Document of

The World Banlk

FOR OFFICIAL USE ONLY

Report No. 14603

IMPLEMENTATION COMPLETION REPORT

GHANA

RURAL FINANCE PROJECT(CREDIT 2040-GH)

JUNE 14, 1995

Agriculture and Environment DivisionWest Central Africa DepartmentAfrica Region

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

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CURRENCY EQUIVALENTS(December 31, 1994)

Currency Unit = CediExchange Rate (average annual):

Appraisal: US $1.00 = 250.0 CediAverage (1989 - 1994):US $1.00 = 499.0 Cedi

Completion: US$ 1.00 = 956.0 Cedi

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR OF BORROWER

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADB - Agricultural Development BankARB - Association of Rural BanksBOG - Bank of GhanaBSD - Bank Supervision Department (BOG)GCB - Ghana Commercial BankCCA - Canadian Credit AssociationCGF - Credit Guarantee Fund (BOG)CIDA - Canadian International Development AgencyCUA - Credit Union AssociationEFC - Export Finance CompanyGOG - Government of GhanaIDA - International Development AssociationMOFA - Ministry of Food and AgricultureNGO - Non-Governmental OrganizationRBD - Rural Banking Department (BOG)RFID - Rural Finance Inspection Department (BOG)RIR - Reference Interest RateSAA - Subsidiary Administration AgreementUSAID - U. S. Agency for International Development

FOR OFFICIAL USE ONLY

GHANARURAL FINANCE PROJECT

(Credit 2040-Gm

Table of ContentsPae

Preface

Executive Summary ................................................................... i

Part I: Project Implementation Assessment ................................ 1.........................

A. Project Objectives, Covenants and Financing .................... ............................. 1Project objectives and components ................................. 1....................... 1Covenants to achieve project objectives ....................... ............................. 2Evaluation of project objectives . .......................................................... 2Project costs and financing .................................................................. 2

B. Major Factors Affecting Project Performance ............................................... 3Overview ................................................................... 3Delays in achieving credit effectiveness ........................... ................ 3Lack of interest by larger commercial banks ............................................ 3Low ceiling on subloans ................................................................. 4W eak capacity of project implementing agency ............... ........................... 4

C. Overall Project Implementation Performance ....................... ............................ 4Overview ................................................................. 4On-lending component ............................................................... .. 5Institution building component ............................................................... 5Technical assistance financed under the project ............... ........................... 7Studies financed under the project . .......................................................... 7

D. Project Sustainability ......................... ........................................ 7Institution Strengthening ................................................................. 7Rural banks ................................................................. 8Subsidy Dependence ................................ ................................. 8

E. Bank Performance ................................................................. 9

F. Borrower's Performance .................................................................. 9

G. Overall Assessment of Project Outcome ........................... .......................... 9

H. Future Operations and Key Lessons Learned .................. ............................. 10Future operations ............................... .................................. 10Key lessons learned ............................... .................................. 10

This document has a restricted distribution and may be used by recipients only in the perfonnance of theirofricial duties. Its contents may not otherwise be disclosed without World Bank authorization. I

Part 11: Statistical Annexes

Table 1 Summary of Assessments ......................................................... 11Table 2 Related Bank Loans and Credits ....................................................... 12Table 3 Project Timetable .................... ..................................... 13Table 4 Credit Disbursements: Cumulative and Actual .............. ...................... 14Table 5 Key Indicators of Project Implementation ....................... ...................... 15Table 6 Studies Included in Project ..................................................... .... 17Table 7A Project Costs by Category .......................................................... 18Table 7B Project Financing ......................................................... 19Table 8 Status of Legal Covenants ......................................................... 20Table 9 Compliance With Operational Manual Statements ............. ...................... 22Table 10 Bank Resources: Staff Inputs ......................................................... 23Table 11 Bank Resources: Missions .......................................................... 24

Part III: Sector-Specific Data

Table 12 Distribution of Subloans by Beneficiary Category .................. ........ ....... 25Table 13 Distribution of Subloan by Gender .................................................... 26Table 14 Summnary Statistics and Subsidy Dependence of Selected Rural Banks ....... .... 27Table 15 Rural Banks: Total Deposits, Reserves and Advances, 1989 to 1993 ............. 28Table 16 Repayment of Subloans under the Rural Finance Project ........... ................ 29Table 17 Rural Banks: Training Courses Offered, 1991 - 1994 ................................. 30Table 18 Rural Banks: Regional Distribution of Training .................... ................... 31

APPENDICES:

A: Mission's Aide-MemoireB: Borrower's Contribution to the ICRC: Maps: No. 21317 - Distribution of Rural Banks

IMPLEMENTATION COMPLETION REPORTGHANA

RURAL FINANCE PROJECT[CREDIT NO. 2040-Gi]

Preface

1. This is the Implementation Completion Report (ICR) of the Rural Finance Project (RFP), forwhich Credit 2040-GH in the amount of SDR 15.2 million (US $20.0 million equivalent) wasapproved on July 28, 1989 and became effective on April 26, 1990.

2. The credit was closed on December 31, 1994, compared with the original closing date ofDecember 31, 1992. Final disbursement was on May 8, 1995 and SDR 0.24 million which remainedundisbursed was canceled.

3. The ICR was prepared by Rudolph A. Polson, Agriculture and Environment Division, WestCentral Africa Department, Africa Region, and was reviewed by Cynthia C. Cook, Division Chief,AF4AE and Franz Kaps, Operations Advisor, AF4.

4. Preparation of the ICR was begun during the Bank's final completion mission, January 18 toFebruary 22, 1995. It is based on material in the project file, field visits to selected rural banks, andon interviews with government officials, participating financial institutions (PFIs), and projectbeneficiaries. The Borrower's contribution to the ICR was coordinated by the Bank of Ghana, whichassigned three senior officials from its Rural Finance Inspection Department to participate in the finalsupervision mission and to provide information on the economic, institutional and social environmentin which the project was implemented. These officials also coordinated the preparation of theBorrower's action plan for the future operations of the project. Evaluation of the project from theBorrower's perspective is attached unedited as Appendix B to the ICR.

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IMPLEMENTATION COMPLETION REPORTGHANA

RURAL FINANCE PROJECT[Credit No. 2040-GH]

Evaluation Summary

1. Introduction. At the time of preparing the Rural Finance Project (RFP) in 1988, Ghana hadundertaken substantial policy and institutional reforms. Macroeconomic policy reforms initiated in1983 under the Economic Recovery Program (ERP) had earlier helped to restore fiscal and monetarydiscipline and to stabilize interest rates. These macro-level reforms were followed, in 1989, byfinancial sector reforms which also helped to strengthen the sector by improving the regulatoryframework, restructuring financially distressed banks and improving the efficiency of resourcemobilization as well as the allocation of credit. Because the latter reforms focused primarily onmacro-level financial institutions, the purpose of the RFP was to extend financial sector reforms tothe rural financial sector with the primary objective of strengthening the network of rural banks,credit unions and rural cooperatives in order to improve the efficiency of rural financialintermediation. The project was therefore consistent with IDA lending strategy in the financial sectorwhich emphasized restructuring of these rural banks to enhance their capacity to mobilize increasedlocal resources and to provide increased credit for rural investments.

Proiect Objectives and Covenants to Achieve Obiectives

2. Project Obiectives and Components. The main objectives of the project were to: (i) expandrural productive capacity and employment by providing financing for viable subprojects through thebanking system; (ii) implement a financial restructuring program for the 125 rural banks to enablethem to become more efficient in mobilizing savings and delivering credit; (iii) strengthen theAssociation of Rural Banks (ARB) and the Credit Union Association (CUA) to promoteintermediation in the informal financial sector; (iv) strengthen the capacity of the Bank of Ghana(BOG) for rural bank inspection and examination; (v) build an enhanced capacity for rural creditappraisal among the rural banks and the national-level banks; and (vi) build local capacity forresearch in rural finance policy. To achieve these objectives, the project had two distinct components:an on-lending component, through eligible participating financial institutions (PFIs); and aninstitution building component, comprising technical assistance to the BOG, the ARB, rural banks,rural cooperatives and credit unions [paras. 1, 2].

3. Specific Covenants to Achieve Project Objectives. Specific covenants for achieving projectobjectives were: for credit effectiveness, signing of Subsidiary Administration Agreement (SAA)between the Borrower and BOG as the implementing agency; submitting to IDA the operationalpolicies and procedures for the Rural Finance Inspection Department (RFID), the department withinBOG responsible for project implementation; signing of a participatory agreement between the BOGand at least two PFIs; recruiting a Rural Finance Advisor and a Rural Bank Restructuring Advisor;submitting to IDA the restructuring plans for the Agricultural Development Bank (ADB) and at least20 of the 125 rural banks; and establishing a rural bank Recapitalization Fund within the BOG withan initial sum in Cedis equivalent to US$300,000. Other agreements addressed issues of sectoralpolicy and overall project implementation [paras. 3,41.

4. Evaluation of Proiect Objectives. The project's objectives, as stated in the SAR, were clear,concise and realistic and were consistent with government's priorities for restructuring the rural

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financial sector. Given the dismal state of the rural banks, these priorities consisted primarily ofstrengthening the 125 rural banks as the vehicle for promoting savings mobilization and creditdelivery in the rural economy, while using the line of credit as an added incentive for participation inthe institution-building program [para. 51.

Project Implementation Experience and Results

5. Factors Affecting Achievement of Major Objectives. Key factors affecting the project were: (i)inability of the implementing agency to timely meet effectiveness conditionalities, thereby delayingproject start for nearly a year after credit approval; (ii) lack of interest by the larger commercialbanks to participate in the on-lending program, due in part to their traditional preference for tradeand industry subsectors, the high costs of project funds (as measured by the reference interest rate),and the inherently high risks associated with agricultural credit; (iii) the low ceiling of Cedis 50.0million (about US$50,000 at current exchange rate) on subloans, which effectively excluded largerborrowers; and (iv) slowness of the implementing agency to develop the capacity for effective projectmanagement during the initial two years [paras. 7 - 11].

6. Project Sustainability. Some key project activities -- training of rural bank staff and directors,capacity enhancement at the RFID for inspection management audits of the rural banks, capacityenhancement at the ARB, and the development of rural cooperatives -- yielded benefits that have highprobability of being sustained, and for which the Borrower, through its post-credit operational plan,has indicated a commitment for continuing support beyond the completion date. The projectsucceeded in conducting a comprehensive diagnosis of the constraints faced by the rural bankingsector and developed an action plan for the restructuring of each rural bank. Although 55 of the 125rural banks are currently rated satisfactory in accordance with the PNDC Law - 225, a majority ofrural banks (including some from among the "satisfactory" category) are weak, with shallow capitalbase, poorly trained staff and weak internal controls [paras. 21, 22, 23].

7. Proiect Costs, Financing and Timetable. At appraisal, the total project cost was estimated atUS$38 million, comprising the on-lending component (US$28.million), institution building (US$9million), and the Rural Finance Inspection Department (US $1 million). The financing plan was: IDA(US$20 million), GOG (US$1.1 million), PFIs (US$5 million), beneficiaries (US$3 million) andvarious co-financiers (US$8.9 million). However, co-financing of US$8.9 million did not materializeand project costs were accordingly adjusted by the amount of the expected co-financing, to US $29.1million. By completion, the actual (latest estimate of) project costs was US$28.4 million, which wasconsistent with the revised financing plan established at credit effectiveness [para. 6].

8. Bank Performance. On the whole, Bank performance, from project identification throughcompletion, was satisfactory. Overall, the Bank was responsive to problems identified during projectimplementation, to which it responded adequately through increased supervision and consultationwith the Borrower [para. 12].

9. Borrower Performance. Despite the initial problems encountered by the implementing agency,overall assessment of Borrower's performance was satisfactory. The major implementation delaysoccurred prior to the project mid-term review (MTR), after which the implementing agency emergedas a cohesive team with shared vision and purpose [para. 13].

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10. Project Outcomes. On the whole, the outcome of the project was satisfactory. The projectsucceeded in channeling needed resources to the rural economy that helped, to a large extent, inincreasing smallholders' incomes and in spurring rural investments, especially of community-levelenterprises. More than 15,250 beneficiaries, consisting of 1,550 groups and 13,700 individualsbenefited from the estimated Cedis 9.8 billion (about US$19.8 million at the average projectexchange rate of Cedis 500.0). The main activities funded were poultry (Cedis 3.9 billion), trading(Cedis 2.1 billion), crop production (Cedis 1.9 billion) and cocoa marketing and estate rehabilitation(Cedis 1.2 billion). The average subloan size was Cedis 4.7 million for groups and Cedis 180,000 forindividuals, indicating that loans were not concentrated among a few beneficiaries, such asparastatals. The project led to increased deposit mobilization and increased credit to the ruraleconomy that would not have otherwise occurred. Total deposit mobilized by the rural banksincreased from Cedis 4.6 billion in 1989 to Cedis 13.2 billion by 1994, the completion of the project.Loans and advances by the rural banks nearly doubled, from Cedis 3.7 billion in 1991 to Cedis 6.8billion in 1994, compared to the Cedis 1.7 billion of external project resources channeled through therural banks. The project strengthened key rural financial sector institutions: the RFID, in inspectionmanagement audits of the rural banks; the ARB, in training of rural bank staff and directors; andrural cooperatives, in inventory credit. Overall performance of technical assistance was satisfactory[para. 20].

Summary of Findings. Future Operations and Lessons Learned

11. Key Findings of Implementation Experience. The implementing agency was created specificallyfor the project, and lacked experience with Bank procedures. It also experienced frequent changes insenior staff. Given this, expectations of its initial performance were optimistic, especially withregard to timely compliance to effectiveness conditionalities. A delayed project start was the result.The well-balanced combination of training and regular inspection and examination helped in thesuccessful use of technical assistance for strengthening rural financial institutions [paras. 11 & 22].

12. Plans for Future Operations. The Borrower is committed to seeing the development of a strongrural financial sector, the centerpiece of which is the rural banking system, and has therefore, in itspost-credit operational plan, identified the priority areas and the resources to ensure continuity in keyproject activities. Because the project focused on strengthening sector institutions, it single greatestcontribution was that it helped to lay a good institutional foundation upon which future rural financeoperations can build. However, in order to maximize development impact and to effectively addressthe needs of both formal and informal sector clients, follow-up rural finance interventions should bepreceded by comprehensive diagnosis of the constraints, issues and priorities for addressing the creditneeds of the rural economy [para. 24].

