Agri-bank under the spotlight

The concept of an agricultural bank is not new in Africa and around the world. Countries such as Nigeria and Namibia have banks for farmers whose performance has been mixed. In this fourth article in the series on agri-business in Malawi, JACOB JIMU sheds more light on the workings of an agri-bank.

Charles Mkwapatira had no idea that government is exploring the possibility of setting up an agricultural bank to provide credit to farmers.
When told that the Ministry of Agriculture and Food Security is in talks with other stakeholders to establish the agri-bank, he breathed a sigh of relief that at last there is a window of opportunity that could give farmers the push they have long sought.
“This is a great idea. Most farmers in Malawi are not educated, so commercial banks take advantage of the low literacy to con them. I believe the bank will promote the interests of farmers.
“Farmers will have a readily available bank where they can access loans. I am very excited with the news,” said Mkwapatira, a farmer in Samson Village, Traditional Authority (T/A) Thomas in Thyolo.
Since 2003, Mkwapatira has been operating under Manthimba Irrigation Scheme which has 375 members. Over the years, the group has been a role model in community-led irrigation farming, providing critical insights into the potential of irrigation as a tool for poverty alleviation and rural development.
The proposed bank, said Mkwapatira, would give individual farmers and groups such as Manthimba Irrigation Scheme an important platform for growth.
If the idea of the bank comes to fruition, it could be a game changer in the country’s agriculture which is dominated by 4.5 million smallholder farmers, representing about 80 percent of the industry.
However, experts say a lot needs to be done to make the bank a viable instrument for energising the industry. One such expert is Austin Mbamba, a specialist in agribusiness, who said while the idea is good in principle, it could be undermined by the structural problems that have retarded progress in the agricultural sector in Malawi.
“An agri-bank, short form for agricultural bank, is a type of bank that lends money to farmers over long periods of time at relatively low rates. Thus, in comparison to other commercial banks, an agri-bank targets farmer business entities or individuals so as to alleviate their capital challenges through loans that attract low rates of interest. The banks usually offer agricultural loan products such as operating loans, equipment financing, livestock loans, loans for real estate and equipment lease financing.
“The question of whether an idea of establishing an agri-bank in Malawi is viable or not is not straightforward. In a general sense, it is a very good idea to establish an agri-bank, especially in a country whose economy is agricultural-based.
“However, large populations of farmers are smallholder farmers who run small businesses; as such, it may prove costly for an agri-bank to operate. In this case, many people will flock to get loans of usually small amounts, but the fixed costs of managing an account regardless of whether the holder is engaged in big money or small money transactions are the same. So, it would be costly to the bank,” said Mbamba.
To tackle the problem, he proposed that when operational, the bank should deal with groups of farmers such as clubs and cooperatives instead of individuals.
“This is to be done in such a way that farmers combine resources and obtain credit from the bank as one entity. In that way, the bank will have one account to manage, but it would belong to a number of individuals. This can also work well in terms of funding for heavy machinery as they would be used on combined land from farmers; hence, being economical.
“For this to work, farmers need to be sensitised on how they can operate such groups and why it is important that they do so. As such, government would have to involve extension personnel in the sensitisation process,” said Mbamba.
True to Mbamba’s insights, the idea of farmers’ cooperatives is gaining currency in Malawi as a crucial means for enhancing productivity and profitability in farming.
Brighton Mkakato, another expert in agri-business, argued that the idea of agri-banks has been problematic because such financial institutions have struggled to fulfil their mandate as sources of financing for farmers and tools for fighting poverty.
One of the main hurdles that could stymie the proposed agri-bank is the problem of loan default that is hobbling financial institutions in Malawi.
And if the bank will be run by government, the situation could be more severe given the perception bred by politics and other factors that what belongs to government is a gravy train for a free meal.
“Most agri-banks turned out to be a flop. Instead of producing income to be profitably reinvested, they disbursed funds that were not repaid and generated losses that were a drain on public resources.
“Even though most agri-banks proved to be a failure in the past decades, they have continued to be major providers of rural and microfinance services in most countries through their branch network. Their outreach varies widely, but in many countries, they are major providers of rural financial services, sometimes they are the only ones,” said Mkakato.
Also stifling agricultural productivity in the country is the nature of farming tools the majority of farmers use. Typically, a farmer in Malawi uses a hoe, meaning that a grower has to spend days tilling a piece of land that a machine such as a tractor could work on in hours.
But in countries such as China and India where agri-banks have boosted agricultural production and productivity, mechanised farming is the norm. That is why Mbamba said an agri-bank that is adequately supported by progressive policies and structures would help the agricultural industry in Malawian to take a big leap forward.
“In most of the countries, especially the developed countries, Agri-banks have performed very well in the sense that agriculture is now highly mechanised and as such increasing productivity of the agricultural sector. Credit facilities that are provided by such banks have helped improve the per capita GDP of individuals and households; hence, translating into economic growth and eventually economic development as people’s livelihoods improve.
“According to the World Development Report (2008), in China, where agri-banks are prevalent, agriculture is estimated to have been 3.5 times more effective in reducing poverty than growth outside agriculture, for Latin America it is 2.7 times more, while Africa it is only 1 percent. It should be noted that in African people are working harder in agriculture, but productivity is not significantly increasing,” said Mbamba.
While the debate on the feasibility and viability of an agri-bank is going on, government is yet to provide details of the operational model of the bank. Mkakato said depending on the political economy of a country, ownership could be private, cooperative, public or mixed.
Now the question is: which operational model and ownership structure is best suited for Malawi? n