World Bank Document · Bank Kemajuan Perusahaan Malaysia Berhad January 1 - December 31 ... Commercial Agriculture/Agio-Industries Sector ..... 4 ... Table 1 Summary of Loan

Th. World BankFMR OFFICIAL USE ONLY

Report No. 6065-MA

STAFF APPRAISAL REPORT

MALAYSIA

DEVELOPMENT FINANCE PROJECT

October 24, 1986

Projects DepartmentEast Asia and Pacific Regional Office

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

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CURRENCY EQUIVALENTS

Currency unit = Ringgit (M$)

Average 1985 March 1986US$1.00 = M$2.48 US$1.00 = M$2.53M$1.00 US$0.40 M$1.00 = US$0.40

FISCAL YEAR

Government of Malaysia

January 1 - December 31

Bank Kemajuan Perusahaan Malaysia Berhad


Sabah Development Bank


ABBREVIATIONS

BKPM - Bank Kemajuan Perusahaan Malaysia BerhadBNM - Bank Negara MalaysiaEPR - Effective Protection RateERR - Economic Rate of ReturnFTZ - Free Trade ZoneCDP - Gross Domestic ProductGNP - Gross National ProductIMF - International Monetary FundLMW - Licensed Manufactured WarehouseMIPS - Malaysian Industrial Policy StudiesNEP - New Economic PolicyNIF - New Investment FundPFIs - Participating Financial InstitutionsSDB - Sabah Development Bank BerhadSSE - Small Scale EnterprisesUNDP - United Nations Development Program

FOR OFCIA USE ONLY

MALAYSIA



Loan and Project Sumary

Borrowers: Bank Kemajuan Perusahaan Malaysia Berhad (BKPM) andSabah Development Bank Berhad (SDB).

Guarantor: Malaysia

Loan Amount: A total of US$65 million equivalent comprising two loans:BKPM: US$20 millionSDB: US$45 million

Terms: 15 years including three years grace for BKPM, and 13 yearsincluding four years grace for SDB, both at the standardvariable interest rate.

RelendingTerms: BKPM woul. onlend Bank loan proceeds to subborrowers in Ringgit

for periods of up to 15 years and SDB for periods of up to 13years, at variable market rates. The Guarantor to charge a onetime 1 fee paid up front for guaranteeing the repayment ofBank loan and availability of foreign exchange therefor.

ProjectDescription: The project would provide long-term capital for medium- and

large-scale subprojects essentially in the private sector, withthe Bank funds financing the direct and indirect foreignexchange component. Eligible sectors would include: manufac-turing, transportation, tourism and commercial agriculture; butthe bulk of financing is projected to be for manufacturingsector subprojects. Consumer real estate, oceangoing shippingand cocoa growing financing would be excluded. The estimated50-60 subprojects would generate jobs and produce a wide rangeof products for import substitution as well as for exports. Amajor benefit from the proposed project would be the opportu-nity for the Bank to work closely with two additional develop-ment banks on the refocussing of their lending strategies andon upgrading their institutional efficiency. Together with theinstitutions participating in the Small Scale Enterpriseproject approved in 1984, the Bank would now be associated withfour of the five major development banks in the country and,thus, have the opportunity to further strengthen institutionalarrangements for providing long-term capital for investmentfinancing. The project is expected to result in total estima-ted investment of about US$250 million. The project risksinclude a longer than projected period of loan commitment

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

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resulting from the present unfavorable investment climatecontinuing longer than anticipated, and financial difficultiesfor the participating institutions. The risks are relativelyminor and manageable.

EstimatedDisbursements: FY87 FY88 FY89 FY90 FY91 FY92

--------------- ~~~r$ 'i n -- ------------…~~~~TUi$ mitiTon)-

Annual 1.3 11.7 23.4 17.6 8.4 2.6Cumulative 1.3 13.0 36.4 54.0 62.4 65.0

Rate of Return: n.a.

Staff Appraisal Report: No. 6065-KA, dated October 24, 1986.

M: IBRD No. 19374

MALAYSIA



Table of Contents

Page No.

LOAN AND PROJECT SUK4ARY ..................... ......... .i-ii

I. SECTORAL BACKGROUND .............................. . I

The Manufacturing Sector ................................Commercial Agriculture/Agio-Industries Sector ............... 4Financial Sector. ...................... ............ 4Bank Strategy for Industrial Sector Lending ................. 7

II . THE PROJECT ... .............................................. 7

Project Objectives and Description-e-.. ................... 7Bank Kemajuan Perusahaan Malaysia Berhad (BKPM) ............. 8Sabeh Development Bank Berhad (SDB) ............

III. THE PROPOSED BANK LOAN ...................................... ,0

Features of the Proposed Loan . ....................Procurement and Disbursement .............................Project Benefits and Risks ................. -.

IV. AGREEMENTS AND UNDERSTANDINGS TO BE SOUGHT ATNEGOTIATIONS ........... o... ......... ... 22

This report is based on the findings of an appraisal mission to Malayaia inOctober 1985. Mission members were Zamir Hasan (mission leader), Hugh Murphyand Tsutomu Shibata.

ANNEXES

1. The Financial System:

Table 1 Components of the Financial System, December 31, 1983-85.Table 2 Lending Rates of Selected Financial Institutions as of

December 31, 1984 and June 30, 1985

2. BKPM

Appendix 1 Statement of Future Operational StrategiesAppendix 2 Statement of Operational and Financial PoliciesTable 1 Summary of Loan Operations, 1981-85Table 2 Characteristics of Loan Commitments and Outstanding as of

June 30, 1985Table 3 Summarized Balance Sheets as of December 31, 1981-85Table 4 Summarized Income Statements for the Years 1981-85Table 5 Financial Indicators, 1981-85Table 6 Resource Position as of December 31, 1985Table 7 Summary of Projected Loan Operations, 1986-90Table 8 Summarized Projected Balance Sheets, 1986-90Table 9 Summarized Projected Income Statements, 1986-90Table 10 Projected Cash Flow Statements, 1986-90Table 11 Projected Financial Indicators, 1986-90

3. SDB

Appendix 1 Strategy Statement, 198b-1988Appendix 2 Policy StatementTable I Summary of Loan Operations for the Years 1981-85Table 2 Medium- and Long-Term Loan Size Distribution as of June 30,

1985Table 3 Sectoral Distribution of Loan Portfolio as of June 30, 1985Table 4 Summarized Balance Sheets as of December 31, 1981-85Table 5 Summarized Income Statements for the Years 1981-85Table 6 Financial Indicators for the Years 1981-85Table 7 Analysis of Arrears for the Years 1981-84 and First Half 1985Table 8 Analysis of Loans in Arrears as of June 30, 1985Table 9 Resource Position as of December 31, 1985Table 10 Projected Loan Operations, 1986-90Table 11 Projected Balance Sheets, 1986-90Table 12 Projected Income Statements, 1986-90Table 13 Projected Cash Flow Statements, 1986-90Table 14 Projected Financial Indicators, 1986-90

4. Estimated Commitments and Disbursements of Proposed Bank Loan

5. Selected Documents and Data Available in the Project File

CHARTS

1. The Financial System of Malaysia2. BKPM Organization3. SDB Organization

MPAIYSIA



I. SECTORAL BACKGROUND

1.01 The industrial sector which comprises manufacturing, mining andquarrying, construction, and electricity and gas, accounts for about 31% ofKalaysia's Cross Domestic Product (GDP). Although its share has declined fromabout 372 during 1970-75, it is still the single largest contributor to GDP.Within the industrial sector, the share of manufacturing is about two thirdsof the total; it was 19% of GDP in 1985. Since the pr-pased project willbenefit principally the manufacturing sector, the discussion in the followingfocusses on this sector. The potential for commercial agriculture/agroindustries in the State of Sabah is also discussed briefly because a part ofthe proposed loan is expected to finance some subprojects in this subsector.A more detailed discussion of the industrial sector is contained in the latesteconomic report of the Bank titled Malaysia: Industrializing a PrimaryProducer (Report No. 5908-MA, dated June, 1986).

The Manufacturing Sector

1.02 Trends in Manufacturing. The performance of the Malaysian manufac-turing sector has mirrored that of the overall economy: very good until thelate 1970s, a marked slowdown during the early 1980s, some revival in 1984 butdeclining again in 1985. Tts share in GDP has increased from 14% in 1971 to19% in 1985. However, the growth of manufacturing output has decelerated con-siderably, from an average annual rate of about 13% during 1973-78 to about 5%per year during 1982-85. Despite some revival in 1984 when it increased at12.9%, the growth of manufacturing output fell 3% in 2985, and is projected toincrease marginally in 1986.

1.03 Structure of Manufacturing. Textiles and electrical goods are thefastest growing subsectors within manufacturing. During the 1970s, annualgrowth in textiles was about 16% p.a.; however, in the early 1980s, its growthslowed down to about 8%. The electrical goods subsector expanded in the 1970sat an average annual rate of 13.3%; but unlike textiles or even overall trendsin manufacturing GDP, it picked up momentum in the eerly 1980s when the aver-age annual growth rate increased to about 19%, largely owing to sustainedrapid export growth. Besides electrical goods and textiles, the metal pro-ducts, paper and printing, and transport equipment subsectors have also regis-tered significant expansion. Manufacturing employment is concentrated inelectrical and electronics, textiles and garments, food and wood based indus-tries; together these account for nearly half of manufacturing employment.

'.04 Manufactured Exports. The performance of manufactured exports hasbeen impressive indeed; their share in total exports increased from 15.1% in1973 to 31.1% in 1984. But growth rates of manufactured exports (with the

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exception of electronics) bah. follow"e th pattern of Sgo h rates of output,viz, a slowdown in the early 1980. compared to the performance in most of the1970s. During 1975-79, manufactured exports increased at an average annualrate of 26.5%, but slowed down to about 14% during 1980-84. Manufacturedexports still account for about 30% of total merchandise exports. The majorcontributors to the rapid export growth were: (a) electrical machinery, elec-tronics and applianees, which increased from M$359 million in 1974 toM$6,762 million in 1984; (b) textiles, clothing and footwear whose exportsincreased from M$160 million in 1974 to M$1,143 million in 1984; and(c) petroleum and chemicals, whose exports increased from M$235 million in1974 to M$1,325 million in 1984.

1.05 The robust export performance in manufactured items is largely dueto the Free Trade Zones (FTZs) and Licensed Manufactured Warehouses (LMWs),which together account for about two thirds of cotal manufactured exports ofMalaysia. The FTZs are concentrated in electrical/electronics as FTZ exportsof these items amounted to 89% of exports of this subsector. An importantfeature of FTZ firms, however, is their heavy dependence on importedmaterials; value-added as a proportion of total sales is rather low. The FTZsand LM:4s are also dominated by multinational companies. The result has beenthat the linkages of the FTZ firms with the rest of the economy are very weakand the spread effects have been much smaller than anticipated at the timethese were established.

1 0e1 rndustrial Strategy. If the socio-political imperative of main-rainirig relatively high long-term growth of the overall economy is to beachieved, the inevitable conclusion is that manufacturing has to play a keyrole. Manufacturing also offers the best potential for reducing the balanceof payment.s scrain and absorbing a growing labor force. However, the export-based development, led essentially by electronics/electricals and textiles,Located ir FlZs, and owned by multinationals, no longer offers a viable stra-tegy. SInce the early 1980s, the overall world economic scene is character-.<.e4 sy s'* gr:wth and a disinflationary environment, giving rise to press-ures :r, industrialized countries to limit imports. With a very limited growthof the market, if not an actual contraction, the competition between export-orienred developing countries has become very intense, because the markets aswe] i as the products are essentially the same.

1.07 Starting in the early 1980s when the FTZ's manufactured exportsstarted to slow down, the Government realized that the deepening and diversi-fication of manufacturing was important to nurture new export industries forthe future and to ensure that the economy would have a leading sector capableof generating the needed level of emplyment. For a variety of reasons rela-ted to the New Economic Policy (NEP),- the lumpy nature of investments in theindustries selected and the relatively long gestation requirements, it was thepublic sector that took the lead in developing metal, cement, pulp and paper,

1/ The New Economic Policy, declared in 1971, is a long-term policy toeradicate poverty and reduce raciaL imbalances in income, employment andow-rership of assets.

transport, and petroleum or gas based industries. Some of the projects havebeen completed and others are approaching completion; but it will be someyears before their viability can be fully established. Looking ahead, thereis little doubt that Malaysia needs to gradtate from light labor intensivemanufactures and move towards the production of intermediate and producergoods. Also, as industrialization continues, it is likely, that the role ofthe private sector will become steadily greater.

1.08 The Government is cutting back on infrastructure investment and hasstarted to stimulate private sector involvement in manufacturing. It hasembarked on a program of "privatiation," which is still unfolding. TheGovernment is identifying suitable activities/entities which can be priva-tized. At the same time, it has declared that it would also consider propo-sals for sale/transfer to the private sector of any activity/entity identifiedby the private sector itself. The extent of privatization may range from com-plete transfer of ownership at one extreme to transfer of management only atthe other extreme. Perhaps the most important step the Government has takento further its industrial strategy is to come to grips with the incentivespolicy framework.

1.09 Policy Framework. The policy framework governing industrial incen-tives has remained fairly steady through the years; the average effective rateof protection (EPR) was 24% in 1979 and 23% in 1982. However, the incentiveframework governed by nontrade policy instruments also exerted significantprotectionist influence. In 1979, these fiscal incentives added nearly 9%protection to subsectors for domestic production, and though estimat:s are noravailable for later years, the impression is that it strengthened further tousher in the second round of import substitution activities. The combinedeffect of both trade and fiscal incentive policy instruments was to exert astrong anti-export bias to precisely those subsectors which were growing fastin the early years and had potential for further growth during the i980s.

1.10 In view of the manufacturing slowdown since the late 1970s, theGovernment is quite concerned, and has recently undertaken a major review otthe policy framework based on the results of the Malaysian Industrial PolicyStudies (MIPS), a United Nations Development Program (UNDP) funded and Bankexecuted project. A thorough review has been completed by the Government, aprocess in which the Bank actively participated. The major conclusions thathave emerged are: (a) there is no basis for additional and across-the-boardincentives; (b) the general environment has to be conducive for industrialgrowth with respect to strategy, incentive regime and the role of public/pri-vate sectors; (c) there is a need for specific selective changes in the iicen-tive regime, but not sweeping changes or overhauling of the entire regime; and(d) export promotion efforts would have a priority. The Bank agrees withthese conclusions.

1.11 Having reached these conclusions, the Government is now consideringthe means of giving effect to them. The Investment Coordination Act wasrevised in December 1985 to raise the government licensing threshold forinvestments from M$250,000 to M$l million. The result of this will be toleave the investment decisions about a greater proportion of total projectq to

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private entrepreneurs and bring more automaticity to the application of incen-tives. The Government is also taking steps to reduce bias against exportingthrough an extension of duty free status to both direct and indirect expor-ters, and selective reduction in excessive protection for domestic market pro-duction. In addition, consideration is being given to revising nontradepolicy incentives for import competing industries, while continuing suchincentives for the exporting industries. Ligh priority will continue to begiven to regional dispersal of manufacturing activity and for technologytransfer. As mentioned earlier, an attempt is also being made to reduce therole of the public sector through privatization. All these policy initiativesare steps in the right direction.

1.12 The Industrial Master Plan was made public in February 1986, and theFifth Five Year Plan incorporating the strategy of IMP was announced in April1986. The Bank staff has been actively involved in the discussions of policyoptions first in the context of the management and execution of the MIPS proj-ect and subsequently in the context of the identification, preparation andappraisal of the proposed project and normal country economic work. The Bankwill continue to be actively involved in these efforts and their monitoring.

Commercial Agriculture/Agro Industries Sector

1.13 Since Sabah is predominantly an agricultural State, there is greatpotential for the development of commercial agriculture/agro industries. Thecomprehensive Sabah Regional Planning Study focuses on commercial scaleplantations of four principal tree crops -- coconut, rubber, cocoa and oilpalm -- and on potential processing industries including copra-kilns, coconutoil mills, coir, rubber processing and various products based on rubber, cocoab.an drying, cocoa butter/paste, chocolate and confectionery, and palm oilprocessing and refining. In addition to these potentially importantindustries, timber based industry is already quite well developed in Sabah.In the future, the choice of specific crops and/or industries, and the pace ofdevelopment, would depend on international marketing considerations, princi-pally price developments. As the principal development finance institution inSabah, Sabah Development Bank would participate in the development andfinancing of these industries as opportunities arise. Given the present worldproduction of cocoa, however, Bank funds would not be allocated to its produc-tion and processing (see paragraph 2.02).

Financial Sector

1.14 Financial System. Since Malaysia's independence in 1957, thecountry's financial system has grown from one comprised primarily of commer-cial banks to one with a wide range of financial institutions and services.Today, the financial system is one of the most developed among countries at asimilar stage of economic development as Malaysia, and is deepening rapidly.As an indication of financial deepening, the ratio of broad money (If ) to GDPwas 59% in 1983, significantly higher than Thailand's 45%, Korea's 2'% andIndonesia's 20% in the same year.

1.15 The banking system, which is the major component of the financialsector, consists of Bank Negara Malaysia (BNM), serving as the central bank,

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and 38 commercial banks, 43 finance companies and 12 merchant banks. Theconmercial banks, with a branch network of more than 700 offices, represent byfar the largest component, accounting for about 45Z of total assets of theentire financial system at the end of 1984. The 43 finance companies, 12 ofwhibh are subidiarios of commercial banks, are the socond largest deposittaking institutions with more than 300 branches, and account for about 11 oftotal assets of the financial system. Among the nonbank financial interme-diaries, the Employees Provident Fund is the largest, accounting for about 141of the total assets of the financial system. The development finance institu-tions account for less than 31 of the total assets of the financial system.Their share is believed, although exact data are not available, to be muchhigher in terms of providing long-term capital for the manufacturing sector.The relative share of the various components of the financial system is givenin Annex 1, Table 1; the financial system is depicted in Chart 1.

1.16 The financial system is served by a sophisticated money market wherethe principaL instruments are treasury bills, overnight and seven-day callmoney, short-term deposits, negotiable certificates of deposit, bankers'acceptances and repurchase agreements. In the equities market, the KualaLumpur Stock Exchange (KLSE) with a market capitalization of US$29.2 billionas of end 1984, is bigger than the stock exchanges in South Korea, Taiwan, thePhilippines, Thailand and Inuonesia combined. About 280 companies arepresently listed on the KLSE, 60% of which are also listed on the Singaporestock exchange. A market for corporate debt instruments is yet to develop inMalaysia.

1.17 Interest Rates. Interest rates in Malaysia are, generally speaking,free and market determined. Selected interest rates as of December 31, 1984and June 30, 1985 are given in Annex 1, Table 2. Rates for individualborrowers are determined by adding a margin to a base lending rate (BLR) whichis determined by each bank individually in line with its own cost of funds.In June 1986, the BLR of the two largest banks was 9.75%, and the 12-monthsdeposit rate was 7%. In recent years, the inflation rate was 3.7% ir 1983,3.9% in 1984 and 0.3% in 1985 (as measured by CPI), meaning that real interestrates for lending as well as for deposits have remained substantiallypositive.

