Collateral-free farming loans set the stage for significant growth in agricultural output
Agribank is not the first local financial institution to develop a collateral-free loan scheme but it is certainly the first to do so exclusively for part-time farmers.
In my view, the product is unique in the sense that it is tied to full-time employment.
Initiatives such as this are commendable. It is perhaps the only relatively safe in-between step for the bank to exercise its mandate, and to mitigate loan risks at the same time.
One of the agricultural bank’s main problems, is defaults. When the bank started its ambitious Affirmative Action loan scheme more than 15 years ago, it was punted as the final solution to all our land problems and disputes. The intention was that two back to back, four-year amortisation holidays would enable most farmers to get on their feet.
In the meantime reality has manifested itself in a myriad of Affirmative Action loans that went sour, to the point where the bank now leases back farms to its former white owners just so that the interest on the Agribank loans can be serviced. If it were not for this intervention, Affirmative Action would have bankrupted the bank.
The bank’s new collateral-free product may still turn out to be its saving grace. It rests on a very solid principle namely a steady income for the loan recipient decreases the risk of default. Technically speaking, the loan is not collateral-free since the condition of full-time employment, doubles as the deemed collateral.
It is also an encouraging sign that the bank’s new generation of loan schemes automatically include such standard features as life insurance on the life of the debtor. Although this is standard practice in conventional lending, I believe it is vital for this also to be part and parcel of agricultural lending.
The only feature I found lacking, is a type of insurance against unemployment. For instance, this could easily have been arranged with the Social Security Commission, where debtors for a small fee, can take out unemployment insurance, even if only for a limited period, to cover the Agribank loan when the debtor is either temporarily unemployed or between jobs.
Although the bank was not keen on making it explicit that full-time employment is a condition to get one of these loans, the fact that a salary deduction must be signed by the employer, implies that it is only for part-time farmers with full-time employment. However, I do not find this an impediment, instead it is one of the features that makes it a feasible scheme.
A long time ago, when there was much debate around the effectiveness of the Affirmative Action loan scheme, I was told by a then Agribank official that their most dependable clients are all people with full-time jobs. The definition of what exactly is a bona fide full-time farmers, was then also part of the often heated differences in opinion on who exactly qualified for an Agribank loan and who not.
I think we should not let traditional views block our progress on steady land reform, and on improving agricultural output in communal areas. If a man or women is a competent farmer, but the operation is too small to carry a conventional loan, let he or she take up a permanent job and only farm part-time, especially if some funding will help to bring that farm to higher production and output.
In a sense, a loan scheme for what bona fide farmers will derogatively call, “hobby farmers”, is essential to help them cross that bridge from small, informal farmer, to big commercial farmer. In the end it is about empowerment and agricultural output, not about personal labels.
A loan scheme for a part-time, small scale communal farmer, is also a form of creating a remittance channel where previously there was none. Communal farming communities typically have much surplus labour in the family and in the clan. It is therefore, in my mind, irrelevant who actually tends the cattle or the fields. As long as there is a breadwinner in the family who also has access to funding, it improves the prospects for the entire family, and by implication for whole villages.
Agribank’s no-collateral loan product is an ideal mechanism to channel capital to the communal farmers without exposing the bank to undue or unmanageable risks. And if such a small scale farmer proves him or herself capable of managing both the full-time job and the farming operation, then that person will be the ideal candidate to later qualify for a conventional farm loan, exit the communal area, and take up his or her rightful place in the commercial farming sector, without defaulting.
I hope the central government this time supports Agribank with capitalisation and liquidity. The collateral-free route, based on employment, is in my view the correct way to approach agricultural lending for individuals who do not have access to conventional funding channels.
In a roundabout way, it is the beginning of a systematic, practical approach to address many ancillary issues like food security, rural poverty, productivity and community development.