BERTUS VAN HEERDEN & DEON SCHEEPERS: How the Land Bank can reinvent itself

Has the Land Bank finally turned a corner? Its financial statements received a good audit and it has resumed lending. The Land Bank’s operations are important for South Africa’s food security and it plays a pivotal role in agricultural development.

Though progress has been recorded, the bank is far from a complete turnaround; it is still under financial strain and will have to craft a different approach to avoid a repeat of past troubles.

The Land Bank has a niche market and is able to provide long-term finance while enjoying a measure of regulatory relaxation and protection. It has some competition from commercial banks in wholesale finance, but virtually none in long-term loans (up to 25 years) for buying farmland.

Niche banks focus on a particular part of the market. The Land Bank’s operations, marketing and product mix cater to the long-term finance of small and medium-sized farming operations.

An international perspective on agricultural banks is that they are established to help agricultural development, with loans for longer periods than those of commercial banks. They typically charge farmers less interest than commercial banks, which is the development impetus.

From the 1980s to the early 2000s the typical Land Bank rate was prime minus 200 basis points; recent inquiries indicate prime plus 200bp. This will make the Land Bank uncompetitive in long-range finance and displace the developmental role embedded in the finance of farmland, attracting only bad apples.

The market position of the Land Bank can create high levels of specialisation, with core competences where general skills are less in demand. A core competence equates to a competence that sets a company or bank apart from its competitors, and which they will find difficult to acquire.

To accommodate its core function of long-term finance, the bank’s strategy, structure, tactical planning and action plans should be to the point and simple. The field of finance is simple, bar long-term finance that introduces a time factor where the probability of adverse market conditions increases the risk profile. This is mainly due to future uncertainty and pairing long-term paper with finance tranches. It is, however, possible to mitigate the time-factor risk.

A further characteristic of this banking is low-volume, high-value transactions that reduce cost on the back of low-level legacy systems that could more easily incorporate new technology, for example single view ability of a customer.

The core competence should centre on providing long-term finance with a low service delivery cost and a short turnaround time. The basic credit evaluation criteria and philosophy will be repayment ability based on the agricultural value of a farm. It will require a combination of centralised and decentralised valuation and simulation models, with an element of local knowledge and intervention. It is essential that the bank understands its playing field (narrow focus) and rightsizes the balance sheet before any recapitalisation.

With this approach, the bank should be positioned to issue Land Bank paper (bonds) and score 50-150 points on the cost of capital. This will be linked to the recovery and financial performance of the bank. It will take time, but it can be done.

In the process, the Land Bank can raise finances once it is restored to the highest achievable credit rating by international ratings agencies while the government, as the sole shareholder, can provide a safety net for climate disasters.

The Land Bank Insurance Co (LBIC) could be used with the state to accommodate this function, or the LBIC could be structured to be the sole provider. As the scope of the LBIC might be too limited, its mandate and risk cover offerings might have to be reviewed and expanded. This would be a secondary institution, governed separately and independently from the Land Bank, with a narrow scope of financial assistance.

A positive ESG image will become more significant. Meaningful and regular interaction with the broad community will improve the image of the Land Bank and is an olive branch outreach — a win for the Land Bank is a win for South African agriculture.

The Land Bank provides an environment for incentivised investment and saving structures to balance climatic swings at farm level; this should be broadened.

To achieve this, parts of the Land & Agricultural Development Bank Act need to focus on a narrow set of objectives, the fewer the better. It might be worthwhile to re-examine the functions of the Land & Agricultural Development Bank board regarding a degree of overreach.

Van Heerden is a former director of agriculture, Standard Bank; Scheepers is an agricultural economist at the University of Pretoria