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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No: PAD1122
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVLOPMENT
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED LOAN
IN THE AMOUNT OF US$93 MILLION
TO THE
LAND AND AGRICULTURAL DEVELOPMENT BANK OF SOUTH AFRICA
WITH THE GUARANTEE OF THE REPUBLIC OF SOUTH AFRICA
FOR A
LAND BANK FINANCIAL INTERMEDIATION LOAN
DECEMBER 29, 2016
Finance and Markets Global Practice
Africa Region
This document is being made publicly available prior to Board consideration. This does not
imply a presumed outcome. This document may be updated following Board consideration
and the updated document will be made publicly available in accordance with the Bank’s
policy on Access to Information.
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CURRENCY EQUIVALENTS
(Exchange Rate Effective October, 30 2016)
Currency Unit = South African Rand
ZAR 13.47 = US$1
SDR 0.73 = US$1
FISCAL YEAR
January 1 – December 31
ABBREVIATIONS AND ACRONYMS
AES Agricultural and Environmental Services
AFC Agricultural Finance Center
AFS Annual Financial Statements
AfDB African Development Bank
AG Auditor-General of South Africa
B&CB Business and Corporate Banking
BBBEE Broad-Based Black Economic Empowerment
CASP Comprehensive Agricultural Support Program
CB Corporate Banking
CDB Commercial Development Banking
CEO Chief Executive Officer
CFO Chief Financing Officer
COO Chief Operating Officer
DAFF Department of Agriculture, Forestry and Fisheries
DBSA Development Bank of Southern Africa
DFI Development Finance Institution
DRDLR Department of Rural Development and Land Reform
EIA Environmental Impact Assessment
ERR Economic Rate of Return
ESMS Environmental and Social Management System
FIL Financial Intermediary Loan
FM Financial Management
FSDRP Financial Sector Development and Reform Program
GDP Gross Domestic Product
GRS Grievance Redress Service
IBRD International Bank for Reconstruction and Development
IDA International Development Association
IFAC International Federation of Accountants
IFRS International Financial Reporting Standards
IPF Investment Project Financing
ISP Implementation Support Plan
ISR Implementation Status and Results Report
JSE Johannesburg Stock Exchange
LOC Line of Credit
LRAD Land Redistribution for Agricultural Development
MAFISA Micro Agricultural Financial Institution of South Africa
NCR National Credit Regulator
NDP National Development Plan
NGO Non-government organization
NIM Net Interest Margin
NPF New Procurement Framework
NPL Non-Performing Loans
NPV Net Present Value
NT National Treasury
PDO Project Development Objective
PFI Participating Financial Intermediary
PLAS Proactive Land Acquisition Strategy
PS Performance Standards
RCB Retail Commercial Banking
REM Retail Emerging Markets
ROAA Return on Average Assets
ROAE Return on Average Equity
SAP Systems, Applications and Products
SARB South African Reserve Bank
SLAG Settlement/Land Acquisition Grant
SME Small and medium enterprise
S&P Standard & Poor
US$ United States Dollars
VCF Value Chain Financing
WB World Bank
WBG World Bank Group
ZAR
South African Rand
Regional Vice President: Makhtar Diop
Country Director: Ivan Velev (Acting)
Senior Global Practice Director: Gloria M. Grandolini
Practice Manager: Alejandro Alvarez de la Campa
Task Team Leaders: Gunhild Berg/Uzma Khalil
SOUTH AFRICA
Land Bank Financial Intermediation Project
TABLE OF CONTENTS
Page
I. STRATEGIC CONTEXT .................................................................................................1
A. Country Context ............................................................................................................ 1
B. Sectoral and Institutional Context ................................................................................. 4
C. Higher Level Objectives to which the Project Contributes .......................................... 9
II. PROJECT DEVELOPMENT OBJECTIVES ..............................................................11
A. PDO............................................................................................................................. 11
B. Project Beneficiaries ................................................................................................... 11
C. PDO Level Results Indicators ..................................................................................... 12
III. PROJECT DESCRIPTION ............................................................................................13
A. Project Components .................................................................................................... 13
B. Project Financing ........................................................................................................ 18
C. Project Cost and Financing ......................................................................................... 18
D. Lessons Learned and Reflected in the Project Design ................................................ 18
IV. IMPLEMENTATION .....................................................................................................20
A. Institutional and Implementation Arrangements ........................................................ 20
B. Results Monitoring and Evaluation ............................................................................ 21
C. Sustainability............................................................................................................... 21
V. KEY RISKS AND MITIGATION MEASURES ..........................................................22
A. Overall Risk Rating and Explanation of Key Risks.................................................... 22
VI. APPRAISAL SUMMARY ..............................................................................................22
A. Economic and Financial Analysis ............................................................................... 22
Financial Analysis ............................................................................................................. 22
B. Technical ..................................................................................................................... 23
C. Financial Management ................................................................................................ 23
D. Procurement ................................................................................................................ 24
E. Social and Environment (including Safeguards) ........................................................ 24
F. World Bank Grievance Redress .................................................................................. 26
Annex 1: Results Framework and Monitoring .........................................................................27
Annex 2: Detailed Project Description .......................................................................................31
Annex 3: Assessment of Land Bank ...........................................................................................41
Annex 4: Implementation Arrangements ..................................................................................52
Annex 5: Implementation Support Plan ....................................................................................62
Annex 6: Economic and Financial Analysis ..............................................................................65
Annex 7: Financial Sector, Agricultural Financing and Extension Services Overview ........71
Annex 8: PFI Due Diligence Criteria and Summary ................................................................87
i
PAD DATA SHEET
South Africa
Land Bank Financial Intermediation Project (P150008)
PROJECT APPRAISAL DOCUMENT
AFRICA
Finance and Markets Global Practice
Report No.: PAD1122
Basic Information
Project ID EA Category Team Leader(s)
P150008 F - Financial Intermediary
Assessment
Gunhild Berg, Uzma Khalil
Lending Instrument Fragile and/or Capacity Constraints [ ]
Investment Project Financing Financial Intermediaries [ X ]
Series of Projects [ ]
Project Implementation Start Date Project Implementation End Date
23-Jan-2017 1-Apr-2022
Expected Effectiveness Date Expected Closing Date
31-May-2017 31-Mar-2022
Joint IFC
No
Practice
Manager/Manager
Senior Global Practice
Director Country Director Regional Vice President
Alejandro Alvarez de
la Campa Gloria M. Grandolini Ivan Velev Makhtar Diop
Borrower: Land and Agricultural Development Bank of South Africa
Responsible Agency: Land and Agricultural Development Bank of South Africa
Contact: Bennie van Rooy Title: Chief Financial Officer
Telephone No.: 27-83380-0672 Email: [email protected]
ii
Project Financing Data(in USD Million)
[ X ] Loan [ ] IDA Grant [ ] Guarantee
[ ] Credit [ ] Grant [ ] Other
Total Project Cost: 93.00 Total Bank Financing: 93.00
Financing Gap: 0.00
Financing Source Amount
Borrower 0.00
International Bank for Reconstruction and
Development
93.00
Total 93.00
Expected Disbursements (in USD Million)
Fiscal
Year
2017 2018 2019 2020 2021 2022
Annual 18.60 27.90 18.60 18.60 9.30 0.00
Cumulati
ve
18.60 46.50 65.10 83.70 93.00 93.00
Institutional Data
Practice Area (Lead)
Finance & Markets
Contributing Practice Areas
Cross Cutting Topics
[ ] Climate Change
[ ] Fragile, Conflict & Violence
[ ] Gender
[ ] Jobs
[ ] Public Private Partnership
Sectors / Climate Change
Sector (Maximum 5 and total % must equal 100)
Major Sector Sector % Adaptation
Co-benefits %
Mitigation
Co-benefits %
Finance General finance sector 30
Agriculture, fishing, and forestry General agriculture,
fishing and forestry
sector
20
Finance SME Finance 50
iii
Total 100
I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information
applicable to this project.
