientations and actions of the Board ofDirectors, and at the General Management and Management Committee and also constitutes themanagement charter for Agricultural Credit's supervisory personnel.

Title II

BASIC OBJECTIVES OF CNCA

1. CNCA shall contribute to Morocco's economic and social development, in conformitywith the orientations of the national development plans, particularly in the field of agriculture.

2. CNCA shall develop into a universal bank while at the same time revitalizing itsspecific function of financial support for agriculture. To that end, its purpose is to carry out credit,banking, investment, and equity operations in order to:

- develop all sectors that can help improve Morocco's food production,particularly farming, stockraising, and fishing;

- encourage the development of all activities upstream and downstream ofagricultural, fishery, and forestry production;

- expand and improve facilities for conserving, processing, upgrading, andmarketing farming, stockraising, forestry, and fishery products;

- mobilize and develop savings, particularly in rural areas;

- facilitate access to agricultural ownership and all land-tenure improvementactivities;

- help promote employment, foster the development of rural housing and ingeneral contribute to improvement of rural living conditions;

- promote the setting up and growth of all industrial, craft, commercial, andservice activities, particularly in rural areas.

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ANNEX I1Page 3 of 6

Title mI

TYPES OF OPERATIONS AND METHODOLOGIES

3. CNCA shall furnish assistance to all individuals and public- or private-law juridicalpersons. It shall:

- finance all operations conducive to development of the agricultural sector;

- grant short-, medium-, and long-term loans;

- effect all banking, exchange, securities, and discounting operations;

- establish leasing schemes;

- provide counseling services;

- underwrite equity investments in other similar banks;

- firnish its assistance to enterprises, in the capacity of financial agent, with aview to mobilizing resources, for their account, and to domestic and foreignmarkets, to finance their investment projects;

- manage public funds or loans for account of the State, against remuneration;

- -undtertake all operations, related to real or tangible assets, civil orcommercial, that can directly or indirectly facilitate achievement of theobjectives assigned to CNCA or serve the country's general economicinterests.

4. CNCA shall develop a system of financing of small-scale farmers that meets theirfinancing needs.

5. Only projects that meet the economic and financial profitability and technical viabilitycriteria shall be eligible for CNCA's assistance. In approving projects, particularly agro-industriesand forestry projects, it shall take due account of their possible impact on the environment.

6. CNCA shall continuously and regularly monitor both the execution and theorganization and management of the projects it finances.

7. CNCA shall not directly finance more than 80% of the total cost of an investmentprogram, including that of leasing schemes.

- 80 -

ANNEX IIPage 4 of 6

8. While following the principle that the best guarantee lies in thorough study of aproject, analysis of its economic, technical, financial, and management viability, and completeknowledge of its clientele, CNCA shall take adequate precautions to safeguard its interests and ensurerepayment of the amounts owed to it.

9. CNCA shall ensure that its financial commitments (guarantees, acceptances or equityparticipations) to a particular client do not represent more than 20% of its equity funds.

Title IV

MOBILIZATION OF RESOURCES

10. CNCA shall strengthen its policy for receiving deposits and savings and its role ofrural bank while developing banking instruments tailored to its clientele and to market trends. Thebulk of the resources mobilized will of course be used to finance agricultural and rural development.

11. CNCA shall protect itself against the exchange risks arising out of mobilization ofresources in foreign exchange.

Title V

FINANCIAL VIABILY AND PROFITABILITY OF CNCA

12. CNCA shall ensure that its term debt does not exceed 10 times the amount of itsequity funds and shall maintain a capital adequacy ratio (equlty/risk assets) higher than 8%.

13. Without adversely affecting agricultural development, CNCA, in collaboration withthe monetary authorities, shall set its interest rates so that they produce adequate net income to:

- cover the whole of its operating expenses and debt charges;

- create depreciation reserves and provisions against doubtful debts, exchangerisks borne by it, and depreciation of participations;

- generate adequate net income to remunerate its equity funds.

14. In order to avoid hampering the resumption of investment among debtor small-scalefarmers, CNCA will perform a case-by-case analysis of its credit portfolio, set up adequate provisionsto cover the true delinquency risks, and submit a rehabilitation plan to help farmers indebted to theGovernment.

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ANNEX 1IPage 5 of 6

15. CNCA shall set up a "National Guarantee Fund" to cover farmers against the risk of

delinquency in the event of natural disaster.

16. CNCA shall have its annual accounts audited by external auditors in accordance with

international standards applied in bank auditing.

Title Vl

MEDIUM- AND LONG-TERM PLAN

17. CNCA shall set up a medium- and long-term planning system with annual goals for

development of its activities of lending, receipt of deposits, savings and other resources, and loanrepayments and for expansion of its network.

18. Each year, on the basis of its medium- and long-term plan, CNCA shall prepare a

budget and submit it to the Board of Directors for approval. The budget shall set forth the goals to

be achieved, in light of the prevailing economic situation, the financial, physical, and humanresources to be deployed to ensure its success, and the expected performance criteria.

19. CNCA shall give priority to revitalizing, restructuring, expanding and modernizing its

network.

20. CNCA shall progressively develop a management control and internal check system asthe basis for these planning and network revitalization activities.

