Whereas the Republic of China and Solomon Islands (hereinafter
referred to as the Contracting Parties) wish to further strengt
hen their economic cooperation, and through such cooperation to
deepen their traditional friendship;

Whereas the Republic of China wishes to share its development e-
xperiences and Solomon Islands considers such experiences are of
great value to its development efforts;

Whereas the Republic of China and Solomon Islands recognize the
importance of rural development for Solomon Islands' economic p-
rogress; and

Whereas Solomon Islands recognizes that the Small Holder's Proj-
ect carried out by the ROC agricultural technical mission has m-
ade substantial contribution to the wellbeing of rural people.

Now therefore the parties hereto hereby agree as follows:
(a) The Republic of China agrees to provide a US$2 million conc-
essional loan to the Government of Solomon Islands to finan-
ce the proposed Rural Credit Project, substantially in acco-
rdance with the provisions set forth in Annex to this Memor-
andum of Understanding;
(b) The Solomon Islands wishes to confirm that the concessional
loan mentioned above and provided by the Republic of China
is important to its development program and undertakes to p-
rovide all necessary resources to implement the program men-
tioned in the Annex to this Memorandum of Understanding.
(c) This Memorandum of Understanding shall enter into effect up-
on signature.
(d) This Memorandum of Understanding may be amended by mutual c-
onsent through the diplomatic channel.
(e) Either of the Contracting Parties may terminate this Memora-
ndum of Understanding at any time by giving six months' wri-
tten notice to the other Party through the diplomatic chann-
el.

IN WITNESS WHEREOF the undersigned, being duly authorized, have
signed this Memorandum of Understanding.

Done at Honiara, in duplicate, in the English language, This si-
xth day of July, 1998.