13. Key Lessons Learned. The key lessons for future projects in the rural finance sector are:(i) training of rural bank staff and directors, perhaps more than any single technical assistanceactivity, has emerged as the most important ingredient for the development of a viable rural bankingsector; (ii) in order to be effective monitoring tools, inspection mangement audits of the rural banksshould be combined with regular feedback to the rural banks, with clear guidelines for correctingobserved deficiencies, a time frame for addressing exceptions noted, and possible sanctions for failingto rectify deficiencies; and (iii) inventory credit has emerged as an innovative marketing tool crucialin linking the formal and informal sectors [para. 25].

IMPLEMENTATION COMPLETION REPORTGHANA

RURAL FINANCE PROJECT[CREDIT 2040-GH]

PART I: PROJECT IMPLEMENTATION ASSESSMENT

Project Objectives. Covenants and Financing

1. Project Obiectives and Components. The objectives of the Rural Finance Project (RFP) wereto:

expand rural productive capacitv and employment by financing eligible subprojects incrop production, livestock, fisheries, artisanal agro-processing, input supply, etc. througheligible participating financial institutions (PFIs);

implement a financial restructuring program for the 125 rural banks and strengthen theorganizational and financial management of credit unions to enable them to become moreefficient in mobilizing savings and delivering short and medium-term credit, especially tosmallholders;

* strengten the Association of Rural Banks (ARB) and the Credit Union Association(CUA), two key non-governmental institutions active in promoting financialintermediation in the informal financial sector;

* build an enhanced capacitv for rural credit appraisal among rural and national-levelbanks;

- strengthen the capacity of the Rural Finance InsMection Department (RFID) of the Bankof Ghana (BOG) to provide regular and systematic inspection management audits of therural banks to ensure their compliance with the Banking Laws and other prudentialguidelines; and

build local capacitv for research in rural finance policy within the BOG and other sectorinstitutions.

2. To achieve these objectives, the project consisted of two distinct components: (i) an on-lendin,wnw=, to support viable rural investments in the agricultural sector that would contribute torural income enhancement and employment; and (ii) an institution building component, comprisingmainly technical assistance for strengthening sectoral institutions to enable them to improve theefficiency of rural financial intermediation. Specific institution building objectives were: restructuring80 of the 125 rural banks; strengthening the ARB and the RFID and rationalizing their roles;establishing capacity for rural credit appraisal among the PFIs; and establishing a pilot program ofrural cooperatives in the Upper West Region. In order to implement the project, the BOGtransformed its Rural Banking Department into a Rural Finance Inspection Department (RFID) andgave it an expanded mandate for rural finance and the statutory responsibility for inspection oversightof the rural banks, as opposed to the narrowly-defined objective of rural banking. Appointment of thedirector of the newly created agency was a condition for project negotiation.

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3. Covenants to Achieve Project Objectives. The legal covenants of the project and their statusare summarized in Table 8. Specific covenants for credit effectiveness were: signing of SubsidiaryAdministration Agreement (SAA) between the Borrower and BOG; submitting to IDA the operationalpolicies and procedures for the RFID; signing a participatory agreement between the BOG and atleast two financial institutions; recruiting a Rural Finance Advisor and a Rural Bank RestructuringAdvisor; submitting to IDA the restructuring plans for the ADB and at least 20 of the 125 ruralbanks; issuing deposit guarantees up to a limit of Cedis 100,000 per depositor for rural banksdepositors whose claims could not be met during the restructuring process; and, establishing a ruralbank Recapitalization Fund in the BOG with an initial sum in Cedis equivalent to US $300,000.These covenants were largely met. Credit effectiveness was delayed for six months as the Borrowerneeded more time to meet these conditions, and in particular for completing the restructuring plansfor the initial 20 rural banks.

4. Covenants specific to sector policy and project implementation required the Borrower to:abolish the Cedis 25,000 and 125,000 ceilings on shareholdings in the rural banks by individuals andcompanies, respectively; limit shareholdings in particular rural banks by individuals and companies tonot more than 5 percent and 10 percent, respectively, of their share capital; abolish sectoral quotasimposed on rural bank operations, while maintaining initially a minimum of 20 percent of rural bankportfolio for lending to the agriculture sector; assign to special collection accounts all non-performingloans of the rural banks and require the rural banks to make commensurate provisions for bad debts;prepare a shortlist of consultants to provide loan support services to the rural banks; and complete thenomination of representatives of BOG to the boards of rural banks on which BOG was not fullyrepresented. Other agreements required the Borrower's implementing agency to: prepare amonitoring system for the operations of the rural banks; complete staff development plans for theRFID; and recruit a Rural Bank Inspection Advisor. These covenants were also largely met. Based onimplementation experience, two key covenants were abolished or substantially modified: that limitingshareholdings by individuals and companies in the rural banks to 5 and 10 percent, respectively wasabolished to allow the rural banks to increase their share capital; and that requiring the BOG toappoint its representatives on the board of rural banks was repealed due to increasing conflict ofinterests of BOG representatives in their dual roles as individual shareholders (in some cases) and asofficials of the oversight institution, the central bank.

5. Evaluation of Project Obiectives. The project objectives, as stated in the SAR, were clear,concise, and unambiguous. The project objectives were consistent with, and clearly reflected thegovernment's priorities existing at the time of appraisal: to extend financial sector reforms to the longneglected rural finance sector; to strengthen the rural banking system comprising the 125 rural banksas the key to increased rural savings and credit delivery; and to address sectoral policy constraints --such as the requirement that at least 20 percent of rural bank portfolio be lent to agriculture -- thathad in the past, affected the efficiency of rural financial intermediation.

6. Project Costs and Financing. At appraisal, the total project cost was estimated at US $38.0million, comprising the line of credit (US $28.0 million), institution building (US $9.0 million) andthe RFID (US $1.0 million). The financing plan was: IDA (US $20.0 million), Government (US $1.1million) the PFIs (US $5.0 million), Beneficiaries (US $3.0 million), and Co-financiers, notablyCIDA and USAID (US $8.9 million). However, by project effectiveness, no firm commitment hadbeen made by these agencies to co-finance the project, and the total cost was reduced by the amountof the unrealized co-financing. At effectiveness, the revised project cost was therefore US $29.1million. By completion, the total actual (latest estimate of) project cost was US $28.4 million,

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consisting of IDA (US $20.4 million), GOG (US $1.1 million), PFIs (US $3.9 million), andBeneficiaries (US$ 2.9 million), which was consistent with the revised financing plan established atcredit effectiveness. Cumulative estimated and actual disbursements are in Table 4. The estimated andactual project costs are in Table 7A, with the estimated and actual financing plans in Table 7B.

Major Factors Affecting Project Performance

7. Overview. The major factors affecting the project were: (i) delayed project start-up as theBorrower took nine months to meet conditionalities for effectiveness; (ii) lack of interest by thenational-level commercial banks; (iii) the low ceiling on subloans, which effectively led to theexclusion of larger borrowers from participating in the project; and (iv) the weak capacity of theRFID, the implementing agency. Factors (i) and (iv) were largely under the control of the Borrower;factors (ii) and (iii) were problems inherent in the design of the project that were addressed duringthe Mid-Term Review (MTR) and through subsequent amendments to the Credit Agreement.

8. Delays in Achieving Credit Effectiveness. The credit was approved on July 28, 1989, but itdid not become effective until April 26, 1990. Seven effectiveness conditionalities were stipulated inSections 6.01 (a) to (g) of the Development Credit Agreement (see Table 8). Most of these conditionswere satisfied not long after credit approval. The major delay was caused by Section 6.01 (e) whichrequired the Borrower to submit, in a manner satisfactory to IDA, the financial restructuring plansfor at least 20 of the rural banks. The RFID was slow in assembling a team of consultants to preparethe restructuring plans for the initial set of 20 rural banks, thereby delaying credit effectiveness fornearly nine months. Part of the reason was that the RFID itself had just been established and, lackingthe experience and critical mass of staff, was therefore not fully operational at this stage to dealeffectively with these conditionalities.

9. Lack of Interest by Larger Commercial Banks. The major commercial banks such as BarclaysBank, Standard Chartered Bank (SCB) and Ghana Commercial Bank (GCB) did not participate, to asignificant degree, in the project, a risk that had been identified during project preparation. Therewere two main reasons for the low level of commercial bank participation. Firstly, the majorcommercial banks have traditionally focused on the trade and industry subsectors, with a relativelysmall share of their overall portfolio going to agriculture, given the high administrative costs of suchlending, the risks inherent in rainfed agriculture, and the nature of clients (small, with little or nocollateral, and widely dispersed over a large geographical area). Secondly, the commercial banks paidlittle or no interests on current accounts, which constituted a major source of investment funds, andtherefore considered the reference interest rate (RIR) charged on project funds, which averaged 18percent, as representing an unacceptably high costs of funds. Conversely, the rural banks dependedlargely on savings mobilized as the major source of investment funds. Since rates charged on thesesaving deposits averaged 16 to 18 percent, the average RIR of 18 percent represented an acceptablecost of funds and provided a spread of between 10 to 12 percent to the rural bank, given the on-lending rate of 26 - 30 percent. The availability of external resources also gave the rural banks moreflexibility in allocating credit and in expanding their client base. By completion, the Cedis 9.8 billiondisbursed was distributed as follows: Barclays Bank (0.0 percent), SCB (0.6 percent), GCB (1.0percent), the Export Finance Company (6.3 percent) compared to the rural banks (18.0 percent) andthe ADB (74.1 percent).

10. Low Ceiling on Subloans. The project established a ceiling of Cedis 50.0 million (about US$50,000 at the current exchange rate) on subloans in an effort to prevent the crowding out of smallborrowers by larger, private sector firms and parastatals. The low ceiling effectively directed credit

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to specific size (smaller) operations and denied access to larger enterprises. The exclusion of largerborrowers, coupled with the small number of rural banks participating at any one time, resulted inslbw disbursement of the line of credit: by the original closing date of December 31, 1992, only 45percent of the line of credit of US $15.0 million had been disbursed. The slow disbursementcoincided with increasing demand for funds from produce marketers, input supplier and poultryproducers who had benefited from the agricultural reforms initiated under the Agricultural SectorAdjustment Credit (Cr. 2345-GH). The Development Credit Agreement was therefore amended,removing the ceiling on subloans, thereby allowing individual banks to independently set their ownloan limit, based on the merits of the application, the bank's own prudential guidelines, and theassessment of risks associated with the potential investment.

11. Weak Capacity of Project Implementing Agency. The Bank was over optimistic in itsestimation of the time it would take the project implementing agency -- itself established under theproject -- to emerge as an effective implementing unit. The RFID had no prior experienceimplementing Bank projects, and though its first director was selected because of his knowledge ofBank procedures, his tenure was relatively short, about a year. There was, in general, a highturnover in the senior management of the implementing agency, with four directors heading theagency in as many years. Although the high turnover itself was due to the restructuring underwaywithin the BOG, it nevertheless affected the effectiveness of the unit, especially the continuity neededto strengthen the newly created agency. The RFID was also staffed by employees transferred fromother departments of the BOG, and it therefore took some time for the unit to emerge as a team, asituation exacerbated by the fact that most of the training and technical assistance programs aimed atstrengthening this capacity, were also delayed. For example, it took nearly two years for the RFID toprocure computers needed for the processing of numerous small applications submitted by the ruralbanks, relegating the unit to the manual processing of applications that was highly inefficient. It wastherefore not uncommon to have delays of 3 to 6 months, from the time applications were received bythe RFID and to the time the loan was approved and the account of the rural bank credited with theproceeds. With experience, performance of the RFID improved after the MTR, especially in loanadministration and inspection management audits of the rural banks, such that by project completion,the RFID had established the capacity to inspect all 125 rural banks at least once a year, to deal moreexpeditiously with procurement matters, and to reduce loan processing time to 2 to 3 weeks.

Overall Project Implementation Performance

12. Overview. The overall project performance can be regarded as satisfactory as the credit lineof US $15.0 million was fully disbursed, albeit two additional years being needed for projectcompletion; 55 of the 125 rural banks could be rated as satisfactory, in terms of capital adequacy; theARB has established the capacity to provide a wide range of services to member banks, includingtraining, management information system and advisory services; the RFID has established thecapacity for regular inspection and examination of the rural banks; and the pilot program in ruralcooperatives has demonstrated that rural groups can acquire the technical know-how to profitablyoperate rural enterprises. However, the lack of co-financing prevented implementation of activities tostrengthen credit unions.

13. On-Lending Component. The project on-lent, over a five year period, an estimated Cedis9.8 billion (about US $19.8 million at the average project exchange rate of Cedis 500.0) for financinginvestments that benefited an estimated 15,250 individuals and groups. (Details of subprojectsfinanced under the credit are in Tables I & 2 of Part III). A total of Cedis 7.3 billion (75 percent)went to 1,550 groups (farmer associations, cooperatives, traders and producers associations) while

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Cedis 2.5 billion (25 percent) was utilized by 13,700 individual beneficiaries. The average loan sizewas Cedis 180,000 for individuals and Cedis 4.7 million for groups, indicating that a large number ofsmaller beneficiaries benefited and that the subprojects were not skewed towards a few groups orindividuals. Of important note is that major beneficiary groups were mainly rural cooperativesocieties and associations and not large government-owned parastatals. The activities of groupbeneficiaries were also directly linked to the rural economy, in terms of marketing of inputs orpurchasing commodities produced by smaller outgrowers. Distribution of subloans by activity was asfollows: poultry (Cedis 3.9 billion), trading (Cedis 2.1 billion), crop production (Cedis 1.9 billion)and cocoa marketing and estate rehabilitation (Cedis 1.2 billion). Other activities supported werelivestock, fisheries, oil palm, cottage industries and cotton. About 2,500 or 18.0 percent of the13,700 individual beneficiaries were women who utilized 16.0 percent of the Cedis 2.5 billiondisbursed. The number of female beneficiaries, though representing a small proportion of the total,shows a significant increase over the number of female beneficiaries (248 in all) that had accessed theprogram prior to project mid-term review. Given the continuing low rate of female participation, it isimportant to further address the specific needs of such beneficiaries during future project preparationin light of the different sets of constraints they face. In general, access by women would be limitedby factors such as the lack of land ownership and/or acceptable collateral.

14. The project helped to increase savings mobilization, mainly from small, first time rural clientswho were encouraged to open accounts with the rural banks as a condition for participating in the on-lending program, and who have continued to maintain these accounts long after the end of theircommitments to the rural banks. The number of rural depositors has increased steadily since 1989,with total deposit mobilized increasing from Cedis 4.6 billion in 1989 -- a year before projecteffectiveness -- to Cedis 13.2 billion in 1994, with the 26 participating rural banks accounting for37.0 percent of the total deposits mobilized in 1994. The total loans and advances from the ruralbanks nearly doubled, from Cedis 3.7 billion in 1991, to Cedis 6.8 billion in 1994, compared toproject resources of Cedis 1.7 billion channeled through the rural banks during the past five years,equivalent to about Cedis 340.0 million per annum.