Title VI

ENANCLAL CONTROL

21. The development of CNCA into a universal bank implies relaxation of financialcontrol by the Government. CNCA shall therefore set up, in collaboration with the Ministry of

Finance, a system of a posteriori control to be applied, as in the other financial institutions, by a

government commissioner.

Title VIII

WORK ORGANIZATION AND PERSONNEL POLICY

22. CNCA shall follow a sound policy with respect to work organization and distributionand shall define tasks and responsibilities at the cental and regional levels.

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ANNEX I IPage 6 of 6

23. CNCA shall take steps to simplify the procedures for loan approval and managementof banking services, by developing, decentralizing, and modernizing its data processing facilities.

24. To enable it to perform its new functions as a universal bank, CNCA shall set up aprogram of basic and refresher training for the whole of its staff.

25. Personnel policy shall be set forth in regulations approved by the pertinent financialcontrol agency. These regulations shall provide personnel with the same remuneration and careerdeveopment conditions as are applied by financial institutions similar to CNCA.

26. In order to foster a spirit of solidarity among its personnel, CNCA shall set up a"Social Fund" (Fonds des Oeuwes Sodales) to assist staff in post or retirees and to promote allsocial-type activities of benefit to the staff.

Approved, May 5, 1989

Chairman of theBoard of Directors of CNCA

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ANNEX 12Page I of 2

STAFF APPRALSAL REPORT

KINGDOM OF MOROCCO

NATIONAL RURAL FINANCE PRO,ECT

CNCA's tratc Plamin and Management Control

1. Pm pos In order for CNCA to develop a fairly detailed, strategic plan and a set of

action plans to carry out its strategy as well as a tracking and review mechanism, CNCA established a

Planning Unit reporting to CNCA's Chief Executive Office (CEO). The Unit needs to be internally

organized to be fully operational by the end of 1993.

2. Objecives of the Planni Unit. The Planning Unit will be responsible for

elaborating CNCA corporate objectives, in conjunction with the CEO, and communicating them down

to the lowest management level within the institution. The Planning Unit will also manage the

planning and budgeting process, establish schedules, ensure the necessary coordination betweendepartments, organize and provide materials for planning conferences, and conduct reviews.

3. Mehods. A sound budgeting and planning process requires a short, carefully worded

statement of institutional purpose covering markets and strategic goals that acts as a framework for

the entire management process. CNCA's development objectives and strategy are described in para.

4.36 of the main report. The planning process also states the institution's approach to planning,

fiequency of plan, areas covered, and review/control process. To make the process successful,taining is essential. CNCA's plan will cover the following functional areas:

(a) Risk Asset Mganagement: Sectors targeted for lending, portfolioimprovement, debt recovery, new loan products;

(b) Liability Management: Deposit generation, new liability products, marketing;

(c) Fee Inoome Managemen: Sources of increased fee income and means of marketingand delivering fee-based services;

(d) Personnel Management: Training, career development programs, recruitment,rotation, promotion, compensation;

(e) ProductivityEfficiency Enhancement: Automation, manual of procedures, reviseddocumentation; and

- 84 -

ANNEX 12Page 2 of 2

(f) Control EFu.nIdn: Internal audit, external audit, loan review, performance targets.

The structure of the planning process can be visualized as follows:

(a) Input and analysis phase: scanning the environment, defining corporate mission andobjectives, preparing economic and financial projections;

(b) Decision phase: setting division objectives and strategy development;

(c) Documentation phase: preparing strategic position papers, action plans and budgets;

(d) Review phase: reviewing plan documents, strategy, action plans, budget, reportingrequirements and control mechanisms.

4. PWonm Bevie. Analysis of progress in reaching earnings objectives andimplementing action plans should take place monthly. Quarterly review will give emphasis on theanalysis of acal results against plan. Reviews should take place at all levels of the organization1, andconcentrate mainly on expectation to plan and on the development of corrective action programs forCNCA.

5. Suk. Pklh _ agndI?peratklnalklanning. CNCA has already established broadcorporate objectives for the sectors to which it lends and intends to lend, for the enhancement ofdeposit generating capacity and for the diversification of financial products and services. This meansthat CNCA has already a strong sense of direction. Also, this sense of direction has beencommunicated to CNCA's branch managers. CNCA has developed an Orientation Plan which spellsout the major orientation of the institution for 1993-96. What is needed at this time (end 1993) is aeoncerted effort to set a detailed timeframe for the accomplishment of the annual planning cycle(Business Plan). At this transition period, planning at CNCA should therefore have a practical,implementation-oriented style.

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ANNEX 13Page I of 5

STA APPRAISAL REPORT

KIUNGDOM OF MOROCCO


Climatic Risk Management and Agricultural Insurance Fund

A. Objciv

1. An agricultural risk management mechanism is proposed to provide protection to farmersfrom climatic risks. This mechanism would reduce the climatic risk in lending and encourage greaterparticipation in rural lending among banking institutions. The proposal contains the institutionalarrangements, technical parameters, and financial requirements of the program. This should serve as agood basis for Government to decide whether or not to implement a risk management scheme. Detailsare in Working Document No. 3B.

