Type Title here

DFIs and their Mandates:Pitfalls, challenges and possible solutions-Land Bank

Perspective

Phakamani HadebeLand Bank CEO

Growth in SADC and South Africa

• wcqc

Source: IMF Staff Estimates

Growth in World Population• World ‘population peak’

expected in the next 4 decades;– How will the 9bn people be

fed?

• But can the same be said of ‘meat or protein’ peak?

• And what are the implications for land, food and feed requirements?

Source: FAO

Similar Population growth pattern in SA

Arable Land under Pressure

Source: FAO (HLEF-2050), 2009

The pressure of farm land reflected on farm land

prices, which could not even yield to recession

Source: FAO and DAFF

A possible repeat of 2007/08 Food Price Shock?

• High food prices reversing the gains that have been made over the years towards the achievement of MDGs,

• Also constraining the humanitarian aid in the Horn of Africa, currently gripped by hunger and famine;

• Could this be a an indication of Malthusian crisis lacking in the shadow or results of political developments in the region?

• Indeed Amartya Sen (Nobel Laureate) is of the view that ‘famine does not happen democracies’;

• The tragedy is that small farmers are missing out on the opportunity to general windfall that can be used to reduce gearing.

Source: FAO and Grain SA

Cost of intermediate goods and services

Source: DAFF

Transport and logistics cost

• Fixed cost includes: depreciation, cost of capital, license, insurance and wages.

• Running cost includes: fuel, oil, maintenance, tyres and incidental cost.

Cost-Price Squeeze

45

95

145

195

245

295

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Inde

x: 2

000=

100

PPI Price index: All farming requisites

Source: DAFF and Statistic South Africa

Net farm income and total farming debt

Source: DAFF

Within the above context, what is the role of a DFI?

The Ideal World of Development Financing• DFIs require patient capital that can be invested for long term and possibly at

concessionary rates;

• Post-crisis involves more State and more Market sourcing of investible funds.

– However, market sourcing removes the competitive advantage of a DFI as pricing converges to that of normal commercial banks and thus impacting on development funding

• High food inflation highlighting the importance of more and better jobs.

• DFIs that should be oriented for the long term and are essential vehicles for development financing.

– Effectively, State outsourcers some of delivery priorities to DFIs

• To be effective, DFIs must have the necessary means: financing tools, stable and sufficient resources; technical capabilities; close relationships with stakeholders.

DFI in Brazil[The Brazilian Development Bank

(BNDES)]

BNDES

• A 100% State-owned company under private law established in 1952;

• Main provider of long-term financing in Brazil;

Source: BNDES

BNDES

• Of significance is continued capital allocation from National Treasury, which increased during the crisis period;

• 40% of institutional funding is from Worker Assistance Fund (FAT)- the local equivalence of UIF and is remunerated at long term interest rate (TJLP);

• Combination of National Treasury grant funding together with FAT funding enables BNDES to offer concessionary funding.

Source: BNDES

BNDES

In line with the company’s strategic objectives

Source: BNDES

Impact of BNDES on job creation

Exponential growth in job created through

BNDES funding

Source: BNDES

Ag DFIs in China and IndiaNational Bank of Agriculture and Rural Development• A 100% State-owned Bank• Mandates of facilitating credit flow for

promotion and development of agriculture and integrated rural development.

• Multiple sources of funding:– Deposits;– Borrowing from Government of India;– Capital markets;– Co-operative fund funded by commercial

banks (i.e. NARBARD also act as an agency for scheduled commercial banks that are not achieving priority sector obligations).

Agricultural Development Bank of China• A 100% State-owned Bank• Also a policy bank with mandates;• Multiple funding sources:

– Generally issues bond, considered as safe as the Central Bank's bonds, since it is fully banked by the People's Central Bank of China (PBOC);

The bottom line is that borrowing from government and Central Banks allows these SOEs to provide concessionary lending

Focus on SA’s DFI

DFIs in SA• SA has both National and Provincial DFIs, each

with specific mandates– National DFIs

• Land Bank• IDC• DBSA and others

– Provincial DFIs• Mega- Mpumalanga• Limdev- Limpopo• ECDC- Eastern Cape• Ithala- KNZ and others

Capital Markets the primary source of

funding but has tax concessions

Government the primary source of funding through

provincial treasury departments

Government Priorities

• Education• Fighting Crime• Health• Employment• Rural Development

Government’s Priorities

• The SA-SAM (Social Accounting Matrix) quantify the circular flow of economic activity through the system of National Accounts in a matrix format

