Indian Journal of Science and Technology Vol. 4 No. 8 (Aug 2011) ISSN: 0974- 6846
Sci. Technol. Edu. ¨Financial strategies in agricultural sector of Iran〃 Y.Ansari et al.
꽗Indian Society for Education and Environment (iSee) http://www.indjst.org Indian J.Sci.Technol.
986
Analysis of financial markets and investment development strategies in agricultural
sector of Kohgiluyeh and Boyer-Ahmad Province of Iran
Yaghoub Ansari1, Seyed-Ali Hosseini-Yekani2 and Seyed-Mohammad Mahdavinia3
1Business Administration, Department of Economics, Armenian State Agrarian University, Yerevan, Armenia.
2Department of Agricultural Economics, Sari Agricultural Sciences & Natural Resources University, Sari, Iran.
3Department of Management, Isfahan University, Isfahan, Iran.
hosseiniyekani@gmail.com
Abstract
In order to achieve the economic growth and development, some specific plans and mechanisms in social, cultural and
economic fields are required. Strong financial markets are among such specific mechanisms in the economic area
which in turn requires powerful financial institutions. In this research, abilities and restrictions of financial system of
Kohgiluye & Boyer-Ahmad province of Iran have been reviewed and discussed that the substantial proportion of
required agricultural credits of province farmers is provided by the formal sector of financial market, especially
Agricultural Bank of Iran. The interest rate of formal sector credits is much less than the rates of interest applied in the
informal sector even by enumerating administrative costs. Finally, the financial market development strategies of
agricultural sector of the province have been determined.
Keywords: Financial Market, Broker, Capital, Agriculture, Facilities, Bank, Iran.
Introduction
The effects of financial development on economic
growth have been widely discussed in scientific
investigations. The findings of such studies indicate that
financial markets in developing countries have effects on
economic growth through capital accumulation and in
developed economies financial development leads to
productivity growth. Shiva (2000) confirmed the influence
of improvement in financial markets performance on
economic growth in the context of exogenous and
endogenous growth models in Iran. The findings of his
study indicated that both stock market and banking
system have significant impacts on economic
growth. Philip et al. (2001) reported the relation between
financial market and economic growth which is strong in
France, Germany and Japan but is weak in the U.S. and
UK. According to them, the banking system has more
impact on economic growth. Development of financial
markets is one of the keys to achieve long-term growth of
the economy. Financial markets can lead to economic
growth if it could collect the savings from various private
sources and inject them to generative and productive
investments and facilitate exchange of goods and
services (Nazifi, 2004). The financial markets can lead to
economic growth if it could provide appropriate grounds
for optimal allocation of resources and cause increase of
capital efficiency (Levine et al., 2000). one of the most
important factors affecting the development of financial
markets and their efficiency is to diversify financial
instruments. To achieve this goal, various financial
instruments should be designed. Goldsmith (1969) and
Shaw (1973) observed a close relationship between
financial market development and economic growth in a
number of countries. Of course, they did not specify the
direction of causal relationship between two
variables. King and Levine (1993) by studying 119
developing and developed countries during 1960-1989
concluded that the symbols of financial market
development significantly predict growth symbols. In the
other hand Robinson (1952) believed that financial
brokers are the only channels to direct households…
savings towards investment activities and the main
factors should be sought in capital stock and investment
rates. However, most empirical studies conducted in this
field have obtained positive relationship between financial
development and economic growth. Koupahi et al. (2004)
showed that in general the impact of financial markets on
the growth of the agricultural sector is positive. In other
words, development of country's financial structure plays
an important role in increasing the value added of
agricultural sector. Abdollahi (2003) found that quick and
easy access to financial resources is a major factor in
agricultural sector investment and development.
According to definition, the financial market is a
market in which financial assets are exchanged. Banking
facilities, bonds and common stocks of corporations are
examples of such financial assets. From economic
perspective, discovery the price of financial assets,
liquidity supply and reducing transaction expenses are
considered among the main roles and functions of
financial market. The financial market is divided into
money market and capital market. Based on this
classification, money market includes short-term debts
such as bank facilities and capital market covers longterm
debts such as stocks, bonds and
equities. Considering country's capital market weakness
and nonuse of available financial instruments in this
market for financing agricultural sector, a major
proportion of the required financial resources for
investments in this sector are provided out of financial
Indian Journal of Science and Technology Vol. 4 No. 8 (Aug 2011) ISSN: 0974- 6846
Sci. Technol. Edu. ¨Financial strategies in agricultural sector of Iran〃 Y.Ansari et al.