1.18 Financial Sector Issues. Financial sector issues in developingcountries normally relate to the foreign exchange value of the domesticcurrency and interest rates. In Malaysia. there are no major distortions withregard to these two principal areas. Historically, the Ringgit has been astable currency; and interest rates are essentially market determined,substantially positive in real terms, and responsive to changes in interestrates internationally. Since the capital account of the balance of paymentsis relatively open, the freely determined interest rates also incorporate themarket's judgment as to the relative value of the domestic currency andexpectations with regard to exchange rate fluctuations in the future. Adetailed study by the International Monetary Fund in early 1985 recommendedmeasures to improve the flexibility of domestic interest rates and theirresponse to changes in monetary policy.

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1.19 Although interest rates are essentially market determined, there arelower rates for certain "priority" sectors, and the financial system is"directed" to earmark part of total credit to given sectors. No precise dataare available to shov the extent of lending by the financial system atincentive rates nd that of "directed loading." Rough data indicate, howvesr,that most of the priority sector loans made through the banking sector carryno less than 92 interest, i.e., interest rates that are substantially positivein real terms. BNM has been trying to reduce the extent of lending atsubsidized rates; the Treasury also supports such efforts in order to reducethe pressure on the national budget.

1.20 There are, nevertheless, a number of problem areas in the financialsector. One area is the relative underdevelopent of a securities marketdealing in privately issued instruments. A related problem is the dependenceof the country's development finance institutions on direct and indirectgovernment funding. Late in 1985, the Government asked the Bank to undertakea study of possible modifications in the funding sources of developmentfinance institutions and more generally their role in the financial system.After the general scope of this study was agreed with the Government, thefield work was undertaken in June-July 1986. The report of the study will,inter alia, examine in detail the alternative sources of funds for theseinstitutions and recommend how they may define their role in a rapidly growingand dynamic financial system. The report will also examine the reasons forthe relative underdevelopment of the private debt securities market in thatcontext. Yet another problem has been the insufficient availability of exportfinance; the Government also requested the Bank to undertake a study of thissubject. The field work for this study was undertaken in March-April 1986 andthe draft report is now being studied by the Government.

1.21 A serious problem with the financial sector, and one that is to beaddressed by the proposed project, concerns the availability of long- andmedium-term finance for the manufacturing sector. Over the past few years, ascan be seen in the table below, there has also been a diversion of adisproportionately high share of total credit to the financing of real estate(including construction and housing).

PERCENT SHARE IN TOTAL CREDIT

1978 1980 1983 1984 1985

Real estate, incl.construction, housing 21.4 27.5 32.7 35.3 41.5

Manufacturing 17.8 19.8 17.3 16.1 15.5

This has worked to the detriment of manufacturing and can be seen by comparingthe proportion of total credit going to each one of these sectors with theircontribution to GDP. Manufacturing is contributing about 20% to GDP; the

exact data on the real estate sector's contribution to GDP is not available,but it is no more than lOX. BNM is already putting pressure on the bankingsector to reduce its exposure in the real estate sector. In addition, theGovernment has recently set up a M$l billion New Investment Fund (NIF) toincrease the availability of credit to manufacturing, agriculture andtourism. This is a refinancing scheme under which comercial banks can obtainfunds from BNM up to 751 of the amount of the loans for financing new fixedinvestments; they, however, assume the risk for the full amount of theloans. The cost of NIF funds to commercial banks is 1.51 below the BLR andthe onlending rate is fixed at 1.25% above BLR. Loans under NIF are for up tofive years. The proposed project will complement these measures by increasingthe availability of longer-term credit, principally for investment in manufac-turing, through two development banks. The term of Bank financed subprojectswill depend on their nature, but it is expected that, on average, it will besubstantially longer than five years. The needs of the institutions partici-pating in the proposed project are for funds with maturities of 5-12 years;there will be, therefore, no competition between NIF funds and the proposedBank loan.

Bank Strategy for Industrial Sector Lending

1.22 Until recently, the principal obiective of Bank lending in Malaysiawas poverty alleviatior. The operational programs accordingly emphasizedagricultural and rural development projects. Given the crucral importance ofthe industrial/manufacturing sector at this stage of Malaysia's development,the Government has requested that the Bank, in addition, provide support toefficient industrial development through arrangements for industrial invest-ment in a framework of appropriate industrial and financial sector policies.The underpinning for the Bank's policy dialogue has so for been provided by alarge amount of sector work undertaken by the Bank during the psit three tofour years, culminating in the Malaysian Industrial Pclicy Studies (HIPS)project completed in early 1985. Most recently, in 1986, the Bank has under-taken a study of export finance concentrating on preshipment finance, and astudy of the development finance institutions in the country with emphasis onpossible institutional restruicturing, competitiveness and resourcemobilization.

1.23 The Bank's industrial sector lending program is still evolving.Apart from the Small Scale Enternrise (SSE) project (Loan 2471-MA) whichbecame effective in April 1985, the proposed project will be the first indus-trial sector operation in more than two decades. Its objectives have beenkept modest for that reason.

II. THE PROJECT

Project Objectives and Description

2.01 The main objectives of the proposed project may be divided into twobroad categories: sectoral and institutional. In the sectoral context, theproject continues the constructive policy dialogue in the financial and indus-trial sectors between the Government and the Bank. The broad outline ofimprovements in the policy framework has already emerged, as discussed

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earlier. As regards institutional strategy, the overall approach is to:(a) improve iistitutional efficiency and broaden the activities of the twoparticipating financial institutions (PFIs); (b) broaden the PFIs' resourcebase and reduce their dependence on government funding; and (c) improveresource allocation efficiency by strengthening long-term project basedlending. Together with the institutions under the SSE project, the Bank wouldbe associated with four of the five principal development banks in the countryand, thus, have the opportunity to further strengthen institutionalarrangements for providing long-term capital for investment financing. Theproject would also, by providing long-term foreign exchange funds insubstitution of short-term private sector borrowings, help improve thecountry's foreign debt profile and help the central bank in its debt manage-ment.

2.02 The proposed project would provide long erm capital to finance abroad range of medium- and medium-to-large scale projects, essentially in theprivate sector. The subprojects will be selected and appraised by the twoPFIs. Broad criteria for project selection have been agreed with the PFIs;these supplement those specified in the PFI's charters and policy state-ments. Projects in manufacturing, transportation, tourism, and agro-industry/commercial agriculture would be eligible. Financing for consumer real estate,ocean-going shipping, and cocoa growing would be excluded. Agreemen' to thiseffect was reached during negotiations. Economically justified import substi-tuting and export promoting projects will be emphasized. Only the foreignexchange component (direct as well as indirect) of the total costs of individ-ual subprojects would be financed under the proposed loan. To ensure thefinancing of a reasonable number of projects, it has been agreed to limit themlximum size of a subloan to 10% of the amount of the proposed loan to eachPFI (para. 3.03). It is expected that the proposed loan would finance about50-60 subprojects, mostly in the manufacturing sector.

2.03 In consultation with the Government, including BNM, two developmentbanks have been selected to participate in the proposed project. These are:Bank Kemajuan Perusahaan Malaysia Berhad which was set up in 1979 as a whollygovernment-owned development bank and has so far financed only shipping andshipyard related projects; and Sabah Development Bank which is the principaldevelopment finance institution in the State of Sabah. When the projectpreparation was started, five institutions were envisaged, including a commer-cial bank, and a merchant bank. However, the e institutions dropped out forvarious reasons, including one development bank which opted Out after theappraisal had been completed.

Bank Keinajuan Perusahaan Malaysia Berhad (BKPM)

2.04 Nature and Role. BKPM was established in August 1979 as agovernment-owned development finance institution to provide financing forlarge-scale capital intensive projects with long gestation periods, which theprivate banking system was reluctant to finance. However, soon after theinstitution started operations in 1980, the Government's fiscal positiontightened and it could not provide the required budgetary resources to BKPM tofinance the kind of projects originally intended. BKPM, therefore, concen-trated on financing coastal shipping, small shipbuilding and ship repair

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industries which had high priority from a balance of payments point of view.Because of the priority given to this sector by the Government, most loanshave been at less than market rates of interest.

2.05 After more than five years in operation, BKPM is redefining itsrole. This reassessment has taken place during the period of the preparationof the proposed project, which has been a catalyst for the process. BKPM hasconcluded that it cannot depend exclusively on the Government for its resourceneeds without placing unacceptable constraints on its growth, and it cannotcontinue to limit its sectoral concentration to shipping and related activi-ties. It decided to seek a loan from the Bank as a first step in diversifyingits resource base away from the Government. It cannot yet forego governmentfunding, but it is planning a significant decline in the proportion of totalresources that it obtains from the Government. This proportion will declineto less than 75% during 1986-90; it may decline even further depending on howsuccessful its efforts are to raise funds from the market. BKPM has alsodecided to give increasing importance to auxiliary capital goods industries todeepen the industrial structure and provide linkages with and support to heavyindustries which have already been sponsored. As a result of this decision,only 43% of new commitments will go to shipping and related industries in thenext 5 years and the proportion of this sector in its total yearly commitmentswill decline from 100% now to 41% in 1990. It is also planning to play asignificant role in providing export finance but this role will develop onlygradually. These decisions are incorporated in a Statement of FutureOperational Strategies already approved by BKPM's Board of Directors and givenas Annex 2, Appendix 1; the proposed Bank loan will support these strategicchanges in BKPM's operations.

2.06 Board of Directors. BKPM's Board of Directors, appointed by theGovernment, consists of a Chairman, Deputy Chairman and two other Directors.All are government civil servants. The current Chairman, who is now the ChiefSecretary to the Government, was appointed at the time of BKPM's establish-ment. The Deputy Chairman and one Director are appointed from BNM; the DeputyChairman is the Deputy Governor of BNM. The fourth Director is appointed fromthe Treasury. BKPM intends to expand its Board by appointment of privatesector representatives; this will be a step in the right direction as part ofits effort to diversify activities. The Board, which meets monthly, approvespolicy matters, annual budgets and all loans. Day-to-day operations arehandled by the General Manager who had broad governmental experience beforejoining BKPM in 1981.

2.07 Operating Policies. In 1985, BKPM codified all operational policiesand guidelines into a new Statement of Operational and Financial Policiesreflecting its expanding operations (Annex 2, Appendix 2). This has beenreviewed and is acceptable; major changes would require prior Bank approval.BKPM, expects all projects to be viable both economically and technically. Inaddition, collaterals and/or guarantees are required. BKPM finances 90% ofthe project costs at maximum. BKPM does not allow debt/equity ratio to exceed10:1 for shipping projects and 5:1 for industrial projects. Domesticshareholders should be in a majority in the borrowing company. BKPM's minimumloan amount is M$1 million. The same amount is applied to guarantees.Maximum exposure limit to a single borrower or group is 30% of BKPM's equity.

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2.08 Organization, Management and Staffing. BKPM's organizationstructure is shown in Chart 2. BKPM's head office in Kuala Lumpur has fourdepartments: Research and Development, Treasury, Secretariat and Adminis-tration, and Credit. It has no present plans to open any branches. Totalstaff as of September 30, 198J,was 35 (21 professionals and 14 other staff).Staff turnover has been high,_ mainly due to a salary scale which is not com-petitive with commercial bank salaries and the high demand for trained creditanalysts. Most of the staff are still young, but are expected to becomeseasoned managers as the organization grows. Management also plans toincrease the staff by about ten, mainly in the Credit Department, within thenext 18 months. A senior engineer was recently hired to strengthen the capa-bility to appraise engineering projects. During negotiations, BKPM informedthe Bank that two more engineers have been selected and would be joining theinstitution before the end of 1986. An additional eight staff members, mostlyfor the Credit Department, are expected to be recruited in 1987. These plansfor staff recruitment and strengthening are satisfactory.

2.09 BKPM management recognizes the importance of staff training.Although its small size does not justify having internal training courses,BKPM provides adequate training opportunities to staff. Credit analysts, forexample, are initially trained at local project evaluation courses offered byBank Pembangunan Malaysia and Malaysian Industrial Development Finance Berhad,then proceed to overseas training including: (a) project evaluation coursesoffered by the Association of Development Financing Institutions in Asia andthe Pacific; and (b) shipping courses in London.

2.10 Project Appraisal and Supervision. BKPM's Credit Department is incharge of project appraisal and supervision as well as loan documentation andadvisory services. The Department has recently produced a comprehensiveCredit Department Manual which covers project appraisal techniques and proce-dures, and is geared to the shipping and shipbuilding industries. TheDepartment has seven analysts, four of whom have MBAs. An experienced engin-eer was appointed recently, as BKPM starts financing of engineering proj-ects. One of his initial tasks is to adapt the project appraisal techniquesto changes in the lending strategy. The quality of the appraisal reports isgenerally acceptable given the brief history of the organization. However,appraisals at present do not include calculations of incremental labor costsor the cost of jobs created. A financial rate of return is calculated forevery project, but economic rates of return (ERRs), although required in themanual, are not calculated. However, BKPM plans to start shortly ERRcalculations for larger projects. During negociations, an understanding wasreached that BKPM's appraisals of all above free-limit subprojects wouldinclude full economic analysis, including the ERR calculation. Understandingwas also reached that BKPM would bring out explicitly in its appraisal reportsthe environmental impact for all above free-limit subprojects. Project riskassessment to determine an appropriate interest rate is at present determinedsubjectively by the credit analyst, using no objective rating system. Acredit rating system is being developed to assist Directors in decision

2/ The loss of professionals was three in FY84 and five in FY85.

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making. Despite these drawbacks, the selection of projects by BKPM has beensatisfactory.

2.11 BKPM's supervision procedures are generally satisfactory. Sincethere are only a limited number of projects, the staff has been able to visiteach project at least twice a year.

2.12 Operations. BKPM's financial services include making medium- andlong-term equipment loans, short-term working capital loans, bills discount-ing, guarantees and leasing. BKPI also arranges loan syndications and pro-vides advisory services. Its overall operations during 1981-85 are summarizedin Annex 2, Table 1. Since its inception, BKPM has committed 28 loans amount-ing to N$176 million. Annual commitments peaked at M$41.9 million in 1983.Commitmentr in 1984 and 1985 amounted to M$30.5 million and M$34.4 millionrespectively. In the first six months of 1986, commitments were lagging their1965 pace. BKPM attributes the low commitment volume to the overall poorinvestment climate. Although BKPM is still small, its loans outstanding haveincreased almost three times in the last four years. The growth has been interm equipment loans which increased, on an outstandings basis, from M$15.6million in FY81 to M$71.2 million in FY85. Short-term working capital Loansnow account for 20% of the total outstanding portfolio, having declined frombeing almost 50% at the end of the first year of operations. Term loans forthe purchase of ships and equipment for shipyards and engineering sector areprovided for up to 12 years with 2-5 years of grace. The repayment period isdetermined according to the nature of the project, the borrower's ability torepay and the economic life of the project.

2.13 Characteristics of BKPM's operations are given in Annex 2,Table 2. As of the end of 1985, all BKPM loans had gone to the shipping andshipbuilding industries. BKPM's loans have ranged in size from M$600,000 toM$25 million. The average loan size was relatively large at M$5.7 million.Most of the loans are concentrated in Sabah and Johore where the shipyards andshipping companies are located.

2.14 Other services offered by BKPM include guarantees, leasing, loansyndications, and management advisory services. Repayment guarantees areissued for imported ships; two guarantees totalling M$8.7 million have beenprovided thus far. BKPM has recently agreed to offer guarantees for leasingto be financed from a loan of US$10 million provided by the IslamicDevelopment Bank.

2.15 BKPM also arranges loan syndications for projects which need sub-stantial financing and four syndications totalling M$73.6 million have beenarranged thus far. Advisory and management services for shipping are alsooffered to BKPM's clients, and advisory services are obligatory for small bor-rowers unfamiliar with the business.

2.16 Financial Position. BKPM's summarized balance sheets are given inAnnex 2, Table 3. From FY81 to FY85, BKPM's total assets grew from M$144 mil-lion to M$207 million. Although the loan portfolio has increased substan-tially during the past four years, short-term investments (M$100 million)still exceeded the loan portfolio at the end of 1985. The short-term invest-

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ments represent the temporary deployment of liquid resources before they arecomitted/disbursed as long-term loans. Due to a relatively large amount ofpaid-in capital of M$40 million and retained earnings, the long-term debt/equity ratio remains at 2.1:1. BKPM's own limit is 10:1. The quality of theloan portfolio is so far satisfactory, and there have been no arrears or re-schedulings since BKPM's inception. Total reserves and provisions at the endof FY85 amounted to 24.5% of loans outstanding. Given the present quality ofthe loan portfolio and the amount of reserves, the provision for bad debts,set at 1% of loans outstanding, is considered adequate.

2.17 Financial Performance. BKPM's income statements and financialindicators are given in Annex 2, Tables 4 and 5 respectively. BKPM's incomehas increased steadily since assets have grown while the cost of resources hasremained stable. BKPM'8s loan portfolio is still small, and interest on loansaccounted for 241 and 321 of gross income in FY84 and FY85 respectively, show-ing considerable increase from 5% in FY81. In FY85, earnings from investmentof liquid resources, which amounted to M$11.6 million, provided most of thebank's income (M$17.7 million). Guarantee fees and other income provided thebalance. At 9.8%, the yield on investments and deposits is much higher thanaverage loan interest (7.4%). Financial expenses have remained stable for thepast four years, as BKPM has made neither new borrowings nor repayments.BKPM's gross spread on average total assets was 5.3% and 5.6% in FY84 and FY85respectively. Administrative expenses at about 0.7% of average total assetshave remained unchanged for the last four years. Net income after taxes as apercentage of total average assets has been about 2.5% which is satisfactory;the return on equity for 1985 was 7.6%. Since the Government does not requiredividends, BKPM has been able to retain all its net income.

2.18 Audit. In accordance with Malaysian practice, BKPM reports itsfinancial statements on an accrual basis. Its accounts are audited annuallyby external auditors who are acceptable to the Bank; being a government-ownedinstitution it is also subject to audit by the Treasury. The audit reportshave been unqualified, including the 1985 report.

2.19 Resources. Since 1982, BKPM has added no major resources exceptretained profits, which increased from M$7.7 million in FY82 to M$20.8 millionin FY85. Its principal sources of funds have been: (a) term borrowing fromthe Government (M$100 million), with interest at 6% capitalized until 1985;(b) a line of credit from BNM (M$10 million) which may go up to M$40 millionat an interest rate of 3%; and (c) paid-in capital (M$40 million). Resourceposition as of December 31, 1985 is summarized in Annex 2, Table 6; it showsthat uncommitted resources amounted to M$36 million as of that date.

2.20 Projected Operations. BKPM's projections of its future operationsare given in Annex 2, Table 7. BKPM sees its overall lending operations in-creasing considerably from the depressed levels of 1984-85. It is projectingits term loans to increase to M$216 million in 1990, for a total of aboutM$940 million for the 1986-90 period. Although the overall projections arequite ambitious in view of BKPM's actual performance and lackluster economicenvironment, BKPM believes they can be achieved; in the past BKPM's operationswere confined to shipping and related activities only, whereas in the future,it will be financing other sectors as well. The Industrial Master Plan and

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the new Five-Year Plan have already been announced, and BKPM expects theinvestment demand to pick up in the second half of 1986.

