For many years, smallholder producers of high-value horticultural products in Kosovo have faced the typical “missing middle” access to finance challenge. Most producers have less than 1 hectare (ha) of land, and correspondingly low amounts of collateral to borrow against. Yet, many individuals do not qualify for or cannot access financing designed for the poorest of the poor. Interest rates from microfinance institutions (MFIs) often exceed 20%, and bank finance is unavailable for loans of €5,000 or less. For those who can access credit, products specifically designed for the agricultural production cycle are limited and individual transaction costs are high. While most major banks promote agricultural lending on paper, in practice, opportunities for smallholder lending are limited.

Within this context, Tetra Tech implemented the USAID New Opportunities in Agriculture (NOA) Project. NOA identified and prioritized agricultural value chains with significant potential for increased domestic and export sales, job creation and improved inclusive economic opportunities in Kosovo. NOA was framed around private sector engagement principles, including building from a foundational question of “who should do what” within the value chain. Accordingly, the NOA team identified and routed nearly all activities through existing small-scale processing and aggregation firms.

Through technical assistance and matching funding, NOA facilitated improved access to export and local markets and helped firms meet the standards required to sell within those markets. Additionally, firms were encouraged, with initial risk buy-down support, to provide embedded technical services to contracted smallholder growers. Successful market linkages and consistent product quality resulted in forward contracted offtake agreements for processors, which, in turn, enabled back-to-back contracts with growers.

However, smallholder growers had no confidence in contracting initially, feeling that any attempt to litigate a contract breach with a larger firm in Kosovo was doomed to fail. In response, the NOA team helped distill the industry standard 12-page legal contract between the aggregator and the producer into a one-page, easily understood agreement. This agreement included a clause mandating alternate dispute resolution in cases of breach by either party, precluding lengthy and costly court cases. Each contract was locally notarized for a small fee, providing producers and aggregators with a simple, effective and actionable binding agreement. Adoption of the contract mechanism increased following an intensive awareness and behavior change campaign.

Through these basic agreements, linking smallholder production to actual market opportunities, the necessary confidence was established along the value chain. For the producer, confidence took the form of knowing that: 1) high-quality crop production was possible and would be supported by technical expertise, 2) investing in quality inputs would be worth the risk and 3) the crop would be sold if agreed-upon standards were met. For the aggregator, confidence took the form of structured and programmed production that would materialize on time, enabling their market contracts to be fulfilled.

The next challenge was to secure finance for the preseason and operational inputs necessary to initiate production. This was not the responsibility of the aggregator, which had its own financial demands and associated risks. The NOA team consulted with several financial institutions, and an opportunity to use confidence instead of collateral emerged.

After discussions with a number of financial institutions, it was Türk Ekonomi Bankası (TEB), within the BNP Paribas group, that was most receptive to trying something new to meet the agricultural financing gap. Through a co-design process, the bank confirmed that the agreements and related support structures created sufficient confidence in future cash flow to replace traditional collateral requirements. Just as importantly, the process made TEB consider the business case for lenders, rather than simply rely on collateral that could be collected against. To create a digitized, traceable and easily accessible channel for finance without excessive transaction costs, the bank developed the Agro Card, which:

• Initially provided up to €5,000 in production credit to each grower for a given season.
• Was only valid within a network of certified and registered input and agro-equipment suppliers and fuel stations. These vendors were equipped with a dedicated point of sale (POS) system for the Agro Card.
• Helped to guarantee input supply quality and mitigated against abusing the credit for consumption unrelated to agricultural production through an established vendor network.
• Did not carry an explicit interest fee for the grower, as the cost was covered via a POS fee charged to the vendor, who would in turn factor the fee into product pricing.
• Did not require repayment until after a grace period that aligned with production seasonality. Once the grace period ended, TEB offered installment repayment options. Farmers only paid a fee if they had outstanding balances beyond the agreed-upon payment due date(s).

The Agro Card was launched in February 2014 under NOA and continued to gain awareness-raising support throughout the follow-on USAID Agricultural Growth and Rural Opportunities (AGRO) Activity. Almost a decade later, and more than two years after the close of AGRO, the card continues to be a core agricultural product offering from TEB. Today, there are 2,150 cardholders (as of June 2023; personal communication, TEB bank card marketing department) across Kosovo availing more than €10 million in input credit. The purchase agreements, embedded technical service provision and other necessary conditions that NOA and AGRO helped to create continue without donor support, and across new value chains. The agricultural finance gap continues to close where these conditions are in place.

Confidence instead of collateral enabled production to move from open field (left) to greenhouse production (right).