United World sat down with Enrique Benjamín Díaz Ortega, President of the Board of Agrobanco, talking about the importance of financing the Peruvian agriculture sector.
The growth dynamics of Peru in the last few decades have been much more solid than in many other countries in the region. Despite the slight economic deceleration it experienced last year, it remains an example. I am interested in your opinion about the importance of the financial sector in the country's economic growth. How important is it to finance a diversifying sector like agriculture?
Undoubtedly, Peru has experienced a significant growth, which has allowed us to stand out as a reference point for many other countries.
This growth hasn't been the same for all sectors, there have been some interesting differences. Peruvian exports, which have traditionally been mostly natural resources, have seen a remarkable boost in the non-traditional ones, especially thanks to agriculture.
Peru has started to produce some new things, such as asparagus, mango, grapes, and many others. The agriculture sector hasn't been only a key factor in our growth, but also it has become a major source for job creation and foreign exchange earnings.
If you look at the statistics, you will find that many regions in the country have reached full employment, especially on the coast, and this is thanks to the agriculture.
This growth has also several other aspects that makes it more solid, for example regarding the infrastructure, which has greatly improved in the last 15 years. This makes it easier for the agriculture sector to export goods, even the smaller exports have reached a broader market.
Peru has been a good student in economy and finance. Although it has suffered from the international crisis, it has quickly improved all its macroeconomic policies.
The country has inflation and balance of payments under control. We suffered greatly because of the crisis caused by El Niño in the years 1997 and 1998, but we could get out of that negative scenario with a very solid financial sector, which not only grew, but also developed a set of prudential standards that makes it one of the better supervised financial systems in all Latin America.
The IBD considers Peru to be one of the best microfinance environments in the world.
This is the context in which the agriculture sector is developing. Former President Fujimori closed all the development banks in 1990, people then used to think that the economy had to be 100% neo-liberal and the private sector had to solve every possible problem.
12 years after that Agrobanco was born, currently the only development bank in Peru. It became apparent that there wasn't a spontaneous solution for the issue of agriculture financing.
The market is not perfect, and simply there wasn't any credit flowing towards the agriculture sector. How do we correct these distortions? Simply by complementing what the market is not providing, but respecting its rules.
The statistics show that most of the pockets of poverty can be found in the rural areas. No country can grow in a stable way if it doesn't have a solution for the large pockets of poverty.
The government understood this, and therefore the bank was reopened. However this bank has a different mindset than its predecessors, it's less about care intervention and more in tune to the market.
In the year 2000, only 1% of farmers received any financing, now we are around 14% or 15%. We are providing the first credit for farmers who had never been in touch with the financial system before.
We have different kinds of credits. First of all, for the smaller clients in terms of land ownership and production. 97% of our clients are among what the National Institute of Statistics classifies as poor or very poor.
To help this segment we have a set of tools, like fees, interest rates as low as 14%, we provide information and consulting so they can reach an average profitability of 20%.
A way to approach this sector is through promoting productive associativity, there are some farming cooperatives and associations with as many as 5,000 members.
We work alongside those associations. We choose representatives who act as a reference, and they tell us who are the farmers, whether they are reliable or not, where do they have their farm, etcetera.
Some cooperatives are more solid than others, so they act as the guarantee for the rest. We are interested in leveraging the sector and promoting integration.
This is not easy, because we depend on the financial and administrative solvency of those associations and cooperatives. This is one of our challenges, to help these organizations to improve their corporate governance and sustainability.
On the other hand, we have been awarded for creating special products for financial deepening. When we give the first credit to those who are new to the financial system, we do it together with the local governments and municipalities from the rural areas that are interested in working with us.
They help us identify the farmers and get in touch with them. We estimate that, in the last four years, our officials have traveled across four million linear kilometers.
The right way to provide financing to this sector is local and face-to-face. We visit the farmers, carry out our analysis, and give them the first loan of 4,000 Peruvian Soles.
They produce and give that money back. That way they can enter the system and we help them create their financial record. We have given out as much as ten thousand loans so far.
We want the private banking to start incorporating these people to their clientele and enter the financial system.
We also give credit to some medium and large scale agriculture projects, which are not usually covered by the commercial banking because of their lengthy production cycles.
In the case of grape production, for example, there are at least four years between the first preparation of the terrain and the first harvest, which is actually not necessarily the best one.
Our bank tries to accompany the farmers in what the agronomic cycles. Our capital is more patient, it allows them to wait the necessary amount of time, and it's not eager for high profits, because it's a state-owned bank, we only start getting the money back once the farmers obtain cash flow.
We don't give away the money or give subsidies; we act like any other private bank. We get credit from international or local banks, and now we will be issuing capital market instruments.
Our bank has administration and financial expenses, plus a small profit margin that we transfer to our clients. This allows us to capitalize our operations, increase our funding base, and generate sustainability.
