With transformation and inclusive growth at the top of the National Development Plan and the latest Agriculture and Agroprocessing Master Plan, crowd-funding brings an opportunity for up-and-coming farmers to participate meaningfully in the value chain, argues Malapane Thamaga.
Smallholder farmers continue to rank access to finance at the top of the list of challenges in their farming endeavours. Unfortunately, formal financial institutions are finding it challenging to find smallholder farmers who tick all the right boxes necessary to qualify for different financial facilities, especially production loans.
This is unfortunately the case even for the state-owned development finance institutions. For instance, black farmers accounted for less than 8% of the Land Bank’s 2018/19 loan book, despite the bank’s mandate for development.
However, the Land Bank has shown an increase of about 30% lending to up-and-coming farmers between the 2017/18 and 2018/19 financial years.
The reluctance of formal financial institutions to finance new era farmers is mainly due to information asymmetry associated with this market segment. Information asymmetry is defined as the situation whereby two parties, e.g. the bank and the smallholder farmer, are not privileged to full information about each other, opening the possibility of decision-making without all the facts on the table.
The consequences of this include adverse selection (i.e. the possibility of considering high risk farmers for loans they cannot repay) and moral hazard (i.e. an incentive for the farmers to increase exposure to risk because they do not bear the full costs of that risk).
Subsequently, banks are likely to charge exorbitant interest rates or finance underserving farmers while passing over fairly deserving farmers purely because they don’t tick all the right boxes. This is especially true for farmers operating on traditional land or government-owned PLAS farms they lack collateral for.
There is, however, a rising emergence of collateral-free finance. This form of finance follows a crowd-funding approach whereby the intermediary entity (crowd-funder) links investors with farmers seeking production loans.
Crowd-funding is defined as the practice of funding a project or venture by raising small amounts of money from a large number of people (the crowd), typically via the Internet. Crowd-funding may follow different approaches, namely donation, reward, lending or equity:
- Donations are funds collected as gifts or contributions with no tangible return to the provider;
- Rewards or “perks” of different value are offered to supporters who “purchase”;
- Lending refers to a loan constructed from many small loan parts collected from the crowd. Most are interest bearing. It is also sometimes called crowd-lending, peer-to-peer lending or P2P; and lastly
- Equity refers to shares, or other types of financial instruments like bonds, which are sold in small parcels to a large group of investors.
Young entrepreneurs leading the way
Lending is mainly followed in the agricultural sector. Three good examples of crowd-funding platforms that follow the lending approach in the agricultural sector are AgriCool, Afrifarm Crowd and Livestock Wealth.
They are all owned by young, black entrepreneurs. This bodes well for transformation in the agricultural sector.
AgriCool was founded by the 29-year-old Zamokuhle Thwala and focuses mainly on supporting fresh produce farmers in KwaZulu-Natal. On the other hand, Afrifarm Crowd is owned by the author of Chicken Farming Master, Mothupi Author Kgopa.
It focuses on investment in chicken layers and operates mainly in Gauteng, Limpopo and North West. Lastly, Livestock Wealth is owned by Ntuthuko Shezi. It focuses on cattle and recently added macadamia production as well as vegetables to its product list.
These crowd-funding platforms are advantageous in that they go the extra mile and offer tailor-made, comprehensive support for farmers.
These three crowd-funding platforms are advantageous in that they go the extra mile and offer tailor-made, comprehensive support for farmers ranging from business plans, technical advice and market access. These services are offered once the farmer has qualified for funding.
Here’s the trick…
Returns on investments differ from one enterprise to another. Typically, at the end of the production cycle, the investor is paid the equivalent of his investment plus a portion of the profit, which is shared between the farmer, investor and crowd-funder.
The trick is that farmers must have been in operation for at least a year, show entrepreneurial qualities and be willing to insure their crops to be considered for funding. In the case of startups the crowd-funders can opt to manage the farm on behalf of the farm owner.
On the flipside, investors are offered an opportunity to become farmers without owning a farm. The investor puts their funds into supporting a vegetable farm in the case of AgriCool, buying a tree, pregnant cow or an ox in the case of Livestock Wealth, and chicken layers in the case of Afrifarm Crowd.
The assets are taken care of on their behalf and returns are paid post harvest, when weaners are sold or once the sales of eggs begin, in the case of macadamia trees, cattle and layers, respectively.
To this end, this form of financial support has worked for smallholder farmers with limited experience and networks in the agricultural sector. However, it remain to be seen if it can survive in the long term, especially given the costs associated with comprehensive support and monitoring to avoid side marketing, a serious moral hazard issue in the agricultural sector.
A renewed incentive to save and invest?
What is also fulfilling about the crowd-funding approach is that investors may visit the farms they have invested in to see their trees, cows and chickens from time to time. Farmers can also send regular pictures to investors.
Indirectly supporting this idea, Dan Ariely, the behaviorial economist and author of the bestselling book Dollars and Sense, makes a comparison between the prior money economy and the now digitised economy and concludes that, “when we saved in livestock, this was very good because we could see how much our neighbors were saving.
But as we invented money, and then digital money, it became harder and harder for us to understand what our neighbours are saving and therefore did away with competition on savings”.
Perhaps crowd-funding has a potential to encourage savings and even better, investment.
The best way to know if you are dealing with the right crowd-funder is through fellow farmers during monthly study group meetings or through engagements with farmer’s associations.
Different types of stokvels
Nevertheless, collateral free finance is not a new phenomenon in the agricultural sector as there are other methods similar to crowd-funding – such as the famous Bangladesh Grameen Bank – which specialises in group lending mainly for women and stokvels in the case of South Africa.
A stokvel is a financial arrangement amongst group members whereby members contribute small, equal amounts to a pool of funds every month from which a member is allocated cash in turns. Different types of stokvels exist, ranging from contribution stokvels and grocery stokvels, purchasing stokvels, investment stokvels to borrowing stokvels.
An advantage of stokvels is that members determine the periodical contribution. It also does away with the problem of moral hazard and adverse selection, given that members know one another and are able to self-select who can be part of the stokvel given their reputation. Thus, they take advantage of peer pressure collateral.
Up-and-coming farmers are also exploring this opportunity mainly to purchase livestock and implements. However, stokvels are yet to be practiced on a large scale due to geographic constraints and difficulty to manage big groups.
This is where crowd-funding comes in as it makes use of mainly the internet to bring parties with similar interests together irrespective of geography.
For a flexible and ground-breaking solution such as crowd-funding it is always a challenge to strike the balance between regulation to protect participants (investor and investee) from scams, etc. and creating unnecessary barriers that will hinder the very purpose of crowd-funding, the provision of alternative sources of finance.
To this day, South Africa is yet to have specific legislation to regulate crowd-funding. Instead, depending on the transaction in question, various pieces of already existing legislation apply. The best way to know if you are dealing with the right crowd-funder is through fellow farmers during monthly study group meetings or through engagements with farmer’s associations.
With transformation and inclusive growth at the top of the National Development Plan’s 2030 agenda and the latest Agriculture and Agroprocessing Master Plan, crowd-funding brings an opportunity for up-and-coming farmers to participate meaningfully in the value chain.