꽗Indian Society for Education and Environment (iSee) http://www.indjst.org Indian J.Sci.Technol.
987
market and by the government. Accordingly at the
present time, financial market of agricultural sector is
exclusively the money market and lacks capital
market. In other words, disbursement of credits and
facilities is the only way to market-based financing for
agricultural and rural sectors. In addition, financial
market can be classified in formal and informal
sectors. A part of the financial market which acts within
the monetary laws, regulations and policies is known as
formal sector or organized financial markets and
conversely the part that acts out of the official rules and
regulations is known as ¨informal〃 or ¨unorganized〃
sector.
Currently a large part of the financial markets of
Iranian agricultural sector is under government…s
surveillance and supervision in such a way that 9.75
percent of the funds offered in this market are provided
from formal resources, including Agricultural Bank, rural
cooperatives and commercial banks. Informal resources
including loan funds, tradesmen, dealers, acquaintances
and others provide 1.24 percent of the funds supply.
Therefore, the formal market is not able to
provide all the requested facilities by
applicants in this sector. The reason for this
issue is low interest rate of facilities in
agriculture sector and consequently the
increase of demand toward these facilities in
the formal sector. Accordingly, this situation
is not observed in informal sector which has
flexible and relatively higher interest rate. In
Kohgiluyeh & Boyer-Ahmad province,
agricultural financial market is limited to the
money market and it is also limited to the
banking system, especially the Agricultural
Bank. In this province, impact of private
sector is also negligible and a developed
capital market does not exist. Agricultural
Bank of Iran as government credit leverage
has a very sensitive role in the most important part of
country…s economy. Therefore, the Agricultural Bank of
province is tantamount a tool for government activities in
necessary investments to strengthen province agricultural
capacity. This Bank provides almost 70% of required
credits and facilities of the province agricultural
sector. The aim of this study is investigating the
conditions of agricultural financial market in the
Kohgiluyeh & Boyer-Ahmad province and determining the
suitable strategies for market and investment
development in agricultural sector of province (Statistics
and Information Center, 2007; Banking Statistics and
Information Division,2010).
Contents and methods
This research is a descriptive and analytical study
carried out as a field study. In this study, all the
information and required data related to monetary, credit
and financial institutions and investment trends in the
Kohgiluyeh & Boyer-Ahmad province of Iran and all
activities in the field of agricultural financial investments
including small and large investments and disbursement
facilities during 2000 to 2009 were collected and
analyzed. The required information is collected through
obtaining necessary permissions and direct reference to
relevant institutions in forms that were already prepared
for this purpose.
Table 1 and Fig.1 indicate the Agricultural Bank facilities
paid in the various agricultural sub-sectors of Iran during
2003-2007. The total amount of disbursed facilities has
been 22,880 billion Rials in 2003, 32,202 billion Rials in
2004, 41,032 billion Rials in 2005, 40,645 billion Rials in
2006 and 44,476 billion Rials in 2007. In this period
disbursement of facilities has experienced an uptrend
except in 2006 which the trend has declined. According to
covered population and further volume of local and
potential facilities, the disbursed facilities paid in
agricultural sector is less than the other sectors and
cannot satisfy the needs of agricultural sector (Table 2).
