Transcript Annual Financial Results 31 March 2003

PRICE RISK
MANAGEMENT
AGRICULTURAL ON
BANKING
AFRACA
3 APRIL 2009
Strategic Intent
 Vision
• Independent one-stop agricultural shop with a wider
regional footprint
 Strategic Objectives
• To enable the Land Bank to deliver on development
mandate
• To promote and advocate for agriculture, rural
development, land access and poverty alleviation
• To mainstream development focus by consolidating and
creating systems for development
• To accelerate transformation of agriculture by
implementing agricultural reform programmes (for
sustainable emerging farmers)
• To enhance agricultural development, rural development,
and land access through innovative and foundational
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solutions
Land Bank Stratification Model
Development path
G
r
o
w
t
h
Commercial
Emerging
Land Reform
Time
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*Refer to Annexure B
Introduction
 Market risk is the risk that factors that impinge on the market values of
assets and liabilities of the Bank cold impact adversely on earnings and
capital. In practice, the most important type of market risk for banks is the
interest – rate risk.
 This process of managing risk is best through of as a series of balancing
acts: potential sources of funds should be balanced against the likely need
for funds; the interest-rate sensitivity of assets should be balanced against
that of liabilities; and both of these variables should be balanced against the
Bank’s profitability goals.
 The Asset and Liability Management Committee, ALCO has the
responsibility for managing a bank’s assets and liabilities, to balance its
liquidity and market risk exposures and thereby to help it achieve its
operating objectives.
 The challenge of ALCO is to assess the probability that these risks might
materialize and to position the bank to be able to handle the most likely
scenarios with a minimum deterioration in performance and profitability
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FUNDING
DYNAMICS:
PRINCIPLES,PARAMETERS, AND FUNDING
APPROACH
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Purpose
 Outlines the key principles (or key lending
guidelines) adopted
 Broadly defines the key target market niches
(TMN’s) that have been identified and adopted
 Deliberates on selected development impact
parameters (DIP’s), as well as their relative
importance and their measurement
 Suggests a funding approach
 Rural Development Strategy
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Key lending guidelines
 Impediments that have faced Land Bank, in
implementing its development mandate to date, include
the following:
 the focus on security-based “balance sheet” financing
 the lack of appropriate lending guidelines for its
products
 Going forward, it is envisaged that Land Bank will
increasingly utilize limited recourse finance in
attempting to address the financial market failure that
currently exists in the agricultural sector.
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Key lending guidelines
 Devcom has identified 3 key lending guidelines to govern all future
land bank funding approvals:
 Sustainability
• There should be a clear ability of each applicant to service the
funding provided by Land Bank. It is envisaged that Land Bank’s
operational capacity will be enhanced to the extent that it will be able
to conduct a multi-disciplinary (production, market, management,
financial and legal) due diligence review of each application, in order
for Land Bank to be able to determine such servicing ability
 The following key elements should be confirmed by a party
independent of the applicant:
• Availability of resources – each application must demonstrate access
to natural resources, such as the land, soil, climatic and/or water
resources required by the envisaged enterprise(s). In the case of
land, access needs to be demonstrated by a legal right, such as a
signed offer to sell or a permission to occupy certificate.
• In addition, each application must demonstrate access to the
institutional resources (such as climatic data, soil testing facilities and
technical support) that are required for a sustainable and profitable
enterprise.
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Key lending guidelines
• Management and ownership – management and/or owners
must demonstrate a basic level of production know-how and
financial understanding.
• Institutional/organizational structure - There should be an
appropriate institutional and/or organizational structure, which
clearly differentiates between management and ownership
roles.
• Support structures - appropriate non-financial support
structures need to be in place.
• Market and marketing infrastructure – each application must
have a readily identifiable market or access to an existing
marketing infrastructure.
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Key lending guidelines
 Commercial orientation\viability
• Each application should clearly demonstrate its commercial orientation
and should have the following attributes:
• Commercial nature – each application must have a commercial
agricultural dimension, which would typically differentiate it from either a
subsistence farming operation or a non-agricultural enterprise or a
residential or lifestyle-driven motive.
• Commercial viability – each application must demonstrate that it is
commercially viable in its own right, when measured in terms of specific
criteria, and should not be regularly dependent on other sources of
income.
• Profitability and cash flow considerations are, therefore, critical. The
projected financial statements of each application will be carefully
scrutinized in order to determine the overall viability of the enterprise, as
well as to prevent any potential incidences of reckless lending.
