Enabling Environment for Agricultural Finance in Arab Countries

Publication Date
Habib Attia

In the framework of Financial Inclusion for the Arab Region Initiative (FIARI), the Arab Monetary Fund in collaboration with the World Bank and with support of the Financial Inclusion Task Force in the Arab Region has released a new publication on Regulatory Environment and Policy Interventions for Agricultural Finance in Arab Countries. It presents findings of a diagnostic of agricultural finance in Arab countries from July-October 2018.

The agriculture sector plays an important role in supporting a sustainable development trajectory for the Arab world. Almost a quarter of the working population in the region is involved in agricultural activities, while the agriculture sector on average contributes to 5.9 percent of the GDP. There is great potential to modernize the agriculture sector, thus empowering rural population and reducing the income gap between rural and urban areas. A modernized agriculture sector will also help better manage scarce water and land resources, alleviate the region’s heavy reliance on food importing and reduce its exposure to international food market risks. 

Current investment to the agriculture sector is nevertheless limited for the needed transformation. On average, agriculture sector receives disproportionately low level of credit from private sector comparing to the sector’s contribution to national economies. Non-performing loans ratios are particularly high for agricultural loans in Arab countries, which might further deter financial institutions from serving the market. Only 27.6 percent of rural adults have an account at a financial institution, comparing with a world average of 64.4 percent. Only 4.8 percent of rural adults have borrowed from a financial institution.

An enabling environment- with targeted and effective agricultural finance policies and regulations, along with established financial infrastructure- is essential to ensure a well-functioning financial system that promotes the development of agricultural finance. This analysis focuses on assessing the financial regulatory and policy environment as well as financial infrastructure for agricultural finance in Arab countries. It aims to assist policy-makers in identifying regulatory barriers and gaining knowledge on best practices.

Governments and central banks play an important role in promoting agricultural finance. A paradigm shift from direct public financing to creating an enabling environment to maximize private sector financing has proven to be more effective and sustainable. Targeted and effective agricultural finance policies, smart regulations, well-established financial infrastructure are essential components of an enabling environment.

The diagnostic focuses on regulatory frameworks and policy interventions that fall under the domain of central banks.

The diagnostic focuses on regulatory frameworks and policy interventions that fall under the domain of central banks. To collect information on relevant regulation and policy, a standardized questionnaire was circulated to Arab Central Banks and Monetary Authorities. Analyses of regulatory and policy environments throughout the report were exclusively based on responses to the questionnaire. Findings on the regulatory and policy environment for agricultural finance are as below:  Findings on the regulatory and policy environment for agricultural finance are as below:   

There exists limited regulatory framework to support the establishment and operation of local financial institutions. Appropriate prudential regulations for MFIs and financial cooperatives support sustainable development of local financial institutions such as MFIs and financial cooperatives, and untap their potential in serving the unbanked population.

The Arab World is making great endeavors to promote e-money activities but there is a need of regulatory guidelines to support other innovative ways of delivering financial services such as agent banking. Leveraging the extensive outreach of non-bank institutions help promote financial inclusion in rural areas. 

Secured transaction laws as well as other legislations relating to agricultural collateral such as warehouse receipts law need to be further improved in the region. Many smallholder farmers do not have access or ownership of immovable asset and are unable to pledge it to secure loans. Regulation can play a key role in facilitating the recognition of available collateral for farmers.

Credit guarantee mechanism and interest rate cap are the most commonly used agricultural finance policy tools in the region. Morocco, Egypt, West Bank and Gaza and Lebanon have established credit guarantee mechanisms for agricultural loans, though agricultural loans only account for a small portion of the guaranteed loans. In addition, features of those credit guarantee mechanisms vary across countries as to coverage and fees. Effectiveness of those policies depend largely on the country contexts and are not measured in this report.

A few Arab countries are at the frontier of establishing enabling financial infrastructure United Arab Emirates, Bahrain, Egypt, West Bank and Gaza and Saudi Arabia have established comprehensive rules and practices to improve the coverage, scope and accessibility of credit information. This is reflected as obtaining full score on Doing Business-Credit Information Index by those countries/economies. However, only United Arab Emirates, Egypt, and Palestine Territories have a collateral registry in operation in the region.

In summary, though the Arab world has made great endeavors to create an enabling environment to promote agricultural finance in certain aspects such as e-money and credit information availability, there lies significant room for the region to improve its regulatory and policy environment. A combination of policies and actions are needed.

The report also includes a toolkit detailing what regulatory and policy tools are available and how they could be adopted by governments and central banks. To better understand both the supply and demand side in facilitating access to agricultural finance at the country level, or to implement reform based on global best practices, policymakers need to conduct in-country agricultural finance diagnostics which is beyond the scope of this report.

Enabling Environment for Agricultural Finance in Arab Countries