DFIs and their Mandates:
Pitfalls, challenges and possible solutions-Land Bank
Perspective
Type Title
here Hadebe
Phakamani
Land Bank CEO
Growth in SADC and South Africa
• wcqc
Source: IMF Staff Estimates
Growth in World Population
• World ‘population peak’
expected in the next 4
decades;
World Population
10,000,000
9,000,000
Number (million)
8,000,000
– How will the 9bn people be
fed?
7,000,000
6,000,000
5,000,000
• But can the same be said
of ‘meat or protein’ peak?
4,000,000
3,000,000
2,000,000
1,000,000
1961
Source: FAO
1972
1983
1994
2005
2016
2027
2038
2049
• And what are the
implications for land, food
and feed requirements?
Similar Population growth pattern in SA
Arable Land under Pressure
The pressure of farm land
reflected on farm land
prices, which could not even
yield to recession
SA Land Price Index
Source: 250.0
FAO (HLEF-2050), 2009
Index (2000=100)
200.0
150.0
100.0
50.0
0.0
1994
1998
2002
2006
2010
Source: FAO and DAFF
Index
A possible repeat of 2007/08
Food Price Shock?
FAO Food Price Index
230
210
190
170
150
130
110
90
70
50
1990
2,500
1993
1996
1999
2002
2005
2008
•
High food prices reversing the gains
that have been made over the years
towards the achievement of MDGs,
•
Also constraining the humanitarian aid
in the Horn of Africa, currently gripped
by hunger and famine;
•
Could this be a an indication of
Malthusian crisis lacking in the shadow
or results of political developments in
the region?
•
Indeed Amartya Sen (Nobel Laureate)
is of the view that ‘famine does not
happen democracies’;
•
The tragedy is that small farmers are
missing out on the opportunity to
general windfall that can be used to
reduce gearing.
2011
SAFEX Maize Price Trend
Rand/ton
2,000
1,500
1,000
Yellow Maize
500
1-May-07
1-Jun-08
White Maize
3-Jul-09
4-Aug-10
5-Sep-11
Source: FAO and Grain SA
Cost of intermediate goods and services
Source: DAFF
Transport and logistics cost
• Fixed cost includes: depreciation, cost of capital, license, insurance and
wages.
• Running cost includes: fuel, oil, maintenance, tyres and incidental cost.
Cost-Price Squeeze
295
Index: 2000=100
245
195
145
95
45
2010
2009
2008
2007
2006
Price index: All farming requisites
2005
2004
2003
2002
2001
2000
1999
1998
1997
Source: DAFF and Statistic South Africa
1996
1995
1994
1993
1992
1991
1990
PPI
Net farm income and total farming debt
Source: DAFF
Within the above context, what is the role of a
DFI?
The Ideal World of Development Financing
• DFIs require patient capital that can be invested for long term and possibly at
concessionary rates;
• Post-crisis involves more State and more Market sourcing of investible funds.
– However, market sourcing removes the competitive advantage of a DFI as pricing
converges to that of normal commercial banks and thus impacting on development
funding
• High food inflation highlighting the importance of more and better jobs.
• DFIs that should be oriented for the long term and are essential vehicles for
development financing.
– Effectively, State outsourcers some of delivery priorities to DFIs
• To be effective, DFIs must have the necessary means: financing tools, stable and
sufficient resources; technical capabilities; close relationships with stakeholders.
DFI in Brazil
[The Brazilian Development Bank (BNDES)]
BNDES
Approvals and Disbursements
US$ billion
• A 100% State-owned
company under private
law established in
1952;
• Main provider of longterm financing in Brazil;
100
Source: BNDES
90
Approvals
85.2
Disbursements
88.2
80
66.3
70
60
50.6
68.8
71.1
50.5
50
40
34.1
30
20
10
22.3
13.1
10.9
33.1
23.5
19.3
12.9
13.6
0
2003
2004
2005
2006
2007
2008
2009 2010*
BNDES
Funding Composition
100%
10%
90%
7%
80%
8%
70%
8%
12%
9%
9%
16%
7%
6%
6%
16%
60%
50%
40%
67%
30%
66%
53%
20%
• Of significance is continued
capital allocation from
National Treasury, which
increased during the crisis
period;
• 40% of institutional funding is
from Worker Assistance Fund
(FAT)- the local equivalence of
UIF and is remunerated at long
term interest rate (TJLP);
10%
0%
2006
Intitutional
Source: BNDES
2007
National Treasury
Foreign
2008
Others
Equity
• Combination of National
Treasury grant funding
together with FAT funding
enables BNDES to offer
concessionary funding.
BNDES
Disbursements by Business Sector
100%
7%
90%
7%
80%
70%
12%
12%
14%
8%
6%
5%
39%
35%
40%
43%
46%
2007
2008
2009
33%
60%
40%
50%
40%
30%
53%
20%
10%
0%
2006
Industry
Source: BNDES
Infrastructure
Agriculture
Trade and Services
In line with the company’s
strategic objectives
Impact of BNDES on job creation
Formal Jobs Creation (Million)
45
40
35
Millions
30
26.2
27.2
28.7
29.5
31.4
33.2
35.2
37.6
39.1
Exponential growth in
job created through
BNDES funding
25
20
15
10
5
0
2000
Source: BNDES
2001
2002
2003
2004
2005
2006
2007
2008
Ag DFIs in China and India
National Bank of Agriculture and Agricultural Development Bank
Rural Development
of China
•
•
•
A 100% State-owned Bank
Mandates of facilitating credit flow for
promotion and development of
agriculture and integrated rural
development.
