Mali Finance PROGRAM OF PRIVATE IRRIGATION CREDIT IN THE OFFICE DU NIGER ZONE Evaluation Report June 2004 «Better performances and sustained impacts in the agri businesses and financial sectors through dynamic partnerships» --Cheick Dramé CTO Mali Finance PROGRAM OF PRIVATE IRRIGATION CREDIT IN THE OFFICE DU NIGER ZONE Final Report June 2004 Submitted to : USAID/Mali By: Chemonics International Inc Contrat No. 688-00-03-00069-00 March 2005 MALI FINANCE PROJECT USAID PROJECT 688-C-00-03-00069-00 _________________________________________________________ PROGRAM OF PRIVATE IRRIGATION CREDIT IN THE OFFICE DU NIGER ZONE Evaluation report Submitted by: Warren Chase Boubacar Diarra Jacques Diarra May - June 2004 1.0 Introduction This report sets forth results of an evaluation of the private irrigation credit program in the zone of the Ooffice duu Niger Zzone (ON). The purpose of the program, which began in Marsch 2000 thanks towith the financial assistance of USAID, was: • to promote investment in private irrigation; • to increase production and the added value for rice and fruits and vegetables; • to create jobs in the production, processing, and trading of rice and fruit and vegetable produce. Thee evaluation is hadused for two goals: 1) to conduct an overall assessment of the program with respect to the management of the whole private irrigation loan portfolio, and to encircle identify issues for recommended follow-up; and 2) In additlearn from the experience as a basis for future initiatives in this area. The team of evaluation team paid a attention to the nature and quality of management tools as well as the points raised by l`USAID with respect to specific borrowers and, problems listed by USAID’s Office of Financial Management. Moreover, interests and risks associated with continuation of the program were defined and analyzed. Given issues with the current status of the program, several stakeholders are interested in the results of the evaluation: • USAID, which is concerned with lessons learned in order to propose an effective management strategy for the program’s future; • the Office du Niger, for which the continuation of the program is important for achieving its objectives; envisaged • The Federation of the Rural Mutual Credit Unions of the Delta (FCRMD), which is keen to obtain realize improved results under in the area of portfolio management and recovery of problem loans; • The Mali Ffinance Project, within the context of a possible partnership relation with the FCRMD as part of its work plan. 1.1 The Evaluation Team The evaluation evaluation mission was carried out from April 19 to 21, 2004, by a team of from the Mali Finance project comprised of: - Warren S. Chase, the project’s DirectorChief of Party; - Boubacar Diarra, specialist in audit and micro financeMicrofinance Specialist - Jacques Diarra, manager of the partnership fund and adviser in micro finance Partners Fund Manager and Microfinance Adviser 1.2 Course Development and Scope of the Mission The evaluation of the program evaluation was carried out following the visit in the field. mission on the ground. The collaboration of the FCRMD’s employees collaboration made possible the mission possible. The mission consisted mainly primarily of: • a meeting with the Chairman and Managing Director of Office du Niger (ON) and the head of its agrio -business department; • meetings with the FCRMD’ s Administrative and fFinancial Oofficer; • a documentary review of the existing handbooks, procedures and files made up; • working sessions with the person manager in charge of the follow-up monitoring of the private irrigation loan portfolio; • Some several field visits on the ground in companaccompanied byy of the aAdministrative and Ffinancial personOfficer and the person manager in charge of follow-up;monitoring; • an in-depth analysis of data collected from Excel files 1.3 The Evaluation’s Limits Limits There was were no particular limits limits affecting the work and related on-site visits. On the contrary, the mission enjoyed the collaboration of all involved, and the evaluation was considered to be a serious and beneficial exercise by FCRMD management. With additional resources and time the evaluation team would have been able to carry out more meetings, produce more complete data, and validate them to a greater extent. However, for the purposes of this exercise, results obtained are sufficient to inform the principal stakeholders. At least this is the hope of the evaluation team. 2.0 General Background The economy of Mali relies mainly on the primary sector (food and industrial crops, livestock, fishing and forestry), with a notable emphasis on agriculture and livestock, which employs more than 80% of the population. These activities, strongly dependent on climate and rainfall (which are two largely uncontrollable factors of production), make the Malian economy very fragile. The primary sector accounts for nearly 50% of the GDP if non- monetized production activities are taken into account. The cultivation of cotton constitutes the dominant agricultural activity and alone accounts for 40% of export receipts. Rainfall is irregular and scattered in its distribution: the capital city can receive as much 1200 mm whereas the North does might not receive anything. The rainy season extends from June to September. As to for the dry season, which extends from January to May, it gives aaverage temperatures can exceed of 35° C and sometimes more in the South, with highs of 45° to 50° C in desert North. The Niger and Bani Rivers constitute the only hydraulic basins of notable importance. The Niger rRiver is very important for the natural irrigation of the agricultural area zone of Niono and for the hydraulichydroelectric energy production. With a view towards sustainable development, the program of private irrigation credit fits well part ofwith USAID’s overall priorities and more particularly in the targeted zone where rice is produced concerned. 