ABSA discourages use of farm land for collateral

ABSA discourages use of farm land for collateral
By Kabanda Chulu
Sat 30 Oct. 2010, 04:00 CAT

ABSA’s head of agribusiness Hans Balyamujura has said the use of agricultural land as collateral when getting a loan is being eroded due to various factors that are considered by banks.

Giving a perspective on “Increasing private sector financing in agriculture-challenges and opportunities” during a regional financing agriculture meeting in Malawi, Amalgamated Bank of South Africa (ABSA)’s Balyamujura said farmers were not price setters but takers.

“This becomes difficult for farmers to pay back loan obligations because they don’t get a price that is in line with their production costs so banks consider these factors when lending to agriculture and when production drops, even the value of land declines since there can’t be value if land is not productive and it becomes difficult to use it as collateral,” Balyamujura said.

“Even when you take (an inactive) land in default, the banks will end up selling it below market price because it is not active, thus attracting less value.”

He explained that financing agriculture was considered to be a cycle by many banks because of the various processes involved when approving a loan.

“Financing agriculture is strictly for commercial purposes and small scale farmers are treated this way because the bank ends at lending and hopes to get a return, actually banks look at agriculture as a cycle evolving through several value chains such as the input producer has plant and machinery while the supplier only has a warehouse and it has no value if goods are not available,” said Balyamujura.

“And when the farmer gets the input, what is he going to produce? Does he have the market? What kind of processors will handle his goods? These are some of the underlying factors banks consider before lending to farmers.”