BAKU, Azerbaijan, October 9. One of the main challenges in financing Azerbaijan’s agricultural sector is that banks apply the same lending conditions to agriculture as they do to other industries, without accounting for the sector’s specific characteristics. Seasonal repayment schedules, longer loan maturities, and alternative collateral mechanisms are needed to improve farmers’ access to finance, Elkhan Mikayilov, chair of the Food and Agriculture Working Group at the American Chamber of Commerce in Azerbaijan (AmCham Azerbaijan), said at the 3rd International Agro Business Forum in Baku on Friday, Trend’s correspondent reports from the event.
According to Mikayilov, government agencies and banks currently offer various financial instruments, but farmers are unable to take full advantage of them. He said the reasons for the mismatch between the availability of financial instruments and the actual needs of the agricultural sector should be examined and practical mechanisms developed to address the problem.
“The main problem is the asymmetry between supply and demand. Government agencies and banks offer various instruments, but Azerbaijani farmers cannot benefit from these opportunities to a sufficient extent. We need to examine the reasons and develop practical mechanisms to address them,” he said.
Mikayilov noted that one of the main challenges in agricultural financing was the failure to tailor lending conditions to the sector’s specific characteristics. He said banks often apply approaches used in industries such as automotive manufacturing and furniture production when lending to agricultural businesses.
The AmCham Azerbaijan representative explained that agricultural income, particularly in crop production, is largely seasonal. However, loan repayment schedules often require borrowers to make equal payments throughout the year.
“International experience shows that agriculture needs its own financing and loan repayment mechanisms. Financial instruments should provide for higher payments during peak seasons and interest-only payments during off-season periods. This approach can be implemented through guarantee mechanisms,” he said.
Another important issue is loan maturity, Mikayilov said. Growing perennial crops and establishing orchards require substantial upfront investment, which can take years to recoup. In some cases, farmers must wait three to five years or longer before their fruit trees begin generating income.
He said grace periods offered by financial institutions sometimes fail to reflect the specific characteristics of agricultural production. Extending loan maturities and providing longer grace periods until farmers begin earning returns on their investments would therefore be appropriate.
Mikayilov also pointed to financial literacy, financial discipline, and collateral requirements as factors limiting farmers’ access to financing. Some farmers, he said, lack the financial knowledge and documentation needed to use the financial instruments offered by banks.
Requiring agricultural businesses seeking loans to provide real estate collateral under the same rules applied to other sectors creates an additional barrier. Mikayilov believes that alternative mechanisms allowing agricultural products themselves to serve as collateral should be expanded.
“Accepting products themselves as collateral, as well as using certificates for products stored in warehouses and crops expected to be harvested in the future, is important. International practice uses instruments such as warehouse receipts and crop receipts. These mechanisms allow existing and future agricultural products to be accepted as collateral,” he said.
Mikayilov noted that AmCham Azerbaijan was discussing pilot projects to introduce such instruments in cooperation with financial institutions and representatives of the agricultural sector. Banks, financial institutions, and agricultural organizations that are members of the chamber are expected to work together to demonstrate how these mechanisms can be applied in practice.
He also stressed the need to expand project financing mechanisms for agricultural processing facilities and greenhouses. Although assets created through lending can potentially serve as collateral for such projects, banks remain hesitant to adopt this approach, he said.
“The construction of a greenhouse or processing facility can itself provide collateral. Under the approach known as project financing in international practice, the asset created through the loan should be considered for use as collateral,” he said.
The AmCham Azerbaijan representative also called for the development of guarantee mechanisms in agriculture. Despite the availability of existing guarantee instruments, farmers and agricultural processing businesses are not making sufficient use of them, he said.
According to Mikayilov, expanding guarantee mechanisms could reduce banks’ risks and make financing more accessible to farmers. He expressed hope that the restructuring underway at the Azerbaijan Business Development Fund and the introduction of new financial instruments would create additional opportunities in this area.
He also welcomed the expansion of subsidy mechanisms and emphasized that introducing agricultural loan insurance could make an important contribution to addressing the mismatch between the supply of and demand for financial instruments.
