This Programme is financed by the European Union.
Turkey MSME Lending Programme
Financing of Agricultural MSMEs in TurkeyTurkey:::: Field Research Report
January 2017
This study was conducted within the framework of Turkey MSME Lending Programme. Turkey MSME LEnding Programme is financed by the European Bank for Reconstruction and Development (EBRD). The technical assistance component of the programme is funded by U.S. Agency for International Development (USAID) in Phase I (November 2010 – April 2012) and the European Union in Phase II (May 2012 – October 2013), Phase III (November 2013 – October 2015) and Phase IV (March 2016 – May 2017). Technical assistance services within the framework of the programme are delivered by Frankfurt School of Finance and Management.
This study has been produced with the financial assistance of the European Commission. The contents of this study are the sole responsibility of Frankfurt School of Finance & Management and can in no way be taken to reflect the views of the European Union or European Commission.
Authors: Emine Burcu Cebeci Ömer Faruk Demirhan Cansu Karatay Erdal Kocoglu
Frankfurt School of Finance & Management Mustafa Kemal Mah. 2124. Cadde Edige Plaza No: 15 D: 3&4 Cankaya Ankara Tel. +90 312 467 44 77 Fax +90 312 467 44 76 [email protected] http://www.frankfurt-school.de
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Table of Content 1. Objective and Methodology of the Survey ...... 6 1.1. Objective ...... 6 1.2. Methodology ...... 6 2. Results and Analysis of the Survey ...... 7 2.1. Demographic Information ...... 7 2.1.1. Age ...... 7 2.1.2. Level of Education ...... 7 2.1.3. Non-Agricultural Income/Activity ...... 8 2.1.4. Geographical Distribution ...... 8 2.1.5. Agricultural Activity ...... 9 2.2. Access to Finance ...... 9 2.2.1. Source of Financing ...... 9 2.2.2. Input Purchase ...... 11 2.2.3. Bank Preference ...... 12 2.2.4. Sufficiency of Loan Amount Received ...... 15 2.2.5. Usage of Agricultural Credit Card ...... 15 2.2.6. Expectations from Banks...... 17 2.2.7. Investment Plans in Close Future ...... 19 2.2.8. Problems of Turkish Agriculture Sector ...... 20 3. Conclusion ...... 22
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List of Charts Chart 1: Age distribution of field survey participants...... 7 Chart 2: Field survey participants level of education ...... 8 Chart 3: Availability of non-agriculture income or activity ...... 8 Chart 4: Regional distribution of the participants ...... 9 Chart 5: Agriculture activities of participants ...... 9 Chart 6: Resource to finance agricultural activity ...... 10 Chart 7: Agricultural input supply conditions ...... 11 Chart 8: Input purchase conditions of farmers using agricultural credit cards...... 12 Chart 9: Input purchase conditions of farmers that are not using agricultural credit cards ...... 12 Chart 10: Bank loan usage in the last 3 years ...... 13 Chart 11: Banks’ shares in lending to survey respondents ...... 13 Chart 12: Number of banks used by respondents to get agricultural loans ...... 14 Chart 13: Agricultural loan customer acquisition by banks (penetration rate) ...... 14 Chart 14: The sufficiency of bank loan that the respondents received in the last 3 years ...... 15 Chart 15: “Do you use an agricultural credit card actively?” ...... 15 Chart 16: Agricultural credit card market shares of banks ...... 16 Chart 17: Agricultural credit card market share (penetration) ...... 16 Chart 18: Expectations of farmers from banks ...... 17 Chart 19: Future plans of farmers ...... 19 Chart 20: The most important problems of Turkish agriculture sector ...... 20 Chart 21: Selected inflation and price index graphs ...... 21
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Abbreviations
: Baking Regulation and Supervision Agency BRSA : The Central Bank of the Republic of Turkey CBRT : the European Bank for Reconstruction and Development EBRD : European Union EU : Farmer Registry System FRS : International Finance Corporation IFC : Credit Registry Bureau KKB : Micro, Small and Medium Sized Enterprise MSME : Small and Medium Sized Enterprise SME : Technical Assistance TA : Agricultural Loan Evaluation System TARDES : Turk Ekonomi Bank TEB : Yapi Kredi Bank YKB
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1.1.1. Objective and MMMethodMethodethodologyology of the Survey
1.1. Objective Launched in November 2010, EBRD’s Micro, Small and Medium Sized Enterprises (MSME) Lending Programme aims at extending medium and long term funding to Turkish banks to support Turkish MSMEs’ access to finance. The technical assistance component of the programme is designed to enhance the technical capacity of EBRD’s partner commercial banks to disburse sub-loans to agricultural MSMEs in a better and well-structured banking practice. The first field survey under the TA programme was conducted in 2011 to understand the needs and demands of Turkish agricultural MSMEs in terms of access to finance and banking services. Before the completion of the loan programme in April 2017, the consultants target to measure its impacts on the agricultural sector and the opportunities for access to finance. This “Financing of Agricultural MSMEs in Turkey: Field Research”, carried out by Frankfurt School of Finance & Management, examines the basic financing problems of micro, small and medium sized agricultural farmers, the conditions in access to finance and expectations of the farmers from the banking sector. The survey also tries to explore the Turkish agricultural producers’ future investments in the sector. This report presents the findings of the field research and summarizes the main outcomes. The results of the study will be shared with the EBRD, partner banks and the other project stakeholders.
