Report No. 860a-ZA FILE COPYAppraisal of theDevelopment Bank of Zambia (DBZ)

November 19, 1975

Development Finance Companies Department

Not for Public Use

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENT

Kwacha (K) 1 equals US $1.56

ABBREVIATIONS

ADB African Development BankAFC Agricultural Finance CorporationDBZ Development Bank of ZambiaDEG Deutsche EntwicklungsgesellschaftEIB European Investment BankFINDECO State Finance and Development CorporationINDECO Industrial Development CorporationKfW Kreditanstalt f'r 1WederaufbauNCB National Commercial BankSNDP Second National Development Plan (1972-76)ZAMDEV Zambia Development Loans SchemeZEMCO Zambia Industrial and Mining Corporation

FISCAL YEAR

Goverr!nent: January 1 - December 31DBZ: April 1 - March 31

FOR OFmFCIAL USE ONLV

TABLE OF CONTENTS

Page No.

BASIC DATA ...................................... i

SUMMARY . ........................ iv

* I~~~~. INTRODUCTION ... ... o:.........1

II. THE ENVIRONMENT ... 1

The Industrial Sector ........... ............ 2The Role of the Private and Parastatal Sectors ... 2Industrial Policies and Objectives . . 4Prospects ...... . ..... .. ... . 5The Agricultural Sector 5Financial Institutions 6DBZ's Role ................................... 9

III. THE INSTITUTION. ... o ........ 10

Charter . . ....... 10Policies. ............ 10Board of Directors. . . 12Management ......... . ............................ 12Organization and Staff . . ............. 12Procedures ....... ...... t14

IV. RESOURCES, OPERATIONS AND FINANCIAL CONDITION .... 14

Resources . .14

Operations.. 14Financial Condition . 15

V. PROSPECTS ............... 16

Projected Operations .. 16Resource Position and Needs .. 16Projected Income Statements . .17Projected Balance Sheets . .18

VI. CONCLUSIONS AND RECOMMENDATIONS . .18

This report was prepared by Messrs. Pieter J. M. Bulters and Tom C. Tsui onthe basis of their mission to Zambia in March 1975.

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

TABLE OF CONTENTS (Continued)

ANNEXES

1. Interest Rates in Zambia2. List of Shareholders3. Operations Policies4. Board of Directors5. Organization Chart6. Loans Approved as of March 31, 19757. Analysis of Loans Approved as of March 31, 19758. Balance Sheets and Income Statements9. Assumptions tor Operational and Financial Forecasts 1976-198010. Forecast of Operations 1976-198011. Projected Income Statements 1976-198012. Projected Balance Sheets 1976-198013. Projected Cash Flow Statements 1976-198014. Pipeline of Projects as of June 30, 197515. Zambian Laws Applicable to the Proposed IFC Investment in the

Development Bank of Zambia16. Estimated Disbursement Schedule for Proposed Loan

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DEVELOFMENT BANK OF ZA.MBIA

BASIC DATA

Exchange Rate: K1 equals US $1.56

Year of Establishment: 1973

Ownership: (as of October 1, 1975)

AmountSubscribed

(K'000)

Class "tA"

Government of Zambia 4i,500Bank of Zambia 500Zambia National Provident Fund 500Zambia National Building Society 150Zambia State Insurance Corporation Ltd. 150National Coimercial Bank Ltd. 100Commercial Bank of Zambia Ltd. 100

6,000

Class "B"

Deutsche Entwicklungsgesellschaft 1,500Group of Yugoslav Banks 30O6/Barclays Bank of Zambia Ltd. 200Standard Bank of Zambia Ltd. 200African Development Bank 150Grindlays Bank International (Z) Ltd. 100Bank of America 100Banca Nazionale del Lavoro 100Den Norske Kredit Bank 50

2,700

Proposed IFC investment 350Other unsubscribed "Class B" shares 950

Total authorized and issued share capital 10,000

1/ Not yet paid-in.

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Resources Position (as of March 31, 1975)

Domestic ForeignCurrency Currency

(K'million)

Subscribed share capital 8.7Reserves and retained earnings 0.1 -Borrowings 0.1 1.4

Total sources 8.9 1.4

Net fixed assets 0.7 -Loan portfolio outstanding 3.8Undisbursed loan commitments 0.7

Total uses 5.2

Resources available for commitment 3.7 1.4

Uncommitted approvals 2.1 -

Operations (for year ending March 31, 1975)

Number Amount(K million)

Approvals 1-4 6.6Commitments 10 2.6Disbursements 6 1.5

Operating results (for year ending March 31, 1975)(K'000)

Gross Income 398Administrative Expenses 309Financial Expenses 19Net Profit 70

Net profit/average net worth (%) 1%

Financial Pbsition (as of March 31, 1975) (K million)

Total assets 7.1Net worth 7.0Debt/equity 0.01

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Interest Rate and Other Charges

Interest rates on DBZ's approved loans have varied between 8 11/2%and 10 1/2%. IEZ intends to charge an average rate of 10% with a minimumof 9% in the future.

Cormitment fee: Normally, IBZ charges 1% upon approval plus 1% of theunwithdrawn balance on each anniversary date.

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SUMMARY

(i) The Development Bank of Zambia (DBZ) was established in July 1973as a statutory corporation to provide medium and long-term financing toindustrial, tourism and large agricultural projects in both the private andpublic sectors. DBZ is also empowered to provide technical and promotionalassistance and management advisory services. While some other existinginstitutions provide financing to the parastatal sector, the Government wishedto establish an independent bank that would undertake thorough project analysisand assist the private sector as well as the parastatal sector. Two Bankmissions in 1971 and 1972 studied the feasibility of such a new institutionand assisted the Government in its establishment. DBZ has a share capital ofK 10 million, 60% of which is reserved for the Government and its agenciesand 40% for private and foreign shareholders. DBZ has requested a Bank loanof $15 million and an IFC equity investment of K 350,000 (approximately$550,000 equivalent).

(ii) Value-added in manufacturing has increased by over 14% p.a. since1971 and, in 1974, the industrial sector contributed 13% to GDP. Althoughit is heavily oriented towards the domestic market and largely depends onimported inputs, it is after agriculture the most promising alternative toZambia's mining economy. Public sector enterprises in manufacturing are con-trolled by INDECO, the parastatal holding company for industry. In 1974, theyaccounted for half of the sector's value-added and employment. The Governmentwants INDECO to consolidate its present operations and improve its efficiency.Although the Government has taken an active role in industry through INDECO,the private sector continues to grow.

(iii) Despite Zambia's potential for agriculture, the agricultural sectorstill accounts for only 10% of GDP and Zambia still needs to import 40% ofits food requirements. Especially in view of Zambia's difficult economiccondition, the Government is keen to reduce its dependence on food imports.Commercial farming already provides 60% of marketed domestic produce andoffers the best short-term prospects for increased agricultural production.

(iv) As of October 1975, DBZ had approved 32 loans for K12.6 million; ithad not made any equity investments as of that date. DBZ has been successfulin tapping some local and foreign resources. It has financed projects in awide variety of sectors. Most of DBZ's projects are in the private sectorand the amount of DBZ's assistance is about equally divided between privateand parastatal projects. Although the Government holds the majority of DBZ'sshare capital, DBZ is free from Government interference in its day-to-daymanagement and selection of projects. The projects financed by DBZ appeareconom!cally sound. DBZ's Statement of Policies is satisfactory.

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(v) DBZ has good management and a professional staff of thirty (eightof whom are expatriates). DBZ is keen to reduce its reliance on expatriatesand has begun a program to train its new Zambian staff. Two DBZ staff membershave attended EDI courses and more candidates are expected in the future.

(vi) DBZ forecasts an active operational program in the next five yearswith expected approvals of K10 million in FY 1976 and increasing to K12.3million in FY 1977 and K15.5 million in FY 1978. These plans include modestlevels of equity financing. DBZ has a well-filled pipeline; almost all pro-jects are private and more than half of DBZ's financing would go to privateprojects. DBZ expects to enhance its economic and financial impact by under-taking syndication of financing for industrial projects of national signifi-cance to which it can make only limited financial contributions. As Zambiafaces severe resource constraints brought on by declining copper prices, DBZ'sgrowing project appraisal expertise will be invaluable in efficiently allocat-ing scarce resources.

(vii) DBZ is a suitable and creditworthy borrower for a Bank loan of$15.0 million equivalent. The loan would cover one half of DBZ's estimatedforeign resource needs through early 1978 and represent about one third ofDBZ's overall commitments. DBZ expects to obtain the remainder of its re-source needs from other foreign and domestic lenders.

(viii) Recognizing DBZ's expected cost of borrowings, modest forecast pro-fitability during the initial years, and the need to build up reserves, it isrecommended that DBZ be granted concessionary tre?atment of commitment charges.An individual free limit of $250,000 and an aggregate free limit of $3.0million are recommended.

(ix) An IFC investment of K 350,000 (equivalent to about US$550,000) inDBZ's share capital is also recommended. DBZ has been designed as a coopera-tive venture between the Government, private and foreign investors and an IFCequity investment is desired both to help complete the financing of DBZ'sshare capital reserved for private and foreign shareholders as well as toenable DBZ to benefit from IFC's experience and advice that can be importantin the development of DBZ's policies and operations through IFC representationon its Board of Directors. Although the Government controls the majority ofDBZ's share capital, the Government is keen to have DBZ operate independentlyand on a commercial basis.

