High risk affects Zimbabwe agriculture funding

Published: 31 August 2017

HEIGHTENED risk, coupled with the attendant high cost of funds and lack of collateral have resulted in a huge funding gap for Zimbabwe's key agricultural sector, a joint policy brief by government and a research institution has said.

President Robert Mugabe's government embarked on radical land reforms, starting in 2000, which saw the emergence of a new farmer class which, however, largely lacks security of tenure and, as a result, access to finance.

The Ministry of Agriculture, Mechanisation and Irrigation Development and the Indaba Agricultural Policy Research Institute said in the policy brief on unlocking supply of agricultural finance that investments to farmers should contribute to increased incomes and food security.

"However, in Zimbabwe, there exists a substantial financial gap in the agricultural sector. This is because of high risks, insufficient funds among financial institutions, the high cost of lending, and lack of formally recognised collateral," the policy brief said.

It said micro-finance institutions lacked sufficient funds for lending and in many cases repayment structures did not suit agriculture lending.

One innovation which has been piloted in Zimbabwe is value chain financing (VCF), which refers to any or all of the financial services, products, and support services flowing to and or through a value chain to address the needs and constraints of those involved in that chain.

However, some critical issues affecting VCF in the country that need to be resolved have emerged.

These include the existence of unequal power relations between smallholders and other players within financed value chains such as off-takers and input providers.

In many cases the more powerful off-takers dictate the terms of trade, creating a perception among farmers that they are being cheated and as a consequence, encourages side-selling which can threaten the sustainability of VCF initiatives.

According to the brief, the Reserve Bank of Zimbabwe (RBZ) should incentivise banks to have microfinance units that effectively service smallholder farmers to encourage commercial lending to the sector.

They came up with a number of recommendations for the central bank to utilise in its national financial inclusion strategy.

The RBZ should move towards establishment of a framework in the current credit registry system that allows for inclusion of borrowers from non-banking institutions such as community based microfinance institutions and contract farming.

The movable asset registry currently being developed should explore the inclusion of small livestock in its framework.

The government should promote bundling of insurance products with farm credit to increase uptake as well as linking these to regional insurance schemes, the brief said.

It noted that the establishment of the warehouse receipt system should be expedited to facilitate use of warehouse deposit certificates as collateral and that sector players should contribute information on value chain financing to a central repository housed by government.

Contracts with farmers, said the brief, should be incentive-compatible to allow the farmer to get the best possible price for both inputs and outputs.

There is need for the establishment of an agricultural revolving fund with appropriate structured lines of credit.

Formal financial institutions must build a relationship first with farmers first before they engage them in business.

"The problem of under-supply of finance to agricultural value chain players is a direct consequence of the perception by formal financial institutions that the sector is highly risky. At the postharvest level, farmers often have uncertain access to markets and are also exposed to considerable intra-seasonal variability in prices as well as inter-year price volatility," said the report.

- fingaz