1.2. Methodology The sample group of interviewees was selected amongst the farmers that the Programme Consultant has interviewed to collect agronomic data regarding 2016/17 agricultural production season. The survey was conducted between May – September 2016 with 796 agricultural producers randomly selected from 58 provinces of Turkey. All surveys were conducted through face-to-face interviews by the experienced agronomists. Apart from the demographic information, the survey questionnaire consists of 8 multiple-choice questions related to the agricultural sector operations and relations with the financial sector of the surveyed. On the other hand, except for "Yes/No" questions, all questions included an “Others” option which enabled the farmers to give open- ended answers. By this way, it was possible to explore and collect all unpredicted answers for the subject under examination. (Please see Annex 1 for the questionnaire.) As the main objective of this study is to monitor the changes and development of agricultural finance in Turkey over the last 5 years, most of the questions were the same with the ones used in the field study conducted in 2011, which enabled Frankfurt School to make comparative analysis and measure the impact of the programme. However, some new questions have been added in line with the changing dynamics of the agricultural and financial sectors. Although the results of the both researches could give us comparable figures, it should be kept in mind that the former study was carried out in relatively less developed provinces of Turkey and therefore the level of education (which is lower on average in the eastern parts of the country) could be a determinant factor. In 2011, 607 farmers from 12 different provinces were interviewed while the number of provinces and farmers increased to 796 and 58 respectively under 2016 survey. Therefore, in terms of number of provinces and surveyed farmers, the revised research has been more inclusive. On the other hand, the average number of surveyed per province in 2011 was 50, while it was 14 in 2016 survey, implying that the recent gives limited insights for province- based analysis. Additionally, the survey conducted in 2011 was more extensive in terms of the areas surveyed (e.g. relations with the producer groups and the public banks, etc.) and the number of questions raised, whereas the questions in 2016 were mostly related with the financing environment in agricultural sector and future expectations around this.
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2.2.2. ResuResultsltsltslts and Analysis of the Survey
2.1. Demographic Information
2.1.1. Age The minimum and maximum ages of interviewed farmers are 18 and 83, respectively; while the age average is 48.4 (Chart 1). The average age in 2011 survey was 46.8 years, which could indicate that the average age among farmers in Turkey has raised slightly. The share of farmers with the age of 50 and above is 48%. In recent years, some policy steps have been taken to increase the number of young farmers in Turkey in line with the EU-driven rural development plans. Different grant schemes provide financial supports to young population operating in rural areas. However, it is observed that these supports do not suffice to enhance the young population working in the agricultural sector, as the majority of the population continued to migrate to urban areas 1. Statistics indicate that the same trend is valid for the European Union. Farmers under 35 constitute only 6% of the farmers in the EU, whereas farmers with an age of 55 and above constitute 55% of the total 2.
Chart 111:1::: Age dddistributiondistribution of fffieldfield sssurveysurvey ppparticipantsparticipants
19 and below; 0% 20-29; 4%
60 and above; 18% 30-39; 19%
Avg. age: 48,4 50-59; 31% 40-49; 28%
2.1.2. Level of EEEducationEducation Of 773 farmers, 65.1% graduated from an elementary and primary school (Chart 2). 0.5% stated to be literate although receiving no formal education at all. The share of farmers with high school graduation was 20.7%, while the share of farmers with a bachelor’s or master’s degree were found to be 12.7%. In Turkey, the share of population with elementary or primary level education is 59.6% while the share with a university diploma is 16.7% for the same age groups (18 years and older) as in the field study. Therefore, the level of education amongst agricultural producers appears to be lower than the overall population, although the gap is not very high.
1 Turkstat data reveals that the rate of population living in the rural areas decreased to 7.9% from 23.2% between 2011 and 2015. 2 EuroStat, 2013.
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Chart 222:2::: Field sssurveysurvey ppparticipantsparticipants lllevellevel of eeeducationeducation
Master degree; 1% Bachelors degree; 10,3% Literate; 0,5%
College; 2,2%
High School; 21,3% Primary Sch.; 49,2%
Elementary Sch.; 15,9%
2.1.3. NoNoNonNo nnn----AgriculturalAgricultural IncomeIncome////ActivityActivity
Chart 333:3::: AvailabilitAvailabilityy of nonnon----agricultureagriculture income or aactivityctivity
Yes; 30%
No; 70%
30.2% of the farmers stated to have non-agricultural income, indicating that about one-third of agricultural farmers earn income from another occupation, activity or family resources. Since the vast majority of agricultural production activities in Turkey are seasonal/periodical, it is common for agricultural enterprises, owner of the enterprise or members of the farmer’s family to work in other paid jobs (including public services). In addition, there are many SMEs (including private enterprises) in rural areas engaged in agricultural production as a secondary activity.
2.1.4. Geographical Distribution The geographical distribution of the farmers is presented below (Chart 4). The first four regions (74% of the total) were Mediterranean, Aegean, Central Anatolia and Marmara regions which also represent the top four in terms of agricultural production volume in Turkey.
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Chart 444:4::: RRRegionRegionegionalalalal dddistributiondistribution of the participants
6% 8% 23% Central Anatolia Marmara 12% Mediterranean Aegean Black Sea 18% 15% Eastern Anatolia Southeastern Anatolia
18%
2.1.5. Agricultural Activity 81% of the farmers participated in the survey are engaged in crop and plant production and 10% are involved solely in animal husbandry, whereas 9% of them perform both activities. While 41% of the farmers involved in crop and plant production cultivate fruits and vegetables, 30% raise field crops such as cereal, industrial plants, fodder plants, etc.
