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

2. Tajikistan - Expanding Finance in Rural Areas2 Overview of Presentation  Background of study  The agricultural sector  The financial sector  Supply and demand for agricultural finance  Perspectives

3. Tajikistan - Expanding Finance in Rural Areas3 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

4. Tajikistan - Expanding Finance in Rural Areas4 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 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

5. Tajikistan - Expanding Finance in Rural Areas5 Recent Trends in Crop Production

6. Tajikistan - Expanding Finance in Rural Areas6 Farming Structure  700,000 small-scale producers  700,000 small-scale producers ( 1,2% of land  27,000 Dekhan Farms (1 – 800 ha) => 61% of land  Kolkhozes and Sovkhozes still control 25% of land

7. Tajikistan - Expanding Finance in Rural Areas7 Production trends by farm type Total Production Output (000 Som) Household Plots Agricultural Entities Dekkan Farms

8. Tajikistan - Expanding Finance in Rural Areas8 Share of farm types in crop output

9. Tajikistan - Expanding Finance in Rural Areas9 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

10. Tajikistan - Expanding Finance in Rural Areas10 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

11. Tajikistan - Expanding Finance in Rural Areas11 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

12. Tajikistan - Expanding Finance in Rural Areas12 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

13. Tajikistan - Expanding Finance in Rural Areas13 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

14. Tajikistan - Expanding Finance in Rural Areas14 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

15. Tajikistan - Expanding Finance in Rural Areas15 The Microfinance Sector Supplier of FundsLoan Portfolio (US$) Share in Total Loan Portfolio (%) Commercial Banks (TMSEF) 15.197.92937.0% MFOs (AMFOT members) 12.800.00031.1% First Microfinance Bank 7.000.00017.0% UNDP Community Development Funds 2.700.0006.6% Mountain Areas Development Programme 700.0001.7% Public Agencies 1.400.0003.4% Other 1.300.0003.2% Total 41.097.929100%

16. Tajikistan - Expanding Finance in Rural Areas16 Microfinance Organizations (1) Features: 4 big MFOs (>US$ 1mn), 9 medium sized MFOs (>US$ 100,000), many small ones 4 big MFOs (>US$ 1mn), 9 medium sized MFOs (>US$ 100,000), many small ones US$ 12.8 mn total portfolio MFO lending MFO lending to agriculture Better presence in rural areas NGOs provide non-financial services (e.g., business advice, extension)

17. Tajikistan - Expanding Finance in Rural Areas17 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

18. Tajikistan - Expanding Finance in Rural Areas18 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)

19. Tajikistan - Expanding Finance in Rural Areas19 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?

20. Tajikistan - Expanding Finance in Rural Areas20 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

21. Tajikistan - Expanding Finance in Rural Areas21 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

22. Tajikistan - Expanding Finance in Rural Areas22 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

23. Tajikistan - Expanding Finance in Rural Areas23 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

24. Tajikistan - Expanding Finance in Rural Areas24 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

25. Tajikistan - Expanding Finance in Rural Areas25 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)

26. Tajikistan - Expanding Finance in Rural Areas26 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

27. Tajikistan - Expanding Finance in Rural Areas27 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

28. Tajikistan - Expanding Finance in Rural Areas28 Thank you for your attention!