Kyrgyz Government Backs Microcredits for Farmers

Thursday, 25 March, 2010

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Asyl Osmonalieva

A new Kyrgyz government-backed microcredit organisation lending to small-scale subsistence farmers has been welcomed as an attempt to boost the country’s flagging agriculture, but some critics say its interest rates are too high and more needs to be done to turn the industry around.

The microcredit company AUB-Agro, a joint venture between a state agency and a private bank, will channel government resources into a fund to issue affordable loans.

AUB-Agro started operations on February 15, timed for the start of the sowing season. It is granting loans of up to 120,000 soms (2,700 US dollars) at a maximum annual interest rate of 23 per cent and for periods between four and 24 months, officials say. And the decision to issue a loan is quick - within a week of receiving the application.

The director of AUB-Agro, Rifat Utyushev, said the interest rate is lower than that offered by other microcredit lenders, whose rates start from 25-30 per cent. He said AUB-Agro’s actual lending rate would come down to 20 per cent with bonuses for timely repayment.

No collateral is needed, as is the case with some other lenders, but farmers must give a guarantee provided by a relative or a third party.

In an interview posted on the website of Open Kyrgyzstan, a media project funded by the Soros Foundation, Utyushev said, “We wanted to finance the poorest group. A majority of our farmers have plots of no more than one or two hectares. They work the land with the help of family members without hiring labour, just to be able to provide for themselves.”

Seventy per cent of all loans provided by AUB-Agro are earmarked for this category of farmers. The funding is for their immediate needs during the sowing season, such as seed and fertiliser purchases and labour costs that can be repaid within one season.

The remaining 30 per cent of AUB-Agro lending is in loans above 120,000 soms. These will be offered at a rate less than 20 per cent but will require collateral.

The chief executive of the Development Fund of Kyrgyzstan, former prime minister Igor Chudinov, said the farming is high on the government’s agenda, “Developing agriculture, creating conditions for higher standards of living in the provinces, and providing food security are priority tasks for the Kyrgyz leadership and for the Development Fund in particular.”

Agriculture, which employs 65 per cent of Kyrgyzstan’s population, contributes 22 per cent to the country’s gross domestic product.

The Development Fund is managed by a new body set up recently to oversee economic planning, the Central Agency for Development, Investments and Innovations, whose head is President Kurmanbek Bakiev’s son Maxim.

Maxim Bakiev has said other measures to support agriculture will include setting quotas for guaranteed purchases through the state procurement agency Agroprodkorporatsia and introducing a leasing system for farm machinery through a state company.

In the southern part of Kyrgyzstan, where the sowing seasons starts earlier than in the rest of the country, AUB-Agro has already made loans of four million soms, the
body’s head of marketing for the area, Luiza Mamarasulova, said.

Some experts said that although microcredits are a welcome development, the dismal state of Kyrgyzstan’s farming sector means that the interest rate, said by the government to be the lowest on the market, is still a burden for farmers and puts them at risk of bankruptcy.

They also say that wide-ranging reforms including long-term funding, developing a food processing industry and creating larger farms are needed to achieve the stated aim of improving living standards in the countryside and providing food security. The sector has been the victim of long-term neglect and reforms needed to be better thought through, they say.

Mirbek Mamatkasym-Uulu, manager of the Osh office of the microcredit company Elet-Kapital, agreed that one thing that makes the AUB-Agro deal different is that no other lender would make loans of the size it offers without collateral. But aside from this point, similar conditions can be obtained from other lenders, he said.

He said that although agriculture was not a priority area for Kyrgyzstan’s 22 commercial banks and 300 microcredit companies, the majority would lend to the agriculture sector and offered different types of loans including loans without collateral. The state-owned Ayil Bank, for example, offered competitive rates which could work out as low as 12 per cent for farmers.

In Mamatkasym-Uulu’s view, farmers will have no prospect of improving their lives unless interest rates go down to the 12-18 per cent range.

An official from the agriculture ministry agreed that AUB-Agro’s rates, although advertised as the lowest on the market, are still high and a different solution is required, “What should be taken into account is that the specific nature of agriculture requires long-term financing with lower rates.”

In an interview with IWPR, economics professor Ayilchy Sarybaev expressed similar views, saying the agriculture sector needs large-scale reforms, state subsidies and long-term loans at low rates.

“We have around 340,000 small farms with different levels of development and prosperity. We do not have a clear policy or strategy for developing the sector, no reforms and without that, any help for the sector will be like a one-off injection,” he said.

Sarybaev also noted an increase in the number of microcredit lenders ready to accept guarantees, avoiding the bureaucracy of collateral.

Koichubek Chynybaev, deputy head of agriculture in the Jayil district of the northern Chuy region, said the government-backed microcredit would provide much-needed cash, particularly during the sowing season.

He said that growers, now that they have access to cash, can buy seed from private farms, whereas previously they were forced to buy from the agriculture ministry at a high price but on credit. “Competition between farms [selling seed] will increase and as a result they will be forced to reduce prices,” he said.

There was a mixed response to the government’s microfinance initiative among farmers, depending on whether their businesses were profitable or not.

In the town of Karabalta, Nurjan Argymov, aged 32, breeds cattle, and the butcher shop he has opened at the local market is doing well. He took out a three-year-loan from Ayil Bank at an interest rate of 23 per cent and is planning to expand.

Having learned about the government’s funding programme, he wants to find out more, “Next year I am planning to take another loan to increase my livestock and to set up a sausage making unit.”

But one farmer in Panfilovka in Jayil district, who gave his name as Kanybek, grows sugar beet, which is not a profitable crop, said that some years ago he took a loan and struggled to pay it off. Now his family survives by renting out their plot of land.

He has heard about the new microcredits but is not rushing to get a loan and has decided to wait another year to see how things develop.

“This year [the government] is promising to support beet growers but I’m most probably going to rent out again,” said Kanybek, adding that the land rent would not bring a profit, merely avoid him going bankrupt.

Asyl Osmonalieva is an IWPR-trained journalist in Kyrgyzstan.