Microfinance as a Development Opportunity for Agribusiness in Albania

ABSTRACT

Agribusiness is an integral part of the national economy, which requires a considerable financial support nowadays.

Uneven rates of economic growth and elevation between countries, represent an opportunity and not a threat to agro ventures in Albania. The financial system should encourage efforts and remain vigilant to developments in a wide range of instruments, from the loans up to the creation of incentives to encourage microfinancial sector in support of development and cooperation of livestock-farming economies, to inform entrepreneurs about lending trends and requirements of lenders.

Investments in agribusiness are the barometer of the economy and GDP growth can not be sustained if this sector does not feel motivated to increase investment and employment.

The current situation makes it necessary to increase in faster rates agribusiness lending by nonbank financial institutions and commercial banks, despite the fact that agrobusiness have encountered many problems that primarily relate to: the very high interest rates for loans in euro and currency, no mitigation procedures for evaluation and approval of loans, especially skeptical attitude towards agricultural economies, highly demanding and specified collateral (about 150%), short period of credit, high cost of procedures and commissioning that lenders apply etc..

I recomend that a good combination of government projects and microfinancial institutions in support of agribusiness is needed to be realised.

Currently there are two nonbanking financial institutions ASC Union, FAFDC (MAFF) that operate in our rural financial sector. These financial institutions may establish a developed micro-credit system for the rural sector in Albania in support of agribusiness.

Key words: microfinance, agribusiness, requirements for micro-loans, development.

INTRODUCTION

Agriculture is the most important sector in wealth creation, in revenue growth, in the improvement of trade balance, but above all in the welfare of the population living in rural areas.

Albanian agriculture is experiencing a slow transition to move from the level of meeting the needs of living, to a commercial sector. After a crisis in the early '90s, the development of Albanian agriculture is characterized by an increase expanded in a long period of time, by changes in promoter elements (from Collective farms to private economies), diversification, mainly in vegetables and livestock and the increase of agro-processing.

Nevertheless, while structural transformation of the economy was taking place, barriers still in force in the agricultural sector, (small area of land, limited use of modern inputs, poor infrastructure, and the poor access to markets, weak processing capacity) undermined the sustainability of growth.

Agriculture is very important for the rural economy because 50 percent of the population lives in rural areas and 58 percent of the workforce is employed in agricultural sector. Agricultural-livestock activity is widespread throughout the territory of the country.There are 350.000 family farms and a total rural population of 1.8 million which means that most rural households are engaged in agricultural activity, ranging from part-time commitment to provide the means of living, up to the commercial level.

It is worth mentioning here that the rural population in its entirety is young (average age 31.7 years), while the population engaged in agricultural activity comes aging due to migration to urban areas.

Trends in agricultural sector

Agricultural growth during the recent years is led by fruits and livestock. These are also sub-sectors with greater potential in providing incomes. Since 2005, the gross value of agricultural production is increased by 27% for all main agricultural categories, reaching a value of 235 043 million by the end of 2010.

An increase of 6.5% in livestock, over 5% in the production in fruit trees cultures, and an increase of 4% in the production of vegetables has been recorded during the period 2005 – 2010.

Increased participation in the production and sale of fruit trees and livestock products shows that such activities have produced convenient opportunities for farm families in rural Albania. Analyses show that agricultural income as well as general ones for farm families, are positively and significantly affected by the area of land cultivated with fruit trees and livestock ownership. By analyzing the market and qualities of products it is seen that there is also potential for a greater commercial stretch as many neighboring countries may become significant importers of meat and other livestock products.

Increase of the number of market-oriented farms. The number of selling farms for 2010 is 95.7% while in 2009 it was 94%. Albanian production in2011 covered 84% of consumer demand in the country and approximately, 50% of these agricultural products were offered on the market.It is evident that vegetables and fruits products, are more likely to be sold in the market, compared with whole grains, and the growing tendency of their production can also be interpreted as a movement towards market-oriented production. On the other hand another important fact to be mentioned is that livestock production, and the number of large livestock farms is increasing. This indicates that the sector is undergoing stable operations which can be specialized, scaled and commercialized, while small farms will continue to produce widely for self-consumption.

