Ensuring accessible loans for small farmers when the land market opens: the agenda for the state, banks and farmers

For small farmers to benefit from the launch of the land market, access to finance will be key. It is estimated that only 2% of farmers’ long-term financial requirements and 50% of their short-term loan requirements are currently met, which already constrains the development of small farming in Ukraine. These were the issues discussed in the round table “How to boost and diversify Ukraine’s agricultural market? Facilitation of the institutional capacity, land mortgage lending & small farmer credit access after land market opening”, which was held on the 4th of November 2020. The roundtable was organized by the Kyiv School of Economics together with the EU and World Bank program “Supporting Transparent Land Governance in Ukraine.

Few small farms can access finance for land purchase and investments. Smallholders listed 4 critical problems:

  • High interest rates;
  • High down payments;
  • Lack of collateral; and
  • Difficulty with preparing accounting and financial statements.

The KSE President, former Minister of Development of Economy, Trade and Agriculture of Ukraine (2019-2020), Tymofiy Mylovanov, stated that it is critical for small farmers to have access to finance when the land market opens on the 1st of July, 2021: “If there is no normal access to finance, the conditions for doing business will not be equal for small farmers compared to large agricultural enterprises. This will distort the efficiency and fairness of the market and may result in a delegitimization of the reform, because there are no equal rules. That is why it is important to do all the homework before launching the land market so that regulation and procedures for accessing finance by smallholders are in place and appropriate.”

Oleh Bachynskyi, founder of the agri-cooperative «Yak Bdzhola (“Like a Bee”), noted that it is difficult to work with banks as they are not always ready to lend to small farmers. “I tried to obtain a loan to buy a tractor, but the bank demanded 50% of its costs as down payment, so I had to use the services of a leasing company at a higher interest rate, but without such a high down payment.”

Ivan Slobodyanyk, Chairman of the All-Ukrainian Congress of Farmers, Head of the Association “Agro-Food Rada”, thinks that launching the “Partial Credit Guarantee Fund” could be key for ensuring access to finance for smallholders. He added that loans at 2% interest in USD and 5% interest rate in UAH are acceptable for farmers. “Only under these conditions can we look forward to launching the market without stress and fear,” he said. It is also important that authorities organize a proper information campaign.

“For small agricultural producers, collateral is an essential question when searching for loans as not everyone has enough. Lifting the moratorium will change this as it makes agricultural land a more interesting collateral for banks,” said Mykhailo Sokolov, Deputy Chairman of the All-Ukrainian Agrarian Council. In his opinion, it is important for a credit program to be in place that is accessible to small farmers. He noted that smallholders also need support with developing business plans,

access to consultations on developing their farms and informationon available state program for agri-cooperation development. In addition, some fiscal amendments are required to make it possible for producers, who cultivate land in the shadow, to become legal, a situation that concerns about 30-35% of agricultural land in Ukraine.

Olena Korobkova, Executive Director of the National Association of Banks of Ukraine, said that banks are willing to lend to smallholders, and that the launch of the land market will expand the range of financial instruments. “We are actively supporting land market opening because if land becomes a liquid asset that can be sold under predictable terms, it will be hard to find a better collateral. Our current ability for lending to smallholders is limited by the moratorium,” she explained. She added that a key factor used by banks to assess a farmer’s creditworthiness is the availability of a transparent financial statement.

Larysa Bondareva, Deputy CEO, Credit-Agricole Bank, and Eugen Zaigrayev, Director for SME Department, PrivatBank, explained that they are developing mortgage lending programs for small and medium farmers. The main limiting factors for smallholders’ credit access is, again, the lack of transparent financial statements as well as concerns over the value of land given the fragmentation of land parcels in many parts of the country. They observed that state support could facilitate lending to small and medium farmers.

“Global practices prove that a Partial Credit Guarantee Fund is exactly the tool which helps small farmers to gain access to finance and it factually substitutes collateral,” said Vahe Vardanyan, Lead Financial Sector Specialist for the Finance and Markets Global Practice in Belarus, Moldova and Ukraine, World Bank. Therefore, adoption of Bill No.3205-2 for establishing the Partial Credit Guarantee Fund will be key for ensuring accessible credit resources for smallholders.

Taras Vysotskyi, Deputy Minister of Economic Development, Trade and Agriculture of Ukraine, expects Bill No.3205-2 to be adopted soon, which will ten enable the inclusion of resources for the PCG in the State budget. He observed that the creation of the State Agrarian Registry will also facilitate access to finance for smallholders, since the system can provide banks with data on the economic activities of a farmer (upon consent by the latter). This registry will bring together all farmers in one unified state information system and offer farmers transparent procedures for accessing state support programs and other services. The State Agrarian Registry has already been piloted with support of the EU and the World Bank. The law #3295, which establishes the State Agrarian Registry, was approved in the second reading by the Verkhovna Rada on November 5, 2020.

Kyiv School of Economics has launched a series of roundtables and public discussions “Transparent Land Governance in Ukraine” aimed at increasing transparency in land governance. This project implementation is supported by the EU and the World Bank program “Supporting Transparent Land Governance in Ukraine”.