Agribank comes to the party

Sam Malaba
Agribank has launched three facilities, namely the Export Facility (US$50 million), the Horticulture Facility (US$10 million) and Value Addition/Business Linkages Facility (US$10 million).The facilities are being offered in conjunction with the Reserve Bank of Zimbabwe as support for production of exports, horticulture crops, and for value addition.

These are productive sector facilities suitably structured to enhance production and viability of exporters, producers and farmers who are in those ventures.

The facilities on offer have favourable terms, covering both working capital and capital expenditure requirements.

Specific contributions of the facilities are as follows:

Export Facility: Exporting companies have been facing challenges of competitiveness in export markets, caused by a high production cost base mainly due to the strong US dollar as well as high input costs.

One of the key drivers to their cost build-up has been the high cost of finance.

The export facility, at 7,5 percent per annum offers highly competitive terms, which will go a long way in reducing the cost of production and, therefore, enhance competitiveness of our products in export markets.

Agribank is excited to offer such support to companies and individuals who are engaging in activities that generate foreign currency, particularly on the back of the current foreign currency shortages.

Availing such a facility to exporters will assist in growing the country’s export base and generate much-needed foreign currency.

Horticulture Facility: To support domestic production of horticulture products. Government introduced Statutory Instrument 64 in June 2016 to support domestic producers and industries.

The measure increased demand for local products and expanded the market for local producers. This facility is coming in to enhance production capacity of local producers in order to cover the gap created by import management and create opportunities to increase horticultural exports.

Value Addition Facility: Ensures producers in productive sectors are able to increase return on their products through value addition. The facility further enhances production of these value-added products as markets are guaranteed through the support provided to off-takers.

In addition, the facility complements other facilities to create a complete value chain financing scheme for productive sectors from production to processing.

In line with its mandate, Agribank has been expanding support for agriculture on a multi-track programme under various initiatives targeting food security and value addition, including support for: smallholder tobacco growers; sugarcane farmers; irrigation schemes; smallholder farmers; cattle pen fattening; and livestock initiatives.

The bank has funding products for smallholder farmers targeting strategic agriculture sub-sectors, including smallholder irrigation schemes, sugarcane farmers, tobacco farmers, Brazilian Mechanisation Programme beneficiaries, soya farmers and potato farmers.

It is working closely with smallholder sugarcane producers in Chiredzi and Triangle, and is the biggest financier of smallholder sugarcane farmers in the Lowveld.

In addition, the bank has standing partnership arrangements with major tobacco industry players such as the Tobacco Industry and Marketing Board and Tobacco Research Board for the development of the tobacco industry, which is a major foreign currency earner.

Specifically, the bank entered into a strategic partnership with the TIMB to finance the construction of “rocket barns” as well as drip irrigation for smallholder tobacco farmers.

It has also availed a facility to the TRB, and that facility is for working capital for group float seed bed training.

Furthermore, the bank is expanding the strategy of financing green market players throughout the country to increase their capacity and their ability to be more viable and sustainable within the agricultural value chain.

Agribank is already established at Mbare Musika, Bindura, Chitungwiza, Mutare (Sakubva), Norton, Bulawayo (Renkini), Chegutu, Chinhoyi and Zvishavane.

The target is to expand to other fresh produce markets in all provincial centres and other outlying areas.

The bank is also working on backward linkages to finance growers and link them to fresh produce farmer markets.

It is also in engagement with development partners supporting agriculture value chain facilities, and its thrust is to support out-grower schemes with structures and partnership arrangements with off-takers for value addition of smallholder output.

Under that arrangement, the bank has already established partnerships and is providing funding for working capital and capital expenditure to out-growers who supply agro-processors.

The initiatives are already underway for supporting tomato growers under the partnership structured between the Agricultural and Rural Development Authority and Schweppes Zimbabwe Limited’s subsidiary, Best Fruit Processors, on processing and value addition of fruits.

Work is in progress for the bank to also replicate its support for the Esigodini project in Matabeleland and assist farmers who will provide input into the Esigodini Plant. In addition, Agribank is negotiating a number of partnerships with development partners involved with smallholder and rural farmers support programmes.

The bank has supported a number of smallholder livestock projects, including cattle pen fattening and dairy farmers, as well as poultry and piggery projects.