In Kohgiluyeh & BoyerAhmad province, the trend of
disbursed facilities to agricultural sector has been
fluctuating in 2001-2009. In general the total disbursed
facilities in all agricultural sub-sectors of province have
increased from 2001 with 137 billion Rials until 2002 with
202 billion Rials. But in 2003 with experiencing a
reduction has reached to 201 billion Rials and since 2003
the trend of facilities has again increased. The amount of
Table 1. Agricultural Bank facilities paid in the various
agricultural sub-sectors of Iran (Billion Rials)
Year 2003 2004 2005 2006 2007
Farming 6490 8242 15296 13104 16248
Gardening 1563 2235 4842 4023 3958
Ranch 3728 5076 7107 11323 9921
Poultry 1126 1733 3400 3031 2153
Bee 51 70 69 292 147
Agriculture Industry 678 1372 2615 2428 1976
Handicrafts 286 493 468 465 847
Pisciculture 254 338 227 454 446
Agricultural services 2047 3025 3621 3801 5734
Other 6657 9618 3387 1724 3046
Total 22880 32202 41032 40645 44476
Source: Central Bank of Iran
Fig.1. The trend of Agricultural Bank facilities paid in the various
agricultural sub-sectors of Iran during 2003-2007 (Billion Rials)
0
5000
10000
15000
20000
2003 2004 2005 2006 2007
Farming Gardening Ranch
Poultry Handicrafts
Indian Journal of Science and Technology Vol. 4 No. 8 (Aug 2011) ISSN: 0974- 6846
Sci. Technol. Edu. ¨Financial strategies in agricultural sector of Iran〃 Y.Ansari et al.
꽗Indian Society for Education and Environment (iSee) http://www.indjst.org Indian J.Sci.Technol.
988
facilities in 2004, 2005 and 2006 reached to 210, 286 and
389 billion Rials respectively. Amount of facilities met
declining trend in 2007 again and reached the amount of
259 billion Rials and with an ascending trend reached to
265 and 501 billion Rials in 2008 and 2009 respectively
(Table 3). The capital market in the agricultural sector has
functioned very weak and was unable to meet agriculture
sector needs. In other words disbursement of credits and
facilities has been the only way of market-based financing
for agricultural sector in province.
Also it is observed that the interest rate of disbursed
facilities in agricultural sector has not much difference
with the other sectors (Table 4). Interest rate in Iran due
to financial repression has negative effects on investment
and economic growth rate and has caused
underdevelopment of agricultural financial markets.
Results and discussion
Theoretically, there is a positive relationship between
real interest rate of deposits and financial
savings. According to Shaw…s theory, the main reason of
positive effects of financial development to economic
growth is the increase of savings level due to positive real
interest rate. The study of average banking interest rates
in Iran indicates negative average interest rates during
years after the revolution which is the
example of financial repression. Shortterm
deposits of banks have over 50
percent share of total investment
deposits and have always experienced
negative average interest rate (Table
4). only five-year investment deposits
within current three years have positive
average real interest rate. That is
because of inflation controlling
policies. The average real interest rate
of facilities has been negative during the
study period except for the period of
Third Development Strategy of Iran.
Negative real interest rate of facilities is
an index for explanation of financial
repression phenomenon. As specified in
the table 4, the average of deposits real
interest rate during 1980-2004 has been
10.4 percent. According to this table,
the banking interest rates in Iran due to
financial repression caused by negative
real interest rates, had negative effects
on investment and therefore on
economic growth.
