Improving Efficiency in Agricultural Micro Lending at Universal Banks by Michael Kortenbusch Business and Finance Consulting (BFC) Berlin May 5, 2006 The.

Improving Efficiencyin Agricultural Micro Lending

at Universal Banks

by Michael Kortenbusch

Business and Finance Consulting (BFC)

BerlinMay 5, 2006

The Development Finance Experts

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Efficiency is the key factor for successful agricultural lending operations

Challenges for Banks:

• Low Client Density

• Client Accessibility

• Uniform Products

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Agriculture in the Caucasus

Low transaction sizes and large distances to banks are the key challenges

Azerbaijan (Beylagan) Georgia (Shida Kartli)

Number of villages 250 313

Average farm size (ha) 5 1.25

Distance to next bank (km) 30 35

Supply with formal credit 10% 25%

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Three steps to improve staff productivity

2. Business Process Optimization 3. Product

1. Clustering

Customizing the approach reduces administrative costs

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1. Clustering

Case One: United Georgian Bank, GeorgiaImplementer: Bankakademie, BFC

Selection of one subsegment in target villages to increase the concentration of customers

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1. Clustering

Case Two: Parabank, Azerbaijan

Selection of two subsegments in target villages

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2. Business Process Organization

Case One: United Georgian BankImplementer: Bankakademie, BFC

– Creditomobile

– Joint processing

– Streamlined risk assessment

– Collateral + peer pressure

– “Universal” lending staff

Average loan processing time is 3 (express loan) and 10 (standard loan) days

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2. Business Process Organization

• Case Two: Parabank, Azerbaijan

– Group lending

– Social screening

– No collateral for group lending

– “Universal lending” staff

Loan processing time: 25 days

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3. Products

Express Agro Loan – USD 200 – 3,300– 30 - 36% p.a.– Up to 14 months– No registered collateral– Third party guarantee– Flexible repayment

schedule– No prepayment fee

• Case One: United Georgian BankImplementer: Bankakademie, BFC

Flexibility in collateral requirements and repayment modus are key factors

Loans are disbursed and repaid in local currency only

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3. Products

• Case Two: Parabank, Azerbaijan

Loans are disbursed and repaid in local and foreign currency

Flexibility in collateral requirements and repayment modus are key factors

Group Agro Loan– USD 100 – 1,500– 30 – 36% p.a.– Up to 24 months– No collateral– Group solidarity principle– Flexible repayment

schedule

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Results

Microlending to agriculture can be as productive as microlending to urban enterprises

UGB Georgia Parabank Azerbaijan

Agro Loan Officer productivity(#, USD) 22 – 35,000 16 – 20,000

Micro Loan Officer productivity(#, USD) 15 – 26,000 12 – 22,000

Outstanding Loan Portfolio(#, USD) 316 – USD 455,000 1,143 – USD 1,025,000

Portfolio at risk (%): + 1 day 3.5% 3.6%(0% for Group Loans)

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Results

Conclusions1. Clustering compensates for larger distances

2. Business Process Organization means:- Streamlining the credit cycle- Serving a group, instead of an individual

3. Product: flexible and easy to get

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Thank you!

Business and Finance Consulting (BFC)Microfinance Research and ImplementationActive in 9 countries:

Clients: EBRD, KfW, World Bank, EEDAddress:Zur Geest 7, 59399 Olfen, GermanyTel./Fax: (+49 2595) 385365E-mail: [email protected]: www.bfconsulting.org