31786 -Soz-

RESTRIICTED

Report No. SOL: Ap-6

7'hi R* hubeen prepared forASIAN DEVELOPMENT BANK Fe excw of the Bank.

APPRAISAL

OF

DEVELOPMENT BANK OF SOLOMON ISLANDS

(SECOND LOAN)

November 1980

,_________________

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CURRENCY EQUVENTS(As of 30 September 1980)

Currency Unit Solomon Islands Dollar (SI$)SI$1.00 US$1.2294USLe.00 SI$0.8134

The Solomon Isla'nds currency (SI$) was introduced on24 October 1977 and pegged to the Australian currency.On 18 May 1979- the S-I$ was revalued by-'5 per centagainst the Australian dollar. Since October 1979the exchange rate of the Sl$ has been determined on thebasis of a weighted basket of currencies of the country'smajor trading partners.

ABBREVIATIO

AILB - Agricultural and Industrial Loans BoardDBSI - Development Bank of Solomon IslandsDFI - Development Finance Institution;EDF - European Development FundGSA - Government Shareholding AgencyIBRD/IDA - International Bank for Reconstruction and

Development/International DevelopmentAssociation

NDP - National Development PlanNPF - National Provident FuidSIHA - Solomon Islands Housing AuthoritySim - Solomon Islands Monetary AuthoritySSL - Solomon Soaps Ltd,

N O T E S

The fiscal year of the Government and of theDevelopment Bank of Solomon Islands coincides withthe calendar year. The fiscal year of the Agri-cultural and Industrial Loans Board was from1 October to 30 September of the following year.

FOR OFFICIAL USE ONLY

PROJECT FOCUS DESIGN AND RATIONALE

1. The Solomon Islands economy consists of a faL.3.ylarge subsistence sector which accounts for about 44 per centof gross domestic product (GDP). Agriculture (includingforestry, livestock and fisheries) is the mainstay of theeconomy, accounting for 70 per cent of GDP and about 90 percent of the country's exports. To ensure continued economicgrowth for the maximum benefit of Solomon Islanders and toencourage investment to create employment and cash income,the country's second National Development Plan (1980-1984)aims at spending $230 million equivalent -- or more thandouble that of the previous Plan which has been completedsuccessfully.

*2. In order to create proper credit and promotionalfacilities for furthering economic development, the Bankprovided three technical assistance grants to the Governmentof Solomon Islands to set up the Development Bank of SolomonIslands as a full-fledged development financing institution(DFI). Bank technical a.ssistance included the provision ofthe services of an expert to serve as DBSI's chief executiveand-to train a Solomon Islander to ultimately take over thisposition. DBSI's organiz ation, management, staff, operatingpolicies and procedures have improved and are generallysatisfactory. A Solomon Islander has been appointed as GeneralManager and is expected to assume his new responsibilities in thbeginning of February 1981. DBSI's operational and financialperformance has also been satisfactory and utilization ofthe first Bank loan has been ahead of schedule. DBSI remainsa suitable vehicle for financing development projects andchanneling Bank funds to prospective sub-borrowers efficiently.

3, The Bank's proposed second loan of $2.0 million(with which US$1.5 million would be co-financed by IDA) wouldcontribute towards the achievement of the objectives of theSecond Plan (NDP II) by: (i) augmenting DBSI's foreigncurrency resources for the purpose of making medium and long-term loans to meet the foreign exchange cost of projects inthe agriculture, manufacturing, transport and services sectors$and (ii) assisting DBSI in its efforts to continue improvingits institutional aspects. The Bank loan will meet part ofDBSI's foreign currency requirements for 1981-1982. DBSI willrepay the loan to the Government of Solomon Islands as per afixed amortization schedule over a period of 15 years with 6years grace, while DBSI will extend subloans for muchshorter periods. DBSI will use the (funds received from)

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

repayments of (the principal of) the subloans not yet duefor repaynt to the Government to make further loans inaccordanrwi with its Policy Statement. The Bank loan,therefore, would also help DBSI in meeti its local currencyfund requirements. The foreign exchange risk on the anksubloans will be borne by the Gover nt.

4. Since its establishment in January 1978, DBSI hasmade a significant contribution tQ the development of projectsand entrepreneurs ng Solomon Islanders for whom DBSI isthe main source of financial assistance, From January 1978through September 1980 DBSI had approved' 2,852 loans amounting toSI$7.9 million; of these 2,513 (or 88 per cent by number)were small loans of only up to SI$1,000,

5. The beneficiaries of the proposed loan are expectedto be about 500 subprojects; about 4() per cent of the loanwould be allocated to subprojects in agriculture, rural develop-ment and natural resources development; 30 per cent. to manufac-turing and construction; and 30 per cent to comrce, servicesand transport. The total fixed cost of the projects to beassisted out of the proposed Bank loan is estimated at US$8.4million; DBSI's share in the financing of the cost of theseprojects is estimated at US$5.6 million (including the Bankloan and IDA Credit for a combined total of US$3.5 million)or 65 per cent. These projects are expected to generate ad-ditional employment and cash income for about 2,833 peopleand contribute annual value added estimted at US$6.5 million.The annual total income of the 2,833 people to benefit frao thissecond loanwould increase by about US$4.5 million which worksout to an annual income of US$1,585 per family.

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TABLE OF CONTENTS

Page

I. INTRODUCTION 1

II. BACKGROUND 3

A. The'Econoomic Setting 3VB Financial Institutions.... 4

Ill. ESTABLISHMENT AND OWNERSHIP 7

A. Bank Technical Assistance 7B. Establishment 7C. Capitalization 8D. Relationship with the Government 8

IV. ORGANIZATION, MANAGEMENT AND STAFF 10

A. Board of Directors 10B. Management 10C. Organizational Structure 11D. Staff and Training 12

V. ACTIVITIES, POLICIES AND PROCEDURES 14

A. Activities 14B. Policies 16C. Procedures 18

VI. OPERATIONAL PERFORMANCE - 20

A. General 20B. Sectoral Distribution of Loans 20C. Size and Maturity of Loans 22D. Socioeconomic Aspects 23

VII. FINANCIAL POSITION AND OPERATING RESULTS 25

A. Financial Position 25B. Operating Results (Income Statements) 28C. Accounting System and Auditing 30

Page

VIII. OPERATIONAL AND FINANCIAL PROJECTIONS 31

A. Operational Prospects 31B.- Financial Projections 32

IX. UTILIZATION OF PREVIOUS BANK LOAN 36

A. General 36B. Nature of Subloans 36C. Procurement Aspects 37D. Compliance with Loan Covenants 38E. Socioeconomic Aspects 38

X. THE PROPOSED LOAN 39

A. Loan Amount, Borrower and ExecutingAgency 39

B. Main Features 39

XI. CONCLUSIONS AND RECOMMENDATIONS 44

APPENDIXES 45

PAPUA .NEW t SIKAIANA

SOLOMON ISLANDSGUINEA ICHOISEUL

ORTLAND ONTONG JAVA

ISLANDS PACIFIC OCEAN

IZ24 . ' SANTA ISABEL PROVINCE

VELLA LAVELLA

KOLOMBANGARA SANTA ISABEL j %(~>KLOMBNEW

Gzo GEORGIAAGizR En a ) MALAITA PROVINCE

WESTE RN <2X VANGUNUPROVINCE Ž---Ak:S

I FLORIDA MALAITA

_ _ _ _ _ _ _ _ _ _ _ RUSSELL IS.IS

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'CŽ- REEF iS.I

EASTERN OUTER on ara

0 ISLESPROVINCE AULAWA

SANTA CRUZ (GUADALCANA

I'D UTUPUA =CENTRAL ISLESPROVINCE I

VANIKORO I | K Kira

TIKOPIA SCALE APPROX 1:1,650,000 1 j MAKIRA

AN UTA MAKIRA/ULAWAA RNNELLj PRCVINCE

I ___ ii

(iv)

DEVELOPMENT BANK OF SJLOMON ISLANDS

Salient Featuresl

1. Establishment Established under the Development Bank ofSolomon Islands Act, 1977. Started operationsfrom 1 January 1978 by taking over all theassets and liabilities of the Agricultural andIndustrial Loans Board (AILIB).

2. Ownership

(a) Authorized Capital: SI$5.0 million '(US$6.15 million)

(b) Paid-in Capital SI$2.78 million (US$3.42 million) (fullyGovernment-owned)

3. Organization and Staff

(a) Board of Directors: Nine members, meets once a month.(b) Management : General Manager(c) Organization Head Office with seven divisions in Honiara and

five branches in Central, Western, Malaita,Makira and Santa Isabel Provinces.

(d) Staff : 65 (24 officers excluding General Manager).

4. Operations (Loan and Equity Investment Approvals)

. -. .. ..., e/ -(SI$'OoO)

AILB!' D B S IOct. 1975- Jan.-Dec. Jan.-Dec. Jan.-Sept.Dec. 1977 1978 1979 1980

Loans for Agriculture 214 390 809 958Loans for Industry/Commerce/

Service 348 1,003 1,724 2,847Equity Investments - 80 - 68

Total Approvals 562 l?47.j. 2.1 3,873

J Data prepared as of 30 September 1908) except where stated otherwise.L/ In its 23 years of operations (1955-1977), AILB's total approvals amounted

to SI$2.6 million comprising 753 loans and one equity investment.

(v)

5. Earnings Record

AILB D B S IOct. 1976 T Jan.-Dec. Jan.-Dec. Jan.-Sept.Dec. 1977 1978 1979 1980

Total Income 122 242 297 271Total Expenditured 19 2 222 ;2Net Profit 24 50 5 (14)Adm. Expenses/Average

Total Assets (%) - 5.7 4.6 -

Interest Spread (%) 0.6 5.5EaxningSpread (%)- 10.2 9.4

6. Financial Position

(SI$'000)AILB DBSI

31 December 31 December 31 December 30 September,1977 1978 1979 . 1980

Total Assets 2,122 2,746 4,013 5,709Portfolio (net) 1,196 1,948 3,058 4,304Long-Term Liabilities 1,408 487 1,154 2,532Equity 707 2,162 2,735 3,144Lonrg-Tern Debt/Equity Ratio (times) 2.0 0.2 0.4 0.8IBad Debts Reserve/Portfolio (6) 1'.0 3.0 4.1 5.1

7. Interest Rate and Other Charges

a. Interest Rates (per cent per anilum)!

(i) Micro-loans2 4 (flat rate)(ii Cattle loan 4

(iii Meat processing loaxis 8(iv) Agriculture 10

(V) Industry, commerce and service 11(vi) Loans to expad,rial.esu At least 1 per cent above

the rates in (iii), (iv)ana (v) above.

(vii) Penalty ratc:- 2 per cent above the ratesin (i) to (vi) above.

b. Service Fee 1 per cent of the approvredanmount (except micro-loans)

rlnIriterest is charged on the oUtstatLdinC balance of the loan except for micro-loanis.i/ As executing aZrency under the Bari:k3',-' B3eef Cattle Development Project (Loan No.

2 8 9-SOL (SF), US$3.57 million, approved on 21 December 1976.

I. INTRODUCTION

1. The Bank has so far provided three technicalassistance grants to the Development Bank of Solomon .Islands(DBSI) and its predecessor, the Agricultural and IndustrialLoans Board (AILB) and one loan of US$2.0 million for DBSI±:/.The first technical assistance grant financed a study on thefeasibility of converting AILB into a full-fledged developmentfinance institution (DFI).- The second technical assistancewas granted to set up and manage the institution and trainstaff for the eventual takeover of supervision and manage-ment by Solomon Islanders. As a result of two technicalassistance projects, the Development Bank of Solomon Islands(DBSI) was established on 1 January 1978.

2. In April 1979 the Bank approved a US$2.0 millioncredit line to Solomon Islands for DBSI. Along with the loan,a third technical assistance grant was given to extend theservices of the Bank Consultant as DBSI's General Managerfor two years. The loan became effective on 2 July 1979 andits use has been much faster than expected.

3. In March 1980 the Government of Solomon Islandsrequested the Bank for a second loan for DBSI to meet itsforeign currency fund requirements for 1981-1982. AnAppraisal Mission visited Solomon Islands from 9 April t980to 26 April 1980. The Appraisal Mission was composed ofS. Mirza (Senior Development Bank Specialist) as ".8ssionChief; Tocher Mitchell (Financial Analyst); and Valerie SanLin (Financial Analyst). The Mission was assisted by A. H.Mufti (Counsel) in the Bank. The Mission concluded that theprogress in utilization of the first Bank loan and the thirdtechnical assistance had been satisfactory and that a secondBank loan was justified. However, loan processing was

1/ T.A. No. 112-SOL for US$45,000 approved in May 1974;T.A. No. 165-SOL for US$250,000 approved in March 1976;T.A. No. 289-SOL for US$130,000 approved in April 1979;Loan No. 394-SOL (SF) for US$2.0 million approved inApril 1979.

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completed only when suitable arrangements had been madeon the matter of the General Managership for DBSI. ThisReport is based on the Mission's discussions with officialsof DBSI, Government departments and other agencies and onits f indings in the field.

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II. BACKGROUND

A. The Economic S

4. The economy of Solomon Islands11 has a dual charactercomprising an indigenous subsistence sector with about two-thirds of the population engaged in non-cash agriculture, anda monetized sec.tor,- Gross Domestic Product (GDP) for 1978 atcurrent prices was estimated at SI$81.7 million, of whichabout 44 per cent was contributed by subsistence production.

5. Agriculture (including livestock, forestry and fisher-ies), is the mainstay of the economy, accounting for over 70 percent of GDP and about 90 per cent of the country's exports. Inrecent years there has been an enlargement and diversificationin the base of agriculture production. Copra continues to bethe most important cash crop, and the smallholder sector accountsfor about 70 per cent of total production. While production fromthe plantation sector is relatively stable at about 10,000 tonsa year, smallholder production fluctuates widely being moresensitive to price and the availability of transport. In thelate 1970s cocoa production revived with the development of adisease-resistant variety suited to local soil conditions, andthe high world prices in 1977 and 1978. During 1-977 and 1978cocoa production in the smalliolder sector increased its sharein total pmduction from 29 per cent to 46 per cent. Palm oiland rice, meanwhile, have been successfully cultivated on largescale plantations. The potential for the development of small-holder farming also exist ; Li cattle, fisheries and garden vege-tables. It is in these areas that rural credit facilities andpromotional and cooperative activities are required to transformrural non-cash agriculture into monetized economic activities.

6. Manufacturing, construction and conmercial activitiesare centered in Honiara and constitute a '1u but rapidlyexpanding sector, accounting for a l1Ltle over 4,000 workers-- or about 25 per cent of total employment -- at the end of1978. Expansion of manufacturing and processing in joint ven-tures with foreign investors, where appropriate, is beingemphasized by t.Ie Government to strengthen the base of theeconomy. This is assisted by the provision of credit fromDBSI and commercial banks. Recent developments include the

1/ The country's total land area is about 29,000 sq km andpopulation was estimated at 220,000 in mid-1978

4-

establishment of a palm oil mill, a rice mill, a saw mill, anda tuna canning factory. Private sector activities inc-luderetail and wholesale trade, transportation, building ponstruc-tion, and saw milling. A range of small-scale manufacturingactivities exists such as baking, furniture making, canoe build-ing, cocoa and copra processing, metal works, and handicrafts.

7. Localization1 / of domestic industries and businessactivities has been slow due to a shortage of skills and capitalamong local nationals. In order to accelerate the process ofgreater national participation in the economy, the Governmentis actively promoting cooperative activities. The nu-mber ofcooperatives increased from 110 in 1968 to 250 at the end ofMarch 1980; the largest number (173 cooperatives) were multi-purpose (stores/produce/marketing) in nature followed by 34consumer, 14. land purchase development, 10 for cocoa marketingand the rest for fishing, saw milling, savings, transportationand others.

8. The major objectives of the second National Develop-ment Plan (NDP II) 1980-1984 are: (i) to ensure the continuedgrowth of the economy by developing the country' s resourcesfor the maximum benefit of Solomon Islanders; (ii) to expandand diversify exports and promote self-reliance; (iii) toencourage a wide geographical and social distribution of eco-nomic activity; and (iv) to increase investment to create,employment and cash income. Emphasis will also be placed oneducationi and training in order to increase the supply oflocal skilled manpower. The total public development expendi-ture during NDP II is set at about SI$230 million, or more thandouble that of the previous Plan.

