Catch-22: Small Farmers vs Commercial Banks

Commercial banks play an important role in the growth of the agri-food sector, says well-known agricultural economist Hamlet Hlomendlini. While they should lend money responsibly, it is also essential that they are not seen to discriminate against small farmers.

South Africa is Africa’s largest food producer and one of the most competitive in the world. To date, the country has expanded its agricultural production beyond what local markets can consume, while increasing the value and volume of its commodity exports.

This makes South Africa an important and revered player in international trade and a major exporter of agricultural products.

Hamlet Hlomendlini is a leading agricultural economist, columnist and spokesperson on issues relating to the agricultural economy in South Africa. Photo: Supplied / Food for Mzansi

Furthermore, while primary agriculture’s contribution to GDP has declined over the years to less than 3%, it remains a key stimulus for growth in the rest of the economy through its backward and forward linkages. with other economic sectors.

And although the contribution to GDP can be considered low compared to primary production, when one considers the entire agribusiness value chain, the sector contributes more than 12% to the economy.

The sector is also responsible for around 9% of formal employment in South Africa along the value chain.

Essentially, South Africa is self-sufficient in the production and processing of all major agricultural products, and remains a net exporter of these as mentioned earlier.

In addition, from the perspective of primary production, the sector remains a pillar to support rural households thanks to its ability to create jobs for unskilled and semi-skilled labor.

While the sector and its related industries have faced several challenges in the past, including political uncertainty, prolonged periods of drought, restrictions related to Covid-19 and recent looting and disruption of logistics and chain supply, the value of agribusiness operations in South Africa continue to grow at an unprecedented rate.

Now, for an agro-industrial sector to be on par with South Africa’s, certain essential catalysts need to be in place. For example, many countries with which South Africa competes on the world stage, such as the United States, the European Union, China, India, Brazil and Australia, continue to benefit from government subsidies or soft loans, while South Africa reduced its support to agriculture during reforms. from the mid-1990s.

While the Department of Agriculture, Land Reform and Rural Development announced a number of interventions last year to help the sector during the Covid-19 pandemic, mainly targeting small agrifood farms in financial difficulty , the survival and growth of the commercial agrifood sector are supported. mainly by commercial banks through the granting of agricultural loans or financing.

Agricultural loans and other services provided by commercial banks to agro-industry are as important as other inputs used in agricultural production or other operations in agro-industry.

Often, the production inputs themselves or working capital used in other agro-industrial operations are acquired through agricultural loans from commercial banks. Therefore, by providing finance to the sector, commercial banks play an important role in promoting the growth of commercial agriculture.

That said, unfortunately, commercial banks are also notorious for being reluctant to lend to small agricultural businesses due to the risk associated with such transactions. This is true not only for small agricultural businesses, but also for other small businesses in other sectors. Funding will not be obtainable if repayment capacity cannot be determined and / or if security or collateral cannot be guaranteed.

Drive future growth

It should be mentioned that it is crucial that commercial banks lend responsibly and with great caution under the national credit law. It is therefore important to understand that commercial banks act as intermediaries responsible for channeling funds from those who wish to save to those who wish to borrow.

Essentially, this means that they take money from depositors and lend it to the market at a cost often referred to as interest. In addition, this means that commercial banks not only protect money from deposits, but also use it as a basis for loans and credits to those who need the funds for production purposes, and / or for them. investment needs used to finance the accumulation of assets.

Finally, while it is essential that commercial banks lend responsibly and prudently, it is also essential that they are not seen to discriminate against small businesses.

It may be in their interest to ensure that they also play a role in stimulating growth for potential small agribusiness enterprises.

A few years later, these small businesses could turn into large operations that the commercial banks themselves will compete for.

But, rest assured, the only bank that will bank this agribusiness in the future is the one that is currently willing to help it develop despite the perceived potential risk.

Finally, it should be noted that arguably the most important role of commercial banks in South Africa in this regard is to continue to play an active role in a number of initiatives currently underway in the agro-food sector. industry.

These initiatives include the development of sectoral master plans and the establishment of blended finance programs, all of which are primarily aimed at accelerating growth in the small-scale agriculture sector.

  • Hamlet Hlomendlini is an agricultural economist, columnist and prominent spokesperson on issues relating to the agricultural economy in South Africa.

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