It is sunrise and a local farmer ungrudgingly wakes up early somewhere in a remote corner of this country; toils on a piece of arable land and realises that this is as much as his hoeing and traditional rain-fed agriculture has taken the farming business.
If he or she has to walk the extra mile, a small bag of government subsidised fertiliser will not match either; he needs a bank loan to mechanise his farm and increase productivity.
He now walks into the bank to queue for a loan, but that loan will never come and the dream of modernising his farm turns into a nightmare.
“There are many challenges facing the Malawian farmer in his effort to access loans,” says Napolean Dzombe, a Malawian farmer who has risen from a small-scale tobacco farmer to one of the biggest commercial farmers in Malawi and southern Africa.
“The biggest challenge is surety which most small farmers cannot afford. If you are just starting up, it is hard to get surety. The second problem is the high interest rates which make the bank loans to be prohibitive.
“Sometimes banks ask farmers to pay back loans during a period when farmers are yet to harvest and the farmer often has nothing to pay the bank,” he says.
Dzombe even laments that over the years, the situation has worsened instead of getting better.
“Back then during the one-party regime, we had farmers’ clubs where we could access various loans. Tama (Tobacco Association of Malawi) and Malawi Rural Finance Company were all providing loans, but today that is not the case. Only the tobacco buyers such as Limbe Leaf are providing loans, but these loans are only being given to farmers who are directly selling their tobacco to them,” explains Dzombe, who started out as a tobacco farmer producing 29 bales of tobacco in 1979 to an owner of one of the biggest rice milling companies in Sadc.
According to Dzombe, it also means other agriculture industries save for tobacco are hardly accessing any loans.
And Jacob Nyirongo, director of institutions and investment at Farmers Union of Malawi (FUM), a representative body of all farmers’ organisations in the country concurs, saying farmers feel let down by the financial sector.
“Most of the farmers’ land is not registered and have limited assets to use as collateral. We have had a few cases where some farmers came up together as cooperatives to access loans, but the amount of money accessed at group level is not sufficient to meet the needs of enterprise. So basically, the biggest challenge is risk management on part of the banks,” he said.
“On the hand, is the issue of interest rates. In Malawi interest rates are very high, around 45 percent and it makes the cost of borrowing very high and difficult to make a profit.”
This is hardly surprising, despite being the backbone of the country’s economy, Malawi’s agriculture sector is heavily lacking financial injection leading to stagnation and failure to modernise.
The problem is exacerbated by the absence of agriculture bank or development banks.
But what is stopping the financial sector to pump into the industry when it is able to support other investments? For Gideon Mwenifumbo, a business consultant, the problem is not unique to Malawi, but prevalent throughout the African continent.
He notes that there is an existing huge gap between financial institutions and the players in agriculture sector, in particular rural farmers which has become a barrier.
“Often agricultural producers in many Sadc countries, including Malawi are not informed about financial products and services. All financial institutions could, therefore, improve how they market and roll out their services, as well as improving how local, national and regional development financing schemes relate,” explains Mwenifumbo, who is business development manager at Tradeline Corporation.
Catherine Grant, head of economic diplomacy for Southern African Institute of International Affairs (SAIIA) agrees, saying the agriculture sector in the whole Sadc region was facing similar financing challenges.
“We are trying to see how to address these barriers so that we make a big push for inter-regional trade, but we are not seeing any results coming through because there are many challenges out there. We have been trying to identify those challenges and access to financing has been on top and we are piloting this in Malawi to address such challenges,” she said.
Grant said access to information remains a huge challenge in the region and while questions remain over security of loans granted to the sector, there is need for more to be done particularly by the financial sector.
But Misheck Esau, vice-president of the Bankers Association of Malawi (BAM) does not hide the anxiety banks have when dealing with the agriculture sector, but acknowledges there is need to hurry with a solution to the predicament.
“We do not ask for a lot; all we ask is for the farmers to get organised. We can’t just give out loans without the farmers showing us a business plan,” said Esau.
“We need to be satisfied that the farmer has a market for his or her produce for example, and not just producing for the sake of producing; we have to stick to set best standards.”
He further acknowledges that the banking and the agriculture sector have fractured communication lines which must now improve for mutual benefit.
“It’s an important discussion and going forward, we really need to make sure the products we (banks) design reach the farmers. But farmers have to address fears of the banks too.”
Esau suggests that most farmers would remove some of the bottlenecks blocking access to loans if they teamed up in groups and apply for loans as cooperatives other than individuals.
But Farmers Forum for Trade and Social Justice, an NGO working in the agriculture sector, disputes fears that the farmers are not organised, citing many existing cooperatives and farmer groups the NGO works with.
“We focus on market development and we come with several challenges. We hear that farmers are not organised, but that’s contrary to what is on the ground. We wait to see how and when the banking sector will fulfil its pledges to support farmers because the farmers are ready,” says Mercy Nkhupera, the organisation’s monitoring and evaluation officer.
Efrem Chilima, an economist with World Bank country office in Lilongwe, says somehow the banks have failed the farmers. He says there is demand for banking services by farmers and yet the banks are overly concerned with risk of supporting the unpredictable agriculture sector.
“There is clear lack of understanding at client needs. A few banks have come to understand the needs of their clients in the agriculture sector. This is one area the World Bank is working on. We want to help commercial banks reach out to the farmers and we are also working with the authorities to remove some archaic legal framework which is hindering the process,” says Chilima.
Supported by a loan from the African Development Bank (AfDB), Dwangwa Farmers Trust is an example of a sugar cooperative that has thrived by selling its produce to Illovo Sugar (Malawi) Limited.
“It is a model that is working well,” remarks Vinda Kisyombo, a senior manager at AfDB office in Lilongwe.
“The trust has grown steadily over the years. If a lot of emphasis was put on banks supporting cooperatives, there is huge potential for the agriculture sector and banking sector working together. Loan restructuring is also very important to suit the needs of the agriculture sector which are different to other investors.
“We [AfDB] for example, even provided recently loans to fishermen who are high risk area because they are always mobile and fishing is unpredictable; so commercial banks too must restructure their loans to suit agriculture sector,” he adds.
All is not lost and a glimmer of hope now appears on the horizon with the banking sector opening up more.
This month, a $200 million trade finance agreement has been signed with Ecobank to finance rural African entrepreneurs. Among those industries to benefit from the deal are agriculture-related, including fertiliser importation, coffee, tobacco, pigeon peas and cotton.
“We are happy, Malawi has reacted quickly. We are moving very fast and Malawi was among the first countries to submit applications and Ecobank Malawi chief executive officer called us to recommend us,” said Ecobank Malawi managing director Charles Asiedu.
And Dzombe recently obtained a loan from Malawi Savings Bank (MSB) for his milling company too.
“Generally, I am now past the days where I could struggle to access bank loans because I now have some assets which the banks recognise as collateral in accessing assets. However, the challenge remains that the scope of the loans are limited; hence, I have been obtaining loans from several banks to meet the budgeted figures. The project on the rice milling company, for example, is not complete, in total I envisaged that it will cost $6 million,” said Dzombe.
Dzombe’s vision is also to empower fellow farmers whom he says would form rice farming cooperatives that would be selling rice to the company at government-set prices and the company would add value and export the rice.
Other farmers, FUM says, do not want to be left behind; hence, FUM with partner organisations is working on maximising the new opportunities to address concerns particularly on lack of organisation and financial illiteracy by farmers seeking loans.
“We are aggregating them into farmers cooperatives and we are also ensuring they have good governance structures,” adds Nyirongo.