B. Financial Institutions

9. The financial system in Solomon Islands is simpleand has developed to meet the country's needs. Financialinstitutions of the Solomon Islands include: The SolomonIslands Monetary Authority (SIMA), DBSI, the Government Share-holding Agency (GSA), National Provident Fund (NPF); and three com-mercial banks. SIMA,established in October 1976, performscertain central banking functions; it advises the Gc''rernmernton currency management and exchange control administration,oversees the development and operaticn of the banking system

1/ "Localization" refers to the replacemerit of expatriatesby local nationals.

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and provides banking services to commercial banks and theGovernment. DBSI was established in 1978 as the main deve-lopment finance institution to meet various credit needs inthe private sector.

10. GSA was established in September 1977 to manage theGovernment's investment portfolio in latge development projects,mainly joint ventures. GSA's portfolio increased from SI$4.9million (US$5.6 million) in 9 projects at the end of 1978 toSI$6.81 million (US$7.83 million) in ten projects at the endof 1979, including all of DBSI's share capital (see paragraph21). NPF started operations in October 1976. Its funds arefrom compulsory social insurance contributions of all wage andsalary earners in the country. NPF's assets increased fromSI$2.3 million at the end of 1978 to SI$5.0 million at the endof 1979, including SI$2.5 million in investments which comprisemainly term deposits with comnercial banks and some real estateloans to the private sector.

11. Branches of three foreign commercial banks operatein the country: Commonwealth Trading Bank of Australia,Australia and New Zealand Banking Corporation and Mongkongand Shanghai Banking Corporation. As of 31 December 1979,their total deposits amounted to SI$43.8 million (demand depo-sits, SI$12.2 million; time deposits, US$24 million and sav-ings deposits, SI$7.6 mi J4ion) while their loans and advancestotalled SI$13.4 million- . Most of their liquidity is depo-sited with SIMA. The total amount of commercial bank depositswith SIMA at the end of 1979 stood at SI$21.6 million, of whichabout two-thirds was in the form of 180 day term deposits.Deposits in the banking system in Solomon Islands aredominated by institutional savers, viz. Copra Board, NPF andthe Port Authority. Since March there has been a steady dec-line in the amount of total depoits within the banking systembecause of a decline in prices of copra and an increasein loans. With a view to mobilizing these excess funds forthe country's development activities, the Government

1/ As of 30 November 1979, total advances amounted to SI$9.3million. Of these about 47 per cent were to the servicessector, 26 per cent to the agriculture (including forestryand fisheries) sector, 9 per cent to the manufacturing andconstruction sector while the remaining 18 per cent was toindividuals.

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floated bonds amounting to SI$1.5 million in 1979 andSI$2.0 million in 1980 wUt.ch were fully subscribed. Lt.is ex-pected that in 1981 SI$3 million would be borrowed domestically,During the current Plan period the Government plans to borrowabout SI$20 million from local commercial banks to financevarious development projects which will cover about 9 per centof total development expenditure.

12. In its efforts to further mobilize domestic resourcesand channel available funds through appropriate institutions,the Government is in the process of establishing a commercialbank, namely National Bank of Solomon Islands, as a joint ven-ture with the Commonwealth Trading Bank of Australia, by acquir-ing the existing assets of its branches in Honiara and the pro-vinces. The National Bank of Solomon Islands will offer allgeneral commercial banking services with special emphasis onresponding to the needs of Solomon Islands' business in genetaland to the rural areas in particular. The new bank is expectedto start operations and st:aff training in the near future andwill establish branches and agencies throughout the SolomonIslands.

13. There has been no change in the interest,rates inthe country since the first Appraisal in February 1979. Inte-rest rates are fixed by the financial institution3 in informalconsultations with each other. The rates offered by SIMA onthe deposits of the cominercial banks range from 4.25 to 8.0per cent a year depending upon maturity. These rates indirectlyinfluence the deposit and lending rates of the commercial banks.Their deposit rates range between 4.0 and 7.0 per cent whiletheir lending rates range between 10.35 and 14 per cent. DBSI'slending rates vary between 4 to 11 per cetic (see paragraph 41).The interest rate structure prevailing in Solomon Islands asof 31 March 1980 is given in Appendix 1.

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III. ESTABLISHMENT AND OWNERSHIP

A. Bank Technical Assistance

14. Since its establishment in 1955, AILB had made alimited contribution to the economic development of SolomonIslands. In order that AILB could contribute more meaning-fully towards implementing the objectives of the FirstNational Development Plan 1975-1979, the Government, inAugust 1973, requested the Bank for technical assistance.

15. Under the first technical assistance, the Bankfinanced the services of two experts for five man-monthsto study the feasibility of converting AILB into a full-fledged DFI. This study indicated that Solomon Islandsneeded a DFI to channel development credit and recommendedthat AILB should be suitably upgraded to achieve this objective.The second technical assistance fir4anced the services of aSenior Institutional Expert for 18 months and a Loan OperationsExpert for 12 months0 The technica' assistance was completedin April 1979 after a six month extension in the term of theSenior Institutional Expert. DBSI was established on1 January l978. Initially, the Senior Institutional Expertand (after expiry of his term in August 1978) the Loan Opera-tions Expert, acted as DBSI's Chief Executive. In order toprovide sound management and training skills, with a view togradually delegating supervisory and management functions toSolomon Islanders, a third technical assistance grant wasapproved (with the first loan of US$2 ,0 million) in April1979 extending the services of the Loan Operations Expertas General Manager by two years to June 1981.

B. Establishment

16. DBSI was established as a public authority underthe Development Bank of Solomon Isleatds Act (the Act) enactedin December 1977. It started operat-ions on 1 January 1978when it assumed all of AILB's assets and liabilities. TheAct, prepared in consultation with the Bank, provides asatisfactory legal framework for DBSI's functions as a multi-purpose and autonomous DFI. DBSI's main objective is toassist in the economic and social development of the SolomonIslands within the Government's overall development plansand strategies, giving particular emphasis to promoting theparticipation of Solomon Islanders in economic development,

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rural development and stimulation of processing and industrialactivities, To implement these objectives DBSI can makeloans and assist in or promote the establishment, maintenance,development or reorganization of enterprises engaged in agri-culture, industry, construction, mining, tourism, transport,cm-unications and services. To perform its functions, DBSIcan exercise powers to acquire, hold, underwrite and disposestocks and securities, issue guarantees, and acquire and makeproperties available for use by other persons, accept depo-sits and administer funds for and on account of the Govern-ment. DBSI is the only financial institution in SolomonIslands which provides medium-and long-term finance fordevelopmental projects in the agriculture and industrysectors, particularly to the indigenous enterprises. DBSIis now well-established and operates as an effective institu-tion for financing economic development.

C. Capitalization

17. DBSI's authorized capital is SI$5.0 million (US$6.15million), of which SI$2.78 million (US$3.42 million) was paid-up as of 31 DN-txmber 1979 compared with SI$1.8 million atthe end of 1976. The Government had originally planned togradually increase the paid-in capital to SI$2.5 million(US$3.08 million) only by 1981, but in view of the rapidexpansion of DBSI's activities, the paid-in capital has beenincreased at a much faster pace than originally envisioned,rising to SI$2.86 million (US$3.52 million) by 31 December1980. The Government plans to continue increasing DBSI' spaid-in capital by SI$0.50 million (US$0.62 million) eachyear during 1981-1984.

18. Undear the Act, at least 51 per cent of DBSI'sshare capital is to be held by GSA. The remaining 49 percent may be alloted to any person or institution approvedby the Minister of Finance. At present, GSA holds all ofthe shares of DBSI.

D. Relationship with the Goverment

19. DBSI has a close relationship with the Government,which has fostered its development through such measures asexempting it from all taxes (tinder the Act), arranging forits financial resources and allowing the use, without costto DBSI, of the extension staff of various ministries for

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project appraisal and follow-up (see paragraph 42). TheMinistry of Finance has administrative jurisdiction overDBSI, whose directors are appointed by, and whose GeneralManager is appointed with the approval of, the MirFister ofFinance, Under the Act the Minister of Finance can, afterconsulting DBSI, give it directions of a general natureregarding its functions and powers. Within this framework,DBSI functions with adequate autontmy and its managementhas full authority to make decisions,

20. DBSI's General Manager has also been associatedwith various Gavernment agencies in an advisory capacity,such as the Commercial Investment Committee under the Ministryof Trade, Industry and Labor, which screens all foreign invest-ment proposals, the Fishing Cooperatives Committee and theFinance and Banking Committee.

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IV. ORGANIZATION, MANAGEMENT AND STAFF

A. Board of Directors

21. Control over the operations of DBSI is vested ina nine-member Board of Directors. The Board is composedof the General Manager as an ex-officio member and eightother members appointed by the Minister of Finance. Atleast four members should be persons who are not publi4officers. The Act stipulates that a Board member may ioldoffice for the period specified in the instrument of hisappointment but not more than three years. The presentBoard of Directors was appointed on 31 December 1979 for aperiod of one year (the previous Board was appointed for aperiod of two years). The Board members represent a widespectrum of expertise covering agriculture, industry,coerce and finance (a list of the Directors is given inAppendix 2), Four members served on the previous DBSI Board,thus maintaining an element of continuity. The Board meetsonce a month to discuss policy mz-ters, review operationsand decide on proposals for financial assistance overSI$1O,OOO (the General Manager can approve loans below thisamount).

B. Management

22. Since its establishment, DBSI has been managedeffectively by Bank consultants, provided for under theBank's second and third technical assistance projects.DBSI's present General Manager is a Loan Operations Expertwho succeeded a Senior Institutional Expert who held thisposition until August 1978,

23. In accordance with the Government policy of loca-ization and the provision in the Agreement covering tne

first Bank loan.1 , the Govrrnment identified and apnointed asuitably qualified persontt to DBSI's Board of Directors

1/ Loan No. 394-SQL (SF), Loan Agreement, Schedule 4,paragraph 4.

2/ This individual has several, years of workingexperience at NPF (before shifting to DBSI)as itsManager. He has a degree in accountingfrom the University of Technology at Lae in PapuaNew Guinea and served on hoth the AILB and DBSIBoards of Directors.

effective 1 January 1980. In November 1980 this individualwas appointed General Manager of DBSI. He has so far beenholding the position of Manager of National Provident X

Fund (NPF), However, because of the time that would be requiredto appoint and train his successor at NPF, he will assume hisnew responsibilities in the beginning of February 1981.Government has agreed that prior to the effective date of theproposed loan agreement, the new General Manager shallassume full responsibilities allowing the present GeneralMana gr to move into an advisory role until the expiry of histerm.L/, In order to ensure smooth turnover of the GeneralManagership, the Government has also agreed that the servicesof an expatriate development bank expert satisfactory to theBank (as Advisor) will be available at least until the end ofNovember 1981 at the Government's exprtnsel/. The Bank considersthese arrangements as practical and sa.tisfactory.

C. Organizational Structure

24. DBSI's organizational structure is consideredappropriate for its current operational requirements (Appendix3 gives details of DBSI's organizational structure as of 30September 1980). DBSI is organized into a Head Office and fivebranches. The Head Office organization is divided into an Opera-tions Department and four services divisions, namely Secretary,Accounts, Securities and Statistics. The Operations Depart-ment has three divisions: (i) the Loans Division for projectevaluation and supervision of loan appraisal work at branches;(ii) the Follow-up Division for supervising disbursements,follow-up and arrears control; and (iii) the Project Promo-tion Division. In order to cope with >,>4dly expandingoperations, DBSI opened four branches 74'F979 and one branchin 1980 and transferred the main operP*tiV L work of loanappraisal and supervision to them from the Head Office. Thebranches are located in Gizo, Western Province; Honiara, CentralProvince; Auki) Malaita Province; Kira Kira, Makira Provinceand Buala, Santa Isabel Province (see Map, page (iii) ).

25. The Project Promotion Division and three branches,Gizo, Auki and Kira Kira are headed by expatriates while the

1/ Proposed Loan Agreement, Section 6.01(a).2/ Pronosed Loan Agreement, Schedule 4, naragraph 4.

w 12

branches in Hioniara and Buala are headed by Solomon Islandsnationals. The services of the four expatriates are providedunder Australian grant. The expatriate officers underAustralian assistanCe have been assigned senior local-staff asunderstudies who will take over upon expiry of the expat-riates' terms (the term of the Branch Manager at Gizo will expirein December 1980 while those of the Head of the Project Promotion

Division at the Head Office and the two Branch Managersat Auki and Kira Kira will expire in December 1981).

D. Staff and Training

26, As of 30 September 1980, DBSI had 65 staff members

(excluding the General Manager) including 24 officers ofwhom 4 were expatriates. In comparison, the total number of

staff at the time of first Bank appraisal (at the end ofJanuary 979) was 26 with 10 officers (one expatriate). Theincrease in staff strength during the past year was in responseto rapidly expanding operatiorn through the opening of fivebranches and the need to train staff for future requirementsbefore the expiry of the terms of the Bank consultant andother expatriates. Total staff strength is expected to be

increased by, 46 per cent to 83 by the end of 1981, whichwould be sufficient to meet DBSI's staff requirements until1984. DBSI's staff strength is supplemented by extensionservices personnel of various ministries whose services areused by DBSI under arrangements carried over from AIJBDBSI's dependence on the staff of Government agencies willgradually diminish as it develops its own trained staffin the field.

27. Despite the shortage of qualified nationals, DBSI

has successfully met its personnel requirements because ofits competitive pay structure, better career prospects andrecognition by the Government of DBSI's important role inthe economy. Of the local staff two are degree holders andtwo have agricultural and accounting diplomas (after high

school). Thy rest of the staff have studied up to the highschool levelLI. Staff expertise is being upgraded throughon-the-job tritining, at all levels, combined with in-houseand external training programs conducted by the Bank's

1/ There is no university or college in Solomon Islands andstudents desiring higher education must study abroad.

- 13 -

consultant and other expatriate staff. All staff receivethree hours of classroom training each week on projectevaluation and supervision. Fourteen staff have attendedexternal courses including three who participated in theBank's development banking program in 1979. Staff are en.-couraged through financial incentives (reimbursement oftuition, etc.) to enroll in courses that enhance theiracademic qualifications; six are taking courses in mathe-matics, accounting and economics conducted by the Universityof the South Pacific in Honiara.

28. Staff have responded to these training programsenthusiastically, and the results so far have been encou--raging. Most of the work related to project appraisal at,branch offices (except for larger applications) is now handledby Solomon Islanders. The local staff still requires moretraining and experience for appraisal and follow-up oflarger projects involving more complex economic, marketingand financial analyses. DBSI will continue to give highpriority to staff training and has assured the Mission thatit will take appropriate steps to develop and conduct suitablein-house training programs in the future. DBSI will also 1/inform the Bank annually on the progress of training programs-

29. In order to continue the staff training programson the lines indicated above DBSI is exploring the possibili-ties of retaining the services of two expatriates for 1982(one for the staff at Head Office and the other for thebranches). Also in order to strengthen and develop its ownsenior level staff in areas of accounting and business advisoryservices, where local staff still have limited knowledge andexperience, DBSI intends to recruit two expatriates, to headthe Accounting and Business Advisory Services Divisions.These expatriates are expected to join DBSI in the beginningof 1981 and 1982 respectively. The Mission considers thatwith these arrangements the management and supervision ofDBSI's operations after the completion of the Bank's techni-cal assistance programs would continue in a satisfactorymanner.

1/ Loan No. 394-SOL (SF) Project Agreement, Scheduleparagraph 8; also see proposed Project Agreement,Schedule, paragraph 8.

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V. ACTIVITIES, POLICIES AND PROCEDURES

A. Activities

30. To enable DBSI to achieve its main objectives ofpromoting participation of Solomon Islanders in economicdevelopment and rural development and in stimulating processingand industrial activities, DBSI is empowered to undertakeactivities such as term-lending, equity financing, under-writing, issuing guarantees and providing advisory assistance.Its main activity 80 far has been to make medium and long-term loans for development projects, which cover a widerange by sectors such as in agriculture (Including tree crops,logging, fishing and livestock), commerce, mining, industry,

construction and services (including tourism and transport)and to conduct related promotional activities.