Themes
Theme (Maximum 5 and total % must equal 100)
Major theme Theme %
Rural development Rural markets 50
Financial and private sector development Other Financial Sector Development 50
Total 100
Proposed Development Objective(s)
The project’s development objective is to sustainably scale up Land Bank’s financing, specifically to
benefit emerging farmers.
Components
Component Name Cost (USD Millions)
Line of Credit for Agricultural Financing 93
Systematic Operations Risk- Rating Tool (SORT)
Risk Category Rating
1. Political and Governance Moderate
2. Macroeconomic Moderate
3. Sector Strategies and Policies Moderate
4. Technical Design of Project or Program Moderate
5. Institutional Capacity for Implementation and Sustainability Moderate
6. Fiduciary Low
7. Environment and Social Moderate
8. Stakeholders Moderate
9. Other
OVERALL Moderate
Compliance
Policy
Does the project depart from the CAS in content or in other significant
respects?
Yes [ ] No [ X ]
Does the project require any waivers of Bank policies? Yes [ ] No [ X ]
Have these been approved by Bank management? Yes [ ] No [ ]
iv
Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]
Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]
The project will have impacts that will be managed in a manner consistent with the following World
Bank Performance Standards:
Performance Standards Yes No
PS 1: Assessment and Management of Environmental and Social Risks
and Impacts
X
PS 2: Labor and Working Conditions X
PS 3: Resource Efficiency and Pollution Prevention X
PS 4: Community Health, Safety, and Security X
PS 5: Land Acquisition and Involuntary Resettlement X
PS 6: Biodiversity Conservation and Sustainable Management of Living
Natural Resources
X
PS 7: Indigenous Peoples X
PS 8: Cultural Heritage X
Legal Covenants
Name Recurrent Due Date Frequency
Description of Covenant
Conditions
Source Of Fund Name Type
IBRD Guarantee Agreement, refer Article V (5.01) of
Loan Agreement
Effectiveness
Description of Condition:
The Additional Condition of Effectiveness consists of the following, namely, that the Guarantee
Agreement has been executed and delivered and all conditions precedent to its effectiveness
(other than the effectiveness of this Agreement), have been fulfilled.
Source Of Fund Name Type
IBRD Front-end Fee, refer Schedule 2, Section III B
1 (a) of Loan Agreement
Disbursement
Description of Condition:
Notwithstanding the provisions of Part A of this Section, no withdrawal shall be made (a) from
the Loan Account until the Bank has received payment in full of the Front-end Fee.
Source Of Fund Name Type
IBRD Retroactive Financing, refer Schedule 2, Disbursement
v
Section III B 1 (b) of Loan Agreement
Description of Condition:
Notwithstanding the provisions of Part A of this Section, no withdrawal shall be made (b) prior
to the date of this Agreement, except that withdrawal up to an aggregate amount not to exceed
eighteen million six hundred thousand (US$18,600,000) may be made for payments made prior
to this date but on or after April 1, 2016 for Eligible under Category (1).
Team Composition
Bank Staff
Name Role Title Specialization Unit
Gunhild Berg Team Leader Senior Financial
Sector Specialist Financial Sector GFM01
Uzma Khalil Team Leader(ADM
Responsible)
Senior Financial
Sector Specialist Financial Sector GFM01
Chitambala John
Sikazwe
Procurement
Specialist
Senior Procurement
Specialist Procurement GGO01
Tandile Gugu Zizile
Msiwa
Financial
Management
Specialist
Financial
Management
Specialist
Financial
Management
GGO26
Ayanda Mavundla Team Member Financial Sector
Specialist Financial Sector GFM01
Christiaan Johannes
Nieuwoudt
Team Member Finance Officer Disbursement WFALA
David J. Nielson Team Member Lead Agriculture
Services Specialist Agriculture GFA05
Dorothe Singer Team Member Economist Research DECFP
Edith Ruguru Mwenda Counsel Senior Counsel Legal LEGAM
Elizabeth Chacko Team Member Consultant Financial Sector GFM01
Ioannis John Balafoutis Team Member Lead Financial
Officer/Debt
Capital Markets &
CBP
Treasury FABBK
Jemima Harlley Team Member Program Assistant Administrative AFCS1
Kisa Mfalila Safeguards
Specialist
Senior
Environmental
Specialist
Environment
Safeguards
GEN01
Lalit Raina Team Member Adviser Financial Sector GFM03
Magalie Pradel Team Member Program Assistant Administrative GFM01
Paula F. Lytle Safeguards
Specialist
Senior Social
Development
Specialist
Social Safeguards GSU07
vi
Maria Eileen Pagura Team Member Consultant Agriculture GFM01
Extended Team
Name Title Office Phone Location
Locations
Country First
Administrative
Division
Location Planned Actual Comments
South Africa
1
I. STRATEGIC CONTEXT
1. The Government of South Africa is pursuing an ambitious policy agenda to support
rural development and achieve a reduction in poverty and inequality. To attain this goal,
South Africa’s National Development Plan (NDP) focuses on agricultural development and
successful land reform as two of its top priorities. As a leading development finance institution in
the rural and agricultural sector, the Land and Agricultural Development Bank of South Africa
(henceforth Land Bank) is a key provider of agricultural financing, including to historically
disadvantaged emerging farmers. The Land Bank plays an important role in contributing to
poverty reduction and reducing income inequality. The proposed project aims to address market
failures in the provision of agricultural financing, access to finance for historically disadvantaged
emerging farmers, and limited availability of medium to long-term financing in South Africa.
