Financing Agriculture in the Kyrgyz Republic

1. Financing Agriculture in the Kyrgyz Republic • Issues, constraints and perspectives by Michael Marx, Rural Finance Officer, FAO Investment Centre EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

2. Small financial sector Loans = 13% of GDP EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

3. Downgrading of commercial banks • Good progress achieved: $ 36m – 20000 clients – PAR +30 days below 1%) • More profitable than corporate lending • No collateral for loans below USD 1000 • Quick loan processing (2-15 days), depending on loan size EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

4. Financial sector Key constraints: • Low confidence into banks • Inadequate mobilization of deposits (efforts and products) • Inadequate legislation on collateral and collateral substitutes • Insufficient lending experience EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

5. Financing of agriculture • Modest level of funding agriculture (≈ $ 48 million ≈ 16% of total loans) • 8% of EBRD SME Finance Facility used for agricultural lending after only 15 months EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

6. Financing of agriculture • Poor experience in the past with agricultural finance (high debts in 1990s) • Perceived often as high risk + low return • Insufficient experience by staff on new approaches • Growing interest due to govt. pressure and search for borrowers • Absence of more innovative concepts beyond direct lending, such as contract financing or structured financing in supply chains EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

7. Perspectives • 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 EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

8. Perspectives • 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 requires more investments in building permanent, mutually beneficial relationships between producer and processor, and eventually the facilitation of equity participation by farmers in the processing sector EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic

9. Perspectives • 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 • New products linking savings and credit and more cross-selling EastAgri Seminar - Berlin - 5 May 2006 Financing Agriculture in the Kyrgyz Republic