2.21 Resource Requirements. The cumulative disbursements during 1986-90on which BKPM bases its resource planning are expected to amount to M$936 mil-lion, including M$275 million in working capital loans. Disbursements forlong-term loans during 1987-89, the estimated period of commitment of theproposed loan, are estimated at M$414 million. These requirements areexpected to be met from the following sources: (a) borrowings of M$173 mil-lion from the Government; (b) M$99 million from its loan collection;(c) M$65 million equivalent in foreign currency loan (including the proposedBank loan of US$20 million); td) M$50 million cash generation from operations;and (e) about M$40 million from liquidation of short-term investments.Repayment of borrowings would be M$13 million which is insignificant.

2.22 As indicated above, BKPM undertakes its resource planning on a cashor disbursement basis. As BKPM moves away from governmental sources offinancing, it should preferably undertake its resource planning on acommitment basis. This was discussed during negotiations and appropriateunderstanding reached.

2.23 Projected Financial Position and Performance. BKPM's financialposition and performance are expected to remain sound for the period FY86-90.BKPM's total assets would increase significantly from M$207 million at the endof 1985 to M$645 million in FY90, with an average annual increase of 25%. Thelong-term debt to equity ratio would increase gradually but would still be areasonable 4.2:1 in FY90 if equity is increased as planned in 1986. The currentratio in FY90 would still be 2.0:1 despite its decline from FY86. Debt servicecoverage for FY86-90 would range from 2.6:1 to 2.9:1 and is satisfactory.Summarized projected Balance Sheets are given in Annex 2, Table 8.

2.24 Net income as a percentage of total average assets would be 1.8% onaverage during the period and satisfactory, despite a slight decline from 2.2%in FY85. With the rapid increase in portfolio, interest income would increasesubstantially as a share of gross income from 32% in 1985 to 92% in 1990, and asa percentage of average total assets, from 8.6% to 10.8% during the sameperiod. With the decline of subsidized funds in total resources, the averagecost of borrowings increases appreciably after 1986, to about 8.5%. Return onequity is expected to remain satisfactory at 9.5% in 1990. Summarized ProjectedIncome Statements, Projected Cash Flow Statements and Projected FinancialIndicators are given in Annex 2, Tables 9-11 respectively.

Sabah Development Bank Berhad (SDB)

2.25 Nature and Role. SDB was established in 1977 as the principaldevelopment finance institution for the State of Sabah although it can, by itsstatute, invest anywhere in Malaysia. Its role quickly evolved not only intobeing an independent development bank for financing private sector projects butalso as a financial advisor to the state government in the financing of publicsector projects and a conduit for government funds for projects selected by thestate government. To safeguard its financial integrity it arranged from thebeginning that government nominated projects would be financed only from the

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funds provided by Government on a project-by-project basis and with repaymentsto the state government tied to collections from the projects. More recently,it has been decided that the SDB will no longer finance any "nominated proj-ects." This decision is included in the Strategy Statement recently adopted bySDB's Board. During negotiations, SDB confirmed that the State Cabinet hadrecently taken a formal decision to this effect. In fact some loans have beenhanded back to the Government and taken off SDB's books. Its advisory role infinancing of public sector projects will however continue. In this capacity itwill continue to syndicate large loans (both local and foreign), participate inloan negotiations and otherwise advise the State Government and governmententerprises, for a fee. Because there will be no nominated projects in thefuture, the growth of its assets will be slower, but SDB will be A leaner andmore independent financial institution. In recent years, SDB has raised anincreasing proportion of its resources from the private capital markets (bothdomestic as well as foreign) and is also emphasizing syndications and loanpackaging in its operations. The change in emphasis away from financing ofgovernment projects and dependence on government funding has been incorporatedin the Strategy Statement (Annex 3, Appendix 1) which charts its course for theforeseeable future. SDB has been a profitable institution and recentlyinstituted dividend payments which will not exceed 10% of the paid-in capital or50% of the net profit, whichever is lower.

2.26 Board of Directors. SDB's Articles of Association provide for a Boardof Directors consisting of a minimum of two to a maximum of seven directors. Atpresent there are four directors including the permanent secretary in the SabahState Ministry of Finance, who was recently appointed the Chairman. The currentManaging Director was previously a SDB Director (para. 2.28). The other twoDirectors are a local Sabah businessman and a lawyer.

2.27 The Board of Directors provides overall policy guidance; one of itsprincipal responsibilities is to approve all loans above M$5 million. TheManaging Director is authorized to approve loans from M$750,000 to M$3.0 mil-lion, depending on the type of loan. An Executive Loan Committee (comprisingany two Directors, the Chairman and the Mans.ging Director) is authorized toapprove loans of M$3-5 million each.

2.28 Organization, Management and Staff. SDB's Managing Director and ChiefExecutive Officer assumed this position in May 1985. The Managing Director isassisted in the day-to-day operations by a General Manager, an SDB employeesince 1979, and four Group Heads. In May 1985, SDB's management structure wasreorganized and strengthened into its present form with functional responsibili-ties divided between the four group heads (operations/accounting, loan supervis-ion/appraisal, personnel/training, research/EDP) where formerly there were onlythree. SDB's present organization structure is given in Chart 3.

2.29 SDB is staffed with competent, well-qualified professionals as evi-denced by 95% of the institution's officer, manager and executive level staffhaving college diplomas or higher degrees. While staff with degreks in businessadministration, commerce, economics and accounting make up the majority of thepositions, technical fields such as engineering (2) and agriculture (3) are alsorepresented. Salary and benefit levels at SDB are competitive with privateenterprise (but higher than the level paid by public enterprises); staff

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turnover has been manageable at approximately 101 per year for the last threeyears. Training being accomplished by SDB for its employees is comprehensiveand satisfactory, and consists of in-house courses organized by its trainingdivision in fundamental and intermediate banking procedures. In the last twoyears most of the su?port staff have attended these courses. In addition,ezternal banking courses in Malaysia, Hong Kong, Singapore and other locationshave been taken by approximately 60 staff in the last 2 years.

2.30 Policies. SDB's operations are conducted in accordance with a PolicyStatement which sets out the institution's objectives, scope of activities andpriority areas for assistance. The Statement is satisfactory to the Bank; majorchanges would require prior Bank approval. The priority areas are agriculture,agro-industry, wood-based industries, and export or import substitution indus-tries. The Policy Statement also broadly defines the qualifications for poten-tial projects and sets guidelines for SDB's limits on investments and lending.Borrowers are normally required to put up equity equal to 402 of project costsbut this may be reduced to 30X for agriculture and 252 for Bumiputra projects.Aggregate equity investments are not to exceed 252 of SDB's equity, and maximumexposure to a single borrower is limited to 302 of SDB's equity. The PolicyStatement also provides that SDB's dividends would not exceed 10% of paid-incapital or 50% of net profit, whichever is lower. SDB is also not to assume anyforeign exchange risk. The Policy Statement is given as Annex 3, Appendix 2.

2.31 Project Appraisal and Supervision. The Loan Operations Department,consisting of 27 professionals (33% of SDB's total professional staff), performproject appraisal and supervision functions. The quality of SDB's appraisals issatisfactory. As a state-owned development finance institution, SDB seeks outprojects which have a high priority in Sabah's economy, but also have highfinancial viability. Project proposals are reviewed by competent SDB profess-ionals and screened by the Loan Review Committee. If the review is satisfac-tory, the project is subjected to an in-depth appraisal focussing on its techni-cat, economic, financial and managerial implications. The appraisal staff hasbeen organized into two teams consisting of agriculture/forestry and industry/construction. Proforma financial projections are made and financial rates ofreturn are calculated for each proect. ERRs are not normally calculated. How-ever, an understanding was reached during negotiations that SDB would undertakefull economic analysis including the c&lculation of ERRs for all above free-limit subprojects under the proposed Bank loan. An understanding was alsoreached that SDB would bring out explicitly in its appraisal reports the envir-onmental impact for all above free-limit subprojects. Data on employment,foreign exchange, and tax generation are not normally calculated. Projects arejudged primariLy on their internal cash generation ability, but also collateraland guarantees offered are taken into consideration. Equity requirement guide-lines for projects are stated in the SDB Policy Statement and are normally 401of total project cost. Project supervision is adequate and is organized intothree teams (agriculture, manufacturing and construction) each consisting offour staff. Borrowers are required to submit quarterly financial statementsalong with annual audited statements. Projects experiencing difficulties mustsubmit monthly progress reports. Construction projects must submit monthlyarchitects' reports detailing progress. Agricultural projects are supervised byvisiting agents (typically retired estate managers) who make quarterly fieldinspections to ascertain maintenance, yields and existence of assets financed by

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SDB. Each project is visited at least once a year by SDB staff; nonperformingprojects are visited as frequently as necessary.

2.32 Operations. SDB provides short- and long-term loans and, to a limitedextent, equity participation to private and government owned enterprises. Theinstitution also arranges/participates in loan syndications of large projects,provides financial advice to state government on development projects, andoffers trade bill discounting and import financing.

2.33 Loan operations (Annex 3, Table 1), SDB's basic business, as measuredby net loans approved, reached a peak level of M$596 million in 1981. This wasexceptional because of inclusion of two large projects in that year. Loanapprovals declined in each of the following years not only because of theabsence of exceptional projects but also due to the reduction of stategovernment funding and a general downturn in economic activity during the1981-85 period. Loan approvals did show a healthy increase in the first sixmonths of 1986 when they amounted to M$57 million (net of cancellation) comparedwith M$39 million during the corresponding period in 1985. A sizeable portion(approximately one third) of SDB's present loan portfolio consists of loans(nominated) to state government projects financed from earmarked funds providedby the state government. These projects are of high social or economic valuebut typically may not be commercially viable at market rates of interest. Asthe nominated loans (currently 17 in number) are negotiated with little or nospread for SDB and as SDB has had little say in the criteria for selection, SDBis pursuing the strategy to phase out the program. Accordingly, the proportionof nominated to non-nominated projects in SDB's total portfolio has declinedfrom 67/33 in 1981 to 34/64 in mid-1986. As stated earlier, the State govern-ment and SDB have recently agreed that SDB would not finance any new nominatedproject. SDB will continue to supervise the existing portfolio of nominatedprojects and repay the corresponding loans te the State government as it makescollections from the borrowers. It will continue to get a small fee for thisservice. These arrangements will be formally confirmed during negotiations.The proportion of nominated portfolio in SDB's total portfolio is forecast todecline to less than 10% by 1990 as the existing loans are repaid. SDB'smedium- and long-term loan approvals of non-nominated projects are currently atan annual rate of M$120 million; the non-nominated projects now comprise abouttwo-thirds of the outstanding loan portfolio (June 1986). Shorter term loansmake up the balance of the loan approvals, and are mostly for complementaryworking capital or for the financing of trade receivables and imports. SDB'sforeign currency loan operations (denominated in US dollars or yen) commenced in1982 and as of June 30, 1986 these loans, which are all in the non-nominatedcategory, make up 29% of SDB's total loan portfolio.

2.34 Partial economic indicators were calculated on a sample of 13 projectsfinanced by SDB representing 22% of its loan portfolio. Approximately 10,400new jobs would be created from the 13 projects at an average investment cost-per-job of US$118,000. Investment costs-per-job were lower for agriculturalprojects (7 projects, 5,500 new jobs at US$39,400 per job) than for manufactur-ing (5 projects, 4,500 new jobs at US$220,300 per job). The cost-per-job ishigh because of inclusion, in a relatively small sample, of some highly capitalintensive large projects. Economic rates of return for the 13 projects rangedfrom 10.6% to 60.4% with an1 average of 24.1%.

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2.35 Loan Syndications. Up to the end of 1985, SDB had arranged andmanaged 35 loan syndications totalling M$1,038 million of which SDB had providedits own funds for a total of M$166 million or 16%. Syndication activity hasincreased appreciably since 1983; 21 of the 35 syndications took place in the1983-85 period. Increasing syndications is one way SDB has tried to deal with

'its resource shortage problem.

2.36 Equity Investments. As of June 30, 1986, SDB had a total equityinvestment portfolio of M$8.4 million, of which MS7.3 million consisted of its62% ownership in Sabah Finance Berhad (SFB). SFB is engaged in short-termconsumer lending and has been consistently profitable. Operating results forSFB in 1984 showed a M$2.0 million net income which accounted for 8.5% of SDB'snet income after tax on a consolidated basis, after subtraction of minorityinterests. Operating results of SFB for 1985 also were profitable, althoughexact figures are not available. SDB's other equity interests include aM$900,000 investment in a construction venture which includes SDB's new officebuilding.

2.37 Portfolio Characteristics. A total of 18% of SDB's loan portfolio isshort term (1 year or less). SDB's loan portfolio consists of 49% withmaturities of less than 2 years; 34% with maturities of 2-5 years and 17% withmaturities of longer than 5 years. A total of 13% of SDB's long-term portfoliois still in the grace period. Lending terms for long term loans as regardsmaturities vary according to the investment repayment capacity; it is normallyless than 10 years, including 3 years of grace for manufacturing, and 8-12 yearsincluding 6 years of grace for agricultural estate development projects. Theaverage loan size of SDB's current long term nonnominated portfolio as ofJune 30, 1985 was M$5.0 million (Annex 3, Table 2); however, 85% of the individ-ual loans were less than the M$5.0 million average and only 3 loans accountedfor 41% of the loan portfolio value. By contrast, the average size of nominatedloans was M$17 million as of the same date. Sectorally, agriculture (includingforestry) accounts for the largest share in the total outstanding portfolio(29%) followed by construction (23%) and manufacturing (17%). The "investment"category accounts for 16%; this is all represented by investment in PermodalanBumiputra Sabah, the Sabah State owned investment corporation. Within themanufacturing sector, a large share has gone to the Sabah Shipyard and to palmoil processing. Loans to Sabah Shipyard and Permodalan Bumiputra Sabah accountfor 601 of SDB's nominated portfolio. Details on the sectoral distribution ofthe outstanding loan portfolio is given in Annex 3, Table 3.

2.38 Financial Structure and Performance. SDB's balance sheets as of theend of 1981 through 1985 are summarized in Annex 3, Table 4. During 1981-85,SDB's assets grew at an average annual rate of almost 8% and amounted toM$1,074 million as of December 31, 1985. SDB's long-term loan portfolio(including current maturities) accounted for about 80% of total assets as of thesame date. Total assets were financed by current liabilities (32%), term debts(55%) and equity (13%). Until 1982, when SDB took its first step to diversifyits funding base, the institution relied exclusively on the state government forits resource needs. By the end of 1985, 60% of SDB's long-term resources werefrom nongovernment sources as a result of SDB's success in raising long-termfunds both domestically and offshore. According to its guidelines, SDB's totalliabilities to equity (total debt to equity) is limited to a maximum of 15:1.

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The actual total debt to equity as of December 31, 1985, was 6.9:1; its longterm debt to equity ratio was 4.4:1. Its majority-owned subsidiary, SFB8 has nolong-term debt. SDB's liquidity position is satisfactory with a current ratioof 1.4 as of December 31, 1985.

2.39 Financial Performance. SDB's income statements, cash flow andfinancial indicators are suarized in Annex 3, Tables 5 and 6 respectively.Interest on loans accounted for 77% of SDB's gross income in 1985, while incomefrom deposits accounted for 17X. Since its inception, SDB has produced a satis-factory return on its assets. During 1981-85, SBD's gross income on assets hasaveraged approximately 8.52 as compared to its financial expenses of 62,producing an average gross spread on assets of 2.5%. Net income after taxes andprovisions to shareholder's equity during the 1981-85 period has averaged arespectable 9.11 in spite of a sharp decline in 1985 because of the need to makesubstantial provisions. The ratio of administrative expenses to average assetsfor the 1981-85 period has risen from 0.512 in 1981 to 0.84% in 1985. This isbecause staff has increased and SDB now has its own building, but assets havenot grown in the last three years.

2.40 Quality of Portfolio. SDB's portfolio status is summarized inAnnex 3, Tables 7 and 8. As of June 30, 1985, 56 loans or 26% of SDB's 216loans were in arrears with payments overdue over three month's of principal(M$58.2 million) and interest (M$15.3 million) for total arrears amounting toM$73.5 million or 8.7% of its outstanding portfolio. The nominated portion ofSDB's portfolio had total arrears of less than 2%. The portfolio affected byarrears amounted to M$125.2 million or 14.9% of the total Dortfolio outstand-ing. Only 4 loans, 2 in livestock, 2 in logging, made up a total of 63% of theprincipal in arrears. These 4 projects are in the process of being restructuredwhich would include additional equity investments by the sponsors. Collectionsof both interest and principal averaged over 80% in 1984 and higher in previousyears.

2.41 Provisions. Total provisions for loan losses amolznted to M512.7 mil-lion or 1.5% of total portfolio as of June 30, i985. This level of provisionsis essentially the same as at year end 1984 (1.5%). However, at the end of1985, the provision was increased significantly to M$22.9 million, following theguidelines which BNM had issued for the commecial banks. SDB's managementbelieves that at this level, the amount for doubtful loans has been overprovided and a part may be transferred back to income in 1986.

2.42 Resource Position. SDB's resource position as of December 31, 1985,is shown in Annex 3, Table 9. At that date, SDB had long-term resourcestotalling approximately M$900 million, of which M$137 million comprisedequity. Borrowings from the government accounted for about 42% of totalborrowings. Nongovernment sources include approximately M$250 equivalent inforeign currency consisting of US$40 million in offshore raised Floating RateNotes plus US$42 million and Y 6 billion in foreign term lcans. As of the samedate, nongovernment local currency resources amounted to M$118 million; thesewere borrowings from commercial/merchant banks on a revolving basis. Prior to1983, SDB had operated on a deficit basis as far as covering undisbursed loancommitments, relying almost exclusively on the state government for funding whennecessary. Since 1983, SDB has tried to lessen its dependence on government

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funding and to do its resource planning on a commitment basis instead of dis-bursement basis. As of December 31, 1985, SDB's resource position showvM$107 million in uncommitted resources. Most of SDB's liquid resources are inthe form of special deposits from the State government; understandably, SDBwants to replace these with longer term funds raised from domestic andinternational nongovernment sources.

2.43 Projected Operations. SDB's annual loan approvals (Annex 3, Table 10)are projected to increase from M$103 million in 1985 to M$187 million by 1990.Agricultural loan approvals are expected to grow at 10 per year with lowergrowth rates forecast for manufacturing (5.5%), construction and real estate(3.5x). All other sectors including hotels and tourism and transport are esti-mated to increase at only 4% per year. SDB has projected the growth of itsoperations very conservatively because of the slowdown during 1984-85; in thesix months to June 30, 1986, operations were running ahead of the 1985 pace.Based on the projected growth rates and taking into consideration the repaymentschedule of the existing portfolio, agriculture would continue as SDB's largestloan portfolio segment, increasing from a 30X share in 1985 to 38Z by 1988. Theforecast assumes that there would be no more new nominated loans and, throughplanned repayments, the nominated portion of the portfolio would decline fromits existing 33% of total to less than 10% by 1990.