Chart 555:5::: Agriculture aaactivitiesactivities of pof participantsp articipants
Animal Husbandry and Crop and Plant Production; 9%
Only Animal Husbandry; 10%
Only Fruit/Vegetable; 41%
Fruit/ Vegetable and Field Crops; 10%
Only Field Crops; 30%
2.2. Access to Finance
2.2.1. Source of Financing Farmers’ financial resources for agricultural production were asked where they can make multiple choices to explore all their possible funding resources.
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Chart 666:6::: Resource to finance agricultural activity
Own funds 76,5%
Bank loan 46,6%
Agri Credit Cooperative 34,3%
Agri Credit Card 19,8%
Consumer Credit Card 16,6%
Maturity/money from input seller 16,2%
Borrowings from family/friends 9,5%
Grants/support from the state 6,4%
Advance payments from buyers 6,4%
From non-agricultural activity 6,2%
Others 2,4%
0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0%
76.5% reported that they reinvest own resources (equity) generated from agricultural activitiy in production (Chart 6). The most preferred external resource was bank loan with a share of 46.6%. Considering that agricultural credit card and consumer credit card also provide credit limits and could be accepted as bank loans, the share of bank loans used as external resource increases to 52.3%. This finding reveals that Turkey has made significant progress in the last 6 years in terms of farmers’ access to bank finance since the same finding was only 15% in the field survey in 2011. As a matter of fact, the Banking Regulation and Supervision Agency (BRSA) data shows that the volume of loans provided to agricultural sector has increased 2.5 times between 2010-2016 June 3. The role of private banks cannot be underestimated as they started to extend agricultural loans as from 2010 with the great spark of the EBRD’s TURAFF funds to trigger competition in the market. In this period, the private banks made significant investments to develop internal capacities to disburse agri-loans with minimized risk and generate a client profile with technical know-how. Technical assistance received from the international financial institutions such as EBRD and IFC led to creation of an expanding effect in agricultural banking market with new banking products, processes, and special campaigns for farmers. On the other hand, Agricultural Credit Cooperatives, which have extensive presence throughout Turkey and serve as an alternative credit institution for farmers, increased share from 5.4% to 34.3% between 2011 and 2016 with help of their new products & raised borrowing limits and placed in the third row after bank loans. The buyers (6.4%) and the input vendors (suppliers) (16.2%) received a significant share in the financing sources of agricultural producers, which are close to the figures in 2011. However, what is striking in Turkey is that the finance received from the input sellers to the farmers is still more popular than receiving finance from the buyers. Therefore, it is understood that the link between the producer and the buyer within agricultural value chain is not as strong as the link between the producer and the input provider. An important reason for this situation is the fact that the farmers have low level of savings, and purchase of inputs from input sellers on credit is widespread to sustain agricultural production. On the other hand, the flow of products, information and money between farmers and the buyers (including agro-industry) in Turkey is already known to be fragile. This “unhappy” relationship between two sectors is evidenced in the very last question of the study, which is explained in Chapter 2.2.8. Accordingly, the farmers addressed the problems with the buyers and marketing of agricultural products as the second most important problem in the sector. Another reason for poor relations and funding between farmers and buyers is the ignorance of value chain analysis and finance. Banks often concentrate on "traditional lending" methods in agricultural finance and consider “collateral-based" finance as the more convenient method. However, finance provided to buyers and agro-industries under the SME and commercial banking is highly linked to
3 2016 June sectoral loan data was preferred since 2016 field survey study was completed in September 2016.
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agriculture finance. Without performing a value chain analysis, it will not be easy to explore if additional financing models (contracted farming, framework guarantee agreements, product/warehouse receipts, production certificate, nucleus farming models, commodity pledge, trust fund model etc.) would be introduced for certain types of agricultural products and sectors. In addition, it is still a very common practice in rural settlements to lend directly in cash at very high-interest rates to small-scale farmers who are unable to borrow from the banks or agricultural credit cooperatives. In other words, input providers act as lenders with very high costs due to farmers’ poor access to finance. 16.6% of the farmers use personal credit cards for financing agricultural activities. Furthermore, it is observed that many of the farmers (70%) using these cards have also indicated that they have additional non-agricultural income (salary, other paid works, etc.). Currently, credit cards show the highest non-performing rate (8.1%)4 in Turkey compared to overall banking products; therefore, it might be an important risk control point for banks to be careful while allocating credit cards to the farmers. 22.9% responded “own resources” as the only source of funding while this rate is 3.6% for loan from agricultural credit cooperatives and 2.8% for bank loans/credit cards. 63% of the farmers who responded “Others” as source of funding stated that they use loans from other cooperatives/associations, while the rest admitted that they sell some of animal stock when they need finance.
2.2.2. Input Purchase To better understand the relation between the sources of funding and the input supply, farmers were asked about the maturity conditions in purchase of agricultural inputs. Only 30% purchase inputs in cash, while 23% purchase only a certain part in cash and 47% buy inputs on credit (Chart 7). Among the farmers that purchase input on credit, 40% buy with a maturity until harvest time. 7% of the surveyed farmers declare that they have maturities for a couple of months and do not wait until harvest. These results reveal that input purchase with maturity is very common in Turkey.
