MONEY FOR AGRICULTURE

As we know, the volume of agrarian produce fell sharply in Azerbaijan in the first years of independence. The changes that occurred in the country's agriculture led to the collapse of several sectors of agrarian industry and eliminated the system of material-technical supplies to farmers, including fertilizers, poisonous chemicals, equipment and spare parts. Until now, one of the most serious problems in developing food production in Azerbaijan is the ineffectiveness of the private sector which emerged as a result of the privatization of state-run farms (collectives and state farms).

Problem debts

Reforms in the agrarian sector, as in other sectors of the country's economy, were affected negatively by debts for the credit that had been allocated to state enterprises, collective farms and state farms, for the development of the private sector during the transitional period. In order to eliminate problems in this sphere and to ensure the dynamic development of the republic, a law "On the debts of privatized enterprises liquidated as a result of agrarian reforms and economic entities from the occupied territories" was adopted in November 2000. The total volume of debt that had accumulated since 1994 was about 100 million dollars. Such debts are considered to be normal in transitional economies where the state sector is replaced by the private sector. For example, in the Czech Republic, which has almost the same population as Azerbaijan, such debts reached 3.5 billion dollars.

In Azerbaijan, the non-banking credit organization Agrar-Kredit was authorized to service problem debts and obligations. One of its tasks was to manage funds allocated for the development of the agrarian sphere by the World Bank, foreign countries, international organizations and the country's government, as an agent bank of the government.

However, these funds are insufficient for the full financing of the agrarian sector in Azerbaijan, where there are currently more than 100,000 farms. In many countries of the world, the state itself helps promote agriculture by issuing small grants. Taking into account the fact that our country is still at war with Armenia, it is too early yet to talk about such grants. In this regard, there is a need to set up a bank of agricultural finance.

It must be noted that the presidential decree approving the implementation of the law "On the state budget of 2007" instructed the Ministry of Finance and the National Bank of Azerbaijan to prepare, within two months, proposals to improve the existing mechanisms to finance and credit the agrarian sector from an institutional point of view. They should contain suggestions on setting up a bank to finance agriculture.

From credit organization to bank

Within this remit, the National Bank of Azerbaijan carried out surveys in order to improve the existing mechanisms of financing and crediting the agrarian sector from an institutional point of view. The deputy chairman of the NBA board, Rufat Aslanli, said that the results of the surveys showed that, due to high risk in the production of agricultural produce, even banks working in the regions of the country are financing consumer demand and small businesses, which does not help the development of the agrarian sector. On the other hand, such a situation also reflects on production in the rural areas, because farmers prefer to change their business and move into the trade sector.

In this regard, proposals on the institutional development of agro-financing have been prepared jointly with the Ministry of Finance. "International experience shows that the crediting of the agrarian sector is technologically different from ordinary crediting, including micro-crediting and project financing," Aslanli said. The reason is that there is a seasonal factor in the agrarian sector, which is why agricultural risks are different from the risks in production. Meanwhile, there is also successful experience in the example of the French bank Credit Agricole and Holland's Rabo Bank. In Germany, there are also such institutions. They have their own specific method of financing agriculture which covers all stages - production, processing, logistics and sales. "We believe that if this positive experience is used in Azerbaijan, we will ensure the full financing of agrarian production," the NBA deputy chairman thinks. In the process of drawing up their proposals, NBA specialists visited France to study its experience.

The proposals provide for the establishment of an agrarian bank in the country. National Bank chairman Elman Rustamov said that the idea is to turn the non-banking credit organization Agrar-Kredit into a bank and then privatize it. Financiers see no need to set up a new, state-run agricultural bank in Azerbaijan.

From 2007, the European Commission started to render technical aid to Agrar-Kredit to prepare it to obtain a banking licence and for future privatization. Under an agreement with the EU, a preliminary schedule for the privatization of Agrar-Kredit by the end of 2008 has been identified. However, no deadline has been set for re-organizing it into a bank.

Strategic approach

Agrar-Kredit is preparing seriously for full banking activity. Last week the board of the credit organization approved a five-year, strategic development plan to follow its transformation into an agricultural bank and recommended that it should be submitted to the Supervisory Council for approval. The Supervisory Council may call a meeting within 15 days.

In the plan, the credit portfolio of the future agricultural bank is divided into three parts - micro, small and medium-sized credits. The micro-credits - up to 5,000 manats - make up the highest number and account for 44 per cent of the general portfolio in the first option. However, due to the growing pace of economic development in Azerbaijan, it is believed that the demand for micro-credits is unlikely to be so high in the next five years, since preference is mainly given to small credits now. In this regard, the board decided to lower the proportion of micro-credits to 20 per cent and increase the number of small credits from 30 to 40 per cent. Small credits can be issued from 5,000 to 35,000 manats and medium-sized ones - from 35,000 to 185,000 manats.

In five years, it is planned to increase the credit portfolio to 98 million manats. Currently, the credit investments of Agrar-Kredit reach 13 million manats.

Deposit accounts will become the main function after the organization turns into a bank. The volume of the deposit portfolio which will be formed within five years is envisaged in the strategy to reach a level of 70 million manats.

It is planned that in the first year, the agricultural bank will attract deposits worth 12 million manats. They will increase to 30 million manats in the second year and to 70 million manats in the fifth year. Agrar-Kredit at first thought that these figures were not realistic due to the population's financial situation in rural areas, where people are not willing to put their savings in banks (if they have any), but after discussions at the board, a decision was taken to preserve these indicators. They were recommended by the European experts who helped prepare the strategic plan.

While making such forecasts, European experts took as a basis the oil revenues that might increase in the next five years, which may also increase incomes in rural areas. Moreover, they took account of indicators of the country's banking system where the volume of deposits has been increasing in the recent period (it has already reached 1.3 billion manats).

The strategy also provides for the expansion of the chain of branches from 12 to 25.

Little remains to be done

Agrar-Kredit believes that it will be possible to get a full banking licence by the end of 2007 or in early 2008. "Today Agrar-Kredit meets 80 per cent of NBA's requirements for banks," the credit organization said. For example, the minimum requirement for the capital of a bank is 10 million manats, while the credit of Agrar-Kredit is 18 million manats. It is working with the SMART banking system which has been introduced in 13 of the country's 43 banks.

After obtaining a licence on the basis of the presidential decree, it will be possible to privatize the agricultural bank (it is not known yet what the new bank will be called) like other state banks (NBA and Kapital Bank). The main shareholder in Agrar-Kredit is the Azerbaijani Ministry of Finance, which has 99.9 per cent of the shares in the credit organization. The remaining shares have been equally divided between the state insurance company Azarsigorta and the open joint-stock company Melioration and Water Economy.

That the new bank project might be successful and useful is also proved by the fact that the European Bank for Reconstruction and Development is interested in it and has made a bid for 25 per cent of its shares.