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Myth and Reality of Agricultural Micro-Lending – Experiences from a Commercial Bank in Georgia

The majority of the international microfinance community holds a strong belief that agricultural micro-lending cannot be profitable due to higher risks and costs when compared to urban micro-lending. The experience of the United Georgian Bank indicates the opposite: agricultural micro-loans can be very profitable, even for a commercial bank.

The United Georgian Bank (UGB) is one of the largest commercial banks in Georgia, established in 1995 as a result of a merger of three former state-owned banks: Savings Bank, Eximbank and Industrial Bank. UGB started micro-lending in 2003 and decided to pilot agricultural lending in 2004. At first experience was mixed but the situation changed dramatically in 2006 following a study tour to the Agriculture Cooperative Bank of Armenia. By the end of October 2006, agricultural loans made up 8.9% of all micro-loans and 4.1% of the entire portfolio value. Although still small, the share of agricultural loans is growing fast. Productivity has increased tremendously and loan officers are keen to lend to farmers. What is the recipe for this success?

One key was staff motivation and empowerment. At first it was difficult to motivate branch managers, micro-loan unit managers and loan officers to whole-heartedly engage themselves in agricultural lending. Branch managers had to organise transport for the loan officers and the loan officers had to spend much time travelling to the villages. On top of that they had to deal with a completely new type of customers which also meant that they had to get their hands and feet dirty during site inspections. Not surprisingly, there was initial resistance. The bank responded by introducing an agricultural lending bonus scheme which paid higher incentives for each loan disbursed but this was soon brought in line with the normal bonus scheme. Far more impact on staff motivation, however, was achieved by head office managers going into the villages together with loan officers, coaching them on the job. To see their bosses getting their hands and feet dirty made a big impression on the loan officers and unit managers. It became very clear that head office is serious about agricultural lending.

A second key was careful product design. The loan structuring is flexible in terms of disbursement and repayment, based on a cash flow analysis which considers all incomes and expenses of the household. Since harvesting and sales of produce differ from case to case and depend on the current market prices, the bank is offering “generous” repayment schedules with rather long duration. At the same time, the bank abolished prepayment fees for agricultural loans in order to encourage farmers to pay back their loans as early as possible, for example if they sell their produce earlier than originally expected.

The third important success factor was adopting a cluster approach for handling rural clients. The basic idea of the cluster approach is simple. The bank selects larger villages with good agriculture potential and talks to the responsible village headman, a political administrator elected by the people, about the loan scheme. Then the village headman spreads the word in the village and organizes a farmer meeting in the village hall. The meetings must be held at times when farmers are free from other obligations. In these meetings loan officers and unit managers inform the farmers about UGB’s agricultural loan products and interview applicants on the spot. In many cases the farm inspection can also be done the same day. The advantages of this approach continue right through the credit cycle – better information about clients, streamlined disbursement and repayment, easier monitoring, etc.

This short paper provides a most encouraging example for any institution aiming to increase its agricultural lending portfolio.

  • Resource type
  • Author Dr. Karin Derflinger, Oleg Ivaniychuk, Helmut Grossmann
  • Year of Publication2006
  • Region
  • LanguageEnglish
  • Number of pages10 pp.

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