2.44 Resource Requirements. Based on its projected operations and on acommitment basis, SDB's requirements for new resources for the five-year period1986-90 total M$565 million. For the 1987-89 period, tne resource requirementsfor long-term loans would be M$357 million, of which about 30% or M$108 million(US$45 million) would be met from the proceeds of the proposed Bank loan. Thebalance of the requirements for the 1987-89 period would come from plannedequity increases, internally generated funds, other borrowings, and drawcowns onexisting non-committed resources.

2.45 Projected Financial Position and Performance. Projected balancesheets, income statements, cash flow statements and selected financial r,1iosare shown in Annex 3, Tables 11-14, respectively. SDB's after tax net incomeshows considerable improvement rising from the M$12.6 million of 1984 toM$17.5 million by 1990 due principally to an increase in the gross spread from1984's 3.02 to a projected 4.4% by 1990. Administrative expenses as a percent-age of average assets would rise from 0.73% at the end of 1984 to 1.2% by 1990due to SDB's occupancy of new larger premises in 1985. SDB's already modestlong-terir debt to equity ratio of 4.4:1 is projected to be reduced to 2.06:i by1990 due to the planned increase of M$80 million in equity and the anticipatedK$40 million rise in retained earnings without significantly increasinglong-term debt. SDB's actual and projected long-term debt to equity ratio iswell within the proposed ceiling of 5:1. Because it will not be financing anynominated projects, SDB does not anticipate any growth in its asset base duringthe 1985-90 period. Instead, its major achievement will be to emerge as aprofitable, robust financial institution which will be less dependent ongovernment-nominated projects and government financing.

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III. THE PROPOSED BANK LOAN

Features of the Proposed Loan

3.01 Lending Terms. The proposed Bank loans of US$20 million to BKPM andUS$45 million to SDB will be guaranteed by the Government. The loans will carrythe Bank's standard interest rate; the loan to BKPM will be made for a term of15 years including three years' grace period, and the loan to SDB will be for aperiod of 13 years including a grace period of four years. The long amortiz-ations would allow the PFIs to use second generation funds and provide them witha new source of funds.

3.02 The subloans will be denominated in Ringgit, and BKPM and SDB willcharge market interest rates which will be variable. The present market ratesare generally in 11% to 13% range, and the rate for loans under the NewInvestment Fund is 11%. As brought out in paragraph 1.18, the freely determinedrates in Malaysia also incorporate the market's judgment of the relative valueof the domestic currency and expectations of future fluctuations. There will beno subsidy either to the PFIs or to the final beneficiaries. The PFIs will paythe current Bank interest rate, including the commitment fee plus a one time 1%fee paid up front to the Government for guaranteeing the repayment of theproposed loan and the availability of foreign exchange therefor. The onlendingrates will be higher than the Bank interest rate as they will, be determined onthe basis of the cost of funds plus a margin which will be determined in rela-tion to market rates and the degree of risk involved for individual borrowers.It is expected that the PFIs will, over the life of the Bank loan, get an annualspread in the range of 3-4%. As for the final beneficiaries, they are expectedto pay real interest rate of about 9% p.a. on Bank funds; the real rate woulddecline in line with a decline in international rates, given the openness of thecapital account of balance payments in Malaysia. To guard against the possi-bility of the PFIs getting an unjustifiably high spread in case market interestrates increase in the future, it was agreed during negotiatiorns that theGovernment, the PFIs and the Bank will hold annual consultations, which willtake into account the cost of Bank funds, the market interest rates andinflation at the time of the review. The amortization period of subloans woulddepend on the nature of the subprojects financed; it is expected to averageabout 10 years.

3.03 Free Limit, Maximum Subloan Size and Debt/Equity Ratio Limit. A freelimit of US$700,000 equivalent has been agreed. With this free limit, it isestimated that for SDB, the number of projects requiring prior approval of theBank would be 25% accounting for about 65% of the loan to SOB. The proportionof the number of projects as well as the amount requiring prior approval of the±Bank will be higher in the case of BKPM because it has recently raised its mini-mum loan size to M$l million. However, it is not possible to give an exactestimate because BKPM's portfolio is still very small and future size distribu-tion of its projects cannot be proje.:ted from the past. An aggregate free limitof 50% of the amount of the proposed Bank loans has also been agreed. To guardagainst the possibility that the Bank loan would be committed to just a fewsubprojects, it has been further agreed to limit the maximum size of the sub-loans to 10% of the amount of the Bank loans to the two PFIs.

- 21 -

3.04 The long-term debt/equity ratio of each PFI will be limited to amaximum of 5:1. At this level, the operations of BKPI and SDB will not be con-strained in the foreseeable future if equity is increased as projected. Theproposed limit is justified given the strong capital structure of the PFIs andthe quality of their portfolio.

Procurement and Disbursement

3.05 Procureme*t. International competitive bidding is not appropriate formedium size private sector subprojects. Given the limit on the maximum size ofsubloans, individual contracts will not be large enough for ICB. The PFIs willbe required to ask subborrowers to obtain as a minimum three quotations fromequipment suppliers and civil works firms before contracts are finalized, aprocedure already practiced by the PFIs and familiar to subborrowers.

3.06 Disbursements. The proceeds of the proposed loan will be used tofinance the foreign exchange costs of the subprojects. Both direct and indirectforeign exchange costs would be eligible. In addition to financing 1001 of thedirect imports, 601 of the cost of locally procured imported machinery (ormachinery fabricated locally using imported material/components) and 452 of thecost of civil works will also be eligible. In the case of SDB, 35% of the costof commercial agriculture projects will also be eligible for financing under theproposed loan. All the foregoing percentages represent the estxmated foreignexchange cost components.

3.07 Reimbursements of expenditures incurred under free-limit subloanswould be made on the basis of statements of expenditure (SOE%). Do'umentationsupporting the SOEs need not be submitted to the Bank but wovid be retained bySDB and BKPM and made available for review by Ban;. ;<upervisivn missions. Inaddition, to facilitate disbursements, two Special Ac.ounts would be establishedin a fully convertible currency in a bank, and on terms and conditions, satis-factory to -he Bank. The authorized allocation for the Spetial Accounts will beUS$1.5 million and US$3.5 million for BKPM and SDB, respectively. Replenish-ments wouLd be made quarterly or when the Special Account is .ivawn down by 502of its inlitial deposit.

3.08 The proposed loan is expected to be committed in aoot. two-and-onehalf years after its effectiveness, and disbursed in five. Estimated disburse-ment schedule is given as Annex 4; the estimates have been prepared followingthe Standard Industrial Development Finance disbursement profile for East Asiaand Pacific Region.

3.09 Accounts and Audit. The accounto of BKPM and SDB are audited byindependent auditors who are acceptable to the Bank. The latest reports we-eunqualified. Any change in auditors will require prior approval of the Bank.The audit reports of BKPM will be submitted to the Bank no later than six monthsafter the close of its financial year; SDB will submit its audited report nolater than nine months after the close of its financial year.

- 22 -

Project Benefits and Risks

3.10 Benefits. The main benefit of the proposed project is that it wouldprovide long-term capital to two principal development finance institutions forfinancing essentially manufacturing sector subprojects. As pointed out in para.1.20, long-term capital for the high priority anufacturing sector is scarce andthe proposed project would ease that scarcity. Another major benefit from theproposed project would be the opportunity for the Bank to work closely with twonew development banks on the refocusing of their lending strategies and onupgrading their institutional efficiency. Together with the institutionsparticipating in the Small Scale Enterprise project approved in 1984, the Bankwould now be involved with all the major development banks in the country and,thus, have the opportunity to further strengthen institutional arrangements forproviding long-term capital for investments. The project will be implementedduring the period when the Bank continues the industrial policy dialogue withthe Government as regards the incentives framework, streamlining investmentprocedures and privatization. The 50-60 subprojects financed would generatejobs and produce a wide range of products for import substitution as well as forexports. The proposed project would have a positive impact on resource mobili-zation in the industrial sector involving an estimated total investment of aboutUS$250 million equivalent. Based op each PFI's experience, the subprojects tobe financed are expected to be efficient in terms of resource utilization and tohave economic and financial rates of return of at least 10%.

3.11 Risks. There is no major risk. A risk exists that an adequate numberof eligible subprojects might not materialize in the forecast commitment periodif the current slowdown in the economy persists for a long time. However, thepipelines of the PFIs have been reviewed and indicate that the risk of slowerthen anticipated commitment and disbursement of the proposed loan is not undulyhigh. A second risk is that the PFIs may experience financial difficulties,loan portfolio deterioration or the inability to raise long-term resources.However, this is unlikely as the institutions are viable, well-managed, ha-&-conservative debt to equity limits and enjoy good government support.

IV. AGREEMENTS AND UNDERSTANDINGS REACHED AT NEGOTIATIONS

4.01 During negotiations, agreements were reached with:

(a) the Government, BKPM and SDB on:

(i) the sectors which would be eligible for financing and those whichwould be excluded (para. 2.02);

(ii) mutual review of interest rates on an annual basis (para. 3.02);

(b) BKPM and SDB on:

(i) the free limit and the maximum size of a single subloan(para. 3.03);

(ii) a maximum long-term debt to equity ratio of 5:1 (para. 3.04); and

- 23 -

(iii) prior approval by the Bank for major changes in the policystatements (paras. 2.07 and 2.30).

4.02 During negotiations, understandings were reached with:

(a) BKPM and SDB on (i) the calculation of ERic for all above free limitsubprojects (pares. 2.10 and 2.31); (ii) the treoatmnt of environ-mental impact in appraisal reports in all above free limit subprojects(paras. 2.10 and 2.31);

(b) BKPM on (i) recruitment of additional staff (para. 2.08); and (ii) thedesirability of undertaking resource planning on a comitment basis(para. 2.22);

(c) with SDB on discontinuation of financing of "nominated projects"(para. 2.25).

4.03 Recommendation. Subject to the above conditions and agreements, Bankloans of US$20 million for 15 years including 3 years grace for BKPM, andUS$45 million for 13 years including 4 years grace for SDB, both on standardterms, are recommended.

- 24 - AMN I

MALAYSIA


Components of the Financial Systeo(December 31, 1983-85)

1983 1984 1985Total assets Percent- Total assets Percent- Total *asets Percent-

(M$ mln) age (Ms mln) age (M$ *ln) age

Central Bank 14,860 11.6 15,927 10.8 16,525 9.9

Conmercial banks 60,174 47.1 66,727 45.4 74,233 44.6

Finance companies 11,360 8.9 15,224 10.4 17,833 10.7

Credit GuaranteeCorporation 128 0.1 171 0.1 208 0.1

Merchant banks 4,736 3.7 5,543 3.8 6,296 3.8

Bank Islam 171 0.1 370 0.3 584 0.4

Discount houses 1,716 1.3 2,106 1.4 2,830 1.7

Development financeinstitutons 3,789 3.0 3,825 2.6 4,091 2.5

Savings institutionsNational SavingsBank 1,501 1.2 1,537 1.0 1,661 1.0

Cooperative Societies 2116 1.7 3,119 2.1 3,936 2.4

Provident, insurance,and pension funds 23,697 18.6 28,014 19.0 32,523 19.5

Other financial inter-mediaries /a 3,469 2.7 4,523 3.1 5,731 3.4

Total 127,717 100.0 147,086 100.0 166,451 100.0

/a Including unit trusts, building societies and Pilgrim Fund Board.

AEP Projects DepartmentJuly 21, 1986

AMUE I

-25- 5 bl-2

MALAYSIA


L idius Rato of Selected Financial Institutionsas of December 31. 1954-85 and March 31. 196

(I P.a.)

Dec 31, 1984 Dec 31, 1985 Mar 31, 1986

Commercial BanksBy ectorsAgriculture 13.17 12.30 12.25Mloing and quarrying 12.76 11.98 11.82Manufacturing 12.70 11.50 11.52Electtrcity 11.80 10.56 11.13Constru.:Zion 13.50 12.60 12.68Wholesale and retail trade and

restaurants and hotels 12.86 12.04 12.07Transport and storage 11.54 11.42 11.41Financing, insurance, real estate

and business services 13.40 12.55 12.53Other services 12.95 12.25 12.29Miscellaneous 11.75 11.23 11.14

Total 12.81 11.96 11.87

Loans to Bumiputra 12.91 11.86 11.95

Finance CompaniesBy sectorsAgriculture 11.77 11.61. 11.81Mining and quarrying 10.98 10.60 10.84Manufacturing 10.94 11.05 11.10Electricity 9.04 9.00 9.02Construction 12.96 12.85 12.79Wholesale and retail trade andrestaurants and hotels 12.52 11.99 11.86

Transport and storage 10.69 10.68 10.68Financing, insurance, real estate

and business services 14.61 14.32 14.25Other services 12.12 12.11 12.18

Total 12.23 12.15 12 14

Merchant BanksCall loans 12.55 11.96 9.825

Ter* loans1 month to less than 3 months 14.60 13.38 13.633 months to less than 6 months 15.78 12.34 12.5756 months to less than 9 months 12.35 12.36 12.389 sontho to less than 1 year 9.30 12.80 9.251 year 15.05 11.75 11.875Over 1 year to less than 4 years 17.10 11.25 11.25Over 4 years 12.90 10.00 9.5

Total Loans 17.10 11.25 11.25

/a Refers to overage lending rate.

AEP Projects Department

July 21, 1986

ANNEX 2- 26 - Appendix 1

Page 1

MALAYSIA


Sank Kemajuan Perusahaan Malaysia Berhad

Statement of Future Operational Strategies(Adopted by the Board on December 6, 1985)

I. INTRODUCTION

1. This statement of operational strategies is for the next five years(1986-1990).

II. FUTURE STRATEGIES FOR THE BANK

2. Since its establishment, Bank Kemajuan has directed its financingonly to the shipyard and shipping industry. The Bank's participation in thedevelopment of the shipping and shipyard industry is not only due to theGovernment's directive but is also in line with the Bank's corporate objectiveto provide long-term loans to heavy industries. The shipyard industry isconsidered one of the fairly well established heavy industries in Malaysia andcatalyst to development by many countries. As such, it was logical for theBank with its limited funds to begin financing this sector. In future, theBank will continue to provide financial assistance to the shipyard andshipping industry. However, the Bank has started to assist other sectorstoo. The share of the Bank's financial assistance to the shipping andshipyard sectors will therefore decline in the total operations. For 1986 to1990, the allocation of financing to be extended by the Bank under the variousprogrammes is depicted in Table 1.

Table 1: BREAKDOWN OF ESTII'ATED FINANCING (1986 - 1990)

Facility Estimated Financing$ Million Z Share

1. Shipbuilding Financing 250 25.92. Shipyard Capital Expenditure 16 i 63. Shiprepairs Discounting 25 2.64. Bridging Finance (for shipyards) 125 12.95. Capital Intensive Engineering

Financing 300 31.16. Export Credit 250 25.9

Total 966 100.0


Page 2

3. The cumulative financing of $416 million for shipping and shipyardsectors shall account for 43X of the Bank's loan portfolio during 1986-1990period. The share of shipping and shipyard financing in the Bank's annualloan approvals will decline gradually from 1001 in 1984 to approximately 41Xin 1990.

4. Table 1 indicates a change in financing strategy by the Bank. Atthe en4 of 1984, the Bank reviewed its contribution to the development of theindustry and found that it had provided adequate schemes for the continuousgrowth of the industry. Therefore, the Bank felt that it would be timely todiversify its activities to other sectors. The government, since 1981 hasbegun spearheading investment in the other heavy industries. The Bank, tosupport the government's effort plans to finance the ancillary industries; thespin-off of the heavy industries. The role of heavy industries in Malaysia'sindustrialization programme has been clearly spelt out in the Fourth MalaysiaPlan Review and will be pursued under the Fifth Malaysia Plan. The majorobjectives are "to reduce the dependence on foreign countries for the supplyof machinery and intermediate inputs (meaning more import-3ubstitution andtechnological self-reliance), exploiting forward and backward linkages inindustrial development, creating spin-off effects for the growth of small- andmedium-scale industries and developing the technological capability of themanufacturing sector".

5. Most of the heavy industries are being undertaken and financed bythe Malaysian Government. The high cost involved in these projects is beyondthe financing capacity of Bank Kemajuan. However, the Bank firmly believesthat it can contribute towards promoting the develonment of the ancillary andauxiliary industries.

6. Thus, Bank Kemajuan decided "to extend and provide financialassistances to the ancillary and auxiliary of the heavy industries" for thenext 5 years. Due to the wide scope of the ancillary and auxiliary indus-tries, the Bank decided to give priority to the financing of engineeringindustry, concentrating in metal, electrical and electronic sectors.

(a) Financing of Capital Intensive Engineering Industry

Broadly speaking, the engineering industry can be defined as anymanufacturing activity which uses metallic materials or acombination of metallic and non-metallic materials as raw materialsin the production process. There are several levels of productssophistication begivning from input to high level assemblies.

At each level, there are several production processes for differentsectors. In other words, the coverage of financing can be very wide.

Due to the limitation of funds and the inexperience of the Bank infinancing the engineering sector, Bank Kemajuan decided to adopt astrategy of financing initially the primary materials shapes andprimary component sectors. This would include foundry production,forgings and stamping under primary materials shapes sector withcar/motorcycle parts, valve, gears under primary components. As the

ANNEX 2Appendix 1

- 28 - Page 3

Bank gains more experience, the financing facilities will beexpanded to other more sophisticated sectors of the engineeringindustry. Various programes have been designed to accommodate theneeds of this industry. The Bank's lending to the engineeringsector over the next five years will be as follows:

Year Amount $ Million

1986 501987 501988 601989 701990 70

Total 300

This would constitute about 31X of the Bank's total loan approvalsduring the same period.

(b) Financing of Manufactured Goods Exportation

Malaysia is known internationally as the principal exporter ofprimary commodities namely tin, palm oil, timber and sawn logs.Since the late 1970s, manufactured goods have become an increasingimportant component of exports. At present, manufactured goodsaccount for 30X of total exports. Malaysia, being relativelynewcomer in the field of exports of manufactured goods needs tointensify its efforts to search for new markets. In the wake ofincreasing competition from other up and coming developing nationssuch as Korea, Taiwan and Thailand, Malaysia has to offer anattractive package deal in its export sales. This would mean thatnot only must the quality of goods be assured and the pricing becompetitive but a a reasonable financing scheme or credit termsshould be provided.

Bank Kemajuan, in financing the engineering industry realizes thatthe domestic market for the industry's product is limited. Thusthese industries will need to explore new market overseas for theirlong-term surviva1 . This will require the formulation of a vigorousmarketing strategy where Malaysian exporters of manufactured goodswill have to offer competitive trade terms inclusive of credit.Such trade terms would certainly need the support of the localbanking industry.

Under the present financial system, there clearly exists a gap inrespect of export financing. None of the commercial banks providelong-term loans and working capital for production purely for


Page 4

exports. Although overdraft facilities are available, these existas normal banking facilities, and are not specially created to meetexport needs. As a result of this deficiency, Bank Negaraintroduced the export credit refinancing scheme. Unfortunately,Bank Negara's export credit refinancing scheme has its limitation.The tenor of refinancing which at present is 90 days is considerablytoo short and the coverage of the scheme is more towards post-shipment instead of pre-shipMent. A recent survey conducted by aWorld Bank expert on export credit indicated that the Malaysianmanufacturers require pre-shipment financing in the form of workingcapital loans for a longer repayment period.

