What can illustrate the relationship between the farmer and the banker in this country? To modify an old consultant joke to a Lebanese scenario, let us assume – purely for the sake of illustration – that a banking guru with decades of expertise in maintaining monetary immobility at the heart of the financial system, decides to depart from his impoverished neighbors by means of a trusty hot air balloon. His hypothetical rationale: our financial wizard thinks that such a balloon is an inconspicuous means of personal transportation which does not require an airport for takeoff, plus he has lots of skills in producing hot air.
A magical fog surprises the maestro when he tries to cross the hills. The balloon drifts northeast in this dense fog and floats into the upper plains of the Baalbek-Hermel district where it gets entangled in an inactive power pylon. Then the fog breaks and the disoriented guru sees a farmer working in a field 40 feet below his aerial contraption.
“Habibi, can you help me?” cries the guru from above. “Get me down and sell me your car. I will give you a Eurobond that is worth 20 times what you paid for that car!” The farmer shakes his head and continues with his potato harvest. The financier tries again. “Please, can you drive me across the border? I am a rich banker and can even give you a blank check.” The farmer shrugs. “At least tell me where I am exactly. I will pay you a million lira,” begs the banker.
The farmer looks up and says: “It seems to me that you don’t know much. I am an honest man and we do honest work here in these fields, so I cannot take the risk of driving you. Also, I need my car to take these potatoes to Beirut where they sell today for two million lira per bag.” (Note: The scene plays out in the not-too-distant future.)
“And where you are is in that little basket hanging way above my head. I tell you that for free,” the farmer concludes and continues with his work.
An old chasm
The distance between Lebanon’s – currently very theoretical – top tiers of finance and – the very real – agricultural sector today does look insurmountable. But the access-to-finance chasm for rural investment needs has already been gaping wide for decades. It was composed in one sense of the conventional rift between those seeking after funding and those providing access to it, in exchange for collateral that they could understand and valorize. However, the gulf between lenders and farmers might have been deepest and widest in terms of mindsets and attitudes where prospective investees and the gatekeepers of lending and investments have for decades failed to find a common language and mutual comprehension.
Illustrative of this mental and material chasm is the share of rural Lebanon in banking sector deposits. According to Banque du Liban figures cited by Bank Audi’s Lebanon Weekly Monitor for week 46 of 2022, the combined share of bank deposits by “region” rather than Mohafazat showed a heavily uneven concentration of two thirds of deposits in Beirut and its suburbs as of June 2022, juxtaposed at the other extreme with 5 percent of deposits in the Bekaa region.
According to numbers in the 2020 Annual Report of the Association of Banks in Lebanon, the regional distribution of deposits shifted down by about 30 basis points in Beirut and its suburbs, and up by a mere 13 basis points in the Bekaa in 2020 when compared with 2019. In terms of bank loans, the values were even more divergent as the capital reported to have been the location of between 73 and 74 percent of all loans. The Bekaa was seeing the least lending activity in the country, only improving from 3.3 to 3.6 percent of credit that has been extended to borrowers in this region, which is stretched across several administrative Mohafazat, or governorates.
The access-to-finance chasm has never been completely hopeless in the sense that funding and farming could never be paired. One can find 10 percent of loan allocations to agricultural projects in the portfolio of Bank du Liban-subsidized loans in the early phase of its, ultimately ill-fated, economic stimulus packages of the 2010s. Also, data from Kafalat, a local financial company, show that the loan guarantee corporation in its heyday engaged with agriculture sector lending as one of its constituent, but far from dominant activities. For the period between 2001 to 2016, Kafalat data show issuance of loans to agriculture in the billions of Lebanese pounds – when one billion pounds equaled approximately $667,000. To cite the values in 2016, subsidized interest medium- to long-term loans with Kafalat guarantees in that year comprised LL652 billion ($432.57 million) of which LL62 billion, or 9.5 percent, had been awarded to agricultural loan applications (versus LL590 billion to industry and tourism).
In the context of access to finance by agriculture, one has to note further that the banking branch density in Lebanon has shown retail network growth as largely bypassing rural areas. One can see as proxy indication for the persistently underwhelming access to finance in the interest of agricultural development. Banking density – albeit on a long-term declining trajectory from 27 in 2004 to 20.3 in 2020 (the latest available data in a World Bank series on this indicator) in terms of branches per 100,000 adults, was in 2020 still nearly twice the global value of 10.8 and higher than reported national branch densities in both the MENA region (13.4) and high-income countries (18.5) – has since the 1990s been considered exorbitant in comparison with peer countries but at the same time notorious for being domestically unequal and tilted heavily in favor of the capital Beirut and its conurbation.