Multiple sources of funding:
–
–
–
–
Deposits;
Borrowing from Government of India;
Capital markets;
Co-operative fund funded by commercial
banks (i.e. NARBARD also act as an agency
for scheduled commercial banks that are
not achieving priority sector obligations).
•
•
•
A 100% State-owned Bank
Also a policy bank with mandates;
Multiple funding sources:
– Generally issues bond, considered as
safe as the Central Bank's bonds, since it
is fully banked by the People's Central
Bank of China (PBOC);
The bottom line is that borrowing from government and Central Banks allows these SOEs
to provide concessionary lending
Focus on SA’s DFI
DFIs in SA
• SA has both National and Provincial DFIs, each
with specific mandates
– National DFIs
• Land Bank
• IDC
• DBSA and others
Capital Markets the
primary source of
funding but has tax
concessions
– Provincial DFIs
•
•
•
•
Mega- Mpumalanga
Limdev- Limpopo
ECDC- Eastern Cape
Ithala- KNZ and others
Government the
primary source of
funding through
provincial treasury
departments
Government Priorities
•
•
•
•
•
Education
Fighting Crime
Health
Employment
Rural Development
Government’s Priorities
• The SA-SAM (Social Accounting Matrix)
quantify the circular flow of economic activity
through the system of National Accounts in a
matrix format
• SAM estimates that for each R1m the Bank
invests, 10.8 jobs are created compared to 5.7
jobs for mining
• The South African economy (2010) achieves
an average rate of 2.55 jobs per R1 million
Government’s Priorities
• Government willing to play a more visible
role/developmental state
• Government undertook DFI review
• Creation of the DFI Council to report to
Cabinet
• New growth path emphasizes the importance
of Rural Development Strategy
• Planning Minister’s Diagnostics highlight the
importance of Rural Development
Land Bank Funding Sources
• Unlike the provincial DFIs and BNDES we saw
earlier, Land Bank is expected to source funding
from the Capital Markets- the same pool used by
commercial banks
• The implication of the above is the convergence of
risk appetite with those of the commercial banks.
• This also means similar pricing structure to the
detriment of emerging farmers and development.
• Even if we want, obligations with capital markets
constrains the Land Bank’s ability to provide
concessionary and long tenor loans.
• Even made more difficult as Land Bank is not a
deposit taking institution.
• In the end, constraints LB’s ability to deliver on the
developmental state outcomes
Hence the birth of REM Segment (ring-fenced)
• Land Bank has launched the Retail Emerging Markets (REM)
for dedicated attention to emerging farmers;
• Working closely with government to ensure concessionary
loans to this target market;
• Some of the programs involving collaboration with
government:
– Value Chain Financing;
– Curatorship Model; and
– Collateral Guarantee Fund
Several initiatives to implement
• Implementation of the Cabinet approved Emerging Farmer
Support Facility;
• Disburse R1bn over next 2 years to emerging farmers via a
new business unit focussing on emerging farmers
• Targeting 30% of market share in the next 12-18 months
Funding Model
Government
funding
Land Bank
Retail Emerging
Markets
(REM)
BCB and
RCB
Land Bank
Insurance Company
(LBIC)
% profit for development
Multilateral
Funding
% profit for development
Lending Model
Retail Commercial Banking (RCB) – Previously
:Retail
Retail Emerging
Markets
to be funded by a
combination of
Government support
and Value Chain
Model
Business and Corporate and Banking (B&CB),
Previously : CFU
The combined NPL’s for RCB and
B&CB are 6.2%.
Land Bank
Retail Emerging Market
Loan book =R1.0 Bn
NPL =58 %
Retail Commercial
Banking
Loan book =2.8 RBn
NPL = 14%
Borrowing for the purpose of
funding commercial business
Business and Corporate
Banking
Loan book = R11.4 Bn
NPL = 5.8%
Sustainable business model: Developing Farmers
Support Facility
Collateral (50% - 90% of loan value)
Supplementary or
Collateral Guarantee
Fund
Credit
assesment
Land Bank
LB to negotiate
partnership
Additional support (Offtake agreement SCF, ARC,
NAMC, Univ, DAFF,
Insurance)
Lending through
LB branches,
municipalities &
Ext offices
LB to negotiate
partnership
Eligible Borrowers
(Farmers & agribusiness)
Agric cooperatives
(+intermediaries)
Technical Support
Sustainable business model: Wholesale Funding
Facility
CURRENT FUNDING MODEL
Estimated cost
to lend of 8%
Financial markets
Land Bank
Intermediaries
On-lend to
intermediaries at 8%+
Lending from FM
at 6%+
Pays approximately Prime +7%
Emerging Farmers
Cost of direct lending = 8% based on:
* Assesment,
*Operational cost,
* Disbursement admin,
* Provision of technical support
* Bad debt provision
* Own profit margin
2.75-3.75%
2.25%
2-3%
GOVERNMENT SUPPORT MODEL: WHOLESALE FUNDING FACILITY
Lending from FM
at 6%+
Financial markets
Farmers pays
Prime minus 5%
On-lend to
intermediaries at 0%
Land Bank
On-lend to farmers at a 4% cap
Intermediaries
Reimburse 4%
DAFF
Reimburse 4%
Emerging Farmers
Conclusion
• Agriculture entering what could be regarded as the
‘golden age’ of agriculture;
• Characterised by high agricultural commodity prices;
• The tragedy is that emerging farmers are once again
likely going to miss out on the opportunity to generate
windfalls;
• Having realised the important of concessionary and long
tenor loans, Land Bank working with government to
ensure effective delivery of development mandates as
contained in the Land Bank Act 2002.
THANK YOU