Chart 777:7: Agricultural input supply conditions
With harvest maturity 40%
In cash 30%
Half cash half with maturity 23%
With a couple of months maturity 6%
Provided from contracted buyer 0%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Agricultural credit cards used in Turkey provide maturities and interest-free periods to farmers for input purchases. To distinguish the effect of the agricultural credit cards on maturities provided during input purchases, the input purchasing pattern of agricultural card owners (20% of the sample) and others was analyzed separately (Charts 8 and 9). In this way, it is possible to see a purified role of card and input sellers in determining maturities.
4 Turkish Banking Sector Key Indicators September 2016, December 2016 (“Türk Bankacılık Sektörü Temel Göstergeleri Eylül 2016, Aralık 2016”)
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Chart 888:8::: Input ppurchaseurchase conditions of farmers using agricultural credit cards
With harvest maturity 54%
Around half cash half maturity 25%
In cash 16%
With a couple of months maturity 4%
Provided from contracted buyer 1%
0% 10% 20% 30% 40% 50% 60%
54% of card-user farmers buy their inputs with maturities until harvest period, 4% with a maturity of couple of months, 25% with some cash and some credits, and only 16% all in cash. It is envisaged that agri cards have a significant impact on agricultural input purchases with maturities, provided that some or all of the input purchases can be made with these cards. For farmers without agri cards, cash purchases (33%) almost doubles the share of farmers with agri cards while harvest maturities still constituted the largest share (36%). 21% of the farmers without agri cards preferred to buy the input with half cash and half maturity.
Chart 999:9::: Input purchase conditions of farmers that are not using agricultural credit cards
With harvest maturity 36%
In cash 33%
Around half cash half maturity 21%
With a couple of months maturity 19%
Provided from contracted buyer 0%
0% 5% 10% 15% 20% 25% 30% 35% 40%
The results show that the input sellers constitute a significant portion of short term financing sources of farmers regardless of agri-card possession. Although this may seem positive at the first glance, it puts a high financial burden on the farmers, since input sellers apply much higher interest rates compared to banks’ interest rates. Another striking feature derived from the survey data is that 29% of farmers who do not use agricultural cards but use cash loans still buy their inputs with maturity on harvest. It is a well-known fact that most of the agricultural cash loans in Turkey are used for working capital expenditures. Therefore, the banks would need to check whether the cash loan amounts are sufficient for the financing of the working capital needs or the agri-loans are used for non-agricultural purposes.
2.2.3. Bank Preference 57.5% of the respondents stated that they used bank loans at least once in the last 3 years, indicating that there is still room for banks to market agri loans. This ratio could be used to induce that approx. 1 million of 2.3 million
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Turkish farmers 5 do not use bank loans. Additional information is required to determine the share of farmers who are credible for banks but not willing to apply for a loan and the ones suitable for banks but cannot access to bank finance for different reasons.
Chart 101010:10 ::: Bank loan usage in the last 3 years
42,5% Yes No 57,5%
The respondents that have answered “yes” to the above question were also asked to give the name of bank(s) from which they received loans. 50% of the number of loans used during the last 3 years were from Ziraat Bank. Ziraat Bank was followed by Denizbank (16.9%), Yapi Kredi Bank (8.1%), TEB (6.7%) and Isbank (5.6%) (Chart 11).
Chart 111111:11 ::: Banks’ shares in lending to survey respondents
Ziraat Bankası 49,8% Denizbank 16,9% YKB 8,1% TEB 6,7% Đ Bankası 5,6% ekerbank 2,9% Finansbank 2,5% Halkbank 2,1% Vakıfbank 1,7% Akbank 1,2% Garanti Bankası 1,1% Anadolubank 0,7% ING 0,5% Koç Finans 0,1% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0%
According to the survey results, an average respondent who received loan(s) in last three years from 1 or 2 banks (1.64 on average). Farmers working with only one bank to get loans constitute 61% of total farmers who received loan(s) in last three years. 35% of farmers work with 2 or 3 banks, and only 5% of farmers work with 4 or more banks. 81% of farmers who used loans from a single bank stated that they used loans from Ziraat Bank, 6% from Denizbank, 4% from Yapi Kredi Bank and 3% from Isbank.
5 National Farmer Registry System, 2014.
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Chart 121212:12 ::: Number of banks ususedededed by respondents to get agriagriculturalcultural loans
1 bank 61%
2 bank 23%
3 bank 12%
4 or more banks 5%
0% 10% 20% 30% 40% 50% 60% 70%
Loan customer penetration of the banks is also shown below, where the loan customer ownership of the banks is analyzed regardless of the frequency of banks, unlike the above “loan numbers market share" analysis. Thus, loan customer penetration could be determined for each bank on farmer acquisition basis. The results of this method reveal that the penetration rate of Ziraat Bank increases to 81.8%. Therefore, 4 of every 5 farmers participated in this study appear to be loan customers of Ziraat Bank. With the same approach, the penetration rate of Denizbank increases to 27.8% while the “number of loan” market share was 16.9%. Yapı Kredi and TEB's penetration rates rise to above 10%. These banks were followed by Isbank, Sekerbank and Finansbank.