31. Loans to the agriculture sector are mainly forfarm development, the purchase of tractors and other farmimplements and housing. In the industry sectbr,.while thelarger and more sophisticated industries have been set upby large foreign companies, DBSI's assistance mostly goes tosmaller units engaged in simple operations using lightmachinery and equipment. Loans are generally granted for theconstruction of buildings and purchase of machinery andequipment.

32. Equity investments are also generally made toprovide capital support to local entrepreneurs both to setup new projects and to help in the transfer of successfulventures from expatriates to Solomon Island nationals. DBSIhas so far made eight such investments in six companiesinvolving a total of SI$232,OOO. DBSI has not issued anyguarantee or done any underwriting so far.

33. Though DBSI is mandated under the Act to givepriority to channeling assistance to local nationals, itcontinues to provide funds, on harder terms, for expatriate-owned projects in view of the economic benefits they generateand in order to maintain a balanced portfolio in terms ofsectors, size, and nature of projects. As of 30 September1980, DBSI had financed 30 expatriate-owned projects amountingto SI$0.81 million (including 4 Bank subloans of SI$0.30million) out of a total 2,852 projectsoamounting to SI$7.88million.

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34. DBSI's project promotional activities aim toattract local nationals to business activities and the useof credit to stimulate local entrepreneurship and foster ruraldevelco,nent consistent with DBSI's objectives and the Govern-ment's development strategy. In order to intensify itspromotional activities, DBSI established a Project PromotionDivision in 1979. This division gives emphasis to projectidentification and development geared towards multipurposeand special purpose cooperatives involved in various types ofdevelopmental and economic activities. In 1979, DBSI assistedeight such new projects with loans amounting to SI$385,350.These projects included a saw mill, an electrical workshopand a new hardware store. Loans to export-oriented cocoaprojects amounted to SI$83,260 for 17 projects, and localbuilding contractors received 19 loans amounting to SI$182,100in the form of bridge financing against specific job ordersof the Solomon Islands Housing Authority (SIHA) and otherorganizations.

35. DBSI continues to make efforts to diversify andbroaden its lending coverage to rural areas, particularly inthe subsistence sector. In 1978, DBSI implemented a "micro-loans scheme" which enables local nationals in rural areasto obtain loans not exceeding SI$1,000 on soft terms 1/, topurchase items like tools, wire, fishing equipment, andbuilding materials. From 1 January 1979 to 30 September 1.9802,299 micro-loans totalling SI$1.29 million were approvedcompared with 214 loans totalling SI$125,000 in 1978.

36. DBSI's advisory services to its clients (in theform of advice and limited training on technical and manage-ment aspects) are carried out with the help of the extensionservice and field staff of the Ministry of Agriculture andLands and the Ministry of Trade, Industry and Labor, but theseare still limited mainly due to a lack of qualified staff.DBS'f intends to set up a Business Advisory Division in 1981to supplement the services provided by the Ministry of Trade,Industry and Labor.

1/ These are: a flat 4.0 per cent inllerest rate (seeparagraph 41), maturity of 6 monthis to 5 years includingone year grace (most of thle loans are for less thantwo years), and minimal security.

16 -

B. Policies

37. DBSI adopted a Policy Statement shortly after itsinception in 1978, formulated by the Bank consultants inconsultation with the Bank (see Appendix 4). The Statementplaces emphasis on the developmenta'L role of DBSI and containsappropriate guidelines and scope for its operations, generalpolicies and procedures, financial and banking practices.

38. According to the Statement, DBSI's equityparticipation in any enterprise shall not exceed 25 per centof the paid-up capital of an enterprise or 10 per cent of itsown equity; DBSI's aggregate equity investments at any timeshall not exceed 20 per cent of its paid-up capital and reservefunds. DBSI's total commitment in a single enterprise willnot exceed 20 per cent of DBSI's total paid-up capital andreserves funds, 65 per cent of the total fixed assets of enter-prises in the industry sector and 80 per cent of the totalassets of enterprises in the agriculture sector (the lattertwo limits can be exceeded in exceptional cases which meritspecial consideration) and, DBSX will not carry any foreignexchange risk on its loans. According to the Statement, DBSIshall set aside at least 3 per cent of its financial assistanceapprovals in each year as a provision for bad and doubtfuldebts until such reserves reach 10 per cent of the total port-folio; DBSI will also transfer all its net profit to a reservefund until it reaches 50 per cent of the paid-uip capital.

39. DBSI has generally adhered to the guidelines setout in its Policy Statement, but, in the light of experiencegained during the first two years of operations, is consideringsome revisions to the Policy Statement which are considerednecessary to expand the scope of operations and also bringabout greater participation by Solomon Islanders in the country'seconomic activity. These revisions would involve an increasein the overall limit for DBSI's equity investments and thelimits for DBSI's maximum comnitment in a single enterprise.Appropriate amendments to the Policy Statement on these pointswould have to be approved by DBSI's Board. While the Missionagrees with the need for a suitable increase in the limit ofDBSI's equity investments, any change in the limits formaximum commitment to a single enterprise should be formulatedand implemented with caution. DBSI has agreed that it will

- 17 -

not substantially amend the Policy Statement without prior

agreement of the Bank, l/.

40. Loan maturities range from 6 months (for micro-loans) to 15 years including grace periods up to 5 years(for loans for cattle, cocoa, coconut and interisland shippingdevelopment). However, maturities on loans for cooperativeland purchases from expatriates may be given for up to 20

years. DBSI's policy on security and collateral and its

security documentation procedures are being reviewed forsimplification and updating purposes. Security normallyconsists of real estate mortgages, bills of sale and personalguarantees.

41. DBSI's interest rate policy, wiiich became effectiveon 1 January 1979 following a review by the Bank's Consultantsof AILB's interest rates2/, remains unchanged (see Appendix 1).

Micro-loans are charged a flat rate3 / of 4.0 per cent a year;agriculture, 10.0 per cent4/9 anc commerce, industry and the

service sectors, 11.0 per cent-L . Expatriates are charged at

least: 1.0 per cent more. The DBSI rate for Solomon Islanders

is slightly less than, and for expatriates competitive with,

those! of the commercial banks (see Appendix 1). Cattle andmeat processing loans financed by DBSI as executing agency

under the Bank's Beef-Cattle Development Project are charged

4.0 per cent and 8.0 per cent respectively on a decliningbalarnce basis. DBSI's margin on the two portions of the loanfor t:he cattle project is 1.5 p.>r cent and 6.5 per cent

1/ Loan No, 394-SOL(SF) Loan Agreement, Schedule 4, para-graph 2, Project Agreement, Section 3.01(e).

2/ AILB's interest rates were: for nationals - 4 per centfor agr&.cultural loans and 5.5 per cent for non-agri-cultural loans; for expatriates - 9 per cent or higherdepending upon the purpose of the loan. These rates werealso applied by DBSI until mid-1978 when it graduallyincreased these to the present level.

3/ Interest is recovered on the entire loan amount approvedcharged from the date of disbursement and not on thebalance outstanding. The effective rate on micro-loanswould work out to around 6 per cent a year on outstandingloans.

4/ Interest is charged on a declining balance basis.

18

respectively. DBSI has agreed to review its interest ratestructure periodically and make suitable adjustments afterconsulting the Bank]:/. Except for micro-loans, DBSI chargesa service fee of 1.0 per cent of the amount of assistanceapproved. Penalty interest of 2.0 per cent is charged onoverdue amounts.

C. Procedures

42. DBSI's operational procedures in respect of projectevaluation and approvals, documentation, loan disbursementsand follow-up have been formulated by the Bank's Consultantsunder the technical assistance program and take into accountthe nature of the loans DBSI makes. An operational manual hasbeen prepared to guide DBSI staff in this task. With theopening of four branch offices, most of the applications forfinancial assistance are now received, screened and appraisedat the branches. Applications from more remote areas arestill being received by, and processed with the assistance ofextension officers of the Ministry of Agriculture and Lands.Also, the services of technical experts of the various minis-tries are used when necessary as DBSI does not have its ownfull time technical staff. However, the final decision onloan approval rests with DBSI. These arrangements have beenworking satisfactorily so far, The Head Office generallyprovides overall guidance, supervision and control, and onlylarge applications for commercial and industrial projects(selected on a case by case basis) are processed at the HeadOffice, Conisidering the nature of the projects financed,appraisal techniques and criteria applied are simple and thereis at present only limited scope or need for DBSI to applysophisticated economic analysis for project evaluation.

43. Normally, a branc!. loan officer interviews thesponsor, inspects the project site, and prepares a reportcovering various aspects of the appraisal in consultation withthe technical staff of the Government agenc'ies concerned.Loans up to SI$500 may be approved by the loan officers,SI$1,000 by the Senior Loan Officer and SI$2,500 by the BranchManager. At the Head Office loans of up to SI$ 3,000 areapproved by the Operations Manager while those up to SI$10,000

1/ Loan No. 394-SOL(SF) Project Agreement, Schedule,paragraph 2,

19 -

are approved by the General Manager. Loan proposals aboveSI$10,000 are submitted to the Board for consideration aboutonce every month.

440 DBSI's Follow-up Division at the Head Officeregulates disbursements, supervises follow-up work andmonitors arrears control while the actual follow-up work isdone by the branches. Disbursements are made directly tosuppliers of material and equipment after reviewing, whereapplicable, progress of the project. Goods financed by DBSIare mostly procured by means of "off-the-shelf" purchases fromlocal importers. The borrowers obtain quotations from localagents on the basis of which DBSI ensures that the prices ofgoods to be procured are reasonable and competitive. The timelag between approvals and disbursements is between 1 to 12weeks depending on the nature of the project. After loandisbursements, the projects are inspected by DBSI branch staffat least once and after that as warranted by repayment perform-ance. Also, the assistance of various Government extensionservice and technical staff is usually sought for follow-uppurposes where necessary and particularly in remcote areas.DBSI maintains effective monitoring and control of loan arrears.Periodic reports (generally on monthly intervals) are receivedfrom branches and, where necessary, appropriate action istaken to rehabilitate the project or to recover its dues.Further training and expansion of branch staff and the continuedassistance and cooperation of the extension service officialsin the field are expected to strengthen further DBSI's projectssupervision capabilities.

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VI OPERATIONAL PERFORMANCE

A. General

45, DBSI's operations expanded significantly during1979 (its second year of operations) Aith 1,044 loans amount-ing tD SI$2.5 million approved during the year compared with289 loans totalling SI$1.5 million in 1978. This 67 per centincrease exceeded approvals projected during the first appraisalfor 1979 and 1980 of SI$1.9 million and SI$2.4 million res-pectively. Operations have continued to expand rapidly in thefirst nine months of 1980 with 1,519 approvals amounting toSI$3.87 million. The large increase in loan apprevals wasmainly due to DBSI's stepped up promotional activities throughits branches in outlying islands and improved loan processingprocedures. There were six equity investment approvalsamounting to SI$68,250 in the first nine months of 1980 com-pared with no approvals in 1979 and two approvals totallingSI$80,000 in 1978.

B. Sectoral Distribution of Loans

46. A summary of the sectoral distribution of loansapproved by AILB (October 1975 to December 1977) and DBSIfrom 1 January 1978 to 30 September 1980 is given in Appendix5. Table 1 below gives a summary of the sectoral breakdownof DBSI's approvals,.

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Table 1: Sectoral Distribution of DBSII's Loan Approvals(SI$ '000)

Oct15.75 to Jan. to Sept.Dec. 7 7 80

No. Amount No. Amount Number Amount Number Amount

Ariculture 116 214 190 2 64 809 9 58

Cocoa - - 3 16 13 52 19 89Copra 5 44 24 93 41 144 45 80Cattle 96 80 32 15 83 73 89 118Fisheries 5 46 14 13 98 91 67 105Forestry 3 30 4 147 15 138 47 27Rural Infrastructure - - 98 60 351 266 555 392Others 7 14 15 46 41 45 117 147

Manufacturin 12 60 2 318

Food, Beverage& Tobacco - - 9 135 37 26 58 60

Textiles & Leather - - 2 108 4 1 6 84General Engineering 2 :-2 7 164 9 246 6 133Others 1 - 7 53 14 87 22 41

Construction 1 1 _ 2 4 26 186 12

Services 49 o2 1,178 476 2,452

Shipping 1 1 12 51 205 191 332 1,674Road Transport 3 11 9 121 37 137 29 99Commerce 10 323 25 190 64 572 107 473Others - - 3 28 6 278 8 205

Total 4 _2 89 4 12044 2,533 1,219 3,873

47. As shown in Table 1, loan approvals to the agricul-turie sector (including livestock and fisheries) increased sub-stanitially after the form,ition of DBSI; however, the share ofagriculture in total loan approvals decreased from 38 per centby amount during October 1975 to December 1977 to 32 per centin L979. Within the agriculture sector, the subsectors thataccounted for the largest share of 1979 loan approvals byamount were: rural infrastructure (housing, co nity develop-ment, water supply, etc.) and fisheries and forestry. Loansfor cocoa development, fisheries and rural infrastructure re-gisitered the biggest increases over 1978. The share of themanjfacturing and construction sectors in loan approvals dropped

22 -

from 31 per cent and 16 per cent respectively in 1978 to 14and 7 per cent in 1979. In the manufacturing sector, generalengineering (viz. shipbuilding and repairs, metal workshops,,plumbing, etc.) is the most important subsector, accountingfor about two-thirds of the total manufacturing sector appro-vals in 1979. The share of the construction sector (mainlyhousing construction contract8 awarded by SIHA) decreasedbecause in some cases conmercial banks have taken over fromDBSI as the contractor's m~ain lender. Loan approvals to theservices sector, including comnerce, shipping and transport, ac-counted for a larger share in 1979 than the previous year. Theshare of the shipping subsector nearly quadrupled in 1979over 1978. During the first nine months of 1980 DBSI approvedSI$1.67 million in loans to the shipping sector, reflecting theneed for interisland shipping.48. In line with one of its main goals, DBSI in 1979significantly increased the proportion of loans approved forSolomon Islanders as opposed to expatriates (for details seeAppendix 6). As a result, 99 per cent by number and 97 percent by amount of loans approved in 1979 went to local natio-nals (individuals, groups, cooperatives, companies with majq-rity Solomon Islander ownership) compared with 92 per cent and61 per cent respectively in 1978. Because both the eccnomy ofSolomon Islands and the operations of DBSI are still in a for-mative stage of growth, most of DBSI's loan approvals aregranted to new borrowers. About 68 per cent of the loans (byamount) approved in 1979 went to new borrowers, compared to93 per cent in 1978, and a similarly large share of loans areapproved for new projects (see Appendix 6).

49. Geographically, in 1979 a greater share of loanapprovals went to outlying islands; 22 per cent by number and47 per cent by amount went to projects in Guadalcanal, themain island, compared with 29 per cent and 76 per cent respecmtively in 1978 (for details see Appendix 6), This trend con-tinued during 0980 with the establishment of five branches inoutlying islands (in the first nine months of 1980 only 17per cent and 39 per cent of approvals by number and amountrespectively were for projects in Guadalcanal).

C. Size and Maturity of Loans

50. Because of DBSI's continuing emphasis on micro-loans,the average size of loans approved has dropped from SI$5,098in 1978 to SI$2,426 in 1979. Most DBSI loan approvals by

-23-

number are small (73 per cent in 1978 and 94 per cent in1979 were for loans of less than SI$5,000) while micro-loansincreased four times thereby increasing their share from 63per cent in 1978 to 87 per cent in 1979. In terms of amountl,the approval of loans under SI$5,000 increased from 14 percent in 1978 to 27 per cent in 1979; it should be noted thatDBSI's margin on micro-loans is close to nil as their associa-ted administrative costs are quite high (see paragraph 64).Loans over SI$20,000 comprised 68 per cent and 56 per cent oftotal amount of loan approvals in 1978 and 1979 respectivelywhile only one loan in 1978 and four loans in 1979 were overSI$100,000.

