Issue 9 February - May 2002by Edzi Netshifhefhe

Since 1994 the South African agricultural sector has been in transformation. Government’s aim has been to include previously disadvantaged individuals into the mainstream of the agriculture economy. In line with this initiative, ABSA bank saw the need to establish a dedicated division focussed on the developing market. To bring previously unbanked individuals into the mainstream and develop them to a level whereby they are able to operate commercially requires a different outlook and specialised facilities. Edzi Netshifhefhe, Manager AgriBusiness, ABSA explains the Bank’s business model for previously disadvantaged farmers.

What services do you offer to previously disadvantaged farmers?
We offer the same services that we offer to commercial farmers, the only difference being that we need to take into account the fact that previously disadvantaged individuals cannot easily meet certain criteria such as security, collateral, etc. This is a symptom of the previous dispensation and we recognise that we first need to enable such individuals to own assets so that in future they may be considered on an equal footing to any other client.

To facilitate this process, Absa Bank has entered into partnership relationships with various private and public organisations. These organisations include Equity Africa, NewFarmers Development Company, Khula Finance Enterprise Limited (Land Reform Credit Facility), the Land Redistribution and Agriculture Development Programme, and Africare. Such organisations provide equity, support, management, mentorship or aftercare in projects, and serve to reduce the risk of the project for the Bank.

Through these programmes, partnerships (joint ventures) are encouraged between existing financially viable commercial farmers and new farmers. Using this approach, the Bank has invested more than R50 million in this market segment. The major constraints we face are identifying financially viable joint ventures, identifying appropriate management skills, support services, equity capital and identifying markets. Joint ventures must not be used to bail out commercial farmers who are in poor financial health with cheaper finance.

What are the advantages of this structure to the commercial farmer?
The new relationship ensures stability of the labour force and the type of commitment that only comes from being a shareholder and stakeholder in a business. In addition, he will obtain an injection of cheaper finance into the business. It is important to note that once a transaction is completed, ownership of the business (including assets and liabilities) belongs to the new company.

What are the terms on the loans provided to previously disadvantaged farmers?
The terms and duration of loans are related to the nature and type of finance sort. In this regard, loans range from short term to long term (up to 10 years). Loans extended to previously disadvantaged farmers are not subsidised or guaranteed ie the Bank takes 100% risk of loans granted. This implies that the Bank has to apply sound business criteria when making financing decisions. However, using the Land Reform Credit Facility*, it is possible to offer clients favourable interest rates and repayment terms.

Have you experienced any problems that could act as a warning to other countries considering similar initiatives?
I have found our biggest problem to be the fact that the previously disadvantaged individuals we have funded are all from the older generation. The younger generation does not seem to view agriculture as a profession and perceive the risks as being too high. This obviously has impact when one is providing long-term loans. An education process is required to encourage the youth to look favourably upon agricultural ventures.

What have your success rates been?
We have not had a single failure. Sure, there have been difficulties, but these have all been issues that can be turned around. We understand that like all new companies, the new companies we have funded in this manner are going through a learning curve. So are we. We renew facilities every year and so far, not one has been declined. We take this to be a very good sign.

Can the model be taken into other African countries?
Representatives from Zimbabwe Farmers’ Union and Tanzania have been looking at our model with interest. We have similar problems to them in terms of the skewness of land ownership in this country, but from our side, we have been pro-active in dealing with the matter since day one. As such, they believe they can learn from us. Our biggest constraint to date has been identifying enough financially viable projects. We are not targeting marginal enterprises.

What are the criteria for qualification?
The most important criteria when looking at a commercial farm for partnership are financial viability, equity, risk, management and support services. The bank has to satisfy its shareholders so we need to be sure that projects will offer a good return. Social stability on the farm is also important, as is the well being of the workers on the farm. In terms of the projects, we look for capital intensive projects, high value and/or value adding products with export opportunities so that we may realise returns quicker.

Has the system had an influence on crime?
We have found that these projects tend to stabilise surrounding areas. They create the perception of a close knit family/ community, and as a result, there is more of an interest in the wellbeing of each member of that community.

Is there scope for ABSA to fund projects outside of South Africa?
It is feasible but relies on identifying the right projects. A limiting factor for projects in Africa is the lack of basic infrastructure and banking facilities. Agriculture relies heavily on a good infrastructure system and a lack there-of is obviously going to impact on the viability of agricultural ventures. In the future, if our neighbouring countries stay stable, this will definitely be the way forward. Many of our neighbouring countries have greater agricultural potential than we do. We are currently looking at a project in Swaziland, and discussed the possibility of joint initiatives with Tanzania’s Minister of Co-operatives and Marketing, Hon. CG Kahama, during his visit to South Africa in September last year. We have close working relationship with Tanzania.

Any views on land reform?
Experience from other parts of the world shows that land reform is a complex and slow process and is not about agriculture only. People require land for many reasons, viz., residential, business, farming, etc. It is also important that the process is inclusive (private sector is crucial) and done properly from the start. In this regard, In South Africa government has initiated programmes such as the Land Redistribution and Agriculture Development Programme (LRAD), Land Reform Credit Facility (LRCF), etc.

* The Land Reform Credit Facility (LRCF) is a fund that was established by the SA Department of Land Affairs and the European Union and is housed in Kula Enterprises. Its function is to lend money to commercial banks at preferential rates and in so doing, acts as a wholesaler for finance.

Author's Contact Details
Author: Edzi Netshifhefhe
Tel: +27 11 350 6101
Fax: +27 11 350 5494
Email: edzin@absa.co.za