Agricultural finance — the imperative for dialogue

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Recently, Chimanimani Senator Monica Mutsvangwa urged the government to enact legislation that makes government-issued offer letters bankable so that financial institutions can support new farmers.

Farmers are struggling to access loans from banks, lack proper farming education and are getting a raw deal from the Grain Marketing Board (GMB) which either does not pay on time or does not pay at all after delivery of produce, she charged.

Mutsvangwa also noted that farmers are finding it difficult to access viable markets and have to sell their produce to the GMB, which however pays too little, making it difficult for farmers to operate viable agricultural businesses.

She further said that the financial sector is guilty of not pursuing the developmental agenda that farmers yearn for. In addition to the uncompetitive prices of agricultural produce and lack of financing, experts also site poor organisational capacities in agricultural markets and ineffective market forces characterised by unclear market signals, as some of the challenges faced by farmers.

All these issues are emblematic of the environment in which Zimbabwean farmers have to operate.

Against this background, stakeholders have identified that demand, supply, access and affordability of agricultural financial services is a veritable elephant in agriculture’s room, and that it has major implications for the competitiveness of producers and other players in the value chain.

Chief executive of ENK Management Consultancy Emily Walker was recently quoted as saying that financing is the biggest challenge for Zimbabwe’s agricultural sector, especially given that traditional sources in the banking sector are not offering long-term funding.

She however, noted that Zimbabwe has a broad range of sources of financing such as micro-finance institutions, which could be enlisted to support agriculture.

Notwithstanding the litany of challenges highlighted above, the agricultural sector in Zimbabwe exhibits classical signs of significant upside potential.

In the January 2011 Monetary Policy Statement, the Reserve Bank of Zimbabwe recorded that agricultural output is estimated to have grown by 33,9% in 2010 and is expected to continue on a recovery path in 2011.

A notable statistic is that 65% of the raw materials required by the manufacturing sector must come from the agricultural sector.

The year 2011 has already seen a raft of developments that can potentially change the face of agriculture if followed through with diligence and sincerity. This week we review some of them.

The launch of the commodity exchange in Zimbabwe (ComeZ) in January 2011 is expected to facilitate easier access to bank loans by farmers.

Under a warehouse receipt system (WRS) such as the one that is likely to be used by Comez, farmers receive warehouse receipts upon delivery of produce.

These warehouse receipts can be used as collateral for purposes of securing bank loans and experts have noted that such use of inventory as collateral eases access to finance and lowers financing costs, especially when smallholder producers participate in groups.

The commodity exchange is also expected to address farmers’ market access and storage concerns, reducing potential losses due to the excessive price volatilities of agricultural produce.

Earlier this month, GMB announced plans to convert 12 of its 18 depots countrywide into warehouses were farmers can store their produce in the event of unattractive producer prices.

Farmers who deliver their produce for storage will get silo certificates stating the tonnage of each crop stored in the warehouses.

As in the case of Comez warehouse receipts, farmers can use the silo certificates as security for bank loans.

GMB says that it came to this decision upon realising that producer prices start on the lower end before rising as the marketing season progresses.

Through this initiative, it seeks to reposition itself in the face of anticipated competition from the alternative marketing infrastructure to be provided by Comez which offers alternative price discovery opportunities.

However, the success of GMB’s initiative will depend on the extent to which the market, including potential lenders, perceive produce stored in GMB’s warehouses to be secure and the ease with which security can be realised if need be.

In other words the market would be concerned about the intrinsic value of the silo certificates and whether GMB can be considered to be a competent and reputable collateral manager.

According to a recent public notice by the Agricultural Marketing Authority, “all institutions intending to buy or process grain during the forthcoming marketing season which begins in April 2011 to March 2012 are required to register with the Agricultural Marketing Authority before dealing in such products.”

The categories of institutions and/or individuals that are required to register are commercial millers, stockfeed manufacturers, traders, brokers, grain industry stakeholder associations and grain storage warehouses.

While this initiative is meant to improve access to and the predictability of market institutional infrastructure, the registration process in accordance with the provisions of the Agricultural Marketing Authority Act (Chapter 18: 24), must be efficient and transparent, if it is not to become just another layer of bureaucracy with can fuel corrupt tendencies.

Agribank recently secured a six-year, $30 million loan facility from the Industrial Development Corporation of South Africa.

The facility is expected to help the bank reclaim its position as the preferred financier of agro-industries and farmers.

In a nutshell, it is expected to improve the range of financing solutions available to the agricultural sector.

However, based on public pronouncements made to date about the facility, it would appear that the $20 million available for on-lending by Agribank will be targeted towards companies operating in the agri-business and manufacturing sectors.

Farmers — smallholder farmers in particular — will be keen to find out if and how they can benefit from the facility, given Agribank’s central role as a government-owned dedicated agricultural financier.

Given Mutsvangwa’s concerns highlighted earlier, she will have been disappointed by recent media reports suggesting that the bank was expected to use the facility “to on-lend to its blue chip and medium-sized clients, some of which are listed on the Zimbabwe Stock Exchange,” categories which appear to exclude smallholder farmers.

CBZ Holdings Limited recently announced plans to launch two standalone investment firms, including an agricultural firm, in an effort to seek further growth away from banking assets and capitalise on the double digit growth of the sector.

CBZ Agriculture, an entity whose formation augurs well for the future of agriculture in Zimbabwe, will seek 40% exposure in farming ventures and will be in competition with existing players such as Trust Agriculture.

In the first half of 2010, Barclays Bank launched a financial inclusion programme in partnership with an organisation called KAITE, benefitting rural farmers involved with organic farming projects in Mashonaland East.

If all these efforts are to bear fruit, there must be an effort to promote coordinated dialogue amongst all the key stakeholders in order to arrive at a consensus on issues that affect the environment for agricultural production.

In addition to helping to eliminate duplication of effort and promoting trust, such dialogue would enable stakeholders to agree on intervention strategies and the requisite market institutional infrastructures that typically facilitate a competitive environment and foster investment in and growth of the agricultural economy.

Such engagement must necessarily be multi-stakeholder in approach and seek the active participation of regulatory authorities, financiers, representative bodies of agribusiness firms, agricultural commodity associations and farmers’ unions.

The legacy of the land reform process is that there is no shortage of opinions on alternative means that could have been used to achieve the desired end, and part of the process of moving on is to encourage constructive engagement and dialogue in order to detoxify the farming environment of negative energy.

This way financing resources can be unlocked, ultimately paving the way for the development of the agricultural sector.

Through sustained dialogue amongst key stakeholders in the agricultural value chain, difference in viewpoints — which could be between banks and farmers, banks and regulatory authorities/representative bodies, or between suppliers and farmers — on areas of mutual interest can be narrowed.

Alliances can begin to emerge and consensus built for the greater good of agriculture.

In your opinion, what options can be considered by stakeholders in order to improve supply and access to agricultural financial services by the various categories of Zimbabwe’s farmers?

Omen N. Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. Feedback: omen.muza@gmail.com