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Can a Government Loan Work for Microfinance? IFAD’s Funding of the Agricultural Cooperative Bank of Armenia

Topic : Community-based Finance, Microfinance

This Donor Good Practices note provides a case study documenting how the International Fund for Agricultural Development creatively used a government loan to support the Agricultural Bank of Armenia, enabling the institution to expand in rural provinces, strengthen its capital base, and become the largest bank in Armenia.

In late 1996, the International Fund for Agricultural Development (IFAD) initiated the Northwest Agricultural Services Project (NWASP) in Armenia. The objective of the four-year project was to develop sustainable agricultural support services for 40,000 people living in three rural provinces of northwest Armenia. At about the same time, the Agricultural Cooperative Bank of Armenia found itself at a critical juncture. Founded with European Union support, the bank had been operating with moderate success for just a year and was ready to implement a strategic expansion.

The objectives of the donor and the retail institution aligned beautifully. The two organizations persuaded the Armenian Ministry of Finance to accept a creative use of an IFAD loan that made sense for a growing microfinance operation. As a result, a US $4.5 million credit line was restructured into a loan and a grant for ACBA, allowing the bank to get its footing, reach self sufficiency, and expand nationwide.

By 2000, ACBA had earned the distinction of “Bank of the Year in Armenia” from the Financial Times. As of December 2003, the bank had 32,640 customers and eight branches throughout the country – the largest geographical coverage of any bank in Armenia. Of US $21 million in its outstanding portfolio, US $8.8 million were agricultural loans. (In the rural provinces, 95 percent of ACBA’s clients are farmers.) ACBA had total assets of approximately US $31 million, total equity of approximately US $9.5 million, and a US $ 0.8 million profit for 2003.

This short paper includes a discussion on the four main reasons for the success of IFAD’s funding of ACBA – ACBA found a creative way to make the IFAD loan work for sustainable microfinance and the Government of Armenia, the priorities of IFAD and ACBA were aligned, ACBA followed commercial practices, and ACBA’s use of the cooperative structure in credit delivery, ensured high portfolio quality.