Why banks shun financing agriculture

Why do local banks tend to sideline small holder farmers despite Malawi being an agro-based economy? What should be done to attract financial institutions to provide agriculture credit?

These are some questions that baffle many commentators and economic analysts in the country.

In Malawi, agriculture contributes 36 percent to the total gross domestic product (GDP) and about 90 percent of foreign exchange. According to the 2010/11 Integrated Household Survey (IHS), 85 out of every 100 Malawians are active in agriculture with 93 percent of them in rural areas and 38 percent in urban areas.

Through a presentation at the 2015 Economics Association of Malawi (Ecama) Annual Lake Conference held at Sunbird Nkopola Lodge’s Lakeshore International Conference Centre under the theme Agricultural Transformation and Value Chain Development For Sustainable Economic Growth, Bankers Association of Malawi (BAM) president Misheck Esau gave some insights on why banks seem to tread carefully in agriculture.

In his presentation titled Transforming Agricultural Financing in Malawi, Esau mentioned unfavourable policy and legal framework as some factors that discourage financial institutions from supporting agriculture.

Essentially, Esau, who is chief executive officer of CDH Investment Bank, said the agriculture sector would be more attractive if government involved the private sector and removed policies that crowd out the business community.

He said: “For example, issues such as some of the subsidies, export bans and price fixation are discouraging. There is [also] need to provide more incentives to large producers who mobilise small out-growers, especially for value addition.”

Besides, Esau also highlighted the need to review banking regulations

to stimulate supply of agriculture financing.

From his presentation, the problem of low financing in agriculture is not peculiar to Malawi going by insights from Shane Moldenhaur of CreditInfo, a credit management and credit risk management solutions provider.

Said Moldenhaur: “One of the biggest things holding back agriculture in many developing countries is access to finance… They [smallholder farmers] are completely out of the financial grid. They are unbanked.”

Esau also quoted Franscois Visagie of Barclays/Absa who said about financing agriculture in Africa: “The biggest thing we can do as local banks or international banks is to help provide training for subsistence farmers. If you can upskill these people, Africa will be the food basket of the

world.”

What is the situation in Malawi and what is the way forward?

In a nutshell, Esau contends the picture painted by Visagie is equally true about Malawi.

To lure financial institutions, he said, there is need for Malawi’s agriculture to produce the right quantities at the right cost for the export market.

He said: “It is the right production cost that makes our exports competitive even in time of commodity shocks. Remember: We [banks] also have to deal with the high cost of finance.”

Malawi’s lending rates hover above 40 percent per annum against the Reserve Bank of Malawi (RBM) policy rate of 27 percent.

Further, Esau mentioned poor access to markets as another hindrance to financing agriculture. In this regard, he said innovations such as commodities exchanges were the way to go to attract agriculture financing.

He said: “Market based pricing systems for agriculture commodities with no price controls should be put in place.”

In an apparent bid to protect smallholder farmers from exploitation by agro-dealers in the liberalised produce market, Ministry of Agriculture, Irrigation and Water Development fixes farm-gate or minimum prices at which farmers can sell their commodities.

Esau added that the fact that most land in rural areas is customary with no title deeds makes it difficult for agriculture finance to thrive as there is no collateral.

Historically, government has been the major financier of agriculture in rural areas where it was based on farmers’ clubs and fully integrated into farm extension services. Prior to the dawn of multiparty democracy in 1993, loan recoveries from the organised farmers groups stood at 90 percent due to the political climate then.

Currently, government runs a Farmer Input Subsidy Programme (Fisp) which is a politically-influenced initiative where “vulnerable” beneficiaries redeem inputs such as fertiliser at less than half the market price of around K18 000 ($30.66). n