Agrobanco also carries out work on behalf of the Ministry of Agriculture. This ministry is in charge of attending to all the possible social demands of the sector.
Three years ago we had the case of a Rust that affected the coffee production and damaged many producers. The Ministry created a special fund to assist them by giving credit at an affordable interest rate.
Our bank was in charge of administrating it like a trust fund. But our institution always tries to preserve its financial model, because a trust fund like this is not included in the balance sheet, it doesn't contaminate nor damages the market conditions.
In the last few years our portfolio has increased greatly, we started with loans but now we are a development and investment bank. We are attending to a segment that has been traditionally neglected, but we don't want to work by ourselves, we want to do this in accordance to the market forces.
Our goal is to become a certified 'green' bank, for this we need to incorporate a series of standards and protocols, and supervision from international institutions.
We are being assisted by France, Germany, and The Netherlands, they are helping us to achieve this goal in hopefully two years. This means that the projects we finance must comply with the best environmental practices.
We want the privates to look for opportunities in alliances with us, while we help them to minimize risks. We can reduce risks by creating insurance or making them invest in equities but with the condition that, if they have problems, we buy those shares.
In the forestry sector, for example, you need at least 5,000 dollars to reforest an area of 10,000 hectares. What we can do about it is creating a financial instrument and offers it with all the necessary information.
Our vision is trying to incorporate the private sector in the long term.
Peru is a country with significant biodiversity; you can farm almost anything here. A big portion of our production is not only aimed at our local market but also for exports.
Peru started this by exporting asparagus, today we are exporting grapes, coffee, and soon we will witness a boost in the cocoa production as well.
The farmers are getting better at their production techniques, and that creates opportunities for investment. One of the big challenges the world is facing right now is how to achieve a more democratic well-being.
Agriculture is an excellent platform to achieve this, to help create a process of inclusion, for example through technology transfer. Investment can also promote inclusion.
Do you think all of this is internationally well-known when it comes to attracting foreign investment, and also act as a model for other countries, for example in Africa?
You will help us make it better known. One of the most important things about Agrobanco is the know-how. Why aren't there more private financial institutions in this sector?
Because you need a certain know-how that can only be acquired with time. We know how to give credit to a small farmer, to a coffee producer in the north of the Amazonas Region or in the south of Junín, the conditions for giving credit won't be the same because of the difference in their agronomic risks.
We develop out risk profiles based on our own experience in each individual case, we have 600 different profiles. This know-how is systematized; we have a database that is actually a translatable model.
You can feed it with more information and it will give you a probabilistic analysis of the risks. This tool for risk assessment is something we are actually willing to share with others.
So far, the Peruvian financial sector hasn't been very interested in agriculture. But there are other financial organizations from the United States that have shown interest in the sector. Do you think the US could become a significant partner and make a contribution to the sector in Peru?
Because of our biodiversity, any production that is potentially interesting to the international markets can be produced in our territory. The inclusion of international institutions is already happening in specific areas.
We are talking to the IDB in order to develop a better crop insurance. All farmers need coverage and protection, especially regarding weather phenomena like El Niño.
Here there is no crop insurance service; there is only one company with this kind of coverage. I once asked an international agriculture bank, “What is the best insurance scheme?”
The answer was: “There is none”. So now we are starting to work together with international banks like the IDB to improve that scheme and make it more affordable.
Agriculture today is expensive, not because of a lack of willingness but because the market has made it so. We are inviting the other institutions to work together in order to reduce the costs.
It's not that the government wants to cover all the areas, it's that we need a long-term program that aims at providing solutions. We are trying to tackle several problems individually.
In Agrobanco we try to work together with as many networks as possible, in order to add value to our solutions. We are already connected to almost all the relevant international institutions.
Warren Buffet once said, “Someone is sitting in the shade today because someone planted a tree a long time ago”. Where in Peru do we need to plant trees today so there is a shade in the future?
If you look at my resume, you will notice that I had no connection with the agriculture sector up until a year ago, when I joined this bank.
I used to be a banker, I knew a lot about the financial sector, pensions, securities, and so on. I am an outsider in this field, which means I have a new and fresh point of view.
This sector has a remarkable potential. If I had to bet, I would bet on the forestry sector, with well-designed policies that could greatly benefit the country for years to come.
I would also bet on the environmental issues. This is a sector that distorts the environment too much, so it's one of our responsibilities to correct that situation. 86% of all farmers are outside the financial system.
Actually, according to our evaluations, only 300,000 farmers out of the total 2.2 million are able to enter the banking system. The rest is just not productive enough.
Our 'green' project could help them to diversify their production, with higher standards and new market opportunities, aiming at the increase in their productivity and allowing them to enter the financial system.
We still have a long way to go, we're doing things one step at a time, we're now able to walk through paths that used to be impossible a while ago. Peru has one of the most solid financial systems in the entire region.