Lending a Hand: a Bank Focuses on Farmers

Transcription

1 Central Asia Tajikistan Lending a Hand: a Bank Focuses on Farmers Prepared by Jens Trummer Reviewed by Aline Kraemer Sector Agriculture, Micro-credit Enterprise Class Large Domestic Company

2 Executive Summary The agricultural sector in Tajikistan the cotton sector in particular is the largest employer and a critical part of the country s economy. However, its development has been hindered by outdated agribusiness management skills, poor sector organization, and limited access to financial services (agricultural loans). Banks and financial institutions have been reluctant to develop lending products geared to smaller cotton farmers due to challenges in loan assessments, supervision and collateral. Cotton farmers remain poor and heavily indebted to private loan companies (commonly known as investors ) that provide financial packages through ginneries at high interest rates. All risk is borne by farmers, and if those farmers find themselves in debt to investors, they are required to contract with the same investor again, as a share of the value of his next season s crop will be used to pay back the debt and interest from the previous season. This can create a vicious spiral leading to heavy indebtedness by farmers and a complete inability to break out of chronic poverty. Potentially, cotton farming could be a very lucrative market for the banking sector. In order to increase its share of lending to the cotton industry, Tojiksodirotbonk (TSB) Tajikistan s third-largest bank restructured its loan portfolio to more effectively target cotton farmers, providing them with financial products at more favourable rates, as well as technical assistance in addressing the major issues of inadequate collateral and unreliable harvest forecasts. TSB was able to target cotton farmers by entering into a partnership with the International Finance Corporation (IFC) 1. Together these two institutions could enhance the development of the cotton sector, providing real benefits for individual farm-based businesses. In March 2007 the two organizations initiated the Southern Tajikistan Cotton Lending Project, supported by funds from the Canadian International Development Agency (CIDA). In addition to developing new financial products, the IFC-TSB partnership provided training on lending to smaller farms, including developing a manual on cotton lending policies and procedures. It also employed the Global Positioning System (GPS) to better estimate the size of farms and crop output, and provided training on agro-techniques for farmers. A top priority was ensuring that women workers benefited from all programme activities. The partnership is ending on 31 March So far, TSB has successfully adapted its loan packages to the needs of cotton farmers and created a sustainable business model targeting the cotton sector. The rate of repayment has increased considerably and small-scale cotton farmers have gained access to competitive loans, helping them to reduce their indebtedness and enabling them to use the capital for investment and growth. Private financiers ( ) are the main cause of cotton farmer debts, according to Nasirullo Babagulov, General Manager of a dekhan farm (a small family farm). Tajikistan s investors are often the sole source of financing available to dekhan farms ( ). Investors sell and finance inputs, like seeds and fertilizer, at high prices, and then purchase the cotton output for 1 IFC first contacted TSB to enquire whether it would consider working with the IFC at the end of

3 low prices. Fortunately for Babagulov, he is a customer of Tojiksodirotbonk, (Source: International Finance Corporation). Context THE COTTON INDUSRTY IN TAJIKISTAN: LACK OF PRODUCTIVITY AND FINANCIAL SERVICES Cotton is a critical product for Tajikistan: The industry is the largest employer and cotton is a major export. It is grown on 53 percent of the country s irrigated farmland, accounting for 60 percent of the value of total agriculture output, and 81 percent of agriculture trade. Cotton supports 75 percent of farm households. 2 Earlier economic growth resulted in a reduction of poverty. However, poverty remains concentrated in rural areas, which grow mostly cotton. Nationally, poverty measured at earnings of $2.15/day or less has fallen from 81 percent in 1999 to 64 percent in However, poverty is still widespread, concentrated in rural areas where 73 percent of the population lives. Picture 1: A Woman dekhan farmer displays her new gloves used to pick cotton Photo: TSB The challenges facing the cotton sector include the following: - Unemployment: Since Tajikistan s independence in 1991, the agricultural sector has absorbed redundant labour from other sectors. However, efficiency in cotton production 2 Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, Asian Development Bank as well as the State Statistics Bureau and Ministry of Agriculture, and the Tax Bureau as at end