I. INTRODUCTION

1.01 The Development Bank of Zambia (DBZ) was established in July 1973as a statutory corporation to provide financial and technical assistance toindustrial, tourism and large agricultural projects. DBZ's establishment hadbeen recommended to the Government by two Bank missions in 1971 and 1972 whichstudied the feasibility of such a new institution. DBZ has requested a Bankloan and an IFC investment. This report appraises DBZ and recommends a loanof US$15.0 million, and an equity investment of K 350,000 (approximately

* $550,000), equivalent to 3.5% of DBZ's share capital and 9% of the share capitalreserved for private and foreign investors.

1.02 Objectives. The major objectives of the proposed loan and invest-ment are:

(i) to provide appropriate medium - and long-term financing tomedium to large-scale industrial projects which meet soundeconomic, financial, and technical standards. This isparticularly important in view of the country's growingscarcity of funds for industrial investments and the factthat DBZ is essentially the only financial institution inZambia providing medium and long-term financing to privateindustry; and

(ii) to assist in the development of DBZ as an effective developmentinstitution by further strengthening its appraisal capacity.

II. THE ENVIRONMENT

2.01 The economic situation of Zambia is analyzed in the "EconomicPosition and Prospects of Zambia," report number 4A-ZA dated December 26, 1972.A basic economic mission visited Zambia in June/July 1975. This reportreflects the mission's preliminary findings.

2.02 Zambia has a population of 4.8 million, which is growing at anannual rate of 2.9 per cent. In 1974, GDP amounted to K1.8 billion, equi-valent to US$585 per capita. During the first three years of the SecondNational Development Plan (1972-1976), GDP in real terms grew at 3.6% p.a.,only slightly above the growth rate in population and substantially belowthe Plan's target of 7.4%.

2.03 Zambia's economy is dominated by copper mining which, in 1974,accounted for 41% of GDP, 16% of total wage employment, 40% of Governmentrevenue and 96% of export earnings. From 1964-1974, the annual productionof copper has fluctuated between a low of 616,000 tons (1967) and a high of748,000 tons (in 1969); it was 700,000 tons in 1974. More important werethe fluctuations in copper prices which ranged between K718 (in November 1972)and K1,950 (in April 1974) per ton; recently the price has been betweenK750-K800/ton.

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2.04 The sensitivity of the economy to the fluctuations in copper revenueemphasizes the urgency for Zambia to diversify its economy. Agricultureaccounts for only 10% of GDP but holds much potential. Development of thesector requires improvement in planning, changes in pricing policies, and im-provement of extension services and credit facilities. After agriculture,industry is the next most promising alternative to mining.

The Industrial Sector

2.05 At independence in 1964, most industries of the former Federationwith Southern Rhodesia and Nyasaland were located in what is now Rhodesia.Since then the importance of Zambia's manufacturing sector has increasedsubstantially. Despite setbacks from the closure of the border with Rhodesiain 1973, value added in manufacturing increased by 14.4% p.a. since 1971,almost matching the Plan target of 14.7% p.a. Most of the recent industrialgrowth has taken place in consumer goods industries such as textiles andwearing apparel, which grew at 18.5% p.a. during 1972-74 compared with anannual growth of 5.5% in chemicals and stagnation in non-consumer goods sub-sectors such as non-metallic minerals. During these years, some ambitiousnew projects, such as a large vehicle assembly plant and a synthetic textileplant, were implemented; these have contributed little to foreign exchangesavings as most of the inputs must still be imported. In 1974, manufacturingoutput amounted to K255 million and accounted for 13% of GDP. Food and beve-rages accounted for 33% of value added in manufacturing, followed by fabrica-ted metal products (21%), and textiles and wearing apparel (11%). At present,there is little industrial activity related to the copper industry and thisis a subsector with some potential.

2.06 Industrial employment in Zambia is currently about 45,000 comparedto a national labor force of approximately 1.5 million. The food, beverageand tobacco industry accounts for one-third of industrial employment, textilesand apparel for 20%, and metal fabrication (including machinery) for 17%.One of the Government's major objectives is to increase wage employment. TneSNDP aimed at 20,000 additional jobs per year, including 5,000 in manufacturing.

2.07 Over ninety percent of all industrial enterprises, employing asimilarly high percentage of the industrial labor force are located in theCopperbelt, where all the mining activities are centered, and along the "line-of-rail" that connects the Copperbelt with the south and which includesLusaka. Any dispersion away from these areas is contingent upon infrastructuredevelopment.

The Role of the Private and Parastatal Sectors

2.08 Following independence, the Government had little control over thelarge, foreign-owned private sector which dominated all major aspects ofmining, manufacturing, commerce, and banking. In 1966, on the grounds thatZambianization was too slow and investment insufficient, the Government directed

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the Industrial Development Corporation (INDECO) to participate on its behalfin the industrial sector. INDECO's activities greatly expanded after theGovernment decided, in 1968, that it would henceforth have a controlling in-terest in all major industries. As of March 1974, INDECO comprised 60 subsid-iaries and associated firms with net assets of K250 million and annual salesof K330 million. They included all major industries and accounted for half ofvalue added and employment in the industrial sector. These companies aregrouped into six areas: brewing and distilling, building supplies and engin-eering, manufacturing, chemicals, rural enterprises, and a miscellaneousgroup.

2.09 INDECO itself is a subsidiary of the Zambia Industrial and MiningCorporation (ZIMCO), which is the overall holding company for the Government'sinvestments in all sectors of the economy. ZIMCO operates through varioussubsidiaries like INDECO for the indLc6rial sector and FINDECO for the financialsector. The President himself is Chairman of ZIMCO's Board of Directors, whichfurther includes the Ministers of all relevant ministries and the ManagingDirectors of the various subsidiaries.

2.10 INDECO's profit for 1974 was about 9% of year end net assets and17% of its net worth. INDECO's profit figures are of limited usefulness,however, since profits of many of its companies are determined largely byGovernment decisions on prices and, in some cases, offsetting subsidies.INDECO's investments average K30 million per annum or two-thirds of total in-dustrial investment. Most of the investment is financed by funds generatedwithin the group; the second most important source is local financial institu-tions. Local financial institutions consider INDECO a prime risk, especiallybecause of its backing by the Government, and are important sources of fundsespecially when they have a high liquidity. For large investments, INDECO alsoobtains suppliers' credits and other foreign financing.

2.11 INDECO promotes and develops projects for its subsidiaries.Because INDECO relies little on government financing, its investment de-cisions are taken independently except for some major projects such as thevehicle assembly and nitrogen fertilizer plants.

2.12 Private initiative and capital are still playing an important rolein medium scale enterprises. Such enterprises benefit from the naturalprotection afforded by Zambia's geographic location and from import dutiesimposed to protect domestic producers and also for balance of payments reasons.In 1972, the private sector accounted for one half of value added and employmentin the manufacturing sector. Much of these private holdings are in the Copperbeltarea. Privately controlled enterprises constitute the majority in textiles andwearing apparel, chemicals, fabricated metal products and industries ancillaryto the mining sector. (IFC has assisted two private enterprises in Zambia. Ithas made two equity investments totalling $2.3 million in Zambia Bata ShoeCompany Ltd. and a loan and an equity investment totalling $1.0 million inCentury Packages Ltd).

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2.13 There is relatively scant information available on small-scale in-dustry in Zambia. The subsector employs less than 20% of industrial workers.Like all industry, small industries (employing 50 or less) are concentratedin the urban centers in the Copperbelt and along the line-of-rail. Smallenterprises are most active in clothing, printing and publishing, and struc-tural metal products.

Industrial Policies and Objectives

2.14 The Government's major objective for manufacturing is import sub-stitution of food products and some consumer goods. The Second NationalDevelopment Plan also emphasizes (i) greater capacity utilization, (ii)further processing of raw materials from agriculture and mining, (iii) creationof additional employment, (iv) establishment of rural small-scale industries,and (v) promotion of industrial exports. The Government would like INDECO toconsolidate its operations and, except for undertaking some large projects,Improve its efficiency rather than expand. The President has recently reaf-firmed that the private sector has a role to play, especially in small andmedium size enterprises. The Government retains the right to nationalizeenterprises which, because of their size, are of a national interest but hascommitted itself to pay in such cases fair and prompt compensation.

2.15 An Industrial Establishment Licensing Act and an Investment Codeare being prepared. Licensing of new ventures is not legally required, butmost medium and large Zambian and foreign entrepreneurs request authorizationfrom the Ministry of Mines and Industry and submit information about theirintended investment such as ownership, financing plan, and employment (Zambiansand non-Zambians), to facilitate obtaining concessions and permission torepatriate future earnings.

2.16 Government incentives mainly consist of tariff protection. Importduties range from 0-100% in respect of finished goods and from 0-15% forintermediate goods and raw materials. Capital goods are subject to a 5% duty.All dutiable goods are also subject to a 10% sales tax which applies to somelocal manufactures as well.. There are also quantitative restrictions which areprimarily aimed at preserving foreign exchange.

2.17 Corporate income tax in Zambia is 45%. Interest, dividends, androyalties paid to non-residents from countries without a double taxationagreement with Zambia are subject to a withholding tax of 20%; payments toother non-residents are subject to 10% for interest and 15% for other payments.Foreign shareholders may repatriate each year up to 10% of their paid upcapital or 30% of net profits accruing to them, whichever,is less.

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Prospects

2.18 Despite Zambia's small domestic market, the need to import most in-dustrial raw materials and the scarcity of entrepreneurs, industrial develop-ment has proceeded at a remarkable pace (para 2.05). Looking to the future,the Government is eager to diversify the economy by expanding the industrial

* base. As the Government would like INDECO to consolidate its existing opera-tions and concentrate on a few large projects, the private sector will conti-nue to have an important role to play in Zambia's industrialization process.

