Building the Armenian agrilending of tomorrow

Give a man a fish and feed him for a day; teach a man to fish and feed him for a lifetime.

Life teaches us that even the best-made plans rarely go according to schedule and, more frequently than not, require us to adapt in order to succeed. This has been a guiding principle at BFC since our inception.

That is why BFC was excited to be tapped to work alongside the German-Armenian Fund (GAF) on the recently-closed KfW-funded ‘Financing the Agriculture Sector in Armenia’ (FASA) project. The project supported a holistic approach to developing agricultural finance that is fundamental to long-term sustainability. The project’s combination of making a EUR 15 million concessional loan available for on-lending to micro-, small- and medium-sized agricultural-related enterprises combined with the flexibility to work with partner financial institutions to provide needed and desired trainings and technical assistance assures a sustainable expansion of agricultural finance which will, in the end, create employment and lead to greater income in the rural areas of Armenia.

A farmer who purchased 50 goats using a Value Chain Finance loan from Farm Credit Armenia UCO in partnership with the Golden Goat cheese factory

A farmer who invested in a greenhouse renovation and extension with the help of a loan from Fast Credit Capital UCO

Signing of a partnership agreement between ACBA-Credit Agricole Bank and agricultural machinery and input supplier Hrashk Aygi facilitated by BFC

“I know many songs, but I cannot sing.” –Armenian proverb

Knowing how to do something is important; however, it does not always mean that we are capable of doing that thing ourselves. For example, one can know everything about playing football, including how to kick the ball and the physics of trajectories and velocities, without being capable of playing at a level like that of Henrikh Mkhitaryan. Only someone with unique qualities like Mkhitaryan can do that. I can teach; I can help; I cannot do.

With this in mind, GAF and BFC engaged in a strategy of dialogue throughout the two-year project. By giving feedback on what we saw, pausing to listen and then working alongside the partner financial institutions (PFIs), we were able to establish a relationship built on trust and mutual success. This meant that PFIs received uniquely-tailored assistance packages that were developed with them and not just for them. In the end, this will help ensure that PFIs are invested in growing their agrilending portfolios, optimizing business processes and, ultimately, helping strengthen the agricultural sector.

“One hand will not clap.” –Armenian proverb

The development of value chain financing (VCF) was of particular importance within FASA as it was the first time such models were set up on a relatively large scale in the country, enabling strong relationships to be built between stakeholders within value chains while simultaneously reducing credit risks and transaction costs for lenders. Two types of VCF partnership schemes were developed: supplier-driven and processor-driven, with each partner within each scheme (PFI, processor, supplier and farmer) having clear benefits that they wouldn’t otherwise have had.

“Our new VCF product has already started to take a market share. Our clients are very interested, and it has already started to create value for them.” – Hrachya Tokhmakhyan, CEO of FINCA Armenia UCO

For PFIs, this means more sales channels, reduced risks and greater security in knowing that farmers will have the capacity to repay their loans. Processors, through take-off contracts, receive a certain level of security against a potential shortage of the raw materials needed for production. Suppliers are motivated by increasing their exposure to potential customers and by increasing available working capital by shifting the extension of credit to customers from their own funds to professional lenders (i.e. PFIs). For their part, farmers get easier access to high-quality inputs and a greater capacity to repay loans taken at very beneficial conditions.

“Rice is not cooked with words only.” –Armenian proverb

The work done under FASA during the last two years has been instrumental in establishing a strong foundation for the future of the financial and agricultural sectors in Armenia in general and, in particular, agricultural financing. Among the more notable accomplishments within FASA were:

  • Trainings to more than 700 PFI staff on various relevant topics
  • The strengthening of PFIs’ operational efficiency and debt collection practices
  • The introduction of specifically designed client assessment tools
  • The introduction of credit process automation
  • The implementation of 20 VCF schemes, each supported by innovative lending products
  • More than 4,000 loans disbursed to Armenian agricultural enterprises
  • Full absorption of available KfW funds (EUR 15 million) by eligible MSMEs

“Spring will not come with one flower.” –Armenian proverb

The PFIs that took part in the project are now equipped with the knowledge and experience to successfully identify, set up and strengthen value chain financing opportunities as well as to streamline their lending  performance. More importantly for farmers, the speed, ease and quality of service is now reaching new heights, meaning that farmers have more time and resources to dedicate to honing their craft. And this is just the beginning for a maturing agrilending sector in Armenia. This does not, however, mean that it is time to sit back and relax.

Now is the time to continue the good work begun under FASA and ensure that Armenia has the support it needs in reaching the next level. In other words, the ground is fertile; the seeds have been planted. It is now time to irrigate and make sure positive growth continues both in Armenia and the general region.

Video of the month: FASA – a story of creating value

Business and Finance Consulting is a Zurich-based consulting firm specialized in financial sector development and has been active in Armenia for the past ten years.

The German-Armenian Fund was established in 1998 by the Central Bank of Armenia. Its main goal is to provide support to the financial sector of Armenia through the channeling of funds from external and internal sources aimed at the development of defined sectors of the economy. They have successfully implemented loan agreements with German development bank KfW since 2004.