4 has not risen, leading to high levels of hidden unemployment and a considerable increase in poverty among farmers and farm workers. According to the World Bank, by 1997 employment in agriculture had risen to 133 percent of 1991 levels while productivity levels had fallen to 35.5 percent, primarily due to the lack of investment. - Decline in productivity: Falling productivity is especially apparent in the cotton sector. 3 Currently, the labour used to produce one ton of seed cotton ranges from 250 to 350 person hours more than four times the competitive level of person hours. - Lack of investment and farm debt: Cotton farms usually have a limited capacity to provide working capital of their own. Cotton farming has not been very profitable in recent years and many farms are carrying large debts owed to local investors 4 who dominate the financing of cotton production in Tajikistan and who also supply other farm inputs. The business practices among local investors in Tajikistan lack transparency and are biased against farmers. As a result, cotton farm debts have been accumulating since 1998 and, as of December 2006, are in excess of $400 million. Commercial banks remain weak with a highly limited capacity to provide working capital to the agricultural sector. 5 Tojiksodirotbonk: Creating New Products and Services for the Cotton Industry The open joint-stock company Tojiksodirotbonk (TSB) was established in December It is the third-largest bank in Tajikistan in terms of total assets and the second-largest bank in terms of total capital. TSB has a wide client base of private enterprises in the trade, services, and industrial sectors. It serves clients from its headquarters in Dushanbe and from 10 branches across the country. Its clients include the biggest Tajik trading companies, other enterprises, entrepreneurs, and some of the embassies and diplomatic organizations based in Dushanbe. As of 1 November 2008, the working assets of the bank were estimated at million somoni (US$ million 6 ) and deposits at some 199 million somoni (US$ 45.7 million). The bank stock was estimated at some million somoni (US$ 23.1 million). For the first 10 months of last year TSB s net profit amounted to approximately 17.8 million somoni (US$ 4.08 million). Since cotton farming is such a major component of Tajikistan s economy and the largest employer, TSB concluded that it should expand lending to this sector. However, the 3 Tajikistan, Country Economic Memorandum, World Bank Investors are private companies that loan to cotton farmers at high interest rates. There are currently around 100 investors in the Tajik cotton industry. See Annex 9 and 10 for a description of the financial institutions and mechanisms of the Tajik industry and how they lead to high levels of indebtedness by cotton farmers. 5 See Annex for a full explanation of how the financial system leads to high levels of indebtedness among cotton farmers and what consequences this has. 6 Exchange Rate US$1 = 4.35 Tajik Somoni (December 2009) 4

5 challenges in lending to cotton farmers include: the difficulty in assessing what size loans should be granted, the high cost of loan supervision, and the scarcity of collateral. Consequently, TSB was reluctant to enter this potentially lucrative market. In order to target cotton farmers, it would need assistance in restructuring its lending products and reducing its risk portfolio. In order to overcome these challenges, TSB entered into a partnership with the IFC, with the financial support of CIDA. Together they initiated the Southern Tajikistan Cotton Lending Project in March The goal for IFC in spearheading the project was to reduce poverty and foster economic growth in the cotton sector of Southern Tajikistan by better orienting the portfolio of TSB to the needs of cotton farmers. Specifically, IFC aimed to help streamline and improve TSB s loan products for cotton farmers as well as improve farming productivity levels. Borrowing in Tajikistan: the Risk of Dependency To explain how TSB came to provide improved financial packages for cotton farmers, one has to understand the lending structure in Tajikistan: The National Credit Agency (financed indirectly by the National Bank of Tajikistan) passes money to local companies (referred to as investors ) who lend this money on to farmers. The three parties sign a credit agreement which establishes the maximum lending levels, the prices for inputs, the area to be cultivated, etc. According to the terms of these agreements, only the farm or farmer bears the risk; the investor bears no risk. Loans are repaid in cotton, not cash. Often, the agreements do not specify at what price inputs are to be purchased, and do not provide a clear method for estimating the value of outputs. While there are relatively onerous performance requirements for farmers, little or no requirements are placed on the investor. Investors supply inputs and cash during the cotton growing season in return for taking delivery of seed cotton from farmers. This seed cotton is then processed (ginned) and sold to exporters. Once the cotton is sold, the value of the product is credited to the farmer. The value of the seasonal finance is deducted from the value of the cotton at the time of sale. The farmer either owes money to the investor, or the investor owes money to the farmer. If farmers find themselves in debt to the investor, they are required to contract again with the same investor, as a share of the value of next season s crop is used to pay back the previous debt and interest. 7 Essentially, investors usually provide inputs (seed, fertilizer) and then take the cotton harvest from the farmers at the end of the season. The farmers have no choice as to the quality and type of inputs. 8 7 Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, ADB. More information can be found in Annexes 9 and Source: communication with IFC. 5