The project will contribute to these broad objectives by supporting Land Bank with long-term
financing. It will help the Land Bank refocus its operations to sustainably scale up lending to
emerging farmers through wholesale channels along with extension services and through direct
lending channels to facilitate emerging farmers’ integration into established value chains. By
targeting farmers and farm workers who are considerably poorer than other income earners in
South Africa, the project will contribute to poverty reduction and income equality.
A. Country Context
2. More than twenty years after the end of apartheid, unemployment, poverty and
inequality remain important development challenges in South Africa, despite substantial
progress in overcoming the legacy of the past. While total employment increased from 9
million in 1996 to 16 million in 20151, the unemployment rate has stayed stubbornly high in the
range of 20-26 percent. In 2015 approximately 5.4 million South Africans were unemployed, of
which about 40 percent were new entrants.2 A 30 percent increase in per capita Gross Domestic
Product (GDP) since the late 1990s and a sharp expansion of the social grant coverage enabled a
significant decline in the poverty rate—from 43.5 percent of the population living below ZAR
219 (inflation-adjusted)3 a month in 2000 to 36.7 percent (or 18.3 million people) living below
ZAR 501 in 2015.4 Nevertheless, pockets of poverty remain deeply entrenched, mostly among
the historically disadvantaged population. With a relatively stagnant income Gini coefficient of
around 0.69 in 2011 (versus 0.72 in 2006 and expenditure Gini of 0.634 in 2015 (versus 0.67 in
2006), South Africa has one of the highest inequality rates in the world. Land distribution, in
particular, is one of the most unequal in the world.5 Threatening progress in poverty alleviation is
the impact of the drought on agriculture and the widening gap between those with and without
jobs.6
3. Recent developments in economic activity are not indicative of major improvements
in growth or employment. South Africa’s annual GDP is estimated to have increased by 1.3
1 Bulletin of Statistics, March 2016, Statistics of South Africa.
2 WBG South Africa Economic Update, February 2016.
3 Methodological report on rebasing of national poverty lines and development of pilot provincial poverty lines,
Statistics South Africa. Refers to population living below the National Lower Bound Poverty Line, those who can
purchase both adequate food and non-food items but must sacrifice food in order to obtain the non-food items. 2000
and 2011 data is from IES survey. 2011 data is based on rebased methodology. 4 WBG South Africa Economic Update, February 2016.
5 South Africa CPS FY2014-17.
6 WBG South Africa Economic Update, February 2016.
2
percent in 20157, compared to 1.5 percent in 2014 and 2.2 percent in 2013, a result of depressed
global conditions, as well as labor unrest and electricity shortages which compounded structural
constraints.8 This weak growth is well-below the projected 5 percent growth needed to drive
down unemployment. Inflation was relatively subdued in 2015 amid lower food and fuel prices
(5.2 percent as of December 2015, up from 4.8 percent in November). However the Reserve
Bank increased the repurchase rate by a total of 125 basis points from start 2015 to end March
2016 due to a deterioration of the inflation outlook as a result of the effects from rising food
prices due to the drought, the risk of a higher pass-through from the sharp depreciation of the
rand (depreciated by more than 30 percent against the dollar in 2015 and continued to weaken in
January 2016, before showing a subsequent moderate recovery) and subdued global growth.9
4. A weaker growth environment will pose a challenge in the management of the fiscal
deficit, which in turn increases the sovereign credit risk. In an effort to mitigate sovereign
credit risk, the National Budget Speech of February 2016 announced a strong fiscal adjustment
effort, bringing the fiscal deficit from 3.9 percent of GDP for 2015/16 to 2.8 percent by 2017/18.
The original target of the 2015 budget had been 2.5 percent, however deterioration in the growth
outlook rendered the target unrealistic. In December 2015, Fitch and Standard and Poor’s (S&P)
downgraded South Africa’s creditworthiness rating to BBB-, one notch above speculative grade,
and S&P placed its rating on negative watch. The turmoil in markets experienced in December
2015 when a weakening in the government’s commitment to fiscal discipline was perceived,
hints at the potential fallout from a further ratings downgrade.10
5. A substantial reduction in poverty and inequality will be hard to achieve without a
major success in rural development. As stated by South Africa’s National Development Plan
(NDP)11
, the main challenge for rural development in South Africa is to “combat the
marginalization of the poor”. While the rural share of poverty fell from 70 percent in 1993 to
58.3 percent in 2011,12
partly due to migration of the poor to townships and informal settlements
around urban centers, rural areas remain characterized by greater poverty and inequality than
urban areas. The contraction in agricultural production at double-digit rates in the first three
quarters of 2015, as extreme weather conditions related to El Nino led to the most severe drought
in almost 20 years, pushed an estimated 50,000 South Africans into poverty.13
6. Agriculture development and successful land reform are key pillars of the strategy
laid out by the NDP for integrated and inclusive rural development. South Africa’s
agriculture sector is characterized by dualism: a modern, market-oriented capital intensive
farming sector consisting of a small number of large commercial farms (around 40,000 farming
units14
) and a large number of subsistence and small-scale or emerging farms, many in the
former homeland areas. In addition, there is growing consolidation in the industry with a number
of mergers taking place and the acquisition of smaller players.15
While improving economies of
7 National Budget Speech, February 2016.
8 WBG South Africa Economic Update 2015.
9 Statement of the Monetary Policy Committee, March 2016.
10 Ibid
11 National Development Plan, p.195.
12 Poverty Trends in South Africa, An examination of absolute poverty 2006 – 2011, Statistics South Africa.
13 WBG South Africa Economic Update, February 2016.
14 Department of Agriculture, Forestry and Fisheries (DAFF): Abstract of Agricultural Statistics, 2010.
15 Examples include the merger of AFGRI and Senwes retail businesses to become Hinterland, OCEANA’s
acquisition of Foodcorp’s fishing business, Rainbow’s acquisition of 64 percent of Foodcorp as well as a stake in
Zambia’s Zambeef, among others.