15. Institution Building Component. Overall, performance of the institution building componentwas satisfactory. A review of specific subcomponents is given below:

Financial Restructuring of the Rural Banks. Achievement of this objective wassatisfactory. Preparation of an acceptable financial restructuring plan for 20 ruralbanks delayed project implementation by six months. The financial restructuring ofrural banks consisted of three integrated steps: (i) diagnosis, including assessment ofthe financial and prudential status of each rural bank; (ii) an action plan establishinga monitoring system for performance targets such as the rate of deposit mobilizationand loan recovery ratios; and (iii) skills development of staff and management toensure attainment of these targets. Specific target of the project was to completerestructuring of 80 of the 125 rural banks. However, by completion, only 55 ruralbanks (44 percent) were rated satisfactory by the BOG, 51 banks (41 percent) wererated as less than satisfactory (mediocre or weak), and 19 banks (15 percent) wererated as distressed. While on face value this may represent reasonable achievements --only two rural banks were rated satisfactory at project effectiveness -- in reality, therural banks are still weak. The official classification of "satisfactory" is rathernarrow, and only takes into account achievement of capital adequacy of 6 percent ofthe banks' risks assets. Therefore, banks rated as "satisfactory" could still becharacterized by weak management, weak internal controls and a high proportion of

6

non-performing loans. The detailed diagnosis of the rural banking system, which wasundertaken after credit effectiveness, revealed, among other things, that these bankswere in worse shape that initially believed. Had the diagnosis been undertaken as partof project preparation, it would have influenced the scope and nature of the technicalassistance program for the rural banks. The single most important accomplishment ofthe restructuring program has been that it helped to lay a foundation for subsequentoperations to continue with the strengthening of the rural banking system.

Strengthenin, the Association of Rural Banks. The outcome of this component wassatisfactory. The project enabled the ARB to firmly establish the capacity fordeveloping and managing the training program for the rural banks, that has benefitedan estimated 2,000 staff over the past five years. More importantly, the ARB hastaken concrete steps to ensure sustainability of these activities, including: (i)decentralization of the training program to the regional chapters of the association inorder to reduce costs, expand coverage to member banks and increase localownership; (ii) training of trainers, which utilizes managers and directors from thebetter rural banks to assist in the training of managers and staff of weaker ruralbanks; and (iii) increasing cost recovery: gradually increasing the fees charged theindividual rural banks for training services so that in the near future these bankswould eventually pay the full costs of these services. From a fledgling organization,the ARB has emerged as a strong association with permanent headquarters andSecretariat and, is planing to undertake, with the support of the BOG, a study thatwould help it to clearly define its relationship as an apex institution for the ruralbanks.

Strengthening Capacity for Rural Bank Examination. Performance of this componentwas satisfactory. However, the project design was generally too optimistic as to howquickly the RFID, itself created by the project, could evolve into an effectiveimplementing agency, given its expanded mandate. The RFID has so far overcomethe initial teething problems, and has establish good capacity for inspectionmanagement audits. By project completion, all the 125 rural banks are being visitedat least once a year by the RFID -- a feat not possible only two years ago. A total of120 staff, including some from other departments of the BOG and from the PFIs,have benefited from local training while 16 staff have participated in various externaltraining, including opportunities to witness successful examples of rural banking inthe Philippines and the Netherlands.

Capacity for Rural Credit Appraisal. The outcomes of this component wasunsatisfactory. The project provided a total of 96 man-months of consultancy to therural banks for credit appraisal and the provision of 100 motorbikes for logistics toenable rural banks to focus on developing and investing in small investments at thecommunity-level, thereby providing important linkages to downstream operations.Similarly, the project also provided for the hiring of 60 project officers to be basedwithin the larger commercial banks who would also help these commercial banks,traditionally lukewarm to agriculture sector lending, to expand the volume of theirsector portfolio. These programs were not implemented and most of the banksinterviewed during the ICR process reported that they had no knowledge concerningthis aspect of the project. It is therefore conceivable that it may have beenoverlooked as the RFID became inundated with the requirements of the larger, more

7

visible components of the projects such as the on-lending program and rural bankrestructuring activities.

Strengthening Rural Cooperatives. Performance of this component was ratedsatisfactory. The pilot program was conceptualized to test the basic hypothesis thatefficiency of rural financial intermediation could be enhanced by organizing ruralgroups to enable them to achieve the desired economies of scale in their operations.The pilot program of rural cooperatives in the Upper West Region tested andsubstantiated this hypothesis. The inventory credit program developed under the pilothas emerged as a simple but innovative instrument for not only promoting ruralfinancial intermediation, but also for providing important linkages between the formaland informal financial sectors. The program has benefited more than 750 farmfamilies through community-level agricultural cooperatives that are profitable and thatare contributing to enhancing the incomes of these families. The success of thisscheme has led to its widespread adoption in other parts of the country, especially bythe ADB in maize marketing in the Ashanti and Brong-Ahafo Regions with annualgross sales exceeding Cedis 2.0 billion.

Strengthening the CUA. This component was dropped due to the lack of co-financing from USAID and CIDA.

16. Technical Assistance Financed under the Project. The implementation of technical assistanceprovided in support of project objectives was satisfactory. Technical assistance enabled the Borrowerto procure the services of advisors in rural bank restructuring, inspection and management whoworked with counterparts from the BOG. The scope of the technical assistance program with therural banks included: preparing a restructuring plan for the rural banks; preparing guidelines forrural bank inspection management audits; preparing management information systems for the ruralbanks; identifying skills gaps for training of BOG and rural bank staff; and preparing the initial plansfor the liquidation of the 19 distressed rural banks.

17. Studies Financed under the Project. The studies financed under the project had directrelevance for designing the pilot program in rural cooperatives in the Upper West and in putting intoa place a program for monitoring and evaluation their impacts. All studies were completed in a timelymanner and their objectives were met. The first five of the studies provided a diagnosis of the ruralcooperative subsector, the strategy for developing pilots and the impact analysis of these pilots. Thesixth study, a review of the rural financial sector, was an important input into the broader GhanaFinancial Sector Review, the latter report helping to identify the key constraints, priorities and futurestrategies for strengthening the financial sector.

Project Sustainability

18. Institution Strengthening. Most of the benefits of institution building appear sustainable.These include: capacity enhancement of the RFID to provide regular inspection and examination ofthe rural banks; training of rural bank staff and directors; and inventory credit. Training: The impactof the training program on rural bank performance has been the most visible aspect of the institutionbuilding efforts in the rural finance sector. Sustainability is encouraged by the fact that rural banksare now increasingly paying a larger share of training costs and to budget for such programs in theirannual work plans, based on identified skills gaps. Other indicators of sustainability are the trainingof trainers program, which operates within the regional chapters of the ARB and the decentralization

8

of training to the regional chapters. Rural bank examination and inspection. Sustainability isenhanced by the fact that the BOG is committed to supporting the RFID in these activities as detailedin the action plan for the post-credit operational phase of the project. Rural cooperatives. Pilotcooperatives established under the project have evolved into profitable rural enterprises, sustainableaspects of which include local ownership through strong grassroots organizations trained to applymodern business principles in managing these cooperatives.

19. Rural banks. Loan recovery rates, profitability and the subsidy dependence are three criteriaused to assess the sustainability of the rural banks, and in particular, to measure the extent of subsidydependence among the 26 rural banks utilizing project resources. Loan recovery: rural banks are, ingeneral, saddled with huge non-performing loans, rising overdues and weak internal controlmechanisms increase their vulnerability to internal fraud. The average recovery rate has declined forall rural banks, from 70.0 percent in 1986 to only 59.0 percent in 1994. The deterioration isattributed to the rapid expansion of rural banks through the creation of agencies and depositmobilization centers. With few and poorly trained staff and with little or no capacity for projectappraisal, the rapid move to create agencies have left most rural banks highly susceptible tofraudulent acts by branch managers who are often loosely supervised by the head office. Performancewas better among the 55 rural banks rated as satisfactory, with 73 percent recovery rate, compared toonly 44.0 percent for the 51 banks rated as either mediocre or weak. Profitability: Most rural bankscontinue to make inadequate provisions for bad and doubtful debts, thereby overstating theirprofitability: 96 of the 106 active rural banks made inadequate provisions for bad debts amounting toCedis 469.8 million in 1994. Profits among the 26 participating rural banks was higher, but variedwidely, ranging from Cedis 0.2 million to Cedis 49.0 million in 1993 (the last year for whichcomprehensive data is available).

20. Subsidy Dependence. Resources to the rural banks were subsidized in two ways: (i) throughthe low interest rate on project funds, which averaged below the rate rural banks paid on termdeposits; and (ii) technical assistance mainly for training, which was largely a grant. Projectresources were on-lent at a RIR that was lower than the rate on term deposits of the rural banks.Unlike the larger commercial banks, rural banks do not participate in the interbank lending programof the central bank and they therefore depend largely on savings mobilized for investments. Therelevant cost of funds to the rural banks was therefore the interest paid on these term deposits.During the past five years, the rate on term deposits which averaged between 18.0 and 22.0 percent,compared to the average project RIR of 18.5 percent. Technical assistance to the rural banks waslargely a grant, averaging Cedis 8.4 million per annum per rural bank over the life of the project.The extent to which subsidized resources affect the sustainability of the participating rural banks ismeasured by the subsidy dependence index (SDI)'. The estimated SDIs are in Table 3, Annex III andthey show, among other things, the widely varying level of capacity among the rural banks. Six ofthe 26 banks (Nyakrom, Akyempim, Nsoatreman, Braka-Breman, Nwabiagya and Bosomtwe) hadnegative SDIs, indicating that, not only have these banks achieved fully an acceptable level of

1 The Subsidy Dependence Index (Yaron, 1992) can be represented as S = A(m - c) + [(E * m) - P] + K, where S is thevalue of annual subsidy received by the PFI, A is the average concessional borrowed funds outstanding, m is the interestrate the PFI would have paid for borrowed funds in the absence of the line of credit, c is the weighted average concessionalinterest rate, E is the average annual equity, P is before tax profit, adjusted for provisions for bad debts, and K is catchallfor all other subsidy, in this case, the average annual value of technical assistance. The SDI ratio is estimated asSDI = S / (LP *i), where LP is the average outstanding loan portfolio of the PFI and i is the weighted average interestrate earned on the loan portfolio. An SDI of zero and less indicates sustainability while positive and increasing SDIs showcorrespondingly increasing level of dependency.

9

sustainability, but that their annual profits exceeded the value of any subsidy (including technicalassistance). Fourteen banks had positive, but low SDIs while seven banks had SDIs in excess of 50percent, indicative of the level of higher degree of dependency (low sustainability). One implicationof these results are that classification of rural banks on the basis of satisfactory and unsatisfactorydoes not show the true state of these banks, as banks rated satisfactory may not be sustainable in thetrue sense of the word.

Bank Performance

21. Bank performance, from project identification through completion, was, on the whole,satisfactory. The Bank responded quickly to the slow implementation performance, such as thatdescribed in para. 11 above, by increasing field supervision and the level of dialogue with theBorrower. The Bank also responded by employing the appropriate skills mix in addressing specificproblems, as in inspection management audits (Table 11). Bank performance was complemented bystrong support from the Resident Mission which provided advice to the implementing agency onprocurement and other related matters and helped to maintain continuity in policy dialogue with theBorrower.

Borrower Performance

22. On the whole, Borrower's performance was also satisfactory. The project was consistent withthe Borrower's objective of strengthening rural financial intermediation and putting the rural bankingsystem on sound financial, technical and institutional footing. The project therefore had strongBorrower commitment and ownership. Prior to the project, the Borrower had implemented substantialpolicy and institutional reforms at the macro-level, including financial sector reforms, which helpedto provide an enabling institutional and policy environment for project implementation. However, atthe implementing agency level, there were practical problems in translating strong Borrowercommitment into effective implementation performance: lack of prior experience in implementingBank projects, high turnover in senior management, delays in procurement of vehicles and computerscritical to carrying out statutory functions of the department such as inspection and examination.However, the RFID was able to transcend the earlier problems, such that by the mid-term review, ithad developed significant capacity for project implementation.

Overall Assessment of Project Outcome

23. Based on implementation performance, achievement of physical targets set in the SAR,sustainability of key project benefits, and the Borrower's action plan for the post-operational phase ofthe project, outcome of the project is satisfactory. By financing eligible subprojects in the ruraleconomy, the project accomplished a key objective of expanding productive capacity and employmentin agriculture. It was also successful in improving the efficiency of financial sector institutions.Assessment of outcome of specific project components is as follows: On-Lending: satisfactory,despite the initial implementation delays. Institution building: satisfactory, but with varying degreesof success in specific subcomponents as noted: (i) financial restructuring of the rural banks --satisfactory, but with low probability of sustainability; (ii) strengthening of the ARB -- highlysatisfactory; (iii) enhancing capacity for rural credit appraisal -- unsatisfactory; (iv) strengtheningRFID capacity for inspection management audits -- satisfactory; and (v) strengthening ruralcooperatives -- highly satisfactory.

10

Future Operations and Key Lessons Learned

24. Future Operations. GOG has indicated, through its post-project operational plan, a strongcommitment to continuing support for key project activities beyond the closing date. An action planand the resources committed for these priority areas are contained in Appendix B to the ICR.Specifically, the Borrower would continue with the following project activities: training of rural bankstaff and directors through the RFID; regular rural bank examination and inspection through theRFID; development of rural cooperatives; and expanding rural investments through the recycling ofrepayments under the line of credit component through the PFIs. However, based on projectimplementation experience, comprehensive diagnosis of the rural finance sector is needed to informthe design and scope of future interventions. Accordingly, follow-up rural finance operations shouldbe preceded by broad consultation, studies and in-depth analysis in order to better understand thesector and to better target proposed interventions. The Bank's Financial Sector Review (FY95)includes an analysis of rural finance issues. Another step in this direction is the ongoingcollaborative sector work with the Borrower on Rural Institutions.

25. Key Lessons Learned. The key lessons learned from project implementation are: (i)training of rural bank staff and directors is a key factor in the development of viable rural banks as itempowers management to adapt more innovative instruments and approaches to deposit mobilization,credit delivery and loan recovery; (ii) rural banks largely depend on savings mobilized forinvestments; commercial banks, on the other hand, use deposits on which they pay little or nointerests, and which they invest in less risky activities in trade and industry. In determining the RIRfor an untargeted credit line, it is important to take these factors into account to ensure that all bankscan participate; (iii) in order to be effective monitoring tools, inspection mangement audits of therural banks should be combined with regular feedback to the rural banks, with clear guidelines forcorrecting observed deficiencies, a time frame for addressing exceptions noted, and possible sanctionsfor failing to rectify deficiencies; (iv) as demonstrated by the ARB, the emergence of a strong apexinstitution for the rural banks is vital to the long-term viability of these banks as it provides asustainable, non-governmental alternative to the provision of vital services (training, financialadvisory and promotional); government's role should be limited to its statutory responsibilities ofinspection management audits and examination; (v) inventory credit has emerged as an innovativemarketing tool crucial in linking the formal and informal sectors; and (vi) rural cooperatives are moreviable if they are organized as rural businesses with profits, instead of subsidy, as the bottomline oftheir operations. Such rural cooperatives, when viable, provide the critical linkage between theformal and informal sectors and the initial technical assistance for training such groups in modernbusiness management has high returns.