2.1 Office du Niger – Background and Context In the oOffice du Niger’s zone, the decade 1992-2002 saw the rebuilding of a system of agricultural financing of agriculture; • the agricultural economics of the zone was rebuilt restructured onaround the profitability of the rice production; • the availability of financing was rebuilt restructured around the BNDA and of three networks of micro finance networks; • the financing of the inputs (fertilizers) for the rice production is now assured; today • the indebting debt situation which prevailed in the zone is gradually improving under through the combined actions of support services provided by financialing institutions services of support and greater responsibility of farmers’ organizations; • after experiencing the misdeeds disadvantages of competition, the financialing institutions innovated worked together innovativelythrough the co-operation within and cooperatively around a credit bureau to identify bad debtors. Despite the abovementioned rebuilding, the environment is characterized by a market that is too strongly concentrated on only one productionproduct, (rice) and only one financial service, (the short-term credit for the inputs (fertilizers)). Despite certain dysfunctionsshortcomings, the needs for financing the inputs (fertilizers) for rice growing seems generally to be covered todayat this point. And the concentration of the money financial market as noted above is not helpful to promoters whose other needs are not coveredaddressedion. The IMF MFIs in the Zone have a major handicap, namely their weak financial standing, which limits their cCapacity to be diversifyied and to make extend medium term credit. Loan portfolio management in ON remains precarious, as evidenced by continuing high default rates on loans, which are in excessespecially high in some ON’s villages in the ON Zoneof the average for Mali’s financial system. 2.2 Overview of the FCRMD Program 2.2.1 Installation Program Design Since 2000, the FCRMD tries has experimented without a program of credit in for land development and private irrigation by private promoters, which was carried outmade possible by thanks to the establishment by in successive tranches of two guarantee funds by USAID of 100 million FCFA in 2000 and 200 million FCFA in 2002 (total CFA300 millions FCFA from 2000 - 2002). The establishment of these fundss was subject to agreements or protocols between the FCRMD, ON, and USAID (see Annex 1), whereby USAID placed grant monies with ON, which in turn placed the funds on deposit with FCRMD. The terms of the agreements allowed FCRMD to use the funds to finance medium term loans for the benefit of private promoters, and based upon a risk-sharing mechanism agreed, to consider the funds as cash collateral for the credits extended under the program. For the first tranche of grant money from USAID via ON, 60% of principal was allowed to be covered and permitted terms called for acontracted one 5 years duration loan term andto an interest rate of 9% per annum. The promoter was required to contribute 10% up-front to qualify for financing. For the second tranche USAID / ON’s risk coverage was increased to 80% from 60%. Other conditions remained basically the same. 2.2.2 Beneficiaries Beneficiaries were Malian entrepreneurs economic operators able to fulfill the following conditions: • be holder a titleholder of of a letter of irrigated ground attributionland or of a lease in the ON’s zone; • have relevant experience in the production, the processing, the and marketing of agricultural products; • have a feasibility study prepared o; • be able to provide a personal capital contribution accounting forof a minimum of 10% of project cost; • in the event of loan default, accept to be dispossessed of one’s letter of attribution land title or lease in favor of any person who could assume a defaulted debt obligation to FCRMD; • agree to make available to the partners (ON, FCRMD, USAID), for consultation, accounting and/or technical data and documents for field’s visits. 