Absa Corporate and Investment Bank (CIB) plans to further grow its agriculture lending book in South Africa and other African markets where demand for funding is strong despite tough economic conditions.
Absa CIB agriculture head Roux Wildenboer says agriculture is a key driver for economic growth and employment creation. He adds that the bank will expand its footprint across the continent, owing to long-term growth prospects.
The largest market for Absa CIB’s agriculture book currently is in South Africa, where business conditions are challenging owing to economic conditions, agricultural average debt levels and general uncertainty about land reform, which has impacted investment.
The major concern in South Africa is the economic performance of the economy which has a knock-on effect on agricultural production, Wildenboer says.
For example, demand for agricultural machinery and implements – particularly the sale of tractors and combine harvesters – has softened in the past two years, with farmers taking longer than before to replace or upgrade machinery.
This has had a negative impact on equipment and other suppliers into the agricultural economy.
Equally worrying is the decision by some investors to postpone investment decisions.
Wildenboer notes that agricultural debt is relatively higher than it has been in recent history and the ability of agricultural businesses to borrow to reinvest has been curtailed, which has a snowball effect on investment in the sector.
“This is seen as a cyclical phenomenon, and even though on aggregate borrowing is not as strong as it used to be, there are still businesses which are growing aggressively. This is the reason why Absa is optimistic about prospects in the agricultural sector,” he adds.
The bank’s lending book has performed well, particularly in the last five to six years, because Absa has moved away from collateral focussed lending to providing support based on an in-depth analysis of the profitability and financial flexibility of a client to withstand any market or economic shocks.
Wildenboer explains that collateral remains important, but is not the main criteria for the approval of funding. The success of the lending book is, therefore, attributable to careful client selection, and a deeper understanding of their business, the agricultural cycles and conditions which may affect viability and profitability in the agricultural sector.
Further, funding decisions are not necessarily based on whether the business is at the top or bottom end of a commodity cycle, but rather on the inherent sustainability of the business’ debt and income levels, taking into account commodity prices and long-term yields forecasts.
“For struggling businesses, Absa may not necessarily provide more funding because some clients reach a point where the bank cannot fund a business beyond its ability to service the additional debt.
“In this case, Absa considers other options to help the business because the bank understands that agriculture is a cyclical and volatile business with periods of drought – as was the case in the Western Cape which affected fruit producers, Wildenboer states.
Outside of South Africa, Wildenboer is bullish about Absa growing its client base in countries such as Ghana, Kenya, Tanzania, Uganda and Zambia.
However, in these markets, regulatory certainty is important as is the macroeconomic environment.
Another concern is infrastructure, particularly the road, port and rail network, which is important for the efficient movement of agricultural produce.
“Absa CIB would like to see significant investment by governments to be made in infrastructure, as this will provide further incentive for investors to grow in the agricultural sector.
“Notwithstanding some headwinds in certain areas, Absa CIB sees agriculture as a vibrant and strategic market. It is the bank’s intention to increase its involvement across the continent in the agricultural sector, and appetite to embark on this strategy has been reaffirmed,” Wildenboer concludes.