3
scale, this consolidation may also lead to lower competition in the market. Around 2006, over
80 percent of South African farmers worked on a piece of land of one hectare or smaller, and
another 11 percent on one to five hectares. Only 3 percent had access to land of larger than 20
hectares.16
It is estimated that there are 2.5 – 3.5 million households engaged in subsistence
farming, about 350,000 – 700,000 who can be classified as emerging farmers, producing part of
their output for the market, and between 11,000 – 15,000 small to medium scale farmers who are
commercially oriented.17
7. The progress of land reform has been slow and a large number of land reform
beneficiaries are not using the land productively. The government committed itself to transfer
30 percent of the 82 million hectares of agricultural land owned by whites in 1994 to historically
disadvantaged farmers by 2014, a total of 24.5 million hectares, through both land restitution and
land redistribution. According to the Twenty Year Review published by the Presidency, only 9.4
million hectares have been redistributed since 1994 through both land restitution and
redistribution.18
Achieving the objective of “productive use” of redistributed and restituted land
requires even greater efforts and innovation. Land reform in South Africa to date has involved
the transfer of relatively large commercial farms in their entirety to groups of beneficiaries. Land
reform beneficiaries are typically resource-poor, risk-averse, and inexperienced historically
disadvantaged farmers. Support provided to them after their takeover of the land, that is post-
settlement support, has been inadequate. Land reform beneficiaries have experienced numerous
problems accessing services, such as credit, training, technology extension, transport, plowing
services, veterinary services, and marketing services. The well-developed agribusiness sector
that services large-scale commercial agriculture has not been seen extending its operations to
emerging farmers who, in most cases, would be cash-strapped and incapable of paying for such
services anyway.19
As a consequence, there is limited integration of small farmers into the value
chain.
8. Support for small-scale farmers is equally crucial to job creation. Employment in the
formal agriculture sector declined from 1.1 million in 1992 to 739,000 in 201420
despite output
growth. Nevertheless, the NDP believes that with successful rural development and land reform
the agriculture sector has the potential to create 1 million new jobs21
by 2030. The NDP counts
on small-scale/ emerging farmers for over 35 percent of the job creation target, in addition to a
10 percent share from subsistence farmers, a 10 percent share expected from better use of the
land that has already been redistributed or restituted to land reform beneficiaries, and a 30
percent share from expansion of labor intensive commercial farming.
16
National Development Plan, p.199. 17
DAFF: Abstract of Agricultural Statistics, 2012; FinScope, 2010; FinMark Trust: The Status of Agricultural and
Rural Financial Services in South Africa, 2013; Center for Inclusive Banking at the University of Pretoria: The
Microfinance Review, 2013. 18
The Presidency, Twenty Year Review, p.64. 19
Edward Lahiff and Guo Li. 2012. “Land Redistribution in South Africa -- A Critical Review”, pp.14-17. 20
The Presidency, Twenty Year Review, p.65. Several factors have undermined the growth of agricultural jobs.
These include higher levels of mechanization, driven partly by a desire to compete internationally. The necessary
introduction of rights for resident farm workers, including security of tenure, has resulted in one of the most intense
migration patterns in South Africa’s history. Close to a million people were uprooted from commercial farms
between 1994 and 2003, destroying jobs and undermining household food security. See “Economic Diagnostic”
prepared for the NDP, p13. 21
National Development Plan, p.197.
4
B. Sectoral and Institutional Context
9. South Africa’s financial sector is the most developed in Sub-Saharan Africa and is
significantly larger and more diversified compared to regional and income-group peers. It
is supported by an elaborate legal and financial infrastructure and a generally effective regulatory
framework. South Africa’s financial system totaled approximately ZAR 10 trillion in assets as of
year-end 2014 (US$ equivalent of 1,026 billion). As of end 2014, the banking sector constitutes
almost 40 percent of the financial system assets, with pension funds and long-term insurers each
contributing roughly 35 and 18 percent, respectively (see Annex 7 for a more detailed
description of the financial sector).
10. The banking sector is highly concentrated, but at the same time commercially
driven and professional. The ‘big four’ banks in South Africa, two of which are foreign
owned22
, account for over 83 percent of total banking assets. This concentrated ownership
structure has led to limited competition and distorted incentives for these banks to serve the
lower end of the market, especially micro, small, and medium-sized enterprises and the low-
income population. Nevertheless, the banking system generally is highly professional and
commercially driven, and does not suffer from distortionary policies.
Provision of agricultural finance and support
11. One of the main challenges for rural and agriculture development is affordable
access to working capital for emerging farmers and medium to long-term finance for small
and medium-sized agricultural enterprises. While the financial services needs of the large
commercial farms are generally well catered for by the private sector, farmers in rural areas
experience many of the challenges faced by their peers in other African countries, ranging from
difficulties in accessing markets, poor infrastructure, and little or no physical assets that could be
used as collateral for accessing financing. With few exceptions, emerging and small-scale
farmers are unable to use the land that they farm on as collateral given that the state owns most
of the land in the former homelands. FinScope’s 2010 Small Business Survey estimates that of
the roughly 700,000 emerging and small commercial farmers, only 5.6 percent used formal credit
services and only 2.5 percent from a bank. In contrast, nearly half of those farmers used formal
savings and/ or payments services and about 30 percent formal insurance.
12. Without adequate collateral, rural farmers face challenges in accessing credit from
traditional commercial banks. While the ‘big four’ commercial banks have made efforts to
become more inclusive, their business models and cost structure do not lend themselves to
serving the agricultural sector. Some banks are funding value chain off-take agreements23
with
large processors and retailers for on-lending to smaller farmers, but such lending is small
compared to the overall loan book of commercial banks. According to the Department of
Agriculture, Forestry and Fisheries (DAFF), total farming debt amounted to ZAR 116,576
million in 2014, out of which ZAR 66,345 million was from commercial banks and ZAR 30,580
22
One is majority and the other one minority foreign-owned. 23
Off-take agreements are agreements between a producer and a buyer to purchase/sell portions of the producer's
future production.
5
million from the Land Bank.24
Compared to total commercial bank loans and advances of ZAR
2,967 billion,25
agricultural lending amounts to about 1 percent of their total loan book.
13. A wide range of programs have been implemented by the government to provide
financial support to land reform beneficiaries and small-scale farmers. In 1994 the
government introduced the Settlement/Land Acquisition Grant (SLAG) to enable individuals and
groups to finance the purchase of land from a willing seller. Until 2000, redistribution policy
centered on the provision of a grant of ZAR 16,000 to qualifying households with an income of
less than ZAR 1,500 a month. In 2001 the Land Redistribution for Agricultural Development
(LRAD) Grant was introduced to establish and promote emerging farmers. LRAD offered higher
grants, paid to individuals rather than to households, and made greater use of loan financing
through institutions such as Land Bank to supplement the grant. A few years later, the slow pace
of land reform led to the introduction of the Proactive Land Acquisition Strategy (PLAS) in
2005-06. The use of grants for land acquisition was discontinued, and the focus was shifted to
the acquisition of strategically located land through PLAS by the state. Since its inception, PLAS
has become the biggest single program area within redistribution, in terms of both budget and
land area.26
14. There are also initiatives designed to provide post-settlement support to land reform
beneficiaries. The LRAD policy for example sets out to close the post-settlement support gap
that prevailed under SLAG. In addition, the Comprehensive Farmer Support Program (CFSP)
provides two grants, one for capacity building and one for on-farm infrastructure. In order to
access on-farm infrastructure grants ranging from a minimum of ZAR 5,000 to a maximum of
ZAR 100,000, beneficiaries must make an ‘own contribution’ along a sliding scale similar to that
of the LRAD grant program. It is a once-off support package designed for LRAD beneficiaries.27
The Comprehensive Agricultural Support Program (CASP) supported by DAFF offers grants to
support short-term operating expenses and small operating needs such as machinery. These
grants are managed at the provincial level and come from funds that are transferred from the
national to the provincial level. Combined land acquisition grants, both for redistribution and
restitution, totaled ZAR 13.6 billion between 2008 and 201228
while grants for movable
equipment and fixed improvements amounted to ZAR 13.4 billion between 2004 and 2012
(DAFF). Borrowing for working capital needs to operate and expand farms has been one of the
most acute challenges for emerging and small farmers as well as land reform beneficiaries due to
the reasons mentioned above.