Bank Kemajuan has already a long-term export credit scheme for theshipping industry. To fill the financial gap for export credit,Bank Kemajuan plans to extend its present export credit scheme tothe engineering sector particularly for the export of capital goodssuch as palm oil mills and rubber processing plants.

By doing this, Bank Kemajuan is only assuming its role as a providerof export financing which is one of the main functions specificallystipulated in the Bank's charter and that is to encourage andpromote exports in the financing of domestic and internationaltrade.

The Bank is fully aware that export credit financing requires aspecialized operation and involves high risks. Therefore, as astrategy the Bank shall develop the export credit programme on agradual basis by introducing schemes one at a time. Nevertheless,the two forms of export financing, namely supplier's and buyer'scredit, will be introduced first, with emphasis on supplier'scredit. Under the supplier's credit, the Bank will also providepre-shipment financing to assist Malaysian manufacturers in theirworking capital requirements specifically for the production ofgoods for export. The various schemes will be introduced gradually,depending on the industry's needs.

While the Bank is gearing itself for the export financing of capitalgoods, the Bank is also studying with the Central Bank on exportfinancing (post-shipment) of more than 90 days for manufacturedproducts. If the funds are available for such purpose, thisfacility shall be a permanent feature in the Bank.

It is envisaged that by three years, Bank Kemajuan would haveintroduced all the necessary export credit schemes which would pavethe Bank towards an Exim Bank.

For the period 1986 to 1990, the Bank will allocate $50 millionyearly under the export financing scheme, which represents 26Z ofcumulative loan portfolio.

ANNEX 2- 30 - Apkendix 1

Page 5

III. RESOURCES

7. As stated previously, the Bank will extend $966 million in financingduring 1986-1990. To finance the various schemes, the Bank requiresadditional funds amounting to $388 million either in the form of loans orequity.

8. Up till now, the funding of Bank Kemajuan comes from theGovernment. However, it is anticipated that the Governmnt vill not be ableto provide the full amount of the Bank's future requirement. It is thereforethe intention of Bank Kemajuan to initiate a policy of self-reliance. TheBank plans not to have too much dependence on the Covernment for funds but theimplementation of this plan vill be carried out gradually. Upon obtaining theGovernment's approval, the Bank intends to raise the funds from the openmarket; local and overseas inclusive of international financial institutionssuch as the World Bank, Asian Development Bank and Islamic Development Bank.

9. The Bank expects to secure $270 million in local currency and $118million in foreign currency to meet its funding requirement of $388 millionduring the 5-year period. In pursuance of this strategy, the Bank iscurrently seeking a loan from the World Bank amounting to US$20 million.

10. The Bank's capital will be increased as the Bank grows. In thisrespect, the Bank plans to increase its paid-up capital to $75 million duringthe Fifth Malaysia Plan through the injection of new funds amounting to M$25million and capitalization of present reserves amounting to M$10 million.

IV. CONCLUSION

11. The Bank will keep these strategies under periodic review to takeinto account significant changes in the overall national and internationaleconomic and monetary situation, and the Government's policies and priorities.

AEP Projects DepartmentDecember 15, 1985

ANNEX 2

- 31 - Appendix 2Page 1

MALAYSIA

DVEWLOPWNT FINANCE PROJECT

Bank Kemajuan Perusahaan Walysia Berhad

Statement of Operational and Financial Policies(Adopted by the Board on December 6, 1985)

I. INTRODUCTION

1. The Bank was set-up in August 1979 to achieve the following maincorporate objectives:

(a) to provide long-term loans and other financial assistance to capitalintensive industries in Malaysia especially high technology andexport-oriented industries and other sectors designated as prioritysectors by the Government.

(b) to encourage and promote exports in the financing of domestic andinternational trade.

(c) to finance and assist the expansion and modernization ofenterprises.

2. As a government-owned institution under the Ministry of Finance,Bank Kemajuan operates with the given mandate according to policies formulatedby the Board of Directors and within the framework of the Companies Act underwhich the Bank was registered.

3. In pursuance of and to accomplish its objectives, the Board hasadopted certain operational and financial policies as described in thisstatement. Revision of this policies statement can be effected by the Boardof Directors.

II. TYPES OF FINANCIAL ASSISTANCE

4. The bank's activities can be classified into direct loans, guaranteeand leasing facility.

1. Direct Loans

(a) Shipbuilding Financing Facility - Malaysian Buyers

Term loans will be extended to assist Malaysian buyers inpurchasing ships built at local shipyards.


Page 2

(b) Shipbuilding Financing Facility - Foreign Buyers

The Bank will also provide an export credit facility forforeign buyers interested in purchasing locally constructedships.

(c) Shipyard Capital Expenditure Progr&mme

To assist Halaysian shipyards in improving and upgrading theirinfrastructure, machinery and equipment, the bank will offerlong-term financing.

(d) Shiprepairs Discounting Facility

The aim of this facility is to provide short-term financing ona revolving basis to enable Malaysian shipyards to undertakeship repairs and maintenance for Malaysian and foreignshipowners.

(e) Bridging Finance Facility

The Bank will provide short-term working capital to localshipyards in order to ease their cashflow during the ship'sconstruction period.

(f) Engineering Financing Facility

The Bank may offer terms loans to capital-intensive engineeringprojects particularly for new purchase or replacement of plant,machinery and equipment. Engineering industries are to bedefined broadly for this purpose. Only projects which needlong-term financing will be financed by the Bank.

(g) Export Credit Scheme

To help reduce the financial burden of Malaysian exporters ofcapital goods, the Bank may extend medium- to long-termcredit. This export credit facility can be made availableduring pre- and post-shipment period of exports.

2. Guarantee

The Bank will offer guarantees for ships acquired abroad byMalaysian ship operators. This guarantee facility will cover bothnew and second hand ships. Currently, the bank stipulates thatsecond hand vessels not exceeding 8 years shall only be guaranteed.This age limit will be reviewed by the Bank when deemed necessary.

3. Leasing

Leasing facilities may be made available to local shipyards andcapital intensive engineering companies for acquiring new machineryand equipment. The leasing period will range from medium- to long-term.


Page 3

5. In addition, the Bank may offer non-financial assistance byproviding its clients and potential borrowers with advisory and anagementservices. These would include advice and direct assistance pertaining toproject planning, implementation and management.

III. BASIS FOR FINANCIAL ASSISTANCE

6. Bank Kemajuan will provide long-term financial assistance to thoseprojects which are considered to be viable based on careful evaluation of theeconomic, management, financial, marketing, technical and general factors, andwhich contribute towards broader developmental objectives.

7. In providing financial assistance to shipping, shipyard andengineering projects, the Bank will conform to the policies and priorities ofthe government. In project selection, priority will be given to hightechnology and capital-intensive engineering projects, which utilize a highcontent of local materials, machinery or component parts, and shippingprojects which involve the construction of specialized vessels locally. TheBank may at its discretion change its priorities in accordance with thepolicies and priorities of the government.

8. An overview of the factors to be considered during projectevaluation is as follows:

1. Economic

For a project to be economically justified, it must be socially andeconomically beneficial to the Borrower and the country. Specifi-cally, projects which produce products in demand, for export, asimport substitute or projects which result in foreign exchangeearnings or savings shall be selected. In addition, nationallydesired projects such as projects encouraged or given priority bythe Government or projects which involve the transfer of technologyto Malaysian will also be selected. To assess the economic meritsof projects, particularly import substitution projects in theengineering sector, the Bank will undertake economic rate of returnanalysis.

2. Management

In selecting projects to be financed, management of the projectshould be sound and competent. Basically, management should possesssufficient relevant experience and qualifications. Assessment ofmanagement's capability will also be based on their pastperformance.

3. Financial

For a project to be financially viable, the internal rate of returnof the project should be greater than the opportunity cost ofcapital. Essentially, the Borrower should be able to serviceinterest and principal throughout the term of the loan.

ANNEX 2_34 - Appendiz_2

Page 4

As a general guide, though subject to revision and depending on acase-by-case basis, the average net profit margin should be about 10percent and total debt to shareholder's equity be less than 10:1 forshipping and 5:1 for engineering.

4. Marketing

As for the marketing aspect, the distribution channels should bestrong and reliable and will be judged from past records of theBorrower. However those projects with secured contracts, readybuyers or established outlets will be generally preferred.

S. Technical

Projects to be financed should be technically feasible. TheBorrower should possess the necessary technical expertise andexperience required for the project or have arrangements fortechnical collaboration with foreign companies. Ideally, theproject should not be overtly dependent on an individual withoutwhom the project is bound to fail. For shiprepair and shipbuilding,the shipyards should possess the relevant expertise, facilities an;experience in constructing and repairing the particular type ofvessel.

6. General

Among other factors to be considered for approval of financialassistances by the Bank include the requirement for capitalcontribution from project sponsors. For this, a minimum of 10percent of total project cost is required under shipping projectsand minimum of 20 percent for engineering loans. This would besubject to revision from time to time and depending on a case-by-case basis. In addition, local participation ir the project shouldnot be less than 51Z and tenor of the loan should not be less thanfive years.

IV. OPERATIONAL AND FINANCIAL LIMITS

1. Minimum Loan Amount

The minimum amount for a single loan is about $1 million. Samelimit shall apply for guarantees extended by the Bank.

A revision of the minimum loan amount will be effected whennecessary.

2. Maximum Exposure

Total commitment in whatever form at anytime to a single borrower orgroup shall not exceed 30% of Bank Kemajuan's shareholders' funds.

The Bank's exposure is subject to review from time to time.

ANNEX 235 - Appendix 2

Page 5

3. Long-Term Debt/Equity Limit

The Bank will borrow long-term funds parallel to the nature of itsactivities and would not incur consolidated lon&-term debts inexcess of five times its shareholders' funds. Guarantees extendedby the bank are treated as direct liability and shall be part of theoverall long-term debt!equity limit of ten times shareholders'funds.

This limit may be revised from time to time.

4. Maturities and Amortization

Repayment period is determined by the nature of the prcjects andshall not exceed 12 years. Grace pericd is available up -o fiveyears but subject to the nature of projects.

Amortization of loans extended by the Bank shall be on a monthly,quarterly or semi-annual basis depending on case.

5. Lending Rates

The bank shall determine its lending rates based on the fot£lowingformula:

Interest Rate = Cost of Funds + Overheads Cost + Buffer + Mar-gin

Level of margin shall be dependent on level of risk of project andtenor of loan.

Based on the bank's current cost of funds at 6%. overheads cost ot1%, buffer at 12 and margin of 0.52 to 3.5%; the lending races shallrange between 8.5Z and 11.5% as indicated below:

Level of Risk TENOR5 years and below 6 - 10 years Above IC yeari

Low 8.5% 9%Medium 9.5Z 10? 10.5%High 10.5Z 11 11.5Z

The Bank will review its lending rate ita lending rates if and wherany significant change in the cost of funds and overhead costsexceeds the buffer level.


Page 6

6. Security

(a) Collateral

Unsecured loans will not be extended by Bank Kemajuan. TheBank shall accept collateral in the form of charges on projectfinanced and assets of borrwers, guarantee by owners andassignments of pertinent insurances. International BankGuarantee, Government Guarantee or local bank guarantee of theimporting country shall be required for buyers' credit underthe export credit scheme.

(b) Project Financing Limit

For security purpose, the Bank will not finance 100% of theproject cost. The following financing limit shall be appliedaccording to type of projects and shall be revisedperiodically.

(i) Maximum 90Z of project cost (for shipping and shipyardloans).

(ii) Not exceeding 85% of plant and machinery cost excludingland (for capital intensive engineering projects).

(iii) Maximum 85% FOB value of contract (for export creditscheme).

(iv) Not exceeding 70% of project cost for second hand vesselsand 90% for new vessel (in the case of guarantees).

7. Management Fee

The Bank may levy a management fee for advisory services rendered toits clients.

This fee amount shall be determined from time to time.

8. Loan Syndication

In instances whereby the project cost exceeds Bank Kemajuan'sexposure, the difference shall be syndicated from other financialinstitutions. The Bank may charge an agency fee, the amount ofwhich is subject to determination.

9. Reserves, Dividend

The Bank is not expected to pay dividends. Its annual profits willbe retained and subject to capitalization of equity base from timeto time.

ANNEX 2-37 - Appendix 2

Page 7

10. Provision for Doubtful Debts

A 1X provision for doubtful debts based on balance of outstandingloans shall be made by the Bank. This percentage will be revised ifnecessary.

11. Money Market Operations

The Bank's money market operations shall essentially be limited tothe placement of its surplus funds with financial institutionsapproved by the Ministry of Finance and will be of fixed tenure,that is 3, 6, 9 or 12 months. The financial institutions approvedby the Ministry of Finance are designated commercial banks, financecompanies and merchant banks. In order to overcome the rigidity offixed tenor deposits, the Bank on the Board of Directors' authoriz-ation shall purchase money market instruments such as negotiablecertificates of deposits, etc. with a repurchase obligation whichallows for more convenient planning of the Bank's liquidity andoptimization of returns on its funds.

12. Foreign Exchange Risk

Bank Kemajuan shall adequately protect itself against foreignexchange risk arising from its borrowing, lending, investment andother operations.

V. ACCOUNTING AND AUDITING POLICY

9. The Bank shall ensure that all accounts of its operation will beproperly kept in accordance with the provisions of the Companies Act. A panelof auditors shall be appointed to audit the Bank's accounting records.

VI. ORGANIZATION AND STAFFING POLICY

10. Bank Kemajuan will develop its staff to the highest professionalstandards by continuous training and education to evolve an efficient andsound organization. The Bank adopts a policy of recruiting and training freshand experienced graduates to equip them with adequate skills and knowledge.

VII. RESOURCE REQUIREMENT

11. In carrying out its operations, the Bank shall rely on diversifiedfunding sources. The Bank expects to secure local resources from theGovernment's allocation and the domestic open market. As a supplement, thebank will seek to raise funds from international sources such as World Bank,Islamic Development Bank, Asian Development Bank, etc.

ASP Projects DepartmentDecember 15, 1985

ANNEX 2- 38 - Table 1

MALAYSIA

DEYL0H33T FINUKCE PROJICT

Bank KewAlun Perusahan Malaysia (BIKPM)

Sumary of Loan (prationa, 1981-85(K$ 000)

Years ended December 31 1981 1982 1983 1984 1985Fb. Amt. No. Ant. No. Ant. No. Amt. No. Amt.

ApprovalsTerm loans 1 25,000 2 16,400 4 34,179 3 20,412 6 23,810Working capital loans - - 2 22,700 2 7,700 3 10,100 4 10,600

Total Approvals 25,000 39,100 41,879 30,512 34,410

DisbursementsTerm loans 14,000 7,450 18,036 17,900 23,473Working capital loans 4,54G 18,306 6,550 5,976 9,13

Total Disbursements 18,540 25,756 24,58f 23,R7h 32,656

RepaymentsTerm loans - 228 1,778 4,199 5,116Working capital loans - 18,146 9,391 2,095 7,430Leasing 65 192 171 43 -

Total Repayments 65 18,566 11,340 6,323 12,546

Loans OutstandingTerm loans 2 15,599 2 22,821 3 39,105 7 52,820 12 71,177Working capital loans 2 14,131 2 14,291 3 11,336 3 15,276 6 17,029Leasing 2 406 2 214 2 43 - - -

Total Loans Outstanding 30,136 37,326 50,484 68,096 88,206


- 39 - ANNEX 2Table 2

MALAYSIA

DEVELOPffENT FINANCE PROJECT

bank Kemaluan Peruaahan Iflaysia (KPM)

Characteristics of Loan Commitm_nts and Outstanding as of June 30, 1985(Ms '000)

Cualativecoiditreoto OutstandinA

No. mount No. Amount

By PurposeTerm lons 17 117.973 8 52,524Wbrking capital loans 9 54,600 6 20,288Others /a 2 8,710 - -

Total 28 181.283 14 72,812

By SizeUp to 1,000,000 4 2,822 2 1,359Above 1,000,000 - 5,000,000 12 32,171 7 9,735Above 5,000,000 - 10,000,000 6 45,610 2 12,960Above 10,000,000 6 100,680 3 48,758

Total 28 181,283 14 72,812

By SectorShipping 15 90,027 9 41,113Shipbuilding 11 82.546 5 31,699Metal and engineering - - - -Others /a 2 8,710 - -

Total 28 181,283 14 72,812

By TypeNew projects 1 10,000 - -Existing projects 27 171,283 14 72,812

Total 28 181,283 14 72,812

By Location (State)Selangor 4 26,236 1 535PerakJohore 3 41,000 2 29,269Penang 5 21,427 3 2,556Trengganu 3 26,370 1 2,960Pohang - - - -

Sabah 8 57,300 5 36,458Sarawak 5 8,950 2 1,034Malacca - - - -Kedah - - - -Negri Seabilan - - - -

Kelantan - - - -Perlis - - - -

Total 28 181,283 14 72,812

/a Guarantee facility.

Note: 0mulative comitments are from the year 1979 till June 30. 1985 andinclude guarantee facility and leasing.


-40- ANNEX 2Table 3

MALAYSIA

DEVELOPHENT FINANCE PROJECT

Lank Kameuan Perusahasn Malaysia (B3PM)

Summarized Balance Sheets as of December 31. 1981-85

An of December 31 1981 1982 1983 1984 1985

AssetsCur-rent AssetsCash and bari balance 71 86 61 199 R1Short-tern lnvestment 99,135 123.031 113,832 107,021 99,501Term loans due within 1 year /a 235 1,802 2,486 4,680 24,462Short-term loans 14,131 14,291 11,336 15,276Interest receivable 4,006 3,145 3,234 3,498 3,248Other accounts receivable 754 975 1,459 1,484 1,304

Total Current Assets 118.332 143,330 132.408 132,157 128,596

Fixed AssetsTerm loans (due after 1 year) /a 15,770 21,233 36,245 47,614 62,862Investment 9,514 9,579 14,672 14,804 14,882Property and equipment 217 259 234 196 240

Total Fixed Assets 25,501 31,071 51,151 62,614 77,984

TOTAL ASSETS 143,833 174,401 183,559 194,771 206,58n

LiabilitiesCurrent Liabilities

Short-term borrowing lb 1o,no0 10,000 10,00n 10,0no 13,525Interest payable 25 25 25 25 920Other accounts payable 106 42 45 160 60PTax payable 2,340 4,096 3,501 3,880 4,575Deferred taxation - 108 4b - -

Total Current Liabilities 12,471 14,271 13,617 14,065 19,628

LonR-Term Liabilities lO6,380 112,380 118,380 124,380 126,164

Paid-up capital 20,000 40,000 40,000 40,000 40,000Reserve 214 3,964 7,750 12,038 16,413Undistributed profits 4,768 3,786 3,812 4,28P 4,375

Total Equity 24,982 47,750 51,562 56,326 60,788

TOTAL LIABILITIES AND EQUITY 143,833 174,401 183,559 194,771 206,580

Guarantee - - 7,110 7,110 8,710

/a Net of provisions for doubtful accounts.

tb Drawn down balance of Bank Negara line of credit, payable on demand and borrowing duewithin a year.