B. InstitutionalArangement

2. Under this option, the conceptual framework calls for the private insurance sector toadminister the insurance program with support from the Government. Insurance cover for risks whichare commercially nsurable would be offered by private insurance companies on their own account whiledrought insurance would be offered by the Government but implementation would be carried out by theprivate insurance sector. If this option is retained, the establishment of a Consortium of privatecommercial insurers, a Technical Support Unit and an Insurance Fund for Agricultural Risk are proposed.

Insuranensnm

3. An Insurance Consortium is proposed to be established in the private sector. ThisConsortium will consist of participating companies who would be contractually responsible to theGovernment for the implementation of the proposed agricultural insurance program. Companies wouldmainin their financial irdependence and bear the risk for their own products, but would comply withcommon terms and conditions. This arrangement differs from the pool concept which has failed in otherinsurance lines such as in automobile insurance. There would be a lead insurance company. The leadinsurer would be the company with the longest experience and the largest share in the agriculturalinsurance market. It should have adequate technical capability and an institutional network.

4. The Consortium would have a legal personality. The members of the Consortium wouldconstitute a Governing Board to be chared by the lead insurer. Its operation would be governedaccording to a set of by-laws which would describe its scope of operation and the requirements andresponsibilities of membership. Agreements reached by the Consortium would be binding on eachmember insurance company.

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ANNEX 13Page 2 of 5

Technical Support Unit

5. Under this proposed option, a Technical Support Unit (TSU) would be established by theConsortium. The TSU would assist participating companies develop new products, carry out actuarialstudies, establish and manage underwriting and loss adjustment, study the agricultural insurance market,prepare annual insurance plans, perform annual reviews of coverage and provide technicalrecommendations to the Consortium.

6. Insurance products which are supported by a Government's subsidy would use a commonloss assessment service. It would be the major responsibility of the TSU to manage the loss adjustmentactivity. It could perform this function by establishing its own network of loss assessors or, subject tothe approval of the Consortium, enter into contract with the lead insurer to perform this function underpre-agreed guidelines.

7. The TSU would be responsible for preparing for the Consortium an Annual InsurancePlan which would be submitted to the Government (e.g. represented by the Ministry of Finance). Thisplan would contain the proposed coverage, the level of premium subsidy, estimated income, financialrequirements and other features of the plan. Agreement to the annual plan would be precondition to theimplementation of the insurance program.

8. It would have a small but highly qualified staff who are knowledgeable on agriculturalinsurance. The TSU would initially need to be provided assistance to develop the necessary managementand staff capability. Staff would be provided local and foreign training. A twinning arrangement witha foreign agricultural insurance organization would be a possibility. The TSU would be financed by apart of the insurance premium, the level to be decided by the Consortium. The budget for the TSUwould be based on the overhead cost and the cost of loss adjustment. It would be hosted by the leadinsurer.

Agricultural Insurance Fund

9. An Agricultural Insurance Fund (Fond d'Assurance Agricole contre les CalamitesNaturelles - FAA) would be established by the Government. It would be the responsibility of theGovernment to provide initial capitalization of the Fund and recurrent costs from possible sources offunds such as annual budgetary appropriations, surcharge on insurance premium, import taxes, profitsfrom wheat imports, land tax, grants, or other sources. After a while, the Insurance Fund should be ableto generate enough revenues to cover its cost, in particular during non-drought years. It would beadministered by a Management Committee (Comite de Gestion) which could be composed of thefollowing: Representatives of the Ministry of Finance, Ministry of Agriculture, the lead insurer, theFederation of Insurance (Federation Marocaine des Societies d'Assurances et de Reassurances), the State-owned 'SocietE Centrale de Reassurance", CNCA, commercial banks and farmers. The Governmentwould decide on the final composition of the Management Committee. A Director would be appointedto supervise day-to-day activities.

C. Insurance Products

10. Insurance products are categorized under three main groups of which the AgriculturalInsurance Fund would support two types:

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ANNEX 13Page 3 of S

(a) Existing Products. These are products currently being offered by insurancecompanh s in Morocco. These are primarily farmers' insurance for vehicles,workmen's compensation, fire, personal accident and third party liability. Thecoverage for agricultural production is very limited, mainly hail and fireinsurance. These products would not need any Government support.

(b) Potentially Commercial Products. These are new products which would have thepotential of beirg commercially viable. These may not be viable in the beginningbecause of the lack of experience and inadequate market penetration. It isexpected that these new products would be commercially viable over time. Theseproducts would need some Government support during the development stage.

(c) Non-Commercial Products. This type of insurance would cover risk whichcannot become commercially viable because the frequency and extent of losseswould make premium rates exceedingly high and unaffordable for farmers. Therisk would be too great for private insurance companies to assume although somerisk assumption could become possible in the medium-term. The most notablerisk to be covered by this type of insurance is drought. This product would needcontinuing Government subsidy but may be reduced over time.