For the Republic of China
[Signed]
蕭萬長

For Solomon Islands
[Signed]
Ulfaalu

Annex

Project Description
Rural Credit Project for the Solomon Islands
A.Project Objectives and Description
1.The primary objective of the project is to accelerate rural d-
evelopment of the Solomon Islands. The development potentials
in the country, especially those in rural area, are not well
activated due to lack of funding sources and skills required
for profitable commercial and production activities. Two goals
are envisaged by the proposed project. First, by providing li-
nes of credit through the Development Bank of Solomon Islands
(the DBSI) and the Credit Union League (SICUL) to the rural p-
eople, the project aims to overcome the resource constraint f-
aced by the rural people, and to enhance the efficiency of re-
source mobilization and strengthen the mechanism for developm-
ent fund intermediation and allocation. Second, by providing
credit to the participants of the rice produce extension proj-
ect sponsored by ROC agricultural technical mission, the proj-
ect will assist the farmers to sustain their level of product-
ion and increase the income of rural farmers.
2.Project Description. The ICDF will provide an U.S. dollar term
loan in an aggregate principal amount not exceeding US$2M to
the Government of Solomon Islands (SIG) for 15 years (includi-
ng 3 years grace period) at an interest rate of 3.5% per annum
payable semiannually. The SIG will in turn channel the loan p-
roceeds in SI dollars to finance the activities undertaken un-
der the following four components:
a.Credit to the DBSI (US$1.9M)
1.Rural Credit: US$1.5M will be channeled through the DBSI
to finance income generating activities of the individuals
, communities, or enterprises. The terms and conditions f-
or this line of operations is as follows:
.Project area: rural areas that encompass all over the So-
lomon Islands except for the Honiara city
.Eligible sub-projects: the activities to be financed will
be as broad as possible to cover all kinds of income gen-
erating activities in rural area, which may include, but
not limited to, projects in the agricultural, industrial,
commerce, transportation, and service sectors.
.Sub-project appraisal procedure: the appraisal of the su-
bprojects will follow the lending policy and procedures
of the DBSI as stated in the General Policy, Procedures
and Guidelines for the ICDF Rural Credit Line as attached
in the Appendix I, and the General Policy Statement, Pro-
cedures and Lending Guidelines of the DBSI.
.Terms of the sub-loan: the terms of the sub-loan will be
determined by the DBSI in according with the credit poli-
cy of the Bank, taking into account the project risk inv-
olved, the nature of the project and the projected cashf-
low of each sub-borrower. As a general rule, the terms w-
ill be the following:
Sub-loan Amount: SI$2,500 - SI$250,000.
Percentage of total cost of sub-project financed: 65% of
total project cost.
Term of loan: up to 10 years
Grace period: up to 2 years
Interest rate: will be in principle the market rate
2.Credit to the participants of ROC agricultural technical
mission (ATM) Small Holders Scheme: US$300,000 (15%) will
be channeled through the DBSI to the participants of the
ROC Small Holders Scheme (the SHS). The same appraisal pr-
ocedures will apply to this line of credit, subject to the
condition that recommendation from ROC ATM on the technic-
al feasibility of the project will be required. To give a-
dequate incentive to the farmers in continuing their agri-
culture production activities, the interest rate applied
to this credit line should be 3 lower than the rate appli-
ed to the sub-loans of Rural-Credit. The loan and grace p-
eriod will be determined by the nature of the projects, a-
nd, under no circumstances, will exceed 10 and 2 years re-
spectively.
3.Training Component: US$100,000 will be used to finance tr-
aining programs approved by the DBSI. The programs will a-
im to:
a.strengthen the capacity of the DBSI staff;
b.assist the rural people in identifying investment proje-
cts; enhance their skill and capacity in starting a busi
ness.
c.train the people in the rural area, especially the borr-
owers of the Rural Credit, to enhance their project imp-
lementation and management capacity;
Detail annual plan for the training program will be pre-
pared by the DBSI and submitted to the ICDF for approval
.
b.Credit to the Credit Union League: (US$0.1 M)
Credit to support the Central Finance Facility (CFF) of thc
SICUL: US$100,000 will be channeled from the SIG through the
Ministry of Finance to enable the SICUL promoting investment
in rural area through widespread credit unions.
B.Project Implementation Arrangement
a.ICDF Loan to the SIG
3.Terms of ICDF Loan. The interest rate will be 3.5% per an-
num for a period of fifteen years, including three years
grace period.
4.The US$2 million Loan will be provided to the SIG. The SIG
will channel the proceeds of the ICDF loan through the Mi-
nistry of Finance (MoF) to the DBSI and the Credit Union
League to rural area to support the activities of differe-
nt project components. The terms of MoF Loan will be in l-
ine with that of ICDF Loan.
b.Credit to the DBSI
5.The MoF will on-lend the ICDF loan to the DBSI at 3.5% of
interest rate. The loan will be denominated in Solomon Is-
land dollars, while the loan and grace period will be in
line with that of the ICDF loan.
6.The MoF will be responsible for project monitoring and su-
pervision based on the credit policy as well as the rules
and regulations set out by the Project.
7.Re-lending terms to the end user of the Fund. Terms of cr-
edit to the end user will depend on each sub-project fina-
nced and will be established at the moment of approval of
each operation. To enhance the risk sharing mechansim and
build an incentive system in the project, the proposed Lo-
an will finance only 65% of the total cost of sub-project,
while the DBSI and sub-project sponsor will be required to
finance the remaining 35%. However, for Credit to the Par-