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PART II: STATISTICAL ANNEXES

Table 1: Summary of Assessments

Substantial Partial Negligible Not Applicable

A. Achievement of Objectives (1) (1) (1) (1)

Macro policies [2] [2] IESector policies el E l EFiumncial objectives [l [2]Institutional development [ 5 I]1Physical objectives E] I E EPoverty alleviation ElGender issues E E IAOther social objectives Q E E IAEnvironmental objectives f E E IAPublic sector management E E ElPrivate sector development I E E E

Likely Unlikely Uncertain

B. Project sustabnablilty (1) (1) (1)

HighlySatisfactory Satisfactory Deficient

C. Bank Performance (1) (I) (1)

Identification E l E]Prepadtion assistance El El Apprisal EI ElSupervision E IA

HighlySatisfactory Satisfactory Deficient

D. Borrower performance (1) (1) (1)

Identification E IA EImplernentation O IA ECovenant compliance E IA EOpertion (if applicable) E E E

Highly HighlySatisfactory Satisfactory Unsatisfactory Unsatisfactory

E. Assessment of Outcomes (1) (1) (1) (1)

IA El El

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Table 2: Related Bank Loans and Credits

Year ofLoan/Credit Title Purpose Approval StatusPreceding Operations:

1. Cr. 1911-GH & 19 11-1, Address fundamental and urgent 1988 & Completed,US$ 100.Om & $6.6m problems of the financial sector 1989 ICR of JuneFinancial Sector Adjust I 1994& Supplement

2. Cr. 1996-GH, US$30.Om Support small & mediumSME Development entrepreneurs in the private 1989 Completed

sectorFollowing Operations:

3. Cr. 2180-GH, US$16.5mAgric. Diversification Develop non-cocoa tree crops 1991 On-going

and horticultural crops

4. Cr. 2247-GH, US$ 22.Om Rationalize agricultural research 1991 On-goingNational Agric. Research resources

5. Cr. 2345-GH, US$80.Om Reform agric. policy to 1992 On-goingAgric Sector Adj strengthen sector coordinationCr. 2245-1-GH; US $5.74 and management 1994 On-goingAGSAC supplement Supplement to agric. policy

reforms

6. Cr. 2346-GH, US $30.4 Provide more efficient extension 1992 On-goingNat Agric. Extension services

7. Cr. 2426-GH, US $18.1 m Support national resource and 1992 On-goingEnv. Resources Mngt env. planning and mngt.

8. Cr. 2441-GH, US $22.5m Increase livestock production 1993 On-goingNational Livestock Services and services

9. Cr. 2555-GH; US$21.5m Provide development of rural 1993 On-goingAgric. Sector Inv. Project infrastructure in support of

development

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Table 3: Project Timetable

| | I Date actual/Steps in project cycle Date planned | Revised | latest est.

Identification (EPS)

Preparation 11/06/87 04/02/88 04/02/88

Appraisal 10/12/88 10/12/88 10/12/88

Negotiations 02/20/89 03/13//89 02/13/89

Board Presentation 03/28/89 06/14/89 06/14/89

Signing 07/28/89 n.a. 07/28/89

Effectiveness 04/28/89 n.a. 07/28/89

Mid-Term Review 12/31/91 06/24/92 06/24/92

Project Completion 04/30/93 04/30/94 04/30/95

Credit Closing 12/31/92 12/31/93 12/31/94

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Table 4: Credit Disbursements: Cumulative and Actual(US$ million)

Bank Fiscal Year FY90 FY91 FY92 FY93 FY94 FY95 (Ii)

Appraisal Estimate 1.6 6.0 7.0 5.4

Cumulative 1.6 7.6 14.6 20.0

Actual (a) 0.0 3.2 3.7 7.3 5.2 1.0

Cumulative 0.0 3.2 6.9 14.2 19.4 20.4

Actual as % of Estimate 0.0 42.0 47.0 71.0 96.0 102.0

Date of Final Disbursement: April 30, 1995

(a) Credit was extended for two years beyond the original closing date of December 31, 1992.(b) For first half of FY95 only, i.e., July I to December 31, 1994.

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Table 5: Key Indicators for Project Implementation

Page 1 of 2

l1. Key lInplemnentationIndicators in SAR Expected/Estimnated Actual at Project CompletionI. Institution Buildingy

(A) Financial Restructuring Rural (i) Restr-ucturing of 125 rural All 125 rural banks completedl Banks banks which: a) have adequate diagnostics phase of financial

capital base; b) make profits; restructuring and action plans werec) have sound financial control prepared, but only 55 banks satisfiedmechanisms; d) have low capital adequacy requirements underarrears/high recovery; e) have the Banking Law 225, 56 are weakgood mechanisms for appraisal and 19 are distressed. The distressedand supervision of loan banks have been shut down, pendingportfolios. liquidation. However, among the 106

operating rural banks, sound financialcontrol is lacking. Little capacity forappraisal and loan supervision exists.Internal control mechanisms not inplace in most banks. Underprovisioning for bad debts among 96of 106 rural banks based on 1994management audit reports.

(B) Strengthening the Association Emergence of an apex that has ARB has established an excellentof Rural Banks (ARB) sound financial base, provides program for training staff and

sound program and services to directors of rural banks. Sustainabilitymembers including public of the program rated high due to localrelations, financial ownership and increased subscriptionmanagement and training. from member banks. ARB now has a

permanent head office and Secretariatand undertakes good PR with BOG onbehalf of the member banks. Apexinstitution study planned for FY96.

C. Strengthening Credit Union Emergence of a CUA that has Component dropped due to lack of co-Association (CUA) sound financial base, is financing.

respected by its members, andprovides sound technicaladvice and program formembers.

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Table 5: Key Indicators for Project Implementation

Page 2 of 2

1. Key huplementationIndicators in SAR Expected/Estimated Actual at Project Completion1. Institutional Building (cont'd):D. Strengthening the RFID, Bank Emergence of strong Reorganization and staffing of RFID

of Ghana department with trained staff completed and ample logisticsand logistics to provide regular provided. Several staff haveinspection management audits completed both local (120 staff) andof the rural banks and to assist external (16 staff) training. RFID hasin the development of rural developed capacity to provide regularfinance policy. examination of all 125 rural banks at

least once a year.

E. Strengthening of Rural Establishment of three (3) Three FSCCs established as Pilots inCooperatives under a Pilot financially and institutionally the Upper West with over 750 farmProgram in the Upper West viable Farmer Service families as members. FSCCsRegion Cooperative Centers (FSCCs) diversifying into shea brokering and

that provide good services to processing in order to spread risksmembers and that would from single crop. Use of inventoryestablish economies of scale in credit as innovative tool in marketinginventory credit. of QPM maize. Program has received

positive evaluation from local officialsfor its impact on poverty alleviationin the resource-poor areas of theUpper West.

II. Line of Credit Lending of US $20.0 million Total line of credit filly disbursed,equivalent, including US $15.0 equivalent in local currency of Cedismillion of IDA resources for 9.8 billion to finance crop production,eligible subprojects in the marketing, processing, transport andagriculture sector. other rural industries with more than

1,550 groups and 13,700 individualsbenefited. Estimated Cedis 1.7 billionchanneled through 26 participatingrural banks.

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Table 6: Studies Included in Project

Study Purpose Status Impact of Study

1. Development of To help prepare a pilot Completed The study enabled the Department ofFarmer Cooperatives program for assisting 1989 Cooperative (DOC), through an NGO, to

rural cooperative establish a Pilot Program of Ruralsocieties in becoming Cooperation in three villages in the Upperfinancially viable and West Region.sustainable

2. Impact Study - Farmer Evaluate the impact of Completed Study assessed the impact of the pilot onCooperatives the pilot program on 1992 individual groups and farm households and

beneficiary villages in enabled the DOC to better design itsthe Upper West Region technical assistance to these cooperatives.

3. Regular Monitoring and To monitor key variables Regular Regular monitoring provided crucialEvaluation Studies related to the target Quarterly information to DOC and NGO on the

group of cooperatives, Report financial viability of the pilots and thesuch as farm cash flow, impact of technical assistance. Enabledcost recovery, increased implementing agency to develop inventorycredit worthiness of credit scheme for servicing members.members, and linkagewith formal financialsector.

4. Diversification Study Study to diversify the Completed Study led to creation of diversified FSCCsof FSCCs revenue base of the 1992 through creation of Processing Service

FSCCs. Centers (PSCs) for sheanut, cowpeas andgrains. PSCs fully operational for all threeFSCCs.

5. Review of the Conduct detailed review Completed Study completed but impact unknown.Cooperative College of the existing program 1993 Major recommendations not implemented.

for training ofcooperatives andrecommend changes

6. Rural Finance Sector Conduct a thorough Completed Results of study used to establish prioritiesReview review of the rural 1994 for future interventions in the rural finance

finance sector as an input sector, especially in linking the formal andinto the Ghana Financial informal sectors. Results would be used inSector Review. designing rural finance component of an

integrated Subsector lending program inGhana.

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Table 7A: Project Costs by Category

Appraisal estimates Actual/latest estimates(US $M) (US $M)

Local Foreign Local ForeignCategory/item costs costs Total costs costs Total1. On-Lending 8.0 15.0 23.0 6.8 15.2 22.0

II. Institutional Building: 2.5 2.5 5.0 3.3 2.1 5.4

(a) Restructuring of rural banks 1.3 0.5 0.8 2.1 0.7 2.8

(b) Association of Rural Banks (ARB) 0.3 0.7 1.0 0.5 0.5 1.0

(c) Rural credit appraisal 0.5 0.3 0.8 0.1 0.0 0.1

(d) Rural banks examination 0.3 0.7 1.0 0.4 0.6 1.0

(e) Rural cooperatives 0.1 0.3 0.4 0.2 0.3 0.5

III. Rural Finance Inspection Department 0.3 0.7 1.0 0.4 0.6 1.0

Total 10.8 18.3 29.1 10.5 17.9 28.4

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Table 7B: Project Financing

Appraisal estimate Actual/latest estimate (a)Source (US$ Million) (US$ Million)

Local Foreign Local Foreigncosts costs Total costs costs Total

IDA 1.4 18.6 20.0 2.5 17.9 20.4

GOG 1.1 - 1.1 1.2 1.2

Participating Banks 5.0 5.0 3.9 3.9

Beneficiaries 3.0 - 3.0 2.9 2.9

Total Project 10.5 18.6 29.1 10.5 17.9 28.4

(a) Actual as at December 31, 1994.Note: Project cost reduced by US $8.9 million due to unrealized co-financing from USAID and CIDA.

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Table 8: Status of Legal CovenantsPage I of 2

Agreement/ Covenant Present Fulfillment DateSection Type Status Original Revised Description of Covenant Comments

Project Agreement (PA)/2.08(a) 2, 12 C 09/30/89 Abolition of the Cedis 25,000 and Cedis 125,000 ceiling on Done

shareholdings in rural banks by individuals and companies,respectively.

2.08 (b) 2, 12 C 09/30/89 09/30/89 Limiting shareholdings in particular RBs by individuals and Done; lifted in June 1990 to allowcompanies to not more than 5% and 10%. respectively, of equity mobilization underthe share capital. restructuring program.

2.09 (a) 2, 3, 5 CP 09/30/89 Requirement that rural banks assign all non-performing Collection agencies not in existenceloans to special collection accounts and make commensurate so no bad loans assigned; about 96provisions for bad debts. rural banks not making adequate

provisions in 1994.

2.09 (b) 2. 12 CD 09/30/89 12/31/90 Abolition of sectoral quotas imposed on rural banks' lending Done in December 1990.operations, while maintaining initially a minimum of 20%for agriculture.

2.11 5 C 09/30/89 09/30/89 Preparation of a shortlist of firms by BOG for purposes of Short list prepared by RFID inproviding loan support services to RBs. December 1990.

2.13 5, 12 C 12/31/89 Nomination by BOG of its representative on the Boards of BOG has established a new policy ofRBs in which BOG is not represented. removing its staff from the Boards of

rural banks to avoid conflict ofinterest

2.14 (a) 1I 5, 9 C 12/31/89 Preparation by BOG of a monitoring system Doneof the rural finance operations of all banks, includingoperations under this project.

2.14 (b) 5, 10 C 12/31/89 12/31/89 Completion by BOG of a staff development program for the Done.RFIDby December31, 1989.

2.14 (c) 3, 5, 9 C 09/30/89 annually Borrower to cause the ARB to submit to IDA, not later than Done. ARB submitting annualSeptember 30, 1989 and September 30, 1990, its annual workplans to RFID and IDAwork program for the following year.

2.15 5 C 12/31/89 Recruitment by BOG of a RBs Inspection Advisor by RB Inspection Advisor arrived inDecember 31, 1989. March 1990.

3.12 1, 5 C 09/30/89 annually BOG to carry out examination of each RB at least once a All RBs examined at least once ayear. year beginning in 1994.

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Table 8: Status of Lega CovenantsPane 2 of 2

Agreement/ Covenant Present Fulfilbnent DateSection Type Status Original Revised Description of Covenant Comments

Credit Agreement(DCA)

4.01 (b) 1, 2, 3 C Twice a year Borrower shall have all records and accounts for each fiscal year Audits current and up-to-date.audited in accordance with appropriate auditing principles byindependent auditors.

6.01(a) 9, 10 C Condition for Signing of Subsidiary Administration Agreement (SAA) between the Done; letter of approval datedeffectiveness Borrower and BOG. November 1, 1989.

6.01(b) 9, 10 C Condition for Submission to IDA by the BOG, the operational policies and procedures Policies submitted on time.effectiveness for the RFID.

6.01(c) 9, 10, 12 C Condition for Signing by BOG of Participation Agreement with at least two PFIs. First Agreement signed witheffectiveness ADB, Barclays and Standard

Chartered Banks6.01(d) 5, 9 C Condition for Recruitment by BOG of a Rural Finance Adviser and a Rural Bank Done

effectiveness Restructuring Adviser.

6.01(e) 1, 2, 5 CD Condition for Submission by BOG the restructuring plans for the ADB and at least 20 Delayed by 6 months due toeffectiveness rural banks. problems in recruiting

consultants.

