How banks can help farmers address financial challenges and risks

While agriculture has played a crucial role in contributing to the country’s GDP, even during this unfavourable period of the Covid-19 pandemic, this sector also has highly unique needs and faces its own challenges from a financial perspective, says  Vaughan David, CEO of Cash Investments: FNB Business.

And thus, says David, it is important for banks to have a full understanding of these challenges, by partnering with farmers to help them manage their personal and business financial needs to ensure they capitalise on opportunities where possible.

David said that financial institutions have to be much more than lenders or financial providers to farmers, but be valued business partners and take a holistic view of the sector, and of the unique needs and challenges of each of their clients operating within it.

David says there are challenges and risks that financial institutions need to help farmers address, in order to be financially sustainable.

Income risk

While farmers are fully aware of the seasonality of their income, the impact of Covid-19 has demonstrated that there will always be unexpected situations or crises that put their livelihoods at risk. While it’s not possible to predict these challenges, it is possible to cushion the impact of such events – and banks need to work with their agricultural clients to make sure they have income protection mechanisms in place to act as financial safety nets.

Future and opportunity planning

The unpredictability of the future makes planning, especially difficult for farmers. Banks need to offer holistic solutions that allow them to be adequately prepared for their known and unknown needs – whether those involve keeping the farm going during lean times, taking advantage of opportunities when they come up, and even planning for retirement.

David explains that an effective cash management strategy is central to any farmer’s future preparation and planning. By allowing farmers to allocate funds during good years and have quick access to those funds if and when they need them for farm and family expenses in ‘tough’ years, cash savings and investment accounts are invaluable.

What cash investment and savings solutions are on offer to farmers to help them effectively manage their money?

Broadly speaking there are two sets of product solutions available to farmers:

Bank deposit products  

These types of savings and investment products are well known and offer the investor, a good level of safety, usually through a capital guarantee, as well as good liquidity i.e., with access to your money.

These product solutions present investors with varying lengths of notice periods or fixed terms; the longer the notice period or the fixed deposit term the higher the interest rate earned on the deposit.  Also, when it comes to call, notice and fixed term deposits, the higher the deposit balance in the product the higher the interest rate earned.

Interest bearing funds  

These products are typically suited for clients who require a higher return than what is offered by normal bank deposit products. Whilst interest bearing funds, like money market funds or stable income funds, are low risk funds when compared to other investment assets, such as equities or multi asset funds, they do present risks that are slightly higher than those associated with bank deposits.

Farmers need to choose savings and cash investment products suited to their businesses needs by understanding the risk and liquidity features associated with the available product offerings. In some instances, the right solution might require compromise on the farmers part in terms of the rate earned vs.  liquidity (access) vs. risk.

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