South Africa : Land Bank problems create opportunities for retail banks

The government's insistence that the Land Bank play a significant developmental role in South African agriculture could ironically send many of the bank's commercial clients into the arms of the retail banks. The apparent difficulties that the Land Bank is having in maintaining a semblance of financial dignity has created some discomfort amongst South African agricultural businesses, which rely on the bank for wholesale funding.

At the same time it seems that retail banks, which in the past have not been able to compete with the rates offered by the subsidised Land Bank, may be considering new financing mechanisms that could lure commercial agricultural clients.

The Land Bank has offered lending rates pegged at 2,5% below prime. There are questions about the sustainability of these attractive rates.

Senwes Financial Director Steven Alberts said agricultural companies, all of which obtain wholesale funding from the Land Bank, are "at this stage very nervous at what is happening at the Land Bank." He said that one can expect that the pressure on the Land Bank to finance emerging farmers is likely to intensify. "I think that all agricultural companies are considering alternative financing mechanisms."

It is likely that these financing mechanisms include the securitisation by the retail banks of agri-businesses' loans to their own clients.

In April this year the Department of Agriculture and Land Affairs extended a R2,2bn ($313 million) bailout package to the Land Bank, which included a R1,5bn ($214 million) capital guarantee and R700m ($100 million) cash. Shortly thereafter the department appointed an independent task team to conduct a due diligence at the bank.

The Land Bank CEO, financial head and general manager of credit were not at work at the time of the investigations by the task team - although the Land Bank insisted that they had not been suspended. Allan Mukoki, Xolile Ncame and Godfrey Masilela resumed their duties in early May. Since then the DA has submitted documents relating to alleged irregular transactions at the Land Bank for forensic investigation.

The Land Bank by 2006 had three years of consecutive losses and five years of declining capital reserves. Over 11% of its loan book was classified as non-performing in 2006.

Moneyweb