The Agricultural Sector

2.19 The Government's objectives regarding the agricultural sector havebeen consistently stated since Zambia attained independence in 1964. Boththe First and the Second National Development Plans emphasized the followingobjectives: (i) to increase rural incomes and thereby redress the rural-urbanincome disparity, (ii) to become self-sufficient in foodstuffs and cotton,and (iii) to diversify the economy and widen the export base by producingagricultural surpluses. Underlying the first objective are social justice anda pressing desire to curb the rural-urban exodus, in order to avoid overeencen-tration of population and urban unemployment.

2.20 The objectives are reasonable, and Zambia has adequate land resourcesand sufficient effective demand to attain practically all of them. However,progress towards the Government's goals during the first decade of independencehas been very slow. Output of the agricultural sector has grown at the averagerate of only 1.7 percent per annum over the last 10 years. Real incomes havenot increased and the terms of trade for the Zambian farmers have fallen over20 percent in the last decade. Zambia is far from being self-sufficient ineither food or agricultural raw-material requirements. Currently about 40 per-cent by value of Zambia's marketed food is imported and in 1974 food imports

cost the country K 43 million. The import items are mostly beef and dairyproducts, barley, wheat, rice, edible oil and cotton, all of which can be pro-duced in Zambia. The immediate task of the sector, therefore, remains to fillthe growing gap between domestic demand and supply of agricultural produce.As the gap is filled by imports, the problem becomes critical in times of lowforeign exchange earnings as Zambia is currently experiencing.

2.21 A unique characteristic of the sector is its dualism. On one extreme,there are about 600,000 smallholder subsistence farmers, using hand tools andtraditional technology. These farmers produce primarily for their own sub-sistence requirements with a little marketable surplus from which they derivevery meagre incomes. Average family sales are estimated at only about $85 ayear (these farmers produce mostly cotton, maize, groundnuts, and free-grazedbeef).

2.22 On the other extreme, there are large state and company farms and aneconomically important group of about 600 commercial farmers. These arelocated on state land under leasehold. Their area occupies about 3 percentof Zambia. Their farms are large and the land is fair. They are close to the

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the line of rail and have good access to market. These farmers use modernmethods to produce cereals, dairy products, beef, poultry and eggs for the urbanmarket and tobacco for export. They consist of experienced expatriate andZambian commercial farmers and a new but growing group of innovative Zambianfarmers known as "emergent farmers".

2.23 Commercial farming (public and private, Zambian and non-Zambian)accounts for 60 percent of the total marketed domestic produce, including 60percent of maize, 35 percent of beef and over a half of the country's milk,pork and tobacco. This subsector can respond rapidly and has the potentialfor significantly increasing its production in a relatively short period.Moreover, certain areas of agriculture, like large scale wheat growing,ranching and processing, require skills which can best be handled by thissubsector for some time to come. The Government has acknowledged thesefacts. To encourage commercial farmers, the Government granted them severalfiscal incentives at the beginning of the last Zambian fiscal year. There are,however, various constraints to increasing agricultural production by thissubsector and agricultural credit is one of them. DBZ will contribute towardsreducing this particular constraint, by making financial resources availableto medium and large scale agricultural enterprises for production and process-ing. The task of small scale agricultural financing will remain with theAgricultural Finance Company of Zambia (see para. 2.35).

2.24 The recent Bank Agricultural and Rural Sector Survey Mission (seeReport No. 841a-ZA).has proposed a new strategy for the sector. The strategyidentifies two urgent needs, namely to increase agricultural production andlessen dependence on imports and to carry out country-wide rural developmentby concentrating limited resources in areas of high growth potential. Themission identified several constraints to both. The major constraintsrelated to pricing policies, organization of administration and services,and the marketing system. The Bank is discussing with the Government aseries of changes which are needed on key policy issues to overcome theseconstraints. It is expected that an action program and identification ofspecific projects will follow, and will lead to increased production and overallrural development.

Financial Institutions

2.25 The small stock exchange which operated when Zambia was part of theFederation with Southern Rhodesia and Nyasaland, no longer exists. The Bankof Zambia, which is the central bank, has been the major force in the capitalmarket through issuance of government securities and bonds. Underwriting ofsecurities can be done by commercial banks; however, the market is small andshares in only a few companies, such as Zambia Bata Shoe Company Ltd., havebeen sold to the public in Zambia.

2.26 There are a large number of financial institutions. In additionto the Bank of Zambia, they comprise four commercial banks and six specia-lized institutions other than DBZ. The largest commercial bank and all

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specialized institutions are goveQ -ment controlled. Except for the NationalSavings and Credit Bank, all institutions are involved in financing the in-dustrial sector. While they may overlap on occasion in industrial financing,more often they supplement each other. Interest rates charged on medium tolong-term loans range between 7.5%-10.25% p.a., with the majority being bet-ween 8-9%. Annex 1 summarizes the interest rates paid and charged by thevarious institutions.

2.27 Commercial Banks. The State-owned commercial bank is the NationalCommercial Bank (NCB) which, after being merged with the smaller CommercialBank of Zambia in March, 1975, has become the largest in the country withassets exceeding K200 million. It is expected to handle the bulk of thecommercial banking business of the parastatals. The three private banks aresubsidiaries of Barclays, Standard, and Grindlays. In 1974, Barclays heldassets of K196 million while Standard held K164 million. Grindlays is thesmallest but is the most active in underwriting.

2.28 Commercial banks have granted loans of up to five years for indus-trial projects during times of amr's liquidity such as in 1973, when copperprices were high. However, due tu the Government's decision in January 1974to encourage importers to use local rather than foreign banks, together withthe drastic reduction of copper prices in late 1974, commercial banks'liquidity has become very tight. Consequently, they prefer to provideshort-term financing and leave medium- to long-term financing to specializedinstitutions, such as DBZ. The commercial banks possess no project appraisalcapacity. Their medium- to long-term loans carry interest rates between 8.5-10.0% p.a., with the majority at 9.0%.

2.29 In 1974, Barclays introduced a program called the Zambia DevelopmentLoans Scheme (ZAMDEV) to assist small well-established farmers, traders, andmanufacturers with 3-5 year loans between K500-5,000 at 9% p.a. The programhas been successful; over K420,000 have been loaned to 168 borrowers eventhough no manufacturing loan has yet been made. Despite its preliminarysuccess, however, Barclays' liquidity constraint limits the future scope ofthe program.

2.30 Specialized Institutions. The six specialized institutions otherthan DBZ are the National Building Society, Zambia National Provident Fund,Zambia State Insurance Corporation, National Savings and Credit Bank, AgriculturalFinance Corporation, and Industrial Finance Corporation. With the exceptionof the Zambia Provident Fund and Agricultural Finance Corporation, these institu-tions, as well as the National Commercial Bank, are subsidiaries of the StateFinance and Development Corporation (FINDECO), which is the Government's holdingcompany for financial institutions.

2.31 The Building Society was formed after nationalization of three pri-vate building societies in 1971. It obtains funds through savings shares anddeposits from the general public and loans from other institutions. As ofMarch 31, 1974, its resources totalled K88 million, of which K63 million were

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invested in mortgage loans and the remainder in Government securities, depositswith commercial banks, and non-Government securities. Its industrial financingconsists of mortgage financing of industrial buildings for 15 years at 9.0-10.25% p.a.

2.32 The Zambia National Provident Fund is a statutory board which admin-isters a compulsory retirement savings scheme for Zambian employees. Its totalassets as of January 1975 were K120 million. Forty-three percent of its fundswere invested in Government bonds, 22% in industrial loans (including loans toINDECO), six percent in industrial equity investments and the remainder inmunicipalities and parastatals such as the Building Society. Loans of theFund have maturities between 10-20 years and carry interest rates between7.5-8.5% p.a. The Fund has no appraisal capacity and lends on the basis ofsecurity or guarantees. It is interested in lending to DBZ or financing largeprojects jointly with it. Its current policy permits it to invest 40% of itssurplus funds or about K10 million per year in parastatals and other commercialand industrial enterprises. It has recently agreed to lend to DBZ K 1 millionfor 20 years at an interest rate of 7.5% p.a.

2.33 The Zambia State Insurance Corporation was formed in 1971 aftera merger of all existing insurance companies. As of December 31, 1973, thecorporation's resources totalled K48 million, of which K29 million wasinvested in Government bonds, loans (including mortgages), and various in-dustrial and commercial investments; the rest consisted mostly of currentassets (funds on deposit) and some fixed assets. One-fifth of its assetsare related to industry. It expects to annually invest between K3-4 millionin industrial loans and investments. Having no project evaluation capacityof its own, the corporation would prefer to join a larger consortium forsuch endeavors. It is also considering the possibility of lending to DBZ.The corporation charges 8.0-9.0% p.a. on term loans of up to 10 years.

2.34 The National Savings and Credit Bank, known as the Post OfficeSavings Bank until 1973, receives deposits from the general public for whichit pays 3.75% p.a. It is empowered to make loans and investments in manu-facturing and other enterprises, but has not done so; instead, it holds nearlytwo-thirds of its assets, which totalled K13 million, in the Building Society,and the remainder in commercial banks and Government securities.

2.35 The Agricultural Finance Corporation (AFC) was established in 1970as a subsidiary of the Rural Development Corporation which is a parastatalholding company under the Ministry of Rural Development; it is primarily acredit organization. AFC obtains its resources from the Government whichhas provided K13 million in interest-free long-term funds, annual subsidiesof K500,000 to cover AFC's operating losses and, indirectly, K5 million bytransferring at K1 million a loan portfolio from AFC's predecessor on whichAFC has collected K4 million and expects to collect another K2 million. AFChas lent between K8-10 million p.a., 95% of which has been in seasonal credit,

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mostly in kind. AFC charges an interest rate of 8.0% p.a. The default rateon AFC's loans is high; as of December 31, 1973, it had to make provisionsequal to half the loan portfolio outstanding.