6 Business Model: New Agreements and Services Empowering Farmers With assistance from IFC, TSB initiated a new tri-party agreement with selected ginneries, which process cotton, and participating farmers. Under these agreements, as soon as farmers deliver raw cotton to the ginneries, the value of their outstanding loan is reduced by the value of their delivery to the ginnery. They don t have to wait until the ginneries manage to sell the cotton. Farmers are guaranteed to sell their cotton at the price that was agreed upon with the ginneries when the farmers delivered the raw cotton. Farmers are now less exposed to fluctuating market prices for cotton and have greater incentives to invest in their businesses. Additionally, loans from TSB have given farmers the freedom of choice in terms of purchasing inputs; they are not bound to receive these from participating ginneries. Picture 2: Agronomist and Agro lending specialist interviewing women farmers Photo: TSB These innovations have greatly benefitted TSB. While other banks in Tajikistan are facing large loan defaults due to the depressed price of cotton, loans made under the TSB-IFC partnership have not yet been affected: As of 31 December 2008, no loans made by TSB to cotton farmers were delinquent. Average loans to cotton farmers amount to US$ 20,000 and are disbursed in 4-5 installments depending on the cotton growing cycle. These loans are used by farmers for growing and harvesting cotton (to purchase inputs and seeds, to pay wages, etc.). The average repayment period for a loan is 12 to 18 months. IFC has assisted TSB in identifying potential borrowers through the following filtering system developed by the IFC-TSB partnership: 6

7 - Filter #1: Identifies only those farms by size which fit the bank s lending criteria, i.e. for TSB, those farms below 100 hectares. - Filter #2: Identifies those farms that have passed Filter #1, and have recorded yields of less than two tons/hectare. - Filter #3: Identifies those farms that have passed Filters #1 and #2, and have no existing debts to the tax authorities and no outstanding social payments. IFC has shared its methodology with other donors so that support can continue to be provided for cotton financing once IFC's involvement ends in TSB charges the same interest rate that other banks charge: For loans funded by the Ministry of Finance, banks are required by the government to charge no more than 14 percent. Since this amount only provides limited revenue, all banks (including TSB) also loan their own money at higher rates of 22 percent. Depending on where the farmers are located and with which ginneries they work, they receive loans at either 14 percent or 22 percent. TSB is developing new products that are tailored to the cotton sector. These include: Harvest financing (short-terms loans for expenses associated with harvesting). Trade financing, selling of cotton fiber. Lending to cotton ginneries to buy seed cotton. Equipment leasing. The bank is interested in providing finance to farmers who urgently need to upgrade their equipment (combines, tractors, plowing and seeding equipment). TSB has funding for this initiative, but lacks knowledge of the leasing business. It has asked IFC to provide assistance. Business Model Constraints and Solution Strategies TSB teamed up with the IFC to obtain technical assistance and share costs. In so doing, the partnership introduced a commercial cotton lending product for small to medium-sized farms 9 in Khatlon Province. IFC and CIDA supplied experts to train bank employees on how to lend to smaller farms, how to supervise borrowing, and how to review lending. Neither IFC nor CIDA have provided any loans to TSB for cotton financing. IFC/CIDA jointly paid for the experts to train bank staff on appropriate monitoring and assessment of collateral. The TSB-IFC team visited each farm for a crop assessment. The process taught the bankers the importance of monitoring collateral, and showed the farmers that the bank knew the expected cotton output, thereby reducing chances of fraud (underreporting) during the harvesting and selling season. 9 SME farms employ 1-50 workers. 7

