Agricultural finance — imperative for dialogue (2)


Last week’s article attracted significant interest from followers of this column.

Of the feedback we received, some was quite detailed and impassioned, leading me to two conclusions.

Firstly, the issue of agriculture and its financing not only sets the cat amongst the pigeons but is also one on which there is an incredibly diverse range of opinions.

Secondly, a follow-up article was unavoidable. Accordingly, this week we review some of that feedback.

A former workmate who is now in the civil service wrote and cannot be named for professional reasons said: “I found your article in today (Thursday April 7)’s edition of NewsDay quite interesting.

Only a week ago, I submitted a policy paper for discussion at my workplace that looked into the options of financing agricultural production in Zimbabwe and I observe that the subject matter and content of your article resonate with some of the issues that I was grappling with in that paper.

Perhaps at an opportune time in the coming week or two, we could meet to exchange notes in more detail.” Needless to say, I accepted the invitation.

While noting that bank loans are not the only source of agricultural financing, Brett Chulu, a columnist for Zimbabwe Independent, said that given the status of agriculture as a major growth driver, banks should prioritise its financing and position themselves to reap the rewards of the sector’s multiplier effects.

He urged banks to enter into backward linkages such as contract farming and similar arrangements under which they supply financial/business management skills.

Chulu also suggested the angel financing model, which might however be torpedoed by current liquidity constraints that tend to make capital timid.

What happened to Agricultural bonds, he also wanted to know. Recent issues of Agri bills by ZB Bank and Agribank (in partnership with FBC Bank Limited) have seen only 50% take-up due to the illiquid market conditions.

Agricultural financing partners should prioritise value addition/agro-processing initiatives as an import substitution strategy, he suggested.

“I even see canned maize imported from SA. Tell me why we’re importingmahewu (traditional millet beverage)?” he asked.

The suggestion that I found most thought-provoking was that diamond revenue must be harnessed for agricultural financing.

“Why not set aside a fraction of diamond revenue for cheap but professionally managed agric financing schemes?” asked Chulu.

Munyaradzi Musamba from a Harare-based company that supplies agricultural inputs said: “I think it will be very difficult, if not impossible, for offer letters to be taken as collateral due to the basic fact that those offer letters gave people land for free, with no payment exchanging hands. As a result, a significant portion of those with offer letters are Zimbabwe’s version of the sub-prime crisis. So a number of farmers that could utilise modern farming practices such as tractors, safe use of agro-chemicals etc can’t do so because their offer letters are worth nothing. They also don’t have a personal balance sheet to use as leverage. This leaves us agro-suppliers with a glut of stock in our warehouses that is proving difficult to sell despite reasonable pricing, especially given the current liquidity crisis.”

By far the most extensive input was from Masimba Shumba: “I agree with most of the points you raised, but I feel that fundamental issues need to be cleared before anyone seriously funds agriculture.

I must make the point though — without politicising the issue — that I agree with the land reform programme fully.

What I disagree with is the methodology through which it was carried out, which I believe is one of the reasons why it is currently a challenge to fund agriculture.

“With regards to the legislation that offer letters be used as collateral, we both know that what makes collateral viable and acceptable is the confidence which the lender has in it. There is currently no confidence in the offer letter hence no professional banker would take it seriously. It is only an offer letter as the name suggests; it’s not a document of title and who knows what will happen tomorrow? More often than not, offer letters have been revoked or double-issued for various reasons, most of which are political.

“The issue of title to land has to be resolved in a way that gives everyone confidence. There is nothing wrong with all the land being vested in the government in trust for the people. There are countries which issue 99-year renewable leases and believe it or not, these leases are even applicable to residential properties and banks can grant mortgage loans against them. This is because these leases are legally recognised and property rights vested in them are respected, which creates confidence enabling them to be collaterised.

“Commodity certificates will work, but I doubt if the ones to be issued by the Grain Marketing Board (GMB) will work, mainly for two reasons: Firstly, there is no confidence in the GMB because there is no guarantee all the produce stored there will not be raided for one reason or another. Secondly, the moment you give people or institutions statutory powers to be sole players you create a monopoly and distort market forces, eroding the confidence that value will be retrieved should the security need to be called in case of default. Who will be the guarantor for the GMB should it fail to honour silo certificates? What’s the sovereign risk of the potential guarantor? For the silo certificate to be acceptable and recognisable as security, I think it goes beyond mere issuance of certificates. These characteristics of GMB silo certificates will obviously have an implication on the cost of money secured by securitising them. Will it be viable to fund agriculture using such expensive money? Will our agricultural exports be viable?

“I agree that the commodity exchange will work if regulated properly and that it offers opportunities for arbitrage for the players in the financial sector which I believe is good for the market. In the medium to long term it can facilitate the channelling of funds into the agricultural sector.

“Still on the issue of the commodity exchange and silo certificates, regardless of their operational merits or demerits, if they work, you agree they will be viable only for seasonal finance, that is, for working capital requirements only given their tenure. For us to realise the vast upside potential that you highlighted, what we need is long-term financing for capacity building.

“We need to develop dams, irrigation facilities, road infrastructure etc which is real capacity building requiring security of tenure, security of title and respect for that title and the rights bequeathed by it. Silo certificates fall short of these requirements as do offer letters.

“For anyone to fund any project there are issues of viability, which go beyond title, something most people appear not to be considering at this stage. The capacity of the holder to be productive on the land and generate the cash flows required to repay loans and remain with a surplus for other needs is important. In this instance there is also need for training in the actual agricultural activities as well as enterprise management, the need for agricultural extension services and for the farmers to be committed to the cause; after all it’s a business. With the resolution of some of these issues, I believe money will flow into agriculture and we can realise our full potential.”

Well there you are — some interesting perspectives on what needs to happen for agriculture to flourish.

FSS still welcomes views on options that can be considered by stakeholders in order to improve supply and access to agricultural financial services by the various categories of Zimbabwe’s farmers. What are yours?

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