The trends of concentration of deposits, loans, branches (also including ATMs) away from the Bekaa region and rural Lebanon have been consistent throughout the 2000s and 2010s. If historical access to finance and banking density in rural districts are further contextualized with soft infrastructures that facilitate the access to education for agricultural stakeholders, the conventional wisdom approach says that agriculture has an incredible amount of catching up to achieve with regard to both affordable financial capital and highly trained human capital. This need for closing the dual capital gap, which predated the collapse, has been highlighted in the past three years by the rising emphasis on building up the real economy. But it is also beyond question that commercial banks, which have lost the ability to lend, have since the start of the crisis been even less conduits for investments into agriculture, than before the banking collapse.
Importance of new infrastructures
Soft infrastructures for the agricultural value chain in a regulated market environment will be anchored in clear property legislation and a tax regime which entail cooperative and usufruct provisions. In terms of labor law, agriculture has to be covered by state frameworks of labor regulations and social protections.
Besides adequate legal infrastructure, state-supported education is recognized as another pillar in the enabling environment of the agricultural sector. The breadth of the educational choices in a country with a focus on elevating its agricultural sector will necessarily extend from vocational training to technical schools and university-level programs on crop and soil management, and agricultural and environmental sciences. Flanking tertiary education, strong value-adding potential can be unlocked by improving the collaboration between academia and industry in matters of agriculture and food processing.
In any country, educational and human capital infrastructures are in rural areas, almost by definition in perpetual need of updating and upgrading. This development focus is on one hand, directed toward keeping the sector aligned with new insights and studies in the constantly progressing realm of agriculturally applied life sciences where the human understanding of nature remains forever incomplete.
On the other hand, producer countries seeking to improve their agricultural exports have to constantly adjust to changing standards and requirements for internationally traded food stuffs and best practices. This latter challenge has long been a barrier standing large against Lebanese agricultural and agro-industrial exports to developed markets.
Overcoming this barrier requires investing in technicians and testing labs on the part of institutions, plus nurturing of awareness and compliance on the producer side. Moreover, under the aim of increasing a country’s food security, capacity building in the supervisory framework and improving producer standards have to be correlated with efforts to reduce food wastage in the domestic market and increase nutritional literacy among local consumers.
In this context, spreading awareness on nutritional values of food products and informing future Lebanese consumers about potentially harmful ingredients in popular snacks has this year become the chosen task of the Lebanese Association of Food Scientists and Technicians (LAFS), says Rana Cheaito, a food technician who has been coordinating the activities of LAFS since the mid-2010s, and recently was appointed as the head of this non-profit association.
“We are a bridge between industrialists and scientists,” she explains. “Our objective this year is to do awareness campaigns on how to read labels attached to food products,” Cheaito tells Executive. In parallel to having initiated a reading-the-labels campaign in schools, LAFS continually interacts with very small businesses – micro-enterprises in food processing and people who make food products in their home kitchens – to build their awareness on good manufacturing practices and food safety, Cheaito says.
This public good of food security and the collaboration among stakeholders have been pursued by LAFS on the level of a volunteer-driven NGO since the organization’s establishment in 1999; and this task was primarily tackled through annual conferences. Over the years, there were several highlights in the organization’s interaction with public officials, but the collaboration with public institutions such as the ministries of industry, agriculture, and economy has yet to be solidified beyond statements and expressions of ministerial intent. However, it is notable that since the economic crisis the membership of LAFS has been subjected to brain-drain pressures; nearly half of its 18 members have taken up roles in academia or industry overseas.
Lebanese food security, in Cheaito’s view, can be improved significantly with a roadmap for agriculture sector strategies and investments, but it is a precondition that more food scientists are employed by both agro-industry and public sector. “We have recommended that food safety quality controls should be mandatory at every food [processing] firm,” she says, commenting that this recommendation, which was adopted by the Ministry of Economy and Trade in a statement at the LAFS annual conference of 2019, has yet to be transformed from an idea to reality. But according to her, this is not for want of trained technicians. “I can tell you that we have enough food scientists and experts, but we don’t have enough who are employed.”
Cheaito also concurs that there is a need to strengthen the pre- and post-harvest agricultural infrastructure of Lebanon with more testing laboratories. “We have the experts, the lands, and the produce, but we don’t have enough labs and testing materials,” she says, adding that private sector investments and operational partnerships between the concerned ministries and academic institutions are the most realistic path.
Back to finance
The landscape in terms of soft infrastructures of education and resident expertise is in need of development, and the legislative and regulatory infrastructure for agricultural growth seems hardly sufficient, but today, the most deficient soft infrastructure remains access to finance. At the time of writing towards the end of 2022, when there is no bankable reversal in the Lebanese state’s presidential stupor yet, the state’s disability for enacting reforms and reaching agreements with all the International Monetary Fund (IMF), development finance institutions, Eurobond holders, domestic creditors, and depositors means that restoration of an access-to-finance capability and institutional infrastructure is not a rational near-term expectation for the agriculture or any other sector.