8 The partnership has also relied on the Global Positioning System (GPS) as a tool for measuring the size of farm plots. The TSB-IFC partnership identified the benefits of getting an accurate measure of the size of cotton farms 10. The Magellan MobileMapper, a GPS-based product, was selected to survey all dekhan (or small family farms) that received financing. This was the first time that such a product was used in Tajikistan. Each farm got its drawing (electronic and hard copy) which it could use to improve agricultural techniques. For their part, banks get more accurate information about the cost of producing cotton on one acre. This technology was introduced and tested in May Farmers are now able to stake out the corners of a field, transmit data, and receive the precise size and layout of the field. Knowing the size of land in hectares allows farmers to use their funds more efficiently to purchase inputs, including seed, fertilizer, and pesticides. The new technology also helps to improve water supply and field irrigation. This new lending scheme has proven a profitable undertaking for TSB. Once the support provided by IFC and CIDA will cease in 2010, TSB will continue to provide to cotton farmers under the same terms and conditions. The following graph demonstrates the interaction between the key stakeholders of the IFC/CIDA-TSB Partnership. Figure 1: Stakeholder Map S Source: Author 10 An accurate sizing of the plots benefits the farmers when buying farming inputs, as most farmers work on a basis of 'agro-norms' or a recommended dosage of inputs (in k.g.) per square hectare. From the banks perspective, knowing the precise amount of land for which financing is being sought ensures that they lend an appropriate amount to the farmer, and it also assists in the monitoring and repayment stages, where the bank can check that the farmer has planted the agreed-upon acreage. 8

9 The following table summarizes the typical challenges that sustainable inclusive businesses face in emerging markets as described by UNDP 11 and demonstrates the solutions TSB adapted to address these shortcomings. Table 1: Strategy Matrix Constraints 1. Missing knowledge and skills 2. Restricted access to financial products and services Solution Strategies: Combine resources and capabilities with others - The IFC-TSB partnership developed a manual on cotton lending methodology for the bank. The partnership has provided training aimed at building internal bank capabilities to meet the needs of smaller farms (borrower supervision, and lending review) - The Partnership utilized GPS technology to accurately measure farm sizes and forecast harvests Adapting products and processes The Partnership develops loan products for small and mediumsized cotton farms. Role of Other Actors The IFC approached TSB at the end of 2006 to cooperate on a programme that would aim to reduce poverty among cotton farmers by providing them with improved loan constructions and financial services. The TSB was a willing partner and the programme has also helped it increase its customer portfolio by including cotton farmers. The International Finance Corporation (IFC), a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private-sector investment, mobilizing private capital in local and international financial markets, and providing advisory 11 Market conditions in poor areas can often look bad for business. Functioning, well-developed markets have adequate infrastructure, steady flows of information and a regulatory environment that is friendly to business while limiting downsides. Market participants have skills, knowledge and access to financial products and services. But where poverty prevails, most of these factors are lacking excluding poor people from meaningful participation in markets, and excluding businesses from the markets of the poor. The case studies in this report show how these limitations can affect businesses trying to engage the poor. They illustrate five general constraints: 1. Limited market information; 2. Ineffective regulatory environments; 3. Inadequate physical infrastructure; 4. Missing knowledge and skills; and 5. Restricted access to financial products and services. ("Creating Value for All: Strategies for Doing Business with the Poor", Growing Inclusive Markets (GIM), UNDP, July 2008) 9

10 and risk mitigation services to businesses and governments. IFC aims to help give people the opportunity to escape poverty and improve their lives. 12 IFC participated in this project to help TSB diversify its loan portfolio to include cotton farmers, and to improve the productivity of cotton farms and the working conditions of women farmers in the province. Apart from the technical assistance described above, the support of IFC also included: - Broadening the scope of the bank s loan products to finance long-fibered cotton in the region of Kurgan Tyube, and expanding the loan programme beyond Kurgan Tyube to other branches - Training aimed at building internal bank capacities to meet the needs of smaller farms including borrower supervision and lending review. This knowledge transfer was one of the key goals of the project. - Training on agro-techniques for the farmers, including information on how to increase productivity. Picture 3: Conducting training at TSB Photo: TSB A lot of work was done to achieve improved social inclusion for women. According to the IFC Dushanbe Office, due to the migration of a significant portion of the male population to Russia and other CIS countries, somewhere between 70 and 90 percent of workers in Tajikistan are women. Many of them lack knowledge of the most basic hygiene and sanitary standards, as well as are unaware of their rights. To address these issues, IFC conducted a 12 In FY07, IFC committed $8.2 billion and mobilized an additional $3.9 billion through syndications and structured finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries. (For more information, visit 10