6.01(f) 2, 4, 11 C Condition for Issuance of a statement by the Borrower that it would provide a depositeffectiveness guarantee up to a limit of Cedis 100,000 per depositor for rural banks

depositors whose claims cannot be met during the restructuring.

6.01(g) 2, 4 C Condition for Establishment by the Borrower of a RB Recapitalization Fund in theeffectiveness BOG with an initial sum in Cedis equivalent to US $300,000.

Covenant types: Present Status:

I = Accounts/audits 8 = Indigenous people C = covenant complied with2 = Financial performance/revenue 9 = Monitoring, review & reporting CD= complied with after delay3 = Flow & utilization of project funds 10 = Project implementation not included in 1-9 CP = complied with partially4 = Counterpart funding 11 = Sectoral budgetary/resource allocation NC = not complied with5 = Management aspects of the project 12 = Sectoral policy/regulatory/institutional6 = Environmental covenants 13 = Other7 = Involuntary resetdement

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Table 9: Comploance with Operational Manual Statements

The project was in compliance with all applicable Bank Operational Manual Statements.

Table 10: Bank Resources: Staff Inputs(in Staff Weeks)

ActualStage of Project Cycle Weeks US$Through Appraisal 57.4 n.a.

Appraisal - Board 26.7 n.a.

Board - Effectiveness 6.8 n.a.

Supervision 106.6 n.a.

Completion 4.5 n.a.

Total 202.0 n.a.

Note: n.a. = not available at the time of the ICR.

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Table 11: Bank Resources - Missions

Month/ No. of Days Specialized Performance RatingStage of Project Cycle Year Persons in Field Staff Skill Implementation Development Problems

Appraisal 10/88 5 16 1, 1, 1, 4, 5 n.a. n.a. n.a.

Appraisal to Board 6/89 1 0 1 n.a. n.a. n.a.

Board to Effectiveness 4/90 1 0 1 n.a. n.a. n.a.

Supervision 10/90 1 1 2 2 Restructuring delays

2/91 1 1 3 2 Poor implementation capacity

6/92 4 1, 1, 3, 4 3 2 Slow disbursement

2/93 2 1, 1 3 2 Slow subloan processing

7/93 3 1, 2, 5 3 2 Slow training take-off/Disb.

11/93 1 2 2 2 Second Extension

4/94 1 2 2 2 No major problems identified

Completion 2/95 2 30 1, 2 2 2

Note: n.a. = not applicable

Key to Staff Skills1 = Agricultural economist2 = Economist3 = Agriculturist4 = Financial analyst5 = Banking specialist

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PART III: SECTOR-SPECIFIC DATA

Table 12: Distribution of Subloans by Beneficiary Category

Total Loans Gr ups Individuals Distri ution (%)Ave. loan Ave. loan

Subsector No. of Total Loan No. of size No. of sizeBeneficiaries ('000 Cedis) Beneficiaries ('000 Cedis) Beneficiaries ('000 Cedis) Group Individuals

Agro-processing 144 33,459.0 10 575.5 134 206.7 83 17

Cocoa marketing 393 972,127.2 13 66,187 380 293.9 89 11

Cocoa Estate Rehab 1,411 230,030.1 39 1,024.1 1,372 138.6 83 17

Rural Infrastructure 137 93,508.9 58 1,057.7 79 407.1 66 34

Cottage Industries 1,099 238,006.9 13 1,254.6 1,086 204.1 93 7

Cotton 145 42,543.1 7 2,018.6 138 205.9 67 33

Crop Production 8,574 1,852,870.9 411 957.4 8,133 175.9 77 23

Farm Inputs 701 93,187.1 - - 701 132.9 0 100

Fisheries 167 24,160.0 - - 167 144.7 0 100

Livestock 216 33,046.7 20 123.8 196 155.9 93 7

Oil Palm 482 97,455.8 20 1,186.8 462 159.6 76 24

Poultry 550 3,896,109.4 101 23,736.7 449 207.8 98 2

Trading 1,103 2,157,547.7 821 2,524.3 282 301.8 96 4

Transport 142 33,180.8 4 382.5 138 229.4 95 5

Total/Average/% 15,264 9,797,233.8 1,547 4,733.8 13,717 180.4 75 25

Source: Mission estimates based on PFI data.

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Table 13: Distribution of Individual Subloans by Gender

Total Loans No. of Beneficiaries Comparative Loan Size Share of Investments('000 Cedis) (

No. of Total LoanSubsector Beneficiaries ('000 Cedis) Male Female Male Female Male FemaleAgro-processing 134 27,704.1 96 38 193.5 240.1 67 33

Cocoa marketing 380 111,692.2 274 106 300.7 276.4 74 26

Cocoa Estate Rehab 1,372 190,089.6 1,075 297 140.7 130.9 80 20

Rural Infrastructure 79 32,163.9 49 30 523.2 217.6 80 20

Cottage Industries 1,086 221,696.9 898 188 202.8 210.7 82 18

Cotton 138 28,413.1 104 34 215.8 175.5 79 21

Crop Production 8,133 1,430,657.8 6,735 1,398 180.8 152.1 85 15

Farm Inputs 701 93,187.1 617 84 133.5 128.8 88 12

Fisheries 167 24,160.0 154 13 145.5 135.4 93 7

Livestock 196 30,570.3 163 33 155.5 158.4 83 17

Oil Palm 462 73,719.1 369 93 174.5 100.2 87 13

Poultry 449 93,294.0 341 108 216.5 180.1 79 21

Trading 282 85,103.7 232 50 312.2 253.4 85 15

Transport 138 31,650.8 113 25 229.8 227.2 82 18

Total/Average/ % 13,717 2,474,102.7 11,220 2,497 184.2 163.0 84 16

Source: Mission estimates based on PFI data.

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Table 14: Summary Statistics and Subsidy Dependence of Selected Rural Banks(cedis '000)

Rural bank Region Total Total Loans Subloans ° SDI (%)Deposits

Nyakrom Central 186,100 30, 320 100,253 -36.0Kaaseman Western 280,790 281,560 237,529 11.0Tano Brong-Aghafo 81,630 63,700 40,292 46.0Nsoatreman Brong-Aghafo 114,910 205,580 92,116 -5.0Brakwa Breman Central 61,980 67,870 155,249 -19.0Akyempim Central 100,050 96,760 46,098 -8.0Abokobi Area Greater Accra 134,130 231,520 77,291 10.0Lower Pra Western 534,040 554,000 214,597 12.0Nwabiagya Ashanti 229,040 193,111 131,118 -6.0Agona Central 119,650 59,690 31,885 15.0Bosomtwe Ashanti 235,730 124,350 48,038 -21.0Wamfie Brong-Aghafo 212,330. 60,680 39,113 55.0Amansie West Ashanti 183,120 52,700 84,953 4.0Amanano Ashanti 181,100 75,040 54,801 37.0Juaben Ashanti 199,790 83,390 80.790 52.0Mumuadu Eastern 212,330 138,130 37,326 1.0Atwima Mponua Ashanti 215,900 13-,630 74,896 31.0Upper Amenfi Western 81,330 15,750 12,155 201.0Okomfo Anokye Ashanti 85,840 25,330 11,829 130.0Mansoman Western 42,020 35,560 47,595 17.0Kumbungu Northern 14,20 5,400 5,246 466.0Atiwa Eastern 67,580 29,870 18,770 77.0Anum Eastern 240,020 120.91 6,776 6.0Ahantaman Western 376,670 236,380 55,127 3.0South Akim Eastern 185,500 89,690 41,712 31.0Asante Akyem Ashanti 70,310 46,410 45,794 284.0Total (26 RBs) 4,442,680.0 3,022,740.0 1,781,268.0As share of all RBs (%)(C) 35.0 45.0 100.0

(a) Based on submissions to RFID for period ending December 31, 1993.(b) Cumulative for period of rural banks participation in program.(c) Based on December 31, 1994 estimates.

Source: RFID, December 31, 1994 and Mission Estimates.

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Table 15: Total Deposits, Reserves and Advances for Rural Banks, 1989 - 1993(in million Cedis)

Category 1989 1990 1991 1992 1993

Total Deposits 4,600 5,890 5,400 9,680 13,240

SecondaryReserves 881 1,380 1,503 5,540 6,710

Total Loans 1,350 2,270 3,700 4,800 6,820

Source: RFID, December 31, 1994.

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Table 16: Repayment of Subloans under the Rural Finance Project(in Cedis Million)

Share of Total Loan Repaid as % of OutstandingPFI Amount Disbursed Disbursed M% Amount Repaid Loan Balance |

Agricultural Development Bank 7,332,4 74.1 843.0 11.5 6,491.3(ADB)

Ghana Commercial Bank (GCB) 93.7 1.0 10.1 10.8 83.6

Standard Chartered Bank (SCB) 61.1 0.6 61.1 100.0 0.0

Export Finance Company (EFC) 621.6 6.3 621.6 100.0 0.0

Rural Banks (a) 1,781.3 18.0 369.8 20.8 1,411.5

Total 9,890.1 100.0 1,903.7 19.3 7,986.4

Note: The maturity date for subloans, by financial institution, is as follows: ADB, September 2000; GCB, December 1997; SCB, March 1994;EFC, March 1994 and the rural banks, December 1997.

(a) Total for 26 rural banks participating in the program.

Source: RFID, December 31, 1994.

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Table 17: Rural Banks: Training Courses Offered, 1991 - 1994.

Target Group 1991 1992 1993 1994Managers and Project Project loan appraisal Accounting for Non- Credit investigation Funds managementOfficers Accountants

Project evaluation Accounting for Non-AccountantsLoan monitoring and supervision Time managementLoan recovery procedures

Managers and Annual planning and Interpretation of financialDirectors budgeting statements

Policy formulation and Management informationresource systemsmobilization

Management decision making Long range planning Training of trainersFunds management Corporate planningInternal controls Operation monitoringCost reduction Interpretation of financial

statements

Accountants Interpretation of financial Management information systems Cost reductionstatements

Bank of Ghana reporting Accounting for Non-Accountantsrequirements

Time Management

Clerks and Cashiers Overview - rural banks Overview - rural bank accounting Overview - rural bank accountingaccounting systems systems systemsCashiering Cashiering CashieringBookkeeping Bookkeeping BookkeepingCustomer relations Customer relations Customer relations

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Table 18: Rural Banks: Regional Distribution of Training, 1994

Directors Managers Project Officers Accountants Cashiers/Clerks TotalNo. of

Region Banks Persons Courses Persons Courses Persons Courses Persons Courses Persons Courses Persons Courses

Greater Accra 5 26 15 5 37 3 12 2 4 2 8 38 76

Eastem 21 132 63 21 135 10 21 7 14 7 24 177 257

Northem 2 9 6 2 14 0 0 1 2 2 8 14 30

Upper West 2 11 6 2 18 1 1 2 4 1 4 17 33

Upper East 2 9 6 2 17 0 0 1 2 1 4 13 29

Central 20 65 57 20 131 5 15 7 14 8 28 105 245

Ashanti 22 126 63 22 139 1 3 8 17 9 28 166 250

Volta 14 47 36 14 78 1 1 3 6 5 20 70 141

Brong Ahafo 18 90 51 18 111 4 10 6 11 6 24 124 207

Wstern 13 63 36 13 95 4 1 1 5 10 1 4 86 156

Total 1193 578 339 119 75 29 74 42 84 42 152 810 1,424

Source: Association of Rural Banks, January 1995.

Appendix A

-GHANARURAL FINANCE PROJECT

[Credit 2040-GH1

IMPLEMENTATION COMfPLETION MISSION

January 18 to February 22, 1995

AIDE MEMOIRE

Introduction

1. A World Bank mission comprising Rudolph A. Polson (Mission Leader, AF4AE) and PatienceMensah (Operations Officer, AF4GA) carried out a final supervision of the Rural Finance Project(Credit 2040-GH) from January 18 to February 22,1995 in preparation of the project's ImplementationCompletion Report (ICR). The mission held discussions with Nana Ama Yeboa, OBP, First DeputyGovernor, Bank of Ghana, Nana Mireku Annto, Acting Director, Rural Finance Inspection Department(RFID), Mr. Buachie-Affram, Registrar of Cooperatives, the president and officials of the Associationof Rural Banks, and the Country Director, Technoserve (an NGO providing technical assistance to therural cooperative pilot project in the Upper West Region). The mission also visited a sample of ruralbanks to review the status of implementation of the on-lending component among the participatingfinancial institutions (PFIs) and to conduct an assessment of the impact of the subloans on projectbeneficiaries.' The mission paid a courtesy call on Mr. George Cann, Ministry of Finance andEconomy Planning, and briefed him on its objectives. A wrap-up meeting, held with the Bank ofGhana, was chaired by Nana Ama Yeboa, OBP, First Deputy Governor. The mission extends itsthanks and appreciation to these officials for their kind courtesies and assistance.

2. This Aide Memoire, subject to review by Bank management, provides a synopsis of themission's key findings and conclusions, the agreements reached with government, and the follow-upactions required under the ICR process. It provides an assessment of the project in the followingareas: (i) project objectives and achievements of these objectives; (ii) major factors affecting projectimplementation; (iii) Bank and Borrower performance; (iv) sustainability of key project benefits;(vi) future operations in the rural finance sector; and (vii) the key lessons learned from projectimplementation.

Overview of the ICR Process

3. Background. The credit of SDR 15.2 million (US$20.0 equivalent) was approved on July 28,1989, but it did not become effective until April 26, 1990, nearly a year later. The IDA creditcomprised an on-lending component of US$15.0 million to finance viable subprojects through eligibleparticipating financial institutions (PFIs), and an institution building component of US$5.0 million forstrengthening key sector institutions to enable them to improve the efficiency of rural financial

During the field visits, the Bank mission was joined by Nana Mireku Annto, (Acting Director, RFID) and Mr. VictorNyarko (Manager, RFID) from the Bank of Ghana and Mr. Mark Owusu-Ansah (Loans Manager, ADB). Mr. Owusu-Ansah coordinated the ADB component of the field visits and interviews with beneficiaries. The mission visited thefollowing rural banks: Lower Pra Rural Bank (Central Region), Nzema Manle Rural Bank (Western Region),Bosomtwe Rural Bank (Ashanti Region), Nwabiagya Rural Bank (Ashanti Region), Nsoatreman Rural Bank (Brong-Ahafo) and Wamfie Rural Bank (Brong-Ahafo Region).

