South Africa's Land Bank can be fixed: change the funding model and narrow the focus

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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.

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The ConversationThe Conversation
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https://theconversation.com/south-africas-land-bank-can-be-fixed-change-the-funding-model-and-narrow-the-focus-209241https://theconversation.com/south-africas-land-bank-can-be-fixed-change-the-funding-model-and-narrow-the-focus-209241
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Wednesday, July 12, 2023
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Tags: 
Land Bank of the Philippines, Marketing, Land and Agricultural Development Bank of South Africa, Farmer, Agriculture, Policy, Reserve Bank of India, South African Reserve Bank, Agriculture department (Punjab, Pakistan), Economics, Government, Essay, Student, Agricultural Development Bank, Reserve Bank, Growth, Annual report, Food security, Stellenbosch University, Mining, Real estate, Security (finance), Bank, Insurance, Land bank
Geotags: 
SOUTH AFRICA
Summary
Key Points: 
  • 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.
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