While Agribank is looking for appropriate long-term funding for breeding, current funding is fairly short-term, hence, the bias towards pen fattening as well as piggery and poultry.

State-supported agriculture

Historically, Government has always instituted mechanisms for agriculture financing.

During the Agriculture Finance Corporation period, Government availed different tenures of agriculture financing as follows:

— Seasonal/short-term working capital financing (one-two years);

— Medium-term financing (three-five years); and

— Long-term financing (over five years).

Post-Independence, during the first two decades, agriculture financing was predominantly undertaken by banks and the AFC, mobilising financial resources from both the domestic economy and the donor community.

In addition, the Government through the PSIP programme also undertook major investments in agriculture infrastructure, including dam construction and irrigation development.

Since dollarisation, commercial bank funding of agriculture has been growing steadily every year, though this has remained inadequate in light of the huge funding requirements of agriculture, particularly also the dominance of short-term lending due to the short-term nature of deposits in Zimbabwe.

In light of the above, financing mechanisms that trigger an agriculture revolution should encompass:

1. Increased private sector involvement in the financing of agriculture given the current financial constraints faced by Government. Partnerships and financing arrangements between private sector investors, farmers, agro-producer companies and public institutions in agriculture should be expanded for purposes of primary production and value addition. This should also be extended to cover agriculture infrastructure, including irrigation development.

Notably, Government support schemes such as Command Agriculture, the Presidential Well-Wishers Agricultural Inputs Support Scheme and Arda/private sector initiatives have had a significantly positive impact on agriculture production and productivity.

In addition, arrangements in the form of joint ventures, Public Private Partnerships, BOOTs and BOTs also need to be expanded in support of agriculture.

2. Increased participation of capital markets and pension funds in providing medium to long-term funding to agriculture.
3. Re-capitalisation of institutions mandated with agriculture development using domestic financial resources to levels which enable these to attract foreign capital.
4. Capacitating these institutions to enter into partnership with both domestic and foreign partners for agriculture financing schemes such as lease finance and structured commodity finance in order to increase support to agriculture.

Lease finance arrangements would assist farmers and other players in agriculture to have access to equipment without significant capital outlay.

5. Re-establishment of an agriculture commodities exchange, the former Zimace, and introduction of a warehouse receipt system.
6. As the country enhances the investment environment and engages the international community, stakeholders, investors and development partners; the country needs to locate and project agriculture as one of the key sectors for investment.

Financing options

Agriculture financing in Zimbabwe in recent years has been dominated by banks as Government-funding receded over the years.

Funding has, however, been highly short-term and costly as banks are relying on short-term sources of funding.

The agriculture sector, just like all other sectors, is grossly underfunded given the liquidity challenges in the economy.

As mentioned before, agriculture requires patient capital, which is correctly priced. Absence of such capital in the domestic market creates need for attracting foreign capital to the sector. Zimbabwe does not have medium and long-term funding required in agriculture, and the available short-term funding is not adequate to meet the myriad financial requirements in the sector.

Over 80 percent of total deposits are demand deposits that are not available for longer-term lending.

International and regional lines of credit are limited and subject to a high risk premium, reflecting the perception of Zimbabwe as high risk due to the existing external debt payment arrears and debt overhang.

Compounding the challenge is the relatively high level of non-performing loans in agriculture as a proportion of total banking sector loans and advances.

Financing agriculture in Zimbabwe is currently constrained by a number of factors, including:

— Low capitalisation of agriculture financing institutions;

— Dependence on unsustainable funding sources;

— Limited Government support;

— High cost of funds;

— High non-performing loans;

— Lengthy litigation process when seeking default recourse;

— High risk emanating from the aspects of natural disasters, climatic change and uncertain polices on land ownership and lack of security; and

— High transaction costs during monitoring of projects.

Accordingly, banks have become more risk averse and have, therefore, reduced lending, in particular to farmers, but are increasing lending to corporate agriculture.

International facilities available for agriculture typically take the form of mechanisation equipment facilities such as the Brazil facility (US$98,6 million), designed to enhance smallholder agriculture productivity, hence output growth.

Resolving the problem of limited credit to the agricultural sector calls for concerted efforts by all stakeholders, including Government, the banking sector, farmers and non-banking financial institutions to chart a collective way forward to augment the flow of credit to agriculture.