11 training session for women farmers on how to help them realize their rights and improve working conditions. Some 36 women from dekhan farms in nine districts of Khatlon Province took part. During the training, specialists from IFC taught participants how to arrange mobile sanitary facilities, organize temporary baby care, provide first-aid kits on cotton fields, and improve sanitation conditions and food safety in an affordable way. The Canadian International Development Agency (CIDA), the governmental agency that supports sustainable progress in developing countries in order to reduce poverty and contribute to a more secure, equitable and prosperous world, has provided the funds for the project. It has supported technical assistance and other programmes (such as the provision of GPS technology and mobile toilets) Both IFC and CIDA are participating in this programme, as their mandates are to contribute to international development and the alleviation of rural poverty. The technical assistance provided by IFC and funded by CIDA helps to strengthen Tajikistan's financial institutions and alleviate rural poverty; this project is directly in line with both organizations developmental objectives. In addition, many impoverished rural farmers have benefitted from this partnership by receiving more favourable and transparent loans. They also received gender-sensitive training in how to apply for a loan, make a payment, and better cultivate and harvest cotton. Results Between March 2007 and December 2009, 206 loans were granted. The total value of loans disbursed by TSB is estimated at more than US$ 4.2 million. As a result of the confidence gained from the strong performance of the portfolio, TSB has developed and accumulated a nation-wide cotton loan portfolio of over US$ 10 million. The Bank does not disclose its profit margins, but the following indicates that the programme has been profitable for TSB: (1) the low level of non-performing loans, (2) TSB management has indicated that they are very pleased with the programme, and (3) TSB asked IFC to expand the project to an additional branch (Yavon) in More than 150 dekhan small family farms have received loans covering a total of 4,200 hectares of land allocated for cotton production. Out of 8,400 dekhan farm employees on these farms, 70 percent are female. Since the loans obtained by farmers are always disbursed on time by TSB (since the partnership began in 2007), farmers are now able to more efficiently invest in purchasing seeds, fertilizers, pesticides, etc. and pay their workers on time. This has led to increased yields and better livelihoods for field workers. 13 At the beginning of the partnership in 2007, TSB faced heavy competition from investors, and later from other banks. However, once farmers realized that loans from TSB were always 13 Source: communication with IFC. 11

12 disbursed on time, that processes were transparent, and that the repayment schedules reduced dependency on the participating ginneries, many farmers switched to TSB. Conclusion Tajikistan s agricultural sector the cotton sector in particular remains the largest employer in southern Tajikistan and a critical part of the economy. Traditionally, outdated management skills, poor sector organization, and limited access to finance have hindered its development. Traditionally, banks and financial institutions have been reluctant to develop lending products geared to smaller cotton farmers because of the difficulties in assessing how much to lend, how to supervise the loan, and how to secure collateral. This case study has described how TSB accessed a lucrative market. With the technical assistance of IFC and CIDA TSB made loans more accessible to cotton farmers and at the same time created a new market for itself. Farmers have been the beneficiaries. They have improved cash flow, which allows them to invest for the future and reduce their dependence on private lending companies, gaining the chance to break out of poverty. Ultimately, this model can be emulated by other banks. IFC has offered to work with other financial institutions that are interested in developing loan products targeting small and medium-sized cotton farmers. 12

13 References The Cotton Sector of Tajikistan, New Opportunities for the International Cotton Trade, Government of Uzbekistan, April 2007 Outcomes, Quarterly IFC Advisory Services Newsletter featuring Business News, Trends and Results from Emerging Economies, IFC, October-December 2008 South Tajikistan Cotton Lending Project, 7 th Project Progress Report for the Canadian International Development Agency (July 1 September 30, 2008) IFC and CIDA, November 2008 South Tajikistan Cotton Lending Project, 8 th Project Progress Report for the Canadian International Development Agency (October 1 December 31, 2008) IFC and CIDA, February 2009 Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, Asian Development Bank, 2. State Statistics Bureau and Ministry of Agriculture, and 3. Tax Bureau as at end Tajikistan, Country Economic Memorandum, World Bank 2001 Tajikistan, Investment Profile, 2001, Business Forum, London April, 2001 IFC Press Releases: IFC Expands Partnership with Tojik Sodirot Bank to Promote Agricultural Lending in Tajikistan, Adham Ergashev and Umed Umarov, Dushanbe, Tajikistan, August 12, 2008 IFC Helps Tajik Farmers Use Satellite Technology to Improve Land Measuring Practices, Adkham Ergashev and Ilya Sverdlov, Dushanbe, Tajikistan, July 08, 2008 IFC and Tojiksodirotbonk to Develop Cotton Lending Products for Tajikistan s Smaller Farms, Ilya Sverdlov and Stephen Lloyd Wright, Dushanbe, May 29, 2007 IFC Promotes Gender Equality in Southern Tajikistan, Adkham Ergashev and Nezhdana Bukova, Dushanbe, Tajikistan, July 28, 2009 Internet Articles: IFC promotes gender equality in southern Tajikistan, Nargis Hamroboyeva, Expanding Access to Finance for Tajikistan s Cotton Farmers Interviews: communication with Raiomand Billimora and Adkham Ergashev from the International Finance Corporation (IFC) 13