51. The large number of micro-loans in DBSI's 1979operations is also reflected in the data on loan maturities,as most of these are for two years or less. About 92 percent of the 1,044 loans approved in 1979 had maturities ofless than 3 years, an increase over 79 per cent in 1978.The weighted average maturity by number of loans approveddeclined from 3.2 years to 2.7 years. The proportion ofloan approvals by amount with maturities of more than 4years decreased from 71 per cent in 1978 to 54 per cent in1979. With the establishment of five new branches in 1980Ei outlying islands DBSI's loans continued to be weightedtowards small loans with short maturities (see Appendix 6),since most loans approved by these branches continue to bemicro-loans.

D. Socioeconomic Aspects

52. DBSI is the only financial institution in SolomonIslands that can provide long-term finance for developmentprojects. Through the micro-loans scheme, which is mainlyadministered by its five branches and directly serves a size-able part of the total population, DBSI has become the firstinstitution to lend to Solomon Islanders in remote areas.DBSI has helped expand the monetized sector of the economy,improve productivity in the subsistence sector and educatepeople in the use of credit. Of the 2,852 DBSI loan appro-vals,(amounting to SI$7.9 million) up to 30 September 1980,2,695 (or 94.5 per cent by number) have been for amountsless than SI$5,000. Nearly all of these loans are to bor-rowers in remote areas and will generate additional employ-ment and cash income to at least as many families. In 1975average cash income per head in these rural areas was only

- 24-

US$45.3 at 1978 prices and about .2 per cent of rural house-holds had reported no cash income±!

53. one of DBSI's most important impacts on economicdevelopment has been in the transportation sector, particu-larly the shipping and air transport subsectors whose deve-lopment is crucial to an archipelagic country such as SolomonIslands. About 29 per cent by amount of DBSI's loanapprovals up to 30 September 1980 has been for projects inthe transportation sector. The larger l.oans in this categoryincluding one of SI$0.11 million to the country's only airlineand two amounting to SI$O.85 million to two shipping comrnaniesserving outlying islands.

1/ Solomon Islands Draft National Development Plan1980-1984, Vol. I; paragraphs 3.22 and 3.23.

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VII. FINANCIAL POSITION AND OPERATING RESULTS

A. Financial Position

1. Balance Sheet

54. The condensed balance sheets of AILB and DBSI asof the end of 1977, 1978 and 1979 are given below (for details,see Appendix 7).

Table 2: Summary of D[BS['s Balance Sheets-( SI $ ' 000 ,

Interim, UnauAitedAs of 51 December 1977 1978 1979 30 September -980

Current Assets 846 1,018 1,235 1,465Loans (Net of provisions)*/ 1,127 1,453 2,233 3,659Equity Investments 70 105 210 210Fixed Assets 7 9 170 375

Total Assets 2,122 _L 6 4,50109

Current Liabilit4aes 7 97 124 33Term Liabilitiesa/ 1,408 487 1,154 2,532Equity 77 2,162 3, 144

Total Liabilities & Equity 2,122 2,746 4013579

Current Ratio 122.2;1 10.5:1 10.0:1 44.4:1Long-Term Debt/Equity 2.0:1 0.2:1 0.4:1 0.8:1

al Excludes portions of loans due/payable within one year.

55. The everall financial position of DBSI has remainedsatisfactory. Its total assets grew by 46 per cent over the I/previous year to reach SI$4 million (US$4.7 million equivalent- )on 31 December 1979. About two-thirds of the increase intotal assets was due to the increase in medium-and long-termloans, which accounted for 51 per cent and 62 per cent

1/ At the exchange rate of sI$1 c US$1.1863 as of 31 December1979,

26 -

respectively. By 30 September 1980 total assets had increasedfurther to SI$5.71 million (US$7 million). As of 31 December1979 DBSI's total portfolio, including the current portion,accounted for 76.2 per cent of total assets (79.1 per cent asof 30 September 1980)e

56. DBSI has a large equity base, mainly due to thecapitalization of long term Government loans in 1978, Thedebt/equity ratios of 0.4:1 as of the end of 1979 and 0.8:1as of 30 September 1980 were therefore, low and well belowthe maximum limit of 3:1 provided for in the loan documents.The current ratio is very high because current maturities inits loan portfolio form a relatively large proportion and DBSIhas very few current liabilities; most of DBSI's long-termdebts are still in their grace periods. As of 30 September1980, the long-term debts outstanding included: (i) SI$l.05million under the first Bank loan (SI$0.58 million still un-drawn) with the principal repayable over 15 years includinga three-year grace period; (ii) SI$O.14 million (SI$0.21million undrawn) under the Bank-financed Cattle DevelopmentProject loan repayable over 25 years including a five-year grace period; (iii) SI$0.73 million under the Government/UK loan repayable over 25 years including a six-month graceperiod after each drawdown; and (iv) SI$0.5 million under theNPF loan repayable over 15 years including three yearsgrace period.

2. Loan Portfolio

57. DBSI's loan portfolio totalled SI$2.98 million asof 31 December 1979, an increase of 57 per cent over the end-1978 position, nearly matching the growth rate of loan approval$during that period. The loan portfolio had increasedfurther to SI$4.54 million as of 30 September 1980. The 886loans outstanding as of 31 December 1979 were quite evenlydistributed both sectorally and geographically (for detail& seeAppendix 8). The largest share of the portfolio was in thecommerce sector, mainly stores (31 per cent), followed byagriculture (27 per cent), manufacturing (22 per cent), trans-port and services (13 per cent) and construction (7 per cent).This distribution is more balanced compared to AILB's port-folio as of 31 December 1977, when the agriculture and commerce

- 27 -

sectors made up 77 per cent of the loan portfolio.

58. As judged by the low level of arrears (seeAppendix 9 for details), DBSI's loan portfolio may be consi-dered of good quality- but the increase that has taken placein the number of loans having arrears must be watched closely.DBSI's total arrears increased from SI$57,000 as of 31 December1978 to SI$95,000 as.of 31 December 1979 and to SI$237,000 asof 30 September 1980. Total arrears as a percentage of loansin the repayment stage increased from 3.1 at the end of 1978to 3.4 per cent at the end of 1979 and to about 5.3 per centat 30 September 1980. The increase in arrears is partly aresult of the rapid expansion of DBSI's portfolio in sectorsnew to it and in outlying areas of Solomon Islands. The factthat arrears as a percentage of loans in repayment in termsof number of accounts has increased at a faster rate (from 29.5per cent at 31 December 1978 to 61.3 per cent at 30 September1980) indicates that DBSI is having some problems collectingon its smaller (i.e. micro) loans to borrowers who mainly livein remote areas. As of 30 September 1980, 44 per cent bynumber of loans in arrears were less than 3 months overdue.,many of which may have been overdue partly because of poorcommunications and can be recovered through close follow-up.

59. By sector, the weakest areas of DBSI's portfolioare the rural infrastructure and cattle subsectors withoverdues as of 30 September 1980 at 17 per cent and 10 percent respectively of loans outstanding in the repayment stage(see Appendix 9). However, since these are mostly small loans,the overall impact on arrears is not significant. Loans inthese two sectors are almost all in outlying areas. Thecommerce, manufacturing and transport sectors are the strongestin DBSI's loan portfolio, with arrears as a percentage ofloans in the repayment stage at 3.7 per cent by amount as of30 September 1980.

1/ Precise information regarding loan portfolio sectoralbreakdown is unavailable for 30 September 1980; however,it can be noted that the shares of the agricultural andtransport and services sectors increased somewhat.

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3. Euity Portfolio

60. As of 30 September 1980, DBSI had four equity invest-ments in its portfolio with a cost value of SI$0e21 million(for details, see Appendix 10). Of these, two investments areoperating profitably and generating dividend income for DBSIwhile two others, Solomon Soaps, Ltd. (SSL) and SIACO, Ltd.,a fish retailer, are loss situations. SSL started up in 1979and has suffered from competition with imports and laborproblems. As a result of steps taken by the Goverment, SSL'soperations have just started to improve. SIACO has beenlosing operation due to unreliable shipping and poor management.DBSI is now formulating a program to rehabilitate SIACO, whichincludes turning the operation over to the private sector.DBSI also has loan exposure to SSL and SIACO totalling SI$0.24million as of 31 March 1980.

4. Adequacy of Reserve for Bad Debts

61. DBSI's highest potential bad debts, as measured byarrears over 12 months, totalled SI$51,000 as of 30 September1980 (SI$37,000 as of 31 December 1979.). Taking into consi-deration potential losses from DBSI's two problem equityinvestments described above, as of 30 Seotember 1980 totalpotential write-offs are estimated at SI$66,000 compared toDBSI's reserve for bad debts of SI$240,334 or 5.1 per centof the total portfolio (as of 31 December 1979, SI$52,000 com-pared with SI$l30,000 or 4.1 per cent of the total portfolio).In 1978, DBSI had to write-off loans of only about SI$8,000while there were no write-offs in 1979nrid in the first ninemonths of 1980. Thus, the reserve appears to be more thanadequate. An assessment made by DBSI's auditor (for the yearended 31 December 1979), Price Waterhouse, also indicates thatthe reserve for bad debts can be considered adequate.

B. Operating Results (Income Statement)

62. A summary of DBSI's income statements is givenbelow (for details, see Appendix 11).

29

Table 3: Summary of Income Statements(SI$' 000)

9 wonths endedYear Fded D 1978 1979 30'September 1980

Interest Income 87 212 194Other Income 12 85 77Total 212 297 271Administrative Expenses 91 155 155Financial Expenses 49 27 20Provision for Bad Debts 44 76 110Operating Profit 28 39 (14)Other Items --Net (22) 34 -Net Profit 50 5 (14)

i Mainly consisted of interest on deposits and dividends./ Interia, unaudited.

63. DBSI's gross t t income rose from SI$86,877in 1978 to SI$212,418 iu 9 zring with the large increasein its loan portfolio. The Irest spread increased from0.6 per cent in 1978 to 5.5 per cent in 1979. It had beenabnormally low in 1978 because a significant part of DBSI'sresources were still on deposit. DBSI's earnings spread ishigh due to the large amount of cost free funds in the formof equity in its long term reoources. The earnings spread was10.2 per cent in 1978 and 9.4 per cent in 1979, droppingslightly as the proportion of borrowings in resources increased.

64. Despite the increase in interest income and improve-ment in the interest spread, net income declined from SI$49,833in 1978 to SI$5,229 in 1979 because: (a) administrativeexpenses were up (increasing in relation to average totalassets from 3.7 per cent to 4.6 per cent) due to the increasein staff and opening of new branches necessary to deal with alarge number of small loans and scattered population centers;(b) the provision for bad debts as required under the PolicyStatement was relatively large due to the increase in loanapprovals; and (c) there was a SI$29,232 extraordinary chargethat offset most of 1979's operating profit, whereas in 1978,there was an extraordinary gain of SI$31,000 on the sale ofDBSI's original headquarters building. The loss of SI$14,514in the first nine months of 1980 is due to the large provisionfor bad debts of SI$110,334 related to the high volume ofapprovals. For the entire year, however, DBSI expectsa nominal profit (see paragraph 73). Although it is

- 30

in an early stage of development, DBSI's financial position may beconsidered relatively strong; with a steady increase in operationsand disbursements, the operating results are expected to improve.

C, Accounting System and Auditin

65. DBSI's accounting procedures are adequate, but needto be streamlined. A manual must also be prepared for betterguidance and training of staff both at the Head Office andoranches. DBSI will attend to this after the appointment of afull-time professional accountant in early 1981.

66. Under the Act, DBSI's accounts are to be audited byan auditor(s) appointed annually by DBSI with the AuditorGeneral's approval. Under the loan documents for the firstBank loan, DBSI's accounts have to be audited by independentauditors acceptable to the Bank. DBSI's accounts are presentlyaudited by Price Waterhouse & Co. Under the proposed loan,DBSI's accounts will continue to be audited by independent au-ditors acceptable to the Bank, The auditor's report would besubmitted to the Bank within four months from the close of eachfinancial year;/.

1/ Loan No. 394-SOL(SF) Project Agreement, Section 3.06.also proposed Project Agreement, Section 3.06.

- 31 -

VIII. OPERATIONAL AND FINANCIAL PROJECTIONS

A. Prospects

67. Table 4 summarizes DBSI's operational projectionson an approval basis by sectors for 1980-1984 (for detailssee Appendix 12).

Table 4: DBSI's Prolected Loan Approvals(SI$' 000)

Ac LualYear Endii]a 31 D)ecember 1972 1980 1981 1982 1983 1984

Agriculture 808 1,026 1,289 1,613 2,017 2,521Manufacturing 360 403 504 630 788 985Construction 186 208 260 325 406 508Commerce 572 543 685 856 1,070 1,338Services and Transport 607 2,039 1,486 1,858 2,323 2,904

To,-)-i. Approvals 2,533 4,219 4,224 5,282 6,604 8,256

68. DBSI's 1979 loan approvals at SI$2.5 million, roseby 72 per cent over 1978 and were also 30 per cent higherthan estimated during the first loan appraisal. In the firstnine months of 1980 DBSI's financial assistance approvalsreached SI$3.87 million. Based mainly on this operationalperformance, DBSI's loan approvals during 1980-1984 areexpected to grow by 2 5 per cent a yearl'. Equity investmentsare expected to be 10 per cent of the approvals in Table 4.

69. As of 27 October 1980, DBSI's pipeline of projectstotalled SI$4.7 million; in addition projects which are at arelatively early stage of development and for which primarycontact has been made with DBSI amounted to SI$7 million.The sectoral distribution of these projects is as follows:agriculture 42 per cent, construction 21 per cent, serviceand transportation 18 per cent, commerce 10 per cent andmanufacturing 9 per cent.

I/ The 1981 increase would be 25 per cent after exclusionfrom 1980 approvals Qf two large loans for the shippingsector totalling SI$0.85 million.

- 32 -

70. Given DBSI's rapid growth of loan approvals in the

last two years, the large pipeline of projects, further insti-

tutional strengthening as the Bank consultant continues to

train indigenous staff including loan officers, the large po-

tential for the further growth of loan approvals as DBSI's new

outlying island branch promotional and marketing efforts take

hold, and the potential for growth in the economy, the Mission

considers DBSI's loan approvals projections for 1980-1984 to

be attainable. The Mission also considers the projected

sectoral breakdown to be realistic.

71. Based on the projected financial assistance approvals

for 1981-1982, DBSI will require about SI$9.5 million to meet

its overall fund requirements. The foreign currencyrequire-

ments can be estimated based on experience with the first Bank

loan, where 50 per cent of loan approvals were to meet foreign

currency requirements. This percentage is relatively high

because, construction materials, machinery and equipment must

be imported.

72. DBSI expects to meet its local currency fund require-

ments of SI$5.7 million (including a deficit on approval basis

of SI$0.9 million for 1980) from the following sources:

SI$4.8 million in loan repayments during 1981-1982; SI$1.0

million in share capital contributions by the Government; and

additi,*onal borrowings of SI$0.6 million from NPF and SIMA for

a total of SI$6.4 million. DBSI's foreign currency requirements

for 1981-1982 have been estimated at SI$5.3 million (including

a deficit, on approval basis, of SI$0,55 million for 1980).

The proposed US$2 million Bank loan with IBRD/IDA cofinancing

of US$1.5 million (for a total of SI$2.85 million equivalent)

will provide about 54 per cent of these requirements. The

balance of SI$2.45 million is expected to be met from SI$0,24

million in capital contributions from Australia/New, Zealand

Aid through the Government, the SI$0J9 million EDF loan, the

local currency resource surplus and from unidentified sources.

B. Financial ProJections

73. DBSI's projected financial statements and their

underlying assumptions are given in Appendixes 13 to 16.

Taible 5 below summarizes the projected income statements.