11. Commercially Viable Products. Products would be developed and sold by individualinsurers following underwriting guidelines of the Consortium. To encourage the development of theseproducts, it is proposed that the Government subsidize a proportion of the premium on a de-escalatingscale for a period of five years. For example, the subsidy would be 50% in the first year and decliningto 10% in the fifth year. Individual companies would retain full risk and would negotiate private sectorreinsurance, thereby attracting expertise of international reinsurers and avoiding risk assumption of theseproducts by the Government.

Non-Commercial Products

12. Drought insurance would be sold for and in the name of the Agricultural Insurance Fund.Participating companies would retain a part of the premium but would not retain any risk. Droughtinsurance would be sold as additional cover to a basic coverage under an existing crop insurance productor new commercially viable product to ensure that sound underwriting practices are maintained. Aspecial type of basic coverage targeted to the cereal sector would also be developed. Coverage wouldbe made available to all farmers nationwide. It should be made mandatory for borrowers of CNCA totake out a drought insurancepolicy and would be useful to other commercial banks. It would be optionalfor those who voluntarily insure.

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ANNEX 13Page 4 of 5

13. As experience is gained in drought insurance, a review would be carried out to determinewhether private insurance companies could assume a part of the risk. The feasibility of developing a risksharing and/or stop loss arrangement whereby private insurance companies would be the primary insurerwould be explored.

D. Technical Parameters

14. Drought Insurance, Drought insurance would initially be limited to cereal production thisbeing the major crop at risk. Of the total area of agricultural land of 8,944,100 hectares (including fallowof 1,906,800 hectares), 5,490,800 hectares or 59 % is grown to cereals. Of the total cereal area,4,243,000 hectares or 77% are predominantly rainfed. Some of these creas are the most sensitive todrought. By limiting the average yearly losses as a percentage of the sum insured (loss rate) to 15% inany given area, as much as 82% of the total cereal area grown under rainfed conditions or 3,485,000hectares could be covered by drought insurance. Other areas which have losses beyond an average of15% would be excluded.

15. The average yearly loss rate for areas which are insurable is estimated to be 7.35% ofthe total sum insured, assuming insured yields of 40 to 70% of average yields with larger deductiblesbeing applied to more risky areas. By providing a 15% loading to allow for additional losses whenprovincially calculated losses are further subdivided into smaller ecological regions and adding a 10%margin for cost of selling and contingencies, the average gross premium rate is calculated to be 9.2% ofthe sum insured. This would vary from as low as 2.3 % to as high as 18.0% depending on the area.With a proposed 50% premium subsidy from Governmnent, premium rates charged farmers would rangefrom as low as 1.2% to as high as 9.0%. Loss assessment would be performed on an areawide basis.

16. Commercially Viable Products. The proposal for commercially viable products is to offercoverage for risks which are commercially insurable. The basic policy for commercially insurable riskwould cover hail and fire. Additional perils which can be covered are frost, flood, excess rain and wind.The likely crops are fruit trees, vines, vegetables, greenhouse crops, industrial crops and specialty crops.Consortium members would be encouraged to develop policies for each crop type and region. Coveragewould be based on the cost of production. Premium rates would range from 2.5% to 7.5% for the basiccover and from 3.5% to 10.0% for both basic and additional cover.

E. Financial Requirements

15. DroughtInsur . The sum insured is estimated to be DH 150 per quintal or DH 600-1,800 per hectare depending on the level of insured yield. The major factor which would determine thecost of the program to the Government isthe level of uptake of drought insurance. Assuming a 50% premium subsidy and a 30% coverage of theinsurable area, the annual cost to the Government would be DH 45 million ($5 million). At 70%coverage, the cost increases to DH 105 million (US$ 11.7 million). The cost to the Government wouldaverage DH 43 (US$ 4.78) per hectare, a reasonable level compared to the higher costs in othercountries.

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ANNEX 13Page 5 of 5

18. The problem arises in meeting the capital requirements of the Insurance Fund. Insuranceschemes normally would spread risk over time and space. Since drought usually occurs as a nationalcatastrophe (every five years in average in Morocco), there is very little opportunity to spread the riskover space. The drought insurance scheme is limited to spreading the risk over time. In a severe droughtyear, potential losses would range from DH 418 million (US$ 46 million) with a 30% coverage to asmuch as DH 975 million (U1S$ 108 million) with a coverage of 70%. If it happens that there are twoconsecutive drought years as has happened during the past two years (1991-92) and 1992-93), the losseswould be staggering. The problem arises with the onset of drought during the early years of theprogram. The Insurance Fund should have available as much to absorb losses for two consecutivedrought years to cover this eventuality. The capital requirements of the Fund can be reduced by (a)reducing initial coverage to farmers being financed; (b) obtaining international reinsurance; and (c)arranging for a contingent loans agreement.

19. Commercially Viable Products. To encourage the private sector to develop theseproducts, premium would be subsidized on a declining scale so that by the sixth year of the policy therewould no longer be any subsidy. Depending on the crop, the sum insured would range from DH 3,635for irrigated cereals to DH 115,379 fo. iato productioh. Using 30% of the rainfed cereal area as thebasis for estimating cost to the Government, the cost for the first year is estimated to be DH 17 million(US$ 1.9 million) and reduced to zero on the sixth year or a total of DH 29 million (US$ 3.2 million)over a five year period on the assumption that there would be no additional new products developed.