Chart 131313:13 ::: Agricultural llloanloan cccustomercustomer aaacquisitionacquisition by bbbanksbanks (((p(pppenetrationenetration rateraterate)rate )))
Ziraat Bankası 81,8% Denizbank 27,8% YKB 13,3% TEB 10,9% Đ Bankası 9,2% ekerbank 4,8% Finansbank 4,2% Halkbank 3,5% Vakıfbank 2,8% Akbank 2,0% Garanti Bankası 1,8% Anadolubank 1,1% ING 0,9% Koç Finans 0,2%
0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0% 80,0% 90,0%
In terms of the penetration rate, it is observed that Ziraat Bank (75.5% in 2011), Denizbank (8.3% in 2011), Isbank (4.7% in 2011), Yapi Kredi Bank, TEB, Sekerbank and Finansbank (each below 3% in 2011) increased their market shares when compared with 2011 findings. In particular, the partner banks of the EBRD in MSME Lending Programme, including Isbank, Yapı Kredi and TEB, have become important players in the agricultural lending
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market by establishing their segmentation and organization for agricultural banking in the last 3 to 7 years although they did not present a significant share in the previous study concerned.
2.2.4. SufficienSufficienccccyy of Loan Amount Received Farmers who used bank loans in the last 3 years were asked whether they could get sufficient credit for their agricultural needs (Chart 14). 71% of the respondents answered “yes”. When the banks of the respondents who answered “no” are examined, no specific concentration on one bank is observed.
Chart 141414:14 ::: The sufficiency of bank loan that the resporespondentsndents received in the last 3 years
Yes 71%
No 29%
0% 10% 20% 30% 40% 50% 60% 70% 80%
2.2.5. Usage of Agricultural Credit Card Agriculture credit card is the most popular product of the banks in recent years in financing operating expenses of the farmers, and especially small-scale farmers. In order to observe the card usage pattern in agricultural sector, agricultural MSMEs were asked "whether they actively use an agricultural credit card for financing agricultural expenses". Since the number of banks offering agricultural credit cards have reached 11 in Turkish market and a significant number of farmers own these cards, the “active usage” was emphasized and explained by the interviewer to the respondent when necessary. Accordingly, 36.5% of the respondents declared to actively use agricultural credit cards.
Chart 151515:15 ::: “““Do“Do you use an agricultural credit card activeactivelylylyly????””””
36,5%
Yes No
63,5%
Active card usage rises to 57% when the same question is applied to the farmers who have used a bank loan in the last 3 years. Therefore, it is understood that more than half of farmers working with banks for loans also actively
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use the agriculture card. Given that every commercial bank with specialized agricultural banking services offers agricultural credit card to its customers, this ratio can be assumed as the activation rate of the agricultural cards for the sector. The number of agricultural cards in possession of the farmers who actively use the cards is 410. Therefore, the number of cards per active user is 1.41. The top two cards being used by the respondents are Ziraat Bank’s Basak Kart with 46.3% share and Denizbank’s Üretici Kart (Producer Card) with 29.5% share (Chart 16). When compared to the analysis for banks’ market share in agri-loans, it is observed that Denizbank, TEB and Sekerbank have higher shares in agricultural credit card market than in cash loan market.
Chart 161616:16 ::: Agricultural cccreditcredit cccardcard mmmarketmarket sssharesshares of bbbanksbanks
Ba ak Kart 46,3% Üretici Kart 29,5% Harman Kart 7,3% Hasat Kart 7,3% Verimli Kart 5,4% Đmece Kart 2,4% Finansbank Tarım Kart 0,7% Vakıfbank Tarım Kart 0,7% Ekin Kart 0,2% 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 40,0% 45,0% 50,0%
Furthermore, agricultural card customer penetration of the banks is shown below by ignoring the farmers who use cards from more than one bank (Chart 17). In this analysis, card customers of each bank were divided by the total number of farmers using cards, not to the total number of cards as in the previous analysis. Thus, the agricultural card penetration of each bank can be determined based on individual farmers.
Chart 171717:17 ::: Agricultural cccreditcredit cccardcard mmmarketmarket ssshareshare (penetration(penetration))
Ba ak Kart 65,7% Üretici Kart 41,9% Harman Kart 10,4% Hasat Kart 10,4% Verimli Kart 7,6% Đmece Kart 3,5% Finansbank Tarım Kart 1,0% Vakıfbank Tarım Kart 1,0% Ekin Kart 0,3% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0%
Ziraat Bank's card penetration is lower than its cash loan penetration; while Denizbank and Sekerbank has a higher penetration in cards than in cash loans, implying that these two banks have concentrated on the agricultural card disbursement in their marketing strategy. While TEB's cash loan and agricultural card penetration are very close to each other, it is assumed that Yapi Kredi Bank, Isbank, Finansbank, Vakifbank and Garanti Bank have focused on marketing cash loans rather than the agricultural credit card.
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2.2.6. Expectations from BBBanksBanks Participants were asked to indicate their three most important expectations from the banks (Chart 18). In this way, the participants could reflect their genuine expectations by eliminating less important ones, although they were not restricted to select only one choice.
Chart 181818:18 ::: Expectations of farmers from bbbanksbanks
Suitable pricing (interest and fees) 66,6% Suitable collateral conditions 54,8% Suitable repayment conditions 47,5% Fast answer for loan evaluation 18,7% Easy application and procedures 18,1% Consultancy in agriculture 9,9% Experienced and knowledgeable staff 8,8% Suitable product types for agri 5,4% No further expectation 4,4% Taking animals as collateral 3,1% Access to bank branch 2,6% Others 1,5% Well behavior of the staff 1,0% Agri insurance become optional 0,6% 0,0% 10,0% 20,0% 30,0% 40,0% 50,0% 60,0% 70,0%
The results show that:
• 4.4% of the participants stated that they had no additional expectations and were generally satisfied with the level and quality of agricultural services of banks.
