What are the biggest challenges for setting up finance systems in Africa?
To begin with, we don’t try to control finances or human resources in other African countries from our offices here in South Africa. Our approach is to appoint local people and empower and upskill them. These citizens understand the culture, government and specific agricultural environment of their country better than we could.
These individuals function autonomously. However, we use established financial systems and procedures, and the appointed people must follow due process. With this approach, our credit method stays the same, but the mandate is adapted to specific countries, and changes according to the level of skills available.
How important are client relationships?
In African countries to the north of us, the banking model between clients and financiers is relationship-based. We engage with our clients and get to understand not only their needs but their ability to be successful. This concept, incidentally, doesn’t mean I lend you R1 million just because I know you.
It means I give you the loan because you can use it responsibly and successfully. Relationships are based on values and principles. Integrity and honesty have the same weight in any country. If you have these values, you have a base from which to work, and can move forward.
How does ecosystem financing work?
Financing in South Africa is based mainly on tenure security: a farmer borrows a portion of the value of his farm, and because he has cash flow, he can repay the loan. The farm has a title deed that belongs to an individual. In other African countries, a farmer has a title deed for 50 to 99 years, and the land belongs to the state.
In a system like that, one has to look at the whole ecosystem of the farming business and cannot approach financing only from a tenure security point of view.
There is also a need to consider the difference between value chain finance, as in countries where there is tenure security and title deeds, and ecosystem financing, as found elsewhere in Africa, where land ownership cannot be the backbone of collateral. The value chain and its financing are fairly well understood everywhere on the continent.
In this case, a farmer takes his produce to a processor, where it is sold to a retailer. Normally, the retailer is dominant in the value chain.
But retailers have learnt that they cannot be as dominant as they once were, so they assist producers where needed.
Nonetheless, the producers become dependent on the retailer. In a value chain, the strongest role player usually controls the system; if the farmer is on his knees, the retailer will give him just enough to survive in order to keep the value chain in place. People get exploited in this system, especially in Africa.
If a new producer sells coffee beans to a retailer for, say, R20/ kg, and the retailer markets them for R200/kg, the retailer makes a profit of R180/kg. But this ends up eventually destroying the farmer’s business; this person cannot work sustainably for only R20/kg the future. This approach isn’t sustainable in Africa.
Ecosystem financing operates differently. If you look at ecosystems in nature, you are aware that if you remove water, the system dies. Likewise, if there is a frog in the system that might not seem important, you learn that the entire ecosystem suffers the moment you remove it. Moreover, there is no dominance in an ecosystem. Instead, there is interdependence or an understanding that every role player fulfils an important function in the system to the benefit of all.
At the bank, we see financing as an ecosystem activity. Our focus is not to control, but to know and understand how the whole system works.
Do you have a specific example of this agricultural interdependence in Africa?
Yes. I had a project in Africa where a cattle and grain farmer wanted to irrigate 10 000ha. In order to do this, he had to buy 30 000ha of fragmented land, with many smallholders farming in-between his farms. These smallholders also produced cattle and grain.
In South Africa, you can fence- off your property, but it doesn’t work like that in Africa. This producer faced a big challenge: he always found the smallholder farmers’ cattle grazing his grains. However, because he knew that engagement was needed in an ecosystem, he had to understand his neighbours’ difficulties.
When he saw an old woman walking by, he gave her a lift and listened to her needs. When he realised that she walked 6km to fetch water every day, he had boreholes drilled for the community. Then he learnt that the small-scale producers were paying too much for seed, and were therefore carrying it over from one season to the next, which meant that its resistance diminished. So he bought in bulk and sold it to them at prices that only bulk buyers could get.
Soon, his neighbours’ cattle no longer grazed his lands because the community had grasped the benefits of being part of this ecosystem. The community realised that it needed him, and ensured that the cattle no longer grazed his grains.
The producer then pledged offtake agreements for their grain at the same price he received from the traders. He also ploughed their lands at cost to ensure sustainable production, further supporting the ecosystem.
We need to adopt this mindset in South Africa, and we are heading in that direction. But mentally we’re not yet geared for it. The thinking in such a system is built on integrity, trust and relationships.
How do you provide financing in this kind of ecosystem set-up?
If a farmer who farms 2ha and only ever harvests 4t is suddenly given 60ha in a security financing system, he will get a loan for production of the whole land. This is because if he doesn’t deliver, the bank can sell his land and settle the outstanding production debt. In an ecosystem, one cannot do this. If I engage with the client and understand his needs as well as the ecosystem he operates in, I will know how to finance him sustainably.
That farmer may have to use 1t of his produce if there is drought – that’s understandable. In the ecosystem set-up, I’m aware that he has never ploughed 60ha and doesn’t have experience of the input costs, production time line, labour needs or offtake agreements that would be involved in farming 60ha.
I therefore cannot give him the full loan until he understands his new operation. In this system, there are ways around some of these problems; this has worked in countries such as Zambia.
If a farmer’s cash flow is supported by produce sold at a fair market-related price to a reputable offtaker, and by input suppliers who provide the right products and service at a reasonable price, I’ll consider financing him. The focus is on a sustainable cash flow supported by the interdependence of the farmer, offtaker, suppliers and financier, and not on dominance and land security.
With this type of financing, one can break poverty through the increase of agricultural production. This will also mean that no grants are given, but rather that employment opportunities are created to support a self-sustainable economic ecosystem, thus enabling people to be productive.
In an ecosystem, every role player – the farmer, community, suppliers, processors and offtakers, among others – determines whether I can finance and how the land will be used.
Phone Johann Kotzé on 087 730 6700 or 079 523 5767.