20. Administrative Costs. The annual administrative cost of operating the Insurance Fundis DH 1.3 million (IIS$ 145,000) or 3.0% of the amount of the fund while the Technical Service Unitwould cost DH 3.4 million (US$ 375,000) or an equivalent of 3.8% of the total premium during thefirst year of the program. These rates would decline as volumes increase during subsequent years.

F. Benefits of the Program

21. Potential social and economic benefits on the program include (a) farmer incomestabilization in adverse years; (b) increased rural welfare and reduced urban migration; (c) reducedrequirement for ad-hoc disaster relief; (d) formalized and contractual distribution of indemnity basedon objective measurement of loss severity; and (e) encouragement of farmers to invest in improvedcrop production technology. Potential benefits to operation of the agricultural credit system forCNCA and other banks include (a) partial or full repayment of short-term loans in the event of cropshortfall or damage; (b) improved financial stability of farmers leading to ability to service medium-and long-term loans; (c) opportunity for increased credit discipline by separation of causes of loanfailure by climatic or other reasons. Potential benefits to the Government include the regular andknown annual budgetary allocation to an insurance Fund and reduced requirements for disaster relieffinancing.

22. Brief terms of reference for the creation of the Agricultural Insurance Fund are inattchment I of this annex.

- 90 -ANNEX 13

Attachment I

Terms of Reference for the Creation in Morocco of anAgiculitural Insurance Fund for Natural Calamities

1. Purose. The Government of Morxco envisage the creation of an Agricultural Insurance Fundthat will insure climatic risk and, in particular, cover part of the principal of unpaid subloans granted atCNCA's risk to small and medium operators in rainfed areas. The Fund will intervene only in caseswhere it is clear that natural calamities are a dominant factor in the formation of existing arrears. TheFund will be open to all farmers, and to all banks in case they wish to finance rainfed agriculture.

2. Justification. Credit guarantees for climatic risk will encourage rural banks to provide crediL tosmall farmers , and reduce the risk to the rural banking sector to lend to target groups living indisadvantaged economic areas. Loan repayment guarantees can also foster the formation of privatemutual guarantee associations by target group beneficiaries.

3. Methods. Government will establish the Fund in cooperation with the insurance sector, and withCNCA's assistance. Based on the conclusions and recommendations of the technical study onAgricultural Risk Management and Insurance Fund (May 1993), this will include:

(a) a clear definition of the objectives of the Fund;

(b) proposals for organizing, financing and managing the Fund;

(c) analysis of the risks that are eligible for coverage by the Fund and of the operationalprocedures to provide effective and efficient risk coverage to the beneficiaries;

(d) legal aspects and preparation of the by-law under which the Fund will be established andwill operate, establishment of the Management Committee and nomination of the Directorwho will supervise day-to-day activities.

4. Conditions for Success. Despite the advantages of such insurance funds, too much should notbe expected from them. They alone cannot solve the problem of improved access to credit for smallfarmers. Loan default in case of natural calamities should also be as3ociated with a careful analysis ona case-by-case basis of the eligibility to the Fund. The risk of bureaucratization of an Insurance Furdfor drought management can be minimized if the target beneficiaries can participate actively in theguarantee process. Beneficiaries will have to pay a compulsory premium to be eligible. The InsuranceSector will insure insurable risks, and other climatic risks up to a certain limit (stop loss provision) fromwhich the Fund will step in. The scheme will not repay income losses of farmers, but only part of thecrop production cost involved, and therefore related loan dues.

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ANNEX 14Page 1 of 2


KINGDOM OF MOROCCO


CNCA's On-lending Appraisal Methods

1. Appraisal of Subloans to Farmers Fishermen. Rural Women. Artisans and OtherRural Ouirators. The objective of the appraisal is to demonstrate that: (a) the proposed investmentsare sound on technical, environmental and economic grounds, and are financially viable based on thesubproject's financial plan and cash flow analysis; and (b) the subloan applicants are creditworthy, andwill be able to repay their loans. As calculations of financial rates of return (FRRs) for all subloans areimpractical, CNCA calculates an FRR for typical subprojects in each principal activity financed. Forsmall-farm loans, separate feasibility studies are replaced by standardized loan packages for variouscategories of investment to speed up approval decisions and disbursement. Regarding small farmers andrural women, improved methods have been tested under the previous Bank-financed agricultural creditproject (Ln. 3088-MOR). CNCA has introduced nationwide these improved methods of subloan appraisalfor investment lending to small farmers, and is also using appropriate methods for subloans to fishermen,artisans and other rural operators. Details are in working document no. 7.

2. Apprasal of Subloans to Agro-Industrial Investors. For these projects, CNCAconducts environmental impact assessments and it uses the following additional financial measurementscase-by-case to cross-check internal rate of return IRR) and net return on equity (ROI) calculations',and working capital requirements:

(a) current ratio (current assets to current liabilities) of at least 1.3, as computed from thebasic financial statements of the last five years;

(b) long-term debt to equity ratio, after the proposed loan has been made, preferably not over2 to 1; and

(c) ratio of cash flow after taxes to long-term debt service of at least 1.3, as estimated fromprojected cash flow statements on five years. Cash flow should include net profit aftertaxes, depreciation, and annual financial charges on long-term debt; long-term debtservice includes principal and interest.

