The Central Bank of Iran on Tuesday unveiled a supply chain finance (SCF) scheme based on contract farming to improve financing for the agriculture sector.
Speaking on the sidelines of the ceremony, CBI Governor Ali Salehabadi said the scheme will help improve “targeted finance” in the agriculture sector and reduce wastage of financial resources, CBI’s website reported.
Back in January, CBI launched the SCF scheme to improve lending efficiency and navigate banks’ resources toward financing the production sector.
SCF involves automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this framework, buyers agree to approve their suppliers' invoices for financing by a bank or other outside financier.
In coordination with the Agriculture Ministry and other relevant bodies, CBI now wants to extend the SCF scheme to contract farming.
As per the definition of the Food and Agriculture Organization of the United Nations, contract farming “is agricultural production carried out according to an agreement between farmers and a buyer, which places conditions on the production and marketing of the commodity”.
Farmers and processing or marketing firms are the parties to the contract, coming to terms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.
Addressing the unveiling ceremony, Asghar Abolhassani, the CBI vice governor, said the central bank drafted guidelines and laid the groundwork for launching SCF last year.
“We will have to allocate a big segment of banking resources to the agriculture sector if we don’t use SCF methods,” he said.
Javad Sadatinejad, the agriculture minister, spoke about plans to tap contract farming for increasing wheat cultivation across the country.
“Under contract farming, we plan to give farmers the needed agricultural input and provide insurance coverage for the crop,” he said, announcing a rather ambitious plan to implement contract farming on 2 million hectares in the next agriculture year.
Finance in contact farming method involves paying farmers and “executors” to cultivate crops, procure inputs and machineries. It also involves undertaking expenses for development and research as well as technical training to create added value.
As per the FAO guidelines, the contract farming arrangement also involves the purchaser in providing a degree of production support through the supply of inputs and technical advice. The basis of such an arrangement is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the purchaser to support the farmer's production and purchase the commodity.
