Access to finance is a challenge for the Egyptian economy as a whole, however, the problem is particularly acute in the agricultural sector; while the large-scale modern segment has access to credit, small-scale farmers – who represent the great bulk of farming activity in the country – have much more difficulty obtaining loans, in particular from commercial banks.

BARRIERS: Many barriers to obtaining finance in the sector relate to banks’ lack of technical expertise in agriculture and traditional loan models that do not take into account the specificities of the sector. For example, commercial loans generally fail to take into account the agricultural cycle, requiring that repayments begin immediately – when farmers have no income – rather than when the crop has been harvested or livestock sold. Banks treat agricultural borrowers like any commercial company, despite the seasonality of farming.

Another problem is the tendency for farmers to lack the necessary collateral for securing loans. The fragmentation of traditional agricultural and the small size of most farms often makes lending to farmers unattractive for commercial banks, as the income from the small loans required by smallholders may not be worth the transaction costs involved.

A state-backed bank, the Principle Bank for Agricultural Development and Credit (PBDAC), is charged with providing credit to the sector. As of mid-2012 the bank, which operates around 1210 branches, had outstanding loans of around LE26bn ($3.7bn) on its books. However, the institution is unable to meet all the sector’s needs by itself and has faced criticism for not adequately fulfilling its financing role.

“PBDAC see themselves more as a development bank; they do not see their main role as the provision of credit. There is a need to split their development role from their lending function as otherwise they will be unable to do either properly,” Ali El Saied, senior adviser for business intelligence and agribusiness at ACDI/VOCA’s Egyptian office, told OBG. Farmers also complain that the interest rate on loans from the bank, which can run as high as 20% (though most are lower) are too expensive and that they cannot afford them.

The lack of access to credit makes it difficult for farmers to invest in expanding or upgrading their farms, but more importantly, it can also make it difficult for them to even finish growing their crops or harvesting, forcing farmers to rely on informal financing methods. Among the most prominent of these are middlemen who buy up crops in advance and who form what is known as the kelala system. Many farmers are reliant on the system despite its costs, because of its stability. “Farmers have very little access to finance and often cannot afford to pay labourers to finish the season, so they sell in advance to intermediaries for less than they could earn if they were able to wait until the harvest was complete,” said El Saied.

EFFORTS: The government’s strategy for sustainable agricultural development toward 2030 calls for improving credit availability and providing concessional financing targeted at a number of key areas, including field irrigation, land reclamation, rural women and women’s associations. The strategy also calls for using farming contracts as collateral, thereby resolving the issue of farmers’ lack of conventional forms of collateral. PBDAC is aiming to expand its lending to the sector, with plans to triple the total number of farmers borrowing from the institution, from around 1m currently. In February 2013 the bank announced plans to expand Islamic retail banking services across 24 branches, having previously offered limited sharia-compliant services at 10 branches, in the hope that expanding the availability of such services will encourage more farmers to borrow. Under the initiative, the bank will make up to LE100m ($14.2m) of Islamic retail financing available by June 2013 to finance activities like equipment purchases and education. Donors and non-governmental organisations are also working to address the problem. For example the USAID-funded Zaytun project and the Egyptian Banking Institute provided training to senior Egyptian bankers on agricultural finance in June 2012.