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Compliance with the bank’s risk appetite
 There should be a fair to good chance that Land Bank will be able
to recover its funding, particularly after the application of
appropriate measures to mitigate some of the risks involved, such
as insurance, non-financial services and the way in which the
application is structured.
 Each application will typically be assessed in terms of inter alia one
or more of the following financial parameters:
 Debt to equity ratio
 Cash flow cover ratio
 Income security ratio
 Profitability
 The principle of sensitivity analysis of key variables (such as
turnover) would also be employed to assess the robustness of
each application in relation to the abovementioned financial
parameters.
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Target niche markets
 In order that Land Bank is better able to meet its development mandate,
several key target niche markets (TMN’s) have been identified and
defined.
 The identified TMN’s, which also incorporate the traditional “development”
clients in Land Bank’s existing loan book, represent a much broader
definition of development clients, the generic term for which is referred to
in this document as the “emerging entrepreneur”.
 This definition of the emerging entrepreneur includes all of the following
individuals or groups:
 Emerging HDP farmers
 Emerging HDP entities, such as companies and/or trusts
 Existing HDP communities that wish to engage in agricultural and/or rural
development enterprises, projects or initiatives.
 The targeted focus on these specific TMN’s will enable Land Bank to be
more effective at addressing the financial market failure that exists in the
agricultural space in Southern Africa.
 TMN’s that Land Bank are expected to focus on, in the short and medium
term, would also inform the KPA’s in Land Bank’s corporate plan.
Identified TMN’s are expected to include the following:
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Target niche markets



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Indirect funding of emerging entrepreneurs via direct funding of large
corporate clients, including inter alia existing co-operatives and other
similar wholesaling clients. This target market will inter alia utilize an
indirect/wholesaling funding mechanism to support emerging
entrepreneurs, such as a cash credit account facility (CCA). In
particular, increases in funding of existing corporate clients could be
partially ring-fenced or reserved for specific development foci, such as
emerging entrepreneurs
Indirect funding of emerging entrepreneurs via the direct funding of
newly established co-operatives as well as via existing commercial
infrastructure, in order to support emerging entrepreneurs in specific
sub-sectors where marketing risks can be mitigated by off-take
agreements or contracts, as well as via the application of a core
unit/outgrower model (eg a sugar mill with HDP contract growers)
Direct funding of emerging entrepreneurs, via a revised set of lending
criteria (such as softer security/collateral parameters) that would be
partially determined by the sources of funding available for this subsector.
Target niche markets





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Direct funding of emerging entrepreneurs, particularly groups such as
trusts and communities, via the funding of inter alia enterprises that
utilize land now available under the national land reform initiative, as well
as those that can make a substantial contribution to food security. Such
funding could involve inter alia partial risk and profit sharing by Land
Bank, in the form of ordinary and/or preference shares and/or mezzanine
funding and/or the provision of debt instruments. Land Bank would
typically divest its equity holding over time, in favour of emerging
entrepreneurs
Direct funding of the participation by emerging entrepreneurs in
commercial primary or secondary agriculture (such as food processing)
Direct funding of the acquisition by emerging entrepreneurs of shares in
existing and/or expanding enterprises, in order to inter alia promote
national procurement policy
Direct funding and/or support of focused rural development enterprises
or initiatives involving communities and/or groups, particularly those
promoting the participation of women and/or youth and/or the disabled
(WYD).
Direct funding of non-HDP commercial farmers and/or entities.
Development impact parameters
 The DIP’s that will be considered by Land Bank in
assessing the development impact of each application
for finance from Land Bank
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Proposed Funding model to support development
 Specialist funding sources are expected to be utilized to support products aimed at
the target niche markets.
 The proposed funding model (refer also to the Funding Model to Support
Developmental Lending) identified various sources of funding that could enable the
bank to play a key role in meeting its development mandate in financing of the
agricultural sector.
 Land Bank is expected to make use of the following sources of funding:
 Equity (from the shareholder)
 Financial market funding, via the sale of Land Bank bonds/paper
 Multilateral development finance institutions (MDFI’s)
 Syndicates and/or special arrangements with commercial banks and/or other
development finance institutions (DFI’s)
 Focussed use of dividend income generated by the Land Bank Insurance Company
(LBIC)
 Grant funding, typically from the Departments of Agriculture and/or Land Affairs
 Each funding source will be used, where appropriate, to support a range of products
that will be developed for each target development niche markets, should they
qualify.
