Transcript Financing Agriculture and Rural Development

Expanding Finance in Rural Areas
of the Kyrgyz Republic
by Michael Marx
Credit and Rural Finance, FAO Investment Centre
Overview of presentation
1. Background on mission and Kyrgyzstan
2. Agriculture
3. Financial sector
4. Financing of agriculture
5. Perspectives and recommendations
1. Background (1)
Our task was to assess:
●
the potential of the agricultural sector and
●
the ability of the financial sector to serve the
agricultural sector, and to recommend how this
could be expanded further
1. Background (2)
We did this through 3 activities:
●
assessment of the agricultural sector
●
assessment of the financial sector,
●
survey of farm households and food processors
We do therefore more concentrate on the
potential, rather than lamenting on the
constraints (which do exist)
1. Background (3)
3 reasons to invest more in the agricultural
sector:
●
Higher incidence of poverty in rural areas than in
urban ones
●
Agriculture contributes 37% to GDP, the highest
share in Central Asia (and Eastern Europe), and
11% to total exports; it absorbs 55% of total
labor
●
Potential to grow further
2. Agricultural sector
Some key issues (1)
●
56% of total land area is agricultural area
●
7% is arable land, 87% pastures
●
High dependence on irrigation
●
Increased pressure on the land (less available
land, more farmers)
●
Arable land/agricultural worker = 1.2 ha (53% of
1990 level)
Some key issues (2)
●
Low level of concentration of farming → high
level of dispersion, with its implications on risks,
dependency, transport costs, market
opportunities, etc.
●
Concentration on wheat, potatoes and cattle
●
Cotton is less important than in other countries
Wheat
●
Most important crop, ≈ 1m tons
●
Slow decline in production, falling profits, after
sharp increases in mid 1990s
●
Low average yields, as standard practices are
not followed, due to lack of capital
Other cereals
●
Maize, rice and barley are other important
cereals
●
High demand for Uzgen rice, no marketing
problems
●
Most of maize and barley is not marketed, but
consumed by producer
Potatoes
●
Second most important crop, 1.2 m tons
●
≈ one quarter home consumed, small quantities
exported
●
Very little processing (1%)
●
High variation of prices influencing production
quantity in next season
Cotton
● Important for the economy in Osh and
Jalalabad oblasts
● Slow growth trends, despite stagnant market
prices and slow payment of farmer
● Farmers benefit from a strong commodity
chain that covers all aspects from production
to marketing
Sugar beet and tobacco
●
Specific products with good value added
●
High dependency on the ability of the supply
chains and processors to absorb production
Oil seeds
●
Soybean, safflower, sunflower and mustard seed
steadily expanding
●
Reasonable profits, where marketing
arrangements exist
●
Further expansion for fodder production possible
Vegetables, fruits and berries
● Specific market requirements
● High exposure to price fluctuations
● Good potential if stable marketing arrangements
can be made
Livestock
●
Cattle most important, followed by sheep, goats,
horses, pigs, yaks
●
Processing of wool on the decline
●
Egg production increasing
●
Many smaller niches
Exports and imports
Major agricultural exports:
●
cotton, sugar, tobacco, hides
Major agricultural imports:
●
prepared food, chocolates, cigarettes, beer,
wheat, vegetable oils
Main producers
●
Private farmers were the main drivers of
marketable surplus production, using 71% of
arable land and accounting for 40% of total
output
●
Household farms with high intensity farming, but
smaller share for markets
●
Declining importance of the state farms
Fertilizers
● Scanty data, dominated by the ‘classical’
agronomy approach to maximize outputs, and
therefore not very reliable
● The good results achieved in some sectors were
due often to following the standard practices
● Prospects of increasing the use of inorganic
fertilizers
● Importers are usually small-scale
Agro-processing (1)
●
Big gap between potential and actual
achievements
●
Obsolete machinery, inadequate market
orientation, lack of finance, operating in niches
with small margins, in many of the older
companies; better systems in newer ones
Agro-processing (2)
● The commodity chains that existed during the
centrally-planned economy functioned very well
in the sense that all pieces functioned and
contributed to the outputs
● Some elements that disappeared under the
market system have not yet been replaced in all
commodities (input supply, market
arrangements, finance, transport)
● Cost of processing also increased with the
fragmentation of the producers
Agro-processing (3)
●
Key issue: could processors make all the
necessary arrangements (contract farming) to
secure inputs to farmers and inputs to factories?