ticipants of ROC ATM Small Holders Scheme, preferential t-
erms may be applied when recommendation is made by the ROC
ATM.
8.Collateral/ Guarantee requirement. The normal collateral
requirement will apply to the sub-loans. Whenever any pot-
ential sub-borrower is not able to meet the collateral re-
quirement, the DBSI will submit the project to the Central
Bank to seek proper guarantee from the Small Loan Guarant-
ee Scheme (SLGS).
9.Roles of the DBSI. The DBSI will use the credit to extend
sub-loans in local currency to the rural individuals or e-
ntities in accordance with the accreditation policy of the
scheme. The DBSI will be responsible for each project's e-
ligibility declaration, and for informing the SIG of their
status.
10.Selection and Appraisal of Subprojects. On applying for a
sub-loan under the Rural Credit component, the credit app-
licants will be required to present evidence of intent to
make a capital asset investment or to procure raw materia-
ls or parts for production.
11.The subprojects would be selected and appraised by the DB-
SI in accordance with sound banking and financial princip-
les and procedures. The appraisal of subprojects should t-
ake into consideration its financial viability, market po-
tential for the goods or services to be provided by the s-
ubproject and proposed financing for the capital costs of
the sub-project.
12.Environment Aspects. Given the nature of the Project, whi-
ch supports small-scale economic activities in manufactur-
ing, trading, services, etc., the environmental impact ge-
nerated is expected to be minimal. However, when an indiv-
idual investment project has been detected to have negati-
ve environmental effect, environment safeguards should be
incorporated into the project design and implementation.
13.The DBSI will determine the repayment schedule of each sub
-loan, taking into account the programmed cash flow of the
subproject, subject to the term ceiling of the sub-loans.
c.Credit to the SICUL
14.Credit to the SICUL will be used as start-up capital for
it to operate the Central Finance Facility (CFF) that aims
to finance rural investment projects through credit unions
with sound management.
15.The terms of the loan will be in line with that of the IC-
DF loan. The management of the facility will be subject to
close supervision of the Central Bank.
16.A well-prepared policy and operation plan to extending lo-
ans to the Credit Unions, as well as the procedures to be
applied to appraise sub-loans to the Credit Union, have to
be reviewed by the CBSI with the concurrence of the MoF b-
efore submitted to the ICDF for approval.
d.Disbursement and Repayment Arrangements
17.Disbursement. Imprest fund approach will be applied to the
disbursement to the DBSI, while one time disbursement of
US$0.1 million will be made to the SICUL. The Request for
Drawdown shall be submitted by the MoF to the ICDF, while
the disbursement will be made directly to the project acc-
ounts (PA), the first drawdown request by the SIG should
be made within 60 days after Loan Agreement Date.
18.The PAs will be kept by the CBSI under the name of the DB-
SI or the SICUL, depending on the purpose use of the proc-
eeds. However, the CBSI shall not at any time for any rea-
sons withhold the PAs, except when it is approved by the
ICDF.
19.All repayments from sub-projects shall be kept in the PAs
and recycled to finance new projects eligible for financi-
ng from the Project.
20.The first disbursement to the PAs of the DBSI will be US$0
.4 million. To apply for replenishment of the PA, a withd-
rawal application along with a Statement of Expenditure (
SOE) summarizing payments from the DBSI to sub-borrowers
in a minimum amounts of US$0.3 million, will be submitted
by the DBSI to the ICDF for review. For making replenishm-
ent, the SOE and other documents should show to the satis-
faction of the ICDF that the proceeds of loans have been
used exclusively in accordance with the cond itions of the
Project.
21.The loan allocation for the three components will be revi-
ewed and adjustment can be made subject to the agreement
of the ICDF, the SIG, and/or the DBSI and the SICUL, one
year from the first drawdown.
22.For each sub-loan financed, the DBSI should be sure that:
-The loan funds will not be used for the repayment or ref-
inancing of previous obligations of the end users;
-All other conditions will be established in accordance w-
ith the regulations and practices normally applied by the
DBSI;
-Each beneficiary will permit the supervision of the cred-
it by the DBSI and the ICDF.
23.Commitment Fee and Commitment Period. The MoF will pay the
ICDF a commitment fee at a rate of 0.75% per annum on the
undisbursed balance of the loan. Payment of the commitment
fee will be made on the Interest Payment Date. The Loan c-
losing date will be 36 months from the date of the first
drawdown of the Loan.
24.Repayment of Principal. The SIG will repay to the ICDF the
principal amount of the Loan drawn down on the last day of
the Commitment Period in United States Dollars in 24 equal
installments.
e.Subproject Monitoring
25.The MoF will furnish to the ICDF all such reports and inf-
ormation as the ICDF may reasonably request, including but
not limited to, (i) a quarterly report on the implementat-
ion of the Project within two months after the end of each
quarter; (ii) a projected annual disbursement schedule for
the loan, broken down by quarters by 15 December each year
; (iii) a completion report on the Project within three m-
onths after the closing date of the loan.
26.The MoF will make sure that the DBSI and the SICUL monitor
sub-projects during the implementation and operational st-
ages and, for the sub-loans over SI$100,000, the DBSI will
submit semi-annual reports on the utilization of the sub-
loan, and the operation and financial performance of sub-
borrowers and sub-projects under implementation. The form-
at of the reports shall be pre-approved by the ICDF. Not
withstanding this, the ICDF shall reserve the right to ca-
rry out independent inspections of sub-bor rowers and sub-
projects.