Tajikistan - Expanding Finance in Rural Areas1 Rural and Agricultural Finance in Tajikistan Current Status, Challenges and Perspectives Frank Höllinger

Tajikistan - Expanding Finance in Rural Areas 1

Rural and Agricultural Finance in Tajikistan

Current Status, Challenges and PerspectivesCurrent Status, Challenges and Perspectives

Frank Höllinger

FAO, Rome


Overview of Presentation

Background of study The agricultural sector The financial sector Supply and demand for agricultural finance Perspectives


Background of Study Purpose:

Assess structure and size of demand and supply for rural/agricultural finance

Make recommendations for enhancing the supply Approach:

Data collection and interviews with stakeholders during two field missions (Dec 05/ March 06)

Review of literature and secondary data


Agriculture and the Rural Economy Agriculture: backbone of Tajik economy

25% of GDP, 70% of total employment, 26% of exports and 39% of tax revenues

Agriculture dominates rural economy Rural non-farm economy poorly developedRural non-farm economy poorly developed

Suitable agro-ecologic conditions for a wide range of crop and livestock activities: Fruits, vegetables, oilseeds, grains, meat, dairy, etc.

Dominant crop: cotton 1/3 of cropped area, 2/3 of total crop output value, 75-90% of ag.

exports, 85% of fertilizer use Livestock production only accounts for 20% of ag. output


Recent Trends in Crop Production Output of the Major Crops

0

200

400

600

800

1000

1200

1988 1992 1995 1997 2002 2003 2004 2005

Year

Tons '000

CottonCereal Crops a/PotatoVegetables b/Fruits


Farming Structure

700,000 small-scale producers700,000 small-scale producers (<0.3 ha) => 1,2% of land 27,000 Dekhan Farms (1 – 800 ha) => 61% of land27,000 Dekhan Farms (1 – 800 ha) => 61% of land Kolkhozes and Sovkhozes still control 25% of land

Land Distribution to Different Types of Holdings, 2006

8%

18%

61%

1% 12%

Kolkhozes

Sovkhozes

Land of Dehkan Farms

Houshold and SubsidiaryLandOther


Production trends by farm typeFigure 4. Trends in Agricultural Output by Farm Type

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

'000

So

mo

ni

(200

0 p

rice

s)

Total Production Agricultural entities Dekhkan farms Household Plots

Total Production

Output (000 Som)

Household Plots

Agricultural Entities

Dekkan Farms


Share of farm types in crop output

0

100

200

300

400

500

600

700

800

900

1000

Cotton Cereal Crops Potato Vegetables Fruits

Main crops

Tons '000

Household plots

DFF

State/collective


Livestock production Trends

Share of livestock in total ag. output decreased from 40% to 20%

Recovery of cattle, sheep and goat production Increased importance of dairy production Cattle production shifted from collective farms to

households (87%) Challenges

Low productivity of household production Overgrazing of near-village pastures


Issues Poorly integrated value chains for non-cotton crops

and livestock Atomized production and marketing structures: high

transaction costs Processors: Outdated equipment, poor quality and

packaging, limited access to high value markets, lack of FDI

Lack of liquidity, barter transactions, difficulties in accessing raw material

Lack of trust between farmers and processors


Main constraints to ag growth Deterioration of farm infrastructure and equipment Difficulties in accessing quality inputs and services Cotton: production quota, low profitability, debt Incomplete land reform process: Insecure land rights,

incentive problems of DFs Limited management skills Marketing: limited size of domestic market, access barriers to

export markets, topography constrains market integration Limited access to finance


The Banking System Structure and performance have improved but

several issues and challenges remain: Low levels of financial intermediation

Deposits 4-5% of GDP, Credit 14 – 19% of GDP, including cotton debt

Mainly short-term assets and liabilities High spreads Weak lending skills


Bank lending to agriculture (1)Current features:

Only 10% of agricultural lending goes to non-cotton crops (US$ 20 mn in 2005)

Clients: mainly large farms and processors


Bank lending to agriculture (2)

Issues and challenges:Issues and challenges: Limited branch network in rural areas

High transaction costs

Poorly adjusted products and procedures Short maturities, over-reliance on collateral and

business plans, etc.