AEP Proiects DepartmentJuly 21, 1986

- 41 - ANNEX 2

MALAYSIA


Bank Kemajuan Perusahaan Malaysia (BKPM)

Summarized Income Statements for the Years 1981-85(M$ '000)

Years ended December 31 1981 1982 1983 1984 1985

IncomeInterest on loans 594 2,Q68 3,414 3,892 5,777Interest on investments 11,794 11,528 11,445 12,231 11,644Guarantee fees - - 33 36 } 246Other income 105 167 221 115 }

Total Income 12,493 14,563 15,113 16,274 17,667

ExpensesFinancial expenses 6,300 6,300 6,3no 6,300 6,505General and administrativeexpenses: Personnel 180 458 563 689 765

Others 226 582 495 541 663Provision for doubtful accounts - - 506 177 200Others _ _ _ _ _

Total Expenses 6,706 7,340 7,864 7,707 8,663

Income Before Tax 5,787 7,223 7,249 8,567 9,034

Less: Taxation 2,175 3,240 3,437 3,802 4,574

Net Income 3,612 3,983 3,812 4,765 4,460


-42 - ANNEX 2Table 5

MALAYSIA


Bank Kemajuan Perusahaan Malaysia (BKPM)

Financial Indicators, 1981-85

As of December 31 1981 1982 1983 1984 1985

As 2 of Total Average Assets1. Gross income 9.1 9.2 8.4 8.6 8.R2. Financial expense 4.6 4.0 3.5 3.3 3.23. Gross spread (1-2) 4.5 5.2 4.9 5.3 5.64. Administrative expense 0.3 0.7 0.6 0.6 0.75. Provision and taxes 1.7 2.0 2.2 2.1 2.46. Net income 2.5 2.5 2.1 2.6 2.2

Net lTcome as % ofAverage equity 15.8 11.0 7.7 9.0 7.6Share capital 18.1 13.3 9.5 11.9 11.4

Ozher RatiosIncome from loans as x of averageloan portfolio 5.9 8.5 7.9 6.7 7.4

Cost of debt as % of average totalborrowings 5.6 5.3 5.0 4.8 4.8

Interest spread 0.3 3.2 2.9 1.9 2.6Book value as % of par 1.2 1.2 1.3 1.4 1.5Interest coverage /a 1.9 2.1 2.2 2.4 2.6Debt service coverage /b 1.7 1.6 1.5 1.5 1.6Current ratio 9.5 10.0 9.7 9.4 7.1Long-term debt/equity /c 4.2 2.3 2.3 2.2 2.1Total debt/equity 4.6 2.6 2.5 2.4 2.2Reserves and provisions as x ofthe portfolio 16.7 19.5 23.4 24.5 24.5

/a Net income before tax, provisions, interest and depreciation to interestcharges.

/b Net income after tax + noncash charges + interest charges + term loan col-lections to interest charges + repayment of term borrowing.

/c Including guarantees.


-43- ANX 2Table 6

KAIAYSIA


Bank Kemaiuan Perusahbn Malaysla (BKPM)

Resource Position as of December 31, 1985

M$'000

Long-Term Resources

Paid-in capital 40,000

Unappropriate profit 20,788

Provision for doubtful accounts, depreciation andother noncash items 1,608

Term loans from government 139,689

Total Long-Term_Resources 202,085

Less: Term loans outstanding (88,208)

Other fixed assets (240)

Amount Available for Disbursement 113,639

Less: Undisbursed approvals/commitments (77,404)

Amount Available for Approvals/Commitments 36,235


_44 - ANNEX 2

MALAYSIA


Bank Kern am n Peruaahaan Maloysia (BKPM)

Summary of Proiected Loan Operations. 1986-90(N$ 000)


ApprovalsEquipment loansLocal currency 120,n00 145,000 163,000 168,000 170,000Foreign currency 16,000 28,000 39,000 45,000 46,000

Total Equipment Loans 136,000 173,000 202.000 213,000 216,000

Working capital loans 82,000 91,000 96,000 104,000 110,nOn

Total Approvals 218,000 264,000 298,000 317,0no 326,0nn

DisbursementsEquipment loansLocal currency 89,000 108,000 118,nO0 123,000 123,0OnForeign currency 10,000 20,000 20,000 25,000 25,000

Total Equipment Loans q9,000 128,000 138,nO0 148,000 148,000

Working capital loans 55,000 55,000 55,000 55,0nO 55,000

Total Disbursements 154,000 1R3,eo0 193,000 203,000 203,nno

RepaymentsEquipment loansLocal currency 8,141 19,127 31,450 45,868 56,157Foreign currency - - 476 1,905 3,810

Total Equipment Loans R,141 19127 31,926 47,773 59,967

Working capital loans 32,050 57,115 55,000 55,000 55,000

Total Repayments 40,191 76,242 R6,926 102,773 114,967

Loans OutstandingEquipment loans

Local currency 154,794 242,280 326,929 401,921 466,216Foreign currency 10,000 30,000 40,029 71,898 92,383

Total Equipment Loans 164,794 272,280 375,957 473,R19 558,599

Working capital loans 27,15 25,000 25,000 25,000 25,000

Total Loans outstandina 191,908 297,280 400,957 498,819 5R3,5QQ

Guarantees Outstanding 18,710 28,710 38,710 48,710 58,710


-45 - AMWU2

MALAYSIA

DEVYLOPK IT FINACN PIOJECT

bank Kemaluan Perusahaan MalaYsia (MKIM)

_ mrized Pro ected Balanc Shoets. 1986-90

As of Deeember 31 1986 1 7 1988 1989 1990

AssetsCurrent Assets

Cabh and bank balance 625 752 850 1,000 1,200Short-tern lavestments 101,090 94,959 76,213 59,366 45,900Working capital loan 27,356 25,000 25,000 25,000 25,000Interest receivable 6,529 5,694 8,052 15,267 12,162Other accounts receivable 1,428 1,528 1,628 1,728 1,828

Total Current Assets 137,028 127,933 111,743 102,361 86,090

Fixed AssetsTerm loan 154,553 242,280 326,929 401,921 466,216Government securities - - - - -Investment 5,000 5,000 5,000 - -

Foreign loan 10,000 30,000 49,029 71,898 92,383Property and equipment 294 354 408 458 502

Total Fixed Assets 169.847 277.634 381,366 474,277 559.102

TOTAL ASSETS 306,875 405,567 493± 109 576,638 645,192

Liabilities and EquityCurrent Liabilities

Short-term borrowings (incl.current msturities oflong-term loans) 15,000 20,000 25,000 30,000 35,000

Tax payable 2,772 5,548 6,824 7,912 9,383Other accounts payable - - - - -

Total Current Liabilities 17.792 25,548 31.824 36.912 44,383

Long-Term LiabilitiesLoans from government 189,032 253,188 306,113 349,792 378,213Foreign loan 10,000 30,000 50,000 74,092 96,284

Total Long-Term Liabilities 199,032 283.187 356,113 423,884 474,498

!SultyPaid-up capital 75,000 75,00 75,000 75,000 75,000Reserves 11,638 15,050 21,831 30,172 39,842Unappropriated profit 3,412 6,781 8,341 9,670 11,468

Total Equity 90,050 96.831 105.172 114,842 126,310

TOTAL LIABILITIES AND EQUITY 306,875 405,567 493.109 576.638 645,190

Guarantees Outstanding 18,710 28.710 38.710 48,710 58,710


-46 - ANNEX 2

Table 9

MALAYSIA

DEVYLOPYIET FINANCE PROJECT

Bank KEmal.a Perusahaan Malaysia--(BKPM)

Summarized Projected Income Statements, 1986-90(M'000)


IncomeInterest on loans 14,992 28,470 40,259 51,213 60,812Interest on investments 8,968 8,789 7,312 5,496 4,401Guarantee fees 85 285 385 485 585Other income 100 100 100 100 100

Total Income 24,144 37,644 48,056 57,294 65,898

ExpensesFinancial expenses 15,500 22,386 28,875 35,649 40,012General and administrative expensesPersonnel 821 863 9(6 951 999Others 620 679 713 747 783

Provisions for bad debts 1,050 1,387 2,396 2,365 3,253

Total Expenses 17,941 25,315 32,890 39,712 45,047

Income Before Tax 6)204 12,324 15,165 17,582 20,851

Less: Taxation 2,792 5,548 6,824 7,912 9,383

Net Income 3,412 6,781 8,341 9,670 11,468

AEP Proiects DepartmentJuly 21, 1986

_ 47 _ ANNEX 2

Table 10

MALAYSIA


Bank Keuajuan Perusahaan Malaysia

Projected Cash Flow Stetoete ns 1986-90000)


SourcesNt ncome 6,204 12,329 15,166 17,581 20,851Nloncsh charges (depreciation,provisions) 1,107 1,427 2,442 2,416 3,309

Subtotal 7.311 13,756 17,608 19,997 24,160

Increase in paid-in capital 25,000 - - - -

Drawdown onForeign currency borrowings 10,000 20,000 20,000 25,000 25,000Government fund borrowings 62,280 68,000 57,000 48,000 33,000

Subtotal 72,280 88,000 77,000 73,000 58,000

CollectionDomestic currency loans 8,141 19,127 3i,450 45,868 56,157Foreign currency loans - - 476 1,905 3,810Working capital loans 32,050 57,115 55,000 55,000 55,000

Subtotal 40,191 76,242 8 102,773 114,967

Liquidation of short-term invAstments 4,540 6,131 18,746 16,848 13,466Decrease in other assets 9,804 - - 5,000 -

Increase/(decrease) in liabilities 5,000 5,000 5,000 5,000 5,000

Subtotal 19,345 11,3 23,74-, 26,848 18,466

Total Sources 164,126 189,129 205,280 222,618 215,593

UsesXdaition to fixed assets (gross) 100 100 100 100 100

DisbursementsDomestic currency loans 89,000 108,000 118,000 123,000 123,000Foreign currency loans 10,000 20,000 20,000 25,000 25,000WHorking capital loans 55,000 55,000 55,000 55,000 55,000

Subtotal 154,000 183,000 193,000 203,000 203,000

Repayment of borrowingsForeign currency borrowings - - - 908 2,807Government funds 3,627 3,845 4,076 4,320 4,579

Subtotal 3,627 3,845 4,076 5,228 7,386

Increase in other current assets 1,633 (735) 2,458 7,315 (3,005)Increase in short-ters investments - - - - -Increase/(decrease) in cash 129 127 98 150 200

Subtotal 1,762 (608) 2,556 7,465 (2,805)

Decrease in other liabilities 292 - - - -Tax payment 4,345 2,792 5,548 6,825 7,912

Subtotal 4,637 2,792 S,548 6,825 7,912

Total Uses 164,126 189,129 205,280 222,618 215,593

- 48 - ANNEX 2Table 11

MALAYSIA


Bank Kesalaaun Perueshaan Malasia (BRPM)

Projected Financial Indtcators, 1986-90

As of December 31 1986 1987 1988 1989 1990

As X of Total Average Assets

1. Gross income 9.4 10.6 10.7 10.7 10.82. Financial expenses 6.0 6.3 6.4 6.7 6.53. Gross spread (1-2) 3.5 4.3 4.3 4.0 4.34. Administrative expenses 0.6 0.4 0.4 0.3 0.35. Provisions and taxes 1.5 1.9 2.0 1.9 2.06. Net income 1.4 2.0 1.9 1.8 2.0

Net Income as X of

Average equity 4.2 7.2 8.2 8.8 9.iShare capital 4.5 9.0 11.1 12.9 15,3

Other Ratios

Income from loan as % of averageloan portfolio 11.0 11.5 11.3 12.3 1*.4

Cost of debt as 2 of average totalborrowings 8.7 8.6 8.4 8.5 8.3

Interest spread (X) 3.3 2.9 2.9 2.8 ?.1Interest coverage 1.6 1.7 1.7 1.6 1.6Debt service cover 2.6 2.8 2.9 2.9 2.9Current ratio 8.1 5.1 3.5 2.8 2.0Long-term debt/equity 2.4:1 3.2:1 3.7:1 4.1:1 4.2:1Total debt/equity 2.4:1 3.2:1 3.7:1 4.0:1 4.1:1Reserves and provisions as 2 ofportfolio 7.0 6.1 6., 7.6 8.8


- 49 - Appendix 1Page 1

MALAYSIA

DEVELOPNNT FINANCE PROJECT

Sabah Develop ent Bank Berhad

strate5y Statenet 1986-88

(Adopted by the Board of Directors on July 28, 1986)

1. Operational Strategies

(a) The Ba?k will endeavor to keep its accounts in arrears at a minimumlevel.-

(b) SDB will strive to achieve a balanced assets portfolio.2/

(c) Exposure to single customer SDB's total commitments in whatever formto a single group of companies is to be restricted to 30X theaggregate of SDB's paid-up capital and unimpaired reserves.-

(d) Lending emphasis will still be centered upon agriculture projects.Plantation crop cultivation in Sabah will continue to expand due togovernmental support, low lard prices ang abundant uncultivatedarable land and good growing conditions._/

(e) With the current depressed market situation of the Construction andReal Estate sector, it is not expected that the relative share ofthis sector in the Bank's outstanding loan portfolio would beexpanding. However, if justified the Bank will continue to supportindividual projects in this sector.

(f) The Bank will continue to place great emphasis on supporting themanufacturing industry by way of lending, iouity participation,advisory services and feasibility studies.-

(g) The Bank will discontinue direct lending to nomoated projects andconsolidate/phase out existing nominsted loans.-

(h) The Bank will endeavor to expand its fee-based activities bundertaking a wide spectrum of corporate advisorv services.-

(i) The Bank will continue to play a leading role in loan syndications,either alone or in conjunction with other financial institutions.-

(j) SDB will place more emphasis on socio-economic impact of projects inits appraisal of loans in line with its role as a developmentfinance institution. As far as possible and especially for largeprojects, the Bank will institute the calculation of the economicrate of return, foreign exchange savings/earnings, value added,multiplier effect and employment generated in its appraisals.

AM= 3- 50 - Appendix 1

Page 2

2. Funding Strategy

(a) The current funding position of the Bank is that there is an excessof long-term fund of $45,531,000 and on the other hand, there is anoverco itment of short-term fund of $55,039,000. It is expectedthat this position vill be reduced or eliminated by 1988. The stepstaken in this direction will include the following:

(i) reducing new short-term loans

(ii) arranging with commercial banks to provide Bankers AcceptanceFacility for trade financing.

(b) SDB will continue to increase its paid-up capital from the existinglevel of $120 million to $200 million in 1990.

(c) The existing United States Dollar Floating Rates Notes will bematuring in 1988. SDB will source new funds to replace this sourceof fund.

Cd) SDB will continue to seek additional Revolving Credit/Overdraftlines from financial institutions to meet its short-term fundsrequirements.

(e) SDB will seek new long-term resources to meet its needs for long-term lending. The sources to be considered in the future wouldinclude World Bank, the State Covernment, domestic long-termborrowings, borrowings in foreign currency from private sources andloans from international institutions including another Loan fromthe World Bank.

3. Human Resource Development Strategy

(a) Sabah Development Bank endeavors to recruit only the most qualifiedpersonnel to work in the Bank and retain sufficient staff ofsufficient quality to meet the Bank's objective.

(b) The Bank pursues a definite and planned training program for thepurpose of upgrading and developing its human resources. As a rein-forcement to the Training Program of the Bank, SDB is also tosponsor its staff for attachment to the various Commercial Banks andDeveloping Financing Institutions in order to expose and to improveits officers in their specialized areas.

4. Research and Information System

(a) SDB will continue to strengthen its research capability andactivities to provide the basic data and information needed for itsefficient operations.

(b) SDB will improve its management information system by centralizinginformation in the Research Division.

AMU 3- 51 - Appendix 1

Page 3

To this end, the existing computer systems vill be reviewed and newsystems will be developed; new software packages will be acquired;and additional terminals will be installed.

Notes to the Strategy Statement

1. The total amount in arrears as at 31st August, 1985 was approximately$100 million comprising more than 102 of total outstanding loan portfoliointerest on delayed payment. More than 505 of the total amount inarrears relates to loans extended to the agriculture and timber sectors.Approximately M$35.0 million of amount in arrears is from a single groupof companies which is currently undergoing a corporate restructuringexercise involving the acquisition of a public listed company which willin turn raise funds to repay the loans in arrears. It is anticipatedthat the corporate restructuring exercise will be completed by the end of1985 and at least half of the amount in arrears will be settled by then.Another M$27.0 million of amount in arrears is from companies ultimatelyowned by statutory bodies, some of which are currently seeking financialassistance in the form of additional equity injection from the StateCovernment and the private sector.

2. Of its net loans approved amount of $1.6 billion up to the end of 1984,Agriculture sector accounted for the greatest share at 32.5X; followed byConstruction and Real Estate at 21.82; Manufacturing at 17.2%; Investmentat 7.1%; Electricity/Utilities at 6.9% and the remaining to Transport &Storage, Hotel & Tourism, Mining & Quarrying, General Commerce andMiscellaneous. Total loans approval of the Bank is expected to increaseto more than 2 billion by the end of 1988.

Between 1984 and 1988, the Agriculture loans are expected to expand at arate of 10% per annum accounting for 352 of total loan approvals of theBank by the end of 1988. Manufacturing, Construction & Real Estatesectors are expected to grow annually at 5.52 and 3.52 and account for20% and 18% of the total loan approvals. The Investment, Electricity/Utilities, Transport & Storage, Hotel & Tourism, Mining & Quarrying,General Commerce and Miscellaneous together would expand at an annualrate of 4% to make up for the rest of the loan portfolio.

The above will result in an outstanding loan portfolio composition ofAgriculture - 38%, Manufacturing - 19.52, Construction and Real Estate -19%, and others - 23.5%. At the end of 1988, the total loan outstanding(after repayment) will be $851 million.

3. Three groups of companies where SDB's commitments have exceeded thesingle customer limit are statutory bodies and State Government agencies/companies owned by statutory bodies where foreign currency loans andnominated loans have been extended. In addition, the total commitmentsto these corporations include self-liquidating transactions and short-term advances. Two groups of companies belonging to the private sectorare currently undergoing corporate restructuring exercise to alleviatetheir cashflow problems in order to repay some of the outstanding loans.

ANNEX 3Appendix 1Page 4

It is anticipated that SDB's esposure to these groups can be reduced by$35 million by the end of 1985 and a further $33 million by 30th June,1985 through repayment, corporate restructuring and the phasing-out ofnominated loan.

4. Up to the end of 1984, SDB's Agricultural loans to plantation cropstotalled M$174.127 million or 10.5Z ;of total SDB's loans. They were forthe cultivation of cocoa (15.3Z of total Agricultural loans); oil palm(8.0%); coconut, tea, coffee, cashew nuts and others (4.2Z). With anexpected growth rate of 102 per annum, the Agricultural portfolio isexpected to account for 35% of the total portfolio of the Bank by 1988.