Increase of agricultural exports. Trade volume of agricultural and food sector in 2011 was approximately 711 million EUR with an increase of 6.7% compared with 2010 and the import / export trade balance was nearly in the ratio 7:1. In 2011 the level of exports rose by 29.7% compared with 2010, while imports are increased only by 4.2%.

EU remains the main trade partner of Albania because it does not take only 73% of all Albanian exports of agricultural products (in value) but it is also the place from where originate 56% of Albanian imports.

One of the most important problems of the agricultural sector is that the level of required investment is low for reasons mainly related to the limited funding. Indicators on growth of bank and non-banking loans of agricultural and the agro-processing sector in 2011, indicate that credit is more prevalent for, processing businesses and livestock production and fruit economies.

However, credit difficulties are a major source of inefficiency for most Albanian producers. Little more than a third of all farm households report having access to credit, and only 10 percent of them had received bank loans.

The ability to obtain loans, among other things is connected with the small surface of land that the people own. More efficient and effective ways to improve rural credit is to solve the legal problems that prevent non-banking activities in the agricultural sector, for example the difficult procedures for the removal of the right of ownership of a mortgaged property.

On the other hand the banking sector needs to be trained to understand how to work with farmers, assess risk in the agricultural sector and to identify alternative forms of collateral that will facilitate the lending process.

Orientations for development of agribusiness

For the development of agribusiness, determining factors are: increase of productivity on one hand, and the increase of standards of production and competitiveness of agricultural and livestock products on the other. Agriculture accounts a considerable development space for the Albanian economy, this is one of the main reasons that makes the future of this sector to require radical transformation in three main directions:

• Building an infrastructure that will enable Albanian farmers the availability on line for any information that he needs

• Developing financial infrastructure that will enable the increase of access to financing alternatives (mostly through micro) in order to give a boost to agricultural production to provide employment in these areas.

• The law of agricultural cooperatives which is expected to encourage more cooperation between farmers, and to standardize the union of these agricultural companies which have begun and are spreading spontaneously from individual initiatives of farmers, a result this of the need for the increase of the income for their families. This law will increase and standardize products, reduce production costs and will enable the growth of more incentives from the state and foreign donors.

Albanian agribusiness development is associated with some links that should guide the concentration of energy in the future.

• Cooperation between business and market actors. Experience clearly shows that the fierce competition of the market can be beaten only if farmers cooperate closely for the production and marketing of agricultural products, both amongst themselves and with the merchants and processors of these products but all this requires planning and financial support.

• Schemes of direct subsidies and direct funding support for agriculture, despite the positive effects are not the key to long-term solution. Significant investments in physical infrastructure, in the production technology in promoting culture and entrepreneurial skills (i.e investment in the sector of knowledge) are needed, as well as the establishement of a real partnership between agribusiness entrepreneurs, state, and all operators that support the development of agriculture in Albania.

• Priority should take the whole system of construction and operation of agricultural markets and must radically change their way of management in order to make fully functional the process of collection, storage and marketing of the product

• The close cooperation of government with business, which in partnership with the state can take over the management of these markets aiming their effective use and growth in storage and trading standards..

• A better orientation of support schemes for financing of the maintenance and processing lines on one hand, and for the production and marketing in order to increase the standards of production and competitiveness of the agricultural sector in general on the other, aiming in particular the export.

• Increase of lending and a better partnership with lending institutions, as currently lending for Albanian agriculture is very low and reaches 5% of total lending to the economy.

Developments in the banking sector

Albanian banking system is consistently characterized by a high liquidity (despite the decrease of its level during the year 2005), therefore, availability of money for lending has never been a problem, but the willingness of banks to grant loans is conditioned by a strategy that does not undertake the risk. There is also a reluctance to give credit due to the difficulties banks face in applying their rights on mortgages, on immovable property of the borrower in case of non-repayment of the loan. Procedures in such cases are too long and very difficult, due to an inefficient legal system. The banking system in Albania is the most important element of the financial system, whose assets occupy 97% of the total assets of the entire system. In late 2011 results that the majority of the loans portfolio (about 79% of them) is secured by collateral.

The major part of the loans of the system (about 55%) is collateralized by immovable property, while 11% of the loans are non-collateralized.