Increasing production

The major risk in agriculture financing emanates from the aspects of natural disasters, climatic changes and uncertainty on security of tenure.

Risks have also emerged from the growing level of NPLs and high costs of funds.

The establishment of the Zimbabwe Asset Management Corporation by the Reserve Bank of Zimbabwe has contributed significantly to the reduction of NPLs.

In respect of climate change and natural disasters, we need to appreciate that Zimbabwe lies in a semi-arid region with limited and unreliable rainfall patterns and temperature variations.

Increasingly, Zimbabwe is characterised by shifting rainfall patterns, recurrently dominated by mid-season dry spells.

Where farmers were previously accustomed to continuous rainfall over at least six months from October to March of the following year, this has since changed dramatically, with output implications.

Rainfall exhibits considerable spatial and temporal variability characterised by shifts in the onset of rains, increases in the frequency and intensity of heavy rainfall events, increases in the proportion of low rainfall years, and increases in the frequency and intensity of mid-season dry-spells.

Agriculture production and productivity has been declining over the past few decades, reflecting both contextual internal developments and the impact of changing weather patterns.

Agriculture production in Zimbabwe is vulnerable to climatic and weather changes, in particular erratic rainfall patterns and spatially distributed rainfall, due to its heavy dependence on rain-fed agriculture and climate-sensitive resources.

Agriculture’s sensitivity to climate-induced water stress is likely to amplify and compound the current challenges of low production and low productivity.

To mitigate the risks of climatic changes, intensive development of irrigation facilities becomes apparent. Development of irrigation facilities ensures increased production as farmers are able to supplement the rainfall and would be capacitated to produce all-year round.

The currently unfavourable tenure and pricing of agriculture finance pose a risk, constraining capacity for growth and expansion of farming activities.

Also high costs of finance results in high costs of the final products, and this reduces competitiveness of agriculture output against imports and in export markets.

Resultantly, the sector recorded high levels of NPLs, which can diminish the appetite of financiers.

Agriculture risks being crowded out in the credit market by other sectors that have high affinity for short-term costly capital.

Availing long-term funding, capacitating Agribank and other institutions to be able to attract cheaper, long-term capital from international development institutions that are into agriculture development could assist in mitigating risk.

Low-hanging fruits

There are several sectors that could be regarded as low-hanging fruits for agriculture, which could generate quick returns and facilitate growth.

Horticulture is one sub-sector that is low-hanging as it can be done intensively on a small scale, with high rates of turnover and returns in a year.

There is significant demand for horticulture products both in the domestic and international markets. Besides, production of horticulture products could also be integrated into urban agriculture on a small but intensive scale, and these could be produced by a number of non-farm holders.

Cash crops such as soya, sugarcane and tobacco could actually anchor agriculture development as they have structured production and marketing systems that are already functional.

Expansion of farming activity around these crops, ensuring their marketing remains well-structured, is a ready opportunity.

In addition, there is also potential for increasing value addition processes for these crops across their value chains, which could enhance and increase demand.

Grain crops, particularly maize, are equally low-hanging products in that they are relatively easy to grow and can be produced by all levels of farmers, from large-scale to small-scale farmers, and in most parts of the country.

Output for grain crops could easily be enhanced through timely provision of adequate inputs to producers.

In addition, there is huge potential for value addition into such products as stock-feed and edible oils thus creating an available market and also potentially, exports.

Larger role

Agribank welcomes Government-initiated agriculture support programmes which have significantly enhanced productivity and increased the hectarage under grain crops.

A bumper agriculture season is now envisaged for the country.

Government programmes are critical in ensuring production through availability of inputs and creating market linkages for farmers.

Funding under the initiatives has given farmers the opportunity to increase productivity and farm output.

Event those with NPLs and could not access ordinary bank financing now had the opportunity to be financed through Government facilities, creating capacity to clear their debts, thereby becoming bankable again for coming seasons.

Such programmes and interventions by Government are ideally supposed to be temporary, with commercial bank financing assuming an increasingly larger role for financing agriculture, with appropriately structured financing packages at the right price and tenor. Government-support initiatives should be progressively confined to A1 and communal farmers for long-term sustainability.

Mr Sam Malaba is CEO of the Agricultural Development Bank of Zimbabwe. He wrote this article for The Sunday Mail.