2.2.3 Roles and Responsibilities The Ooffice du Niger is responsible for: • disseminating information on the programme and the eligibility criteria of eligibility ; • directingleading the process of pre-selection process for credit files of applications; for credi • for ensuring the control verification of land improvements financed as well as the technical follow-upmonitoring of the realization progress of the financed projects receiving financing; • - providing a technical report semi-annually to USAID and the FCRMD, including the number of requestsapplications received and the total surfaces acreage concerne; • providing aThe state of progress report on of the installation land improvements financed; • preparing an annual report on the improvement projects based notingon the achieved level of production, the output, employments jobs created and the estimate of the generated net income generated; • organizing as needed update meetings with the FCRMD, promoters, and USAID. As a financial institution partner, the FCRMD is responsible for the implementation of the program, i.e. managinge the loan portfolio related to and to respecting the terms of the draft-Agreements with ON/USAID. Under the terms of the second tranche of funding (200 million FCFA) In fact, tFCRMD must: • participate in the covering of the risk to the amount ofof up to 10% of the principal amount. • review and analyze loan applications; • ensure follow-upmonitoring and covering prompt recovery of bad loans,ly and all under the same conditions as when it operates for its own account and only at its only sole risks; • report semi-annually to USAID about: o the situation status of the granted disbursed loans; o - the situation status of reimbursements, including charged interest received. 3.0 General Performance of the Program The program for private irrigation credit is currently in its fourth year of implementation, with fifteen agricultural promoters having received a total amount of 430,630,410 FCFA in financing (see Annex 3). This financing has allowed the development of 997 hectares of private irrigation Private irrigation, which is significant. It is important to stress that among the fifteen promoters financed,; there are two GIE’s, appear whose number of membership varievariess from 50 to 150 producers. In general, subject to concerns noted in 3.1.1 below about actual disbursements, the funds were used for the general purpose intended by USAID, i.e. private irrigation. In addition, while there exists no segregated accounting for reflows, the total amount of interest and principal reimbursed was less than the amount of new loans made of the same type, which means that reflows were de facto re-employed for program purposes. The program of private irrigation credit did not profit benefit from "proactive" management from its partners. Thus, the dynamics which characterized relations at the beginning of the program blurred little by little such that no formal meetings took have taken place between the ON and the FCRMD since 2002. There is therefore a deficit lack of communication between the two partners directly involved in the management of the program. it 3.1 the Portfolio Management The management of the private irrigation loan portfolio at FCRMD comprises contains gaps. The system in place does not correspond to principles of sound portfolio management managementof the portfolio. Indeed, for to apprehending appreciate the quality of the management of the loan portfolio of the portfolio, the evaluation team based in priorityfocused on the existing management tools while carrying out appropriate checks of all of the credit files of borrowers granted credit under the program (see Annex 3). The checks performed related to the conformity of the credit files to reasonable standards, correct accounting of financial flows (disbursement of the loans, reflows, interest charged etc.), and problem loan managements,, in other words, the presence of proper credit controls and procedures of audit. From these checks supplemented by site visits, the following was noted: 3.1.1 Status of Credit Files Despite of USAID’s recommendations, three credit files were not updated with respect to payment in full of the required 10 per cent personal capital contribution (see Annex 3). In addition, checking verification of the credit history of for financed promoters that received financing was not completed in every case, on the other hand. Certain files comprise evidenced a lack of best practices with respect to control of disbursement of proceeds to finance property improvements. For example, in financing construction works a contractor should normally be paid directly by the bank with the bank’s monitoring progress in use of funds to ensure that proceeds are applied for the purpose intended. In the case of the FCRMD portfolio, the evaluation team noted instances of loans disbursed directly to the promoter rather than a contractor, or simply payable to “cash.” When such practices occur, they may indicate misuse of proceeds, especially when the payments are made for improvements whose cost appears high. As the Mali Finance Project is not an audit firm, the team was not suited to reach any final conclusion on this matter but recommends that USAID follow up with a audit by a qualified international firm. On the plus side, the majority of the files at FCRMD were updated compared with respect to USAID’s concerns about the absence of letters of attribution, contracts of service, reports of works’ receptioncompletion of improvement work, and letters of engagement letter. 