5. In the past the Bank has encountered difficulty in getting such projectsto finance especially from the private sector due to the constraintsfacing the industry. The constraints include poor infrastructure, laborshortages and high cost of production. Of the total amount of $282.1million approved for the sector, only 24 projects were involved. Morethan 70% of these were extended to government sponsored projects. By theend of 1988, it is expected that our ecposure to this sector will be20%.

6. Steps have been taken to submit a Cabinet paper to propose to convert thespecial time deposits (STD) (tied to nominated loans) into term loans foronlending to nominated projects on a back-to-back basis. Henceforth, SDBwill not be financing nominated projects as in the past. However, if anynominated project is financed in the future, it will be done on an agencybasis for a fee without SDB assuming any risk in respect of suchprojects.

At the end of 1984, the amount outstanding for nominated loans totalled$292.949 million. By the end of 1988, the figure is expected to declineto less than half and by 1990 to a quarter, or only 9% of estimated totalportfolio outstanding at that time.

7. The Bank has in the past provided advisory services on corporate as wellas financial matters. They include mergers and acquisition advice,financial analysis, bids evaluation, project feasibility studies, marketstudies, cash flow management and forex management. Since 1978 up til1984, fees earned by the Bank totalled $9.32 million or only 2.5% oftotal revenue during the period. The bulk of fees earned was for loanssyndication/management accounting for 17.8% of the total fees earned.

8. However, due to competition from other financial institutions in thisarea of activity and the recessionary economic environment, the Bank'ssyndication activities is not expected to grow as in previous years.Since it began syndication activities, SDB has up to the end of 1984,either by itself or together with other financial institutions, lead andco-lead managed a total of 29 syndications worth $793.271 million. TheBank participated an amount of $106.4 million.

November 13, 1985

ANNEX 3- 53 - pp"dix 2

Page 1

MALAYSIA


Sabah Development Bank Berhad

Policy Statement(Adopted by the Board of Directors as amended on July 15, 1985)

I. Objectives

1. SDB is a public company limited by shares set up with the objectiveof carrying on any and every aspect of development banking and toassist business enterprises in Sabah in particular and Malaysia ingeneral.

2. In achieving this object it will at all times endeavor to follow theapproved objectives of State and National economic policies.

3. This will be accomplished by:

(i) building up a sound financial structure to enable it to carry onits activities and acquiring the necessary funds with which toprovide the development assistance required by industry,agriculture, construction, transportation and service sectors;

(ii) building up a sound organizational structure and employing thehigh level of expertise which will be required to carry out itsfunctions efficiently;

(iii) giving particular attention to fostering a strong and healthyentrepreneurship and capital market in Sabah;

(iv) providing as wide a form of assistance as necessary for thefulfillment of its role as a development finance institution;

(v) establishing firm and growing relationships with other financialand allied institutions, both domestic and foreign, with theobjective of enhancing its effectiveness as a development bank.

II. Activities and Scope of Operations

4. Specifically SDB will unieriake provision of various types offinancial and other assistance to both public and privateenterprises by:

(i) medium- and long-term loans for fixed assets and developmentexpenditure, and where necessary short-term credits for workingcapital purposes;

ANEX 3

-54 - iiini _ 2Page 2

(ii) issuing guarantees, letters of indemnity and other necessaryforms of financial and nonfinancial assistance;

(iii) equity participation;

(iv) underwriting and syndication of loans;

(v) providing technical amn managerial services;

(vi) corporate advisory services;

(vii) promotional activities in the identification and development ofnew projects.

5. SDB will also act as financial intermediary for the State Governmentof Sabah.

6. In addition, SDB will undertake other relevant activities involvingparticipation in the development of the State of Sabah in particularand Malaysia in general.

III. Priority Areas for Assistance

7. SDB will give preference to enterprises which will effectivelycontribute to the broadening of the economy of Sabah and nationaleconomic integration. Priority will be given to:

(i) encouragement of Bumiputra enterprises;

(ii) agricultural development;

(iii) agro-based industries;

(iv) wood-based industries;

(v) industries with potential for exports or import substitution;

(vi) housing development.

IV. Criteria and Procedures for Development Financing

8. SDB will make loan/investment decisions on the basis of sound creditand investment criteria as follows:

(i) project must be financially viable, technically feasible andeconomically sound;

(ii) particular attention will be paid to the quality and experienceof the management and the market prospects of the project;

(iii) audited financial statements will normally be required from allborrowers for at least the three previous fiscal periods.

- -5 ANNEX 3

Page 3

Additionally, applications for project finance and equityinvestments must be supported by feasibility studies and detailedprofit and loss and cash flow projections, together with proformabalance sheets;

(iv) SDB will normally require borrowers to provide at least 401 ofthe cost of a project but exceptions may be made for agriculturaland certain other projects where the percentage may be lowered to301 and for Bumiputras to 25Z;

(v) in accordance with sound banking practices, SDB will secure itsloans and advances with appropriate collateral from its clientssupported where appropriate by the joint and several guarantee ofthe partners, directors and shareholders;

(vi) no disbursement will be made until sufficient financial data hasbeen provided and security documentation effected, unless priorarrangements have been made and adequate alternative (temporary)security provided.

V. Operational and Financial Guidelines

9. The normal minimum lending limit is $250,000.

10. SDB's equity investment in any single enterprise, excluding equityinvestments in its subsidiaries or in rehabilitation projects, shallnot normally exceed the lesser of 0l of SDB's paid-up capital andunimpaired reserves or 20% of the paid-up capital of the enter-prise. SDB will divest itself of such holdings as soon as it canjustifiably do so, with a view to stimulating the local capitalmarket.

11. SDB's aggregate equity investments, excluding equity investments inits subsidiaries or in rehabilitation projects, shall not exceed 25%of its paid-up capital and unimpaired reserves.

12. SDB will not seek to control any of the enterprises in which it hasinvested nor will it participate in the management of suchenterprises except for the purpose of safeguarding its interest.

13. Although SDB does not come under the supervision of Bank Negara, ithas adopted the same maximum exposure limit as the Central Bank hasprescribed for commercial banks. Therefore, SDB's total commitmentsin whatever form to a single enterprise or same group shall notnormally exceed 30% of the aggregate of the SDB's paid-up capitaland unimpaired reserves.

14. SDB will diversify its portfolio in order to maintain a reasonablelevel of risk.

15. SDB will at all times endeavour that the maturities of its assetsare appropriate to those of its resources.

ANNEX 3- 56 -

Page 4

VI. tesources

16. SDB is presently wholly-owned and funded by the Sabah StateGovernment which has comaitted adequate resources to enable the Bankto function without excessive capital constraints. However, theManagement has endeavored to diversify SDB's resources and to sourceits funds from both domestic and international markets.

VII. Foreign Exchange Risk Exposure

17. SDB is not allowed the risk of foreign exchange exposure, this beingpassed on its clients or covered by other suitable means.

VIII. Accounting

18. SDB will maintain adequate accounting records to reflect itsbusiness operations in accordance with generally accepted accountingstandards.

A qualified independent public accountant will be engaged on acontinuing basis to regularly audit SDB's financial statements andoperating figures.

IX. Provisions and Reserves

19. Initially, provision for possible future bad debts will be made fromannual profits until this has reached 3% of the overall non-nominated loan/investment outstanding at year end. However, SDBviill review annually the quality of its portfolio and maintain anadequate level of provisions for bad and doubtful debts, includingequity investments.

20. SDB will transfer 50 percent of its net annual earnings to theGeneral Reserve Fund until such Fund is equal to the paid-upcapital.

21. SDB may declare dividends up to 50% of its net profit or 10% ofpaid-up capital whichever is lower, if justified by circumstances.

X. Organization and Staffing

22. SDB will continually strive to build, develop and strengthen itsmanagement and staff and will aim to evolve an efficientorganizational structure. To this end, it will adopt and followfair and equitable recruitment, employment and compensationpolicies; suitable training opportunities will be provided toenhance the staff's professional qualifications and improve jobperformance.

AMNNX 3

- 57 - Appendiz 2Page 5

XI. Relationship with Government Authorities and Other Financial Institutions

23. SDB vill at all times seek to develop and maintain cooperativerelationships with Government bodies, and other Bank or non-Bankfinancial institutions.

Table I

4ALAYSIA

DEVKLOPHENT FINANCE PROJECT


Sumary of Loan Operations for the Years 1981-85 /a

1981 1982 1983 1984 1985No. Amount No. Amount No. Amount No. Amount No. Amount

Loan ADprovalsWbrking capital loans /b 8 52,872 16 201,926 5 17,100 17 55,863 - 26,150Term loans 57 617,022 26 146,202 44 332,380 29 112,945 - 89,143

Subtotal (gross loans) 65 669,894 42 348.128 49 349..480 46 168.808 - 115,293

Cancellations 9 73,231 2 9,425 7 66,250 5 29,473 - 12,320

Total Net LoAns Approved 56 596,663 40 338.703 42 283.230 41 139,335 - 102,973

DisbursementsWorking capital loans /b - 233,386 - 268,388 - 150,793 - 153,384 - 127,680Term loans - 393,788 - 255,370 - 185,597 - 152,384 - 159,832

Total Disbursements - 627,174 - 523,758 - 336,390 - 30S,768 287,512

ReparntsWorking capital loans lb - 176,857 - 231,924 - 162,693 - 168,048 - 127,411Term loans - 43,204 - 155,560 - 115,388 - 192,303 - 55,001

Total Repayments - 220,061 - 387,484 - 278,OA1 _ 360.351 182,412

Total OutstandingWorking capital loans /b - 144,313 - 180,771 - 168,877 - 154,213 - 154,482Term loans - 491,816 - 591,626 - 661,835 - 621,916 - 726,747

Total Outstanding /c - 636,129 - 772.403 - 830,712 - 776,129 - 881,22q

/a Loan operations include following foreign currency denominated loans:

1981 1982 1Q83 1984 1985

,ApprovalsUS$ t000) - 42,000 47,000 5,000 -

Ten ('000) - - 6,000,000 - -

DisbursementsUSS ('000) - 40,000 15,000 14,606 15,nOOYen ('000) - - 560,000 1,290,000 950,000

Repay ents-us ''000) - - 5,000 5,000 5,nooYen ('000) -- - - -

OutstandingUSS ('000) - 40,000 50,000 59,606 69,606Yen ('000) - - 560,000 1,850,000 2,800,000

/b Consists of revolving credits, loans for working capital requirements, bill discounting, trade receipts,etc.

/c Excludes interest in arrears.

AlP Projects DepartmentJuly 21, 1986

ANNEX 3-59 - Table 2

MALAYSIA


Sabah Development Bonk Rerhad

Medium- and Long-term Loan Size Distribution /a(as of June 30, 1985)

Loan size range X of Original amount of loan 2 of(MS million) Number total (MA million) total

0 - 1.5 42 44 26.3 6

1.5 - 2.5 17 18 33.1 7

2.5 - 5.0 22 23 83.2 17

5.0 - 10.0 4 4 30.6 6

10.0 - 15.0 6 6 71.6 15

15.0 - 20.0 2 2 36.1 p

20.0- 50.0 1 1 25.n 5

50.0 - 100.0 1 1 72.0 15

Over 100.0 1 1 100.Q 21

Total 96 io0 478.7 100

/a Based on original amount of the non-nominated loan portfolio as of

June 30, 1985.


ANNEX 3-60 - Table 3

MALAYSIA


Sabah Development Rank Berhad

Sectoral Distribution of Loan Portfolio as of June 30, 1985(M? '000)

Nominated Non-nominated Totalportfolio portfolio portfolio

Sector Amount ! Amount 7 Amount 7

Real estate - construction 26,846 9 164,276 31 191,122 23

Manufacturing (includes ship-truilding) 99,702 34 43,90A A 143,700 17

Transport and storage 25,907 9 15,005 3 40,912 5

Investment p8,012 30 40,6Q5 8 128,7n7 16

Agriculture - forestry 23,744 R 218,610 41 242,354 29

Ilotels and tourism 16,374 6 30,191 6 46,565 6

Miscellaneous and generalcommerce 12,417 4 20,715 3 33,132 4

Totals 2393o2 100 531 490 100 826i492 100

Staff loans, miscellaneouscredit facilities androunding 15,R94

Outstanding Loan Portfo-lio per SDR RalanceSheet of June 30, 1985 842,386


- 61 -

IALA!SIA

DEWLOPWP6T FINANCE PEOJICT

Sebal Developmnt ank larhad

Sumrised Balance Sheets as of December 31. 1901-05r( '000)

As at Dscbez r 31, 1981 1982 1903 1984 1985

ASSPSSCvrrenr AesetsCash at bannf and on hand 3,148 1,292 973 1,562 7S 264Securities 51,323 41,178 78,420 I09,?77 LDue from time - short-torm 95,IIO 222,200 146,50 14,3i0 + 54.376Trad, fisann VWid disocounttri 12,486 9,328 9,175 3,602 1Pro ect flnsnctng - short-term 225,314 184,779 105,360 265,419 70,997Less reserve for loan losses (1,143) (1,206) (3,097) (3,748) n sCurrent iturities of lonx-tsrmprotect finncing 294,61if 147,312 291,013 80,153

Arrears account 32,222 22,910 94,025 51,477 ' 266,565Interest receivable 9,977 14,011 29,305 41,097Other assets 3R7 620 1,769 2,951

Total Current Assets 724,200 642,424 753.393 702.440 467,162

Noncurrent AssetsTime deposits 44,500 - 2,50C-Project finncing - long-term

Nostnated - 286,t05 380,121 279,437Non-nominsted 385,960 183,116 115,R92 81,238 603,95QNon-nominated (FC) - 94,t40 122,2R3 8c,440 1

Total Project Financint - Long-term 385,960 563,161 618,296 450,115 6o3.q9S

Less reserve for loan losses 11,720) (4,R33) (6,701) (8,62P1 (22,R4,S.ess current maturities (294,6t6) (147,312) (291,813) (80,153) n.a.

Net Project Financing Ag,624 4!1,01f, 31967A, 361,334 __!L,2"

Staff loans 1,649 2,711 4,503 6,l'4Eq.ttv investment R,!3' R,)3 7,97Z 2,092 0,R s

Total Non:urr. , AGsets 1. 143,194 421,860 334, 57

37 5P13 607,20'

Fixed assets 7%. 976 973 K' !'7,-0Intangible assets 42) 2,31Q 2,276 2,660 -

TOTAL ASSE'S . ±., 2 9

4 1 MAI AO 1,I.l,40$ ,091,6O' 3160

IABILITIES AND EQUITYCurrent Liabilities

Tim deposits 46W Q9 501,569 28A,469q 245,30 2 ,srInterest payable 32,26. 32,446 39,6e9 30,504 2Other short-tesr liabilties 0,h1' 22,n42 15,n39 34,4?8 48, 22Current mturities of term liabilities - 1,204 579 1,477 11,724

Total Current Liabilities Vf,.471 557,261 363 36 311,760 342,502

Term LiabilitiesSpecial time deposits 237,h62 226,232 352,643 273,997 161,210Revolving loans - - 50,000 114,900Foreign cutrencv borrowings - - 26,803 71,076 1 353,20rFloating rate notes - 90,040 93,400 96,40n )Government loans 71,555 78,405 74,060 R0,271 Pr," -4

Tot&, Ters Liabilities 309,217 395,077 602,986 636,644 59S,284

uces current mturities - (1,204) (579) (1,477) -

Net Teri Liabilities 309,2;17 391673 602 407 635, 17 595,2P4

Provision for retireent gratuitfee 75 117 162 22n -

Total LIabilities 815,762 951.251 966.305 947,147 937,'86

EguttYComon stock 45,nnr 1no,0no 100,0f! 110,000 II'¾)O"General reserve - - 15,O00 1 5,0nC 26,50lUnappropriated Profits *,937 16,l29 !,Ion 9,4S71

Total Equity '3 '37 116 328 125,100 134.457 136 583

TOTA.1 LlABILITIFS ANT) FCIT 8 29 1 067 579 1.091 405 1.0O1,6n4 I 74,369

AZP Projects DepartmntJuly 21, 1906

-62 - ANNEX 3

Table 5

MALAYSIA


Sabah DevelopMent Bank Berhad

Summarized Income Statements for the Tears 1981-85(X4$ °°°O)

Year ended December 31, 1981 1982 1983 1984 1985

IncomeInterest on loans and advances 45,050 63,638 62,752 73,568 68,313Income on investments 394 260 260 259 637Interest on deposits 23,608 18,044 20,307 17,512 15,284Guarantee 1,351 2,257 3,031 2,429 ' 3,660Other income 267 267 321 215 }

Total Income 70,670 84,466 86,671 93,983 87,894

ExpensesInterest on foreigncurrency borrowings - 8,625 9,687 15,619 1

Tnterest on domestic currency }64,245borrowings and deposits 51,974 49,338 '3,251 44,891 }

General and administrative expenses 3,370 4,915 6,301 6,149 8,962Provisions for doubtful accounts 1,908 3,176 4,559 1,778 10,519Miscellaneous and others 936 1,065 1,489 2,259 -

Total Expenses 58,188 67,119 65,287 70,696 83,726


Less: Taxation 6,795 9,556 9,612 10,630 2,042

Net Income 5,687 7,791 11,772 2,126

Appropriati'1Dividends - - 3,000 13,300 n.a.Reserves - - 15,000 - n.a.Unappropriated retained earnings 2,850 8j537 16,328 10,100 n.a.

Total 8,537 16,328 10,100 9,457 n.a.


- 63 - ANMNE 3Table 6

MALAYSIA

DEVELOPMfENT FINANCE PROJECT


Financial Indicators for the Years 1981-85

1981 1982 1983 1984 1985

As 2 of Total Average Assets1. Gross income 9.68 8.72 R.02 8.65 8.152. Financial expense 7.16 6. 03 4.99 5.o7 5.963. Gross spread (1-2) 2.52 2.69 3.03 2.98 2.194. Administrative expense 0.51 0.57 0.66 0.73 0.845. Provision 0.26 0.33 0.42 0.16 0.986. Net income 0.78 0.80 1.09 1.16 0.20

Net Income as x ofAverage equity '3.17 9.17 9.75 9.75 1.57Share capital 12.64 7.79 11.77 11.51 1.93

Other RatiosIncome from loans as x cfaverage loan portfolio /c 10.59 9.22 8.09 9.40 8.37

Cost of debt as 2 of averagetotal borrowings 5.09 9.8 7.78 9.80 n.a.

Interest coverage /a 1.29 1.36 1.49 1.42 1.20Debt service coverage /b 3.87 4.28 3.24 1.27 n.a.Current ratio 0.85 0.89 1.27 1.99 1.36Long-term debt/equity /d 1.34 1.45 2.00 2.69 4.36Total debtiequity 15.24 8.18 7.72 7.04 6.87Provisions as % of theportfolio 0.45 0.82 1.28 1.59 2.95

/a Net income after tax, provisions, interes. and depreciatlon to intxrestcharges.

/b Net income after tax + noncash cbarges + interest charges + term loan col-lections to interest charges + repayment of term borrowing.

/c Include loans and advances outstanding and bill' discounted.

/d Excludes from long-term debt special time deposits which are linked tonominated projects.


