Commercial banks play a significant role in enabling growth in the agribusiness sector, argues well-known agricultural economist Hamlet Hlomendlini. Although they must lend money responsibly, it is also critical that they not be perceived as discriminating against small-scale farmers.
South Africa is Africa’s largest producer of food 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 boosting the value and volume of its commodity exports.
This makes South Africa an important and revered role player in international trade and a significant exporter of agricultural products.
In addition, while the contribution of primary agriculture to the GDP has shrunk over the years to less than 3%, it remains a key stimulant for growth in the rest of the economy through its forward and backward linkages with other economic sectors.
And while the GDP contribution may be seen as small in respect to primary production, when considering the whole agribusiness value chain, the sector contributes over 12% to the economy.
The sector is also responsible for approximately 9% of formal employment in South Africa across the value chain.
Essentially, South Africa is self-sufficient in the production and processing of all major agricultural products, and it remains a net exporter thereof as previously mentioned.
Furthermore, from a primary production standpoint, the sector remains a mainstay for sustaining rural households through its ability to create employment for unskilled and semi-skilled labour.
Remarkable growth despite setbacks
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While the sector and its related industries have faced several challenges in the past, including policy uncertainty, extended periods of drought, Covid-19-related restrictions, and the recent looting and disruptions in the logistics and supply chain, the value of agri-food operations in South Africa continues to grow at an unprecedented rate.
Now for any agribusiness sector to be at the level of South Africa’s, some critical enablers need to be in place. For example, many countries with which South Africa competes in the global arena, like the US, European Union, China, India, Brazil and Australia, continue to enjoy government subsidies or subsided loans, whereas South Africa reduced its support to agriculture during the reforms of the mid-1990s.
While the department of agriculture, land reform and rural development announced a number of interventions last year to assist the sector during the Covid-19 pandemic, mainly targeting financially distressed small-scale agribusiness operations, the survival and growth of the commercial agribusiness sector is supported primarily by commercial banks through the provision of agri-loans or finance.
The agri-loans and other services provided by commercial banks to agribusiness are as important as the other inputs being used in agricultural production or other operations in agribusiness.
Often, production inputs themselves or working capital used in other agribusiness operations are acquired through commercial banks’ agri-loans. Therefore, by providing finance to the sector, commercial banks play an important role in fostering commercial agricultural growth.
That said, commercial banks are unfortunately also known to be hesitant to lend to small-scale agricultural enterprises due to the risk associated with such operations. This is true not only for small-scale agriculture enterprises though, but also for other small enterprises in other industries. Finance will be impossible to get if repayment ability cannot be determined and/or security or collateral cannot be guaranteed.
Stimulating future growth
Worth mentioning is that it is crucial that commercial banks lend responsibly and with great caution under the ambits of the National Credit Act. It is therefore important to understand that commercial banks serve as intermediaries responsible for channelling funds from those wishing to save to those wishing to borrow.
Essentially, this means they take depositors’ money and lend it to the market at a cost often referred to as interest. Furthermore, this means that commercial banks do not only protect the deposit money but also put it to work, using it as the basis for loans and credit to those who need the funds for production purposes, and/or for investment needs used to fund the accumulation of assets.
Finally, although it is critical for commercial banks to lend responsibly and prudently, it is also critical that they not be perceived as discriminating against small-scale enterprises.
It may be in their best interests to ensure that they also play a part in fostering growth for potential small-scale agribusiness enterprises.
A few years down the line, those small enterprises may become large operations which the very commercial banks will be fighting over to bank.
But, rest assured, the only bank that will bank that agribusiness in the future is the one that is currently willing to help it grow despite the perceived potential risk.
As a last note, it is worth emphasising that arguably the most important role for South Africa’s commercial banks in this respect is to continue to be active players in a number of initiatives that are currently being driven in the agribusiness sector.
Among these initiatives is the development of sector master plans and creation of blended finance schemes, all of which are aimed primarily at accelerating growth in the small-scale agriculture sector.
- Hamlet Hlomendlini is an agricultural economist, columnist and prominent voice on matters relating to the agricultural economy in South Africa.
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