15. Value chain integration is an opportunity to address significant skills and financing
gaps of emerging farmers. In South Africa, there is a growing recognition in government and
the private sector that value chain integration may be an effective way of building up a new class
of commercial emerging farmers. Drawing on the successful experiences in the sugar, poultry,
cotton, tobacco and forestry sectors, the government and private sector are joining forces to scale
up efforts in these and other sectors. A new area opening for value chain integration is in the
supply of fresh fruits and vegetables to retail supermarkets. With new Broad Based Black
Economic Empowerment (BBBEE) procurement policies government is encouraging the private
24
DAFF: Abstract of Agricultural Statistics, 2015. 25
SARB Selected South African banking sector trends December 2014. 26
The Presidency, Twenty Year Review, pp.63-4. Edward Lahiff and Guo Li. 2012. “Land Redistribution in South
Africa -- A Critical Review”, pp.8-12. 27
Peters Jacob. 2003. “Evaluating land and agrarian reform in South Africa”. 28
National Treasury: Medium-term Budget Policy Statement, 2008-12.
6
sector to get involved. For example, Walmart-Massmart has established a supplier fund to
support emerging farmer integration into their supply chain.29
The South African Poultry
Association through the creation of the Developing Poultry Farmers Organization (DPFO)
facilitates technical and financial assistance to access contracts with egg and poultry
businesses.30
Land Bank
16. In addition to government grants, financing from Land Bank has been expected to
play a critical role in land reform and agriculture development. Land Bank was established
in 1912 and is governed by the Land and Agricultural Development Bank Act of 2002. Land
Bank was given a mandate of 11 aspects, which fall into five broader areas: (i) access of the
historically disadvantaged population to land; (ii) agriculture productivity, growth and job
creation; (iii) gender equity; (iv) environmental sustainability; and (v) food security. The NDP
published in 2011 continues to call for a key role of Land Bank in providing financial support to
land reform beneficiaries and to help them overcome difficulties in entry into commercial
farming31
(see Annex 3 for detailed assessment of Land Bank).
17. As the leading development financial institution in the rural and agriculture sector
in South Africa, Land Bank had an approximately 29 percent market share in agricultural
financing as of July 2015. The bank32
has achieved a significant turnaround during the past five
years. It is now on a sustainable trajectory with profits of ZAR 420 million in 2014/15 (up 61
percent from 2013/14), and a Return on Average Assets of 1.12 percent and a Return on Average
Equity of 6.78 percent. Total assets stood at ZAR 39.4 billion in 2014/15 with a performing loan
book of ZAR 36 billion. Non-performing loans (NPLs) under Land Bank methodology were at
3.72 percent in 2014/15 and the cost-to-income ratio was 54.9 percent. Fitch Ratings upgraded
Land Bank from AA to AA+ in January 2014. The rating was maintained at AA+ in December
2015. Moody’s Investor Services has assigned Land Bank a credit rating of Aa1.za in May 2016. The
bank does not take general deposits and funds itself mainly through the debt and capital markets,
issuing instruments such as promissory notes.
18. Land Bank is fully owned by the South African government and supervised by the
National Treasury.33
It follows prudential guidelines as issued by its Board of Directors. It is
consequently not prudentially supervised by the South African Reserve Bank (SARB). The bank
is audited by the Auditor General. Land Bank is engaged in both wholesale lending through
intermediaries as well as direct lending. Intermediaries are mainly credit providers, cooperatives,
or agri-businesses.
19. In 2015, Land Bank adopted a new strategy following the completion of its
organizational review. The review was undertaken following conditions set by NT pursuant to
29
“Smallholders and agrifood value chains in South Africa – Emerging practices, emerging challenges,” 2013.
PLAAS, Institute for Poverty, Land and Agrarian Studies, School of Government, University of the Western Cape,
pp.1-4. 30
“A Profile of the South African Egg Industry Market Value Chain,” 2014. Department of Agriculture, Forestry
and Fisheries, Republic of South Africa, pp.22-24. 31
National Development Plan, p.200. 32
Source of financial information is Land Bank’s 2014 and 2015 Annual Report. Per the report, Land Bank Group
includes REM, RCB, B&CB, LDFU, and LBLIC. Land Bank only includes REM, RCB, B&CB and Group Capital. 33
In 2008, the administrative and supervisory powers over Land Bank were transferred from the Minister of
Agriculture and Land Affairs to the Minister of Finance.
7
the issue of a government guarantee, aimed at enabling the Land Bank to raise longer term
funding. The review was completed in August 2015, and subsequently an implementation plan
was approved by the Land Bank Board. Land Bank has started implementing the new strategy
and key changes are planned to be put in place over a two-year period in line with the priorities
of Land Bank. The changes focus on: (i) a strategy to optimize the retail commercial banking
segment of Land Bank, the long-term viability of which was a concern owing to loan losses and
significant operational costs; (ii) new initiatives to potentially expand the development portfolio
of Land Bank for emerging farmers34
in a sustainable and commercially viable manner by
adopting a project finance approach in partnership with large corporates and intermediaries to
integrate the emerging farmers into established value chains; and (iii) steps to align Land Bank
financial soundness indicators, credit appraisal processes and risk management practices with
international banking standards.
