The Banking Council therefore makes the following submission to the Portfolio Committee having drawn on information from some of its members that are involved in the agricultural sector.

The presentation has five parts to it, which are:

1. The contribution of banks to agricultural development
2. The activities of banks in agricultural development
3. The relationship with the Department of Agriculture
4. The future involvement of banks
5. Other comments banks are bring to the attention of the portfolio committee

1. The contribution of banks to agricultural development

The involvement of banks in agricultural development is demand driven and no specific budget is allocated.

In figures produced by the National Department of Agriculture on total farming debt since June 1995 the amount exceeds R402.3 billion. About 33% of this amount would have been sourced from the Land Bank and the erstwhile Agricultural Credit Boards. The remainder of 67% of the funding would have been drawn from commercial banks, cooperatives and private investment. Between June 1995 and June 2002 the average indebtedness to banks was 36% with the percentage of debt to the banks increasing from 33% in 1995 to 42% of total farm debts in 2002. In 2002 the total farm debt was R28 billion. The figures of the National Department of Agriculture are not specified as indebtedness for agricultural production. It could include indebtedness for the acquisition of land, equipment, production costs, distribution costs and processing costs.

A similar difficulty will pertain to any data that could be obtained from the banks and their exposure in this sector. The total exposure of the commercial banks in the agricultural sector as at December 2002 was close to R11 billion for that year. The banks will currently have difficulty giving a breakdown by race of their exposure in the agricultural sector.

It will be useful for the Portfolio Committee to be reminded of the Comprehensive Africa Agriculture Development Programme (CAADP) prepared by the Food and Agriculture Organisation for the NEPAD discussions. This report indicates that between 2002 and 2015 an estimated annual investment of US $17 billion will be required for agriculture to set Africa on a path to reduce its dependence on imported food and contribute to its own food security. It is of note that the investment in agriculture in South Africa in 2002 was about US$3.5 billion, which is about 20% of the investment required annually in agriculture for the entire continent. The CAADP report states that an estimated US$251 billion of investment will need to be made in agriculture in Africa until the year 2015. Much of this investment is expected to be made through bankable projects. It is in this context that the banking infrastructure in South Africa could play a significant role.

2. Activities of banks in agricultural development

The Banks have been engaged in a wide range of activities in support of agricultural development. Some of these activities recorded below as examples include:

1. Farmer support and development

• Sponsorship of the Co-operative Development Initiative, which is co-ordinated by the Agribusiness Chamber. Partnerships such as with the New Farmers Development Corporation and Equity Africa, which provide venture capital to new businesses. New Farmers has been in operation since March 1995. It is a private equity/venture capital investor and catalyst in agribusiness with an empowerment and transformation focus. The several of the major banks are shareholders in New Farmers.
• Involvement in agricultural development support programmes of organised agriculture, e.g. Grain SA's Foundation for Farmer Development.
• Participation in government's share equity schemes e.g. Bokosini Farms (Machadodorp) under Sizanani Trust; The British American Tobacco small maize farmer scheme in Eastern Cape and the Taurus/PREBAC emerging farmer scheme; Loutow in Vredendal, Anytime Investments in Paarl and Mdluli Trust in Mpumalanga
• One bank has established a Black Business Incubator Fund - for equity participation or a combination of debt and equity - focus is on small and medium business. Initial investment in this fund is R250 million with R25 million allocated for the pilot phase. Agribusinesses will not be excluded from this fund.
• Some banks are making available simple computerised budgeting systems to the farmers at minimal costs. Cash flow programmes are also made available on line through the Internet.
• Relations have been developed with Africare South Africa, the institution involved in credit guarantees for those people who would otherwise not access loans from financial institutions due to lack of collateral.
• In the case of some banks Black commercial farmers are being integrated into all areas of the banks operation, namely pre-plant crop finance, short and long term credit in the grain and livestock sub sectors. In a bid to build capacity and improve on skills, study groups are being organised and held in various areas. These are organised jointly with input suppliers, insurers, cooperatives and development agents from non-governmental organisations and academic institutions.
• One bank is establishing a mechanism in which emerging or commercial farmers with little or no farming and farm management experience will be assessed and integrated into its main client base in terms of savings mobilisation and access to various financial products. This is being initiated through GrainSA' Foundation for Farmer Development (FFD).

