ALES - Agricultural Loan Evaluation System

FS Blog

Agricultural Lending Innovation

One of the major impediments to agricultural lending is the high cost of evaluating borrower creditworthiness. The specific nature and diversity of agriculture requires sophisticated agronomic know-how. However, it is expensive to use “expert” loan officers to collect and evaluate borrowers and anticipate cash flows. As a result, many agricultural micro, small and medium enterprises (MSMEs) and households remain without access to finance.

However, the increasing demand for agricultural commodities, as well as rising competition in the urban areas, has led financial institutions (FIs) to look again at this sector. They demand innovative approaches to implement agricultural loan products with risk evaluation systems that calculate cash flows and thus reduce costs.

In response to these challenges, IAS has developed an innovative scoring tool called ALES.

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ALES’s purpose is to strengthen the agricultural lending capacity of financial institutions and establish the necessary link between agricultural enterprises and FIs. It increases access to finance for farms and other agribusinesses while controlling the risks and costs for financial institutions. ALES provides loan officers with little or no knowledge of agriculture with an efficient and standardised way of working with agricultural clients.

How does ALES work?

ALES is a comprehensive risk assessment model and loan calculator. Through its scoring methodology, it determines credit risk. Through agricultural tech-cards, ALES calculates the producer’s working capital need and the most likely yield/income from agricultural activities. It suggests loan limits in line with repayment capacity and real needs of producers, as well as providing recommendations on loan maturity.

ALES can assess various loan requests on working capital, investment, and machinery, as well as equipment for various activities, such as crop production, animal husbandry (meat or dairy production), aquaculture, poultry (meat or egg), and apiculture. It is hence ideal for farmers and agricultural enterprises involved in agricultural activities. ALES also helps structure their payment schedule and better evaluate repayment capacity.

ALES calculates credit risk based on three variables:

Qualitative Aspects: Does the client meet appropriate qualitative needs to operate agricultural production effectively?
Agricultural Aspects: Does the farmer meet agronomic needs to produce yields high enough to cover all costs and deliver acceptable gross margins?
Financial Aspects: Do the farmer’s production, costs and income meet the minimal safety margin levels needed to reduce credit risk?

Added value for financial institutions

Cost-efficient and standardized assessment of loan applications for various agricultural loan products
Credit risk reduction
Cost reduction for client analysis
Tailor-made repayment plans
Lower training and management costs
Ability to promptly react to market changes
Less conflicts between sales and underwriting department
Lower costs for end users

Results

Thanks to ALES, more than 300,000 rural MSMEs had access to finance in various countries worldwide. More than 1 billion EUR bank loans have been disbursed.

Agriculture lending systems have been implemented in more than 15 partner financial institutions in countries such as Turkey, Tajikistan, Senegal, Kazakhstan, Ukraine and tech cards have been developed for more than 1,300 agricultural products.

Financial institutions experienced considerably decreasing NPL rates and an increasing market share. As a new concept and methodology, ALES has been centralized for the use of several banks in Turkey through the Credit Bureau of the country in 2014.