Regarding investments for newly created enterprises the ratio analysis will be done on the basis ofprojected financial statements only.

I/ On IRR and ROI a hurdle rate (cut-off rate) will be introduced for accepting or rejecting investmentproposals. CNCA normally requires that IRR should be about 12X to make a limited risk "accept"decision, but it does not automatically reject a proposed investment with a 10X IRR if additionalmeasurements shou that the investment is sound.

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A.NNEX 14Page 2 of 2

3. Ig for Rurut 1ffii . CNCA stafted lending for rural housing, on a pilot basis,in 1984 with uneven success because of extremely tight terms and conditions for subloans and lengthyapplication procedures. In December 1987, CNCA revised its credit guidelines for rutal housing on thebasis of the findings of a market study on rural housing carried out with the participation of arepresentative sample of 1,890 rural families in four provinces. In 1988, CNCA started to expand creditin that secor and to target it more precisely based on the results of the study. Actual lending for ruralhousing increased from DH 40 million (US$5 million) in 1988 to DH 140 million (US$17 million) in1989 and to DH 172 million (US$21 million) in 1992. Borrowers for construction loans for low-cost newhouses receive a 4% or 5% social housing rebate from Government on the current 14% or 12% interestrate ch&rged by CNCA (para. 4.20, Table 4.1 of main report), resulting in a net interest rate that isamply positive in real terms.

4. Disbursemnt and Sunsion of Sublom. CNCA would require selectedsub-borrowers to use project funds for approved purposes. This would be achieved through directpayments to suppliers, and quarterly or semi-annual visits to subprojects by CNCA's field staff as maybe prescribed by CNCA's headquarters. Follow-up reports on each visit would comment briefly onutilization of subloan funds, compare actual and planned operations, review clients' management andfinancial problems, assess environmental impact where applicable, and make recommendations. CNCA'sheadquarters staff would also make selective field visits to problem operations nationwide to assess theirproblems and develop solutions.

- 93 -

ANNEX ISA


KINGDOM OF MOROCCO


Project Implementation and Bank Supervision

A. Supervision Strategy

1. Effective project implementation will be the key to the development impact of CNCAin Morocco. Bank supervision strategy and plans will pay special attention to the institutionaldevelopment objectives of the project, and monitor closely the status of legal covenants anddisbursements. Supervision will also be a joint effort with the Bank cofinancier partners and will becarried out in full partnership with CNCA and in consultation with the Government on the points ofaccountability of the Guarantor (foreign exchange risk coverage, financial sector liberalizationmeasures and drought management).

2. Heavy start-up supervision will be needed to ease the transition between Loan 3088-MOR and the new loan, to keep institutional reforms on track, and to monitor progress oncofinancing, on the diversification by CNCA of its loan portfolio (agro-industries, rural housing,fisheries, rural women activities), branch network development with an improved assets/liabilitiesmanagement, and to also monitor progress of CNCA regionalization.

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ANNEX l5B

STAIF APPRAISAL REPORT

KINGDOM OF MOROCCO


B. Superviion Plans and Tentative Scdedule of Kea Missions

Approximate Expected StaffDates Activity Skills Input

(Month/Year) Requirements (Staff Weeks)

05/94 Project launch workshop Financial Analyst 2and first full supervision. Banking Specialist 2Full review of CNCA Office Technology Expert 11993 results. Work Plan Crop Insurance Expert Ifor 1994. WID Specialist 2

Agro.-ndustry Expert 1

10-11/94 Follow-up mission. Financial Analyst 2Audit/Recoveries/ Branch Network Development andManagement Control Training Expert 2Accounting Plan.Regionalization Program.

05-06/95 Second Full Super-vision Financial Analyst/Rural Financeand full review of 1994 Specialist 2results. Crop Insurance Expert 1Work Program for 1995.

10-11/95 Follow-up mission on Financial Analyst 11995 program

06/96 Third Full super-vision Financial Analyst/ 2mission. Mid-Term Rural Finance SpecialistReview of all project Banking Expert Iobjectives, results and WID Specialist Ilegal covenants Work Specialists to be iden-tifiedProgram for 1996-1997. (depending on potential issues).

2

11/96 Follow-up mission on Financial Analyst Iprogram made since mid-term review

05-6/97 Fourth and Final Full Financial Analyst 2Supervision and combined Consultants as necessary 2ICR process for Loan3088-MOR and this loan

- 95 -

ANNEX 16Page 1 of 2


KINGDOM OF MOROCCO

NATIONAL RURAL FLNANCE PROJECT

Measuremnt of CNCA's Dependence on Subuidies/P (1988-1992)

(--- in current DH Mitrim) ----

RETURN ON EQUITY (BEFORE TAX)j2 5.1X 6.2X 6.2X 6.02 1.7X

SUBSIDY DEPENDENCE INDEX (S0I)/3 62.7X 60.2X 52.8X 51.21 54.4%

CALCULATION OF THE SDI 1988 1989 1990 1991 1992

A: "MARKET REFERENCE RATE(' 12.01 12.01 12.0% 12.11 12.51

B: AVG. COST OF "CONCESSIONAL" FUNDS: 5.21 6.11 6.21 6.21 6.01C: AVERAGE CONCESSIONAL LIABILITIES:/; 7,507.0 8,058.4 8,978.1 10,074.4D: SUBSIDY ON LIABILITIES C(A-9)xCl:/' 449.3 470.3 531.4 649.1