The government controls financial
resources in Iran and disburses
facilities to financial market with low
interest rate. Alongside this formal
financial market, there are other
informal markets that provide required
credit and financial resources of
agricultural sector with high rates and
show more sensitivity towards market fluctuations. In
general, the study of financial markets structures in Iran
suggests underdevelopment. The review of investment
trend in agricultural sector of Iran during 2005-2007
towards three years of 2002-2004 indicates 4.8 percent
decrease of gross fixed capital formation in this sector. In
the final three years of Third Development Strategy of
Iran the amount of investment growth in the agricultural
sector has been 8.29 percent on average while this
growth has been estimated 4.21 percent in the first three
years of 4th Development Strategy of Iran. Total deposits
of Province financial and monetary institutions, in 2008-
2009 have been 6,332 billion Rials and the total
disbursed facilities of province in all sections have been
9,709 billion Rials. But the amount of disbursed facilities
in agricultural sector of province has been only 501 billion
Rials. The percentage of public and private banks
disbursed facilities in mentioned period has been 6.25
percent in industry and mining sector, 7.35 percent in
commerce and services, 3.23 percent in housing and
construction, 8.1 percent in exports and 6.13 percent in
agricultural sector. These proportions have been the
same in the province as well. Therefore, disbursed
facilities in the agricultural sector have been trivial
Table 3. Agricultural Bank of Kohgiluyeh and Boyer-Ahmad facilities paid in the
various agricultural sub-sectors of province (Billion Rials)
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009
Farming 39 52 40 59 58 167 55 163 136
Horticulture 18 25 26 30 58 66 43 7 69
Ranch 57 86 96 91 82 95 97 47 134
Fisheries 3 7 6 7 12 18 11 9 3
Bee 2 5 4 1 1 4 4 ----- ------
Machinery 13 19 22 13 36 29 26 3 10
Waterwells 2 3 2 4 6 3 4 3 7
Irrigation
pressure
3 5 5 5 33 7 19 33 142
TOTAL 137 202 201 210 286 389 259 265 501
Source: Agriculture Bank Management of province
Table 2. Agricultural Bank facilities paid in the agricultural sector of Iran and
Kohgiluyeh and Boyer-Ahmad Province (Billion Rials)
Year 2003 2004 2005 2006 2007
Facility paid in the countries 22880 32202 41032 40645 44476
Facility paid in the province 201 210 286 389 259
Share of province Facilities .8% .6% .7% .9% .6%
from the State Facilities
Table 4. Harmonic Average of real interest rate of deposits and facilities during
1979-2004 (Billion Rials)
Deposits
interest rate
Clipping rate
of inflation
harmonic rate
of facilities
harmonic rate of
deposits
Period
1979-1988 7.5 9.8 18.9 -11.5
1989-1994 9 13.4 18.9 -9.5
1995-1999 12.6 17.2 25.6 -13
2000-2004 12.2 17.1 13.9 -10.6
Total 9.7 13.4 20.1 -10.4
Source: Journal of the process No.42 and 43 , 2005, Central Bank of Iran
Indian Journal of Science and Technology Vol. 4 No. 8 (Aug 2011) ISSN: 0974- 6846
Sci. Technol. Edu. ¨Financial strategies in agricultural sector of Iran〃 Y.Ansari et al.
꽗Indian Society for Education and Environment (iSee) http://www.indjst.org Indian J.Sci.Technol.
989
compared to other sectors and could not be able to meet
the needs of country's agricultural sector and especially
the province. Consequently, lack of funding in agricultural
sector has slowed down the investment process in this
sector and agriculture financial market has encountered
recession.
Conclusion
Considering the potential capacity of agriculture in
Kohgiluye and Boyer-Ahmad province of Iran in terms of
excellent conditions of water, soil and inexpensive labor
force, the available financial institutions, current tools and
their capacities are completely unsuitable. Also the
interest rate of formal sector credits even by calculating
the administrative costs is much less than the interest
rates in informal sector. These issues have caused the
formal sector of financial market to encounter excess
demand for funds which lead to recession in province
agriculture. Therefore in order to increase the investment
in agricultural sector of province, some suitable incentives
including increasing the credits of Agricultural Bank,
comprehensive support of agricultural sector,
establishment of stock market to strengthen farmers…
financial capacity as well as creation of diversity in
financial markets and brokers, supporting of private
sector in agricultural activities are strongly required.
To create efficiency in agriculture financial markets
the government should legislate appropriate policy
frameworks and remove its ineffective interventions in
this sector and should endeavor to eliminate financial
broker obstacles. By and large, the effects of financial
markets development have been positive on the growth
and development of agricultural sector. Considering this
impact, expansion and also diversification of country…s
financial markets in general and establishment of
professional financial markets in agricultural sector in
particular are required. Also, it is necessary for the capital
market to play the better role in country's financial market.
As a result, stock market can play an effective role in
enabling province financial markets and accordingly in
the growth of agricultural sector.
It is recommended to take into consideration the
micro credits to rural cooperatives companies which can
cause development and growth of agriculture financial
market. Financial liberalization process can be effective
to remove the obstacles in the way of financial markets
through which can lead to empowerment and thereof the
agricultural sector growth. Therefore, reform and
expansion of agriculture financial markets and especially
creating and developing new financial tools to mobilize,
regulate and direct financial resources to integrated
places should be among the goals and priorities of the
province.
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