Agricultural Development Bank

• It is disheartening to see how many South Africans, including parliamentarians, have forgotten the simple and influential role the Land and Agricultural Development Bank (Land Bank) played in South African agriculture.
• The Land Bank was a conduit for cheap money for mortgage finance for farmers, for production finance to co-operatives, and for the liquidity of the marketing boards.
• The Land Bank, established in 1912, had a narrow mandate for many decades.
• Its funding model and its narrow mandate meant that, for decades, it was a stable institution.
• Secondly, the bank’s activities most be refocused to mortgage finance for land purchases and wholesale finance for production credit.

Funding

• With this mix of funds, its cost of capital was far below the prime rate.
• In essence, Land Bank, in a true sense, fulfilled its development mandate – it provided affordable finance.
• It is also impossible for farmers to start a business with interest rates above the prime lending rate.
• New leadership also changed the nature of the Land Bank to be more commercially focused and to compete with commercial banks.
• The other big change involved Land Bank linking its lending rate to the prime rate.

What needs to be done

• The bank’s cost of capital should be lower than the repo rate (rate at which the Reserve Bank lends to commercial banks).
• This could happen through a one-off parliamentary appropriation of R10 billion (about US$533 million).
• Johann Kirsten and Wandile Sihlobo wrote this essay from notes they prepared for students at the department of agricultural economics at Stellenbosch University.
• Johann Kirsten is Professor in Agricultural Economics and the Director of the Bureau for Economic Research at Stellenbosch University.