Rethinking the Land Bank's Funding Model and Refocusing Its Role

The Land and Agricultural Development Bank (Land Bank) has historically played an important role in South African agriculture, providing farmers, cooperatives, and marketing boards with affordable financing. It was founded in 1912 with the primary goal of providing mortgages to white farmers for land acquisition and wholesale financing to agricultural cooperatives. Because of substantial state support in the form of capital endowments, parliamentary allocations, and state-guaranteed debentures and bonds, these loans were made available at below-market rates.

However, critical errors and poor governance have eroded the Land Bank’s stability and jeopardised its role as a development finance institution in the agricultural sector over the last 25 years. Misguided decisions and poor credit choices led to the bank’s near-bankruptcy in the early 2000s. Even after it was resurrected in 2008, costly errors continued to plague its operations.

The Land Bank had accumulated reserves of R1.7 billion (equivalent to $368 million at the time) by the end of the 1997 fiscal year, which had been built up over many years. However, these reserves were completely depleted due to irregular expenditure, poor lending decisions, and financing activities outside the bank’s mandate. As a result, the bank’s ability to serve the agricultural sector as a whole was severely harmed, affecting the success of land reform beneficiaries, aspiring black commercial farmers, and the agricultural industry’s overall growth and food security.

Nonetheless, we are confident that the Land Bank’s issues can be resolved, allowing it to fulfil its critical role as a financier of land reform and provider of preferential financing terms to aspiring black farmers, similar to the assistance provided to white farmers from 1912 to 1996. We propose a simple solution based on our sector experience and the lessons learned from the bank’s early successful years: return to the bank’s core mission.

This solution is made up of two major components. To begin, the Land Bank’s funding model must be revamped in order for it to maintain its status as a true “development finance institution.” Funding costs must be reduced, which necessitates a reorganisation of its funding sources. Historically, the state provided capital endowments, annual parliamentary allocations, and state-guaranteed long-term debentures and bonds to the bank. Because of these funding mechanisms, the bank was able to offer loans to farmers at interest rates lower than the commercial prime lending rate. However, changes made after 1996 increased the costs of lending to agriculture significantly, jeopardising the bank’s development mandate. To correct this, the government must restore its capital allocation to the Land Bank, supplemented by annual funds earmarked for agricultural development from the agriculture department and provinces. Additional R25 billion contributions from retailers, food processors interested in fostering the growth of commercial black farmers, and long-dated capital market instruments can help establish a sustainable funding base.

Second, the Land Bank’s activities should be refocused primarily on mortgage finance for land purchases and wholesale finance for production credit. The bank can effectively support land reform initiatives by specialising in these core areas. Historically, it fulfilled this mandate by offering low-cost financing through long-term mortgages and favourable terms that commercial banks could not match. However, a series of errors resulted in changes in interest rate policies and a shift in the bank’s focus to commercial banking competition. The Land Bank began charging compound interest rates rather than simple interest rates, which resulted in an increase in non-performing loans and subsequent legal battles. Furthermore, the bank’s decision to tie its lending rates to the commercial prime lending rate harmed its ability to set interest rates independently. Other mistakes, such as lending to non-agricultural activities and reducing the number of offices and field staff, hampered its effectiveness even more.

To address these concerns, the Land Bank must return to its core mission of keeping its cost of capital lower than the prime rate. The involvement of the state in restructuring its funding structure is critical, as is the establishment of a balanced mix of funds to enable sustainable development finance. A one-time parliamentary appropriation of R10 billion, combined with annual funds from the agriculture department and provinces, contributions from stakeholders such as retailers and food processors, and long-term capital market instruments, can help achieve the desired total book of R25 billion.

Main Image: Food For Mzansi