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Can SARB play any role in financing land reform?

“Because the Land Bank does not borrow Rands directly from the SARB at the repo rate like other banks do, farmers cannot access finance at the optimal rate (closer to repo), making hurdle rates for farmers higher than necessary,” said renowned economist Buddy Wells.

Writing in his weekly blog Economic Thinking, Wells said the entire land reform approach needed the South African Reserve Bank (SARB) tentacles for black smallholder farmers to contribute positively to the food production.

His views come after the recent announcement made by government to lease 700 000 hectares of state land to mostly emerging farmers.

“The SARB is constitutionally mandated to do what it can to ensure that South Africa’s land reform process does not lead to hyperinflation and the destruction of our economy. The Constitution of South Africa says “the primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustain able growth.” 

Appearing before Parliament’s Select Committee on Finance earlier last week, Land Bank said it was currently developing a Fit-For-Purpose Funding Model which will be a mixture of development and commercial portfolio.

“It’s currently targeted for implementation at 60/40 by 2025. Current liquidity challenges will place heavy burden on the State to just rescue the Bank’s current business continuity risk,” Land Bank’s CEO Ayanda Kanana informed the committee.

The Land Bank also highlighted that there was unlikely support for Development Costs (“Unfunded Mandate”) as it was a material risk to realise the desired 60/40 target.

For Wells, Land Bank did not operate like a commercial bank as it does not have a lee-way to create new money when it issues loans.

“It is only a development finance institution which means it must borrow money on the market first before it lends. The result is that it cannot provide funding to farmers at interest rates below the rate it pays at the market to borrow money itself if it is to avoid going bankrupt.”

Kanana concurred to this point when he briefed the committee. Supporting Development and Transformation had proven to be a challenging for the bank as the cost of the Bank’s funding was based on commercial interest rates from the capital markets; and the “strict financial covenants that the Bank has to adhere to.”

To date, the Land Bank’s support for the development and transformation segment had increased to R8.4bn in FY20 from a R2.5bn in FY16 yet it had a persistent Non-Performing Loans – currently at R6.4bn.

Kanana further highlighted that 29% of South Africa’s agricultural debt was financed through Land Bank. “In FY20 the Bank disbursed a total of R20.5bn in loans made of re-advancement / re-financing of loans (R19.6bn), and new facilities (R900m) to support the agricultural sector,” he said.

For Land Bank to carry the development model and aspirations of black farmers, Wells proposed that either SARB funded land reform directly or by provide loans at repo to the Land Bank so that the Land Bank can finance land reform cheaply.

Wells added: “If the SARB issues loans to the Land Bank at repo, the Land Bank can offer qualified black farmers ultra-low interest loans with which they can buy farmland and equipment.”

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