●
Key constraints: management skills of
producer, marketing of products, access to
finance, mutual trust and confidence between
processor and producer
Conclusions (1)
●
Small production size, scattered producers, high
transport costs, distance to markets,
management skills, fragile natural environments
suggest to concentrate on higher-value, niche
markets, and a well diversified production
●
Investments in management, marketing, finance
are indispensable to tap the potential
Conclusions (2)
Market potential:
cotton, tobacco, barley, sugar beet, lucerne
seeds, seed potatoes, tomatoes, cucumber,
cherry tomatoes, berries, fresh beans, medicinal
herbs, mushrooms (?), cattle meat, milk, hides,
yak, pig, silk, wool, fresh water fish
3. Financial sector (1)
●
19 commercial banks
●
1 Govt.-owned agric. bank (KAFC)
●
106 microfinance institutions
●
306 credit unions
●
Pawnshops
3. Financial sector (2)
34.15
3.92
Loan portfolios USD Million
13.24
42.5
205.21
Commercial Banks
KAFC
Credit Unions
MFIs
Other Institutions
Financial sector (3)
●
Migrant remittances ($ 195 m) almost as high as
total loans outstanding of commercial banks ($
205 m) [2005]
3. Financial sector (4)
Loan portfolio 2005
Commercial banks
in % of GDP
8.6%
KAFC
1.8%
Credit unions
0.6%
MFIs
1.4%
Others
0.2%
Total
12.5%
3. Financial sector (5)
●
Loan purposes of commercial banks [2004] still
concentrating on trade (49%) and manufacturing
(18%)
●
6% for construction
●
3% for agriculture (increasing trend)
3. Financial sector (6)
●
EBRD-funded Micro and Small enterprise
Finance Facility implemented since 2002
●
Downgrading of commercial banks to suit MSE
requirements
●
No collateral for loans below USD 1000
●
Quick loan processing (2-15 days)
3. Financial sector (7)
● Rapid expansion with excellent portfolio quality (PAR 30
days + > 1%!), more profitable than corporate lending
● 20 000 loans outstanding worth $ 36 million after 4 years
3. Financial sector (8)
Key constraints:
● Low confidence of the public into banks
● Inadequate mobilization of deposits (efforts and
products)
● Inadequate legislation on collateral and collateral
substitutes
● Insufficient lending experience (risk analysis,
term loans, enterprises)
3. Financial sector (9)
Key constraints (cont’d.):
● Low capitalization of the banks
● Term structure of liabilities, with predominance
of short term funds, only permitting short-term
lending (73%)
● Modest overall profitability of banks (2.4% RoE)
● Big spreads between deposit and lending rates
(23% for som lending [16% for $])
4. Financing of agriculture (1)
● Moderate level of funding agriculture (≈ $ 48
million ≈ 16% of total loans = 2% of GDP), most
of which coming from KAFC
● KAFC portfolio switching from livestock to other
agricultural activities
● Growing exposure of commercial banks
● 8% of EBRD SME Finance Facility used for
agric. lending after only 15 months
4. Financing of agriculture (2)
● Poor experience in the past with agricultural
finance (high debts in 1990s)
● Perceived often as high risk + low return
● Insufficient experience by staff
● Growing interest due to govt. talk and search for
borrowers
● Insufficient knowledge where to start/continue
● Absence of more innovative concepts beyond
direct lending, such as contract financing or
structured financing in supply chains
5. Perspectives (1)
● Development of collateral substitutes, such as
warehouse receipts, pledging of future harvest +
secured sales, livestock, personal guarantees
● Increase threshold of zero collateral lending
(currently $ 1000) for good clients
● Revision of land laws to permit banks accept
farm land as collateral, more security for buyers
of agricultural land
● Revision of collateral legislation
5. Perspectives (2)
● Assist banks to identify profitable supply chains
and finance supply chain actors; this goes
beyond the mere financing of processors to fund
contract farmers
● This also requires more investments in building
permanent, mutually beneficial relationships
between producer/farmer and processor, and
eventually the facilitation of equity participation
by farmers in the processing sector
From classical finance to Commodity/Market Supply
Chain Finance
Finance
Supplier’s
Supplie
r
,
Supplier
Procure
Produce/
Process
Transport
Sell
Customer Customer’s
Customer
5. Perspectives (3)
● Assistance
to build the capacity of farmer
associations and cooperatives to manage their
role in supply chains
●
Experimentation by banks to provide structured
finance in supply chains (cession of payment
claims, domiciliation of payments in bank
accounts as collateral for working capital loans)
5. Perspectives (4)
● Experimentation on products linking savings and
credit
● Outreach of financial institutions in general to
poor and low-income households
● Training of bank staff in medium to large-scale
agricultural project analysis
● Adjusting repayment schedules to cash flows
● Assistance in designing new products and crossselling approaches
What clients want
●
35% want lower interest rates
●
18% want longer term credit
●
8% want less bureaucracy and red tape
Thank you
for your kind attention!