Who should own the agri-bank?

In countries that have agri-banks, one issue that exercises the minds of planners and policy makers is the ownership of the banks. Because of its implications for the performance of the proposed agri-bank in Malawi, government and others involved in thrashing out the idea will do well to give the issue the critical attention it deserves. As he winds up the series on agri-business in Malawi, JACOB JIMU engages two experts in the field to analyse and present the best operational models for an agri-bank in Malawi.

The mixed fortunes that have characterised the work and performance of agri-banks across the world have raised questions on whether Malawi has what it takes to successfully run such financial institutions. Poor loan repayment and the banks’ chequered record as instruments for fighting rural poverty are some of the problems that have tainted the reputation of agri-banks in Africa and beyond.

Key to explaining the performance of agri-banks is the issue of their operational models in areas such as ownership and loan policies. The question of who owns the bank has implications for the feasibility, viability, underlying philosophy and sustainability of the institution.

As Malawi mulls the idea of setting up a bank for farmers, the inevitable issue of the best model for running the bank will arise.

The issue is: who should own the bank and how can it ensure that being an accessible source of financing for farmers does not undermine its foundations as a business that should pay its bills, survive and make profits?

Quite an easy question on the face of it, but the answers are not so straightforward.

Agri-business specialist Austin Mbamba said the point of departure in deciding the operational model that suits Malawi should be a clear understanding of the prevailing business environment, economic fundamentals as well as social and political factors.

“In terms of ownership structures, an agri-bank could be a state-owned or public-owned bank, domestic joint-equity bank, foreign joint-equity bank or a private bank which could be domestic or foreign-owned. In short, a state-owned bank is owned and run by government. A public bank is sometimes the same as a state-owned, bank but in this instance, it is that which is owned by other parties but it is characterised by its shares being on the stock exchange market where people or entities can purchase shares of the bank.

“A domestic joint-equity bank is one where the bank is partly owned by government and partly owned by other domestic parties. Similarly, a foreign joint-equity bank is where foreign investment is involved instead of domestic investment. For a private bank, it is totally owned by a private entity which could be domestic or entirely foreign.

“The different ownership structures have different impacts on the performance of a bank. With the understanding that an agri-bank is a development bank which targets farmers, it simply means the owners should have the best interests of farmers at heart, rather than just profit generating. In that case, private-owned banks would be far from ideal in my opinion, especially considering that agri-banks give out loans at low rates of interest for longer periods,” said Mbamba.

He said in most countries that have agri-banks such as Nigeria and China, the banks mostly began as state-owned financial institutions funded by government and donors. However, Mbamba said state-owned agri-banks have traditionally encountered the problem of political interference which has created an environment that has enabled people who are not creditworthy to access loans which they have not paid back.

In the event that the proposed bank in Malawi is wholly owned by government, it could stifle the efficiency of the institution given the background that state-owned companies are generally viewed as tools for building political patronage.

Mbamba said taking politics out of the institution would create ideal conditions for the success of an agri-bank in Malawi.

“A domestic joint-equity ownership structure would be ideal for an agri-bank in this country. This is where both government and other domestic investors would be joint partners. This is the case because government has the best interests of farmers. In that way, it would influence policies that would be beneficial for the country.

“On the other hand, the other shareholders would make sure that the bank still operates at a profit to ensure that the bank does not go out of business, thereby eliminating the problems that come with being a state-owned agri-bank. This is why in China the agricultural bank is no longer state-owned but joint-equity. Likewise, in Nigeria, the Bank of Agriculture in 2000 incorporated with the People’s Bank of Nigeria as part of an on-going restructuring,” he said.

Currently, government is holding talks with other stakeholders such as the private sector to work out how the concept of an agri-bank will be actualised. This gives pointers to the possibility of public-private partnership in running the bank.

Brighton Mkakato, who also specialised in agri-business, believes that the risks state ownership creates for the efficiency and sustainability of an agri-bank mean that private ownership provides the platform for the long-term survival and success of financial institutions that target those in the farming industry.

Mkakato said agri-banks owned by government have historically faced problems such as low repayment rates and high transaction costs.

“Private owned agri-bank is another category. These are institutions that are owned and controlled by various organisations other than government. They provide both short-term and medium-term loans to farmers. In certain cases, farmers are also given long-term loans.

“These banks operate efficiently because of competition in the market; as such, they provide quality services to their clients. They charge a high interest rate, so transaction costs are low and most of these banks are able to sustain themselves.

“The last category consists of mixed ownership with both the state and the private sector owning the bank. Most state-owned agri-banks have been privatised in order to improve efficiency in their operations. This transforms the banks into self-reliant and sustainable financial intermediaries by continually increasing their saver and borrower outreach and the quality of their services to all segments of the rural population, including the poor,” said Mkakato.

To improve the outreach of the agri-bank in Malawi, Mbamba proposes that it should have microfinance as one of its pillars. He said the microfinance component will help small-scale farmers in rural areas who would otherwise lose out in a normal setting of a commercial bank.

“This is the case because as far as loans are concerned, most rural small-scale farmers are not reached, but in aggregate, these play a big role in the agricultural sector in the country. If proper mechanisms of a microfinance system are put in place, such farmers can benefit a lot.

“Nevertheless, these smallholder farmers in rural areas should be sensitised on honouring the loan agreements because some of them may think this is just one of those political manoeuvres politicians use and they do not necessarily need to pay back. This may lead to increased numbers of loan defaulters and eventually failure of the bank,” he said.