20. Following the adoption of this new strategy, Land Bank has two main business lines:
Corporate Banking (CB) and Commercial Development Banking (CDB).35
The new CDB
business line is a combination of previous Retail Emerging Markets (REM) and Retail
Commercial Banking (RCB) business lines. In 2014/15, CB accounted for 83.6 percent of the
bank’s loan book and CDB accounted for 16.4 percent, of which 1.3 percent was composed of
loans provided under REM.36
21. Under CDB, the wholesale finance facility continues to focus on lending to emerging
farmers for development purposes. Farmers supported under this facility typically have no or
limited access to commercial funding and little or no collateral, but can be commercially
sustainable and viable with financing and technical support. Subsistence farmers are not
supported under CDB. Lending is based on cash-flows and non-financial support (end to end on-
farm support) is provided by Land Bank intermediaries and agricultural specialists based in Land
Bank branches.37
The wholesale lending to emerging farmers offers production financing,
installment sale finance, and medium-term loans. The total wholesale finance portfolio to
emerging farmers amounted to ZAR 489 million in 2014/15 (increase of ZAR 97 million in that
year).
22. Intensive and high-quality extensions services under the wholesale finance facility to
emerging farmers are effectively provided by Land Bank’s intermediaries. These
intermediaries have a comparative advantage in providing these services due to their close
interaction with the beneficiaries. The non-financial complementary services, especially
extension services, are critical for emerging farmers to develop (see Annex 7 for a summary of
extension services provided in South Africa). The costs for the extension services are embedded
in the overall cost structure under wholesale finance facility and are borne by the
intermediaries.38
While the provision of extension services is costly, especially for new emerging
farmers, intermediaries can generate profits from these clients over time due to the long-run and
comprehensive nature of engagement between intermediaries and their clients. The current
34
In addition to existing wholesale lending currently provided under REM. 35
The new Corporate Banking unit is the former Business and Commercial Banking unit. . 36
Information in Land Bank’s 2015 Annual Report is disaggregated by former three business lines i.e. B&CB, RCB
and REM. For the purpose of analysis in this section, the financial information for RCB and REM is consolidated
where appropriate. 37
These refer to the existing branches and Agricultural Finance Centers. 38
This means that intermediaries are shouldering the costs of providing required extension services instead of Land
Bank, partly justifying the lower-cost financing they are receiving.
8
model of providing extension services is considered to be of high quality according to the
assessment carried out during project preparation.
23. Under CDB, the RCB business line which was exclusively focused on direct retail
lending to medium scale farmers, through 27 Agriculture Finance Centers (AFCs), has
been significantly restructured to improve its long term sustainability. RCB was loss-
making due to high operating costs of the large branch network and had NPLs of 11 percent in
2014/15. RCB was losing clients to commercial banks and agricultural enterprises who started to
lend in that space and could offer a wider range of products. The competitiveness and long-term
viability of RCB was therefore questionable. The new strategy aims at consolidating the branch
network into 9 provincial offices in strategically important geographical locations which will
also result in significant staff reduction. Importantly, the consolidated branch network’s role will
specifically focus on facilitating effective partnerships in their respective regions with corporate
retailers, emerging farmers, government programs, as well as technical and financial
intermediaries to leverage on high impact and high value chain finance deals.
24. Importantly, as part of the new strategy, Land Bank aims to scale up financing
support to emerging farmers in a sustainable and commercially viable manner through
their integration in established value chains. The approach is anchored in identifying high-
potential value chain projects in a given geographic region and securing buy-in from large
agriculture corporates or technical partners to assist in supporting emerging farmers’ integration
into the chain. The agriculture corporates will provide technical support (directly or indirectly) to
the emerging farmers, building up their capacity to be sustainable suppliers to the chain. Land
Bank has identified selected potential value chain projects and agriculture corporates to partner
with in the grains, winery, horticulture and livestock sectors for this type of financing.
25. The CB business line is the corporate part of the bank and the most viable business
line. The CB business line involves both direct and wholesale lending. Lending takes place
primarily through intermediaries (cooperatives and agri-businesses). CB operates through two
offices in Pretoria and Cape Town. The total portfolio of CB amounted to ZAR 31 billion in
2014/15. While CB targets commercial farmers, the workers employed on these farms tend to be
part of the low-income population.
26. Land Bank aims at increasing its developmental focus in both CB and CDB business
lines by strengthening its wholesale business as well as its direct lending to emerging
farmers. Both business lines contain a development portfolio with “development” referring to a
focus on supporting the historically disadvantaged population in line with Broad-Based Black
Economic Empowerment (BBBEE).39
International experience with development banks suggests
that wholesale lending is more likely to be successful than retail lending. The key reason is that
wholesale lending does not require a large branch network which is costly to build and maintain
but rather leverages the networks already built by other financial service providers. Wholesale
lending is also more market enabling and does not aim at competing with the private sector.
Direct lending via value chain financing leverages the corporate partner’s ability to provide
technical support to the borrower, building up their capacity to be sustainable suppliers to the
chain. As such, emerging farmers in this scheme have the potential to increase their revenues and
thus a greater likelihood of fulfilling debt obligations to the bank. The project will therefore
focus on supporting Land Bank in scaling up its wholesale portfolio as well as expanding direct
39
http://www.economic.gov.za/about-us/programmes/economic-policy-development/b-bbee.
9
lending through LB’s new approach of integrating emerging farmers into established value
chains. Using long-term financing to fill existing funding gaps will additionally help Land Bank
meet its investment needs as well as improve its asset liability management.
27. Land Bank is making an important contribution to job creation. Land Bank
estimates that the impact of its loan disbursements on employment opportunities in South Africa
was close to 400,000 in 2013-2014.40
This estimate is comprised of over 23,000 new
employment opportunities generated and over 370,000 jobs maintained during the year. One
employment opportunity constitutes 240 days worked per year. The estimated new jobs created
are arising out of the medium and long-term loans Land Bank is providing.
C. Higher Level Objectives to which the Project Contributes
28. Through the role of Land Bank in rural and agricultural development, the project is
strongly linked to the government’s objectives of eliminating poverty, reducing inequality
and improving job creation. The goals of the NDP are fully aligned with the twin goals of the
World Bank to eradicate extreme poverty and increase shared prosperity. The operation has been
requested by National Treasury and Land Bank and carefully calibrated to their specific needs.
29. The project will contribute to poverty reduction by targeting farmers and farm
workers who are considerably poorer than other income earners. According to South
African household data (Table 1), an approximation for those working as farmers and farm
workers shows that this group is twice as poor as other workers, receives about 53 percent less
income, and lives in households with consumption per capita about 54 percent lower than other
workers. The difference holds for international as well as national poverty lines. The group is
also predominantly black. The project will support Land Bank in providing financing to those
farmers and farm workers, which will contribute to poverty reduction.
Table 1: Poverty Characteristics of Farmers in South Africa
Source: World Bank calculations based on Income and Expenditures of South Africa Metadata, Statistics of South Africa.
Notes: Farmers (all) is an approximation of the universe of farmers. Other wage earners includes those with gainful employment
outside of farming, and ‘other groups’ includes non-wage earners including social grant and pension recipients. The national
poverty lines are defined as ZAR335, ZAR 501 and ZAR 779 per capita per month respectively. The lowest poverty line sets a
monetary value below which an individual is not able to attain a basic minimum nutritional requirement.