 Appropriate funding instruments, such as senior debt, junior/mezzanine debt, equity
and funding of capacity building, are also expected to be applied. This approach will
enable Land Bank to secure funding from funders whose mandate and/or funding
focus aims at very specific target niche markets.
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Next steps
 Fundsubcom is expected to progressively focus on the
following key aspects:
 Prioritization of the target niche markets
 An assessment of the availability of funds from various
funding sources.
 The development of an application appraisal
methodology that is able to measure the development
impact of each application for finance received.
 The development of appropriate funding instruments.
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Proposed Funding model to support development
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SUPPORTING
FINANCING
INSTRUMENTS
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Impediments to financing emerging farmers
 The Development Committee has identified some of the critical issues that have
impeded the financing of the emerging farmers in the agricultural sector. The
issues are as follows:
• Gearing effect on sustainability and viability of a farming enterprise
-
Many emerging farmers have limited cash resources to put as deposit in order to reduce
the level of gearing which when is high, imposes high debt service burden and lead to a
high probability of failure of the project particularly when the productive capacity of the
land is limited relative to the high costs of acquiring agricultural land and input costs. The
NCA also prevent financial institutions to finance farming projects were net asset value is
high but productive value is low
• The lag in loan service related to projects which take years to
generate cash flows to repay loans
-
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Some farming projects like the timber, fruit production and other sectors of similar nature
projects require that farmers first plant the trees which then take long to be ready for
production, leading into the inability of the farmer to service the debt costs within a year of
having incurred a loan for this purpose. The Land Bank does not currently have products
which enable these type farmers to only repay their debt when the trees begin to bear
fruits. For example, in case of timber, it takes seven years and more for trees to have
developed to a stage on which they can be sold and generate cash flow, while in case of
fruit production it takes a minimum of about three years for tress to develop to a level
where they can produce harvest
Impediments to financing emerging farmers
• Limited Insurance products available to cover full risk
- In case of insurance, the Land Bank insurance company has
products which only cover 70% of the risk. This means that there is
30% which is not covered, and the financing institutions have 30% of
open exposure which in case of the occurrence of the trigger event
has to be absorbed in the balance sheet. This leads to the
deterioration of the balance sheet of the institutions like the Land
Bank depending on the degree and level of capitalization as well as
the level of profitability
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Proposed solutions
 Equity Investments and Grants
•
•
•
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To reduce the high gearing effect on the emerging farmer’s ability to service
their debt it is recommended that the bank consult with the National Treasury
and the DOA with the objective to propose that the government consider the
following:
The Bank should also be allowed to develop equity instruments and use them
to invest is some of these projects. The benefits are that the debt service
costs will be reduced as equity investments by the bank will reduce the level
of debt, and its costs service burden. This means that the sustainability and
commercial viability of the project is improved. The Bank will then sell equity
to the owners at a nominal price when the Bank has archived its
expected/required return on the instrument (e.g. 5% real after Tax IRR)
The DOA and DLA should also be requested to provide the bank with cash to
be used as grants particularly in cases of the installation of infrastructure by
the beneficiaries of the land reform projects, and beneficiaries should only
borrow from the bank to finance production loans. The bank will develop
criteria on which beneficiaries can qualify for grants for this purpose. For
example, the criteria can say that in cases where the productive capacity of
the land is high the grant component will be low, but high in case of low
productive capacity
Land
Partners
Expertise
Community
Finance
Equity & Gearing
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Production
Proposed solutions
 Introduction of Grace Periods
•
For timber, fruit production and other sectors of similar nature, the bank should approach
National Treasury and DOA to provide funding that will be set aside for financing of loans
that require that beneficiaries should only start servicing their debt costs when production
begins. This can be done by establishing a separate fund that service interest costs in full
or in part, and require the beneficiaries to repay the fund (at concessionary rates were
possible) when production begins with the objective of minimizing the burden of interest
that is being capitalized when there was no payment made during the grace period (grace
