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Setting Up a Pre-harvest Financing Framework in Serbia

June 2015 - Finance. Legal Developments by Karanovic & Nikolic.

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Over the last 10 years, considerable legislative efforts have been made towards creating a favourable framework for financing agribusiness and agricultural production in Serbia. The latest piece of legislation in that sector is a law on secured pre-harvest financing.

Looking back, in 2005 Serbia introduced the national strategy on agricultural development (the Strategy), which outlined obstacles and set goals with regard to financing agribusiness and agricultural production. At that time, the main problems were a lack of: (i) short-term financing which would bridge the gap between selling newly harvested agricultural products and collecting the purchase price; (ii) mid-term financing for investing in working capital (as such investments cannot be financed by the yield of a single production cycle); and (iii) long-term financing for purchasing agricultural land. In other words, the main issue was a lack of easily accessible financing for inputs, production and the accompanying support operations required for agricultural production. The Strategy aimed to expand the market in which financing was accessible to include all participants in the agricultural production cycle.

However, rather than following the approach outlined in the Strategy, the Serbian state adopted a different approach to solving the problem of financing agribusiness and agricultural production. Specifically, the state was directly involved in financing agricultural production (for example, by granting subsidised loans and interest rate subsidies), while at the same time creating optimal conditions for the financing of agricultural production by developing the existing legal framework. 

In 2009 Serbia enacted the law on public warehouses for agricultural products, which was a milestone from a legal framework development perspective. This piece of legislation introduced a rather safe and simple system for pledging existing agricultural products, allowing them to be used as collateral when obtaining financing for agribusiness and agricultural production. In that way, a new avenue for financing agricultural production was created.

The next big step in creating a favourable legal framework for financing agribusiness and agricultural production in Serbia was the law on secured pre-harvest financing (the Law). During the drafting of the Law, all major agrarian business stakeholders in Serbia (that is, banks, insurance companies and agribusiness companies) were involved in providing input, which was used as the starting point for drafting certain solutions introduced by the Law.

The Law aims to finance pre-harvest production, specifically financing the inputs required for agricultural products, with a loan tenor that corresponds to the term of the entire crop cycle. In summary, the main focus of the Law is to help farmers access pre-harvest financing in order to bridge the funding gap between investing in agricultural production and collecting the price upon sale of the newly harvested agricultural products.

The Law not only governs contracts on agricultural pre-harvest financing, but also the registration of such agreements, the settlement of creditors’ claims under the agreement (by using future agricultural products as a form of loan security without taking them into possession) and special rights and obligations of the contracting parties in agricultural financing. Specifically, the Law introduces distinct financing/enforcement mechanisms, custom-made for the Serbian market model.

The financing mechanism set in the Law allows the contracting parties to regulate their mutual rights and obligations relating to the financing of agricultural production by concluding an agricultural financing agreement. Since these agreements are subject to specific provisions (for example, exclusion of force majeure) prescribed by the Law, financing is provided in a more favourable and secured legal framework. These agreements contain mandatory elements and are entered into a registry of financing contracts run by the Serbian Business Registers Agency.

Besides this mechanism, the Law also introduces a simple, quick and reliable system of enforcement, incorporating new solutions for overcoming impediments encountered in practice when pledging future agricultural products. Under the general legal regime (that is, Serbia’s civil law rules), future agricultural products can be pledged but also mortgaged at the same time. However, the way in which these two liens affect each other is unregulated. As such, the Law contains a set of rules to regulate these transactions. 

In addition, while enforcement mechanisms introduced by the Law are based on the standard pledge model under Serbia’s civil law rules, certain parts of the registration and enforcement procedures have been altered and specifically tailored to meet the particular needs of participants in the agricultural production financing process. 

At the moment there are number of financing options offered to the agricultural sector, namely by banks (and affiliated leasing companies), state funds and major agribusiness companies. However, the availability of financing options offered by banks (and affiliated leasing companies) is significantly constrained due to a combination of legal, economic, institutional and behavioural factors, which usually perceive the creditworthiness of borrowers from the agricultural sector as weaker than those in other sectors. In that regard, the Serbian market still lacks banking facilities for agricultural production. Instead, big agribusiness companies are the key figures in financing agricultural production.

In conclusion, the impact of the Law should be twofold. Specifically, financing/enforcement mechanisms provided by the Law should help to provide financing both to small agricultural producers and big agribusiness companies. Therefore, as financing becomes accessible to all participants in the agricultural production cycle, the Law will not only provide cheaper and more accessible financing for agricultural production (primarily for small agricultural producers), but will also support market development.

The Law was adopted in November 2014 and it should come into effect from 1 June 2015. Although the practical and market effects of the Law are yet to be seen, it is reasonable to expect further development of the financial market in Serbia and especially the market segment dealing with the financing of agricultural production. 


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