Mobilizing New Sources of Finance for Serbian Agri-Businesses
It is no secret that Serbia’s agriculture industry is a key strategic sector with great potential for growth—it already accounts for approximately eight percent of the country’s GDP. However, even two decades after the country’s political and economic transition process began, its pace still lags behind its potential, considering the country’s strategic advantages.
Located near large European markets, Serbia has inherent competitive advantages in the production and processing of fruits, vegetables, grains and livestock. Lack of financial awareness and education, and finance and business management skills, coupled with the presence of burdensome bureaucratic and administrative barriers all contribute to slower-than-expected growth and development of the agricultural industry.
A key factor unlocking this potential is readily-available and accessible financing for small and medium enterprises.
In general, agricultural SMEs are financed primarily by private resources, commercial banks and/or government loans and subsidies.
However, financial loan products are primarily provided to larger firms, with limited resources available to small enterprises and start-ups—which often lack credit history, financial skills to prepare business and investment plans, and/or are unable to provide adequate real estate collateral.
To address these shortcomings, the USAID Competitive Economy Project facilitated a loan portfolio guarantee scheme supported by USAID Serbia; the Serbian Ministry of Agriculture, Forestry and Water Management; and two local partner banks - ProCredit Bank and Addiko Bank - in December 2019.
Originally dubbed “DCA Guarantee” (after USAID’s Development Credit Authority, which initiated and oversaw the process), it has since been implemented as the “USAID guarantee scheme.” It leverages joint financial resources provided by USAID and the Serbian Government (through the Ministry) to cover potential loan losses by commercial lenders.
Specifically, the USAID guarantee scheme covers 60% of loan principal losses and incentivizes banks to provide up to $90 million in new loans to food processors and individual farmers over a 12-year period.
The purpose of the guarantee is to mobilize partner banks to expand lending through an efficient and streamlined risk-sharing mechanism. It aims to support new investments, acquisition of modern equipment and launch of innovative business ventures—particularly for SMEs.
This flexible financial product supports long-term lending with up to a 10-year maturity for a range of agribusinesses, including micro, small and medium-sized enterprises (MSMEs), food start-ups and entrepreneurs, agricultural associations and cooperatives, and registered small-scale growers and producers.
The scheme extends to all segments of the agricultural industry, including the F&V sector, and places special emphasis on loans for start-ups operating for less than three years, and legal entities based in the country’s underdeveloped Southern and Southeastern regions.
The scheme could not have launched at a better time, given that Serbia’s agriculture industry is undergoing a multi-year overhaul led by the Serbian government to strengthen its competitiveness. The Ministry of Agriculture, Forestry and Water increased the level of financial support and designed subsidized lending programs in coordination with private commercial banks and financial institutions. Additionally, the EU-subsidized IPARD program continues to be a major source of financing for large scale agricultural investment projects. The USAID guarantee scheme complements the overhaul by providing financial loans to investment-ready clients lacking sufficient collateral for traditional bank loans.
In January 2020, two partner banks - Addiko and ProCredit Bank – commenced approving loans backed by the DCA guarantee. Both banks have reported that the scheme is an important new financial product for their clients and it represents a significant opportunity for the entire agricultural industry. Addiko and ProCredit Bank also praised the USAID guarantee scheme for its streamlined loan approval process. Most importantly, the scheme can be used in conjunction with other loan programs offered by international institutions (such as IPARD) and/or state loan programs to compensate for lack of collateral.
Market interest and demand for this innovative product has been extensive, exceeding initial expectations of both banks—particularly among clients with new investment projects ranging from $300k to $2M. Both banks had already allocated over 80% of the first $10M tranche before March 16, 2020—when the Serbian government imposed restrictive measures in response to COVID-19. Interestingly, the resulting economic uncertainty generated further interest in the scheme. By September 2020, partner banks disbursed and approved around $20M in loans, and pre-selected or pre-approved over $10M in new loans to be disbursed from the second tranche of the DCA guarantee.
ProCredit and Addiko Bank attribute the scheme’s quick utilization to technical assistance provided to SMEs, a large number of positive referrals through USAID’s Competitive Economy Project partner organizations, and the scheme’s ability to lower risk and exposure for commercial banks.
The Project’s complimentary assistance program specifically targets industry innovators—leaders who are helping shift the agricultural sector’s outlook from traditional to modern. Assistance included tailored mentoring sessions and business plan development for food processing companies in the F&V sector. Since the DCA guarantee’s inception, the Project has helped 11 SMEs to develop business and investment plans required to apply for the USAID Guarantee. This support led to the SMEs receiving loans totaling $8.7M in fewer than six months—investments ranging from new processing and laser sorting and packaging equipment to greenhouses and green energy projects.
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