E: AVERAGE EQUITY + QUASI-EyTY: 1,183.1 1,229.6 1,275.4 1,339.0F: SUBSIDY ON EQUITY tAxE]:/ 142.6 147.8 154.6 167.0

G: RESERVE REQUIREMENT: 8.81 12.51 12.51 12.51H: RATE ON RESERVES WITH BAM: 0.01 0.01 0.01 0.01I: SUBSIDY ON RESERVE EXEMPTION : 118.9 193.0 219.6 252.9

J: TOTAL SUBSIDY lD+F+1: 710.7 811.0 905.6 1,069.0

K: ADJUSTED PROFIT:18 64.4 178.1 223.0 310.3- NET INCOME BEFORE TAXES 65.5 67.8 68.3 20.1+ EXCHANGE ADJUSTMENT 14.6 15.9 11.5 13.5+ LOAN LOSS ADJUSTMENT (15.7) 94.4 143.2 276.7

L: NET SUB8SIDY CJ-KI:/9 646.3 633.0 682.6 758.7

M: INTEREST INCOME: 952.0 1,073.4 1,198.1 1,332.0 1,395.1

N: SUBSIDY DEPENDENCE INDEX tL/MN:/ ° 62.7X 60.21 52.81 51.21 54.41

0: CURRENT AVERAGE ON-LENDING RATE:/" 12.61 11.91 11.31 10.81 10.31P: INCREASE IN ON-LENDING RATE REQUIRED

TO ELIMINATE SUBSIDY DEPENDENCE ENxOl: 7.91 7.21 6.01 5.51 5.6X0: LOWEST RATE FOR ECONOMIC 20.51 19.11 17.31 16.41 15.91SELF SUFFICIENCY tO+Pl

Source: World Bank (Agriculture and Natural Resources Department)

/t CNCA believes that this calculation should be tailored more specifically to the case of CNCA andtherefore reserves its judgement on the figures presented (OED, PPAR, Decemter 30, 1992).

/2 Two important reasons for the relative downtrend in profitability, as measured by the Return onEquity are that: a) CNCA has continued to augment its provisions for bad debts. These have risenfrom 39.31 to 42.51 of the total volume in arrears over the past year; b) Since January, 1992, CNCAhas adopted a more prudent approach for the inclusion of accrued interest income on non-performingloans in its income statement.

For details on economic theory and methodology, see World Bank Discussion Paper No. 174 by Mr. JacobYaron.

- 96 - ANNEX 16Page 2 of 2

A The Market Reference Rate used is the interest rate on six-month Treasury Bills as a base rate forshort term funds and the numerical average of the one-year and five-year Treasury Bill rates as abase rate for long term funds. The short and long term base rates are weighted by the proportion ofCNCA's risk assets that are short or long term. One percentage point is added as the administrativecost associated with mobilizing these deposits. (The 1991 Financial Sector Developnent Project addsa mark-up of 0.75% over the cost of funds.) The mark-up can also be thought of as representing thepremium that an investor would expect over and above the Treasury Bill rate to invest in CNCA.Given the type of lending that CNCA engages in (agriculture) a 1/ mark-up may represent too small arisk premium.

The table below gives an estimation of the "market reference rate" that CNCA woutd have to pay ifaccess to other available funds were removed overnight:

1989 1990 1991 1992

INTEREST RATE ON 6-MONTH T-BILLS: 9.5% 9.5% S.5% 10.5%WEIGHT: SHORT TERM / TOTAL RISK ASSETS: 31.1% 32.6% 35.2% 35.3%

INTEREST RATE ON 1-YEAR T-BILLS: 11.0% 40.5% 11.0% 11.0%INTEREST RATE ON 5-YEAR T-BILLS: 12.5% 13.0% 13.0% 13.0%

NUMERICAL AVERAGE OF THESE 2 RATES: 11.8% 11.8% 12.0% 12.0%WEIGHT: LONG TERM I TOTAL RISK ASSETS: 68.9% 67.4% 64.8% 64.7%

WEIGHTED COST OF FUNDS: 11.0% t1.0% 11.1% 11.5%

ADDITIONAL COST OF MO81LISING RESOURCES: 1.0% 1.0% 1.0% 1.0%

MARKET REFERENCE RATE: 12.0% 12.0X 12.1% 12.5%

/' Include one-year "Solidarity bonds" and all of CNCA's long-term sources of funds: IBRD loans, otherexternal loans and domestic loans.

/e The subsidy is calculated as the difference between the market reference rate and the averageinterest rate (6%) paid on "concessional" funds, times the average annual volume of concessionalfunds, i.e. as tA-B]xC. (Despite for borrowings, the average cost of resources (in financial terms)at CNCA is actually at the same level as other banks, i.e 6%). As CNCA takes on the full foreignexchange risk on concessional borrowings, the valuation of this subsidy becomes difficult (as it isdependent on the valuation of the risk associated with foreign borrowings).