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intermediation. The project encountered numerous problems during the first two years, and significantdisbursement lags occurred. However, disbursement improved significantly after the mid-term review(MTR) when design-related constraints affecting project implementation were remedied. But theearlier delays in meeting project effectiveness conditions and the slow progress of the first two yearsnecessitated an extension of the original closing date to enable the Borrower to complete key institutionbuilding activities crucial to achievement of the project's developmental impact. The credit wastherefore extended by two years; it finally closed on December 31, 1994, and is expected to be fullydisbursed by April 30, 1995, when the accounts are closed.

4. Timing and Consultation with Borrower. Discussions on the ICR process, in particular, thetiming of the ICR mission and coordination of the Borrower's input began in early 1993. TheBorrower took specific actions in support of the ICR process included: (i) hiring of two localconsultants in October 1994 to prepare its draft evaluation report; and (ii) assigning two senior officialsof the RFID to provide the formal liaison with the Bank during the ICR process. The consultants' draftreports, submitted to the RFID in December 1994, formed the basis for preparing the Borrower'sevaluation of the project, including its post-implementation action plan.

5. Data Sources for the ICR. Data for preparing the draft ICR were obtained from the relevantproject files, the progress reports submitted by the PFIs, and from field visits and interviews withselected project beneficiaries. Data from the financial institutions that participated in the on-lendingprogram -- the ADB, Standard Chartered Bank (SCB), Ghana Commercial Bank (GCB), the ExportFinance Company (EFC), and 26 rural banks -- on subloan amounts, purpose, type of beneficiaries,location of investment and other socioeconomic profiles were used to conduct an impact assessment ofthe subloans in the rural economy.

Summary of Mission's Findings and Conclusions

Project Costs. Financing and Disbursement Status

6. Estimated Project Costs and Financing Plan. At appraisal, the total project cost was estimatedat US$38.0 million, comprising the on-lending component (US$28.0 million), institution building(US$9.0 million), and the Rural Finance Inspection Department (US$1.0 million). The level of IDAfinancing was estimated at US$20.0 million. Co-financiers, notably USAID and the CanadianCooperative Association (CCA) through CIDA were expected to contribute a total of US$8.9 million,but this component was dropped for lack of firm commitment from these agencies. At effectiveness,the revised project cos. was therefore US$29.1 million, excluding the component which was to befinanced by cofinanciers.

7. Actual Project Costs and Financing at Completion. At closing, the actual rijectLt wasUS$28.4 million, consisting of local costs of US$10.5 million (US$10.8 million estimated) and foreigncosts of US$17.9 million (US$18.3 million estimated). Actual project financing was as follows: IDAUS$20.4 million, Government US$1.2 million, PFIs US$3.9 million, and project beneficiaries US$2.9million which was consistent with the revised financing plan established at credit effectiveness.

8. Disbursement Status at Completion. The Credit was approved on July 28, 1989, becameeffective on April 26, 1990, and closed on December 31, 1994, after two extensions of one year each.The credit is expected to be fully disbursed by April 30, 1995. The line of credit component,including the IDA contribution of US$15.0 million, was disbursed fully before the closing date ofDecember 31, 1994. The institution building component of US$5.0 million is expected to fullydisburse by April 30, 1995.

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Project Objectives and Specific Covenants

9. Project Objectives and Components. The main objectives of the project were to: (i) expandrural productive capacity and employment by providing financing for viable subprojects in cropproduction, livestock, fisheries, artisanal agro-processing, inputs, etc.; and (ii) strengthen sectorinstitutions in order to improve the efficiency of rural financial intermediation. The two projectcomponents were: (i) a line of credit; and (ii) institution building. Institution building had severalsubcomponents: restructuring of the rural banks; strengthening the ARB and the CUAs; building anenhanced capacity for the appraisal of rural credit; strengthening the capacity of the Bank of Ghana forrural bank examination; and building a capacity within BOG for research in rural finance policy; anddevelopment of rural cooperatives. The project's objectives, as stated in the SAR, were realistic andadequately reflected the priorities for strengthening the rural financial sector as agreed withgovernment.

10. Specific Covenants to Achieve Project Objectives. Covenants contained in the DevelopmentCredit Agreement established conditionalities for credit effectiveness. However, inability of the BOGto fulfill these conditionalities in a timely manner delayed project effectiveness for nearly 10 months.The project became effective on April 26, 1990, when the last condition -- the preparation ofrestructuring plans for the first 20 rural banks in a manner satisfactory to IDA -- was satisfied.Covenants contained in the Project Agreement defined the policy and institutional arrangements forproject implementation and covered issues such as abolition of sectoral quotas on loans, abolition ofceilings on shareholdings in rural banks, development of a credit monitoring system for rural banks,and the recruitment of technical assistance personnel under the project. These covenants were alsolargely met.

Overall Achievement of Proiect Objectives.

11. On the whole, the project achieved its two main objectives of expanding investment andemployment in the rural sector and strengthening the capacity of key sector institutions in order toimprove the efficiency of rural financial intermediation. Achievements of specific components aredetailed below.

12. On-lending CoMponent. The project on-lent, over a five year period, an estimated Cedis 9.8billion for financing investments that benefited an estimated 15,250 individuals and groups. The key areasof investment were: poultry (Cedis 3.9 billion), trading (Cedis 2.1 billion), crop production (Cedis 1.9billion) and cocoa marketing and estate rehabilitation (Cedis 1.2 billion). Other activities supported werelivestock, fisheries, oil palm, cottage industries, cotton, rural transport and agro-processing. Of the totalCedis 9.8 billion under this component, subloans to groups such as marketing and producer associationstotaled Cedis 7.3 billion (75.0 percent), while subloans to individual investors amounted to Cedis 2.5billion (25.0 percent). The individual loans of Cedis 2.5 billion benefited an estimated 13,700 smallinvestors, most of whom were men, with women beneficiaries numbering 2,500 (18.0 percent) of the13,700 and accounting for 16 percent of total investments. The average size of group loans was Cedis 4.7million compared to Cedis 180,000 for individuals. Deposit mobilization. Among the rural banks, theproject helped to increase deposit mobilization, mainly from small first-time rural clients who wereencouraged to open accounts with the rural banks as a condition for program participation, and whocontinued to maintain these accounts long after the end of their initial commitment to the rural banks. Thetotal deposits mobilized by all rural banks nearly tripled, from Cedis 4.6 billion in 1989 - a year beforeproject effectiveness - to Cedis 13.2 billion in 1994, with the 26 rural banks participating in the projectaccounting for 37.0 percent of the total deposit mobilized. Increased Credit Allocation. Credit and accessto credit also increased: total loans and advances nearly doubled, from Cedis 3.7 billion in 1991 to Cedis

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6.8 billion in 1994, compared to external project resources of Cedis 1.7 billion channeled through the ruralbanks during the life of the project, and which averaged about Cedis 340.0 million per year. However, thecredit to the rural economy represents only a small fraction of the demand, as total institutional lending toagriculture, excluding the rural banks, was much higher, at an estimated Cedis 24,348.0 million inNovember 1994.

13. Impact on Institution Building. Overall, achievement under the institution building componentis evaluated as satisfactory. The performance of individual subcomponents is detailed below:

Restructuring the Rural Banks. Overall, achievement was marginally satisfactory. Specifictarget set in the SAR was the complete restructuring of at least 80 of the 125 rural banks byproject completion. However, by completion, only 55 rural banks (44 percent) of the 125 ruralbanks had been rated satisfactory by the BOG, 51 banks (41 percent) were rated as less thansatisfactory (mediocre or weak), and 19 banks (15 percent) were rated as distressed. While onface value this may represent significant achievements -- only two rural banks were ratedsatisfactory at project effectiveness -- in reality, the rural banks are still weak and susceptibleto both intemal and external shocks. Although the satisfactory banks are currently meetingcapital adequacy requirements of 6 percent of risks assets, most continue to face a myriad ofproblems, including weak management, low capital base, and high proportion of non-performing loans. They are also plagued by weak internal controls which increase theopportunities for fraud by staff. If anything, the diagnosis conducted during the restructuringprocess revealed that the rural banks were in worse shape than earlier believed and, in order tobecome fully viable, these rural banks would need continuity in technical assistance programssuch as training, that have benefited them tremendously over the past five years. TheBorrower has, in its post-credit action plan, agreed to maintain the momentum of technicalassistance to the rural banks in such areas as training, inspection and examination anddevelopment of rural cooperatives.

Strengthening the Association of Rural Banks. Achievements under this subcomponentwere satisfactory. The project enabled the Association of Rural Banks to firmly establishthe capacity for managing the training programs of the rural banks that benefited more than2,000 staff, managers and directors. The achievements of the training program exceededinitial expectations, and even more importantly, the ARB has decentralized this activity tothe regions in order to reduce costs, expand coverage to member banks, and encouragelocal ownerhi and management.

Strengthening Capacity for Rural Bank Examination. Performance of this subcomponentwas also saisfac There were, however, initial delays in training of RFID staff, afteridentification of skills gaps by project consultants based within BOG. BOG managementwas slow in approving staff development plans submitted by the RFID, and consequently,training did not begin as scheduled. The RFID capacity for examination was enhanced bythe procurement of 6 field vehicles, and in 1994, for the first time, the RFID was able toinspect all 106 rural banks (comprising the 55 satisfactory and 51 weak/mediocre banks).(TMe 19 distressed banks are closed, awaiting liquidation or transformation to savings andloans). Furthermore, the RFID has put into place, though not yet fully institutionalized, afeedback mechanism to rural banks cited for serious exceptions during regular inspectionexercises. This feedback function has been important in keeping good rural banks fromsliding back to the unsatisfactory category while closely monitoring the weaker banks toensure that their performance improves.

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Buildini CaRacity for Rural Credit Appraisal. Achievement of this subcomponent wasunsatisfacoQy. A total of 96 man-months of consultancy to the rural banks for creditappraisal and the provision of 100 motorbikes as logistics to project officers within therural banks were not implemented by the RFID. Similarly, for the national level-banks,the recruitment of 60 projects officers, as stipulated in the project, was also notimplemented. A few satisfactory rural banks have hired project officers, but a majority ofrural banks have yet to establish this important capacity.

Strengthening of Rural Cooperatives (Pilot Program). This component is rated assatisfactory. The pilot program was conceptualized to test the basic hypothesis thatefficiency and effectiveness of rural financial intermediation could be enhanced ifindividual smaliholders were organized into groups in order to achieve the desiredeconomies of scale. A total of 750 farmers in the resource-poor areas of the Upper Westwere assisted through technical assistance provided through an NGO to form marketingcooperatives that are profitably engaged in inventory credit. Sales from their commercialactivities totaled Cedis 13.8 million in 1993. This is a significant achievement, given thataverage annual family cash income in these areas is Cedis 750,000, with about 10 personsper household.

* Strengthening the Credit Union Association. This subcomponent was canceled due to thelack of co-financing.

Key Factors Affecting Proiect Performance

14. The major factors affecting the project were: (i) inability of the Borrower to satisfy, in a timelymanner, all conditionalities for effectiveness; (ii) lack of interest by the national-level commercial banks toparticipate in the program; (iii) the low ceiling on subloans, which effectively led to the exclusion of largerborrowes from participating in the project; and (iv) the weak capacity of the RFID, the implementingagency. Effectiveness Delay: The delay in meeting credit effectiveness was due to the inability of theRFID to satisfy all stipulated conditionalities in a timely manner, in particular, Section 6.01 (e) of theDevelopment Credit Agreement which required the Borrower to submit, in a manner satisfactory to IDA,the financial restructuring plans for at least 20 of the rural banks. Lack of interest by National-levelBanks: The low participation rate of the national-level banks, with the exception of the ADB whichtraditionally lends to agriculture, was a reflection of their assessment of high administrative costs of suchleading, the risks inherent in rainfed agriculture, and the nature of potential clients (small, hckingcollateral, and widely dispersed). Because commercial banks paid little or no interests on current accounts,the reference interest rate (RIR) on project funds, which averaged about 18 percent, representod anunacceptably high costs of funds to these banks. By completion, utilization of the on-lending proceeds wasdistributed as follows: Barclays Bank (0.0 percent), Standard Chartered Bank (0.6 percent), GhanaCommercial Bank (1.0 percent), the Export Finance Company (6.3 percent), compared to the rural banks(18.0 percaet) and the ADB (74.1 percent). Low Ceiling on Subloans: The project established a ceiling ofCedis 50.0 million (about USS50,000 at the current exchange rate) on subloans in an effort to prevent thecrowding out of small borrowers by larger private sector firms and parastatals. This low ceiling effectivelydirected credit to specific size (smaller) operations and denied access to the larger enterprises, whoserequirements were significantly higher than the ceiling. During the MTR, the credit agreement wasamended to allow participation of larger borrowers, and disbursement increased significantly. Bycompletion, the average loan to parastatals and groups had increased from Cedis 599,000 to Cedis 4.7million. 9

15. Bank Performance. On the whole, Bank performance, from identification through completionwas satisfactory. The Bank was responsive to constraints identified during implementation and,

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accordingly, increased its level of supervision and consultation with the Borrower: 54 percent of totalstaff weeks was used for supervision of the credit. However, the Bank could have done more to securcommitments from co-financiers before proceeding to the Board, thereby avoiding the cancellation ofthe CUA component of USS8.9 for lack of co-financing.

16. Borrower Performance. On the whole, Borrower performance was also satisfactory. The projectwas consistent with the Borrower's objective of strengthening rural financial intermediation and putting therural banking systen on sound financial, technical and institutional footing. The project therefore hadstrong Borrower commitment and ownership. Prior to the project, the Borrower had implementedsignificant policy and institutional reforms at the macro-level, including financial sector refonns, whichhelped to provide an enabling environment for project implementation. However, at the implementingagency level, there were practical problems in translating strong Borrower commitment into effectiveimplementation performance: lack of prior experience in implementing Bank projects, high turnover insenior managernent, delays in procurement of vehicles and computers critical to carrying out statutoryfunctions of inspection management audits. However, the RFID was able to transcend the earlierproblems, such that by the mid-term review it had developed significant capacity for projectimplementation.

17. Assessment of Project Outcomes. Based on the implementation performance, estimates ofsustainability and the Borrower's plans for the post-credit phase of the project, overall outcome of theproject was satisfactory. The project accomplished its key objectives of financing eligible subprojects inthe rural sector and of strengthening financial sector institutions. Overall assessment of specific projectcomponents is as follows: Line of credit: outcome satisfactory, despite the initial implementation delays.Institutonal building: overall outcome satisfactory, but with varying degrees of success in specificsubcomponents as noted: (i) financial restructuring of the rural banks -- less than satisfactory, given thepartial achievement of targets and low probability of sustainability; (ii) strengthening of the ARB --outcome highly satisfactory; (iii) enhancing capacity for rural credit appraisal - outcome less thansatisfactory; (iv) strengthening BOG capacity for inspection management audits of the rural bankingsystem -- outcome satisfactory; and (v) strengthening rural cooperatives - outcome highly satisfactory.

