Why banks still see agriculture as high risk

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Last week’s instalment referred to the Chisumbanje ethanol project and the displacement of about a thousand villagers.

Lilian Muungani, public relations officer for Green Fuel, the company that is running the ethanol plant at Chisumbanje, wrote to set the record straight.

“The ethanol project is not relocating people; rather the whole development is taking place around people hence the 4 000 hectares of land being developed for community irrigation at an annual rate of 500 hectare,” she said.

FSS lauds the project promoters’ efforts to integrate the community into the project because without that their social licence would be withdrawn.

We would hate to see the image of a project of such scope and magnitude, with immense import-substitution potential, being harmed by disputes with near-project communities.

In this instalment, we continue on an agricultural tip, seeing as we can that the summer cropping season will soon be upon us and financing remains a burning issue.

Year in, year out, we hear accusations and counter-accusations yet when all is said and not done, farmers still don’t have the required financing.

And banks get their fare share of criticism, so I thought we could examine why they generally remain not very well-disposed towards lending to agriculture and what could be done to shift the paradigm.

Despite their pretensions, some banks in Zimbabwe wouldn’t touch agriculture with a barge pole, in its current form.

To stretch the analogy a bit, others wouldn’t be seen dead near “agriculture” and would other run their balance sheets like hedge funds. Well, I think they are dead wrong, given the immense growth potential of agriculture.

Despite the RBZ’s exhortation that banks must commit 30% of their loan book to agriculture, the threshold remains below 20%, though it is improving.

So what is the basis of banks’ “reluctance” to lend to agriculture? Is it a case of unwillingness or inability?

Skills gap: Agricultural lending is a specialist area requiring specialist skills, yet some banks do not have the required depth to run successful agri-business units.

This is because not all banks focus on agricultural finance in the same way, so it might not be an area of core competency.

High-risk profile: Zimbabwe’s agricultural sector is now dominated by smallholder farmers, most of whom have no capacity to offer any form of security.

“One of the big challenges . . . is that you can’t do any sort of credit analysis on the viability of the small farmer. They also don’t necessarily have a credit history”, says Ladi Balogun, MD and CEO of a Nigerian bank. If, however, there is a more established company buying the produce it makes it a lot easier to finance,” said Blogun.

Systematic risks: These are risks that are inherent to a whole sector, such as weather and price risks. Falling prices, for instance, would affect most if not all of the farmers.

In order to pre-empt such risks, banks diversify their lending portfolios, which tends to see them minimising their exposure to the agricultural sector where systematic risks abound.

However, various strategies such as crop diversification, irrigation, insurance and the availability of storage facilities can be used to mitigate such risks.

Collateral issues: Lack of collateral by borrowers, the majority of whom are now smallholders, limits banks’ appetite for lending to Agriculture.
It is anticipated that changes being made to the 99-year leases will accord them collateral value and entice the banking sector to lend more to the sector.

Given the above challenges, what are some of the interventions which could make banks play a more meaningful role in financing agriculture?

Exploiting synergies with NGOs: Banks should consider exploiting synergistic opportunities with the NGO/donor community, which because of its developmental focus (as opposed to the profit motive of banks) is usually better placed to manage projects on the ground in ways that banks can’t.

NGOs have been known to assist banks effectively with management of risks by providing technical support (extension services) and training to organised groups of farmers in rural areas where banks fear to tread.

Adopt a value chain approach to lending: Historically, banks have relied on the traditional balance sheet lending approach characterised by consideration of a good track record, collateral and capital which makes them overly cautious at times.

In recent times, lenders have been adopting a value chain approach which calls for a deeper understanding of the interdependencies along the value chain.

Once they do, they discover that contracts, links with other parties in the value chain, technical assistance and insurance can form “soft” collateral which could be relied upon for lending purposes.

A value chain approach to lending does not only rely on historical issues such as past investment, but is also informed by the promise and possibility of future success.

The bank has to determine the productive value of the farm and make it the basis for advancing any lending to farmers.

Regulatory intervention: One way of “encouraging” banks to support agriculture would be for the regulatory authorities to move up the regulatory value chain from moral suasion to blunt regulatory intervention.

It’s not without its controversies but it has been done elsewhere. In Nigeria, for instance (where some of our former farmers are), the central bank ordered all banks in the country to establish agricultural finance departments within six months or face appropriate sanctions.

Banks are also required to lend to the entire value chain.

Will Zimbabwean farmers wait for regulatory intervention before they can adopt some of these strategies? Mail your insights to omen.muza@gmail.com.

Omen N. Muza is a banker and Managing Director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.