2.36 The Industrial Finance Company was established in 1969 as an INDECOsubsidiary to finance small commercial and industrial enterprises. It wastransferred to FINDECO in 1971. It obtains its resources from commercialbanks, the Government, and parastatals such as the Zambia State InsuranceCorporation; except for Government funds which are subsidized, the bulk of theCompany's resources costs between 7.5-8.5% p.a. The Industrial Finance Companyhas concentrated on financing the Zambianization of retail businesses and hasneglected industrial financing. More recently, it has expanded its activitiesinto hire-purchase financing of private and commercial vehicles, industrialplants, and various equipment and machinery; it intends to start leasingoperations. Hire-purchase activities now account for 55% of the IndustrialFinance Company's operations which amount to Kl million per annum. Lendingto commercial enterprises represent 40% and industrial enterprises only 5%.Loans of the Industrial Finance Company have a maximum maturity of 5 yearsand carry interest rates between 9-10% p.a. Although it has no upper financ-ing limit, the Company is expected to serve primarily small enterprises (itsindustrial loans average K40,000). Due to a variety of difficulties such asa high default rate on its loans, continuing operating losses, and shortageof staff, the effectiveness of the Industrial Finance Company is limited,particularly in industrial financing.

DBZ's Role

2.37 While most financial institutions provide some medium- and long-termfinancing on the basis of security, DBZ is the only institution in Zambia whichconcentrates on medium- and long-term financing of productive enterprises andwhich has a staff capable of appraising projects. Private projects depend onDBZ for financing whereas parastatals can sometimes obtain financing at betterterms from the other financial institutions when these are liquid. Althoughmany parastatal projects are too large for financing by DBZ or another insti-tution alone, DBZ can play a useful role by appraising such projects andinviting other institutions to participate in the financing.

2.38 DBZ was established to finance medium- and large-scale enterprises.DBZ is not intended to serve the small-scale industry and agriculturesectors. Because of the special nature of agricultural credit, it is rec-ommended that DBZ restrict itself to commercial agriculture and that theGovernment strengthen AFC and expand its activities to provide medium- andlong-term financing for small farmers. Unless DBZ is properly equipped forfinancing small scale industry, the Government should consider strengtheningthe Industrial Finance Company for this function.

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III. THE INSTITUTION

Charter

3.01 DBZ was established as a statutory corporation in July 1973 under aDevelopment Bank Act and commenced operations in January 1974. According toits charter, DBZ's main function is to provide medium and long-term loan andequity financing for industrial, large agricultural, and tourism projects.DBZ's charter also allows it to provide technical and promotional assistanceand management advisory services.

3.02 DBZ has an authorized share capital of K 10 million consisting of600 "Class A" shares and 400 "Class B" shares of K 10,000 each. The "ClassA" shares are reserved for the Government and its agencies and have been fullysubscribed and paid-in. The "Class B" shares are reserved for private andforeign shareholders. Eight institutions and a group of Yugoslav Bankshave subscribed K 2.7 million out of the K 4 million "Class B" shares. Annex2 shows a list of DBZ's shareholders. DBZ has requested an IFC investment inits share capital. An investment of K 350,000 (approximately US$550,000equivalent) is being proposed. This would make IFC the second largest "ClassB" shareholder after the Deutsche Entwicklungsgesellschaft (DEG). DBZ isalso discussing subscription of the remaining "Class B" shares with other in-stitutions.

3.03 The Government has the formal power to exercise control over DBZ.It owns directly and through various of its agencies about 60% of DBZ's sharecapital; the Minister of Planning and Finance nominates six of DBZ's tenBoard members, including the Chairman and Managing Director; the Act empowershim to give the Board general directions concerning DBZ's policy as he maydeem necessary and appropriate in the public interest. In practice, however,the Government is keen to have DBZ operate independently and has not inter-fered in DBZ's operations. The Government has supported adoption of a State-ment of Policies that establishes sound guidelines for DBZ's business as wellas the establishment of a broadly based Board. Indeed Government representa-tives on DBZ's Board include two private businessmen. DBZ's independence isevidenced by its rejection of several parastatal projects, some of which hadGovernment support. DBZ's management expects that IFC's investment andassistance will enhance DBZ's effectiveness.

Policies

3.04 DBZ has recently adopted a Statement of Policies (see Annex 3),which covers, inter alia, the following policies:

(i) Criteria for DBZ's assistance. DBZ's financing will belimited to projects which are financially viable, technicallyfeasible and meet certain economic criteria. DBZ will giveequal priority to parastatal and private projects;

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(ii) Financing limits. According to the Statement of PoliciesDBZ will normally finance no more than 75% of theborrower's fixed assets, excluding permanent workingcapital. The Statement of Policies restricts DBZ's equityinvestment in a single enterprise to 5% of DBZ's net worthor 25% of the share capital of the recipient, whichever isless, and DBZ's aggregate equity investments to 25% of DBZ'snet worth. These limits on equity investments are more re-strictive than the relevant limits in the Act, which are10%, 25% and 100%, respectively, and reflect DBZ's con-servative attitude towards equity investments (see alsoparas 3.14 and 5.03). The Act limits DBZ's commitmentsto a single enterprise between a minimum of K 25,000 anda maximum of 20% of DBZ's net worth;

(iii) Security requirements. In the past. DBZ has requiredcollateral of at least twice the amount of its loan. Thiswas very restrictive. Other local institutions, which donot appraise projects and rely entirely on security,require between 100 and 125%. The Statement of Policiesmerely requires DBZ to obtain adequate security. DBZ intendsto use this flexibility in its security reqjuirements;

(iv) Interest Rate Policy. In the past. interest rates on DBZ7s approve(iloans have varied between 8-l/2 and 1O-l/2,S. Because of dilfferencesin the cost of its resources, competitiveness, and differences inrisk, DBZ will continue to charge flexible interest rates. DBZ in-tends that, to reflect DBZ's increasing cost of capital, its futurelending rate will average 10% with a minimum of 9%. Given the costof Bank funds, DBZ plans to on-lend the proposed Bank loan at 10-l11%.This will not present any problem in utilizing the proceeds from theproposed Bank loan as funds available to DBZ are limited. Recently,DBZ has charged 10-1/2% for some highly profitable industrial projects,9-12% for some agricultural projects, and 9% for some large parastatalprojects where it participated in a consortium which charged lowerrates. DBZ's lending rates seem reasonable in relation to the likelycost of funds and the inflation rate, which has been relatively low(about 7.5% p.a. during the last three years). DBZts interest ratewould be only slightly higher than the rate of other institutions(8-l A %-9%). DBZ also charges a commitment fee equal to one percentof the loan amount approved plus one percent of the withdrawn balanceon each anniversary date;

(v) Repayment period. DBZ's loans have a minimum maturity oftwo years and maximum maturity of 15 years;

(vi) Borrowing policy and debt/equity limitation. The DBZ Actlimits DBZ's debt to seven times its net worth. Duringnegotiation, DBZ has agreed to limit its debt/equity ratiofor the time being to 4:1. According to the projections,DBZ's debt/equity ratio would not reach 4:1 until March 31,1980.

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(vii) Foreign exchange risk. DBZ's statemient of policies pre-cludes it from assuming the foreign exchange risk on itsoperations. The possibility of the Government assuming tle.foreign exchange risk has been under discussion but it IIOWappears likely that DBZ will pass the exchange risk onto :itssub-borrowers.

3.05 DBZ is presently establishing a Special Development Fund to financeprojects in rural areas on concessionary terms. DBZ's general security andinterest rate policies will probably not apply to these operations, whichDBZ plans to finance from separate soft resources. DBZ has already obtainedK 3.1 million from two bilateral aid agencies.

Board of Directors

3.06 DBZ's Board of Directors has 10 members. The Government appointssix Directors, including the Chairman and the Managing Director, while "ClassB" shareholders are to appoint four Directors, including the Deputy Chairman.Annex 4 shows a list of DBZ's directors. The Government has appointed as itsrepresentatives the Permanent Secretary of Planning and Finance (Chairman), DBZ'sManaging Director, the Economic Advisor to the President, the Managing Directorof INDECO, and two private businessmen. The "Class B" shareholders have, inthe interim, appointed only one director, a representative of one of the localcommercial banks. DBZ expects additional representatives of "Class B" share-holders to be nominated in due course. To facilitate IFC's assistance indeveloping the policies and operations of DBZ, it is proposed that IFC be rep-resented on DBZ's Board. This proposal has the necessary support of a numberof "Class B" shareholders. The Board meets about once every two months. Ithas established an Investment Committee consisting of four Directors to whomit has delegated the approval of loans up to K 100,000.

Management

3.07 DBZ's management consists of a Managing Director and a GeneralManager. The Managing Director was previously a Director of the AfricanDevelopment Bank and an Under Secretary in the Ministry of Finance. He pro-vides DBZ with dynamic leadership. The General Manager was previously one ofthe general managers of Den Norske Kredit Bank and has been made availablefor two years to DBZ through NORAD.

3.08 DBZ has a Loan Committee which is chaired by the Managing Directorand includes the General Manager and all department heads. All projects mustbe approved by the Loan Committee before they can be presented to the Invest-ment Committee or the Board. The General Manager heads a staff recruitmentcommittee, which includes all department heads and recommends candidates foremployment to the Managing Director.