Poor image among rural producers Perceived lack of interest


The Microfinance Sector

Supplier of Funds Loan Portfolio (US$)Share in Total Loan

Portfolio (%)

Commercial Banks (TMSEF) 15.197.929 37.0%

MFOs (AMFOT members) 12.800.000 31.1%

First Microfinance Bank 7.000.000 17.0%

UNDP Community Development Funds 2.700.000 6.6%

Mountain Areas Development Programme 700.000 1.7%

Public Agencies 1.400.000 3.4%

Other 1.300.000 3.2%

Total 41.097.929 100%


Microfinance Organizations (1)Features:Features:

4 big MFOs (>US$ 1mn), 9 medium sized MFOs 4 big MFOs (>US$ 1mn), 9 medium sized MFOs (>US$ 100,000), many small ones (>US$ 100,000), many small ones

US$ 12.8 mn total portfolio

MFO lendingMFO lending to agriculture Better presence in rural areas NGOs provide non-financial services (e.g.,

business advice, extension)


Microfinance Organizations (2)Issues and Challenges

Limited product features: Mainly group loans with highly standardized procedures Average loan sizes USD 300 – 400 High costs (often 4% per months flat)

Only suitable for a narrow range of activities: 36% livestock, only 6% agricultural production

Recent tends Growing competition in urban and peri-urban areas Introduction of indiv. lending and ag. lending by MFOs


Supply and demand: The Gap

Currently supply is limited to the top and the bottom end of the market

Main underserved market segments: 1. Small DFs (< 5ha): loan sizes up to USD 5000

2. Medium-sized DFs (5 – 100ha): loan sizes USD 3,000 to USD 20,000 and above

3. Medium-sized processors (USD 5,000 – 50,000)


Dimensions of potential demand700,000 Households:

Still unmet demand (USD 3-5 mn?), but need for product diversification

27,000 Dekhan Farms: Average working capital requirements USD 500/ha Example: 10ha farm => USD 5,000, plus investment capital

requirements

But: How many DFs are well managed and profitable enough to take and

repay loans? What is the absorption capacity of markets for incremental produce?


Perspectives (1) Adopt a gradual approach Link with initiatives in the agricultural / agri-

business sectors Finance different actors of agricultural value

chains Farmers, processors, input dealers, produce

dealers, exporters


Perspectives (2) Downscaling of banks:

Focus on small- and medium-sized DFs and processors,

Loan ranges: USD 3,000 – 20,000 and above Upscaling of MFOs:

Micro and small DFs Larger individual loans, up to USD 5,000


Perspectives (3) Innovations in products and procedures:Innovations in products and procedures:

Introduce cash flow based lending: grace periods, irregular repayment installments

Streamline loan appraisal / approval procedures Introduce flexible working capital finance products for

repeat customers: Automatic loans Credit lines and overdrafts

Be flexible with collateral focusing on cash flow and long-term relationship with client


Perspectives (4) Medium-term loans and leasing

Introduce (micro)-leases for farm and processing equipment and transport

Need for supply chain development to facilitate access to suitable technology


Perspectives (5) Enhance rural deposit mobilization:

to enlarge loanable funds to provide additional financial service to

customers to gain information on potential borrowers and

strengthen bank-customer relationship

Pilot savings-cum-loan products


Perspectives (6)Build institutional capacity for ag lending:Build institutional capacity for ag lending:

Recruit / train staff (loan officers, credit committee members, branch managers)

Elaborate cropping activity calendars, crop budgets and cash flows as decision support tools

Engage in strategic partnerships with actors in the agricultural sector (extension services, input suppliers, farmer associations, processors, etc)


Perspectives (Gov & Donors) Provide technical assistance to Banks and MFIs for

product innovation

Provide seed funding for introduction of term finance products

Enhance and better coordinate initiatives to support commercial agriculture and agri-business within a value chain framework


Perspectives (Gov & Donors) Improving legal and policy environment:

Improve land tenure security, create legal and institutional framework for land markets and mortgaging of land

Introduce other collateral options (warehouse receipt system)

Address cotton debt issue and underlying structure of cotton marketing and financing

Continue negotiations with neighboring countries to address barriers to trade


Thank you for your attention!

Documents

Tajikistan - Expanding Finance in Rural Areas1 Rural and Agricultural Finance in Tajikistan Current Status, Challenges and Perspectives Frank Höllinger