Rural and Agricultural Finance in Tajikistan

1. Rural and Agricultural Finance in Tajikistan Current Status, Challenges and Perspectives Frank Höllinger FAO, Rome Tajikistan - Expanding Finance in Rural Areas

2. Overview of Presentation • Background of study • The agricultural sector • The financial sector • Supply and demand for agricultural finance • Perspectives Tajikistan - Expanding Finance in Rural Areas

3. 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 Tajikistan - Expanding Finance in Rural Areas

4. 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 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 Tajikistan - Expanding Finance in Rural Areas

5. Recent Trends in Crop Production Tajikistan - Expanding Finance in Rural Areas

6. Farming Structure • 700,000 small-scale producers (<0.3 ha) => 1,2% of land • 27,000 Dekhan Farms (1 – 800 ha) => 61% of land • Kolkhozes and Sovkhozes still control 25% of land Tajikistan - Expanding Finance in Rural Areas

7. Production trends by farm type Output (000 Som) Total Production Household Plots Agricultural Entities Dekkan Farms Tajikistan - Expanding Finance in Rural Areas

8. Share of farm types in crop output Tajikistan - Expanding Finance in Rural Areas

9. 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 Tajikistan - Expanding Finance in Rural Areas

10. 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 Tajikistan - Expanding Finance in Rural Areas

11. 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 Tajikistan - Expanding Finance in Rural Areas

12. 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 Tajikistan - Expanding Finance in Rural Areas

13. 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 Tajikistan - Expanding Finance in Rural Areas

14. Bank lending to agriculture (2) 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 Tajikistan - Expanding Finance in Rural Areas

15. The Microfinance Sector Tajikistan - Expanding Finance in Rural Areas

16. Microfinance Organizations (1) Features: • 4 big MFOs (>US$ 1mn), 9 medium sized MFOs (>US$ 100,000), many small ones • US$ 12.8 mn total portfolio MFO lendingto agriculture • Better presence in rural areas • NGOs provide non-financial services (e.g., business advice, extension) Tajikistan - Expanding Finance in Rural Areas

17. 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 Tajikistan - Expanding Finance in Rural Areas

18. Supply and demand: The Gap • Currently supply is limited to the top and the bottom end of the market • Main underserved market segments: • Small DFs (< 5ha): loan sizes up to USD 5000 • Medium-sized DFs (5 – 100ha): loan sizes USD 3,000 to USD 20,000 and above • Medium-sized processors (USD 5,000 – 50,000) Tajikistan - Expanding Finance in Rural Areas

19. Dimensions of potential demand 700,000 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? Tajikistan - Expanding Finance in Rural Areas

20. 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 Tajikistan - Expanding Finance in Rural Areas

21. 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 Tajikistan - Expanding Finance in Rural Areas

22. Perspectives (3) • 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 Tajikistan - Expanding Finance in Rural Areas

23. 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 Tajikistan - Expanding Finance in Rural Areas

24. 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 Tajikistan - Expanding Finance in Rural Areas

25. Perspectives (6) 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) Tajikistan - Expanding Finance in Rural Areas

26. 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 Tajikistan - Expanding Finance in Rural Areas

27. 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 Tajikistan - Expanding Finance in Rural Areas

28. Thank you for your attention! Tajikistan - Expanding Finance in Rural Areas