From the start of the financial crisis until today, private sector actors have been diverting their business transactions away from local banks, while households have made the informal economy their habitat, and the direct channeling of foreign financial aid circumvented the state and the banks in favor of dealing with small initiatives led by civil society organizations. The latter shift toward unconventional financing on the basis of micro-economic partnerships between foreign donors and Lebanese civil society organizations and NGOs is especially prominent in agricultural and green development projects.
In terms of developing the agro-food economy, an orderly return of conventional banking or the occasionally proposed establishment of a state-owned agricultural bank, both presuppose banking reform. Moreover, there is consensus among financial analysts and strategists that recovery of investor’s trust and the hope to see the channeling of funds into Lebanon through commercial banks will remain confined to the realm of hopeless dreams until an IMF agreement is in place.
Among few access-to-finance avenues that were not under complete capture by commercial banking, the microfinance sector, after the microcredit tradition of Mohammed Youus and the Grameen Bank initiative, has been rising in Lebanon since the early 2000s, albeit rather slowly by comparison with many developing economies.
The oldest microfinance institution (MFI) in Lebanon which still is operating under an NGO status, is Al Majmoua. Formed in the 1990s with a mandate to serve low-income businesswomen, the organization evolved in the 2000s into a leading MFI providing microcredit to urban and rural women and men who were seeking to secure independent livelihoods. Lately, in the course of the financial and economic crisis of Lebanon, the organization has identified agricultural clients as a new priority target group, Al Majmoua’s executive director Youssef Fawaz tells Executive.
“We have for more than 18 months [been] looking again into green financing and we also have been trying to be more involved with agricultural finance,” he says. An agreement testifying to the new orientation of Al Majmoua was signed in October with the multi-partner initiative WE4F; and the agreement will see the Lebanese MFI develop a financing product designed to help farmers obtain solar-powered irrigation systems.
Before the crisis, Al Majmoua had expanded its client base to 90,000 borrowers – absent a license that would allow it to accept deposits – whom it served with a staff of nearly 1,000. The vast majority of these borrowers were not agriculturalists. “Our portfolio reflected the economic pie in the country, with a bias to women-led ventures. The bulk of micro-loans was in trade and services sectors, with ten percent or less in the agricultural sector,” Fawaz explains.
In the crisis, the MFI’s headcount atrophied to about half of its pre-crisis staff of 450. Its deployable financial resources suffered the same fate as those of every funder. A large share of its funds in bank accounts were denominated in dollars and became inaccessible. Also, as the MFI shifted to receiving lira payments from its loan clients after demand for its credit dropped in the early phase of the crisis, it soon started to have difficulties in even accessing these lira in its accounts. “The funding has completely dried up. We have been in crisis mode for more than three years,” Fawaz says.
Without mincing words, he describes the MFI’s financial and human capital conundrum, putting the financial capital need at $5 to $6 million. “We are in a difficult situation and need to start climbing again. The challenge is that to climb again seriously, we would need new capital to come in, so that we can again lend in dollars. My plea to whoever wants to listen is to help save the sector of microfinance,” Fawaz says, arguing further that Al Majmoua could leverage its proven track record as a financially sustainable microcredit provider with good prospects for delivering returns to investors. “Microfinance is a sector that can reach 100,000 clients in the most remote areas of the country from the north to the south and the eastern Bekaa. We have the scales, the track record, and the history and we have the human infrastructure,” he enthuses.
On this, the hopeful side of its business Fawaz names two non-financial assets. The first is the observation that the MFI has recently noted a burgeoning recovery in people’s desire to borrow, and the second that the level of human capital has been preserved at a level where a rapid restart of the microcredit activity will be possible. The current staff level of “slightly less than 250 is still good and we remain relevant, as we have 32,000 clients,” Fawaz says.
He emphasizes that this level needs to be maintained in order to preserve Al Majmoua’s ability to re-engage clients in a coming economic recovery period with credit, technical assistance, and financial literacy training activities. “If experienced and skilled MFI workers were to be dismissed because of payroll difficulties, it will really be a missed opportunity for the period after the organized launch of a recovery strategy. I could lay off another 100 people tomorrow. But then, on the day when you decide that you want to reach 100,000 clients, it will again take us 15 years to get there.”
The fact that microfinance – when compared with commercial banking and larger-scale investment facilitations – is today a sector with outstanding reach potential for serving rural smallholders and micro-entrepreneurs in the agricultural economy, adds urgency to Al Majmoua’s social and economic appeal.