33

Table 5: Summary of Pmrjected Income Statements, 1980-1984

(sis' 000)

Year Ended 31 December 1980 1981 1532 1283 1984

Income 460 691 974 1,273 1,639Administrative Expenses 266 366 504 574 665Financial Expenses 62 189 278 392 473Provision for Bad Debts 127 127 158 198 248Net Profit 5 9 34 109 253Net Profit/Average Equity (%) 0.2 0.3 0-8 2.4 4.8Administrative Expenses/

Average Total Assets (%) 5.3 5.2 5.3 4.8 4.5Interest Coverage (times) 1.1 1.1 1.1 1.3 1.5

74. Gross income is expected to increase at an averageannual rate of 41 per cent (55 per cent in 1980 with growthrates declining gradually to 29 per cent in 1984). By com-parison, gross income in 1978 and 1979 grew by 116 and 40per cent respectively. The interest spread is expected toincreare from 5.3 per cent in 1980 to 6.8 per cent in 1984because DBSI expects to have a larger proportion ofits portfolio consisting of higher interest rate loans; micro-loans, on which DBSI charges the lowest interest but whichbear relatively higher administrative expenses, will form asmaller proportion by amouit. Administrative expenses as apercentage of average total assets will remain high but areprojected to decline steadily after 1982 (administrativeexpenses will be higher at first because of branch start upexpenses in 1980 and large increases in staff assulmed for1980/1981). As a result, profitability as measured by netprofit as a percentage of average equity will increase steadilyalthough it will still be low in 1981 and 1982 because DBSI hasmnde provisions in administrative expenses for the six monthextension of the Bank consultant's texm and the salaries ofthree expatriates (see paragraph 29). The earnings spread,on the other hand, is expected to decline from 9.4 and 9.5in 1979 atnd 1980 respectively to 7.8 in 1984, because theproportion of interest bearing liabilities in DBSI's resourcestructure will increase (the proportion of interest freeresources, viz. equity, will decrease). This level of earningsspread, although reduced, is still considered satisfactory.Interest coverage will also remain at adequate levels. Overall,therefore, DBSI's income and profits are expected to reach a

- 34 -

satisfactory level. DBSI's cash flow is expected to be morethan adequate to service its debt obligations and loan commit-ments, aided by the fact that DBSI's profits are tax exemptas per the DBSI Act. Additionally, in accordance with a pro-vision of its Policy Statement, DBSI does not expect to payany dividends during 1980-1984. Since most of DBSI's long-term liabilities will still be in their grace periods duringmost of this time, debt service coverage will remain high.

75. The projected balance sheets for 1980-1984 aresummarized below.

Table 6: DBSI's Projected Balance Sheets, 1980-1984(SI$,' 000)

As of 31 December 1979 1980 198) 1982 1983 1984

Current Ass ts 1,235 2,903 3,426 4,068 4,433 5,389Loans (Net) 2,233 2,124 3,244 4,671 5,947 7,746Equity Investments 210 500 954 1,497 2,113 2,884Fixed Assets 335 499 551 553 565 587

Total Assets 4,013 6,026 8,175 10,789 1l058 16j0 6

Current Liabilit s 124 142 159 209 234 391Tenn Liabilities- 1 1,154 2,644 4,267 6,297 7,932 10,570Equity 2,735 3,240 3,749 4,283 4,892 5,645

Total Liabilities andEquit1 6,026 8,17-5 10,789 13.058 16,606

Current Ratio 10.0:1 20.4:1 21.5:1 19.5:1 18.9:1 13.8:1Long-Term Debt/Equity 0.42 0.82 1.14 1.47 1.62 1.87

/ Excludes portions of loans currently due.

76. DBSI's total assets are proje ted to grow froSI$4 million (US$4.8 million equivalent-/) as of 31 December1979 to SI$16.6 million (US$20.4 million) by 31 December 1984.The jor part of the assets will be the loan portfolio, whichwill account for around 75 per cent of DBSI's total assetsduring 1980-1984. This loan portfolio will grow at an averageannual rate of 36 per cent (48 per cent in 1980 declining to

1/ At the exchange rate of SI$1.0 - US$1.1863 as of 31December 1979.

- 35 -

a rate of 27 per cent in 1984), a higher growth rate thanfor loan approvals due to the particularly high growth ofapprovals during 1978 - 1980 and the lag time betweenapprovn .Is and disbursements. DBSI's equity is expected togrow by about 15 per cent a year to SI$5.6 million (US$6.9million equivalent) by the end of 1984. The debt/equityratio is expected to increase to 1.87 by 31 December 1984.This level is still well below the limit of 3:1 prescribedin' the Bank's loan documents. The current ratio will bevery high because current maturities in its loan portfolioform a relatively large proportion (see paragraph 51) andalso most of DBSI's long-term liabilit.ies will still be intheir grace periods. DBSI's financial condition is expectedto be satisfactory during the projected period.

- 36

IX. UTILIZATION OF THE PREVIOUS BANK LOAN

A. General

77. The Bank's first credit line of US$2 million toDBSI became effective in July 1979. It was originallyexpected that the loan would be fully committed withinthree years from the date of loan effectiveness and wouldbe fully disbursed by the middle of 1983. Utilization hasbeen faster than originally expected because of the expansionof DBSI's operations. As of 30 September 1980 US$1.77 millionwas committed for 322 subloans against which an amount ofUS$1.26 million had been disbursed. The balance of the firstBank loan to DBSI is expected to be fully coiitted by theend of 1980. All the disbursements so far have been on areimbursement basis. mainly for off-the-shelf purchases,made within the 120 da q period provided for this purposein the loan documents.-

B. Nature of Subloans

78. Of the 322 subloans, about 80 per cent by number(for US$212,000) were approved for the agriculture sectorand rural infrastructure (mainly for the purchase of trac-tors, implements and vans and the construction of farmhouses), about 19 per cent (for US$1.34 million) for thecommerce and service sectors, viz, transportation (includinginterisland shipping), construction, tourism, etc., and only2 per cent (for US$0.19 million) for manufacturing. The lowshare of the manufacturing sector is in line with its sharein DBSI's overall operations in 1979 and is due to lack ofrelevant experience and entrepreneurship among SolomonIslanders, who were predominant as the sub-borrowers. Thesubsectors that benefitted most from the Bank subloans weretransport (about US$1.0 million or 56 per cent of the totalcommitted), forestry and farming (US$74,000), constructionfUS$81,000), tourism (US$54,000) and general engineeringincluding shipbuilding and repairs (US$0.18 million). Sub-loana for about 33 per cent of the total amount went for newprojects while 67 per cent went for expansion, balancingand modernization of existing projects.

i/ Loan No. 394-SOL (SF) Project Agreement, Section 2.03.

- 37 -

79G Although the size of indiv4ual subloans hasvaried between US$151 and USW96,00a' (the upper limitfor subloans was US$250,000)J, only nine subloans for atotal amount of US$1.16 million out of 322 sublr*is approvedup to 30 September 1980 have been above the free limit ofUS$30,000. The average size of subloans approved up to30 June 1980 stood at US$5,487. There were 227 subloansbelow SI$1,000 (US$1,229) of which 145 subloans were foramounts not exceeding SI$500, all under DBSI's micro-loanscheme.

800 About 92 per cent by number of the subloans and38 per cent by amount are for up to five years maturity andabout 79 per cent of the subloans by number and 29 per centby amount carried maturities of between one to three years.The comparatively short period of repayment of the subloansis due to the fact that they were granted for the purchase oflight equipment and machinery. There is a good geographicaldistribution of subloans; about 31 per cent by amount went toHoniara, 20 per cent each to Western Province and CentralIsles Province (excluding Honiara), 18 per cent to SantaIsabel and 9 per cent to Malaita. This distribution is inline with the distribution of loans approved by DBSI in 1979and is an improvement over 1978.

C. Procurement Aspects

81. DBSI has followed the agreed upon procurementprocedures. In most cases individual orders have beensmall and procurement has been made from local supplierson an "off-the-shelf" purchase basis. Purchases by countryfor the first Bank loan to DBSI as of 30 June 1980 were madefrom Australia and New Zealand (41 per cent), Fiji (25 percent), Japan (25 per cent), USA (8 per cent) and UK (1 per cent).

1/ There were only two subloans exceeding the maximumlimit of US$250,000, both for US$296,000, for financingthe procurement of interisland shipping vessels,approved as special cases.

2/ Loan No. 394-SOL (SF) Project Agreement, Schedule,paragraph 3, also proposed Project Agreement,Schedule, paragraph 3.

- 38 -

D. Comliance with Loan Covenants

82. The Government and DBSI have complied with allthe conditions and covenants in the loan documents. onthe whole the Bank's experience with regard to the utiliza-tion of the loan by DBSI has been satisfactory (for detailssee Appendix 17).

E. Socioeconomic Aspects

83. The small size of the subloans and the nature ofmany of them makes quantification of their socioeconomicbenefits difficult. Of the total 322 subloans, only nineexceeded the free limit of US$30,000 and only four wereabove US$100,000. A number of subloans have been for thepurchase of transportation equipment including trucks, buses,outboard motors and canoes. The socioeconomic benefits inthese cases include the generation of additional employmentand income for people in rural areas, mobilization of personalsavings, assistance to poor people, nurturing their entre-preneurship skills and improving transport facilities. Thetwo largest subloans (US$296,000 each) financed the procure-ment of interisland vessels to facilitate the regular move-ment of goods which will stimulate further production ofcash crops and raise farming aubove the subsistence level.

84, A selection of 74 DBSI Bank subloans in varioussubsectors amounting to SI$1.02 million (US$1.21 willion)or 61 per cent of the Bank's loan also indicates DBSI'sfairly significant role. These subprojects have benefittedabout 368 persons with wages and cash income of SI$00 7million. The total revenues and gross value added havebeen approximately SI$2.50 million and SI$114 millionrespectively.

- 39 -

X. THE PROPOSED LOAN

A. Loan Amount, Borrower and Executing Agency

85. On the basis of DBSI's estimated additional foreigncurrency requirements of SI$5.3 million (equivalent to US$6.52million) during 1981 and 1982, it is proposed that a Bank loanof US$2.0 million equivalent be extended to Solomon Islands(Borrower) from the Special Fund resources in a cofinancingarrangement with IDA, which would provide a credit of US$1.5million under the standard IDA terms, making a total ofUS$3.5 million (equivalent to SI$2.85 million). The proceedsof the Bank loan will be relent to DBSI (Executing Agency)under a Subsidiary Loan Agreement satisfactory to the Bankl/to be executed between the Government and DBSI. The IDA creditwill be administered by the Bank2/ and will also be subject tothe following terms and conditions as set out below for theutilization of the Bank loan.

B. Main Features

1. Purpose

86. DBSI will use the loan proceeds of the Bank and theIDA credit to make subloans to finance the foreign exchangecost of specific development projects.2/. The tentative sectoralallocation is: agriculture, rural development and naturalresources (40 per cent); manufacturing (including small scaleindustries and construction) (30 per cent); and commerce,services and transport (30 per cent). Within each sector,DBSI will give priority to making subloans to smaller enter-prises, particularly those in rural areas and to enterprisesowned by local nationals4/.

2. Foreign Exchange Risk

87. The Borrower will bear the foreign exchange riskon the proposed loan.5/.

1/ Loan Agreement, Section 3.022/ See ADB-World Bank Co-financing in the South Pacific,

Doc. In-149/80 dated 25 September 1980.3/ Loan Agreement, Section 3.03(a).4/ Project Agreement, Schedule, paragraph 1*

5/ Loan Agreement, Schedule 4, paragraph l(c).

- 40

3. Utilization

88. The loan is expected to be utilized within a periodof two years from the date of loan effectiveness. Consideringthe need for flexibility, the closing date for submission ofsubloan applications for approval/authorization for withdrawalhas been fixed at thr e years from the date of effectivenessof the proposed loan-1/. The closing date for withdrawals isfour years after the date of loan effectiveness 2 .

4. Amortization

89. As in the case of the first Bank loan, fixed amorti-zation is proposed between the Borrower and DB P extended to15 years including a grace period of six years . DBSI's localcurrency requirements are fairly large over the projected period.A fixed repayment period would enable DBSI to recycle the prin-cipal repayments received from its sub-borrowers. The long re-payment and grace periods will strengthen DBSI's resource posi-tion and help to keep debt service obligations and financialburden on DBSI in its initial period of operations at low levels.As DBSI is owned and funded by the Government and is an integralelement of the Government's development strategy, the proposedrepayment terms will also benefit the Government as the counter-part funds of the Bank loan will reduce DBSI's demand for addi-tional local currency funds for its operations.

90. The sub-borrowers' repayment terms to DBSI will notexceed 15 years including 3 years grace period except loansfor cattle, cocoa, and coconut projects whose grace periodsmay be up to 5 years because of their longer gestation periods±!.

5. Interest Rates

91. The relen§Ing rate by the Borrower to DBSI will befixed at 5 per cent- . Such a relending rate would conformwith Bank policy since it is based on the need to strengthenDBSI's financial viability by ensuring it an adequate interestspread- . DBSI's activities ,are still in an early stage of

1/ Project Agreement, Section 2.02(c).2/ Loan Agreement, Section 3.053/ Loan Agreement, Schedule 4, paragraph 1(b).4/ Project Agreement, Section 2.04(b).5/ Loan Agreement, Schedule 4, paragraph l(a).6/ See Lending and Relending Policies, Doc. R35-80

Revision 1, Final, 17 April 1980, paragraph 6.

- 41 -

development: its volume of operations though expandingremains relatively small, and its activities contain a signi-ficant developmental and promotional content. These twofactors result in high administrative costs for GBSI (seeparagraph 64). Furthermore, as a new DFI, DBSI needs to buildup its reserves to an adequate level. The country's interestrate structure, within which DBSI has to operate, restrainsDBSI from unilaterally increasing its lending rates. In viewof these factors, the 5 per cent relending rate is consideredappropriate.

92. DBSI's lending rate on subloans will be as follows:a 4 per cent flat rate for micro-loans yielding an effectiverate of around 6 per cent on outstanding balances; 10 per centfor agricultural loans; and 11 per cent for commercial,industrial and service loans (both on outstanding balances).In keeping with DBSI's policy, sublending rates on loans toexpatriates will be at least 1 per cent higher than theseratesl/. The overall average lending rate on subloans during1980-1982 is estimated at 10.1 per cent giving an overallinterest spread of 5.1 per cent on the proposed loan.

6. Free Limit

93. Considering DBSI's past lending pattern and thatits staff needs more experience in project appraisal, the freelimit will be kept at US$30,000, the same as in the first Bankloan-./ (of 322 subloans, only nine were above free limit underthe first loan).

7. Maximum Size of Subloans

94. In order to ensure a wide and balanced distributionof subloans, DBSI would not make any subloan in an amountexceeding US$0.25 million equivalent except with Bank con-currence-l. In view of DBSI's present and expected operations,few loans will be over US$250,000. DBSI's Policy Statementrestricts its maximum commitment per enterprise to 20 per centof its equity; this limit amounted to US$0.77 million as of30 September 1980.

1/ Project Agreement, Schedule, paragraph 2.2 / Project Agreement, Section 2.023/ Project Agreement, Schedule, paragraph 3.

42 -

8. Reimbursement and Expediures

95. A period of 120 days for reimbursement of expendi-tures incurred before the receipt of a subloan applicationby the Bank will be allowedJ/.

9. Procurement

96. DBSI will satisfy the Bank that the Procurementprocedures adopted by individual sub-borrowers are appropriatein the circumstances. DBST will also ensure that goods andservices to be financed out of the proceeds of the Bank loanand IDA credit will be purchased at reasonable prices, takinginto account relevant factors such as delivery time, efficiencyand reliability of goods, their suitability for the projectconcerned, and the availability of maintenance facilities andspare parts, and, in case of services of the quality and thecompetence of the parties providing thema/.

10. C erartnds

97. DBSI will use all funds received from the repaymentof the principal of the subloans, subject to loan servicepayments under the Subsidiary Loan Agreement, to make furtherloans in accordance with its Policy Statement4

11. Appointment of General Managtr

98. Prior to the effective date of the proposed loanagreement, the new General Manager shall assume full respon-sibilities allowing the present General Manager to move intoan advisory role until the expiry of his termn&. The Borrowerwould also, prior to making any future appointments to theposition of General Manager of DBSI, consult the Bank regardingthe qualifications, experience a d tenure of office of theperson proposed for appointmen t..

1/ Project Agreement, Section 2.03.2/ Loan Agreement, Schedule 3, paragraph 2.3/ Project Agreement, Schedule, paragraph 4.4/ Loan Agreement, Section 6.01(a).5/ Loan Agreement, Schedule 4, paragraph 3 and 4.

Project Agreement, Schedule, paragraph 5 and 6.

