NEW LIFE FOR AN OLD IDEA

Due to a number of objective factors, ba-nks have been reluctant to allocate credits for the development of the agriculture sector in Azerbaijan so far. The state traditionally acted as the main donor of the agriculture sector. It provided farmers with subsidies, as well as with technical and financial assistance through various funds. However, agriculture crediting can only become widespread after a specialized agrarian bank is set up in the country. 

Credits allocated by the state 

The experience of agrarian reforms of the past decade has showed that in conditions of market economy, the intensive development of the farming industry in Azerbaijan is possible only through concessional loans. During the first decade of Azerbaijan's independence and particularly, in late 1990s, when a large-scale agrarian reform launched in the country, international financial organizations played a major role in providing low-interest and long-term monetary resources to agriculture. Since the start of the agriculture reform (1998), the development of Azerbaijan's agriculture sector was supported by over 20 international projects. However, the overall volume of credits and donor assistance did not exceed 500-600 million dollars. 

The bulk of these financial resources were directed towards local infrastructure projects and various branches of agriculture or towards the implementation of pilot programmes aimed at developing agricultural communities, as well as the formation of cooperatives and credit unions in various areas of the country. Despite the positive outcomes of these initiatives, international donors provided mostly consultative or technical help and the volume of direct crediting of the agriculture sector was exceptionally small. 

The new phase in concessional crediting of the agricultural sector started over 9 years ago after the government started implementing programmes of socio-economic development of districts in the periods of 2004-2008 and 2009-2012. The state programme aimed at providing the country's population with food products greatly encouraged the development of agriculture production. The programme was launched over four years ago and will end in 2015. The main financial lever for implementing these state programmes was the allocation of state preferential credits for farmers and small and medium enterprises which process and produce foodstuffs. The state-owned agencies, Agroleasing, the National Found-ation for Supporting Business and the Azerbaijani Investment Company played a key role in the process. Over the past ten years these agencies helped direct over billion mantas worth of investments towards the most promising branches of economy, encouraging the private sector to invest in innovative technologies and create progressive forms of economy. The main focus here was on organizing a joint export-oriented agricultural complex in the regions. 

However, according to expert estimates, in order to advance the sector to a qualitatively new level of development it is necessary to improve the volumes of crediting to up to one billion manats annually. In order to accumulate necessary resources, alongside budget investments, it is necessary to involve resources from private investors and banks. Recent years have seen intensification of the process as we can observe a significant investment activity by the leading holdings which channel their assets, as well as resources of affiliated banks for the development of food and processing industry. The production of wines, juices, canned food, meat, fat and oil products, sugar, the processing of cotton and tea packaging, building of refrigerating warehouses and elevators, the building of large dairy farms - is only an incomplete list of investment projects the local financial and industrial groups have been working on recently. 

Apart from this, immediate financing of agriculture businesses is not among the priorities of large crediting agencies. Relatively high risks versus relatively low profit, the insufficient development of the land market, problems with the collateral liquidity, as well as the fact that farmers are reluctant to ensure their property significantly decrease commercial banks' interest to credit the agriculture sector. 

This is basically why over 15 non-banking credit organizations, established largely by international humanitarian organizations, act as main donors of farming industries. They serve over 500,000 customers across the country, providing them with financial services through over 160 affiliations and units. The overall credit portfolio of these organizations exceeded 720 million dollars last year. The lion's share of the credits were given to agricultural areas. Nevertheless, insignificant re-sources, relatively high interest and short maturity period are not very useful for financing farming industries. 

New lease of life

Currently, Azerbaijan appreciates the need to create a specialized agrarian bank capable of accumulating resources from various sources and creating an efficient system of allocating new reimbursable loans. "Currently, state-run foundations and microfinance organizations are the main sources of providing banking services to the agriculture sector. At the same time, we are now studying international experience to increase the financial sector's support to agriculture through the presence of combined state and private presence. The formation of the national system of market financing of the agriculture sector envisages, among other things, the creation of a specialized agrarian universal bank," the chairman of the Azerbaijani Central Bank, Elman Rustamov, said recently in an address to the participants of the 43rd conference of the central committee of the International Confederation of Agricultural Credit (CICA). 

Negotiations for setting up the specialized bank started over four years ago. It was proposed to use as its basis the structure of the AqrarKredit non-banking credit organization, created in early 1990s, which enabled farmers to access low interest long term loans. After the merger of AqrarKredit with the Agrarian Credit Foundation, the organization significantly expanded the scopes of its activity and financial opportunities. At the moment, its affiliations operate in all industrial regions of the country, implementing various credit projects. By January 2013, the credit portfolio of AqrarKredit reached 17.7 million manats and the total assets - 26.6 million manats with the increase by 2.7 per cent. The organization ended the year 2012 with a small profit but its revenues exceeded 4.1 million manats. 

At the moment, the capital stock of AqrarKredit is 18.6 million manats which is insufficient for creating a new bank. According to the regulations of the Central Bank, which will be enforced on 1 January 2014, the minimum volume of total assets of existing banks, as well as the capital stock of new banks should be at least 50 million manats. Therefore, the founders of AqrarKredit, the ministries of finance and economic development, now face the challenge of attracting necessary resources to increase their capital to the necessary level. It is possible that part of these resources will come from the state treasury or from private investors. 

A few years ago, the privatization and expansion of AqrarKredit's shareholder base was considered as one of the means of transforming the agency into a fully-fledged agrarian bank. Consultations on the matter were held with the World Bank, the International Financial Corporation, the European Bank of Reconstruction and Development and even international agrarian banks, such as Credit Agricole and Rosselkhozbank. However, in the post-crisis period, lengthy negotiations with foreign donors did not result in appropriate agreements. "In any event, in prospect it will be a bank with wide foreign participation because such agencies require high capitalization. However, at the initial phase, the agrarian bank's capital can be formed at the expense of state resources," Mammad Musayev of the AqrarKredit said. 

In any event, the creation of a specialized agrarian bank becomes particularly important now as the state support projects for the development of the non-oil sector of economy, and the agriculture sector in particular is a strategic priority for Azerbaijan. The Central Bank of Azerbaijan's increased participation can act as a guarantee of successful implementation of the project. It is possible that the issue will be successfully resolved by the end of the year.