Agriculture has come under the spotlight in SA. Not only did the 2015/2016 drought highlight the sector’s importance to economic growth and job creation ambitions, the recent policy proposal on land expropriation without compensation drew attention to its importance in ensuring national food security, while also addressing inequality.
Over time the focus of the debate on agriculture has evolved from focusing mainly on the sustainability of production to a discussion of farmer support, and more recently on land ownership. However, one factor — access to finance — remains a cardinal feature that has not been properly addressed. This is because the financial services sector plays a significant role in the growth of SA’s agricultural sector.
The financial services sector’s credit exposure to agriculture amounted to R158bn in 2017, according to data from the department of agriculture, forestry & fisheries. The latest industry estimates put 2019 figures north of R160bn. This figure has been on an increasing trend since 2000.
Aggregate agricultural debt, adjusted for inflation, has grown by an annual average rate of 11% over the past 17 years, with the Land Bank, followed by commercial banks, accounting for much of this growth. Evidently, the agricultural sector has proven to be reasonably lucrative for local financiers, particularly at a time when corporate lending has been stifled by weak manufacturing growth.
Interestingly, despite this boom in agricultural lending, emerging farmers, and agroprocessing small, medium and micro-sized enterprises (SMMEs) in particular, have repeatedly lamented their inability to access credit and working capital, a challenge that has crippled many in their paths to commercialisation. Though the state has launched several initiatives to bolster the provision of finance to these farmers and SMMEs, primarily using the Land Bank as a conduit, many of these facilities remain underutilised, mainly because projects fail to meet funding criteria.
This incongruency illustrates the need for alternative funding models and innovation in the agricultural funding space, a need the numerous financiers in the sector have failed to address over the years. The shortage of emerging-farmer and SMME funding in the face of robust aggregate agricultural credit growth also highlights the agricultural sector’s dichotomy and the scale of untapped potential in the market.
Against this backdrop, it is encouraging to note the emergence of Grobank, a new commercial bank transitioned from the Bank of Athens and focusing primarily on the food value chain.
While most SA commercial banks have divisions offering agricultural finance, Grobank is the first commercial bank seeking to place all its eggs in the agricultural basket, so to speak.
At a time when the big banks are re-engineering their processes to modernise legacy systems and improve their digital offerings as numerous new-era entrants are hot on their heels, Grobank’s entry into SA’s banking landscape is certainly a bold one.While some people have lauded the new bank for its daring ambitions for the agribusiness finance market, some have understandably raised concerns about the sustainability of the agricultural finance market given the recent debates about land expropriation without compensation. Much has been written about the risks faced by SA’s banking sector should wholesale land expropriation occur. From our reading of the governing party’s policy documents, this situation is unlikely to materialise.
Many, including most credit ratings agencies, share this sentiment, and banks have to a large extent continued with business as usual, with positive results. In a report on SA banking performance, Ernst and Young notes that the country’s banks reported double-digit profit growth in 2018 and the highest returns on equity since the global financial crisis. It is thus likely that if the government continues to take a measured approach to land expropriation and the economy supports robust activity, new entrants into the banking landscape will be handsomely rewarded and increased competition will benefit agricultural clients.
On the agriculture front, the success of specialist banks such as Rabobank in Europe, South America and Australia provides a case for increased focus on the domestic agribusiness market. After all, agriculture continues to be viewed as one of the sectors that will drive growth and job creation in SA. At the heart of all this there should be financial innovation that is tailored for the agricultural sector.
New entrants in particular have the opportunity to step up to the task and plug the gap of the unbanked segments of agriculture. This calls for innovative financing models that will leverage technological advancement, either through new digital platforms and satellite technology. The traditional banks have failed to service these segments because of the rigid screenings, collateral requirements, and other regulations. However, with digitisation in this fourth industrial revolution, more can be done for the unbanked.
All over Africa new agritech and fintech start-ups are mushrooming, and their business models are focused on improving the efficiencies of agricultural value chains, all boosting a case for more innovative and inclusive financial instruments for the sector. This, supported by technological advancement, is the future of financing in the agricultural space, and the future looks bright for this critical sector.
Article by Thabi Nkosi and Wandile Sihlobo
Nkosi is executive director responsible for research, business development and investments at Afgri Group Holdings. Sihlobo is chief economist of the Agricultural Business Chamber of SA.
(Published: 02 May 2019 – 18:42)