/7 The subsidy represents the opportunity cost of capital.

/' In this calculation, two important adjustments are made to CNCA's pre-tax profit. The first is anupward adjustment to pre-tax profit by the amount of CNCA's foreign exchange risk contribution toavoid double-counting by augmenting CNCA's profits by the amount of CNCA's foreign exchange riskprovision. A second adjustment is made to reflect that profits may be overstated (understated) ifprovisions are underestimated (excessive). Pre-tax profits were then adjusted by the differencebetween actual and "adequate" provisions (see below). Since 1990 this has had the effect ofaugmenting profits.

Adequacy of CNCA's Provisions (for credit risk)

1988 198V 1990 1991 1992

OUTSTANDING END-OF-YEAR ARREARS: 2,041.0 2,538.0 2 823.0 3,333.4 3 673.0CUMULATIVE BAD DEBT PROVISIONS: 640.3 872.6 1,082.4 1,309.9 1,562.2"ADEQUATE" PROVISIONS, BASED ON LEVELAPPROVED BY CNCA AUDITORS IN 1990: 714.4 888.3 988.1 1,166.7 1,285.6SHORTFALL OR EXCESS: (74.0) (15.7) 94.4 143.2 276.7

In the tight of two consecutive years of drought and of CNCA's drought-related arrears, it isdifficult to assess the adequacy of provisions to also cover climatic risks.

s' Total subsidy minus adjusted profits. As the figures are in millions of current Dirham, the realgrowth in CNCA's subsidies is somewhat smaller.

/10 This is the ratio of the net subsidy to interest income. It reveals the increase in interest incomethat would, ceteris ribus, obviate the need for subsidies for CNCA if all implicit and explicitsubsidies were eliminatea overnight.

/I One reason this average rate has declined is that after January 01, 1992, CNCA stopped recordinginterest over 26 months in arrears in the income statement, according to CNCA's audited financialstatements for 1992 (Note 2.2). There are clearly limits to the accuracy that can be achieved incalculating the SDI on the basis of available information and assumptions made.

- 97 -

ANNEX 17Page I of 2


KINGDOM OF MOROCCO


Selected Documents and Data Available in the Project File

1. Study and Recommendations on CNCA's Strategy for Resource Mobilization and RiskManagement (December 1992).

2. Agricultural Insurance Fund for Natural Calamities in Agriculture (August 1992).

3A. Report on Agricultural Risk Management and Terms of Reference for a Detailed Technical Studyon Agricultural Insurance in Morocco (February 1993).

3B. Technical Study and Actuarial Analysis on Agricultural Risk Managementand Insurance Fund (May 1993).

4. CNCA Plan of Action to reach its female clientele (March 1993), and Progress Reports on theKhemisset Pilot Project (198S-1992).

5. Training Master Plan for CNCA 1992-95 and 1993 Training Program.

6. Rural Finance in Morocco: Evaluation 1988-91 and Business Plan 1992-95 (Basic PreparationReport in two volumes with statistical data volume updated in April 1993 for 1993-1996).

7. CNCA Credit Guidelines (Normes et Conditions de financement), June 1991.

8. The Agricultural Development Fund (FDA): Selected Documents and Data.

9. CNCA Financial Position and Performance, Audit Reports on 1989, 1990, 1991 and 1992Accounts by Price Waterhouse, and Minutes of CNCA Annual Board Meetings.

10. CNCA Reorganization Plan.

11. Financial and Economic Rates of Return of Selected Investment Models.

12. OED Performance Audit Report No. 11491 of December 30, 1992 on previous Bank Involvementin two past Agricultural Credit Projects.

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ANNEX 17Page 2 of 2

13. Bank Full Supervision Report on the National Agricultural Credit Project (Ln.3088-MOR), May

1993.

14. Completion Report (by CNCA) on the Implementation of the National Agricultural Credit Project

(Ln. 3088-MOR), June 1993.

15. Technical Assistance Contract between CNCA and GAPSET M3C for the Development (since

1992) of an Executive Decision-Making Information and Management Control System, and

Progress Reports 1992-1993.

16. Financing of Agriculture in Morocco: Constraints, CNCA's Role and Competition withCommercial Bank Lending

17. Banking Law Reform Bill (1993) and Central Bank Circulars of May 14, 1993 on Loan

Classification and Loan Loss Provisioning.

18. CNCA/UNIDO Technical Assistance Agrement (1993) to support the agro-industrialdevelopment and WID components of the National Rural Finance Project.

19. CNCA Central Computer System Modermization Plan (1992) and Contract with STERIA for

Implementation (1993).

20. Agricultural Banks in Developing Countries from Specialization to Universal Banking and 25Years of Cooperation IBRD-CNCA Morocco (World Conference on Rural Finance in Marrakech,

May 1993).

21. Annual Report (1991) of The Professional Banking Association of Morocco on Commercial

Banks and Specialized Financial Institutions Acuivities.

22. Annual Reports of the Central Bank of Morocco (BAM) for 1991 and 1992.

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