1. Land Reform

• Working Relationships have been formed with Khula Enterprises regarding the use of the Land Reform Empowerment Facility

1. Training

• Training grants to emerging farmers and or to farm workers intended to cover as many provinces as possible subject to the availability of funds.

1. Publications

• Support for publications like the quarterly AgriReview, which is available at no cost to the farmers. This provides valuable information on farming. All the farmers have to do is to subscribe.
• Contribution to a series of educational articles on banking and related issues published in NuFarmer and Entrepreneur - with Banks using their intellectual capital and also paying for the column space.

1. Sponsorships

• Sponsorship of a Farmer of the Year Competition to encourage commercial farming and best practice.
• Sponsorship of the National Department of Agriculture Female Farmer of the Year Competition to encourage the involvement of women in agriculture.
• Several of the banks have Foundations, which are also supporting agricultural and social development. One of the Foundations has for the period 1^st July 2000 to 30^th June 2003 made grants amounting to R27.8 million to non-governmental organisations and academic institutions for various social activities such as community care, education, public policy, arts and culture, health, environmental issues, skills development, etc. of which R4.8 million has been towards skills development. Requests for funding are received and considered throughout the year; applicants are encouraged to submit proposals.

1. Relationship with the Department of Agriculture

The Banking Council has and continues to enjoy a positive relationship with the National Department of Agriculture. The banks have given inputs and comments on various agricultural legislation and policies. The banks participate in Working Committees that deal with agricultural finance and related issues. Currently the Banking Council is participating in several technical task teams that are considering the role of the financial sector in the transformation of agriculture. The financial sector will also be having an ongoing engagement with the Department of Agriculture in advancing aspects of the BEE Financial Sector Charter.

The larger member banks of the Banking Council are participating in the technical task teams that have been established by the Department of Agriculture. In addition member banks are also engaged with Provincial Departments of Agriculture. For example, there is a commitment from the Department of Agriculture in Gauteng to provide extension services to bank funded projects in the province. Meetings are planned in June for discussions with the Departments of Agriculture in Limpopo the Free State Provinces to consider possible relationships.

Still under discussion with the Department of Land Affairs is the agency agreement on accessing LRAD funds.

The Banking Council's relationship with the Department of Agriculture is cordial and is increasingly becoming interactive through joint meetings. It is anticipated that this will continue to grow for the good of agricultural development especially as ways are sought to improve access to finance in the farming sector.

The Banking Council appreciates and acknowledges the challenging and significant role that the Department of Agriculture has to play for agricultural development and transformation at both the national and provincial levels of government.

2. The future involvement of banks

Banks are investigating the possibilities of partnerships with other interested parties, which can add value and assist in risk mitigation. Banks will also consider the mobilisation of donor funds that can be channelled into agricultural development. The most significant work being done within the banks is around the BEE Financial Sector Charter. This document is in the process of being finalised as a draft for discussion with government. One of the areas of special attention will be agricultural development. At this point it will be inappropriate to discuss the details of this Charter.

3. Other comments

The banks have also considered the request made by the Portfolio Committee for any other comments that maybe of help to the legislators as they consider development in agriculture. Below are a collection of views, challenges and lessons from banks that are being brought before the Portfolio Committee:

1. The Land Bank Act

The banks have had differences over certain provisions of the Land Bank Act, which invade the security held by banks as the Act gives an undue preference to the Land Bank. The playing field is thus an uneven one and banks are at times reticent to lend in this market where the Land Bank is involved.

The Land Bank is persistent in its preferent attitude in that it is approaching the High Court to sanction its dominance and to override genuine security of the commercial banks as in the case of the Land Bank v/s Charl Jacob Venter, The Standard Bank of South Africa and three other respondents. This legal action by the Land Bank in securing its preference confirms the worst concerns of the commercial banks about the vulnerability of the security that they hold. Ongoing discussions on amendments to various clauses in the Act have been suspended pending the outcome of a satisfactory resolution in regard to litigation initiated by the Land Bank. We believe that this matter will require legislative intervention in making amendments to the Land Bank Act that will allow the commercial banks to be role players in agricultural lending rather than forcing them out of lending for agricultural development.