Organization and Staff

3.09 Annex 5 shows DBZ's organization chart and the staff allocated toeach department. DBZ's professional staff totals 30, including eight ex-patriates in senior positions. Four of them are financed through bilateralassistance. The terms of most expatriates expire in mid-1976 and DBZ is

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looking for replacements. DBZ is keen to reduce its reliance on expatriates.It plans to fill most vacant positions with Zambian nationals and has chargedone of the expatriates with establishing and conducting a training program forthe new Zambian staff. During the last year, two DBZ staff members haveattended EDI courses; DBZ is looking for continued EDI support to train theZambian staff.

3.10 Operations Department. This department is in charge of projectappraisal, including engineering studies, and follow up. It is headed by aformer Deputy General Manager of the Industrial Development Bank of India.

3.11 DBZ's processing time is short, usually 3-4 months. Projectappraisals, which have been of uneven quality in the past, are generallyImproving. DBZ has recently prepared a standard format including guidelinesfor various financial calculations. The market and financial analysis arereasonable. Until recently, DBZ did not make a comprehensive analysis of theeconomic aspects of its projects. DBZ has now decided, however, to calculatethe economic rate of return for all projects exceeding K 160,000. The economicanalysis is particularly important as most of DBZ's projects are for importsubstitution and as no Government agency takes a comprehensive look at theeconomic aspects of projects.

3.12 DBZ has begun to follow up on some of its projects for which dis-bursements have been made but has not yet established a systematic follow-up system. DBZ is aware of the importance of supervision and has recentlyrecruited an officer and two assistants for this task.

3.13 Promotion and Planning Department. The department is headed byan economist provided from bilateral assistance. Its main function is projectidentification and promotion but, so far, it has concentrated on policy for-mulation, preparation of background papers and market studies for the opera-tions department.

3.14 With regard to project promotion, the major contribution of thisdepartment will probably be in the refinement of the project proposals whichare not yet fit for financing when they are presented to DBZ. Most of theseprojects are expected to be private as parastatals have their own staff todevelop projects. DBZ has not yet made any equity investments as its manage-ment has understandably wanted to build up a fairly strong and quick yieldingportfolio in order to get DBZ off to a sound start. However, to becomeeffective in project promotion, DBZ must become more willing to take equityparticipations.

3.15 Finance Department. The head of this department is an experiencedexpatriate who previously occupied a similar position with the Tanzania Invest-ment Bank. Besides the preparation of financial statements, budget and finan-cial forecasts and the investment of liquid funds, this department is alsoresponsible for disbursements and collections of loans. The department is pre-sently developing an internal reporting system taking into account the Bank'saudit and reporting requirements.

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3.16 Administrative Department. This department, which is headed by aZambian, is responsible for the Board secretariat and personnel administra-tion. Recruitment is handled by Management. DBZ does not have a lawyerand relies for legal matters on a private law firm. DBZ intends to recruita loan administrative officer with a legal background.

Procedures

3.17 Shortly after DBZ's establishment, UNDP provided an expert toformulate procedures for DBZ such as an operations manual and guidelines forportfolio supervision. DBZ is adapting the procedures to its specific needs.They generally form a sound basis for DBZ's operations. DBZ's standard LoanAgreement with clients is satisfactory. DBZ is presently considering somechanges which were proposed by the Bank.

3.18 Procurement and disbursement. DBZ normally asks its clients toobtain quotations from several suppliers and to choose the ultimate supplierin consultation with DBZ. DBZ bases its disbursements on the general pro-gress of a predetermined investment program. To meet the Bank's disburse-ment requirements, DBZ will relate its financing and disbursements to specificitems of expenditure for Bank-financed projects.

3.19 Audit. DBZ has appointed Coopers and Lybrand as its auditors. Theaudit report for FY 1975 (ended March 31, 1975) was brief, reflecting DBZ'syoung age. DBZ has agreed that future audits will comply with the Bank's il-lustrative audit form to the extent that the supplementary information is re-levant for DBZ's operations.

IV. RESOURCES, OPERATIONS AND FINANCIAL CONDITION

Resources

4.01 As of March 31, 1975, DBZ's resources totalled K10.2 million, consist-ing of the subscribed share capital (KS.7 million of which K6.9 million waspaid-in), reserves and retained earnings (K100,000), and a loan from theAfrican Development Bank (K1.4 million at 7% p.a.). Recently, DBZ has alsoarranged to borrow a total of K7 million from the Bank of Zambia (K5 millionat 7%), the Government (Kl million at 7%), and the Zambia National ProvidentFund (Kl million at 7.5%). The maturities vary between 8-20 years; however,no repayment schedule has yet been specified for the Government loan.

Operations

4.02 During its first full year of operations (ending March 31, 1975),DBZ made a good start and approved 14 loans for a total of K6.6 million; thiscompares favorably with the performance of other dfcs during their initialyear of operation. From April to October, 1975, DBZ approved 18 more projects

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for a total of K6 million. As of June 30, 1975, DBZ had signed contracts for22 projects, accounting for K7.8 million, and disbursed K4.1 million. DBZ'sability to keep the time lag between approvals and commitments as short as ithas is an important achievement. DBZ has not yet made any equity investmentsor guarantees.

4.03 DBZ has been aggressive in seeking sound projects during its firstyear. DBZ's impact on those projects have been necessarily limited due tothe lateness of its entry. DBZ is eager to increase its role in project for-mulation and preparation, and it fully expects to do so as its staff acquirefurther experience and expertise. To enhance its impact on large nationalprojects whose financing requirements exceed DBZ's exposure limits (para 3.04),DBZ is planning to undertake syndication of such projects, as it has alreadydone in two cases.

4.04 Among the 14 loans approved during FY 1975 (Annex 6), there werefive domestic resource-based projects: one for vegetable and fruit growing/storage, one for sugar processing (this project is expected to create 2,300additional jobs) one for quarrying, and two cattle ranches. Although mostDBZ-financed projects, like the majority of manufacturing interprises inZambia, rely on imported inputs, they appear economically well conceived.Three of the loans involve projects with some export features. DBZ has notdirected its lending to any particular sector and has financed a wide varietyof projects. (Twenty-five percent of all projects financed until June 30,1975 were for agriculture but they accounted for only 8% of the total amount).

4.05 Eighty percent of the projects approved as of March 31, 1975(Annex 7) are private; they account for one third of the approved amount.About half the loans were for new projects; expansions of on-going enter-prises accounted for 80% of the approved amount. Most of DBZ's assistanceis for projects in Lusaka, the Copperbelt and along the line of rail. Mostloans have been to projects that appear to have very good financial prospects.The median loan size is K123,000. The loan maturity ranges between 5 and 13years and averages 8.7 years. The average interest rate is 9%; DBZ intendsto charge an average rate of 10% with a minimum of 9% in the future.

4.06 Most of the approved projects are directed towards the domesticmarket. Although DBZ's past appraisals do not include a thorough economicanalysis, the projects appear generally economically sound in view of hightransportation costs on similar imports. The average cost per job createdis $20,000 which is reasonable.

Financial Results and Condition

4.07 Annex 8 shows DBZ's income statements and balance sheets. As ofMarch 31, 1975, DBZ's loan portfolio amounted to K 3.6 million; DBZ hadinvested K 2.5 million in liquid assets at an average yield of 5.8% p.a.During FY 1975, administrative expenses amounted to 4% of total assets which

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is reasonable for a new institution. Net profits amounted to 1% of sharecapital on an annual basis. The low profitability is common for a newinstitution and DBZ's financial condition is sound.

V. PROSPECTS

Projected Operations

5.01 DBZ expects that approvals will amount to K10 million in FY 1976and will increase gradually to K22 million in FY 1980 (Annexes 9 through13 show DBZ's projections through FY 1980 together with the underlyingassumptions). This forecast level of operations seems reasonable in view ofDBZ's approvals to date and its large pipeline of projects.

5.02 DBZ has a well-filled pipeline of projects. As of October 1975, thepipeline consisted of 23 projects for a total amount of K 7.1 million (seeAnnex 14). The pipeline included only one parastatal project, a fisheryproject which accounted for forty percent of the amount. Of the privateprojects, nine accounting for half of the amount are for industry. They covera variety of subsectors. Most of them either will use domestic raw materials,be labor intensive or take advantage of high transport costs to Zambia. DBZ'spipeline also includes two hotel projects and five bakeries. In consistencewith the Government's emphasis on increasing food production, one third ofDBZ's private projects under study (accounting for 10% of the amount) are foragricultural schemes, including farm and cattle ranch development and poultryfarms. AFC provides only short-term financing, and DBZ is the only institutionthat can finance these projects.

5.03 In view of the usual low initial returns on equity investments,DBZ does not intend to make any until FY 1977 and the amount of such in-vestments is expected to remain relatively low thereafter. This reflectsDBZ's rather conservative attitude. DBZ is aware, however, that if it wantsto be effective in project promotion it should be willing to provide moreequity financing once it is better established.

Resource Position and Needs

5.04 As of March 31, 1975, DBZ's uncommitted resources amounted toK3.0 million, including K1.4 million of the ADB line of credit. Accordingto DBZ's projections, its resource requirements will develop as follows(amounts in K million):

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Year ending March 31 1976 1977 1978 1979 1980

Available for approvals atbeginning of year 3.0 (5.4) (16.2) (29.6) (45.6)

New share capital 1.3 - - - -

Internal generation of funds /1 0.3 1.5 2.1 2.8 3.8

Approvals during the year 10.0 12.3 15.5 18.8 22.0

Cumulative resource requirements 5.4 16.2 29.6 45.6 63.8

/1 Cash from operations plus loan collections minus debt repayments.

