Abi Habib: `Our loans are convenient, because they are cheap… and long term`
In making agriculture more sustainable in recent years, the availability of financing options has seen some important improvements. The number of loans to the agro sector has mushroomed in the last two years, especially through loans granted under the Kafalat loan guarantee program.
Lebanese farmers and small agricultural enterprises commonly encountered problems in accessing loans at commercial banks, whose focus of business would rarely include agriculture and whose branch networks were concentrated away from rural areas. Agriculturalists on their part were often reluctant to seek bank loans, which carried high interest charges and requirements to post land as collateral, a stipulation which the small land owners and family farmers viewed as running contrary to their traditions.
This placed agriculturalists in a situation where sponsored programs were most appropriate to their needs. One type of such finance vehicle is micro finance, which fundamentally aims at enabling poor people to realize their potential for economic productivity. The tool to achieve this is provision of micro credits with strict repayment discipline, modeled after a development concept popularized over the last two decades through the collateral-free lending activities of the Grameen Bank in Bangladesh. Over 20 foreign and domestic NGOs have involved themselves since the mid 1990s in managing the provision of such loans to Lebanese individuals and small enterprises, in many instances with an emphasis on serving specific communities or geographic regions.
An UNDP country survey from 1997 found that the concept encountered a notable amount of skepticism at that time, but a 2002 paper for a World Bank development debate drew a more promising picture on the potential of micro finance for Lebanon. Presently, accumulated NGO-driven micro lending activities with a ceiling of $5,000 per loan are estimated to stand at a level of around $30 million. As charities, micro finance NGOs are dependent on donor contributions. Except for micro lending initiatives within general lending by commercial banks, the activity is yet to be regulated, making it difficult to analyze the overall scope, distribution and performance. “Some of the NGOs have become more productive, others less,” said economist Joey Ghaleb, who co-authored the 2002 paper.
Experts said that new dynamics would enter this realm and boost the micro finance volume when the central bank implements a planned framework, under which banks will be allowed to utilize a portion of their statutory reserves for advancing funds to micro lending. For the time being, the Kafalat program remains the best non-commercial loan. Kafalat is the loan guarantee corporation whose shareholders are the National Institute for the Guarantee of Deposits and 50 commercial banks. The company was established in 1999 and its portfolio of loan guarantees has seen a tremendous increase from mid 2002, to reach a total amount of $199.2 million at the end of February 2004. With 1,355 loans, agriculture accounted for almost half of all guarantees awarded.
“Our loans are convenient, because they are cheap and more importantly, they are long-term,” said Kafalat chairman, Khater Abi Habib. Loans benefiting from the scheme, under which Kafalat guarantees 75% of principal and interest up to a ceiling of $200,000, can go a long way to help farmers restructure their activities, or enter new activities on land that had been under-exploited.
As it does not stipulate a minimum loan amount, the scheme could also be accessible to clients whose needs are in the range of micro finance. Kafalat as a rule processes loan guarantee requests within three weeks. A characteristic of the program suited to the needs of small businesses, and farmers in particular, is the low reliance on real estate collateral. “With the presence of our guarantees,” Abi Habib said, “it has not become totally easy but much easier.”
While not designed to finance major agro-industrial projects, the scheme allows the infusion of larger amounts into agro-industry through the nation’s industrial lending program. “I saw a number of agro-industrial concerns financed by central bank-subsidized loans creating sure markets for agriculturalists as suppliers of raw materials,” said Abi Habib, “and those agriculturalists are in turn being financed by banks on basis of the strength of the purchase contracts given to them by agro-industrialists, plus the strength of market developments and guarantees given by Kafalat.”
As medium-term facilities, the low-interest seven-year loans with a one-year grace period are suited to the needs of most agriculturalists. One sub sector of agriculture to which the parameters of Kafalat loan guarantees are less well suited, however, is tree farming. To start operation of an orchard, a farmer needs finance facilities that are repayable over 12 to 15 years, with a three-year grace period. For this, Kafalat guarantees are inadequate and a source of long-term funding would be needed, with possible sponsors including Lebanon’s usual partners in lending and aid programs, such as the World Bank, EU and their affiliated finance institutions.
The loan guarantee company is engaged in continuous efforts to inform its client base of existing or potential small and medium entrepreneurs. “The best marketing is for us to be in the midst of our potential users,” said Abi Habib, “the north is our weakest market, and that’s why the largest portion of our visits and activities is now to the north.”