Busting Agro-Lending Myths and Back to Banking Basics: A Case Study of AccessBank's Agricultural Lending

Michael Jainzik[1] and Andrew Pospielovsky[2]

One third of AccessBank's micro-business loans are extended to farmers. The portfolio of this segment has grown quickly and performed well. Why is AccessBank Azerbaijan successful in agricultural lending, a sector often disliked by other commercial banks? And why is the bank viewing farmers as a strategic core clientele? This case study aims to give some answers and explore some of the myths around agricultural lending.

Greenfield Small Business Bank in a Transitional Economy

AccessBank was founded in 2002 by international development finance institutions together with a technical partner.[3] It was created to provide a broad range of financial services for micro and small enterprises, and low and middle-income households, sectors that were largely ignored by Azerbaijan's banking sector at the start of the decade. In the intervening years, the bank has grown rapidly into the leading microfinance provider in Azerbaijan, both in terms of numbers of credit and deposit customers, and in terms of credit volume, as well as in terms of range and quality of banking services. At the same time, AccessBank has also developed into one of the leading banks in the country: As of 1 January 2011 AccessBank ranked seventh in terms of total assets ($459 million), sixth in terms of loan portfolio ($340 million), and first in terms of profitability and portfolio quality.[4] It serves 120,000 credit clients as well as 45,000 deposit clients in 29 branches (14 of which are outside of the capital of Baku).

The Republic of Azerbaijan is considered an “upper-middle-income economy” by the World Bank.[5] The economy is heavily dominated by extractive industries (oil and gas) which are capital intensive, but provide employment for only a small proportion of the population. Instead, the oil and gas-driven trade and current account surpluses have fuelled both inflation and appreciation of the Azerbaijani Manat against foreign currencies, reducing the competitiveness of other sectors of the Azerbaijan economy, inhibiting their growth and development (Dutch Disease). In addition, rampant corruption is widely regarded as one of the key factors inhibiting the development of an efficient market economy in Azerbaijan.[6] These, among other factors, limit the diversification of the economy, which is badly needed to create employment opportunities for a broader strata of the population.[7]

Physical infrastructure, particularly with regard to the road network, and supply of electricity and water is of comparatively good quality, and improving from year to year as oil income is invested into the upgrading of physical infrastructure. Almost all of the villages in Azerbaijan can be reached by roads all year long, which is a favorable element of the local framework conditions for farming. Agricultural land in Azerbaijan was privatized after independence (see Box 1). This clear private ownership of land is also an important prerequisite or facilitation for agricultural lending. However, the environment for farming is not perfect. A generally poor to defunct business environment is regarded as the main obstacle.[8] Farmers have access to local markets, mainly via small private traders, but processing and storage is underdeveloped and weak; organized value chains are of limited importance.[9] Producer organizations and professional associations are widely nonexistent or weak.[10]

  • [1] Former Chairman of the Supervisory Board, AccessBank, and Director of KfW Office Windhoek, KfW Development Bank.
  • [2] Banking Consultant, formerly Chief Executive Officer of AccessBank Azerbaijan.
  • [3] Current shareholders are Access Microfinance Holding, Black Sea Trade and Development Bank, European Bank for Reconstruction and Development, International Finance Corporation, KfW Development Bank, and LFS Financial Systems GmbH. LFS is a Berlin-based consulting company that is contracted by AccessBank on a continuing basis for the provision of management, technical, and IT services.
  • [4] Recently, AccessBank has received a lot of international recognition: It has received the highest rating among all banks in Azerbaijan, see Fitch Ratings (2011). The bank was awarded “Best Bank in Azerbaijan” by Euromoney (2010 & 2011), Global Finance (2011), and The Banker (2011) magazines. AccessBank's extraordinary performance appears especially illustrated by its low Portfolio at Risk (PAR) in times of economic cooling. Whereas Accessbank produced a PAR quota of only 0.85 percent of its gross loan portfolio at the end of 2009 (and 1.00 percent at 2010-end). Hübner (2010) reports that an analysis of the audited financial statements of ten larger local banks showed that 9 of them display a PAR quota higher than the sector-wide official figure of 4.3 percent (published by the Central Bank of Azerbaijan), ranging from 6.5 percent to 20.0 percent.
  • [5] See: data.worldbank.org/about/country-classifications.
  • [6] Azerbaijan was ranked 134 of 178 countries in Transparency International's 2010 Corruption Perception Index. International Crisis Group believes that tolerance of corruption and farming out of “rent-seeking rights” acts as pillar preserving unity and obedience within Azerbaijan's ruling elite. See International Crisis Group (2010), pp. 8–10.
  • [7] See Hübner/Jainzik (2009), pp.12-14, for a sketch of the economic structure.
  • [8] World Bank (2005) identified four fundamental problems facing businesses (including farms) in Azerbaijan: weaknesses in the legal and regulatory system; pervasive administrative barriers to investment; weaknesses in infrastructure provision; and corruption. A further basic problem specifically for agriculture has been the extreme weakness of government agencies that should normally be in charge of making and implementing agricultural regulatory policies, such as the Ministry of Agriculture. See Dudwick, et al. (2005).
  • [9] Compare World Bank (2005), pp. 27 et sqq. According to the World Bank, this is mainly due to credit constraints for processors and the lack of a effective policy regarding development of a competitive agro-industry: “Little has been done to improve the overall business environment for agriculture or the agribusiness industry to date“, World Bank (2005), p. 32. The situation has not changed much since 2005.
  • [10] See World Bank (2005), pp. 33 sqq.
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