• The most preferred choice was a “more suitable pricing” (66.6%) in terms of interest rates and commissions. Some of the respondents also pointed to the high prices of private banks, low-interest rates and high commissions in state bank (Ziraat Bank) in additional remarks and stated that the interest subsidies should also be provided to the private banks.
• Increment of the expectations about suitable loan pricing by 53.4% compared to 2011 survey results can be interpreted that there has not been enough improvement in the last 5 years or the expectations for low pricing have increased with the rising competition in agricultural banking. The second highest expectation (54.8%) is the improvement in collateral conditions. Some of the detailed requests mentioned related to this question point that banks shall not ask mortgages as a compulsory collateral, extend loans also for the production on lands without a title deed or for land titles that are not directly owned by the farmer him/herself (joint-owned lands, inheritance lands, rented lands), value the sales price of lands with reasonable market prices, and lastly not ask more than one personal guarantors. Expectations for better collateral conditions was the topmost demand from the banks as a result of 2011 field survey with a ratio of 79%. Thus, the revised results demonstrate an improvement in this area, although it remains one of the most important problems in access of farmers to finance. In Turkey, the most preferred type of collateral for loans within the "traditional lending" context is still property mortgages. Especially medium and long term loans are still disbursed on the condition of land or housing mortgages and with an additional acceptable surety (personal guarantors) instead of instruments that will rely on the cash flow such as product payments, product pledge, product certificates or movables (car, machinery, etc.) pledge. One of the most important reasons for this issue is lack of enough capacity for registered and certified storing facilities in Turkey. A licensed warehouse system came into effect in 2013 but it is now available
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for only cereal products. In addition, a new law was issued on October 20, 2016 enabling the use of movables as pledge in commercial transactions (law no. 6750), which could also create an opportunity for agricultural MSMEs to access to bank finance more conveniently. Problems indicated about land values and land titles have been long known issues in Turkey resulting from the inheritance culture and migration dynamics as well as real estate boom starting from the early 2000s. Essentially, banks are under tight regulation and supervision of BRSA in terms of real estate and mortgage practices. Therefore, mortgage valuation of agricultural lands has also started to be carried out by the registered and licenced companies by the Capital Markets Board. In recent years, it was often argued that valuation firms are relatively unsuccessful in the proper expertise of agricultural lands. To cope with these problems, the valuation companies started to employ agronomists to assess the agricultural value of the land correctly. However, there are systematic problems such as fragmented, distant, jointly-owned land parcels (around 5 parcels per farmer) in Turkey, untransferred inheritance lands for decades, lands under consolidation projects that are not accepted as collateral, and unclassified deedless lands. The problems raised for lands and mortgages are not expected to diminish unless these structural problems are resolved. Another problem is that agricultural land in Turkey is usually overpriced like all kinds of real estates, which leads to a gap between "market” and "legal" values of lands in expertise reports. A new indicator for the value of agricultural land has been identified as per the new regulation introduced by practice direction of the Law No. 5403 on Soil Conservation and Land Use, which foresees that the value of the agricultural land will be 20 times of its annual net agricultural income from crops being cultivated on the land. In addition to this rule, new concepts, such as "sufficient income agricultural land" and "economically integrated enterprise" brought together with this law increased the minimum land sizes up to 15-17 ha, varying from district to district. All these developments are thought to accelerate land transactions between landowners in Turkey.
• The third highest expectation (chosen by 47.5% of respondents) from the banks is “suitable repayment conditions”. Detailed expectations stated under this choice included eased loan restructuring after climatic problems, illnesses and unexpected drops in yields and prices, single or flexible repayments suitable with the next harvest time after restructuring the loans, and finally no additional loan commissions for early repayment of the loans. The reason for a higher expectation level for repayment conditions in this study compared to the respective rate derived in 2011 research (41%) could be increasing climatic and economic (market) risks for agricultural production as well as increasing competition in agricultural banking. Apart from the above expectations, 18.7% of the respondents asked to get a quick evaluation and response after loan application and 18.1% asked for easier loan process and procedures. Some farmers who asked for easy loan procedures also stated that procedures in state banks are more difficult. The ratio of farmers stated the same expectation was 13% in 2011 field study. Although there have been significant improvements in overall agricultural lending procedures in Turkey after centralized or built-in agri-lending systems such as TARDES and other CAP tools, banking systems connected with national Farmer Registry System (FRS), pre-approved loan schemes, etc., increasing regulations in the banking sector and customer expectations show that there is still room for improvements. For instance, farmer registration and farm accounting systems in Turkey are still not sufficiently developed for the effective use of the banks. FRS is a system that farmers apply each year to declare their crop production within the respective year and receive government payments for the products declared. The system was established first in 2001 with the financial support of the World Bank and opened for the use of banks by the Ministry of Food, Agriculture and Livestock (provided through KKB for TARDES user banks) only in 2014, which was an important turnover for the banks to verify the production information of their agricultural clients. However, the system still faces challenges during farmers’ application periods, disconnections from time to time and server update problems for months which affect the banks’ agri-lending operations in a sound manner. Thus, the banks may still be required to ask a hard copy of FRS document (C certificate) from their clients or use previous year’s data to evaluate the loan application for the new production season.
