Although the Government of Azerbaijan has started to treat agriculture as one of the main priorities of the economy, the produced volume remains below the expectations and is not that competitive in the international markets. In order to meet these challenges greater collaboration and cooperation both up- and down-stream of production is required between various players in the value chain.
In order to increase the competitiveness of agro-products in Azerbaijan, the advantages of an improved agro-food value chain have to be promoted. Value chain model is ideal for addressing the needs of all stakeholders involved: access to finance, secure sales, procure of products, reduce risk and/or improve efficiency. On the financial institutions side, introducing the concept of Value Chain Finance (VCF) will help them to reduce their costs and risks of agricultural lending. Due to the reduced risk offered by the VCF, financial institutions perceive it as a good starting point to penetrate into the sector.
AzAFF provides a great opportunity for the sector by promoting agricultural value chains and an opportunity for the partner financial institutions to get involved in these chains as a main player through the technical assistance of AZAFF. In VCF, FIs have four main goals:
To reduce their credit risk through the use of the off-take contracts as part of their collateral package. In the case of dairy structures, they usually commit to pay their suppliers through their FIs that can use part of the cash flows to repay the credits they have provided;
To reduce their transaction costs (administrative costs, monitoring) thanks to the fact that VCFs can provide the same type of credits to large number of individual farmers signing similar contracts with off-takers;
To optimize their marketing strategy by having all stakeholders in value-chains among their clients, from input suppliers to final distributors, and to optimize their cash flows as credits to the ones are usually generating deposits of the others;
To focus on the most dynamic stakeholders as partners of efficient “coordinated” value chains tend to grow more quickly than “isolated” stakeholders.
For off-takers, a VCF scheme has three main advantages:
It helps reinforce their contractual agreement with farmers as VCF makes non delivery of contracted products a case of default and termination of loan agreement, except in case of force majeure;
It allows providing to contractual farmers credit resources obtained in good and transparent conditions, as the FI has lower risks and transaction costs. It eliminates in particular informal payments to the stakeholders involved in the allocation of credit resources. Credits to farmers by FIs often substitute previous credits provided by off-takers to their suppliers and therefore substantially improve their cash flow;
It can reduce its administrative costs as payments to farmers are made through internal bank transfers.
For farmers, VCF provides also three key benefits:
It helps to rebalance the contractual relation with off-takers to their benefit, especially if they are not members of strong cooperatives or associations representing them collectively. Off-take contracts are never prepared by farmers but by off-takers. This leads to a genuine asymmetry for which PFIs act as a buffer. As they provide credits to farmers, PFIs have no interest in having them trapped by unfavorable or even fraudulent contracts;
It allows them to obtain credits in much better conditions than with individual “isolated” credits as the PFI has a lower risk and lower transaction costs. This means less need for collateral and better terms (interest rate, repayment profile);
Farmers can often obtain through structured off-take contracts quality technical assistance provided with or with the support of their off-taker, as well as collective access to key inputs coordinated by their off-takers which play often de facto the role of service cooperatives.
The technical assistance funds of the project are provided by the EU Neighborhood Investment Facility.
The technical assistance services within the project are provided by Frankfurt School of Finance and Management.