To cover its operations until the end of FY1978, DBZ needs K30 million inaddition to the increase in paid-in share capital to K10 million. Of thisamount approximaLely 1'. 24 million is needed to finance the import componentof DBZ's operations. DBZ expects to obtain K14 million from local sources,K 8 million of which will be used for financing imports. It has alreadyreached agreement with the Bank of Zambia, the Government and the ZambiaNational Provident Fund for a total amount of K 7 million during FY1976. DBZexpects to obtain K 6 million more from foreign sources, such as the AfricanDevelopment Bank, Kreditanstalt fur Wiederaufbau and the European InvestmentBank. It is proposed that the Bank fill the remaining resource gap with aloan of K10 million ($15 million). This amount would cover one third of DBZ'soperations and one half of its foreign exchange requirements through FY1978(ending March 31, 1978).

Projected Income Statements

5.05 Annex 10 shows DBZ's projected income statements assuming that DBZwill earn a spread of two percent on the average cost of borrowings. The pro-jected income statements-can be summarized as follows (amounts in K'000):

Year ending March 31 1975 1976 1977 1978 1979 1980(actual)

Total Revenue 398 836 1,683 2,815 4,068 5,478

Net Profit 70 168 331 482 636 950

Net profit as % ofaverage share capital 1% 2% 3% 5% 6% 9%

Net Profit as % ofaverage net worth 1% 2% 3% 42 5% 8%

The projections indicate that the return on net worth (after adequateprovisions) will increase from 1% in FY1975 to 8% in PY1980. As a statutory

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corporation, DBZ is exempted from corporate taxes. The projected level ofprofitability is modest but sufficient to maintain an adequate equity base.Although profit may allow some small dividends, the return on equity will bemodest. (According to the Act, DBZ can pay dividends only after at leastthree profitable years). DBZ's administrative expenses as a percentage ofaverage total assets are expected to decline from 4% in FY1975 to 1% inFY1980. This requires strict control over administrative expenses but seemsfeasible. DBZ's debt service capacity will be adequate with an interest andprincipal coverage exceeding 1.6 throughout the period.

Projected Balance Sheets

5.06 Annex 12 shows DBZ's projected balance sheets. DBZ's totalassets are projected to increase from K7.2 million at the end of FY1975 toK64 million at the end of FY1980, which represents an average growth rateof more than 50%. Provisions will amount to 1.7% of the outstanding loanand equity portfolio in FY1980. DBZ's debt/equity ratio will reach 3:1during 1979 and 4:1 at the end of FY1980.

VI. CONCLUSIONS AND RECOMMENDATIONS

6.01 The manufacturing sector, which has increased substantially sinceZambia's independence, will have an important role to play if the nation isto move away from its dependence on the mining sector. Government shouldformulate policies and design a consistent set of investment incentives tospur industrial activity. Pending the enactment of the proposed code (seepara. 2.15) there is sufficient investment activity to Justify DBZ's role.It is important that DBZ use proper economic criteria in selecting projectsand that, ultimately, the Government apply such criteria to all projectsimplemented in Zambia. While the parastatals have some access to otherfinancial institutions, private enterprises essentially can obtain mediumand long-term financing only from DBZ.

6.02 DBZ has a dynamic management which has succeeded in recruitingsuitable staff and established a good track record in terms of its volumeof business and ability to keep its project processing time to a minimum.DBZ's projects are generally financially and economically sound. In viewof its promising start, it is likely that DBZ's impact on projects will growrapidly as it gains the necessary experience. DBZ has been able to build upa substantial pipeline of interesting projects which are, on the whole,consistent with Government's objectives for Zambian industry. The industrialprojects in the pipeline cut across a wide variety of manufacturing subsectors.

6.03 To cover its operations until March 1978, DBZ needs K30 million innew resources, of which K24 million would be for imports. DBZ expects toobtain K20 million from local and foreign sources. It is recommended that

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the Bank lend DBZ $15 million (approximately K10 million) to fill its remainingresources gap and that IFC invest up to K350,000 (approximately $550,000equivalent) in DBZ's share capital to increase the subscription of "ClassB" shares.

6.04 The loan would finance the c.i.f. cost of imported goods, theestimated foreign exchange component of imported goods purchased in Zambiaand civil works. It would be repaid according to a flexible amortizationschedule, conforming to the aggregate amortization schedules of DBZ'ssubloans which have a maximum maturity of 15 years. Since DBZ is a new com-pany, has not yet had time to develop its operations, and will have a lowprofitability during its early years, it is recommended that DBZ be givenconcessional treatment of commitment charges which would only accrue on amountsauthorized for specific subprojects. DBZ would need the Bank's prior approvalfor all projects using $250,000 or more of the proposed loan and would notbe able to use more than $3 million in total without the Bank's approval.Given the cost of Bank funds, DBZ nlans to on-lend the proceeds of the loan atan interest rate of 10-1/2%, with the foreign exchange risk borne by the sub-borrowers.

6.05 Justification. The proposed loan will serve to alleviate Zambia'sshortage of funds for industrial investments by providing term financing tomedium- and large-scale industrial projects which meet appropriate economic,financial, and technical criteria. The loan and equity investment will alsoprovide the opportunity to assist the further development of DBZ as an effec-tive appraiser and allocater of scarce resources. At present, DBZ is theonly Zambian institution undertaking comprehensive project appraisals. Theindustrial sector has a potentially significant role to play in reducingZambia's dependence on the mining sector.

6.06 The proposed IFC investment would make IFC the second largest"Class B" shareholder and, with the support of a number of other "Class B"shareholders, would allow it to be represented on DBZ's Board of Directors.DBZ is looking for the technical support of IFC, which through its membershipon DBZ's Board is expected to reinforce the Bank's efforts to strengthen furtherDBZ. As no other institution in Zambia is designed to provide medium and long-termfinance to the private sector, a significant portion of DBZ's business will bewith private enterprises. The Government controls the majority of DBZ's sharecapital, but is keen to have DBZ operate independently and on a commercialbasis.

ANNEX 1

DEVELOPfEWT BANK OF ZAMBIA

Interest Rates in Zambia(as of March, J.975)

Interest Rate per Annum (%)

Bank of Zambia, discount rate 5.0

Interest rates on fixed-term deposits or.savings accounts

National Credit and Savings Bank Accounts 3.75Coomercial Banks Savings Accounts 4.0Commercial Banks Fixed-term Deposits

3-6 months 4.06-12 months 4.51-2 years 5.02-3 years 5.53 years and over 6.0

Zambia National Bailding SocietySavings Shares 3.5Investment Shares 6.0Deposits (3 to 60 months) 3.0-7.25

Governmient stock (long-term bonds) 7.25Iending rates on coumercial banks overdrafts 7.5-10.0

Lending rates on medium- to long-term loans

Comercial banks 8.5-10.0Agricultural Finance Corporation 8.0Inchdstrial Finance Corporation 9.0-10.0Zambia National Provident Fund

Loans to municipalities 7.5Indastrial loans 7.5-8.5

Zambia National Eiilding SocietyMortgage loans - Residential properties 7.5Mortgage loans - Commercial and industrial

properties 9.0-10.25Zambia State Insurance Corporation 8.0-9.0Development Bank of Zambia 9.0-10.5

IBRD/DFCDMay, 1975

ANNEX 2

DEVELOFMENT BANK OF ZAMBIA

List of Shareholders(as of October 1, 1975)

Amount subscribed(K'O0O)

"CLASS A" Shareholders

The Government of Zambia 4,500Bank of Zambia 500Zambia National Provident Fand 500National Commercial Bank Ltd. 200Zambia National Bailding Society 150Zambia State Insurance Corporation Ltd. 150

6,000

"CLASS B" Shareholders

Deutsche Entwicklungsgesellschaft i,500Group of Yugoslav Banks 30C;/Barclays Bank of Zambia Ltd. 200Standard Bank of Zambia Ltd. 200African Development Bank 150Grindlays Bank International (Zambia) Ltd. 100Bank of America 100Banca Nazionale del Lavoro 100Den Norske Credit Bank 50

2,700

Proposed IFC investment 350Other unsubscribed "CLASS B" Shares 950

Total authorized and issued share capital 10,000

j/ Net yet paid in.

IBRD/DFCDOctober 28, 1975

ANNEX 3Page 1 of 3

DEVELOPMENT BANK OF ZAMBIA

OPERATIOMS POLICIES(Approved by DBZ 'S Board of Directors on August 15, 1975)

I. GENERAL

1. DBZ is a national development institution, and shall contributeto the development of economically viable enterprises in Zambia inall the sectors of the economy mentioned in the DBZ Act, mainly:-

a) manufacturing industries;b) ranching and large scale agriculture;c) tourism.

2. DBZ shall invest on the basis of national priorities for economicand social development as laid down in Development Plans. *,thin thisframework, DBZ shall give equal priority to parastatal and private projects.

3. DBZ shall only finance projects which are technically feasible andfinancially viable. Wthen these requirements are satisfied, DBZ shall givepriority to projects contributing towards:-

- foreign exchange savings and possible earnings.- development of local technology and of manpower skills.- permanent employment.- use of local raw materials.- development of related industries.- Zambian ownership and management.

4. DBZ will not subsidise enterprises or projects.

5. DBZ shall to its best endeavour identify investment opportunitiesand present them to potential Zambian and foreign investors.

6. DBZ shall, where appropriate and possible, offer technical assistanceand advice to its clients in matters of project planning, organisationand financing.

II. INVESTMENT POLICY

1. DBZ shall grant medium and long term loans wihose terms and conditionssuch as repayment periods, interest rates, commitment and other charges willvary with the requirements of each project. It may also invest in the sharecapital of enterprises, underwrite securities and guarantee debts.