period implies interest capitalized and therefore compounds the gearing problem which
can be negative if rates are not concessionary
 Insurance Fund
•
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The bank should approach the National Treasury and DOA to assist it with funds to set
aside to cover the 30% exposure that is not covered by insurance. This fund will be tapped
into by the Bank when the trigger events occur, but there should be a procedure that will
be put in place so that either National Treasury or DOA has power to approve that the
Bank should when the event occurs, tap into the fund finance the 30% shortfall. The other
vehicle that can be established is that the Shareholder and the Land Bank agree that the
bank will set aside a percentage of its profits for this purpose (this can be modeled along
the lines of the arrangement that NT has with DBSA for the Development Fund). The other
issue is for the Bank and shareholder to enter into negotiations on what is the appropriate
vehicle that can be put in place to ensure that there is cheap and affordable insurance
Required interventions and instruments
 To achieve some policy principles, several
interventions will need to be embarked upon,
including the following:
 Products
•
The Bank will develop appropriate products to enable delivery
of the targeted market niche in line with the requirements of
the market segments. These products will be reviewed on
annual basis
 Non-financial services to support new farmers and
the sector
•
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The Bank will facilitate and promote provision of non-financial
services to the agricultural sector. Aftercare services will form
the major thrust of these interventions
Required interventions and instruments
 Funding for development
• The Bank will raise funds in accordance with the target market
niches. The Bank will only lend in those target market niches that
are properly funded. It will then review funding requirements on
regular basis
 Stakeholder alignment and partnerships: corporate and operational
level
• The Bank will have a two-tier approach to managing stakeholders
and partners. At corporate tier level or strategic level; the Bank
will be guided by its stakeholder mobilisation, engagement and
management plan/programme. This will be a deliberate proactive process of engaging stakeholders and partners. At
operational tier level, the Bank will enter into formal memorandum
of understanding (MOU) with those partners and stakeholders it
enters into relationship with. The stakeholder management
process will be revised every two years.
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Required interventions and instruments
 Financing of strategic interventions for transformation
• The Bank will finance and facilitate implementation of
transformative programmes of government through (AgriBEE,
land reform and equity investments) within the Land Bank
mandate
 Role in the development of agriculture in the region (SADC)
• The Bank shall strive to position itself through SADC and
NEPAD institutions by identifying agricultural initiatives and
determines its role either through financial services and nonfinancials services.
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STAKEHOLDER
ENGAGEMENT AND
PARTNERSHIPS
STRATEGIC
FRAMEWORK
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The framework
ENVIRONMENT SCAN
KEY ISSUES
STRATEGIC AUDIENCES
ID E N T IF Y
S E G M E N T
IN D IV ID U A L
G R O U P
IN S T IT U T IO N
P O L IT IC A L
S O C IA L
E C O N O M IC
P R O F IL E
D E M O G R A P H IC
P S Y C H O G R A P H IC
P O S IT IO N
EXPECTATIONS
ALIGNMENT
KEY MESSAG ES
EN G AG EMEN T
IN FO R MATIO N
RESOURCES
SK ILLS
TO O LS
STR ATEG Y
SYSTEMS
STR U C TU R ES
ORGANISATIONAL
GOALS
C H A N N ELS
PLATFO R MS
B U D G ET
SH A R ED VA LU ES
STYLE
PROGRAMMING
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MONITORING
EVALUATION
The partnerships programme
 The core of the Land Bank Partnerships Programme
will be informed by the Land Bank Stakeholder
Mobilisation Framework. The Land Bank Partnerships
Programme (LBPP) is a multi-faceted and multi-disciplinary
process that seeks to mobilise partnerships based on the
Development Policy and Strategic Framework
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Partnerships identification process
Low Human
Capacity
High Human
Capacity
Low Financial Resource
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High human capacity and low
financial resource
Advantage to LB: skills, knowledge
LB contribution: financial resources
Prospective partners : Universities,
Research inst,
Strategy: long term relations
Low human capacity and low financial
resources
Advantages to LB : Vision
LB contribution: Capacity building:
Technical, Financial assistance
Prospective partners: Agriculture
formations, emerging cooperatives,
clients (subsistence farmers)
Strategy: short and medium
High Financial Resource
High human capacity and high financial
resources
Advantages to LB: Expertise, Finance
LB contribution: Agricultural
expertise/experience
Prospective Partners: DFI (National and
multilateral); Agri-Industry
Strategy: short, medium and long
Low human capacity and high financial
resources
Advantages to LB : Budget, mandate,
authority, policy initiative, programmes
LB contribution : Conduit for delivery,
One-stop shop, Agency, advocacy
Prospective partners : Government:
DoA, DLA, NT
Strategy: short, medium and long
THANK YOU
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