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2 Lack of Agricultural Finance

AccessBank has always provided financing to agriculture, but for its first five years of existence AccessBank lacked any dedicated products or specific approach to dealing with the agricultural sector in a coherent and adequate way. As a result, by January 2007 lending to agriculture accounted for only 1.3 percent by amount of the total business loan portfolio ($600,000 out of a portfolio of $47 million) and

5.1 percent in terms of number of loans (719 out of 14,143). As agriculture is estimated to account for 30 percent of GDP and to provide income and employment for 45 percent of all households in Azerbaijan, these figures clearly illustrate that the bank had not tapped the market potential.

In actuality, no financial institution in Azerbaijan had tapped this market. At the end of the first half of the last decade, there were practically no useful financial services for farmers and rural households in Azerbaijan. The availability of credit to smallholder farmers was extremely limited, despite of a number of public interventions.[1]

3 Typical Reservations Against Lending to Farmers

Even within AccessBank itself, among management as well as loan officers, there was high reluctance to lend to farmers. Agricultural lending was perceived as being “higher risk” compared to other, non-agricultural business lending. Perceptions in AccessBank reflected standard opinions of bankers who are not familiar with agriculture:

x Agricultural risks: External physical factors that have direct negative influence on the production process, such as bad weather or pests, were considered to make agricultural lending much more risk-prone than other types of lending. Additionally, as such risks tend to affect many borrowers at the same time, leading to substantial and unmanageable connected risks. Insurance or other mitigating mechanisms are not developed in Azerbaijan.

x Longer production cycles and irregular cash flows: Especially in primary agricultural production where production cycles tend to be long, the bank suspected a lack of reliable repayment capacity due to a lack of cash income in agricultural households. In Azerbaijan in particular, the prevalence of barter transactions and subsistence production was thought to negatively influence the steadiness of the borrowers' cash flow.

x Price and market risks: Agricultural products are often subject to severe seasonal and general price fluctuations induced by local, national, or international changes in demand or supply. This can be aggravated by quasi-monopolistic market structures for certain goods (due to locally dominant buyers). Once more, these risks are likely to affect many borrowers at the same time.

x Affordability of commercial micro-finance interest rates: Profit margins on investments in agriculture were considered lower than in other sectors, negatively influencing the borrowers' cash-flow and repayment capacity. As a consequence, agricultural entrepreneurs were believed to need subsidized financing.

x Weakness of collateral. Rural clients were considered to lack marketable collateral, which results in higher write-off amounts compared to other sectors with stronger collateral.

A second driver of skepticism in regard to agricultural lending was the assumed higher transaction and distribution costs for agricultural lending: As farmers typically live and work in small villages further away from the bank's branches, this increases travel times and costs for bank staff, especially for conducting loan analyses and monitoring. Moreover, it was believed that loans to smallholders would be below the average micro-loan size, which would also increase proportional transaction and distribution costs.

  • [1] See Lamberte/Fitchett (2006) for a summary of the rural financial market in Azerbaijan in the first half of the decade.
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