- 43 -

12J BS PlcStemn

99. Substantial amendment will not be made to DB§I'sPolicy Statement without prior agreement of the Banki'.

13. Debt/Eguity Ratio and Other Financial Covenants

100. DBSI will maintain the debt/equity ratio within3:1. Debt would include all long-term debts and guarantees-/The Government has given satisfactory assurances to the Baj>with respect to meeting DBSI's local currency requirements.;.The Government would make further contributions to DBSI'spaid-in capital durinpg 1981-1984 at a rate of at leastSI$0.5 million a year4J±, and take all appropriate measuresto assist DBSI in the event DBSI experiences any large andcontinuing operational deficits5/ .

1/ Loan Agreement, Schedule 4, paragraph 2;Project Agreement, Section 3.01(c).

2/ Project Agreement, Section 3.09.3/ Loan Agreement, Section 4.04.4/ Loan Agreement, Schedule 4, paragraph 6.5/ Loan Agreement, Schedule 4, paragraph 7.

- 44 -

XI. CONCLUSIONS AND RECOMMENDATIONS

101. The Solomon Islands economy is basically rural,with about two-thirds of the population engaged in non-cashagriculture. The potential for development is consideredgood. Solomon Islands has successfully completed its firstNational Development Plan (197541979) and has launched a newNational Development Plan (1980-1984) which will continue toemphasize agricultural diversification, export expansion andrural development. DBSI, as the only DFI in the country,isexpected to play an important role in the development of theeconomy.

102. Bank technical assistance to DBSI is being imple-mented satisfactorily and is expected to be completed in June1981, DBSI's organization, management, staff, operating pol-icies and procedures have improved and are considered generallysatisfactory. The quality of DBSI's portfolio and its finan-cial position is considered gdod; its profitability has so farbeen marginal but is expected to improve in the future. DBSIis also fully supported by the Government. With the expansionin DBSI's operations, its dependence on the Government's directfinancial support will gradually decline, The utilization ofthe first Bank loan has been faster than expected. The Govern-ment and DBSI have gernrally complied with the covenants of thefirst loan.

103. In view of the foregoing, the Mission considers thatDBSI is a suitable DFI for a second loan. It is proposed thatthe Bank approve a loan of US$2.0 million equivalent to Solomon

Islands from the Bank's Special Fund resources for relending toDBSI to meet part of its foreign currency requirements during1981-1982 on the terms enumerated in Chapter X and detailed inthe attached loan documents. The Bank loan will be cofinancedby IDA for an additional amount of US$1.5 million equivalentunder standard IDA terms but subject to other terms and condi-tions set out for the utilization of the Bank loan.

-45-

APPENDIXES

No. Pa&e

1 Interest Rates in Solomon Islands 46

2 Board of Directors 47

3 Organizational Chart 48

4 Statement of General Business Policies 49

5 Loan and Equity Investment Approvalsby Sector 56

6 Characteristics ot Loan and EquityInvestment Approvals 57

7 Balance Sheets 58

8 Loan Portfolio Distribution 59

9 Portfolio Arrears 60

10 Equity Investments Portfolio 61

11 Income Statements 62

12 Projected Operations, 1980-1984 63

13 Major Assumptions for Operational andFinancial Projections, 1980-1984 64

14 Projected Income Statements, 1980-1984 67

15 Projected Cash Flow Statements, 1980-1984 68

16 Projected Balance Sheets, 1980-1984 69

17 Compliance with Loan Covenants UnderFirst Bank Loan 70

46 -

DEVELOMNT BANK OF SOLOMON ISLANDS

Interest Rates in Solomon Islands(per cent per annum)

As at 31 March 1980

1. SIMA Deposit Rates to Commercial Banks

Call Money 4.2530 days 5.7560 days 6, 5090 days 7.25

180 days 8.00

2. Deposit Rates of Commercial Banks to Public

Savings Bank Account 4.00 - 6.00Savings Investment Account 6.00 - 6.50Call Money 3.7530 days 5.00 - 5.2560 days 5.75 - 6.0090 days 6.25 - 6.50

180 days 7 .00

3. Lending Rates of Commercial Banks 10.35 -14.00al

4. Lending Rates of DBSIT

Micro- loans-c/ 4.00 (flat rate)Cattle loans- c/ 4.00 (reducing balance)Meat processing 8.00 -do-Agriculture 10.00 -do-Industry/Commerce/ Services 11.00 -do-Penalty rate on cattle loans 2.00 added on to the

above ratesService fee 1.00 per cent of the

approved amount(except for micro-loans)

a/ These rates apply to nationals only. Expatriates are chargf dat least 1.00 per cent over these rates.

b/ Available for nationals only.c! Relates to loans under the Bank's Beef Cattle Deve. opment Project.

Source: SIMA/DBSI

13 6(Reference to Text: Paragraph 41, page 17).

47- Appendix 2

DEVELOPMENT BANK OF SOLOMON ISLANDS

a/Board of Directors-

(As at 31 March 1980)

Name Sector Occupation

1. Mz. L. P. Maenu'u OBE Government Permanent Secretary,(tChairman) Ministry of Health &

Medical Services

2. Mr. M. Wickham Private Company Executive(Deputy Chairman) (Transport)

3. Mr. W. Tshe Private Businessman(Manufacturing & Trading)

4. Mr. J. H. Cornish Government Undersecretary,

Ministry of Finance

5. Mr. K. Misi Semi-Government Manager,

National Provident Fund

6. Mr. P. Blunt Government Senior Business Advisor,

Ministry of Trade,Industry and Labor

7. Mr. M. Todd Government Senior Field Officer, Ministryof Agriculture and Lands

8. Mr. J. Roni Private Busineesman

(Former Permanent Secretary,Ministry of Agricultureand Lands)

9. Mr. S.A.B.R. Thalakada Government General Manager, DBSI(Ex-of f ic io)

a/ Except for the General Manager, all board members were appointed on1 January 1980 to 31 December 1980.

(Reference to Text: Paragraph2l, page 10).

DEVELOPMENT BANK OF SOLOMON ISLANDSORGANIZATIONAL CHART -- as of 30 SEPTEMBER 1980

GENERAL MANAGER 1S.A.B.R. Thalakad j

0

0 Chiof of Operations

0 G.W. Boyd

n.I0

0

xStatistics Loan Proniotion FoNow4up BusinsOfficer Accountant Secretar Officer Division Division . Division AdvisoryB. Kotty P. Sale C, Mekau K. L. Kuper Vant G. W. Boyd D. Teobsi Division V

( ;A. Nuhuhu) (Vacat)'1

p-i p-i P- P-I P -O P-2 P-3D S- -1 S - 3 5-0 S-0 S-O

lb

Gi,o Branch Honiara Branch Auki Branch Kiraekira Brwnch Buale BranchP4 L-- HA HW- estern Province Guabdeanal Province Rblaita Province Maknira Province Sto. Isobel ProvinceR. AverV C. Panekera K. Ayton p. Jemes 0. Pulomana

P -4 P -3 P -4 p.3 p-1 Is-I S-3(3) S-4 1) S-I S-0

Notes: 1) Names in parnthesis indicate local counterparts/under study to expatriate. Total Staff:2) Flqures in parenthesis indicate new staff unrder trainenq on Loan Appr;isal

and follow-up work. Manaqprevnt (Env.) 131 Broken lhnes indficate office/branch to he set up in the near future. Profenionals: Exp. 4

Nationals 20Supporling 41

Total:__

Tfite-h

- 49 - Appendix 4

DEVELOPMENT BANK OF SOLOMON ISLANDSStatement of General Business Policies

(Policy Statement)

I. The Bank

The Development Bank of Solomon Islands (the Bank)was established under the Development Bank of Solomon IslandsOrdinance 1977 as an independent statutory body operating,under the direction of its own Board.

The purpose for which the Bank may exercise itsfunctions under this Ordinance is the assistance of theeconomic and social development of Solomon Islands withinthe overall national development plans and strategies, givingparticular emphasis:

a) to promoting the participation of SolomonIslanders in that economic development;

b) to rural development; and

c) to stimulating processing and industrialactivities which might be expected tostrengthen the economic independence ofSolomon Islands.

II. Scope of Activities

1. The Bank will conduct its operations within thegeneral framework of the national economic policies, plansand priorities.

2. Although the primary role of the Bank is to promoteeconomic development and production in the private sector,the existence of Government or other public ownership in anenterprise will not preclude that enterprise from beingassisted by the Bank.

3. The Bank will finance projects aimed at increasingproduction and development in the fields of agricultureincluding horticulture, livestock and fishing, timber ex-traction and reforestation, quarrying, industry, manufactureand processing of all kinds, tourism, commerce, transport andcommunication, service industries, includirng professions,hospitals, schools, cooperatives as well as community activities.

(Reference to Text: Paragraph 37, page 16).

-50- Ap,pendix 4Page 2

4. The Bank will finance both new enterprises and theexpansion or modernization of existing enterprises.

5. The Bank will provide financial and other forms ofassistance in the following ways:

a) extending loans;

b) making equity participation;

c) guaranteeing the finance provided by othersources;

d) providing technical managerial and financialconsultancy services; and

e) assisting in the identification, formulationand promotion of new projects.

6. The Bank's financial assistance will be primarilyfor the acquisition of fixed assets. However, the Bank may,in deserving cases, also finance seasonal and short-termcredit requirements in the agricultural sector as well asworking capital requirements in any sector.

III. Development Policies and Operating Principles

7. It will be one of the Bank's important aims toinvestigate and identify investment opportunities, and promoteand assist in the establishment of enterprises of importanceto the economy of the Solomon Islands.

8. When determining whether assistance shall be given toany enterprise, the Bank will give preference to enterpriseswhich will:

a) use local raw material in processing andmanufacture;

b) make use of those technologies which providemore opportunities for effective employmenttraining of local people;

c) contribute effectively to broadening the baseof local entrepreneurship;

- 51 -Appendix 4Page 3

d) have a good potential for expanding exportsor decreasing imports; and

e) lower costs within the country and improve theefficiency or standards of goods and serviceswithin the country.

9. The Bank will carry out its operations as a develop-ment bank in accordance with sound banking and business practices.

10. The Bank will provide financial assistance only tothose projects which, on the basis of its own analysis, appearto be economically justified, technically viable and profit-able. Special consideration will be given to the quality ofmanagement of proposed enterprises and the market prospectsof the products or services.

11. The Bank will endeavor to secure its loans and gua-rantees in accordance with sound banking practices, but in sodoing, the Bank will have due regard to its development functicnsin the economy of the Solomon Islands.

12. Applicants will be required to provide a reasonableequity in cash or kind or by way of collateral for the loan tothe enterprise by the Bank to ensure that they have an appro-priate stake in their own venture. They will also have toensure that the total financial requirements for the successfulimplementation of their project will be available.

13. The Bank will ensure, in making its financial assistanceavailable to any one borrower, that the financial requirementsfor the completion and commissioning of a project 'will take intoconsideration any cost overruns that may need6eo;be-accoMnihodated.

14. Loans will usually be disbursed after the promotershave made an appropriate financial, or equity contribution oftheir own to the project with adequate collateral for the loanand after the Bank has ensured that such disbursement will bein line with the requirements of the investment schedule of theproject.

15. The repayment period of loans to the Bank, includingany grace period as appropriate and needed, will be determinedtaking into account:

- 52 -Appndix 4

Page 4

a) the repayment capability of the enterprise;

b) the useful life of assets to be acquiredunder the Bank's assistance;

c) an adequate payouit to the promoters duringthe repayment period; and

d) optimum use of the Bank's own funds by meansof the turnover of its portfolio.

l6. The Bank will closely supervise the use of its funds,by way of checking the progress of the projects so financed andthe performance of these enterprises to ensure that remedialaction is taken promptly shbuld circumstances so warrant.

17. The Bank will require its borrowers to keep recordsand accounts in accordance with sound and generally acceptedaccounting principles, and to furnish such information ontheir operations and accounts as it deems appropriate. TheBank will ensure it has the right to inspect the financialrecords, as well as the books of accounts, the operations, andother records of any enterprises it finances.

18. The Bank will endeavor to assist entrepreneurs withthe provision of managerial, technical and c-ir advisory ser-vices. It is the aim of the Bank to help its borrowers towardsthe successful completion of their projects.

19. The Bank will endeavor at all times to build up aneffective organization and develop an adequate and technicallyqualified staff in order to carry out its functions efficientlyand to assist its clients in the formulation and conduct oftheir projects.

20. Business secrets and other information furnished tothe Bank by applicants or clients will be treated as confidential.

IV. Diversification of Portfolio

21. In order to reduce the concentration of risk, theBank will seek to diversify its portfolio by sectors of operationsand by avoiding inappropriately large investment in any oneproject. In view of its development function, the Bank willalso pursue geographical diversification of its portfolio.

- 53 - Appendix 4Page 5

22. The Bank's equity investments shall serve mainlyfor the establishment of new enterprises or the balancing orexpansion of existing enterprises and the Bank will endeavorto dispose of such equity investments as soon as this becomesfeasible and a reasonable price can be obtained therefrom.The Bank's equity investment will nct normally exceed twentyfive per cent (25%) of the paid-up capital of the assistedenterprise.

23. The Bank will not commit to a single enterpriseequity participation more than ten per cent (10%) of itsunimpaired paid-up share capital and reserve fund. Theaggregate equity investment of the Bank at any time shall notexceed twenty per cent (20%) of its paid-up share capital andreserve funds.

24. The Bank's total commitment in the form of loans,equity investments and guarantees in a single project orenterprise shall not exceed:

a) twenty per cent (20%) of the total of theBank's unimpaired share capital and reservefunds;

b) sixty-five per cent (65%) of the total fixedassets of such enterprises including the Bank'sown investment when they are in the industrialsector; and

c) eighty per cent (80%) of the total assets ofsuch enterprises including the Bank's owninvestment when they are in the agriculturalsector.

25. In exceptional cases meriting special considerations,limits under clause 24 (b) and (c) may be exceeded, providedthe loan is covered by adequate additional security over assetsnot forming part of the project, or personal guarantees.

26. In financing worthwhile projects requiring more thanits maximum lending limits under clause 24, the Bank may seekthe syndicated cooperation of other financial institutions,both local and foreign, limiting the Bank's liability in suchcases to the ceiling referred to under clause 24.

- 54 Appendix 4Page 6

V. Financial Guidelines

27. The Bank will review and determine from time to timethe rates of interest and fees to be applied to its advances,these in the light of prevailing national policy and develop-ments in the capital market, and with due consideration to thecosts of its own borrowings, administrative expenses and theneed for adequate reserves and provisions.

28. The Bank will not carry the exchange risk on its debtspayable in foreign currency. The Bank will endeavor to havesuch risk assumed by Government or a Government agency. Inthe eventthat Government or its agencies are not prepared tobear the foreign exchange risk relating to its repayment ofdebts in foreign currency, such a risk will be passed on tothe Bank's borrowers.

29. The Bank will not normally take a controlling inte-rest in or participate in the management of any enterprise inwhich it has invested. However, should it become necessaryto protect'its own interests, the Bank may undertake suchactions in this respect as it considers expedient and appro-priate.

30. The Bank will not undertake long-term borrowingobligations, including guarantees, that in the aggregate wouldexceed three times the total of its unimpaired paid-in sharecapital and reserve fund.

31. The Bank will maintain accounting records adequateto reflect its business operations in accordance with soundand generally accepted accounting principles and practices.

VI. Provisions and Reserves

32. The Bank shall set aside in each year, at least threeper cent (3%) of its approvals of loans, equity investmentsand guarantees in that year as a provision against bad anddoubtful debts until such time as the provisions equal tenper cent (107.) of its loan, investments, and guarantee port-folio, and will thereafter set aside annually such amountsas are sufficient to maintain this provision at least at thatlevel.

55 - Appendix 4Page 7

33. The Bank shall transfer all its net profits to areserve fund until such time as the reserve fund is equal tofifty per cent (50%) of the Bank's paid-up share capital.

VII. Revision of Policies

34. This statement of General Business Policies has beenapproved by the Bank's Board, any revision of statement shallrequire the prior approval of at least six (6) of the nine (9)members of the Board of the Bank.