Sustainability. Future Operations and Key Lessons Learned

18. Project Sustainability. Given the commitment from the Borrower, the emergence of strongersector institutions, and local ownership, sustainability of key project benefits appears highly likely.The RFID has emerged as a viable agency with demonstrable capacity to provide systematicmanagement audits of the rural banking system. The ARB has developed good capacity for conductingthe training program of rural banks' staff and directors, but this cannot be sustained in the short-termwithout support from BOG. To a large extent, the rural banks, through charges levied by the ARB,are already bearing an increasing share of training costs, but more resources would be needed,especially if training is to focus on the weaker banks. Two indicators of the sustainability of thetraining program are: (i) the training of trainers program, a local twinning arrangement between thestrong and weak banks in a specific region; and (ii) the increasing awareness among some rural bankmanagers to budget for training based on identified skills gaps. Also, it is important as a sustainabilitymeasure, that the current rating scheme used by the BOG in classifying rural banks be expandedbeyond simple capital adequacy and embrace other attributes of sustainability such as quality of staff,internal controls systems, quality of portfolio and staff development. Rural Cooperatives: Thefarmers service cooperative centers, established as pilots under the project, are profitable, with stronglocal ownership and have received commendations from regional authorities for contributing directly toefforts of poverty alleviation in the resource-poor areas of the Upper West Region. Innovativeinstruments for rural financial intermediation developed under this component, such as the inventorycredit scheme, are worthy of further testing and replication.

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19. Rural Banks. On the basis of loan recovery rates, profitability and quality of their portfolios, therural banks are, in general, still far from being sustainable. A few banks have nevertheless madesignificant imnprovements under the project that are noteworthy. These include the 55 banks ratedsatisfactory by the BOG and, specifically, the 26 banks that participated in the on-lending program. Theaverage recovery rate among all rural banks was 59 percent as at December 31, 1994, compared to 70percent in 1986, a significant decline. The reason for the decline varied -- rapid expansion of branches andmobilizing agencies, the inability to increase portfolio quality, and low prices for agriculture output.However, as expected, performance among the 55 satisfactory rural banks was better, with 73 percentrecovery rate, compared to only 44.0 percent for the 51 banks rated as mediocre. The better performanceshowed a marked improvement in their ability to handle the varied risks associated with agriculture sectorlending. Most rural banks continue to make inadequate provisions for bad and doubtful debts, therebyoverstating their profitability: as at December 31, 1994, 96 of the 106 active rural banks made inadequateprovisions for bad debts amounting to Cedis 469.8 million. Profits among the 26 participating rural bankswas higher, ranging from Cedis 0.2 million to Cedis 49.0 million as at December 31, 1993. On the basis ofthese mixed results, rural banks would need significantly more assistance beyond the scope of thisoperation in order to become viable.

20. Future Operations and Key Lessons Learned. The Borrower is committed to the development ofa strong rural financial sector, the centerpiece of which is the rural banking system, and has therefore, in itspost-project operational plans, identified the priority areas and the resource requirement for support ofinstitution strengthening objectives in the medium term. The Borrower's plan would ensure continuity inkey technical assistance activities such as the training of rural bank staff and directors, replication andwider testing of innovative instruments of rural financial intermediation developed under the pilot programof rural cooperation, and regular inspection management audits of rural banks, including feedback tomanagement. Key Lessons: The key lessons for future projects in the rural finance sector are:(i) training of rural bank staff and directors, perhaps more than any single project activity, is the essentialingredient for the development of a viable rural banking sector; (ii) in order to be effective monitoring tools,inspection mangement audits of the rural banks should be combined with regular feedback to theirmanagement, with clear guidelines for correcting observed deficiencies, a time frame for addressingexceptions noted, and possible sanctions for failing to rectify deficiencies; (iii) as demonstrated by theARB, the emergence of a strong apex institution for the rural banks can lead to the development of asustainable, non-governmental alternative for strengthening the rural banking system; (v) inventory credithas emerged as an innovative marketing tool that has potential for providing strong linkages between theformal and informal financial sectors.

21. Next Steps: Priority Actions. The immediate next steps, based on the lessons learned from theproject, are to: continue the institutional strengthening efforts in the rural finance sector for which theBorrower has requested a bridging reallocation from on-going projects in the agriculture sectorportfolio to continue with technical assistance to the ARB, the RFID and the Pilot Program in RuralCooperatives in the Upper West; and to begin early preparation (diagnosis, testing of new instruments,broad client consultation, and studies) of a follow-up rural finance operation, for which the Borrowerhas requested a PPF and which would be a component of the proposed Second Agriculture SectorInvestment Credit (ASIC) scheduled for FY98.

rfpaide.doc

Appendix B

IMPLEMENTA TIONCOMPLETION

REPORTGHANA

RURAL FINANCE PROJECTCREDTNO. 2040-GH

MARCH 10, 1995

1

IMPLEMENTATION COMPLETION REPORTGHANA

RURAL FINANCE PROJECTCREDIT NO. 2040-GH

This is the Implementation Completion Report (ICR) for the Rural Finance Project in Ghana, forwhich Credit No. 2040-GH in the amount of SDR 15.2 Million was approved on June 30, 1989 andbecame effective on April 26, 1990. The credit closed on 31st December, 1994, instead of theoriginal closing date of 31 st December, 1992. It was almost fully disbursed.

The Bank of Ghana engaged the Consultants, Messrs K. Gyasi-Twum and Akwasi Owusu-Bi toassist the Government in the evaluation of the implementation experience and project performance.

The report fully reflects the views of the Govermnent.

Preparation of this ICR begun during the Bank's Final Supervision Mission from January 18 toFebruary 22, 1995. It is based on materials in the project file, field visits to the project sites,participating banks, interviews with officials of Bank of Ghana, the Association of Rural Banks,other participating agencies, and some final project beneficiaries.

EVALUATION SUMMARYRURAL FINANCE PROJECT

CREDIT NO. 2040-GHiGHANA

INTRODUCTION

The rural sector of the Ghanaian economy is important for its share of the national population (65percent) and its total productive capacity, producing about 53 per cent of the Gross DomesticProduct (over the period 1975-87). Much of the productive capacity of the rural sector is devotedto agricultural production, producing about 80 per cent of all agricultural produce of the country.

Significantly about 90 per cent of rural agricultural producers are small-holders whose practices arecharacterized by low productivity due mainly to less productive and inefficient productiontechnology and post-production losses. It is however recognized that consistent and systematicinvestment in more modem and cost effective production technology in rural areas backed withincreasing investment in, and restructuring of, rural infrastructure could significantly induce growthin the rural sector. This calls for substantial rural financial intermediation.

Unfortunately commercial banks have tended to focus more on urban industrial and commercialactivities which are more profitable and less risky. Rural banks (RBs) have been set up since 1976to fill the gap in the rural/agricultural sector financial intermediation. However most of the RuralBanks have neither been able to mobilize enough deposits nor satisfy the demand for credit in theproductive sector in their respective catchment areas.

Project Objectives and Components

In recognition of the need to restructure the rural financial markets with the view to ensuring theimprovement and sustainability of rural financial intermediation, the Ghana Government (GOG)obtained a credit of 15.2 Million SDRs from the International Development Association (IDA)under a development credit agreement dated 28th July 1989 to finance the Rural Finance Project(RFP).

The main objectives of the project are to:

(a) expand productive capacity and employment generation in the rural sector by providingfinancing for viable projects in agriculture, livestock, fisheries, artisanal, agro-processing,and input supplies through a multi-agency lending approach;

(b) implement a financial restructuring programme for rural banks to enable them become moreefficient in deposit mobilization and in the-delivery of short and medium term creditespecially to small-holders.

3

(c) strengthen the Association of Rural Banks and the Credit Union Association, two importantNGOs that are promoting financial interrnediation in informal sectors.

(d) build an enhanced capacity of the appraisal of rural credits.

(e) strengthen the rural banks examination unit in Bank of Ghana

(f) build a local capacity for research in rural finance policy.

In pursuance of the above objectives, the project was made up of two components viz.

i. a line of credit or on-lending component of 11.35 million SDRs (about US$15.8 million)ii. an institution-building component of 3.85 SDRs (about USS5.3 million)

IMPLEMENTATION EXPERIENCES AND LESSONS LEARNED

The project objectives were relevant and realistic within the context of Ghana's Econic RecoveryProgranmme. The overall achievement of the RFP has been substantial. About 9/of the totalcredit was disbursed. There were appreciable achievement in the financing of priate econormicactivities in agriculture, livestock, fisheries and artisanal agro-processing in the rural sector. Theline of credit had enabled the participating banks to expand their credit portfolios while thebeneficiaries were able to maintain, rehabilitate or expand their enterprises.

Under the restructuring and institution-building process, rural banks (RBs) were being brought inline with the provisions of the Banking Law, 1989 and the relevant Rank of Ghana Notices andCirculars thereby ensuring their liquidity profitability and solvency at all times.

The Bank of Ghana examination and inspection capacity was also strengthened through technicalassistance and training under the project.

The Rural Finance Project also enabled the Association of Rural Banks (ARB) a non-governmentalumbrella organization open to membership by all rural banks, to secure the assistance of externalconsultants and logistic support to mount training programmes for all levels of rural banks staff anddirectors.

Under a pilot scheme in the Upper West Region, fanners organized in cooperatives were assistedthrough technical assistance, training and credit to derive fuller benefits from their farmingactivities.

The original three-year project life turned out to be too optimistic. The use of the line of Creditand the implementation of the rural bank's restructuring programme and other institutionalstrengthening activities such as the pilot programme on the strengthening of the Farmers ServicesCentre Cooperatives (FSCCs) needed more time than anticipat- J There was e .,ry indication

4

towards a more realistic 5-yeaf project life. Hence the request and approval for a two-yearextension of the project period.

Line of Credit Component

A provision of 11.35 rnillion SDRs (about $15.86 million) was made for on-lending to financialinstitutions which entered into participatory agreements with the Bank of Ghana. Participatoryagreements were signed with the following 6 (six urbanized financial institutions;

i. Agricultural Development Bank (ADB)ii. Standard Chartered Bank Ghana Ltd. (SCB)iii. Barclays Bank of Ghana Ltd.iv. Ghana Commercial Bank (GCB)v. Social Security Bank Ltd.vi. Export Finance Company Ltd. (EFC)

In addition to the above, 31 (thirty-one) rural banks had signed the project participatory agreement.

About 99.9% of the line of credit was disbursed to three national banks, the Export FinanceCompany and twenty-six rural banks.

Participation by the Ghana Commercial Bank and Standard Chartered Bank was minimal. BarclaysBank and Social Security Bank did not subnit any application for reimbursement.

Disbursement was however slow during the initial stages of the project life. The reason for low andnon-participation by national banks included the following:

i. High cost of project funds (i.e. reference interest rate)

ii. High risk associated with eligible sub-projects in the sectors covered.

iii. Lending policy of individual financial institutions geared towards short-term lending tosector other than the agricultural sector.

iv. Inability to meet eligibility criteria for participation in the project.

v. Excess liquidity

In order to accelerate the rate of disbursement of the line of credit, a number of changes were madeto project design. These were:

i. The amendment of the formula for and frequency of calculating the cost of project funds,i.e. reference interest rate.

ii. The removal of the ceiling on individual borrowing from the project.

5

Of the 31 rural banks that signed the participatory agreements, 26 (twenty-six) actually accessedthe on-lending facility. Late qualification and failure to ensure continued compliance with all laid-down eligibility conditions (in the case of one rural bank) were the reasons for their inability toaccess the facility.

Two rural banks which were assessed as having qualified for participation in 1991, but did not signthe participatory agreement gave the reason for their non participation as lack of immediateinvestment avenues in their respective catchment areas. One of the banks however had an on-goingspecial programme for their women customers with the assistance of a foreign NGO.

As at 31st December, 1994, the sum of 9.89 billion ($15.8 million) had been disbursed to ADB,SCB, GCB, EFC and 26 RBs. (Table 2 attached).

The total loan portfolio of the rural banks increased from 1.35 billion as at December 1989 (beforethe project) to 6.82 billion as at December 1994. Likewise, ADBs total loan portfolio increasedfrom 5 billion as at December 1991 to 33.2 billion as at December, 1994.

Interviews conducted on some PFI beneficiaries indicate that the on-lending facility had enabledthem to increase the output of their enterprises as well as employ more hands. One suchbeneficiary who is a poultry farmer had his total bird population and egg production increasingalmost three fold after benefitting from the line of credit.

Institution Building

87% of the institution-building component was disbursed. The project assisted 122 RBs inpreparing their restructuring programmes through training and technical assistance.

The RFP made an impact on rural financial intermediation in the following areas:-

t. assisting 122 RBs in preparing their restructuring programmes through technical assistanceand training.

ii. providing training, technical assistance and logistic support to the RB examination Unit(BSD) and the RB inspection unit (RFID) of Bank of Ghana.

iii. providing extemal consultants and logistic support to enable ARB prepare training modulesand mount training programmes for RB staff and directors. The training addressedtechnical deficiencies in the skills of staff and directors.

The above intervention has contributed towards the achievement of the following:

I The improvement of financial and management status of the RBs as evidenced in thencreases in the rural banks classified as satisfactory, from 2 at the onset of the project to 55

6

as at December 1994. 51 RBs were at the close of the project classified as mediocre orweak while 19 were distressed.

2. Bank of Ghana has improved its role in the supervision and monitoring of rural banks. BSDexamined 52 RBs in 1993 as against 46 in 1992 whilst the RFID covered 107 RBs asagainst 81 in 1993. For 1994 55 and 106 RB were examined and inspected respectively.

3. Training of RB personnel is now being conducted on a continuous basis. 872 staff anddirectors of RBs have been trained.

In addition to the above, under the pilot programme on rural cooperatives in the Upper WestRegion, an inventory credit scheme had resulted in substantial price gains to the participatingfarmers.

Key Lessons Learned

Key lessons learned are:

i. On-lending scheme had motivated RBs to upgrade themselves into satisfactory category

i. System of reimbursing PFIs with sub-loans instead of providing funds up-front made PFIsmore circumspect and meticulous in screening eligible subprojects

iii The more credit a bank is able to provide the more customers the bank gets and the greaterits mobilized deposits. The RFP therefore has potential of expanding mobilized deposits forPF is.

iv. Even though PFIs are prepared to grant term loans to rural entrepreneurs, there are notmany identifiable investments that need term loans.

v. Regular inspection and examination of rural banks is essential for maintaining the viability ofthe rural banking system.

vi. Training for all levels of staff of RBs should be conducted on a continuous basis.

