The Land and Agricultural Development Bank has joined a long list of State-Owned Entities that are on the verge of defaulting on its debt. File Picture Leon Lestrade/African News Agency(ANA)
The Land and Agricultural Development Bank has joined a long list of State-Owned Entities that are on the verge of defaulting on its debt. File Picture Leon Lestrade/African News Agency(ANA)

OPINION: How to save the Land Bank

By Dr Sifiso Ntombela and Andrew Makenete Time of article published May 11, 2020

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DURBAN - The Land and Agricultural Development Bank has joined a long list of State-Owned Entities that are on the verge of defaulting on its debt, should the government not open its fiscus to inject more capital oxygen.

The challenges facing the Bank can be attributed to a variety of strategic and operational deficiencies that have ultimately left the Bank with a very weak balance sheet, unbalanced loan book and junk investment status.

Currently, the Bank’s loan book is dominated by risky-short-term loans instead of long-term mortgage deals that are ideal for the sustainability.

The multitude of issues calls for a broader and critical strategic engagement on a repositioning of the Bank, than just pumping more money to it. Without a deep coherent thinking, the sustainability and relevance of the land Bank is at risk, implying that the agenda of agricultural reconstruction and development, first recognized in the 1995 White Paper on Agriculture, will be impossible to achieve, now and in the future.

Strategically, the first wave of regressive reforms, at least from an emerging farmer perspective, started in 1998 when the Strauss Commission recommended that the Agricultural Credit Board (ACB) which was supporting farmers rejected by commercial banks be closed and its mandate and its debt book be handed over to the Land Bank. The ACB was closed but its debt book was not transferred to the Land Bank. 

Two years later, the Bank’s manded was expanded to include development of emerging farmers, however, there was no designated funding for this new function. In a parallel process, the government was rolling out the land reform programme to redress land inequality and has since acquired 9 million hectares to date. 

Unfortunately, the value of acquired state land together with 16 million hectares in communal areas is not recognized on any government balance sheet today. We argue that government and Land Bank can use the vast amount of already paid state farmland as levers to strengthen the balance sheet of the Bank. This can be achieved by transferring state farmland into Land Bank’s assets book, which will improve capital adequacy and reducethe need of the Bank requesting for more state’s bailout in the  future.

Government, that is the Department of Agriculture, Land Reform and Rural Development (DALRRD), is not structured or equipped to dealing with both the administration and collection of funds from land reform beneficiaries but the Bank can be repositioned to perform these functions. 

Over and above, stretching the already constrained fiscus to bring life in the Land Bank, DALRRD can transfer the Agricultural Land Holding Account, which currently lies dormant in DALRRD, into the assets book of the Bank. This option is fully permitted in the Provision of Land and Assistance Act 126 of 1993. With this transition, the government will be able to grow the land holding portfolio of the Bank, thus allowing the Bank to diversity its income streams and also enhance its balance sheet to borrow from capital markets. 

This propose transition does not intend to exclude or understate the role o commercial banks and other financiers. Nevertheless, financing agricultural land and emerging farmers are not core function of commercial banks. The transfer of state acquired land into Land Bank’s assets books is essentially enabling land banking in the Land Bank.

By facilitating land banking, it would restore value of 9 million hectares purchased by government and unlock potential of emergingfarmers, thus accelerate the agricultural reconstruction and development. This is part of land administration systems that the Presidential Advisory Panel on Land Reform and Agriculture recommended to Cabinet in May 2019. 

By allowing the Land Bank the ability to do Land banking it will fill the gap that was never closed with the demise of the ACB, whose land banking functions included being the first port of call for those who want to farm. Land banking will create sufficiently resource muscle for the Land bank and it would render the need for government bailout redundant.

In term of operational improvement, the Bank needs to correct its loan book by increasing the share of long-term loans. It must also diversify its product offering to farmers such as providing life insurance to farmers with existing loans in the Bank. Agricultural value chains are evolving with more value generated at processing and export activities. 

The bank needs to attract these downstream value chain players – given their high cashflow strength, they will easily service their loans at the Bank.

Governance measures needs to strengthen to enhance farmers have confidence on the Bank operational systems. This could be achieved by appointing a board that is composed of experienced players in the field of banking, marketing, production and processing, policy and regulation as well as consumer protection issues. 

The retention of experienced staff in the bank will also bring operation efficiency in the Bank. 

BUSINESS REPORT ONLINE

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