• SAM estimates that for each R1m the Bank invests, 10.8 jobs are created compared to 5.7 jobs for mining

• The South African economy (2010) achieves an average rate of 2.55 jobs per R1 million

Government’s Priorities

• Government willing to play a more visible role/developmental state

• Government undertook DFI review• Creation of the DFI Council to report to Cabinet• New growth path emphasizes the importance of

Rural Development Strategy• Planning Minister’s Diagnostics highlight the

importance of Rural Development

Land Bank Funding Sources• Unlike the provincial DFIs and BNDES we saw

earlier, Land Bank is expected to source funding from the Capital Markets- the same pool used by commercial banks

• The implication of the above is the convergence of risk appetite with those of the commercial banks.

• This also means similar pricing structure to the detriment of emerging farmers and development.

• Even if we want, obligations with capital markets constrains the Land Bank’s ability to provide concessionary and long tenor loans.

• Even made more difficult as Land Bank is not a deposit taking institution.

• In the end, constraints LB’s ability to deliver on the developmental state outcomes

Hence the birth of REM Segment (ring-fenced)

• Land Bank has launched the Retail Emerging Markets (REM) for dedicated attention to emerging farmers;

• Working closely with government to ensure concessionary loans to this target market;

• Some of the programs involving collaboration with government:– Value Chain Financing;– Curatorship Model; and– Collateral Guarantee Fund

Several initiatives to implement

• Implementation of the Cabinet approved Emerging Farmer

Support Facility;

• Disburse R1bn over next 2 years to emerging farmers via a

new business unit focussing on emerging farmers

• Targeting 30% of market share in the next 12-18 months

Funding Model

Land Bank

Retail Emerging Markets(REM)

BCB andRCB

Land Bank Insurance Company

(LBIC)

% profit for development

% profit for development

Government

funding

Multilateral

Funding

Lending ModelRetail Commercial Banking (RCB) – Previously :Retail

Borrowing for the purpose of funding commercial business

Business and Corporate and Banking (B&CB), Previously : CFU

Retail Emerging Markets

to be funded by a combination of

Government support and Value Chain

Model

The combined NPL’s for RCB and B&CB are 6.2%.

Sustainable business model: Developing Farmers Support Facility

Supplementary or Collateral Guarantee

FundLand Bank

Additional support (Off-take agreement SCF, ARC,

NAMC, Univ, DAFF, Insurance)

Eligible Borrowers (Farmers & agribusiness)

Agric cooperatives (+intermediaries) Technical Support

Collateral (50% - 90% of loan value)

LB to negotiatepartnership

LB to negotiatepartnership

Credit assesment

Lending through LB branches,municipalities & Ext offices

Sustainable business model: Wholesale Funding Facility

CURRENT FUNDING MODEL

Financial markets Land Bank Intermediaries Emerging Farmers

Lending from FMat 6%+

On-lend tointermediaries at 8%+

Estimated cost to lend of 8% Pays approximately Prime +7%

Cost of direct lending = 8% based on:* Assesment, *Operational cost,* Disbursement admin, * Provision of technical support

* Bad debt provision

* Own profit margin

2.75-3.75%

2.25%

2-3%

GOVERNMENT SUPPORT MODEL: WHOLESALE FUNDING FACILITY

Financial markets Land Bank Intermediaries Emerging Farmers

DAFF

On-lend tointermediaries at 0% On-lend to farmers at a 4% cap

Reimburse 4%

Reimburse 4%

Farmers pays Prime minus 5%Lending from FM

at 6%+

Lending from FMat 6%+

On-lend tointermediaries at 8%+

Estimated cost to lend of 8% Pays approximately Prime +7%

Cost of direct lending = 8% based on:* Assesment, *Operational cost,* Disbursement admin, * Provision of technical support

* Bad debt provision

* Own profit margin

2.75-3.75%

2.25%

2-3%

Conclusion

• Agriculture entering what could be regarded as the ‘golden age’ of agriculture;

• Characterised by high agricultural commodity prices;

• The tragedy is that emerging farmers are once again likely going to miss out on the opportunity to generate windfalls;

• Having realised the important of concessionary and long tenor loans, Land Bank working with government to ensure effective delivery of development mandates as contained in the Land Bank Act 2002.

THANK YOU