14 Annexes Annex 1. Press Release: Expanding Access to Finance for Tajikistan s Cotton Farmers Nasirullo Babagulov, the general manager of MMM Farm in southern Tajikistan, must drive over an hour to reach the nearest bank in Kurgan-Tyube. MMM Farm, jointly owned by its 44 members, is unique among Tajikistan s cooperative farms, which are known locally as dekhan farms. Not only does it count 34 women among its owners, but MMM is one of only a few farms that have remained free from debt owed to private financiers since its establishment in Private financiers are commonly referred to as investors in the Tajik cotton industry. Investors are the main cause of cotton farmer debts, Babagulov says. Tajikistan s investors are often the sole source of financing available to dekhan farms like MMM. Investors sell and finance inputs, like seeds and fertilizer, at high prices, and then purchase the cotton output for low prices. Recent studies have estimated cotton debts in Tajikistan amount to nearly $420 million as a result of this unsustainable system of financing. With roughly 75 percent of the rural population employed in the cotton sector, finding solutions to this problem is a key concern for raising living standards in Tajikistan. Creating targeted financial products Fortunately for Babagulov, he is a customer of TojiksodirotBonk (TSB), Tajikistan s thirdlargest bank. TSB has partnered with IFC s South Tajikistan Cotton Lending Project, which is funded by the Canadian International Development Agency, to develop a new product--cotton loans tailored to small- and medium-sized dekhan farms. These loans provide alternative sources of financing during the cotton harvest cycle. With limited experience in assessing this type of loan, TSB worked closely with the project to develop credit risk tools for dekhan farms and proper due diligence procedures. The in-depth training allowed TSB s loan officers to assess MMM Farm s request for a loan and approve $16,500 for financing inputs and harvesting costs. The TSB Kurgan Tyube branch relies heavily on the advisory services provided by IFC for loans to small- and medium-sized cotton farmers in this region, says Khabibullo Khaydarov, branch manager of the TSB branch in Kurgan Tyube. We did not have the know-how or the capacity before IFC arrived. The policies and procedures for cotton lending to dekhan farms developed by IFC are essential to a strong, effective cotton portfolio for TSB. How does the South Tajikistan Cotton Lending Project expand access to finance? The project works with regional banks to develop loan products for small and medium-sized cotton farms. So far, farmers have accessed $79,500 in loans. 14

15 The project provides training on the specifics of lending to smaller farms, borrower supervision, and lending review. It works to build public awareness of lending policies and procedures. Source:IFC ( Annex 2. Map of Tajikistan Source: CIA World Factbook Retrieved 26th November,

16 Annex 3. Selected Economic Indicators of Tajikistan Annex 4. Farmland by Use, 2003 (Source: ADB, 2004) 16

17 Annex 5. Tajikistan Cotton Production, Source: Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, ADB Annex 6. Tajikistan Area Sown to Cotton, ('000 tons) Source: Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, ADB 17

18 Annex 7. Tajikistan Cotton Yields, (centers/ha.) Source: Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, ADB Annex 8. Schematic of Cotton Financing in Tajikistan Source: Improvement of the Tajik cotton Industry, Reinhart Report,

