A bankers’ perspective on bankability of 99-year leases

THE agriculture sector is key in the development of the economy. Agriculture is one of the key primary industries in Zimbabwe, with a huge contribution to employment, gross domestic product and exports. As a consequence, the financing of agriculture is an important function of the banks in Zimbabwe, with as much as 20% to 25% of all bank lending currently going to support agriculture.

BY Clive Mphambela

Agriculture is one of the key primary industries in Zimbabwe, with a huge contribution to employment, gross domestic product and exports
Agriculture is one of the key primary industries in Zimbabwe, with a huge contribution to employment, gross domestic product and exports

One of the topical issues in the financing of agriculture has been the discussion around the suitability of 99-year leases as collateral for agricultural lending. After protracted negotiations between stakeholders in government and players in the banking industry, much progress has been made in ensuring that a suitable lease instrument be put in place. This week we wish to share, what, in a banker’s eye, would constitute a bankable 99-year lease, as well as sharing some of the expectations by bankers from the farmers who will seek facilities from banks on the back of the instrument.

What is a 99-year lease?

A 99-year lease is a legal document that gives farmers who are allocated land under the Agricultural Land Settlement Act (Chapter 20:01) certain rights, privileges and conditions under which the land is allocated and used.
Why are 99-year leases important to banks?

Banks support agriculture and are keen to ensure that farmers who hold 99-year leases have access to financial assistance to expand their farming operations. Banks encourage farmers to build their homes on the farms, to strengthen their security of tenure, and also use the farms to establish their “domicilium citandi et executandi”. This can be interpreted to mean a place of reasonable permanent residence of the customer.

It is for this reason that banks request for a customer’s “proof of residence” at account opening or at the establishment of any trading relationship with a banking institution.

Ninety nine-year leases will, therefore, give farmers a reasonable assurance of security of tenure, which will encourage the farmers to invest on the land.

What, therefore, would constitute a bankable 99-year lease?

A bankable 99-year lease must ensure that the farmer has;
 A stable and assured stay on the land for as long as the farmer is productive;
 An incentive to invest on the land in building immovable infrastructure such as a house, irrigation canals and dams, barns, sheds and other farm structures that promote productivity of the land and reduce the risk of failure;
 Access to assured and stable markets for his/her produce;
 Access to a reasonable and predictable transfer market of buyers that will enable him/her to have reasonable assurance for compensation for any permanent improvements made on the farm should there be need for the farm be re allocated to a third party;
Allows the banks or any lender to hold both moveable and immovable property as collateral for loans advanced to the farmer.

Does a 99-year lease guarantee a farmer access to a bank loan?

It should be noted that having a 99-year lease on its own does not guarantee a farmer access to bank loans. Banks will have to look at various other risk factors in assessing whether a farming business meets the minimum criteria set by the banks in considering various businesses for lending purposes. Most importantly, the farming enterprise must be viable in accordance with the assessment criteria set by the lending bank. It is, therefore, possible that occasionally, other risk factors will militate against the granting of a facility to the farmer.

What, therefore, are the expectations of banks before a farmer is considered for lending?

Firstly, a farmer must establish a banking relationship with a bank by opening and maintaining a bank account. This enables the bank to better understand the farmer’s business and his/her circumstances over time. It is important that the farmer conducts his business in a manner that fosters confidence with the bank. It is also important that a farmer has a good credit standing and repayment track record on any past facilities.

Secondly, a farmer must demonstrate that they understand that farming is a business enterprise and should be run as such.

A farmer must, therefore, endeavour to present a sound business case to the bank when trying to access credit facilities. A good, well-written business plan will outline on a season by season basis, what the farmer intends to grow, when and how much they will harvest, where they will sell the harvest and for how much they think they will sell the produce. It must state clearly the requirements for both long and short term financing. The business plan must also outline how the farmer intends to address and mitigate various risk factors that can derail the business plan in the short, medium and long term.

A farmer must, therefore, ably demonstrate a keen understanding of all these critical elements to the banker.
How will banks approach the assessment of maximum exposures to farmers?

Banks usually rely on the forced sale value of the collateral presented by a farmer (be it moveable assets such as tractors, vehicles etc or other immovable buildings and infrastructure).

Banks will, therefore, only be able to offer loans that do not exceed the forced sale value of assets listed as collateral. The forced sale vale of an asset is usually well below the perceived market value of the collateral. This strategy protects both the borrowers and the banks.

Borrowers are protected from potential over indebtedness, whilst the banks are also protected by the reasonable assurance that the collateral will be more easily transferred to another lessee in the event of the borrower defaulting on their loans or the farming business failing for any other reason or if the land has to be repossessed in line with the law.

Will banks be able to lend to farmers amounts in excess of the forced sale value of improvements on the farms?
Yes, banks will in certain instances be able to lend funds in excess of the assessed forced sale value of collateral provided the farmers can provide additional security acceptable to the bank and the enterprise is sufficiently viable to meet repayments of the loans.

Will banks be able to lend to farmers who have no improvements on the land?

It is quite difficult if not impossible for a bank to lend against non-existent collateral. It will be, therefore, incumbent on farmers, in addition to providing the bank with a sound business proposal, to also present alternative non-farm based collateral to support the facilities that they may need from the bank.

While that above has been said, it is important to note that banks have varying criteria for assessing risks of different businesses including agricultural enterprises. Farmers are therefore encouraged to approach their respective banks and be appraised of the banks’ credit requirements so that it becomes easier for them to be assisted
It is for this reason that all banks have specialist advisors in their Agribusiness units to tackle such issues.

Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers’ Association of Zimbabwe. BAZ expressly invites farmers and other stakeholders to give their valuable comments, further questions and feedback related to this article to him on clive@baz.org.zw or on numbers 04-744686, 0772206913. Please also kindly visit the BAZ website www.baz.org.zw for similar articles.

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