Currently in 2012 there are 16 commercial banks that operate in Albanian market, 14 of which are foreign-owned banks, and some subjects that have as their main activity micro-credit, SME financing, and only a small fraction of them are focused on rural finance and agribusiness.

Why is the financing of agribusiness enterprises from banks a major concern?

Financing of the agribusiness enterprises in Albania highlights one of the main problems that the business is facing, in his efforts to secure funding, insecurity.

Financimi i ndërmarjeve te agrobiznesit në Shqipëri nxjerr në pah një nga problemet kryesor me të cilin përballet biznesi, në përpjekjet e tij për të siguruar fonde, pasigurine. Referring to data obtained from actual interviews we are presented with some of the main problems.

• Only a small number of agribusinesses have a long and successful business history, to attract investors to invest their money

• Large companies are required to prepare and publish detailed financial information, which is needed in the funding process. For agribusiness, dominated by small enterprises, this information is almost inexistent..

• Banks, in general, are nervous to small enterprises and this relates to the perception of their high credit risk

• Due to the lack of information from other ways, agribusiness enterprises provide it through a business plan, list of assets that possess and details regarding key aspects of management, trying to give in this way guarantees for the credit received.

• Based on the information provided, lenders take a decision regarding the loan terms, which are not favorable due to the risky classification. In addition, investors will require continual monitoring of business investment activity.

• Another problem that agribusiness should be facing is insufficient capacity of assets that can be used as collateral for financing. Among other things here we consider even the low price of land (as the main collateral), which applies to rural areas.

Agribusiness lending is perceived as a high-risk activity, even because the business plans, which are often required to provide funding support, are often not professional and incomplete.

Most of the agribusiness enterprises have insufficient collateral, they do not have a history of success with lenders, and are characterized by the inability to maintain a fair and transparent accounting. This situation makes us think about the lack of mechanisms to assess accurately the business risk of this sector.

Microfinance a real opportunity for agribusiness

Beside mentioning the steps taken to improve and make the evolution of the banking system in Albania during these years, I would like to make evident the fact that microfinance in general and the institutions involved in it, have an admirable influence in support of rural areas in the country.

This evaluation takes into account the fact that although microfinance institutions occupy in the credit market in the whole banking system (about 5%), they have already established their authority and the physiognomy of the financial market.

Microfinance, as part of the system is able to identify areas in which there are insufficient services or financial products to different categories of customers. It also can identify potential institutional partnership, aiming the decline of the cost of services or finding more efficient ways of providing them. Successful experience of creating entrepreneurial cooperatives in some countries, may be an alternative that apart all, would create facilities in the process of providing a greater access and lower cost of financial resources.It is easier for these entrepreneurial cooperatives to be integrated in the economic and financial system of the country. In the market of microfinance services in Albania are included: commercial banks (i.e Procredit Bank),Savings and loan companies /Unions (i.e “Jehona” Union and ASC Union that include respective affiliatedcooperatives), Non-Bank Financial Institutions / NGOs( i.e NOA, Besa Fund, World Vision ), and informal lenders, that offer a wide range of services (which include urban and rural areas), and reach the following values for 2010:

Loan: 367.0 million

Active borrowers: 86.901

Deposit: USD 327.7 million

Depositors: 1.460

The financial crisis has affected the banking system.Thus, it is evident a shrink of loan portfolio in 2011, because the second level banks have been more prudent, in order not to increase the number of bad loans. There is a decline of the credit level by the banking system, nevertheless this decline is not evident in microfinance. Microfinance system in our country has given more credit for the year 2011 than a year ago, by coming to help to more rural households. The level of bad loans for this year reaches to 6.8%, this is a lower level than that of our banking system and a much lower than that of the region.

Table 1

Data of micro-finance divided by operators in market (in million USD)

Source: Annual Statements of ProCredit Bank, Besa Union, NOA, ASC Union ,FAF DC(FFZM),Vision Fund”-2010

If we refer to the importance that these institutions have in the agribusiness sector, the division of the market portfolio will be as follows:

Chart 1:Agri loan porofolio in volume

In comparison to the importance that agri credit takes in the total loan portfolios of these institutions, it is evident that this sector makes up nearly 10% of their loan portfolios.