ANNEX 3Pge 2 of 3

2. DBZ's financial assistance shall notamount to less than K25,000in any one project.

3. DBZ's total outstanding commitments in favour of one single enter-prise shall neither exceed 20% of DBZ's net worth nor 75% of the enter-prise's fixed assets. Exceptions to this rule must be determined bythe particular nature and merits of a project.

4. DBZ's total investments in the form of equity participation shallnot exceed 25% of the Bank's net worth. In one single enterprise, DBZ'smaximun equity investment shall not exceed 5% of the Bank's net worthnor, in normal circumstances, 25% of the share capital of the enterprise.

5. DBZ's funds shall not normally be committed specifically for thefinancing of working capital.

6. Where appropriate, DBZ may join with other financing institutions,local or foreign, in financing projects.

7. DBZ shall endeavour to distribute its investments among the varioussectors of the economy mentioned in the DBZ Act, and to the differentprovinces of Zambia.

III. RELATIONSHIP WITH CLIENTS

1. DBZ shall not seek to obtain controlling interest in a project orenterprise. It will also generally avoid assuming management responsi-bilities in such projects or enterprises.

2. When deciding upon its investment, DBZ shall take into account allfinancial requirements of the project or enterprise for the duration ofits investment.

3. In accordance with normal banking practice, DBZ will require itsclients to provide and to maintain adequate security, to keep recordsand accounts in accordance with sound accounting practices and to furnishwhatever information on their operations and accounts DBZ deems desirable.DBZ will have the right to inspect the enterprises and projects if finances.

4. Business secrets and other information furnished by applicants orclients will be treated as confidential by DBZ.

IV. FINANCIAL POLICY

1. As an independent institution, DBZ shall at all times manage itsfunds in such a way that it can honour its obligations. The Bank'sprofit margin must at all times be sufficient to cover the operating costs,to build up provisions and reserves, and to renumerate its share capital.

ANNEX 3Page 3 of 3

The minimum interest rate charged by DBZ shall thus substantiallyreflect its cost of capital.

2. To this end DBZ shall:-

- require adequate security for its loans;

- maintain a satisfactory balance betweenthe maturities of its own obligations andthose of the loans it grants;

- ensure that either the borrowers or theGovernment incur the foreign exchange risksin respect of funds borrowed in foreigncurrency by the Bank; and

- make adequate provision against potentiallosses and build up reserves to a levelconsistent with sound financial practices,taking into account the size and quality ofits portfolio of loans and investments aswell as the need to pay dividends to share-holders.

3. Vhenever the Bank considers it necessary to increase capitalresources for operations, DBZ will endeavour to raise funds at bestpossible terms locally or abroad.

V. SPECIAL FUNDS

From time to time, Special Funds may be placed under the Bank'sadministration, ear-marked for specific purposes or categories ofborrowers. Modifications in the Bank's normal Operational Pblicieswill have to be worked out for each Special Fund.

IBRD/DFCDOctober 28, 1975

ANNEX 4

DEVELOPIENT BANK OF ZAMBIA

Board of Directors

(As of October 1, 1975))

Board Member Position Appointed by

Mr. F. N. Walusiku Permanent Secretary Class A shareholders

(Chairman) Ministry of Planning andFinance

Mr. C. N. Lihusha Haaaging Director, DBZ " " i

Mr. J. B. Nyirongo Managing Director, INDECO

Mr. L. M. Lishomwa Special Assistant to thePresident on Economicaffairs "

Mr. E. J. Shamwana Solicitor ""

Mr. M. S. Siame Chairman of M. S. Company " "

Hr. F. H. Nkhoma General Manager, Barclays Class B shareholders (Standard,Bank (Zambia) Ltd. Barclays, and Grindlays Banks)

EBRD/DFCDOctober 28, 1975

a

i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. 4

ANNEX 5DEVELOPMENT BANK OF ZAMBIA

ORGANIZATION CHART(AS OF OCTOBER 1, 1975)

Board of Directors

Chairman: Mr. F.M. WalusikuP.S. Ministry of Planning & Finance

Loan Committee

Chairman: Mr. Lihusha

Managing Director

Mr. C.N. Lihusha

Mr. |uardt (eap.), Maagr r.W p),Maagr r ahMaagM.he omanScrtaChrrman: Mr. Lynth

Mr. B.A. Lenth (exp.)

|Mr. Pasitkari (exp.) |

Promotion & Planning Department Opiierations Department Finance Department -Administrative Departrnent,

Mr. Rudhardt (exp.i. Manager Mr. Wadw,ha (exp.), Manager Mr. Rahnman (exp.), Manager Mr, Chemnbe, ComPany Secretary1 Senior Economist 4 Senior Project Officers (2 exp., 1 vacant) 1 Accountant 1 Assistant Secretary3 Economists (i vacant) 4 Proiect Officers 11 vacant) 2 Assistant Accountants 1 Personnel Officer2 Assistant Economists (1 vacant) 2 Assistant Proiect Officers 1 Executive Officer

1 Senior Loan Officer (vacant)2 Loan Administrative Officers (1 vacant)3 Assistant Loan Administration Officers1 Engineering Consultant (exp.)2 Engineers (vacant)

Employment

Professional staff 30Of which: Zambians 22

Expatriates aVacant Professional Positions 8

Total 38

Note: lexp.) = expatriate.

IBRD/DFCDOctober 28, 1975

World Bank.- 15325

DEVELOPMENT BANK OF ZAMBIALoans Approved as of March 31. 1975

(Amounts in K I 000)

Ownership Type of Amount Maturity Interest Total Othr Sources of FinanceBorrower Economic Activity Location h private X Zambian Project Approved (year) rate Project Cost Equity Loans

1. Walkover Estates Agricultural estate Lusaka 100 50 new 90 10 9 180 90

2. Universal Footwear Shoe manufacturing Lusaka 100 51 expansion 50 5 9 60 10

3. Vimal Textiles Towel manufacturing Lusaka 100 51 new 170 10 9 230 60 -

4. Indeco IndutrialHoldings Bag manufacturing Kabwe - 100 rehabili- 1300 8 8.5 7,600 1050 5250

tation (suppliers credit)

5. Reform bakery Bakery Kafue' 100 100 new 27 5 9 54 27 -

6. Nova Knit Polyester fabrics Ndola 100 49 new 440 5 9 740 300 -

7. African Properties Cattle, farm Kabwe 100 95 expansion 123 13 9 266 143 -

8. Dunelm Estates Cattle & Poultry farm Chipate 100 51 expansion 86 12 9 117 31 -

9. Medwich Clothing Garmet manufacturing Kitwe 100 84 expansion 262 7 10 462 200 -

10. LECO PVC blendings Mwancha 100 - new 75 5 10 200 125 -

11. ZNWMC Storage & distribu- Kabwe - 100 expansion 1400 12 9 5100 2100 1600tion

(Building society)

12. Century Packages Packaging materials Lusaka 100 68 new 500 8 10 1670 670 500 (IFC)Ltd. *

13. Zambia Sugar Co. Sugar production Lusaka 30 75 expansion 2000 8 9 30000 11000 17000(various sources)

14. Southern Quarries Quarrying Livingston 100 100 expansion 105 5 10 134 29 _

Total 6628 46813 15835 24350

* Joint Operations with IFC

IBRD/DFCD

November 1975

ANNEXI

DEVELOPMENT BANK OF ZAMBIA

Analysis of Loans Approved as of March 31, 1975(Amounts in K'OOO)

No % Amount %A. Type of Project

New 6 43 1,302 20Expansion 8 57 5 326 80

17 100o xL. 100

B. Ownership (Private /Public)Privrate 11 7Q 1,928 29Public 3 2- 4,700 71

C. Ownership (Zambian/Foreign)Zambian 12 86 6,113 92Foreign 2 1 515 8

% 100 ~6,628 -im

D. LocationLusaka 5, 37 2,810 42Kabwe 3 21 2,823 43Copperbelt 3 21 777 12Other 3 21 218 3

4i 10-0 =, T-

E. Economic Act'±vityManufacturing 10 72 4,929 74.;griculture 3 21 299 5,torage and Distribution 7 21

i1 o-o -6Zw loo0

F. SizeUp to K150,OOO 7 50 556 8K150,001 - K500,OOO 4 29 1,372 21K500,001 and over 3 21 .700 71

17 TC) 628 100

Average size: K470,000Median size: K123,000

G. Maturityyears 5 36 697 11

6 - 10 years 6 43 4,322 65More than 10 years 3 21 1.609 24

7l 1o0o 100

Weighted average maturity: 8.7 yearsMedian maturity: 8 years

H. Interest Rate;) -55% 1 7 1,300 20".o% 9 64 4,386 66

10.0% 4 29 942 14T007U8 100

Average interest rate: 9.0%

IBRD/DFCDApril 1975

ANNEX 8

DEVELOPMENT BANK OF ZAMBIA

Balance Sheets(Amounts in KO00)

As of Yarch 31, 1974 1975

ASSETS:

Short term investments 6,395 2,500Other current assets 93 397

Total current assets 6,488 2,897

Loans _ 3,623Fixed assets (net) 298 633

Total assets 6,786 7,153

LIABILITIES-

Cuirrent liabilities 90 63Mortgages - 74

Total liabilities 90 137

Paid-in share capital 6,650 6,900Reserves 46 116

Equity 6,696 7,016

Total liabilities and equity 6 786 7,153

Income Statements(Amounts in KIMl)

Year ending March 31, 1974 19759 months

REVENUE:

Interest on short term investments 200 307Income from loans 80Other income 2 11

202 398

EXPENSES:

Administrative expenses 142 309Financial expenses 14 19

156 328

NET PROFIT: 46 70

IBRD/bFCDOctober 13, 1975

AME 9

DEVELOPMENT BANK OF ZAMBIA

Assmaptions for Operational aad Financial Forecasts 1976-1980Approvals

See Annex 10

Disbursements

Loans: Disbursements take place over a one-year period, starting 3 months after approval.Equity investments: Disbursement occurs during year of approval.