30. Through supporting Land Bank’s growth and development plan, the project will
support job creation in the agricultural sector in South Africa. Based on Land Bank’s
estimates, the bank is playing an important role in job creation and job maintenance in South
Africa. Jobs are not only created for emerging farmers under the CDB business line but also for
poor farm workers who are employed on commercial farms supported under CB. Given that the
project will provide long-term funds to Land Bank, which the bank estimates to contribute most
40
Land Bank Annual Report 2013-2014.
Population $1.25 a day $2.5 a day National Low National Med National Upper
Total Economy 50,175,588 0.12 0.36 0.22 0.37 0.54 0.79 21,472
Farmers (all) 465,360 0.10 0.32 0.18 0.33 0.52 0.92 20,447
Other Wage Earners 11,524,933 0.04 0.16 0.08 0.17 0.31 0.68 34,870
Other groups (non-wage,
including social grant
beneficiaries) 38,185,295 0.14 0.42 0.26 0.43 0.61 0.83 17,441
Poverty Rates Share of
Blacks
Average
Consumption
10
to job creation and which the bank will on-lend to farmers through its intermediaries, the project
will have a direct contribution to job creation in the agricultural sector of South Africa.
31. The project will address market failures in the provision of agricultural financing
and limited access to finance for previously disadvantaged emerging farmers. Commercial
bank financing for agriculture amounts to 1 percent of commercial bank’s loan book (ZAR 2,753
billion) which is low compared to farmers reported demand. In addition, financing from
commercial banks can typically not be accessed by emerging farmers due to a lack of adequate
collateral. The CDB business Land Bank is designed to specifically provide financing to
emerging farmers, who do not have collateral as security, so that these farmers can later become
commercially viable. In addition, the CB business line also has a large developmental portfolio
in line with BBBEE and indirectly supports poor farm workers employed on the commercial
farms supported under CB. The project will support Land Bank in addressing these market gaps
by providing additional resources to specifically finance emerging farmers in a sustainable
manner.
32. Moreover, the project will support Land Bank in piloting its new approach to scale
up financing for emerging farmers by facilitating their integration into established value
chains. The emerging farmers lack financing and operate largely outside of the established
agriculture value chains. However, partnerships with corporates and technical partners operating
in the same value chain have demonstrated the potential for addressing farmers’ skills and
financing gaps by sustainably integrating emerging farmers into established value chains. This
project will support Land Bank’s initiative to finance such projects, by directly lending to
emerging farmers within a structured value chain project.
33. The project will also address the limited availability of medium to long-term
financing for Land Bank. Currently, Land Bank predominantly relies on short-term funding
sources for lending to the agricultural sector due to limited availability of medium and long-term
financing. The availability of long-term financing under the project will help Land Bank in
improving its asset-liability management and deepening its financial intermediation capacity.
34. The project will complement the active WBG engagement with the government on
achieving its rural development and financial inclusion objectives. Under the reimbursable
advisory services program agreed with the Department of Rural Development and Land Reform
(DRDLR) in 2010, the World Bank is providing knowledge advisory services to support the
development and implementation of the Comprehensive Rural Development Program that will
also help government in addressing some of the challenges faced in the implementation of the
land reform program. A US$4 million multi-donor World Bank executed Trust Fund launched in
2014, the Financial Sector Development and Reform Program (FSDRP), provides analytical and
advisory services to the South African government on a range of initiatives aimed at expanding
financial inclusion and strengthening financial stability. Among the activities in the financial
inclusion space are advice on the establishment of a credit information service for SMEs and a
movable collateral registry, a review of government support schemes aimed at expanding SME
finance, a strengthening of the retail payments landscape including agency and mobile banking,
and advice on personal insolvency and an enhanced consumer protection framework. The WBG
also delivered a diagnostic report on the possibility of public private partnerships for agricultural
insurance to the National Treasury in 2016 and is currently discussing possibilities to provide
support on this area going forward. Moreover, IFC is engaged with private financial institutions
11
to enhance private sector access to funding through short-term liquidity support and longer-term
foreign currency funding.
35. The operation is fully aligned with the Country Partnership Strategy (CPS) for
South Africa for the period of FY2014-1741
and the Twin Goals of the World Bank Group
to eradicate extreme poverty and increase shared prosperity. The project is expected to
contribute to all three pillars of the CPS. First of all, it supports the reduction of inequality by
increasing access to finance for the historically disadvantaged population, specifically to benefit
emerging farmers. Secondly, it catalyzes private investment in rural development and agriculture
through financing solutions provided by Land Bank. Thirdly, it helps strengthening institutional
capacity of Land Bank on agricultural financing as well as asset-liability management, and the
capacity of its intermediaries.
II. PROJECT DEVELOPMENT OBJECTIVES
A. PDO
36. The project’s development objective is to sustainably scale up Land Bank’s
financing, specifically to benefit emerging farmers. The PDO will be achieved by providing
long-term financing for Land Bank. This will facilitate a broader and deeper financial
intermediation by Land Bank and diversify its funding sources away from government.
B. Project Beneficiaries
37. Project beneficiaries will be the target beneficiaries under CDB and CB business
lines as detailed in the respective credit policies. The wholesale finance facility under CDB
focuses on historically disadvantaged South Africans in primary agriculture fulfilling certain
criteria, such as a maximum asset size of ZAR 3 million, access to land, farming on a full-time
basis, difficulties in accessing traditional financing due to a lack of security, and existing off-take
agreements or contracts in place. CB clients are either historically disadvantaged or other clients
engaged in primary and secondary agriculture. According to the CB credit policy, they must be
solvent, have viable business plans, and adequate security, among others. Indirectly, the project
will benefit the poor farm workers employed in the commercial farms supported by CB. Under
Land Bank’s new approach to scale up financing support to emerging farmers in a commercially
viable manner through integrated value chain finance projects (or partnerships), the target
beneficiaries are groups of historically disadvantaged emerging farmers in the form of an agri-
business, cooperative or other forms of partnerships and engaged in primary and secondary
agriculture. The beneficiaries will benefit from the financing provided by Land Bank for
investment and working capital loans. In addition, participating financial intermediaries (PFIs)
will benefit from the longer-term funding provided through the project.
38. The target beneficiaries are farmers under CDB and emerging farmers under CB
who are more likely to be poor than other income earners. As shown in Table 1 above, the
target beneficiaries are twice as poor as other workers and receive about 53 percent less income.
By supporting those farmers and emerging farmers through financing, Land Bank and the project
will contribute to poverty reduction and income equality, subject to high quality extension
services and the infrastructure required for successful farming being in place as well.
