/ 19 July 2008

Tourniquet needed for Land Bank

Lack of support for emerging black farmers and mismanaged land reform are contributing to the ongoing woes of the Land Bank, say industry insiders.

The bank, which was transferred to the treasury earlier this week after a succession of scandals, including alleged fraud, financial mismanagement, a massive shortage of expertise in financial services and political interference, has been running at a loss for three consecutive years.

All of the bank’s highly publicised woes contribute to a crisis of confidence in the institution, which is vital to South Africa’s agricultural economy.

According to Kraai van Niekerk, DA spokesperson on agriculture and former minister of agriculture, land reform and the establishment of emerging black farmers is being severely hampered by poor management and service provision in the department of agriculture.

This affects the Land Bank’s ability to function, as it is required to finance development farmers, who tend to be the riskier clients and more likely to default on their loans, says Van Niekerk.

In the past decade the bank has been required to change its focus to include the promotion of equitable ownership of agricultural land, particularly by historically disadvantaged people.

”With the emergence of new farmers the bank is expected to give soft loans without security, which it is not geared for.”

Disastrously, says Van Niekerk, the extension of services — designed to offer financial and management guidance to farmers — provided to emerging farmers has broken down.

But, he says, the staff given the task of providing these services, which are a function of provincial government, ”are not qualified to do the job”.

”That is why so many of these projects fail,” he says: ”Because the support structures are not in place.”

It is a vicious circle. While emerging farmers have the finance provided by the Land Bank, they lack the support structures required by the department of agriculture. Without help and expertise farms are not profitable and farmers default on loans, leaving the bank further exposed.

Professor Johan Willemse, associate professor of agriculture economics at the University of the Free State, says that the combination of these factors has led to the financial crisis in which the bank finds itself.

While alleged major financial mismanagement and poor oversight form a large portion of the bank’s troubles, this is compounded by a lack of skills and financial expertise in what essentially remains a financial institution, says Willemse.

He says the attrition of skilled financial managers to the private sector has resulted in poorer credit control.

The bank used to categorise the farmers it financed into varying categories of risk, he says. Under the old Agriculture Credit Act the bank could provide loans to farmers with little or no collateral — which presented greater risks to banks. The Act, which fell away in 1999, allowed for the close monitoring of loaned money.

But in the mid-Nineties these functions were transferred to the department of agriculture and the boards given the task of overseeing loan money and providing support and guidance to farmers are no longer functioning properly, says Willemse.

With skills attrition and impaired credit controls and risk management the bank’s debt has worsened, its liquidity has been impaired and its debt increased.

”If you want to lend to riskier clients the fund needs to be ring-fenced or guaranteed in some way,” says Willemse.

Van Niekerk says that if emerging farmers default or don’t pay loans the bank cannot take legal steps to reclaim the money. It is unclear whether this is a regulation or not, but according to Willemse that is ”how it is understood to work” by those in the sector.

The bank’s developmental mandate has made it difficult to operate as a financial institution. ”You can’t mix finance with politics,” says Willemse.

”If you want to step away from the financial game you need to put specific regulations in place to control the risks. Government must back up or guarantee these debts, for example.”

According to the 2006/07 annual report, non-performing loans — loans that are in or close to being in default — make up 15% of the bank’s total loan book, about R2,4-billion of R16-billion. But the bank’s cash reserves sat at a meagre R1-billion. This prompted the treasury to inject about R700-million into the bank in March last year with a R1,5-billion guarantee to ease its cash-flow crisis.

The bank ran at a loss of R100-million in 2006/07, the third consecutive year it was in the red. Despite the broadened scope of its mandate, loans to commercial and development farmers declined by 18%, dropping from R5,9-billion in 2005/06 to R4,9-billion in 2006/07.

The bank ascribes this drop to the migration of clients to commercial banks. But, says Van Niekerk, what is concerning is that it is the established farmers — the bank’s more secure clients — who are leaving for greener pastures.

Willemse says that the damage to the bank’s credibility is also impairing its ability to raise capital in the money market.

His chief concern is that this could result in less credit available to the agriculture industry, which could result in shrinking production by farmers who cannot afford to produce more crops and higher food prices for consumers.

”In a world with shortages of food and high food prices, our system needs to work. The Land Bank is vital to that system,” he says.