Where small producers can find money for buying land and development

Why draft Law No.3205 «On Credit Guarantee Fund in Agriculture” is critically important

The Agrarian and Land Committee of the Verkhovna Rada of Ukraine has recommended the Parliament to add draft Law No.3205 “On the Credit Guarantee Fund in Agriculture” to the agenda of the Verkhovna Rada’s plenary sessions. It means that very soon one can expect voting on this bill.

Behind this legislative initiative is a very simple, but an extremely important task – to give small agri-producers a possibility to obtain bank funding for buying land or other investment needs, which is actually absent now. First of all, it will leverage the chances of small agri-producers in their competition with medium-sized and large players and land speculating resellers, which is, in fact, probably the most effective safeguard against excessive concentration of land in somebody’s ownership when launching agricultural land turnover in Ukraine.

Why it is critically important

Today small agri-producers have almost no funding from banks, which has expremely negative effects for their development. Instead, the banking sector is cooperating with medium and large agri-producers with pleasure. It is also the lack of acceptable financial accounting that holds back small farmer crediting (due to the simplified taxation system and accounting in the agrarian sector), credit record, and liquid collateral. As a result, it is difficult for banks to assess their crediting risks. The problem is aggravated with the moratorium on selling agricultural land, since small agri-producers mostly cultivate their own land, yet they may not use their asset as collateral.

Although the abolishment of moratorium opens a possibility to use agricultural land as collateral for loans, the importance of having available credit history by potential borrowers and knowledge of the sector means that the risks of crediting agri-sector secured by land will remain rather high at the initial phase after opening land market. Partial gurantees for credit risks are one of the most effective instruments to resolve the collateral problem.

How it will work

The essence of this instrument is that the Credit Guarantee Fund (to be established according to draft Law No. 3205), on behalf of the state and using the state funds, takes upon the responsibility to partially compensate the loan (50%, according to the bill) in case of default of the borrowing agri-producer (the bill limits the size of the farmer up to 500 ha). It will reduce the risks for banks and simplify the access of small and very small farmers to bank loans. Moreover, considering 50%-credit guarantee and high-discipline of agri-business in terms of loan repayment (as a rule, small agri-producers are highly-disciplined in this regard), UAH 1.00 invested by the state will generate UAH 8.00 of credit resources for agri-producers. In addition, alongside with partial guarentees, other instruments of state support to small and very small farmers will also be available. For example, cheaper credits through co-funding investments or partial reimbursement of interest rate. Of course, to achieve this goal, the existing system of state support in agri-sector will require fundamental changes and be targeted exclusively at small and very small agri-producers.

Economic effects

According to preliminary estimations, the State needs to capitalize around UAH 1.5 billion in the Fund in order to ensure the expected demand from agri-producers up to 500 ha for buying land under the most favorable scenario of land market opening. However, the net effect from the Fund activities in terms of financing land buying is expected within UAH 3.6-30.4 billion of additional GDP during 3-5 years, depending on the land market opening scenario.

That is why, the Credit Guarantee Fund is a critically important infrastructural element of the agricultural land market and development of primarily small agri-producers. It is crucial that this draft law be approved.

Oleg Nivievskyi, Kyiv School of Economics