19 Annex 9. The Origins of Farm Debt A complete description of the cotton sector financing system is not provided here but merely an outline of its structure and operation to facilitate an understanding of the present debt situation. Generally, seasonal finance was secured through the National Bank of Tajikistan (NBT) with the majority coming from private banks and foreign cotton trading companies. The finance was then passed to AgroInvestBank (AIB), a credit agency handling the monies on behalf of the sector as a whole. When AIB fell into insolvency in 2004 due to nonperforming debt and an inability to attract external credit lines, much of the non-performing cotton sector debt was transferred to a newly created organization called Kredit Invest (KI). KI was created as a non-bank financial institution with an initial capitalization of $300,000. Since 2004, KI has acted as the main credit agency for the distribution of cotton sector financing. The credit agency passes money to local companies (referred to as investors) who onlend to farms or farmers. The 3 parties sign a credit agreement which sets out the main terms such as maximum lending levels, prices for inputs, area to be sown, etc. The terms of these agreements suggest that the only risk bearing party is the farm or farmer, as any unpaid amounts are owed to the credit agency, with no clauses passing any payment default risk to the investor. Agreements only provide for repayment of financing in cotton, not cash. Often the agreement does not provide for any price information for inputs and no clear method for estimation of the value of outputs. While there are relatively onerous performance requirements on farms, there are either no requirements placed on the investor or KI, or where there are, they are not monitorable. In effect, investors contract to supply inputs and cash during the cotton growing season in return for which they take delivery of seed cotton from farmers. This seed cotton is then processed (ginned) and sold to exporters. The value of the cotton is then credited to the farmer. The value of the seasonal finance is deducted from the value of the cotton at the time of sale and the farmer is either in debt or in credit with the investor/ki. If the farmer finds himself in debt to the investor, he is then required to contract with the same investor for the next season, a share of the value of his next season s crop going to pay back the previous debt and interest. The accounting system between farmers and their investor is a cause of confusion/obfuscation. Because of its opacity, many debts have been challenged by farmers as mistaken or inflated. Effectively, the investor supplies inputs and some cash during the growing season rarely showing the unit cost of the inputs supplied. In principle, the farmer is supplied a statement of account at the end of each month during the season showing the amount of previous debt, the value of inputs during the month, interest charges, and cash advanced. When cotton is sold, the statement shows a credit entry, which is deducted from the total balance. The documents are often mathematically incorrect, inputs are charged at prices not actually agreed in advance, and cotton credits cannot be checked by the farm. 19

20 It is estimated that working capital requirements for producing cotton in Tajikistan varies from $380/ha to $580/ha. Source: Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, ADB Annex 10. Dimensions of the Debt As a result of the opaque farm credit system, cotton farm debts have been accumulating since 1998 and, as of December 2006 are in excess of $400 million. Outstanding loans from creditors to DCFs ($500 million) have funded the credit to farmers ($390 million) and for other agricultural investments ($110 million). DCFs have borrowed from international banks ($252 million), international cotton traders ($128 million), domestic banks ($46 million), the pension fund ($600,000), and others ($74 million). Most of these loans are now due. Default of DCFs to their creditors will affect the country risk profile, since agricultural loans from external creditors will remain unpaid. Such default will also damage funding options for future country seasonal crop finance for both cotton and other crops. Money cannot come from local financial institutions alone, as the seasonal production financing requirements would absorb most of the total bank funding available domestically and provide an unacceptable level of risk to the banking system. Lenders have not responded to the usual market signals of non-repayment by slowing down cotton lending, and there have been no efforts to consider farms capacity to repay on a sustainable basis. Debt has been allowed to accumulate due to three factors: (a) government interference in production and financing decisions, (b) lopsided production contracting arrangements described above, and (c) lack of enforcement of regulations. The net effect of accumulating cotton farm debt on farmers has been devastating. The usual incentives to improve productivity and maximize net returns do not work because of the complex web of rent-extractive market arrangements. Many farmers produce cotton only because they are instructed to do so by local governments which have control over the farmers land use rights, and because cotton is the only crop for which farmers can borrow working capital. Access to seasonal production credit for cotton is a critical input for the sustained growth of the cotton subsector. The banking sector in Tajikistan is extremely small, with only $160 million in total outstanding assets as of March 2006 and a deposit-to-gdp ratio of 4 percent. With a delinquency rate of 36 percent on its 13.4 percent of total portfolio in agriculture, formal financial institutions are cautious in lending to agriculture. Lending to the agricultural sector has been effectively frozen because of heavy farm debt levels and related liquidity and institutional capacity restrictions. It will be impossible to generate agricultural financing from international financial organizations and the private sector unless cotton farm debt is resolved in a transparent and voluntary manner between all parties. Banks and other financial 20