2. Farmer Support and Development

1. Progress in the developing agriculture market segment is slow due to the involvement of many role players. To finance a project requires input from various role players, for example, the Bank, the Department of Land Affairs, consultants, etc. This is because most of the developing farmers do not only need finance, but also a range of other support services (technical, marketing, financial management, etc).
2. Financial literacy and numeracy poses a communication problem between the Bank and prospective borrowers.
3. Advisory and technical support services are some of the necessary ingredients of financing developing farmers. This advice should cover financial aspects, available assistance programmes, and technical and marketing aspects. Advisory and technical support services are some of the necessary ingredients of financing developing farmers. This advice should cover financial aspects, available assistance programmes, and technical and marketing aspects.
4. A public-private partnership approach is necessary for the success of developing farmers. This is because developing farmer's need more than finance in order to succeed.
5. The importance of a management team, particularly in group projects cannot be overemphasised.
6. Mentoring is essential at the early stages of the transfer of ownership (at least 2 years).
7. Post transfer support (working capital, training in hard and soft skills, mentorships)

3. Equity, Financing and Guarantees

1. The major challenge of financing developing farmers is own contribution (equity) and lack of "conventional" security/collateral. This can be addressed to some extent by utilising grants and guarantees. However, the available guarantees and grants cater for "small" projects or large group projects as a result of their "outreach" focus.
2. Where equity-share schemes are involved, the motives of both participants should be noble. Partnerships, which are initiated because the current owner of the farm is experiencing financial stress do not work.
3. There are unscrupulous players, some acting as consultants, who exploit the ignorance or lack of knowledge of some aspirant farmers in order to access grants or cheaper funding. These players should be identified and isolated.
4. Transaction costs are high - small amounts/low volumes.
5. Although a high number of loan applications are received, the "hit rate" (successful applications) is low - It varies from province to province, e.g. about 4% in Limpopo and 25% in the Western Cape.
6. Market values of properties is an issue that needs to be addressed in the context of collateral and appreciating value for the farmer.

4. Markets

1. Off-take agreements (markets) are necessary to ensure that projects have secure markets.

5. Monitoring

1. Monitoring and progress reports are important for the success of projects. It is also important to ensure that the funds are used in accordance with the agreed business plans.
2. Development projects should form part of the key performance areas of bank's staff.
3. Verification of business plans

6. LRAD

1. LRAD has become a numbers game. There are needs e.g. an equity fund to supplement LRAD and the issue of reducing numbers to ensure sustainability and viability
2. Availability of LRAD grants is becoming a concern on project that could work

7. The Role of Government

1. Strengthen the present agricultural insurance services provided by the private sector. We hope this will be highlighted and shown in the forthcoming agricultural insurance bill.
2. Initiate and develop guarantee schemes specifically designed to meet agricultural needs of the emerging and black commercial farmer.
3. Find ways in which to securitise communal land rights.
4. Strengthen the co-operative movement in terms of membership, training and management. There is need to emphasis training and management so as to protect the local communities and have efficient supervision measures in place.
5. Government should consider obtaining certification to potential markets (countries) for exporters of agricultural products especially if we are to achieve transformation. At present this cost is borne by the exporters.
6. The Department of Trade and Industry should be positioned in such a manner that it can respond to the need for tariff changes faster and efficiently.
7. The National Department of Agriculture needs to position itself to serve as agriculture's voice to government and the public in general. For example, when National Treasury and Reserve Bank officials were quoted in the press stating that the Rand was not too strong and was not hurting exports. The Department of Agriculture should have come up with what was happening on the ground in terms of commodity prices and input costs.

The Banking Council is committed to playing its part in the transformation of agribusiness in South Africa and would like to be party to the implementation of the Strategic Plan for South African Agriculture. In order to compete in the agricultural development market in a way that will create shareholder value in the medium to long-term, the banks are amending their strategies to finance and support transformation of agriculture. The banks are committed to increasing the number and quality of developing agriculture clients who have commercial farming as their main objective.