The Challenge

Credit is a vital ingredient for the development of the agricultural sector in every country and directly affects its efficiency. Financing needs are changing rapidly, following the rapid shifts and developments in the market. The prerequisite for credit organizations to operate schemes of agricultural finance is to understand the specificities of the agri-food sector, the complex problems of its operation and to be able to synthesize, analyze and interpret the above data. In every country, agriculture is characterized not only by the fundamentals shown in Table 8.1, but also by a number of other operational characteristics that are related to the natural environment and the socioeconomic conditions of the country that determine the set of strengths and weaknesses of the sector.

Piraeus Bank recognized early that the agri-food sector is an important one for the national economy and strategically labeled it as a target market. Moreover, since 2009, when the country faced a deep recession, it became one of the bank’s top priorities to make an effective contribution to the national economy. In 2012, the acquisition of the ATE Bank (Agricultural Bank of Greece) portfolio, the only specialized agricultural credit institution in the country, by Piraeus Bank accelerated its efforts to apply a new approach to agricultural financing. Since its establishment in 1929 ATE Bank has been the main lender to the agri-food sector as a specialized bank. Piraeus Bank after its acquisition of the ATE Bank entered a reevaluation of the existing financing system of the agri-food sector, searching for more efficient and innovative models of operation. By the beginning of 2013, market research had shown that many farmers:

  • • Faced barriers to gain access to agricultural credit because of their low- income levels and the collateral required.
  • • Used farm loans in an inefficient way in a yearly cycle, such that they increased their real interest expense and, as a result, the cost of their production.
  • • Used farm loans not only for production purposes but also for their consumer needs.
  • • Could not make an economic plan for their production because there was a lack of stable relationships between them and the processing enterprises or cooperatives due to price-seeking behavior.
  • • Did not know at which price and whether they could finally dispose of their production.
  • • Could not feel secure that they would be able to sell their production and sometimes undertook the risk of disposing of it and being paid with significant delay or, in some cases, not being paid at all.

At the same time, processing enterprises and cooperatives:

  • • Faced the difficulty of ensuring the necessary liquidity for the repayment of their suppliers.
  • • Could not release current liquidity for other needs, such as investments and promotions.
  • • Did not have stable suppliers, making it difficult to plan their production
  • • Could not implement quality standards.
  • • Had weak relationships with the farmers, based either on their bargaining power or on their ability to compete on price with competitors.
  • • Faced difficulty in cash flow planning, as they had to estimate quantities, prices, quality levels and the time of delivery available.

Taking into consideration all these factors, the main challenge for Piraeus Bank was the development and enhancement of the relationship between the farmer and the enterprise or cooperative and to achieve it all in an innovative way. In this effort, the bank had some significant advantages:

  • • Liquidity was crucial for the sector due to the deep recession that the Greek economy faced since 2009.
  • • Piraeus Bank was well known in the Greek market for its innovative approach to banking. “E-banking” and “green banking” are two examples of innovative services that created innovation waves in the market.
  • • Piraeus Bank was a market leader in the agricultural sector and had the significant know-how not only in farm credit but also in the financing of the secondary sector of the economy.

The proposed solution was the development of an innovative banking program that could capitalize on the contractual connection between enterprises or cooperatives and farmers, and offer timely financing and ensure payments while, at the same time, it could result in the reduction of the production cost. The contractual partnership has been a traditional international practice since the nineteenth century. However, in

Greece it has been mostly implemented without efficient management and control, resulting in a waste of resources and liquidity, inefficient cash flow planning and irrational use of loans. For this reason, there was a need to change the rationale following agricultural financing to overcome issues related to the old and unsuccessful mentality. The Piraeus Bank “Contract Farming Program” (CFP) could provide partners with motives and a control mechanism and also offer a sustainable solution for the development of the agricultural economy.

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