Loan collections

Average repayment period is 10 years, including 2 years of grace.

Share capital

Paid-in share capital will be increased to K 10 million during FT1976.

Borrowings

All loans approved during FY1975 will be financed from equity. Thereafter, DBZ will cover75% of the import component of its loans from foreign lines of credit, Repayment of theselines of credit matches collections of corresponding subloans.Other resources requirements will be covered by local borrowings which will not be repaidbefore FYl98t .

Provisions

Increased each year by 1 1/2% of the disbursements during the year.

Interest rates and charges

Yield on short-term investments: 5%Interest ratp on loans 10XInterest rate on borrowings 8%Commitment charges on loans and on

borrowings have been ignored

Yield on equity investments

1 % - starting the second year after approval.

Taxes

DBZ is tax exempt.

Administrative 3Xpenses

As provided by DBZ. Rent is expected to remain constant throughout the period. Salariesduring FY1976 as budgeted and increased by K 21,000, K 14,000 and K 15,000 during next threeyears to allow for new recruitment. From FY1977 salaries have been increased by 10% peryear to account for merit increases and inflation. All other expenses have been increasedby 105 per year.

Dividends No dividends have been assumed during the projec.ion period.

IBRD/CFCD/April 1975

ANNEX 10

DEVELOPMENT BANK OF ZAMBIA

Forecast of Operations (1976 - 1980)

(Amounts in KIOOO)

Year ending March 31 1975 1976 1977 1975 1979 19L0(actual) - -

APPROVALS

Loans, domestic component 6,9&V 3,333 4,o°o 5,000 6,000 7,000

Loans, import component - 6,667 8,000 1 0,000 12,000 14,000

Loans 6;-60 10,000 12,000 15,000 18,000 21,000

Equity investments - - 250 500 750 1,000

Total 6-600 10,000 12,250 15,500 18,750 22,000

DISBURSEMENIS

Loans, domestic component 3,800 4j,oSo 3,583 4,375 5,375 6,375

Loans, import component - 2,500 7,167 8,750 10,750 12,750

Loans 3,800 6,550 10,750 13,125 16,125 19,125

EqUity investments - - 250 500 750 1,000

Total 3,boo 6,550 11,000 13,625 16,875 20,125

j,/ It has been assumed that all loans approved before March 31, 1975 will befinanced from domestic resources

IBRD/DFCDOctober 28, 1975

ANNE 11

DEVELOPMENT BANK OF ZAMBIA

Projected Incomae Statements (1976-1980)(Amounts in KrOOO)

Year ending March 31st 1975 1976 1977 1978 1979 1980(a=Eal) ---

REVENUE:

Interest on short terminvestments 318 128 120 137 134 129

Interest on loans 80 708 1,563 2,678 3,909 5,299Dividend income - - - - 25 50

Total revenue 398 836 1,683 2,815 4,068 5,478

EXPENSES:

Administrative expenses 309 429 490 552 622 682Financial expenses 19 141 697 1,577 2,568 3,559Provisions - 98 165 204 242 287

Total expenses 328 668 1,352 2,333 3,432 4,528

NET PROFIT 70 168 331 482 636 950

Net profit as percentageof average share capital 1% 2% 3% 5% 6% 9%

Net profit as percentageof average net worth 1% 2% 3% 4% 5% 8%

Administrative expenses aspercentage of average total assets 4.3% 4.1% 2.5% 1.8% 1.4% 1.2%

IBRD/DFCDOctober 28, 1975

ANNEX 12

DEVELOPMENT RANK OF ZAMBIA

Projected Balance Sheets 81976-1980)(Amounts in K'0 )

is of March 31 1975 1976 1977 1978 1979 1980(a7clua) - -- - -

ASSETS

Ourrent assets 2720 2376 2913 2618 2801 2552

Loans outstanding 3800 / 10350 20125 31027 43429 57856Equity investments - 250 750 1500 2500

Portfolio outstanding (gross) 380C 10350 20375 31777 44929 60356Provisions - (98) (263) (467) (709) (996)

Pbrtfolio cutstanding (net) 3800 10252 20112 31310 44220 59360Fixed assets 633 1287 1614 2146 2392 2392

Total assets 7153 13915 24639 36074 49j13 64304

LIABILITIES AND EQUITY

Ourrent liabilities 63 107 125 140 155 170

Domestic borrowings 74 1649 6649 11649 17649 23649Foreign borrowings - 1875 7250 13188 19876 27802

Total long-term debt 74 3524 13899 24837 37525 51451

Paid-in share capital 6900 10000 10000 10000 10000 10000Reserves and retained earnings 116 284 615 1097 1733 2683

Eqcuity 7016 10284 10615 11097 11733 12683

Total liabilities and equities 7153 13915 24639 36074 49413 64304

Undisbursed approvals 2800 6250 7500 9375 11250 13125

Debt/equity ratio 0.01 0.34 1.31 2.24 3.20 4.00

1/ Includes receivable portion of outstanding portfolio.

IBRD/bFCDOctober 28, 1975

ANNEX 13

DEVELOPMENT BANK OF ZANBIA

Projected Cash Flow Statements (1976-1980)(Amounts in K'OOO)

Year ending March 31 1975 1976 1977 1978 1979 1980(actua) ---

SOURCES:

Net profit 70 168 331 4 82 636 950Provisions 98 165 204 242 287

Cash from operations 70 266 496 686 878 1237

Loan collections - - 975 2223 3723 4698Local borrowings 74 1575 5000 5000 6000 6000Tbreign borrowings - 1875 5375 6770 8520 10108Increase in share capital 6900 3100 _ _ _

Total sources 7044 6816 11846 14679 19121 22043

USES:

Increase in fixed assets (net) 633 654 327 532 246 -Disbursements of loans

- domestic component 3800 4050 3583 4375 5375 6375- import component - 2500 7167 8750 10750 12750

Equity investments - - 250 500 750 1000Repayment of foreign loans - 832 1832 2182

Total uses 4433 7204 11327 14989 18953 22307

Increase (decrease) in netcurrent assets 2611 (388) 519 (310) 168 (264)

Debt service coverage 2.9 3.1 1.9 1.6 1.7

IBRD/DFCDOctober 28, 1975

ANNEX 14

DEVELOBMENT BANK OF ZAMBIA

Pipeline of Projects as of October 6, 1975(Amounts in KOOO)

Project Type of Project Majority Ownership Total Project EstimatedCost DBZ loan

Electrical accessories new private Zambian 600 300Manufacturing of concreeblocks new private Zambian 88 60Furniture manufacturing new private Zambian 45 31Refrigerator assembly new private Zambian 762 200Watch assembly new private Zambian 200 100Container manufacturing new private Zambian 2,300 1,000Printing expansion private Zambian 400 400Sand and stone quarry expansion private Zambian 102 70BDat yard expansion private Zambian 185 102Hotel expansion private Zambian 825 750Ibtel new private Zambian 250 200Bakery acquisition private Zambian 200 150Bakery new private Zambian 35 30Bakery new private Zambian 213 125Bakery new private Zambian 75 50Bakery expansion private Zambian 30 30Cattle ranching expansion private Zambian 201 136Pbultry farm acquisition/ private Zambian 50 30

expansionPbultry scheme new priva.te Zambian 300 210Dairy and fruits new private Zambian 52 37Cattle ranching acquisition/ private Zambian 44 33

expansionFarm acquisition/ private Zambian 75 55

expansionFishery new parastatal 5,500 3,000

Total 7,C99

IBRD/DFCDOctober 17, 1975

ANNEX 15

DEVELOPMENT BANK OF ZAMBIA

Zambian Laws Applicable to the Proposed IFC Investmentin the Development Bank of Zambia

The basic legislation under which the Development Bank of Zambia(DBZ) operates is the Development Bank of Zambia Act, 1972, which incor-porated DBZ, the Development Bank of Zambia (Amendment) Act, 1975 and theDevelopment Bank of Zambia (Amendment) (Nko. 2) Act, 1975. These Acts setout the powers and functions of DBZ.

Approval and Registration

Under the Development Bank of Zambia Act, approval by the Ministerof Finance is required for the issue of shares to IFC in DBZ. Similarapproval is required for any transfer of shares. Also, under the generallaw, a local enterprise must make application to the Bank of Zambia forapproval of the issue of shares in a Zambian company to non-residents andfor any subsequent transfer of such shares. As a condition of approval, itis required that disbursements be made through the Bank of Zambia.

Repatriation

External payments are governed by the Exchange Control Act, Chapter593 of the Laws of the Republic of Zambia, and the regulations issued there-under by the Ministry of Finance. Ministry of Finance approval is requiredto repatriate dividends as well as the proceeds of equity sales and to trans-fer shares in a Zambian company to non-residents.

Taxation

The income of DBZ is exempt from income tax in Zambia under paragraph5 (1) (i) of the Second Sched.le to the Income Tax Act of Zambia.

IFCJanuary, 1976

ANNEX 16

DEVELOPMENT BANK OF ZAMBIA

Estimated Disbursement Schedule for Proposed Loan

Amount($'000)

FY1976

Fourth quarter 250

FY1977

First quarter 700Second quarter 1,150Third quarter 1,600Fourth quarter 1,750

FY1978;

First quarter 1,750Second quarter 1,750Third quarter 1,750Fourth quarter 1,750

FY1979

First quarter 1,300Second quarter 850Third quarter 400

15,000

2/ Year ending June 30

IBRD/DFCDJuly 1975