DtVELOP9 T SAnE OF SOLOM3 ISLANDS

Loan and Equity Inveatment Approvalt by Sector(Si{,'OCO)

A 1L L6aC 1.-10/75 - 31/12/77 1ij/7-3 - - 1U,7/1779 -31/lz:7g /1/70 - 30 M'6

"C .o. 2 Aouqt 1 Yo. 1 A.o-t oA nt No. . A--tD

P Aarlculture 1l6 87 214.305 38 l90 65 389,663 26 642 61 806.458 32 939 62 951 337 25CD C.ocoa - - - 3 16.1L75 -13 51,3 013 Mixed ?areLa8 1 1,872 4 3.50O 6 1,58s1 3. 15,794n Copra 5 43,750 24 93,%,9 41 143,695 5 79,393(D Cattla 96 80.226 32 15,336 83 72,965 y 117.9d8

Pigeria & Poultry 6 12.704 It 41.300 35 24,64L 71 17.160

Ptaherite. 5 45,753 14 12.26 98 71,422 67 104.7V72

0 Forestry 3 30,000 4 146,963 IS 138,230 47 27.348

RurMl Infrastructure - - 98 59,144 351 266,367 1,s3 37L.A60H 0terz- - - - - 2 5.506

X pmfsturtir 3 2 ..11,53 2 25 9 4 59_386 31 64 7 360,29 2 14 12 6 31.,11 Srt-.

Food, Beverage co TbeC - - 9 1J4, 570 317 25992 4 ),J0eTaxtilesand Leathor - 2 10,000 4 460 6 !!5,070Wood and Wood Products I 153 4 2.51I a 52.305 it 11 1 "Natel Products - 3 70,700 2 4,500 3 16,200 0Furnitura and Fixtures - 13 S,1tOO 6 35.005 7 390General Entginertng 2 1t,600 4 93.000 7 24L.900 3 116f..

P 4 Mining - - - - - 4 12.2CO

OQ Constructiont I I 1.500 1 25 9 23.3537 16 26 2 15.8084 7 12 I 144,636 4Pilb Corcce 10 7 322600 51 25 9 00OI07 13 64 6 571.903 23 107 7 473f459 12la Stores 10 322,600 12 1713.063 64 371,'43 471,439

= RTM - 13 12,344 - - 2.000

Servtce and TransportaCtioa 4 1 11,598 2 24 S 19990 14 248 24 606.656 24 369 24 1 9273.53 51Shipping i 950 12 50,575 205 11,217 3 32 - _

Vehicles 3 10,643 9 IZl,485 37 1317039 Z9 Q4,66.Touris- - I 25,000 2 130,750 1 8',000

02 Other. - 2 2,400 4 147,650 7 123.740

1 Toti l34 1O 56L3656 100 289 100 t 100 lt2,533.AL63 100 too 1 63.1 100

a/ Includes two equity investments of SI$80,0. DBSI's total loan approvals in 1978 mamounted to SI$l,393,453. Calculated against this base, sectoral distribution of n

loans in 1978 was: agriculture (28 per cent); manufacturing (27 per cent);construction (17 per cent); comerce (14 per cent) and service (14 per cent).

awlop.mnt tank of Solo-on I laIndsCharacterLatics of Loan n-'J Equity Investent Approvala

(SI$)

A 1. L 8Cumu lative _ _ _ _ _ _ _ _ _ _ _ _ _ _

I/10175 - 31/12/77 71/78 - 31/ 12/ 78 1/1/79 - 31/L2/79 1/1/80 - 30/9/800. % Amount 2 No, 2 Amount 2. No. z Amount 2 No. Amount

A. SIZE

Up to $ 500 31 12 tl,610 2 97 23 32,722 2 461 44 161,278 6 796 52 257,993 6S 501 S 1,000 45 34 32,100 5 117 40 92,360 6 453 43 380.699 15 589 39 !38,569 13S 1,001 - $ 5,000 40 30 73.033 13 29 L1 84,156 6 70 7 L53,886 6 83 6 216,568 63 5,001 - $ 10,000 11 7 89,003 16 18 6 135,800 9 18 2 127,950 5 19 1 148, 949 4$ 10,SGoo - $ 20,000 2 2 31,000 6 9 3 136,700 9 19 2 303,900 12 12 1 189,350 5$20,WI - $ 50,000 2 2 60,000 11 13 5 426,265 29 13 1 454,700 1a 9 1 322,0Zo 4$50,001 - S1O0,000 3 2 265,000 47 3 1 235,400 16 6 1 405, 750 16 5 - 359,900 9m Over 100,000 - - - - 3 1 330,000 23 4 - 545,000 22 6 - 1,889,347 49

Total 134 100 561,756 100 289 100 1.473.453 100 1.04 100 2.533,163 100 1,519 100 3,d73,176 100Average Size 4_92__9_242_

M. X* ITT

Up to 1 year 6 4 7,112 1 48 17 153,217 11 235 23 260,738 10 574 37 377,266 10o 1 year to 2 years 10 7 22,993 5 t06 37 126,395 9 469 45 359,728 14 747 49 541,811 142 years to 3 years 65 48 112,772 20 74 25 11,575 a 250 24 473,509 19 IIS 8 193,150 53 years to 4 years 4 3 18,172 3 12 4 14,681 1 20 2 69,246 3 10 1 20,8234 years to 5 years 1 1 1,800 1 O0 7 310,655 22 26 2 289,556 11 14 1 74,568 2X 5 years to lOyeara 42 32 139,207 34 25 9 542,500 39 35 3 700,786 28 43 3 718.899 19

(t Over 10 years 6 5 204,700 36 2 1 131,430 10 9 1 379,590 15 16 t 1,946,559 50Total 13' 100 561.756 100 Me/ 100 1.393 453!/ 100 L.044 100 2.533,163 100 1 59 100 30873.176 1,

C. LOCATION

Central Province 6 4 3,660 1 20 7 17,510 1 124 L2 304,058 12 135 9 73,934 2Eastern Province 2 2 3,180 1 1 1 1,000 - 10 1 6,601 - 10 - 4,776G&,adalcanal 24 I1 30,317 5 42 15 347.068 24 167 16 327,132 13 222 L5 546,265 14Isabel Province 5 4 3,545 1 13 4 19,214 1 80 8 82,571 3 115 7 551,165 1'Makira/Ula.a Province 30 22 42,716 8 11 11 26,134 2 113 11 115,059 4 73 5 310,055 8Malaita Province 40 30 57.225 10 34 29 195,548 13 268 25 549,310 22 390 26 387,483 10W Western Province 19 14 79,313 14 58 20 97,341 7 219 21 298,282 12 544 36 1,050,746 27Honiara 8 6 341,800 60 40 14 769,638 52 63 6 850,150 34 30 2 948,750 25

4j p. p. Total 134 100 561,756 100 289 100 1,473,453 100 1,044 100 2.533.163 100 15,19 100 3,873, 6

100%D) 0 - - -

D. PnRPOSE

New Project 100 75 198,249 35 ?22 77 556,529 38 828 79 1,084,442 43 1,395 92 2,206,025 57 :Expansion and BMl 34 25 363,507 65 67 23 916.824 62 216 21 1,448,721 57 124 8 1,665,151 43 v

Total 134, 100 561,756 100 239 100 1.473.453 100 1,044 100 2,533,163 1GO 1.519 100 3.873,176 100 l

E. NATIONALITY f

@ ' Nationals 128 96 372,756 66 265 92 899,818 61 1,041 100 2,461,663 97 1,516 100 3,704,176 95 51a Expatriate 6 4 139,000 34 24 8 573,635 39 3 - 71,500 3 3 169,000 5

Total 134 100 561.756 100 289 100 1,473.453 100 1.044 100 2.533.163 .00 1,.9 100 3.873.176 100

F. TY OF B0RROWER

New Borrower 115 86 432,797 77 281 97 1,372,753 93 919 88 1,732,860 68 1,459 96 3,061,152 79Repeat Borrower 19 14 128,959 23 8 3 100,700 7 125 12 809,303 32 60 4 812,024 21

Total 134 100 561.756 1OO 289 100 1,473.453 100 1 044 100 2.533,163 100 1,519 100 3,373,176 100

a/ Equtt, tLvestments are excluded.

Development Bank of Solomon Island.Balance Sheet

(SI$)Auditor: Price Waterhouse

AILB 30 Se?tember */ AILS 30 September a/

As of 31 December 1977 1978 1979 1980 As of 31 December 1977 1978 [979 [980CD

" ASSETS LIAILITIXS ND BQuTyCD

CuSrent Assate 846.619 1-018.047 1,235 00B 1.465.180 Current LiabiLities 6.926 97,228 123.881 33,GZCash 67,132 62,978 141,947 168,670 Accrued Expenses 6,926 24,694 [08,998 -

(I Debtors, Prepaids 21,288 91,773 .32,534 5,323 Due to Subsidiary - 55,230 - -Deposits 758,199 418,236 395,460 646,187 Advance by S.I.C. - 10,000 - 10.04

rt Share in Sub- Curren Ptortion ofo sdiary Company - 55,230 - - Term Liabilities - 7,304 14,883 23,000

Portion of TernH Loens currently TerO Liabilities 1,408,229 487.145 l[154,104 2.531,682CD due - 389,830 615,067 645,000 NP? - - 250,000 500,000X Equity Investmente 70,200 105,000 209,767 209,767 Mis. SIG 1,279,929 250,000 489,066 d63,591" Loans (gross) 1,151,131 1,902,733 2,977,737 4,544,015 SIG,ADB/CDA - L9,900 85,141 139,744

Less: Provision SICiADS - - 212,860 1,051,347 Ljfor lad Others 128,300 224,549 131,920 - ODDebts 25,000 60,000 [30,000 240,334 Less: Current

Current Portica - 389,830 615,067 645,000 Portions - 7,304 14,883 23,C0O I

Net Loans 1,126.181 [.;52.903 2,232.670 3,658.681 FYuity 706,733 2,161,566 2,734.795 3_,4,24Paid-up Capital - 1,'00,000 2,368,000 2,784,251

Fixed Assets (Net) 78,688 169,989 335,335 375,302 Reserves 395,O00 49,833 55,062 62,777Retained Earnings 311,733 311,733 311,733 297,220

'-O lTOTAL LIABILITITSTOTAL ASSETS 2 [2148 2,745,939 4.01L2780 5,708,J30 A:ND QUITY 212 4530

Ratios:

Current Ratio 122.2:1 LO.5:1 [0.0:1 44:4:1Long term iDbc/ >

Equity L.99:1 0.23:1 0.42:1 0.81:1 X

Reserve for BadDebts/Tatel eDPortolto 2.0 3.0 4.1 5.1 .

LnLa/ Interim, unaudiced.

o 4 ,

Development Bank of Solomon IslandsLoan Portfolio Distribution

(SI$ §000)

m A I L Bm 31 December 1977 31 December 1978 31 December 1979

No. Z Amount Z No. .A Amount Z No. % Amount %

0 A. SECTORALC 1. Agriculture 344 87 406 35 384 81 487 26 752 85 822 27O a. Rural Infra-a

structure - - - - 80 17 40 2 424 48 182 6H b. Cattle 284 72 220 19 255 54 173 9 254 29 213 7

c. Forestry 4 1 17 1 6 1 108 6 7 1 91 3d. Copra 16 4 77 7 20 4 99 5 20 2 207 7e. Others 40 10 92 8 23 5 67 4 47 5 129 4

2. Manufacturing 9 2 184 16 24 5 618 32 25 3 644 221 3. Construction 5 1 25 2 8 2 85 4 19 2 221 7O 4e Commerce 31 8 481 42 48 10 648 34 53 6 914 31

5. Transport & Service 6 2 55 5 8 2 65 4 37 4 376 13.

-4 Total 395 100 1,151 100 472 100 1 903 100 886 100 2,977 1G00

B. GEOGRAPHICAL1. Honiara 14 4 606 52 42 9 1,113 59 65 7 1,563 532. Guadalcanal 51 13 79 7 53 11 174 9 140 16 331 113. Malaita 179 45 207 18 186 39 289 15 302 34 511 174. Others 151 38 259 23 191 41 327 17 379 43 572 19

Total 395 100 1,151 100 472 100 1,903 100 886 100 2.977 100

'Note: Loan Portfolio Distribution information as of 30 September 1980 is uwAvailable.

- 60

Appendix 9

Development Bank of Solomon IslandsPortfolio Arrears

(3O1$ 000)

AILB__ _ _ _ _ __ _ _ _ _ __ _ _ _ _

31 Dec. 1977 31 Dec, 1978 31 Dec. 1979No. Amount No, Amount No. Amount No. Amount

I. Arrears

Total Loan Portfolio 395 1,151 472 1,903 886 2,977 n.a, 4,544Loans at Repayment

Stage n,a. n.e.& 458 19841 861 2,831 1,492 n.a.Loans having Arrears 129 144 135 203 346 623 914 1,304

Arrears:Principal 46 46 75 nba.Interest 4 11 20 a. a .Total 50 57 95 237

Arrears Over 12 months n.a0 n.a. 25 28 57 37 98 51Loans having Arrears

as X of Portfolio 33 13 29 11 39 21 n.a. 28.6Arrears as X of Port-

folio 4.3 .3.0 3.2 n,a. 542Arrears as % of Loans

at Repayment Stage na. n.a. 29.5 3.1 40.2 3.4 61.3 n.a,Arrears over 12 months

X of Loans at Re-payment Stage n.a. n.a 5.5 1.5 6.6 1.3 6.6 n.a.

II. Arrears by Sector

Arrears as 7 Loans atRepayment Sttge:Cattle n.e. 35 9 38 8 43 10Rural Infrastructure n.a, 18 2 45 10 71 17Ag>lculture n,a. 33 3 27 2 37 4.5Commrce, Manufacturing

and Transport n,ae 18 2 30 2 43 3.7

(Reference to Text: Paragraph 58, page 27)59 27

j-

Development Bank of Solomon Islan sEquity Investments Portfolio -!

SI$ Amount . Share Date ofName of Investment Ownership Investment Location Status

1. SGlomon Island Investment 104,700 12.2 02-09-72 Honiara Operating profitably andCo. Ltd. (Mendana Hotel, 09-10-78 paying dividends severalBuilders, Hardware, etc.) years already.

2. Solomon Soaps Limited 100,000 31 12-03-79 Honiara Not yet reached break-h (All types of soaps) 12-11-79 even; main problem is

'1 competition from imports.

X 3. FAB Blocks Company Ltd. 5,000 25 30-05-79 Honiara Operating profitably -(Concrete Building Blocks) a dividend is expected

o at the end of thisH first year.xri 4. SIACO Limited (Fish Marketing) 67 100 14-04-77 Honiara Loss situation; manage-

ment is main problem.

0 5. South New Georgia Dev. 12,500 a/ 25 W. ProvinceCo. Ltd. (shipping)0

o 6. Isabel Dev. Co. Ltd. 10,000 25 Isabell (shipping) Province

o 7. Eagle Ltd. (tourism) 15,750 - 20 W. Province

> 8. Islands Spice Ltd. (food processing) 5,000- 20 HoniaraOQ a/

C 9. Marau Shipping Co., Ltd. 20,000- 33.3 Guadalcanal/Makira

:P fD

10. Solent Ltd. (laundry) 5,000 S/ 25 Honiara

a/ not yet disbursed.Including approvals up to September 30, 1980

-62-

Appendix 11

DEVELOPMNNT BANK OF SOLOWN ISLANDSIncome Statements (Auditor: Price Waterhouse & Co.)

