Roundtable: Facilitation of mortgage lending & small farmer credit access after land market opening

Roundtable: Facilitation of mortgage lending & small farmer credit access after land market opening

Towards an action plan to ensure affordable finance”

 To ensure that small agricultural producers benefit from the opening of agricultural land market, farmers should be provided access to affordable loans to purchase land on a mortgage, as not all farmers will have sufficient resources to buy land. Representatives of state institutions and leading Ukrainian banks, as well as Ukrainian and international experts discussed this issue during the round table held on September 22, 2020. The event was organized by the Independent Association of Banks of Ukraine (NABU) with the assistance of the EU and World Bank Program “Supporting Transparent Land Governance in Ukraine”, in cooperation with the Office of the President of Ukraine.

During the round table, the participants discussed the existing restrictions on lending and ways to reduce the cost of bank lending for agricultural producers, especially for small and medium-sized farmers.

Among the key issues that may initially hinder the development of mortgage lending to farmers, the participants identified the lack of data for land valuation, as well as the banks’ high operating costs for issuing a large volume of relatively smaller loans, which will ultimately affect the interest rates to be paid by the borrower.

Regarding creation of a single database of sale and lease prices for agricultural land as the basis for land valuation, Klaus Deininger, Lead Economist of the World Bank’s Development Research Group, presented the results of a study using new data provided by the  state enterprise “National Information Systems” (NAIS) of the Ministry of Justice of Ukraine, as a result of the collaboration between NAIS and the EU/WB Program ‘Supporting Transparent Land Governance in Ukraine’ to develop software to enable recording land transfer prices. The results from about 43,000 agricultural lease contracts, nearly 4,000 emphyteutic leases, and about 3,000 mortgages for non-agricultural land registered over the period from January 2019 to June 2020 have been analyzed and show clear differences for land values across oblasts in Ukraine.

“Price data should be readily available from registry records as the Law 340-IX mandates recording of prices in the process of registration of property rights. Given the volume of transactions, quick actions by the Ministry of Justice to institutionalize price reporting together with analytical work could allow to have a mass valuation model in place latest by end of 2121. It is also extremely important that the National Bank of Ukraine be involved in this process as well”, Mr. Deininger said.

Taras Vysotsky, Deputy Minister of Economic Development, Trade and Agriculture of Ukraine (MoEDTA), presented the Ministry’s approach to make loans more accessible to small farmers using the State Agrarian Registry. MoEDTA will roll-out an automated system of state support in 2021 based on the Agrarian Registry, which is currently being piloted with the support from the EU and the World Bank. All registered farmers will have access to the state program of interest rate compensation on bank loans, and banks will have access to all information available in the Agrarian Registry, which will reduce transaction costs for banks and facilitate decision making on loan approval. 

The round table participants also discussed Bill 3205-2 , which includes provisions for the creation of a partial credit guarantee (PCG) fund. The PCG initiative has been developed with the involvement of the European Union and the World Bank experts, and it will provide state guarantees for agricultural loans if a farmer lacks collateral. A PCG fund can be used to purchase land and agricultural machinery.

“We hope that the bill on the establishment of the Partial Credit Guarantee Fund will be approved by the Parliament in the nearest future. Next, with the active participation of the National Bank and the government, the PCG will be created to help small farmers to develop their businesses and access land market, “said Vahe Vardanyan, World Bank’s Lead Financial Sector Specialist for the Finance and Markets Global Practice.

Other key steps identified by the participants for facilitating mortgage lending to smallholders for purchase of agricultural land include: (i) improvements in the process of returning land as collateral, (ii) foreclosure through a notary’s writ of execution, (iii) ensuring transparent land auctions through SETAM and Prozorro e-platforms, (iv) introducing a better trust institution that will protect the creditor and minimize opportunities for abuse by the debtor, and (v) improving emphyteusis relations. The banks representatives also focused on the feasibility of increasing the liquidity ratio of land, which is currently 0.35.

Baher El-Hifnavi, Head of the World Bank’s Infrastructure and Sustainable Development Program in Belarus, Moldova and Ukraine, pointed out that in addition to the adoption of Bill 3205-2, other key laws are also still missing for a successful opening of land market, particularly Bills 2194 and 2195.

“We must not forget that there are still laws that need to be passed in order to ensure market transparency and security, as well as access for small farmers to credit. We hope that these laws will be adopted in the coming weeks so that sufficient time is left to approve regulations and establish the institutions before the land market opening. These laws will increase the efficiency of land market, remove regulatory restrictions on mortgage lending to farmers and simplify their access to credit, ” Baher El-Hifnavi said.

Tymofiy Mylovanov, President of the Kyiv School of Economics, said that the School experts had already started working with the World Bank and the legal expert working group on a monitoring system to track progress for all necessary laws and regulations still to be adopted before opening of the agricultural land market. “The amount of work to be done is so big that it would require approval of two regulations per week until the launch of the land market. It is critical that the government and all the authorized government bodies understand the importance of taking quick steps in this direction,” Tymofiy Mylovanov stressed.

The banking community is interested in developing mortgage lending to farmers, including smallholders, and has already begun developing such programs for individuals and legal entities. Victoria Strakhova, the event moderator and Advisor to the Head of the Office of the President of Ukraine, thanked the participants and announced that this round table will be the first in a series of mutual consultations to discuss the constraints on expanding mortgage lending to smallholders and identify ways to address and resolve these issues in time for the opening of land market. Based on these discussion, an action plan to ensure affordable lending to farmers when buying land will be developed with the support of the European Union and the World Bank.

The round table was attended by the heads of the Ministry of Economy, Trade and Agriculture of Ukraine; the Ministry of Justice of Ukraine; the National Bank of Ukraine; the State Service of Ukraine for Geodesy, Cartography and Cadastre; the Verkhovna Rada Committee on Agrarian and Land Policy; the Kyiv School of Economics; and 17 Ukrainian banks. Please see also press release by NABU.