21 institutions expect to develop capability to lend to agriculture over the next 2 3 years but currently there are neither funds nor institutional capacity in the financial market to provide full sector financing. Source: Tajikistan: Cotton Sector and Proposed Policy Reforms, Malcolm D. Bale, ADB Annex 11. Results achieved through to date through TSB s Partnership with IFC During the 2.5 year period, 20 trainings on various topics were organized and more than 280 participants from dekhan farms and banks attended them, among which 37 are female. During the trainings, special attention was focused on introduction of simple and inexpensive tools aimed at facilitating women s working conditions, through the following measures: 1. Organization and provision of boiled drinking water and hot meals in the field 2. Organization of childcare through assistance of retired women 3. Better tools and cotton collection methods using gloves made of socks to protect hands, and aprons to be used for cotton picking. 4. Ensure regular cash payment to workers thus provide income access 5. Organization of mobile field toilets and camps (simplified sheds for rest) 6. Organization of field first aid medicine kit. The trainings delivered by programme staff also covered agro technique activities on cotton production related to yield productivity. Since the majority of dekhan farms management staff have no agronomic background, the trainings were organized by programme staff in time and were very important for them, especially on the topics dealing with agronomic methods on cotton production. Upon the completion of trainings, dekhan farms started to carry out the following activities: 1. Stock seeds for autumn 2. Plough fields in autumn period 3. Irrigation in winter season (increase moisture content of the soil and get rid of pests) 4. Apply organic and commercial fertilizers during winter period 5. Crop rotation The gender plan had considerable successes. Working conditions for women farmers have improved: There is improved remuneration for women farmers as a consequence of improved farm productivity, and increased access by women farmers to services and mechanisms not related to the project that respond to gender-specific constraints on rights or to rights violations for them as workers and within the context of the family. 21

22 Based on the involvement of the TSB-IFC partnership, farmers have made the following changes to improve working conditions for women workers on their farms: Gloves: TSB-IFC Partnership staff have designed gloves to protect the hands of the cotton picker. Boiled Water: Farmers are providing boiled drinking water to workers. Hot Food: Farmers are now providing hot food during the day to all workers on their farms. Portable Toilet: The STCLP staff has made recommendations which include the design of a portable toilet which can be easily and inexpensively constructed by dekhan farms. Day Care: Women dekhan farm members are encouraged to form associations, clubs and contacts for sharing child care duties. All measures indicated above (technical assistance and improved loan packages) positively affected yield productivity of farmers who participated in program trainings, thus programme dekhan farms increased yield by 1.5 times in comparison with republic figures in 2007 (program dekhan farms harvested 2.2 metric tons/per ha, while republic statistics indicates 1.5 metric tons/per ha) and by 2 times in 2008 (3.3 metric tons/per ha against 1.6 metric tons/per ha accordingly). Table 2: Yield data for a random selection of farms Name of District Avg. Yield Before Average Yield after % Difference Dekhan Farm STCLP (Tons / Hectare) STCLP (Tons / Hectare) Farruhk Chilikul ( 15% ) MMM Kabadian % Abdujalil A Rumi % Kamol A Rumi % Norkobilbobo A Rumi % Otahonbobo A Rumi % Baroti Tukhta Bokhtar % Navbokhor Kulyab % Panjob Vaksh % Sadbarg Vose % Kishovarz Farhor % Average 26% 15 This particular farm had a decrease due to severe weather conditions and lack of water for in excess of 40 days. 22

23 November 2010 The information presented in this caselet has been made available to the company in subject to ensure its accuracy and is accurate to the best of the author s knowledge.the views expressed in the caselet are the ones of the author and do not necessarily reflect those of the UN, UNDP or their Member States United Nations Development Programme All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic, mechanical, photocopying or otherwise, without prior permission of UNDP. This caselet was drafted in accordance with the GIM 2.0 research design. Information contained in the present caselet has been obtained through desktop research and phone interviews. Design: Suazion, Inc. (NJ, USA) For more information on Growing Inclusive Markets: or gim@undp.org United Nations Development Programme Private Sector Division, Partnerships Bureau One United Nations Plaza, 23rd floor New York, NY 10017, USA 23