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August 09, 2010

South African banks try new agricultural lending models

by Sure Kamhunga

Standard Chartered Bank is providing nearly R3bn to fund agricultural production in SA, using an innovative scheme that avoids the conventional approach of asking farmers to provide a physical asset as security.

Under the scheme, the bank has identified three major contractors, which in turn have subcontracted farmers to grow crops, fruit and breed cattle.

The bank does not lend directly to fund the farmer; instead, the contractor acts as the middleman between the bank and the farmers, and ensures funding is provided for the various stages of production - from land preparation to delivery of harvested crops, said Zhann Meyer, director for commodity traders and agriculture.

"We are taking the emotion out of farming and making it a proper business venture with very minimal, if any, risks to the farmer," Mr Meyer said.

Standard Chartered has become one of the few lenders to realise new methods are needed to make it easier and cheaper for farmers in Africa to access funding.

Not to be outdone, Absa is following Standard Chartered's funding approach. Its agribusiness unit has adopted what GM Ernst Janovsky describes as "value-chain financing", where crops become the main form of collateral.

In Standard Chartered's case, the scheme has been so successful that this season it has provided funding to about 700 crop, livestock and citrus commercial farmers in SA. Its officers had been inundated with calls from farmers wanting to be part of the scheme, Mr Meyer said.

"What we have essentially done is to remove the risk from the farmer and we carry the risk ourselves. We lease the land from the farmer and he is then contracted to us to grow crops according to our agreement and gets paid," he said.

"They do not even worry about prices because we never enter into a scheme without hedging the prices as we are not in the business of speculating on prices."

The bank is funding production on an area of up to 400 000ha, where crops such as white and yellow maize, barley, soyabean and sunflowers have been planted.

It has recently expanded into fruit farming and was expecting up to 12-million cartons of fruit to be produced this season.

The bank would expand the scheme to small- and medium-scale farmers. But because of the fragmented nature of these farmers' operations, it would prefer lending to a group in some form of co-operative scheme rather than dealing with individual farmers.

Mr Janovsky said Absa had also realised new funding methods were now required for farmers, particularly since the cost of a crop began outstripping a farmer's collateral asset value.

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