(s1$)

A IL B D IS IFroa/l1/80 b/Front 01/10/76 01/10/77 01/01/78 01/01/79011/0-

To 30/09/ 77 31/12/77 31/12/78 31/12/79 30/09/80

INCOMEIntere8t on Loans 37,782 9,292 86,877 212,418 193,735Interest on Deposits 47,551 13,620 45,794 26,945 14,712Dividends 5,968 2,457 60,170 5,235 3,371Sundry Income - - 1,014 7,545 13,551Service Fees 856 651 6,533 19,501 25,925Rent and Commissions 2,729 620* 11,404 24 ,981 19,849

Total Income 94,886 626640 211,792 296.625 271,143

EXPENDITURE SAdminist8ative Expenses

Personnel 25,965 6,926 43,243 79,499 87,404Premises 4,595 384 8,078 12,485 27,751Travel 1,647 935 3,744 11,320 123700Depreciation 9,803 2,506 22,700 29,515 -

Other Adm. Expense8s 73317 ,91 12,814 22,244 27,609Total Adm. Expeases 49,027 14.142 90,579 155,063 155,464

financial ExpansGes 15,930 9,812 49,278 26,653 19,859Total Expenditures 64,957 23D954 1391857 1_81.716 175 323

Operating Profit 2,686 71,935 114,909 95j820Bad Debts Written Off 4,050 - 8,036 - -

Provision for Bad Debts 5,000 - 44,204 76,007 110,334Profit on Sales of Fixed Assets 37 18 30,138 - -Other Extraordinary Items - - - 33,673 -

Net Profit 20J916 2,704 49,833 5,229 (14,514)

RATIOSNet Profit/Average Equity (%) 3.0 1.61/ 3.5 0.2 -

Adm. Expenses/Ave Total Assets(%) 3.2 3.2a!/ 3.7 4.6 4.3Interest Spread 2] 2.3 - 0.6 5.e -

Earnings Spread Y 5.7 - 10.2 9.4 -

a/ Annualized b/ 9 mos. interim, unaudited.

I/ Income from Loan Portfolio Financial ExpensesAverage Loan Portfolio Average Borrowings

2/ Income from Portfolio - Financial ExpensesAverage Portfolio Average Resources

(Reference to Text: Paragraph 62, page 28).

- 63 -A d

DlEVEtLOPMtENT BANK aF SOLOMON ISLAN~DS

Projiected O~rtos 1980-1984(SI$ I 000)

ActualFor year ending 31 December -1979 12980 1981 1.982 _1983 -1984

A . A.PPROVALS-'/

Agriculture 808 1,026 1,9289 1,613 2,017 2,521Industry 360 403 504 630 788 985Constru tion 186 203 260 325 406 508Commerce 572 543 685 856 1,070 1,338Services & Transport 607 2,039 1.486 1.858 2.323 2.904

TOTAL APPROVALS 23 4 5.282 6.604 8,256

B. DISBURSEENTS

Actual 9 mos. ended 30 September 2,304Current Year Approvals - 600 2,816 3,522 4,403 5,504Previous Year Approvals - 1.724 1.908 1.760 2.201

TOTAL DISBURSENTS - 2.904 4.540 5,4O 6 .163 L705

C. RPAYYNT S

Existing Portfolio - 925 790 756 483 359Existing Approvals - 175 300 275 230New Approvals - 244 1.057 175 2.504 4

TOTAL IEPAYIENTS - 1,169 2,022 2.809 3.262 4.023

,/ Includes micro-loans and equity investments in each sector.&/ Includes actual approvals of SI$3.87 million for nine months

ended 30 September 1980.

(Reference to Text: Paragraph 67, page 31).

- 64 - Appendix 13Page 1

Development Bank of Solomon IslandsMajor Assumptions for Operational and Financial

Pro ections 19801984

I. Operational Projections

A. ovals

1. Loan APprovals - DBSI in 1979 recorded a loan

approvals growth rate of 67 per cent by amount,

Loan approvals have continued to expand rapidly

during the first nine months of 1980. Based on

this historically high growth rate and DBSI's

pipeline of projects, loan approvals are projected

to increase by 25 per cent annually from 1981 to

1984 (actual shipping subsector loan approvals of

SI$0.85 million are considered as extraordinaryand are excluded from the base year (1980)'s total

to arrive at this rate of increase). The foreign

exchange component of approvals, based on actual

experience, is 50 per cent overall.

2. Equity Investments - approvals are assumed to equal

10 per cent of yearly approvals, given the increased

prospects of localization,

B. Disbursements

l. Of SI$2.5 million awaiting disbursement as of

30 September 1980, SI$0.5 million will be disbursed

before and 1980, SI$1.5 million in 1981 and SI$0.5

million in 1982. Of the projected SI$0.4 million

in approvals for the last 3 months of 1980, SI$0.15

million will be disbursed in 1980 and the balance

in 1981.

2. Based on experience, two thirds of any given year's

approvals are disbursed the same year with the

remaining one third the following year.

(Reference to Text: Paragraph 73, page 32)a

- 65 -

C. Repayments

1. Existing portfolio repaid based on existingrepayment schedules.

2. Existing approvals repaid based on approvedrepayment schedules

3. New (projected) approvals repaid as follows:

a. micro loans - 2 yearsb. agricultural - 10 years including 5 years

gracec. forestry - 3 years including 1 year

graced. fishing - 10 years including 1 year

gracee. cattle - bullet payment after 2 years

(assume for weaner fatten-ing only)

f. pigs and - 5 years including 1 yearpoultry grace

g. industrial - 10 years including I yeargrace

h. construction - 2 years (bridge financingonly)

i. commerce - 7 years including 1 yeargrace

J. services and - 9 years including 1 yeartransport grace

II. Financial Projections

A. Income Statements

1. Interest Income - is calculated on averageportfolio at a weivhted' !,nrS7 ¢,.-wt '-t-

of t.05 per ce-i- during the projected periodof 1980-1984.

2. Other Income - Service fees are calculated atstandard DBSI rate of 1 per cent of approvals.The yield on equity investments, expressed interms of dividends only, is conservatively~assumed at 1 per cent; thus, dividends willincrease by SI$5,000 per year. Commissions(from Insurance Sub-Agency) projected to

- 66 -Apendix 13Page 3

increase by SI$1,000 per year. Rental incomewill decline to SI$10,000 per year as DBSI in1981 will occupy half the space now leased out,and will cease in 1982.

3, Administrative Expenses: PersonnelDBSI staff is expected to grow by 15 to 20 percent in 1980/1981 to cope with the presentrapid growth in portfolio and loan approvals,then by only 3 to 4 per cent in 1982/1983,expected to be a period of consolidation.Salaries and wages therefore will increasesignificantly, by about 50 per cent in 1980and 1981 but moderately thereafter(notincluding the salaries of 3 expatriates tobe hired in 1982). Wage inflation of 5 to10 per cent is assumed. The remaining portionof increases in salary expenses is made up ofmerit increases and increased staff.

4. Financial Expenses - The following are interestrates for anticipated borrowings (all are percent per annum):

a. ADB (including proposed loan)and SIG/EDF - 5.0

b. SIG/UK and ADB/CDA - 2.5c. SIMA - 6.0d. NPF - 8.0

5. Provisions for Bad Debts - 3 per cent of annualloan approvals in accordance with paragraph 32of DBSI's Policy Statement.

T. Cash Flow Statement (items not covered in I and II)

A. Paid-Up Capital - expected to increase by SI$500,000per year.

B. Drawdown of Borrow - assumed as per respectiveloan documents.

- 67 - Appendix 14

DEVELOPMENT BANK OF SOLOMON ISLANDS

Projected Income Statements - 1980-1984(SI$'Oo)

For Year Ending 1 December 1980 1981 1982 1983 1984

INCOME

Interest on Loans 404 627 897 1,187 1,532Service Fee *28 42 49 62 77Dividends Received 5 10 15 20 25Rent Received 22 10 10 - -Commissions Received 1 2 3 4 5

460 691 974 1,273 1,639

EXPENDITURE

Administrative ExpensesPersonnel - Local 120 183 213 250 306

- Expatriate - - 83 91 100

120 183 296 341 406

Premises 36 40 44 48 55Travel 14 15 16 17 18Depreciation 36 48 48 48 48Bad Debts Written Off 20 50 40 50 60Other 40 50 60 70 80Total Administrative Expenses 266 366 504 574 665

Financial Expenses 62 189 278 392 473Total Expenses 328 555 782 966. 1,138

Operating Profit 152 136 192 307 501

Provision for Bad Debts 127 127 158 198 248Net Profit 5 9 34 109 253

Ra±io s

Net Profit/Average Equity (%) 0.2 0.3 0.8 2.4 4.8Admin. Expenses/Average Total Assets 5.3 5.2 5.3 4.8 4.5Interest Spread 7e7 6.1 6.7 6.7 7.4Earnings Spread 9.5 8.3 8.0 7.7 7e8

(Reference to Text: Paragraph 73 , page 32).

68 - Appendix 15

DEVELOPMENT BANK OF SOLOMON ISLANDS

Projected Cash Flow Statements (1980-1984)(si$'ooo)

For Year Ending 31 December 190 1981 1982 19283 _1984

CASH INFLOW

Net Profit 5 9 34 109 253Add: Depreciation 36 48 48 48 48

Provision 127 127 158 198 248Bad Debts Written Off 20 30 4050 60

Cash Generated From Operations 188 214 280 405

Loan Repayment 1,169 2,022 2,809 5,262 4,023Increase in Capital 500 500 500 500 500Increase in Current Liabilities 10 10 10 10 10Decrease in Deposit 395 - - -

Borrowings:

SIG/UK 250 - - - -ADB/CDA 80 go 100 120 70NPF 250 250 - - -ADB I 937 462 - - -

ADB II/IDA - 451 1,500 896 -EDF - 250 300 550 -SEMA - 150 200 250 300Other Borrowings - - - 104 2,500

Total Inflow 3,779 4,399 699 897 8,012

CASH OTJLOW

Loan Disbursements 2,614 4,086 4,887 5,547 6,955Equity Disbursements 290 454 543 616 771Fixed Assets 200 100 50 60 70Increase in Current Assets 30 40 50 60 70Repay Borrowings 12 30 2

Total Outflow 5i5 4,703 5,560 6,553 7,931

Cash at beginning 142 768 464 603 147Increase/(Decrease) 626 (504) 139 (456) 81Cash at end 768 464 603 147 228Debt-Service Coverage (Times) 63.7 90.4 96.4 48.8 50.9Interest Coverage (Times) 1.1 1.1 1.1 1.3 1.5

(Reference to Text: Paragraph 73, page 32).

-69 -

Devolonr.wnt-l WQk of SnInlml-.u lnr'Id

Projy.ted Beiinnce S1eetsX tQ80- 195Y4(S I '' IO )

Ac tiaf IAn at 31 December l97' 1080 1951 1982 1983_- IqR4

ASSETS

Current Assets 1.235 2903 3,426 4,06. 4.433 5.38.a

Cash on hand/Bank 142 768 464 603 147 228Bank Deposits 395 - - -

Debtore & Prepayments 83 113 153 203 263 333Portion of Loans Currently Due 615 2,022 2.809 3,262 4,023 4,828Equity Investments 210 500 954 1,497 2,113 2,884

Loans and Advances (Net) 2,233 2.124 3,224 4,671 5.947 746

Loans and Advances 2,978 4,423 6,487 8,565 10,850 13.762Less: Reserve for Bad Debts 130 277 434 632 880 1.188

Current Portion 615 2,022 2,809 3,262 4,023 4,82SFixed Assets (Net) 335 499 551 553 565 587

Total Assets 4.013 6.026 815 08 ,3058 6

LIAB1LITIES AND iQUIKT

Current Liabilities 124 142 159 209 234 391

Current Portion of TermLiabilities 15 23 30 70 85 232

Other Ctirrent Liabilities 109 119 129 139 149 159

Term Liabilities 1,154 2,f644 4.267 6,297 7,932 10,570

Loan - SIC/UK 621 852 829 805 781 756ADB/CDA 85 165 255 355 449 492NP" 250 500 750 744 724 691ADB I 213 1,150 1,612 1,612 1.612 1,612ADB Il/IDA - - 451 1,951 2,847 2,647ED? - - 250 550 900 900SIMA - - 150 350 600 900Other Borrowings - - - - 104 2,604

Less: Current Portions 15 23 30 70 85 232

Equity 2,735 3,240 3,749 4.283 4.892 5.645

Paid-up Capital 2,368 2,868 3,368 3,868 4,368 4,868Reserve Fund 367 372 381 415 524 777

Total Liabilities & quity 4,013 6 f'6 A 75 10.879 13,058 16,606

Ratios

OuLrent Ratio 10.0:1 20.4:1 21.5:1 19.5:1 18.9:1 13.8:1Long Term Debt/Eqtiity 0.42:1 0.82:1 1.14:1 1.47:1 1.62:1 1.87:1

Provisions as . of TotnlPortfolio 4.1 5.6 5.8 6.3 6.A 7.1

(Reference to Text: Paragraph 73, page 32).

- 70 - A2pendix 17

DEVELOPMENT BANK OF SOLOMON ISLANDSCompliance with Loan Covenants under First Bank Loan

Reference toLoan Documents Remarks

I. Obligations of the Borrower(Government)

1. Borrower shall cause DBSI L.A. Section Complied with.to carry out the Project 4.01(a)with due diligence andefficiency and in confor-mity with sound administra-tive, financial and businesspractices.

2. Borrower shall furnish or L.A. Section Complied with.cause to be furnished to the 4.02Bank all information as theBank shall reasonably requeston the loan and the subloans.

3. Borrower shall promptly take L.A. Section Complied with.all actions including pro- 4.04vision of funds facilitiesservices and other resources,which shall be necessary onits part to enable DBSI toperform its obligationsunder the Project Agreement.

4. Borrower shall relend the L.A. Schedule 4, Complied withproceeds of the Loan to DBSI Paragraph 1.on, inter-alia, the followingterms and conditions:(i) interest at the rate

of five per cent (5)per annum;

(ii) equal semi-annualinstallments of prin-cipal over a period offifteen (15) years,including a grace periodof six (6) years; and

(Reference to Text: Paragraph 82, page 38).

- 71 -Appendix 17Page 2

Reference toLoan Documents Remarks

(iii) assumption by theBorrower of the fo-reign risk withrespect to repaymentof the loan.

5. Borrower shall, prior to L.A. Schedule 4, Complied with.making any appointment to paragraph 3.the position of GeneralManager of DBSI, consultthe Bank regarding quali-fications, experience andtenure of office,

6. Borrower shall take prompt L.A. Schedule 4, Complied with.steps to identify, in con- paragraph 4.sultation with the Bank, asuitably qualified candidatefor General Manager before31 December 1979.

7. Borrower shall take all L.A. Schedule 4, Complied with.necessary measures to ensure paragr4ph 5.that DBSI continue to bestaffed by suitably quali-fied professionals.

8. Borrower shall make further 'L.A. Schedule 4, Complied with.contribution to DBSI's paragraph 6.equity during 1979-1981 soas to increase its paid-incapital I-- SI$2.5 million.

9. Borrower shall promptly L.A. Schedule 4, Complied with.take all appropriate paragraph 7.measures to assist DBSI inthe event that DBSI expe-riences any large and con-tinuing operational deficits.

72 - Appendix 17

Page 3

Reference toLoan Documents Remiarks

II. Obligations of DBSI

1. DBSI shall make adequate P.A. Section Complied with.provision to protect it- 3.02self against any loss re-sulting from change in therate of exchange betweenSI dollar and othercurrencies.

2. DBSI shall maintain ade- P.A. Section Complied with.quate record of the progress 3.03of the project in accordancewith sound accountingpractices.

3. DBSI shall furnish to Bank P.A. Section Complied with.all information as the Bank 3.05shall reasonably request onloan and the subloans.

4. DBSI shall furnish its P.A. Section Complied with.audited annual accounts to 3.06the Bank within four (4)months after the close ofthe financial year.

5. DBSI shall maintain a debt/ P.A. Section Complied with.equity ratio of within 3:1. 3.09

6. DBSI shall review its inte- P.A, Schedule Complied with.rest periodically and shall paragraph 2.consult the Bank prior toeffecting any change.

7. DBSI shall prior to making P.A. Schedule Complied with.any appointment to the paragraph 6.position of General Managerof DBSI, consult the Bankregarding qualifications,experience and tenure ofoffice.

3 Appendix 17Page 4

Reference toLoan Documents Remarks

8. DBSI shall take prompt P.A. Schedule Complied with.steps to identify, in Paragraph 7.consultation with the Bank,suitably qualified candi-date for General Managerbefore 31 December 1979,who shall receive trainingto take over as GeneralManager about six monthsbefore the present GeneralManager's term expires.

9. DBSI shall take all neces- P.A. Schedule Complied with.sary measures to ensure Paragraph 8.that DBSI continues to bestaffed by suitably quali-fied professionals.

10. DBSI shall continue to give P.A. Schedule Complied with.priority to its staff paragraph 9.training programs. DBSIshall keep the Bank informedon an annual basis 6f theprogress of these programs.