Turning Agribank into land bank perilous path

The Brett Chulu Column

CABINET this week approved the proposal to reconfigure Agribank (Pvt) Limited (Agribank) into a land bank to take up the functions of its immediate predecessor, the Agriculture Finance Corporation (AFC), namely to advance short-term, medium-term and long-term agricultural loans to farmers.

In that regard, cabinet set up a task team comprising the portfolio ministries of agriculture, finance, industry and commerce as well as the Reserve Bank of Zimbabwe and the Attorney-General’s Office to map out the framework and steps to rewire Agribank into a land bank.

The idea to remodel Agribank, as per the post-cabinet briefing, was driven by the realisation that although about 95% of current productive land and 90% of the national herd is in the hands of farmers in old resettlements, communal farmers, small-scale commercial farmers and A1 farmers, they find it very difficult to get agro-finance from commercial banks. Since Agribank is a commercial bank , the cabinet’s line of reasoning suggests Agribank is also struggling to adequately serve these segments.

We have come full circle; the government is reversing its decision on December 31, 1999, to fold the AFC to make way for Agribank which came into operation in 2000.

Since the government is turning back the clock, we need to understand the history of the AFC. The AFC was created by the colonial government. It came into being on April 1, 1971 through the enactment of the Agricultural Finance Act, following the amalgamation of the Land and Agriculture Bank and the Agricultural Assistance Board.

The AFC was created as a parastatal under the oversight of the agriculture ministry – the reserve bank had neither supervisory nor oversight role over the AFC.

The AFC received loans from the government at sub-commercial rates for on-lending to farmers at a rate set by government, not the reserve bank.

In essence, government subsidised the AFC in order for the AFC to on-lend at rates three percentage points below the commercial lending rates. From 1971 to 1979, the AFC served about 3 000 commercial white farmers who either held freehold or leasehold titles. In essence, the AFC was funded by the taxpayer.

At Independence, the soul of the AFC changed in order to extend loans to the tens of thousands black farmers, who had previously been systematically excluded from participating in the land bank. By 1986, the AFC was serving about 100 000 farmers, the majority being communal and resettled farmers.

The AFC, due to this rapid expansion faced a number of challenges. First, it found itself having to issue small loans to tens of thousands of clients. As a result, the loan processing and loan recovery costs were inordinately high this, against controlled margins imposed by government, the AFC’s major financier.

Second, due to the almost 33-fold increase in clientele, it placed pressure on the AFC’s internal information systems.

It compromised the AFC’s ability to process loans speedily as well as lessening the integrity of its data and information output. Third, the AFC was ranked lowly in terms of parastatals, resulting in relatively less attractive remuneration packages as compared to premium parastatals such as Air Zimbabwe and the private financial sector. As a result, the AFC struggled to attract and retain top talent. Fourth, over-reliance on government financing and capped margins put the AFC under pressure given the increase in administrative costs driven by its decentralisation project.

These were the major challenges that spurred the AFC’s senior executives from the onset of the 1990s to lobby government to privatise the AFC and establish a fully-fledged deposit-taking bank. The success of that lobbying led to the demise of the AFC on December 31, 1999. Government wants to resurrect the AFC.

There are key considerations government should carefully examine in its attempt to establish a land bank. It is critical that government studies the genesis of land banks and their evolution. The idea of a land bank was first mooted in the United States in 1916 as a political compromise driven by a looming national election. Farmers piled pressure on government to take up the role of extending loans to farmers who complained that existing commercial lending practices were unfavourable to farmers.

The political compromise was a creature named the Federal Land Bank that received its capital from government with the state giving implicit guarantees for loans issued to farmers. Government wanted the borrowers to be also owners of the land banks. This was achieved by farming groups immediately paying the bank 5% of the loan disbursement in exchange for an equity stake in the bank. The challenges surrounding the Federal Land Banks are documented.

The challenges are as follows: very weak and questionable capital structures, government interference in the appointment of key personnel in the banks, politicians influencing the appointment of cronies and acquaintances in various jobs in the land banks, regulatory bodies, interfering in operational decisions, lack of transparency in the financial affairs of land banks, hiding poor financial information, lax regulatory oversight, high loan defaults and government called to bail out land banks.

It is clear a land bank system controlled by government is likely to be fraught with political interference, birthing inefficiencies that the taxpayer is frequently called upon to bear. Zimbabwe’s proposed land bank, if controlled by government will in all likelihood reincarnate the problems experienced with the world’s seminal land banks. The problems may be amplified in an environment of endemic corruption and weak national institutions.

A serious issue facing the success of the land bank is the matter of property rights with respect to farming land. Let us consider the nuances. The pre-Independence AFC worked with farmers who had transferable or marketable land rights. The land bank worked with land as an asset with a market value. That land bank did not face a moral hazard poser where under-productive farmers kept getting financial assistance. The post-Independent AFC expanded to serve tens of thousands of farmers with no titled land- this limited loans to very small amounts based on agricultural output. In drought years, loan defaults spiked.

Frequent droughts that have become the norm will weaken the land bank’s balance sheet. Our circumstances have radically changed; the land bank will face a clientele that has no marketable/tradable land rights. The land bank will face what may be termed a subprime market. It will be a dangerous path to take were the land bank to extend medium and long-term loans based on the word of mouth of government (guarantees). The demise of the US’s Fannie Mae (Federal National Mortgage Association) is a lesson worth repeating here. The Fannie Mae idea was built on the same idea as the original Federal Land Banks. Fannie Mae, due to subprime mortgage lending collapsed and its contagion badly hit the US financial system.

As long as the issue of marketable land rights is not addressed the proposed land bank will reproduce the mistakes of Command Agriculture and other agricultural assistance schemes where political elites benefit and the taxpayer is left to pick the tab and, with no national productive gains realised. If the fundamental issues of market confidence, weak institutions, endemic corruption, poor sovereign debt management are not addressed, the problems with our current agricultural schemes will be simply transferred to the land bank and amplified.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.