Executive Summary
This research is focused on the Land and Agricultural Development Bank of South Africa (Land Bank). As a pivotal role player in the South African agricultural landscape, it is important for institutional investors, retail investors as well as the public to take note of this key institution, what their mandate is, the role they play and, most importantly, the significance of the recent developments that have raised concerns in the agricultural community pertaining to their status as a going concern.
This research starts by exploring the role of Development Finance institutions (DFI’s) in the economy and the critical role they play in Africa’s development.
Development finance plays a critical role in African markets and has disbursed around US$500 billion towards the African continent over the last decade. Some of the major international DFI’s invested in Africa include the World Bank, European Investment Bank, African Development Bank and The New Development Bank. The World Bank Group alone has invested approximately US$116 billion in Sub-Saharan Africa in an assortment of grants, credits, loans and guarantees between 2011 and 2019; whereas the African Development Bank Group mobilised around US$115 billion in 2019 alone for investment into Africa.
Next, we dig deep into the fundamentals of the Land Bank and explore areas of concerns and its possible impacts.
Non-favourable weather conditions experienced across South Africa over the past 5 years were accompanied by an increase in non-performing loans (NPL). Adverse weather conditions were not the sole contributing factor to the increased NPL but do seem to have played a considerable role. The knock-on effect of increased NPL’s were reduced operating profits for the bank which also led to a delay in further growth of the loan book. Late adoption of standardised risk assessment (Basel) principles meant that risk management within the bank was non-existent or very limited up until 2017 and the bank failed to attract low cost of capital because of their increased NPL’s and deteriorating liquidity metrics followed suite.
Lastly, this research piece proposes possible solutions to the Land Bank demise and investigates the roles of alternative funders and solutions for agri-focused businesses and stakeholders.
Several solutions have been pondered in agricultural circles including the raising of capital from foreign investors and making a buyout offer to the Land Bank. The next solution proposed is establishing a farmer-owned co-operative bank. This would typically be a partnership between foreign investors, local farmers, and agribusinesses such as co-operatives and international insurance or agricultural businesses. There is big interest in private equity markets for investing in the agricultural sector in South African and Africa in general, which should also be considered. A partial solution for exporters of Agri commodities might be in the form of hard currency foreign loans. Typically, these loans are in the form of trade finance facilities where a third party (like Africa Merchant Capital) can step-in and unlock working capital tied in invoices and debtors, a market which has substantially grown particularly in the SME space. Time is not in favour of farmers at this stage, and they frankly cannot afford to wait for a Land Bank restructuring.
The full research document can be downloaded here.