Figures for Albania are as follows (in EUR):

Table 2

Portfolio importance in the total agri credit portfolio

Institution	Total Portfolio	AgroPortfolio	% of Agro Loans
ProCredit Bank	161`393`000	16`750`000	10.38
BesaUnion	30`220`000	3`295`000	10.90
NOA	28`430`000	3`020`500	10.62
ASC Union	27`493`000	2`745`900	9.99
FAF DC (FFZM)	13`214`300	1`372`950	10.39
Vision Fund	1`428`600	274`600	19.22

Source: Annual Statements of ProCredit Bank,Besa Union,NOA,ASC Union ,FAF DC(FFZM),Vision Fund”-2010

But, despite the volume of 18% that it occupies in GDP, the support of agribusiness sector by microfinance institutions is not optimal.

Specific problems of this sector in lending by microfinance

• The evident informality in this sector.

• Most of these businesses are family businesses, and they have a great lack of documentation of business performance, by means of which the lending institutions may judge about business financing.

• The small size of farms, seasonality of production and deficiency of revenue in these businesses, the slow progress of land market functioning, inhibit absorption of formal investment in this sector and difficulties in repaying loans due to lack of liquidity in certain periods.

• Relatively high rates of interest (due to very high premium for credit risk) is another limiting factor in the lending progresses in this sector by microfinance institutions

• Having no information of products and services offered by these institutions in the financial markets, lack of economic culture of doing business and of having consultations with business and banking experts, is another risk, a potential this that may lead to the weakening of the market from non qualitative production and consequently brings the decrease of the repaying capacity of the obtained loans.

• Lack of information about the moral of loan-seekers from various regions, sometimes makes institutions of microfinance rigid in lending.

CONCLUSIONS

• Requirements for micro-loans in the agricultural sector are high and they are undergoing a further rising due to the orientation of policies to a developed and competitive agriculture, facts these that have led to the increase of the production, to the orientation of farms towards commerciality, to the increase of exports, the increase of quantity and of the variety of processing of agricultural-livestock products during the recent years.

• Despite the positive developments the banking system in Albania after 20 years now, lacks the financial courage and interest to increase lending in agriculture.

• Microfinance, with its institutions, as part of the system is the best, the fastest and the longest term choice for the agribusiness in Albania.

• Microfinance has the opportunity to identify areas in which there are insufficient services or financial products for this category of customers, it can identify potential of institutional partnership, aiming the decline of the cost of services or finding more efficient ways of providing them.

• The increase of lending capacity, the diversity of financial products and services, information and aggressive promotion of microfinance institutions, must definitely precede the development of agriculture, the expansion and growth of agribusinesses.

• Microfinance institutions should be consistent, reliable and supportive or at least they must have a clear perspective and future legal status.

• Diversifying the portfolio of services and cooperation with banking institutions helps the microfinance institutions to take advantage of banking technology and bank each product in terms of services.

• Microfinance institutions should require their future in the responsible microfinance, in the minimization of risk, the advantages of products, diversification of loan products, transparency in providing product, promotion of small SME loans, etc..

• The government may be involved in microfinance by building a regulatory framework for supervision and the legal regulation of these institutions. Special laws are also needed when they mobilize deposits by the public.

• Central Bank can support microfinance with promotional activities as pilot projects, researches, publication and collection of data, qualifications, etc..

• It is already a requirement of time and a great challenge for rural areas to create the Rural Bank, a bank ,that will be subject of all the laws of banking system.

• This bank will fill that institutional and lending gap in the rural sector, by giving a boost not only to the objective of alleviating poverty, but even to the social and economic development of this sector.

References:

1. “The Microfinance Revolution”-Marguerite S.Robinson-Edited, 2003

2. “Direct Private Sector Financing Programs in Albania”-Botim PNUD-2003

3. “Microfinace Risk Management”-2001

4. “Alternatives for financing your business”-Evanson David 2004

5. “Annual Statements of Central Bank-2010

6. “Annual Statements of ProCredit Bank, Besa Union, NOA, ASC Union ,FAF DC(FFZM),Vision Fund”-2010