MALAYSIA



Akalysis of Arrears for the Years 1981-84 and First Half 1985

(M$'000)

Principal

No. of Total loans Arrears affected by

clients outstanding Principal Interest Total BI7A (T arrears C/A (x)

(A) (B) (C)

Nominated Portfolio1981 1 399,862 - 4 4 - 22,082 5.5

1982 2 410,963 172 145 317 0.1 8,672 2.1

1983 5 429,990 48,878 2,371 51,249 11.9 64,143 14.9

1984 5 292,949 1,094 3,090 4,184 1.4 29,322 10.0

19o5 1st half 4 288,855 2,936 2,539 5,475 1.9 34,446 11.9

Non-uominated Portfolio1981 12 236,267 2,589 2,302 4,891 2.1 33,325 14.1

1982 15 361,440 6,479 2,812 9,291 2.6 23,017 6.4

1983 23 400,721 23,059 6,598 29,657 7.4 62,650 15.6

1984 24 483,180 43,459 8,465 51,924 12.0 84,505 17.5

1985 1st half 28 553,531 55,253 12,763 68,016 12.3 90,758 16.4

Total Portfolio1981 13 636,129 2,589 2,306 4,895 0.8 55,407 8.7

1982 17 772,403 6,651 2,957 9,608 1.2 31,689 4.1

1983 28 830,711 71,937 8,969 80,906 9.7 126,793 15.3 S.1984 29 776,129 44,553 11,555 56,108 7.2 113,827 14.7 a

1985 lot half 32 842,386 58,189 15,302 73,491 8.7 125,204 14.9


MALAYSIA

DEVFLOPMENT FINANCE PROJECT


Analysis of Loans in Arrears as of June 30, 1985(M$ -0003)

3 to 12 months I to 2 er - Over 2 years Total Percentage ofNo. of Ant. in o. o t. n o. o t. n lIn o iEir'YiLit

Sector and subsector loans arrears loans arrears loans arrears loans arrears portfolio arrears

Term LoansAgriculture - Forestry

oil paln 8 2,748 7 7R6 2 281 17 3,A17Cocoa 2 281 - - - 2 281Logging 3 480 - - - 3 4ROLivestock 2 12,085 2 1,455 - - 4 13,540Other agriculture 2 6,037 - - - - 2 6,037 cr

Subtotal 17 21,631 9 2,241 2 2R3 28 24,15S 2.4 33

Construction 4 9,820 1 14S - - 5 9,965 1.2 14Manufacturing 6 1,583 1 1,531 2 811 9 5,925 0.7 RMiseellaneouts 6 2,3R7 2 969 1 2,131 9 5,4R7 0.6 7

Subtotal term loans 33 37,421 13 4,RR6 5 1,22 51 45.5.2 5.4 62

Working Capital LoansAgriculture - Forestry 2 26,463 - - - 2 26,463 3.1 16Construction 1 282 - - - - 1 282 - -Manufacturing 3 1,214 - - - - 3 1,214 0.2 2

Subtotal workingcapital loans 6 27,959 - - 6 27,959 3.3 3R

Total Loan Portfolio 39 65,380 13 4,86 5 57 73,491 4.7 100- w

Percentage of arrears 68 89 23 7 q 4 inn inn - -


66 - 4 4

MALAYSIA

DEVZLOPIENT FINANCE PROJECT

Sabab Development Bank Berhad

Resource Position as of December 31. 1985

M1 '000

A. Lona-Tern

-in capital 110,000Retained arnings 26,583

Subtotal 136.583

Mon cash Items(Accumulated Depreciation, Provision, etc.) 24,496

Loans from Gov't (net of repayment) 79,194

Other long-tern loans:xevolVIng Loan i Aseasb $50 million) 49,667Revolving Loan (BMB $50 million) 38,200OP Evergreen facility (Lloyds S30 million) 30,000US Dollar Borrowings 92,245Japanese Yen Borrowings 57,792FRN 97,100Deposit. (STD) 295,498

Subtotal 764,192

Total Long-Term Resources 900,775

Less=oans disbursed and outstanding (Long-term) 588,360Equity Investment 8,364Other fixed and long-term assets 5,447

Su,btotal 602,171

Resources available for disbursements 298,604

Less: Undisbursed loan approvals (nominated & won-nominated) 53,139

Resources available for approval 245.465

B. Short-TermDeposits (Toanable portion) 82,800Short-tern borrowings 21,000

Total Short-Term Resources 103.800

Less: Total outstanding portfolio (short-term) 182,896

Resources Available for Disbursement (79,096)

Less: Outstanding (short-tern) 58,798

Resources available for further commitments (137.894)

C. Total Resources available for approval 107,571


- 67 - Afu 3rable 10

MALAYSIA

DEMVLOPMENT FINANC PROJECT

Sabah Devel.ment Bank erbad

Prolected Loan Ws ri . 186-O /a

1986 1967 1988 1989 1990

Loan ApprovalsWorking capital loans /b 31,274 34,212 45,433 46,976 49,637Term lo3ns 110,571 111,888 115,277 129,805 137,751

Subtotal (gross loans) 141,845 146,100 160,710 176,781 187,388

Cancellations 7,092 7,305 8,036 8,839 9,369

Total Net Loans Approved 134,753 138,795 152,674 167,942 178,019

DisbursementsWorking capital loans /b 29,192 35,553 46,010 46,570 50,207Term loans 68,114 82,957 107,358 108,664 117,151Staff loans 1,542 1,805 2,049 2,298 2,570

Total Disbursements 98,848 120,315 155,417 157,532 169,928

RepaymentsWorking capital loans lb 32,228 17,450 19,173 24,222 32,15'Term loans 83,543 96,493 139,464 147,932 147,PSQStaff loans 1,095 1,337 1,S56 1,783 2,r2s

Total Repayments 116,866 115,280 160,193 173,937 182,044

Total OutstandingWorking capital loans /b 1R8,098 206,201 233,038 255,386 273,434Term loans 652,891 639,355 607,248 567,980 537,272Staff loans 9,382 9,R50 10,344 10,859 1J,4(n

Total Outstanding /c 850,371 855,406 850,630 834,225 822,1nQ

/a Loan operations include following foreign currency donominated loans:

1986 19R7 1988 1989 1990

Approvalsuss (T00o) 3,443 5,013 12,903 7,370 83rYen ('000) - - - -

DisbursementsUSS ('000) 3,433 5,013 12,903 7,730 830Yen ('000) 1,353,000 - - -

RieparurntsUS$ ( 000) 3,443 5,013 20,520 14,934 A,444Yen ('000) - - 1,080,000 1,080,000 1,080,000

OutstandingUS$ ( 000) 81,327 81,327 73,710 66,096 58,482Yen ('000) 6,000,000 6,000,000 4,920,000 3,840,000 2,760,0nn

/b Consists of revolving credits, loans for working capital requirements, billdiscounting, trade receipts, etc.

/c Excludes interest in arrears.

AlP Projects DepartmentJuly 21, 1986

- 68 - A

MALAYSIA

DEMLOMNT FINACE PROJZCt

Sabah Deweloment Bank ehrbed

Projected Belance Sheets. 1486-90(S '000)

As at December 31 1986 1987 1988 1989 1990

A5SUTS

e ud bcnk\balance 750 711 970 700 700S rittie 58,000 53,000 50,000 48,000 43,000Due from tie - short-term 148,500 169,000 179.500 142,600 127,600Tred flmncing nd diecounting 22,248 22,922 23,684 24,355 25,116Project financing - short-term non-nominated 86,057 93.998 103,497 110,523 121,149Less reserve for loon losses (3,792) (4,018) (4,289) (4,489) (4,793)Current _turities of long-term project financing 92,497 134,107 141,117 145,052 140,092Arrears account 40,720 44,324 48,623 51,827 56,656laterest receivable 37,403 37,595 3R,R70 37,731 38,714Others 780 705 1,378 805 804

Total Current Assets 483.161 552,344 583,290

557,104 549,0RF

Long-Term AseetsProject financing - long-term

leodnated 179,081 147,607 129,183 110,059 78,939lon-nouinated 25A,171 281,9a3 310,490 331,567 363,596Non-novinated (F/C) 254.712 254,712 224,870 195,035 165,2M0

Total Project Financing 691,964 684,312 664,543 636,661 607,735

Less reserve for loan losses (11,S40) (12,076) (12,046) (11,849) (11,P98)Less current aturities (92,497) (134,107) (141,117) (145,0S2) (140,')92)

Niet Project Financing SA7,q27 538.129 511,38r 480 97- 455,745

Staff loans 9,382 9,d50 10,343 10,359 11,4."Equity investment 8,112 10,112 10,112 11,; 1,11

Total Long-Term Assets 605,421 558,091 531,835 5C3,231 48;,2

Fixed assets 1,576 1,3R5 964 '58R 1 61Intangible aesees 1,446 837 262 2,C28 1,569

TOTAL ASSETS 1,091.606 1,112,657 1,116,351 1,063,121 1, 12,1

LJIlLlTIES AND EQUITCurrent Liebiltties

Time deposits (current) 172,125 154,913 139,421 125,479 112,Q11Short-term borrovings 20,000 28,000 32,000 36,00( 40,nooCurrent maturities of long-term borrowings 4,635 38,062 67,666 67,647 34,537Interest payeble 42,756 42,951 42,200 38,420 35,3PROthers 16,719 16,424 18,385 16,328 19,701

Total Current Liabilitie 256,235 280,350 299,672 283,874 242,557

LomaTere LiabilitiesSpecie]l time deposits 179,081 147,607 - - -Revolvings loans 117,200 116,533 116,200 116,200 116,200Foreign currency borrowings 154,712 154,712 124.37n 95,n35 65,200Floating rete notes 100,000 100,000 100,000Governet loans 81,992 R2,264 211,515 IQ3,180 163,42AWorld Snk and other term loans 30,000 75,000 120,000 202,000 210,000

Total Term Liabilities 662.985 676,116 672,085 606,415 554,826

Less current mturities (4,635) (38,062) (67,666) (67,647) (34,537)

Total Long-Term Liabilities 6M.350 638,054 604.419 538,768 52n.2P9

NU-Up cepital 140,000 150,000 160,000 180,0oo 200,000Degery. 33,000 33,000 43,000 43,000 53,000Ihappropriate profits 4,021 11,253 0,2hO 17,47Q 16,1R7

Total Equlty 177,021 194,253 212.26F 240,479 269,187

ML LIAWLTU Me uTt 1,0*1.606 1.112,657 IS116.151 1,063,121 1,032,031

AD Projects DepartmentJuly 21, 1986

- 69 -

Table 12

MALAYSIA



Projected Income Statements, 1986-90(r '00)


IncomeInterest on loans and advances 80,182 81,781 82,863 82,961 84,586Interest on investments 608 608 608 608 608Interest on deposits 17,615 19,035 19,725 16,334 14,459Guarantees 6,029 6,550 7,169 7,636 8,531Other income 2,194 2,076 2,112 2,076 2,073

Total Income 106,628 110,050 112,477 109,615 110,257

ExpensesInterest on foreign currency borrowings 23,704 29,217 31,209 28,942 27,325Interest on domestic currency borrowings 44,485 41,009 39,011 37,477 36,299General and administrative expenses 10,119 10,539 10,99Q 11,577 12,261Provision for doubtful accounts 28 762 240 3 354

Total Fxpenses 7R,336 81,S27 81,459 77,999 76,23A


Less: Taxation 13,594 14,058 15,0O4 15,178 16,603

Net Income 14,698 14,465 16,014 16,438 17,416

AppropriationDividends 7,349 7,233 8,n07 8,219 9,708Reserves 10,000 - 10,000 - 10,000


_ 70 - ANNEX 3- 70 - Table 13

MALAYSIA

DEV=LOPFHET FINANCE PROJECT

Sabah DeveloPent Bank Berhad

Projected ash l Stateents. 1986-90;WUUU


Sourcea of FundsIncome berore Interest and tax 96,479 98,748 101,238 98,033 97,441Noneash eharges 1,268 1,836 1,147 (1,533) 1,127Increase in: Short-term borrowing - 8,000 4,000 4,OO 4,000

Other payablae 4,269 - 1,549 424 978Other liabilities - - - 20 393Interest payable 205 195 - - -Revolving loans 2,633 - _ _ _Foreign currency borrowings 13,530 - - - -Covernment loans 465 272 129,251 - -World lank and other term loans 30,000 45,000 45,000 82,500 7,500Comon stock 20,000 10,000 10,000 20,000 20,0oo

Decrease in: Securities purchased for resale - 5,000 3,000 2,000 5,000Nominated loans ST 2,878 - - - -Due from time - ST - - 36,900 15,000Interest receivable - 1,017Other assets 7 73 - 563 -Arrears account 1,207 - _- -Nominated loans - LT 19,922 31,474 18,424 19,124 31,120Non-noodnated loans FC-LT 8,636 - 29,842 29,835 29,835Premises and equipment - - 89 - -

Total 201,492 200,600 343,540 291,876 213,412

Appl'cstton of FundsPynt of interest 6P,188 70,227 70,219 66,419 63,622Payment of income tax 13,593 1 4 ,0 5 6 15,004 15,176 16,403Payment of dividends 7,34Q 7,213 8,007 8,219 8,708Decrease in: Time deposits ST 19,125 17,212 15,492 13,942 12,548

Short-term borrowings 3,S(Y' - - - -Other pyables - 33 - - -Interest payable - - 751 3,780 3,032Other liabilities 4) h4 88 - -Special time deposits 1, ,Q22 ,44 147,607 - _Revolving loans - 67 333 - 29,835Floating rate notes -- - 100,000 -Foreign currency borrowings - - 29,842 29,835 -

Government loans - - - 18,335 2Q,754

Increase in: Securities purchased for resale 6,00n - - - _Due from time ST 44,500 20,500 10,500 - -Trade financing 648 674 702 731 761Non-nominated loans - ST - 7,941 9,499 7,026 10,676Arrears account - 3,604 4,299 3,205 4,829Interest receivable 4,521 192 1,275 861 -Other assets 37 - 673 - -Non-nominated loans - LT - 23,822 28,497 21,077 32,029Non-nominated loans - FC 13,530 - - - -Staff loans 447 468 493 516 544Equity investment - 2,000 - 3,000 -Premises and equipment 128 272 - 25 671

Total 201,529 200,639 343,281 292,146 213,412

Increase/(decreaee) in cash (37) (3Q9 259 (270) -Opening balance 787 750 711 970 700Closing balance 750 711 970 700 700


- 71 -AM 3-71- ~~~~~ANNEX 3Table 14

MALAYSIA



Projected Financial Indicators, 1986-90

1986 1987 1988 1989 1990

As % of Total Average AssetsGross income 9.93 9.99 10.09 10.05 10.49Financial expense 6.35 6.37 6.30 6.09 6.07Gross spread (1-2) 3.58 3.62 3.79 3.96 4.42Administrative expense 0.94 0.96 0.99 1.06 1.17Provisions - 0.07 0.02 - -Net income (after taxes) 1.37 1.31 1.44 1.51 1.66

Net Income as x of:Average equity 8.99 7.79 7.88 7.26 6.83Share capital 10.50 9.64 10.01 9.13 8.71

Other RatiosIncome from loanr as % ofaverage loan portfolio /c 9.52 9.77 9.90 10.04 10.39

Cost of debt as % of averagetotal borrowings 9.56 1f.25 10.78 9.80 10.20

Interest coverage /a 1.42 1.42 1.45 1.49 1.54Debt service coverage /b 1A9, 1.7Q 2.07 1.07 1.84Current ratio 1.R9 1.97 1.95 1.96 2.26Long-term debt/equity /d 2.73 2.72 3.17 2.50 2.06Total debt/equity 5.17 4.73 4.26 3.43 2.83Provision as % of portfolio 1.80 1.88 1.92 1.96 2.03

/a Net income before tax, provisions, interest and depreciation to interestcharges.

/b Net income after tax + noncash charges + interest charges + term loan col-lection to interest charges + repayment of term borrowing.

/c Includes loans and advances outstanding and bills discounted.7T Excludes from long-term debt special time deposits which are linked to

nominated projects.


MALAYSIA


Eatimated Commitments and Dtaburese nt. of Proposed bank Loan /a

(1ls$ '000}

SDS BKPM Total

Dta- n1Dn- Comd taent eb.wrremeat

IbRD fiscal Commitment bursement Com_itment burgement Period Cumulattie Period Cumulative

year & semester Amount 2/b Amount /h2 Amount 27b Amount 2/b amount amount 2 b amount amount 5/b

FY87lat *eeater 2nd Semester 3,150 7 900 2 1,400 7 400 2 4,550 4,550 7 1,300 1,300 2

Subtotal 3.150 7 900 2 1,400 7 400 2 4,550 4,550 7 1,300 1,300 2

FY88lot *emeater 13,950 36 2,250 7 6,200 1R 1,000 7 20,150 24,700 38 3,250 4,550 7

2nd semester 14,850 71 5,850 20 6,600 71 2,600 20 21,450 46,150 71 6,450 13,000 20

Subtotal 26,600 71 ,11 0 20 12,800 71 6,200 20 41,600 46,150 71 11,700 13,OW 20

Y69let semeater 9,nn0 q9 8,100 3R 4,000 91 3,600 38 13,00n 59,150 91 11,700 24,700 3F

2nd semester 4,050 100 8,100 56 1,800 100 3,600 56 5,850 6S,000 100 11,700 36,400 56

Subtotal 13,050 100 16.200 56 5,600 100 56 18,850 65,000 100 23,400 36,450 56

FY90lst semester - - 6,750 71 - - 1,000 71 - - - 9,750 46,150 71

2nd semester - - 5,400 83 - - 2,400 63 - - - 7,600 53,950 83

Subtotal i2,150 83 - -4 no83 17550 53,950 83

mllst semester - - 3,600 q - - 1,h00 91 - - - 5,200 S9,150 91

2nd semwater - - 2,250 96 - - 1,000 96 - - - 3,t50 62,400 96

Subtotal - S,850 96 _ - I,ROO 96 - _,450 62,400 96

FY92Ist seimater - - 1,800 100 - - 800 100 - - - 2,600 65,00o 100

2nd semester - - - - - - - - - - - - - -

Subtotal - _ 1,ROO 100 _ - 600 100 - - - 2.600 65,000 100

Total 4S,000 100 45,000 100 20,000 100 2N,000 100 65,000 65,000 100 6S,000 65,000 100

/a Assumed loan effectiveness date is January I, 1987. DIsbtirsement percentages are based on Standard Disbureement Profile for nrC loan, In

Fast Asta and Pactfic Region.

/b Cumulative.

AEP Projects DepartmentJulv 21. 1986

- 73 -

ANNEX 5

MALAYSIA

DEVELOPKENT FINANCE PROJECT

Selected Documents and Data Available in the Project File

1. Mlaaysia Development Strategies and their Financing, 1985, (ReportNo. 5560-KA).

2. Malaysia: Industrializing a Primary Producer, 1985, (ReportNo. 5908-MA).

3. Credit Department Manual, 1985, Bank Kemajuan Perusahaan Malaysia Berhad.

4. Sabah and The Sabah Development Bank, 1985, Sabah Development BankBerhad.

5. Project Supervision, 1983, Sabah Development Bank Berhad.

6. Descriptive and Background References, 1985, Sabah Development BankBerhad.

AEP Project DepartmentJuly 21, 1986

-74- CHART 1

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