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10% of the participant farmers chose "provision of advice/consultancy on your agricultural activity" as one of the three most important expectations. This reveals that farmers are expecting support and guidance not only for their financial needs but also information and guidance on agricultural issues. The next most preferred expectation was "experienced and knowledgeable staff" with a rate of 8.8%. When both expectations are considered together, it is observed that about one-five (18.7%) of the farmers demand more skilled client managers in agricultural finance and production although Turkish banks have already made an important progress in employing dedicated staff for agricultural segments and delivering special trainings to them in agricultural production and financing. However, it is understood from the survey that these issues still maintain their importance and/or there are some banks that should take further steps, such as advanced/certified agricultural trainings, agricultural investment training, etc. Only 5.4% of the respondents stated their expectations for more “suitable banking products for agriculture”, which could be considered as an indication of progress in this area. Nonetheless, some farmers specifically addressed their needs for longer grace periods and maturities for loans of new fruit gardens, or loan allocation according to sugar beet quota distributed through sugar factories, loans suitable with sheep & goat production cycles, loans for project finance or value chain finance.
2.2.7. Investment PPPlansPlans in CCCloseClose FFFutureFuture Agricultural producers were asked if they have investment plans in near future and 59% said "Yes" 6. Details of the respondents’ investment plans are given below (Chart 19).
Chart 191919:19 ::: Future plans of farmers
New agri land purchase 30%
Additional animal purchase 19%
New machinery equipment purchase 17%
Modernizing current facility 14%
Irrigation investment 10%
Storage/processing/packaging investment 6%
New animal farm (all kinds of) 2%
Greenhouse construction 2%
Others 1%
0% 5% 10% 15% 20% 25% 30% 35%
Most of the farmers (30%) plan to buy new land for annual and perennial plant production (including crops, horticulture, and vineyards). For this reason, it is foreseen that taking loans from banks to purchase new lands will be increasing. As mentioned before, the new regulation in Law No 5403 will trigger the land transactions. While 19% of the producers plan to increase their animal stock, another 2% of them want to build a new animal farm. It is expected that after the land purchase loans, demand for animal purchase loans and farm construction/modernization loans will increase in the upcoming period. On the other hand, 14% of the respondents plans to modernize their existing production facilities. While 17% of the producers want to buy new machinery-equipment, 10% plan irrigation investments. Therefore, the demand for machinery and equipment loans are expected to rise significantly.
6 The result to the same question in 2011 field survey is 53%, which is close to the 2016 field survey result.
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The ratio of farmers who plan to invest in storage-processing-packaging plants, which are the most needed facilities in Turkey for reducing production losses after harvest, balancing production price fluctuations, arranging pricing mechanism disadvantage to farmers and increasing value addition of production is calculated as 6%. Providing necessary support to farmers who plan to invest in the above-mentioned areas, developing incentives and promoting loan schemes will create significant benefits to the sector as well as contribution to the banks’ credit risk quality. The farmers who chose "Other" investment options (1%) stated their plans to establish renewable energy/solar energy facilities, seed production/propagation plants, enhance branding, establish cooperatives with other farmers and open a pesticides shop.
2.2.8. PPProblemsProblems of Turkish Agriculture Sector The last question was examining the “three most important problems of agriculture sector in Turkey". Again, three options were given to farmers to reflect their top three answers.
Chart 202020:20 : The most important problems of Turkish agriculture sectsectoror
High input prices, dependent on imports 25,4% Low farm-gate prices, problems with buyers 24,8% Unstable government policies 16,6% Fragmented and small size agri lands 8,1% Weak producer groups 5,8% Lack of agricultural labors 5,4% Lack of technical information of farmers 3,9% Access to bank finance 3,1% Others 2,4% Finance for new investments 1,8% Compelling collateral conditions 1,6% Lack machinery/equipments 1,2%
0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0%
Participants pointed out that the first two biggest problems of agricultural sector are "high input prices, dependency on imports for inputs” and “low/variable selling prices and problems of farmers with buyers” with ratios of 25.4% and 24.8%, respectively (Chart 20). These results are not surprising as these two problems have been hot topics in the country during the last two years. As a matter of fact, high cost of inputs and substantial increase in the prices due to intermediary commissions directly affect food inflation, and it is estimated by CBRT that more than one-third of the annual consumer inflation, which is around 7-9% for the last 4 years, is derived from the food prices in Turkey 7 (Chart 20). As seen on the second chart below, unprocessed food prices index has realized 60% increase on average in the last five years. For the first time in Turkey’s history, in November 2016, farmers made big protests in Antalya Wholesalers Market, one of the biggest fruit and vegetable wholesale market in the country, by closing the gates of the market. The farmers claimed that they cannot provide products to wholesale market because wholesalers sell their products to retailers and consumers with exorbitant prices while they receive very low prices in return 8. One of the necessary steps to ease these problems could be restructuring the current regulations and increasing inspections on collectors and other intermediate agents in Turkey. In order to provide a
7 CBRT Inflation Report 2016-IV, October 2016 8 http://www.hurriyet.com.tr/antalyada-ciftciler-hal-kapilarini-kapatip-eyl-40283796
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similar solution, the government issued a new law 9 in 2010 and established the centralized Fresh Vegetables and Fruits Wholesalers Registration System; however, the system has not created a positive effect so far. Ministry of Customs and Trade currently plans to make a set of amendments to the same law after 6 years of its enactment. Another effort is also underway through Food and Agricultural Product Markets Monitoring and Evaluation Committee of the government which was established in December 2014. In September 2016, the committee announced that an early warning mechanism will be established to foresee significant changes in food prices and necessary actions will be taken quickly considering dynamics and constraints of the economy.