Project Implementation Agency

The RFID of Bank of Ghana was responsible for coordinating project implementation, financialaccounting procurement, monitoring, including compliance with Bank policies and procedures.The implementing agency efficiency in processing sub loan applications was initially hamperedowing to lack of computers. There was a delay in the procurement of the computers. In spite ofthis, the RFID performed creditably as the processing time of application was reduced toreasonable limits. Audit reports were submitted on time. Initial problems with submission of

7

replenishment applications were overcome following RFID staff participation in a workshoporganized at the Resident Mission.

Project Sustainability

It is likely that benefits gained under the project would be sustained because of governmentscommnitment to provide resources to continue with some of the activities camried out under theproject.

Presently the BOG is conunitted to providing funds to sustain training of RB staff and directors.The Bank would also continue to play its statutory role as the supervisor of the banking industry.

The repayments from PFIs of matured sub-loans may be recycled in order to sustain the on-lendingscheme at least for the RBs to ensure that the enthusiasm of the banks does not wane.

Bank Performance

Bank Performance in identification preparation, appraisal and supervision of the subject wassatisfactory. The bank responded in a timely manner to proposals by Government to amend certainaspects of the design of the project which were hampering smooth implementation. The Bank wasflexible in realization of funds from slow-moving categories to newly created categories and inextending the closing date on two occasions. The Accra Resident Mission was very helpfuilthrough the offer of advice and facilitating in submission of request to Washington wherenecessary.

Government Performance

Goverunent Performance was satisfactory. A great deal of attention and support was receivedfrom Governrnent in tackling various issues relating to the effective implementation of the project.Governnent seems conumitted to providing an efficient rural financial intermediation. There wasno interference from Governrnent in operational matters. Government's compliance with majorloan covenants was satisfactory.

Post-Implementation Operational Plan

In order to build on the experience gained under the RFP which formally closed on 31st December,1994 and also to ensure the sustainability of the benefits gained, the GOG would provide resourcesfor the post-implementation operational phase. For the on-lending scheme, the Counterpart Fundinto which the repayment of matured sub-loans are lodged would be recycled into the rural financialsector. The balance on the Counterpart Fund stood at 2.0 billion as at 31st December, 1994. Thiswould ensure sustainable flow of resources to the agriculture and related sectors.

On institution building, the BOG would continue to support the ARB in conducting RB staff anddirectors training programmes. The Bank has already committed funds for the ARB's 1995training budget, having already financed the Association's 1994 training Budget.

8

The role of RFID and BSD as supervisory authority over rural financial intermediation would asusual be catered for by BOG.

The BOG would also act as facilitators in the voluntary liquidation of rural banks classified asdistressed.

It is also expected that a Project Preparatory facility would be obtained for preparing a second RFPand as well as fund the replication of pilot programme on the Famers Services CentreCooperatives (FSCCs).

Table 6 shows the financial commnitments for the Post-implementation operational plan (coveringthe period 1995 to 1997).

9

TABLE 1

RURAL FINANCE PROJECT - GHANA

DISBURSEMENT STATUS AS AT 31 ST DECEMBER 1994

CATEGORY ALLOCATED AMOUNT DISBURSED($M) ($M)

SUB-LOANS 15.86 15.84

CONSULTANCY &TRAINING 4.00 4.12

EQUIPMENT & VEHICLE 0.36 0.34

CIVIL WORKS 0.17 0.01

OPERATING COSTS: RFID 0.32 0.16

OPERATING COSTS: ARB 0.16 0.02

REFINANCING OF PPF 0.20 0.20

TOTAL 21.07 20.69

TABLE 2RURAL FINANCE PROJECT - GHANA

SUB-LOANS DISBURSED (¢MILLION)

PFI 1991 1992 1993 1994 TOTAL % OF BENEFICIARIESTOTAL

ADB 760.2 129.1 2,771.7 3,671.4 7,332.4 74.1% 2,674

GCB 0.0 42.1 51.6 0.0 93.7 0.9%Y 24

EFC 0.0 621.6 0.0 0.0 621.6 6.3% 68

SCB 61.1 0.0 0.0 0.0 61.1 0.6% 150

RBS 39.5 311.9 1,218.8 211.0 1,781.2 18.0% 13,116

TOTAL 860.8 1,104.7 4,042.1 3,882.4 9,890.0 100.0% 16,032

TABLE 3RURAL FINANCE PROJECT - GHANA

REPAYMENT STATUS OF SUB-LOANS ('000)

PFI DISBURSED REPAID BALANCEADB 7,332,413 841,111 6,491,302

GCB 93,664 10,064 83,600

SCB 61,128 61,128 0

EFC 621,600 621,600 0

RURAL BANKS (26) 1,781,268 498,000 1.283,268

TOTAL 9,890,073 2,031,903 7,858.170

TABLE 4

RURAL FINANCE PROJECT - GHANA

REPAYMENT SCHEDULE - SUB LOANS ($MILLION)

PFI JUN'93 SEP'93 DEC'93 MAR'94 JUN'94 SEP'94 DEC'94 MAR'95 JUN'95 SEP'95 DEC'95 MAR'96 JUN'96.

ADB 497.9 151.0 28.9 30.0 46.6 16.3 70.3 133.0 437.8 1617.2 455.4 40.8 35 7

GCB 10.1 11.6 40.0

EFC 269.8 197.6 154.2

SCB 61.1

RBS 45.2 189.6 26.1 599.2 262.3 119.6 101.3 181.8 13.5 36.3

TOTAL 884.1 348.6 218.5 184.2 72.7 16.3 669.5 395.3 569.0 1658.5 637.2 54.3 72.0== = = = = = = = = == = = = = = = = = === = = == = == = = = = == == = = =3 = =…== = = = = = =

1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'

SEP'96 DEC'96 MAR'97 JUN'97 SEP'97 DEC'97 SEP'98 MAR'99 DEC'99 JUN'00 SEP'00 TOTAL

158.5 2211.8 12.8 80.8 189.6 721.7 210.3 123.6 162.4 7332.4

32.0 93.7

621.6

61.1

15.3 56.3 33.4 29.5 22.6 49.3 1781.3

173.8 2268.1 46.2 29.5 103.4 81.3 189.6 721.7 210.3 123.6 162.4 9890.1

2~

TABLE 5RURAL FINANCE PROJECT - GHANACLASSIFICATION OF RURAL BANKS

SATISFACTORYNAME OF RURAL BANK LOCATION REGION

1 OKOMFO ANOKYE WIAMOASE ASHANTI2 SEKYERE JAMASI ASHANTI3 ATWIMA MPONUA TOASE ASHANTI4 AMANSIE WEST ANTOAKROM ASHANTI5 ATOBIASE AREA ATOBIASE ASHANTI6 ASANTE AKYEM JUANSA ASHANTI7 NWABIAGYA BAREKESE ASHANTI8 OTUASEKAN KOFIASE ASHANTI9 SEKYEDOMASE SEKYEDOMASE ASHANTI

10 AMANANO NYINAHIN ASHANTI11 JUABENG JUABENG ASHANTI12 TANO NTOTROSO-GYEDU BRONG AHAFO13 YAPRA PRANG BRONG AHAFO14 KINTAMPO KINTAMPO BRONG AHAFO15 BADUMAN BADU BRONG AHAFO16 NSOATREMAN NSOATRE BRONG AHAFO17 WAMFIE WAMFIE BRONG AHAFO18 DERMA AREA DERMA BRONG AHAFO19 ENYAN DENKYIRA ENYAN DENKYIRA CENTRAL20 KAKUM ELMINA CENTRAL21 AKATAKYIMAN KOMENDA CENTRAL22 NYAKROM AGONA NYAKROM CENTRAL23 AKYEMPIM GOMOA D0 WURAMPON CENTRAL24 AKOTI ASSIN AKROPONG CENTFRAL25 AGONA KWANYAKU CENTRAL26 BRAKWA BREMAN BRAKWA CENTRAL27 MANYA KROBO ODUMASE KROBO EASTERN28 KWAHU PEPEASE EASTERN29 AKUAPIM MAMFE EASTERN30 DUMPONG OFRAMOASE EASTERN31 KWAEBIBIRIM ASUOM EASTERN32 UPPER MANYA KRO ASESEWA EASTERN33 MUMUADU OSINO EASTERN34 ANUM ANUM EASTERN35 ATIWA KWABENG EASTERN36 SOUTH AKIM NANKESE ESATERN37 LA COMMUNITY LA GT. ACCRA38 GA AMASAMAN GT. ACCRA39 ADA KASSEH GT. ACCRA40 DANGBE PRAMPRAM GT. ACCRA41 ABOKOBI AREA ABOKOBI GT. ACCRA42 KUMBUGU KUMBUNGU NORTHERN43 WEST MAMPRUSI WALEWALE NORTHERN44 BESSFA GARU UPPER EAST45 NAARA PAGA UPPER EAST46 AGAVE DABALA VOLTA47 MEPE AREA MEPE VOLTA48 KAASEMAN KAASE WESTERN49 BIATORYA SCO ISU NKWANTA WESTERN50 ASAWINSO SEFWI ASAWINSO WESTERN51 UPPER AMENFI ANKWASO WESTERN52 LOWER PRA SHAMA WESTERN53 BOGOSO AREA BOGOSO WESTERN54 MANSOMAN MANSO AMENFI WESTERN55 AHANTAMAN AGONA NKWANTA WESTERN

- MEDIOCRENAME OF RURAL BANK LOCATION REGION

1 ATWIMA KWANWOMAN PAKYI NO.2 ASHANTI2 AHAFO ANO PREMIER WIOSO ASHANTI3 KUMAWUMAN KUMAWU ASHANTI4 BOSOMTWE KUNTANASE ASHANTI5 ATWIMA FOASE ASHANTI6 KWAMAMAN KWAMAN ASHANTI7 ODOTOBRI JACOBU ASHANTI8 ADANSI FOMENA ASHANTI9 ASOKORE ASOKORE ASHANTI

10 FIAGYA BUSUNYA BRONGAHAFO11 SUBINSO SUBINSO NO.2 BRONG AHAFO12 KYIDOM NSUTA BRONG AHAFO13 BOMM AREA BOMM BRONG AHAFO14 SUMA SUMA AHENKRO BRONG AHAFO15 ASUTIFI ACHERENSUA BRONG AHAFO16 TANO AGYA DADIESOABA BRONG AHAFO17 NKORANMAN SEIKWA BRONG AHAFO18 ASUNAFO AKRODIE BRCO' A.HAFO19 NKORANZA KWABRE AKUMA-NKORANZA BRONG AHAFO20 TWIFO TWIFO AGONA CENTRAL21 EKUMFIMAN ESSUEHYIA CENTRAL22 AWUTU EMASA AWUTU BEREKU CENTRAL23 GOMOA APAM CENTRAL24 GOMOA AJUMAKO GOMOA AFRANSI CENTRAL25 ASSINMAN ASSIN MANSO CENTRAL26 BAWJIASE AREA AWUTU BAWJIASE CENTRAL27 NYANKUMASI AHENKRO FANTI NYANKUMASI CENTRAL28 EASTERN GOMOA ASSIN GOMOA DOMINASE CENTRAL29 AFRAM TEASE EASTERN30 AKYEM MANSA AYIREBI EASTERN31 KWAHU PRASO KWAHU PRASO EASTERN32 SOUTH BIRIM ACHIASE EASTERN33 MPONUA AMUANA PRASO EASTERN34 ATWEAMAN AKIM AKROSO EASTERN35 AKIM BOSOME AKIM SWEDRU EASTERN36 ODWEN ANOMA ABETIFI EASTERN37 ASUOPRA &'OSU EASTERN38 SHAI DODOWA GT. ACCRA39 LANG ABAR HUM TUNA NORTHERN40 SONZELE JIRAPA UPPER WEST41 NANDOM NANDOM UPPER WEST42 UNITY ZIOPE VOLTA43 WETO KPEVE VOLTA44 AVENOR AKATSI VOLTA45 GUAMAN GUAMAN VOLTA46 NORTH TONGU ADIDOME VOLTA47 JOMORO TIKOBO NO.1 WESTERN48 AMENFIMAN WASA AKROPONG WESTERN49 NZEMA MANLE AWIEBO WESTERN50 KWAKWADUAM SEFWI-BOAKO WESTERN51 SEFWI BEKWAIMAN SEFWI BEKWAI WESTERN

2

DISTRESSEDNAME OF RURAL BANK LOCATION REGION

1 AFRANCHOMAN AFRANCHO ASHANTI2 AKROFUOM AREA AKROFUOM ASHANTI3 KWAME DANSO KWAME DANSO BRONGAHAFO4 ABURA ABURAABOASE CENTRAL5 SENYA SENYA BEREKU CENTRAL6 BIRIWA BIRIWA CENTRAL7 AYANFURI AYANFURI CENTRAL8 ABEADZEMAN ABEADZE DOMINASE CENTRAL9 SOUTH AKUAPIM PAKRO EASTERN

10 AFRONUAHWE AKOASE EASTERN11 ABUAKWA AKIM ASAFO EASTERN12 UNIVERSAL EHI VOLTA13 WORAWORA WORAWORA VOLTA14 AKAN WAWA DODO AMANFROM VOLTA15 VOLTA WUDIDI VOLTA16 UNITE, UKPE KUKURANTUMI VOLTA17 NORVISI SHIA VOLTA18 VOLTA PREMIER DZELUKOPE VOLTA19 ESIAMA ESIAMA WESTERN

3

TABILE 6

RURAL FINANCE MOJEC - GHANAFOST IMLEM1E1NATlrCN OPERATCINAL

PHASE PLAN

F= - =^1995 1996 19Q7i_AC'T_IVITY IT COVERAGE COST COVF.RZAGE COST COVERAGE COST

ON-LENDING - 40 RBs 02.5b 5o RBs s3.5b 55 RBs 04.5bRECY'CLING OFC TLNqD - RBS

_

TRAINING - 1141 Staff 082.2m 525 staff #75.0 1166ARB & Directors staff & j1O6rn

directorsRB 125 RBs 0125m 111 RBs 0135m 116 RBs l15OmEXAMINATION&IINSPECTION_________

REPLICATION 5 FSCC"s $0.25m 5 FSCC's $0.35m 5 FSC'CC's $0.235mOF UPPERWEST FSCC' sPR[X OG RA.M .

Appendix C

BURKINA FASO r r r~~~~~~~~~~~~~~A

GKANA

RURAL FINANCENORMERN ~~~~~PROJECTDistribution of

Rural Banks

D'IVOIRE ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~ h.IN

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t-. . .

04L~*\ SF OF CUNfA

.\~~~~~~~~~~~~~~~~~~~~ -, =- - -

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|~~~~~~~~~ -

i~~~~~ ~~~~~~ L- -'W

I

dIDT : dA,:19, ' ° I :Oj '4 .,N0'd',4

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