The Sunday Mail
Sam Malaba
The conditions that banks have set for financing agriculture have not changed over the years, even prior to dollarisation.
Banks have good working relationships with all their clients, including farmers.
It must, however, be appreciated that banks have fiduciary responsibilities with respect to management of public funds.
The deposits that banks apply for on-lending essentially belong to the public and as such, banks must be prudent when it comes to lending depositors’ funds.
The conditions that banks then set for on-lending are guided by the principle of safeguarding depositors’ funds.
Rising non-performing loans, which peaked at 20,45 percent in June 2014, have occasioned the need for banks to tighten and strengthen bank lending criteria to minimise NPLs, protect balance sheets and their capital.
It is, therefore, important that farmers maintain their creditworthiness through a good track record and history of meeting repayment obligations.
A creditworthy farmer who is productive and has developed a good relationship with his/her bank will always find his/her bank willing to provide funding.
Going forward, with the setting up of the Credit Reference System, it will be difficult for serial defaulters to access credit because of the information sharing amongst financial institutions that will be an integral part of this system.
Further, the amendments to the Banking Act will now create civil and criminal liability for abuse of depositors’ funds, negligence or reckless conduct of banking business and for breach of statutory duties by directors and senior managers of banking institutions.
Banks cannot, therefore, lend imprudently or without due regard to the implications of their lending on the safety of depositors’ funds.
Collateral
Firstly, farmers must have bankable projects that show a viable business case, complete with envisaged business cashflows.
Secondly, there are schemes and arrangements that have minimised the need for collateral. These include:
i. Effective Stop Order System;
ii. Out-grower arrangements where farmers have agreements with off-takers; and
iii. Contract farming.
The Stop Order System — where banks can register stop orders with marketing institutions through which farmers sell their produce — has worked very well with tobacco and sugarcane.
Under the outgrower scheme, farmers can make arrangements with contractors to produce particular crops, with a guaranteed market.
This has worked very well with crops like soya beans, paprika and other horticultural produce.
Contract farming — where smallholder farmers enter into contracts with corporates to supply particular agriculture produce to be used as raw materials in their manufacturing processes — has worked well for such crops as tobacco, sorghum, maize and millet, among others.
All the above arrangements go a long way in minimising the necessity of collateral. Farmers must be encouraged to build long-term relationships with their bankers.
This is very important because where there is a long term relationship that is characterised by mutual, open and honest interactions, bankers will pursue every avenue to assist farmers, particularly those who prioritise repaying their loans. Where farmers are facing genuine challenges in meeting repayment obligations for unanticipated circumstances, farmers can approach their bankers for restructuring of facilities to meet the needs of both parties.
What is critical in such a relationship is that the farmer performs to expectations and the banker keeps close to the projects to understand their clients and their operations better.
NPLs and new funding models
The Reserve Bank of Zimbabwe reported in the Monetary Policy Statement that banking sector NPLs, which peaked at 20,45 percent in June 2014, declined to about 14,05 percent as of June 30, 2015.
This was a major improvement, in part due to the newly-established RBZ Special Purpose Vehicle — Zamco — taking on board some of the NPLs.
The Bankers’ Association of Zimbabwe does not have consolidated statistics on NPLs, but each bank knows their level of NPLs — by sector.
As already highlighted, we have models which are already operating very effectively, including stop order, outgrower and contract farming schemes.
In addition, there are tripartite arrangements involving smallholder farmers on irrigation schemes, with banks providing finance and development partners providing technical support and training for the farmers.
Recently, Government unveiled the Brazilian irrigation scheme where smallholder farmers are organised in groups and farm mechanisation equipment is supplied on lease-hire bases, with banks availing working capital.
Other important interventions include the Government inputs scheme and the Presidential Inputs Scheme.
Further, BAZ is fully supportive of the (warehousing system).
This system readily confers value through a transferable receipt system that can be used as security by farmers.
This means the value stored in the warehouse with evidence of a receipt can be applied as veritable security for banking sector facilities.
The benefits of implementing the warehouse receipt system for the agricultural sector and the economy are enormous.
US$1 billion uptake
It is early in the season and banks are currently in the process of approving facilities and disbursing. BAZ expects that the entire amount will be fully disbursed. However, the fears are clearly unfounded as the demand for agricultural financing has remained high and BAZ expects full utilisation as has been the case over the past few years.
Zimbabwe is an agricultural-based economy and hence the performance of agriculture is critical for the overall performance of the economy.
Over 70 percent of the population derive their livelihood from agriculture and, therefore, measures to address poverty must, in some way, target the agricultural sector.
BAZ fully appreciates the centrality of agriculture to the economy and the need to adequately fund this sector.
All banks have complied with the RBZ guidelines on interest and charges.
Under the guidelines, prime borrowers with good credit risk would access funding at interest rates ranging from six percent to 10 percent per annum.
Farmers with moderate credit risk can access credit at interest rates ranging from 10 percent to 20 percent per annum, while farmers with comparatively higher credit risk face interest rates of 12 percent to 18 percent.
There is significant competition among banks for prime borrowers and these are borrowing at markedly lower interest rates.
We foresee interest rates further declining in 2016, particularly in light of the Lima agreement for external debt arrears clearance, which would lead to reduced risk premium, implying access to cheaper international credit lines and, ultimately, lower domestic interest rates.
(Regarding the bankability of offer letters), discussions are ongoing, and BAZ remains optimistic that this matter will be resolved in a timely manner.
Conclusion
Going forward, Government’s commitment to clearing the multilateral financial institutions’ external payment arrears and re-engagement with bilateral creditors should pave the way for the country to access balance of payments support and medium to long term financing.Government, multilateral and bilateral development partners will of necessity target agricultural financing as part of the United Nations long term strategy for poverty alleviation under the new Sustainable Development Goals Agenda.
In particular, support for smallholder farmers is expected to increase significantly beyond the near term.
As a result of these initiatives, BAZ is confident that agriculture will underpin economic recovery.
Mr Sam Malaba is the president of the Bankers’ Association of Zimbabwe, and AgriBank chief executive. This article was taken from his interview with The Sunday Mail Chief Reporter Kuda Bwititi in Harare last week.