3.1.2 Vcherification of Credit History With the exception of three promoters, no credit’s files contains information about credit history, and the updating requested Uby USAID was had not been carried out. 3.1.3 Updating of FFiles’ for Missing Items For documents like the letter of attribution or the perimeter lease, the contract of service between the promoter and the company which carried out the improvements, the promoter’s engagement letter which stipulates that in case of non-payment s/he may be deprived of the letter of attribution or her/his lease, the evaluation team noted with satisfaction that all the credit files were supplemented updated. 3.1.4 Reimbursement Rate Actions undertaken to improve the rate of reimbursement were salutarypositive. Currently the rate of reimbursement is 74 % of amounts due (see Annex 3) against compared with 36% as stated by USAID’s Office of Financial Management (OFM) in 2002. This rate can be further improved if the loan covenant enabling dispossession of a indelicate non￾performing borrower of her/his letter of attribution or her/his lease is applied. Nonetheless, it should be noted that the files of two promoters in with chronic payment problems have beensituation referred to counsel (a bailiff or “huissier”) for legal action, which is underway. This step evidences a more professional approach by management with respect to problem debtors. 3.1.5 Collections of Bad Loans In cases of chronic non-payment, Covering loan collection efforts should use the threat of withdrawal of the letter of attribution or the lease in favor of any person who will agree to assume the debt due to FCRMD. This clause, which constitutes an effective means of pressure to bend deal with recalcitrant debtors, has not yet been applied, even for those two cases referred for legal action. 3.1.6 inexistence Project Analysis Feasibility studies which should be the basis for credit decision-making bears contained deficiencies. Analysis done should determine at the time of the project study, business and profitability’s ratios and indicators like percentage of value added, internal rate of return on investment, time of needed for recovery of capital, and net present value. Other ratios like cash flow available for debt service and EBITA, which are standard and applicable even to smaller projects, were absent. 3.1.7 Absence of a Decision-making Body to Review Credit Files Especially for a program of such importance to FCRMD and other stakeholders, and in any caseevent, final selection of a credit file for financing should be made by a credit committee. The evaluation team was not able to locate any written record of such a committee (for example, meeting minutes). This situation does not allow allow for an effective selection of borrowers or transparency. 3.1.8 Length of Loan Term Experience shows that at current loan maturities of 5 years, it is difficult for borrowers to repay their debts, as they are related to infrastructure whose economic life exceeds 5 years. A lengthening of the term of the portfolio is therefore necessary to help ensure its viability. 4.0 Operations 4.1 Computerization A new MIS system (less expensive and user-friendly) is crucial given the inadequacies noted. In this chapterregard, FCRMD has already secured a new management software system (called M Finance) and is proceeding to implement. 4.2 Management Information System (MIS) FCRMD’s current management’s information system does not seem to be adapted to the institution’s data processing. Management software currently in use (Logipro) does not allow effective data treatment analysis. This deficiency has elsewhere been recognized by the institution’s management, and a new software under installationprogram is being installed that will make it possible to fill gaps in MIS. There isa no- very-effective loan follow-upmonitoring system in place, and there is are no tools, like a loan’ amortization table and or a loan monitoring table, to assist with follow￾up. The program coenvisaged anticipated a series of reports by the ON and the FCRMD at various periods by the ON and the FCRMD. It comes outis apparent from our observations that FCRMD only produces a report on the program’s progress per every six- months period on the program’s progress. While these semi-annual reports provide a considerable quantity of passably data, In additionthey does not satisfy partners’ information needs for mafollow-up and management. Regularly entered data for the accounting system always do not always agree with data contained in the follow-upmonitoring report. This situation is due to weaknesses of in FCRMD’s accounting system, which does not allow a for correct charge computation of certain data like interest charged on the loans. (Indeed, there is no accounting document that makes accurately recording ofs interest charged.) There is a real need to set up templates for preparing reports and program’s follow￾upmonitoring the project to ensure that relevant management information can be provided. 4.3 Internal Procedures and Controls In the absence of a procedures manualin use, no evaluation of the internal system of controls was possible, as these should be measured against procedures adopted. However, management of FCRMD is working to make a manual available and implement it a manual as soon as possible. Timing of implementation is uncertain.. 