Chart 212121:21 ::: Selected iiinflationinflation and pppriceprice iiindexindex gggraphsgraphs
Farmers pointed out that the third biggest problem in Turkey is "unstable agricultural policies" of the government (16.6%). Specific remarks indicated under this choice by the farmers are as follows: “lack of production planning", “very often changes in subsidy and support policies", "farmers’ laziness created by the existing support system", "daily and inadequate agricultural import/export policy", "unsuccessful base price implementations". It is striking that the first three choices of farmers for the above question were the same in the 2011 field study. On the other hand, “financial problems of farmers” (difficulty in access to bank finance, finance for new investments, compelling collateral conditions) and the "lack of machinery and equipment", which is also indirectly linked to the former, were ranked after the first three in 2011 whereas they fall to very lower rows in 2016. This is assumed to be an obvious result of the progress achieved in the field of agricultural financing in last five years in Turkey. "Fragmented and small-size structure of lands" is seen as the fourth most important problem of the sector. Definition and concept changes introduced with Law No. 5403 point out massive land consolidations and sales in the coming period as explained before. Following two problems expressed by farmers after the land structuring were "weak producer groups" (5.8%) and "lack of agricultural labors with reasonable prices” (5.4%).
9 Law. No. 5957; “Law on regulation of trading vegetable and fruits, and other goods having sufficient depth demand and supply”
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3.3.3. Conclusion
Financing of Agricultural MSMEs in Turkey Field Research, supported by the European Union and the European Bank for Reconstruction and Development (EBRD), have reached significant and concrete findings of Turkey’s current opportunities and challenges in agricultural finance. These findings might help international finance institutions and other donor organizations to evaluate the current situation and determine the next steps to be taken in forthcoming period in designing new programmes for Turkish agricultural producers. It is significant that this field research directly reveals and proves the achievements of Turkish banking sector in easing access of agricultural producers to finance over the last 5 years. Nevertheless, reduction in loan pricing, easiness in collateral types and procedures and suitable repayment conditions remain the most important three problems of the farmers. Another significant expectation of the producers from the banks is observed to be more information support and consultancy on agricultural production and finance. As a result of this field research, the most important problems of Turkish farmers were explored as low product sales prices compared to high input costs, lack of marketing channels between farmers and buyers and short term and ineffective public policies. Irrigation problems, negative effects of climate change on agricultural production, migration from rural to urban and lack of agricultural labor supply were the new areas highlighted by the respondents compared to the field research conducted in 2011 within the framework of MSME Lending Programme.
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The Technical Assistance component of the project in Phase II (May 2012 – October 2013), Phase III (November 2013 – December 2015) and Phase IV (March 2016 - May 2017) is funded by the European Union. The European Union is made up of 28 Member States who have decided to gradually link together their know- how, resources and destinies. Together, during a period enlargement of 50 years, they have built a zone of stability, democracy and sustainable development whilst maintaining cultural diversity, tolerance and individual freedoms. The European Union is committed to sharing its achievements and its values with countries and peoples beyond its borders. The European Commission is the EU’s executive body.
This programme is funded by the European Bank of Reconstruction and Development (EBRD).
The EBRD is a multinational institution set up with the specific aim of assisting countries to develop into market-oriented economies. The shareholders include 61 countries from both the region and the rest of the world, plus the European Commission and the European Investment Bank. The EBRD invests and operates in 29 countries from central Europe to central Asia. Investing primarily in private sector clients whose needs cannot be fully met by the market, the Bank promotes entrepreneurship and fosters transition towards open and democratic market economies. Please visit www.ebrd.com for more details. www. msmeturkey.com The technical assistance component of the programme is funded by U.S. Agency for International Development (USAID) in Phase I (November 2010 – April 2012). USAID is an independent federal government agency that receives overall foreign policy guidance from the Secretary of State. USAID works in agriculture, democracy & governance, economic growth, the environment, education, health, global partnerships, and humanitarian assistance in more than 100 countries to provide a better future for all and supports long-term and equitable economic growth and advances U.S. foreign policy objectives. USAID provides assistance in five regions of the world: Sub-Saharan Africa, Asia, Latin America and the Carribean, Europe and Eurasia and the Middle East. Please visit www.usaid.gov/locations/ europe_eurasia/countries/tr/ for more details.
The Technical Assistance component of the project (advisory and training activities) is provided by Frankfurt School of Finance & Management.
Frankfurt School of Finance & Management (former Bankakademie) is the leading private business school and advisory institute in Germany with more than 50 years of experience in consulting, qualification and training services in all areas of banking and finance. International Advisory Services, operating since 1992, is committed to improving financial markets and increasing financial access to finance for low-income populations in developing and transition countries and emerging markets. Please visit www.frankfurt-school.de for more details.
This study has been produced with the financial assistance of the European Commission. The contents of this report are the sole responsibility of Frankfurt School of Finance & Management and can in no way be taken to reflect the views of the European Union or European Commission.
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Turkey - MSME Finance Facility Newsletter Volume 12 - April 2017