4.4 Segregated Account for Reflows No internal directive concerning the use of reflows has yet been set issued. A segregated account for reflows is has not effective yet been opened as requested by USAID. However, FCRMD management reassured us during the visit that they would open such an account. If this is done, we recommend that it be for deposit of principal payments only, so that net interest income from the program can be applied to support FCRMD’s operating costs. 4.5 Accounting for Funds Flows Funds flows, especially charged interest,s are not correctly charged entered into the appropriate ledgers. For example, an error of in the recording of the data was raised noted in the caseconcerning of the consulting group ‘‘GIE NIETA’’ ’s personal capital contribution of 8 million FCFA. This situation is not reassuring with respect to reliability of data. 5.0 Recommendations 5.1 To elect onePerform an Audit by an International Accounting Firm cabinet In view of our observations at FCRMD and analysis of the loan files, as mentioned in Section 3.1.1 above, for certain files issues concerning best practices in loan disbursements and suggestion of possible misapplication of loan proceeds were observed by the evaluation team. As Mali Finance is not qualified to do a real audit, we recommend that USAID retain an international accounting firm to perform an appropriate auditthis forof all loan files and to provide an opinion. Such a firm should field experts both in credit management and in operations / accounting audit. 5.2 Restructure the Loan Portfolio Experience shows that at current loan maturities of 5 years, borrowers have trouble repaying their debts, as they are related to irrigation infrastructure whose economic life exceeds 5 years. A lengthening of the term of the portfolio is therefore necessary to help ensure its viability. This would also fit with U.S. best practices for land development loans in agriculture whose terms are normally long term (10 years or more). Final maturities should therefore be extended from 5 to 10 years for existing borrowers, and new borrowers should be offered 10 year terms. The current rate of interest at 9% per annum appears to be reasonable and should be maintained. All borrowers should be offered the 10 years, to start effective the dates their initial loans were funded. For past due accounts, interest due should capitalized and added to principal owing to arrive at an amortization schedule that conforms with 10 years from the initial date the loan was booked. 5.3 Improve Management and Follow-up The current skids lack of control and procedure makes it essential the to installation implement of a rigorous follow-upmonitoring system in order discourage loan default. This suggests improved MIS, for example the preparation of a detailed quarterly follow￾upmonitoring report with rather appropriate information for stakeholders. Follow-up should be carried out on thetwo levels: those responsible for agribusiness services should conduct regular site visits to ensure continuous monitoring of the program; and management of the FCRMD should ensure oversight of implementation of activities and achievement of results, as well as proper control of disbursement of loan proceeds. - In order to improve transparency a management committee should be established comprised of the of two principal main stakeholders of the program,, with occasional participation of observers. This committee might also be used as a vehicle of for information, training and coordination of current operations. A credit committee should be constituted to ensure sounder and more transparent treatment of loan applications. Minutes should be kept of meetings for audit purposes. The rekindling of relations between the partners is a determining element for the program’s success. USAID or its designee, ON, and the FCRMD should meet with regularly to address problems as they arise. 5.4 Take a More Professional Approach to Analyzing Credit Better financial analytical tools should be developed for feasibility studies, and credit forms of application forms should be used for credit.. Analysis done should determine at the time of the project study, business and profitability’s ratios and indicators like percentage of value added, internal rate of return on investment, the time of needed for recovery of capital, and net present value. Other ratios like cash flow available for debt service and EBITA, which are standard and applicable even to smaller projects, should be considered. 5.5 Reinforce Capacity in managing Loan Management Capacity strengthening would involve training for both credit agents and management in loan management and problem loan recovery practices (management expressed strong interest in this subject during our mission and we concur). 5.6 Improve Collection of Bad Loans In order to reduce the default rate, lCoverioan collection efforts should use the threat of withdrawal of the letter of attribution or the lease in favor of a third party that will agree to assume the debt due to FCRMD. 5.7 Segregate Accounting for Reflows USAID’s requirement for a segregated account for program reflows has not been met by FCRMD and should be implemented as soon as possible. The account should be for deposit of principal payments only, so that net interest income from the program can be applied to support FCRMD’s operating costs. 5.8 Installation Implement a Procedures Manual FCRMD should establish a sound administrative, financial, and accounting procedures and incorporate them into procedures manual that can be the basis for proper controls and verification of their use. It is encouraging that management In addition, tis aware of this need and has already begun to take appropriate steps. 5.9 Revise the Project Agreement A new Agreement or Protocol for the program should be drafted to take changes into account. The Agreement should, inter alia, specify roles of the parties, precise procedures to be followed, and accounting for reflows. To avoid USG association with potential loan problems not within its control, USAID should not be party to the new Agreement but provide technical assistance for its preparation and approve its content. ANNEXES Annexes : Annex 1 : Draft-agreement ON-FCRMD Annex 2 : Summary of questions from USAID Annex 3 : Summary tables on the borrowers’ status Annex 4 : FCRMD financial statement (two files) Annexe 1 Draft Agreement ON-FCRMD Annexe 2 SUMMARY OF THE REPONSES TO SHORT TERM AND LONG TERM QUESTIONS RAISED BY USAID 1. Verification of Credit History With the exception of three promoters, no credit’s files contains information about credit history, and the updating requested Uby USAID was had not been carried out. 2. The Payment of Capital Contribution at 10% of Project Cost Our reports show that four of the financed promoters have not yet met this requirement: -Mr. Ahmed Coulibaly 0% of contribution -Mr. Oumar Dicko 0% of contribution -Mr. Dagaly Coulibaly 0% of contribution -Mrs. Ramata Kone 8,3% of contribution 3. Updating of FFiles’ for Missing Items For documents like the letter of attribution or the perimeter lease, the contract of service between the promoter and the company which carried out the improvements, the promoter’s engagement letter which stipulates that in case of non-payment s/he may be deprived of the letter of attribution or her/his lease, the evaluation team notes with satisfaction that all the credit files were supplemented updated. 4. Specific Borrowers Concerning specific borrowers, especially the GIE Nieta, Mr. Ousmane Touré, Mrs. Fatoumata Touré, the evaluation team noted with satisfaction that the necessary verification of credit history for these three promoters was carried out, in addition to the payment in full of the 10% personal capital contribution for each. 5. Reimbursement Rate Actions undertaken to improve the rate of reimbursement were salutarypositive. Currently, the rate of reimbursements as a percentage of amounts due is 74 % against compared with 36% as stated by USAID’s Office of Financial Management (OFM) in 2002. This rate could have be further improved if the loan covenant enabling dispossession of a indelicate non-performing borrower of her/his letter of attribution or her/his lease is applied. Nonetheless, it should be noted that the files of two promoters in with chronic payment problems have beensituation transmitted to the bailiff for legal action, which is underway. 6. Segregated Account for Reflows No internal directive concerning the use of reflows has yet been set issued. A segregated account for reflows is has not effective yet been opened as requested by USAID. However, FCRMD management reassured us during the visit that they would open such an account. If this is done, we recommend that it be for deposit of principal payments only, so that interest income from the program can be applied to support FCRMD’s operating costs. 7. Production of Follow-up Reports The FCRMD has no existing template for the production of reports and the monitoring of loans. However, better definition of procedures for producing reports and a monitoring program are planned. 8. Need for Equipment and Training Given the inadequacies in the program’s management, the reinforcement of the institution’s capacity is recommended especially in the area credit training. New Computer equipment is also advised, subject to the evaluation of an IT specialist. Annexe 3 Summary table on borrowers’ status (fichier Excel) Annexe 4 FCRMD Financial statement Contact List - Mr Issoufou Keita : Chairman and Managing Director of Office du Niger - Mr Yaya Diarra : Head of the Agri-business department of Office du Niger - Mr Adil Yattara : Head of Administrative and Financial department of the FCRMD - Mr Daouda Traoré : Supervisor of private irrigation loans, FCRMD - Mr Bah Napo : Borrower / Program Beneficiary - Mr Boubacar Sosso : Borrower / Program Beneficiary - Mr Modibo Kimbiri et GIE Nyeta : Borrower / Program Beneficiary -Mr. Ousmane Touré : Chairman of FCRMD and also Borrower / Program Beneficiary List of Acronyms Acronyms: USAID : US Agency for International Development ON : Office du Niger FCRMD : Fédération des caisses rurales mutualistes du Delta (Federation of Rural Mutual Banks of the Delta) IMF : Micro Finance Institution DFS : Decentralized Financial System MIS : Management Information System OFM : Office of Financial Management of USAID 1.0