41
Country Partnership Strategy (CPS) for South Africa for period of FY2014-14, Report No. 77006-ZA, October
17, 2013.
12
C. PDO Level Results Indicators
39. The achievement of the objectives and outcomes of this project will be measured
through the following PDO results indicators:
Volume of wholesale loans disbursed under the project (amount US$).
Volume of direct value chain loans disbursed under the project (amount US$).
Number of direct project beneficiaries.
Total NPL rate under the credit line (%).
Intermediate results indicators will be as follows:
Increase in outstanding loan portfolio of Land Bank (%).
Increase in CB outstanding loan portfolio of Land Bank (%).
Increase in REM outstanding loan portfolio of Land Bank (%).
NPL rate for Land Bank (%).
Land Bank liabilities that are long-term (over 1 year) (%).
Return on Average Equity (%).
Land Bank Return on Assets/ Equity (%).
Figure 1: Project Level Result Chain
40. The indicators primarily focus on measuring the change in Land Bank’s business
model towards wholesale financing and increasing its developmental impact through
increased lending to emerging farmers. As the PDO is targeted at changing the behavior of
Land Bank, and ultimately the use of wholesale financing as a mechanism to affect agricultural
Input Activity Output Outcomes
US$93 MM LoC from WBG
WBG disburses to LB
LB disburses
Primary1) Expand LB’s wholesale lending
business through increased lending to PFIs
2) Support value chain financing partnerships
Secondary1) Demonstration effect PFIs
increase lending (to commercial and emerging farmers) and extension services (to emergingfarmers)
2) Integrate emerging farmers into value chains
Tertiary1) Increase access to medium and
long-term finance for commercial and emergingfarmers
2) Promote job creation and income generation
WBG Complimentary Engagements
1) RAS on land Reform2) Assessment of extension services in
South Africa3) FSDRP on financial inclusion, incl. e.g.
credit bureaus, collateral registries, and SME finance
4) IFC investments
Corporate Commercial
DevelopmentCorporate
Commercial Development
Project level Results Chain
13
financing in the longer-term, the indicators above measure how the project will contribute to
Land Bank’s overall portfolio and its asset-liability management framework. While it is
anticipated that the project will benefit the CDB and CB target customers, it would not be
prudent to measure beneficiary level impact in this project because the link between the project
and these beneficiaries is not direct.
III. PROJECT DESCRIPTION
A. Project Components
41. The project is a financial intermediary loan (FIL) of US$93 million to Land Bank as
the borrower and implementing agency with a guarantee of the Republic of South Africa.
The project has one component: a Line of Credit (LOC) for Agricultural Financing in the amount
of US$93 million.
Component 1: Line of Credit for Agricultural Financing (US$93 million)
42. The objectives of the LOC component are to:
Support Land Bank in refocusing its operations on wholesale lending. As explained in
section I.B., Land Bank uses both wholesale and direct lending under the Corporate
Banking (CB) and Commercial Development Banking (CDB) business lines. Given Land
Bank’s limited branch network and based on international best practices for Development
Finance Institutions (DFIs), wholesale lending is more sustainable because it helps Land
Bank leverage a network of financial intermediaries without incurring significant
operating costs. In addition, wholesale lending allows Land Bank to play a market
enabling role because it permits agricultural borrowers to build credit history with
financial intermediaries and improve their financial records for commercial loans, thus
improving their ability to gain access to credit. The LOC will help Land Bank in
expanding wholesale lending to both commercial and emerging farmers under the CB and
CDB business lines respectively. Through supporting the CB business line, the LOC will
support employment generation for poor farm workers employed on the commercial
farms supported. The CB business line also contains a large and growing developmental
portfolio in line with BBBEE, therefore making an important contribution to the NDP
and Land Bank’s development goals.
Support Land Bank’s new approach to help integrate emerging farmers into established
value chains. Based on the outcomes of its organizational review, Land Bank decided to
scale up financing support to emerging farmers in a sustainable and commercially viable
manner through partnerships with large agriculture corporates that emphasize integrating
emerging farmers in established value chains. The approach is anchored in identifying
high-potential value chain projects in a given geographic region and securing buy-in from
large agriculture corporates or technical partners to assist in supporting emerging
farmers’ integration into the chain. The agriculture corporates will provide technical
support (directly or indirectly) to the emerging farmers, building up their capacity to be
sustainable suppliers to the chain. Land Bank has identified potential value chain projects
and agriculture corporates to partner with in the grains, winery, horticulture and livestock
sectors for this type of financing. The success of these initiatives is expected to have a
demonstrative effect in the medium term helping to bring in commercial banks’ financing
for such initiatives and agriculture in general which is currently very limited.
14
Box 1: Trends in Development Finance Institution Practices
Based on the Global Survey of Development Banks (World Bank Policy Research Working Paper 5969, 2012), a
survey of 90 DFIs across the World, several trends for the DFI sector can be identified (although there are obviously
counterexamples for each trend). The survey included a range of DFIs across all regions and with different
mandates. Out of the DFIs with a specific mandate, the majority were focused on agricultural activities. Some of the
main trends based on the survey are:
While the majority of DFIs are entirely government-owned, mixed public-private capital structures are
becoming more common;
DFIs still serve as the largest source of long-term credit for agriculture, housing, and infrastructure in
emerging economies;
The majority of DFIs are not accepting deposits from the general public, but raise funding from the
wholesale and capital market. This allows DFIs to focus on their lending operations, avoid direct competition
with the private sector, and limit the potential exposure of taxpayers to losses. In addition, governments tend to
move away from direct budget transfers, preferring to guarantee the debt and liabilities of the institution;
The credit model used by DFIs is trending away from mixed wholesale/ retail towards a wholesale-only
model;
Governments seek to make DFIs self-sustaining and insulate them from political interference. Only half of
all DFIs offer credit at subsidized interest rates;
The trend is for DFIs to be profitable and have non-performing loan (NPL) ratios of below 5 percent,
reflecting greater wholesale credit activity (all wholesale-DFIs had NPL ratios below 5 percent), better
governance, professionalization of management, and stronger risk management practices; and
Regulation and supervision of DFIs is being strengthened, with the favored model now to require DFIs to
comply with commercial banking regulations. The clear majority of DFIs are regulated and supervised by the
same authority that supervises private commercial banks.
43. To achieve the above objectives, Land Bank will provide both wholesale finance to
participating PFIs for on-lending to commercial and emerging farmers and direct
financing, in partnership with large agriculture corporates, to emerging farmers to support their
integration in established value chains. It will do so through two main financing windows:
Window 1: Wholesale finance to commercial and emerging farmers. This window will
provide a wholesale line of credit to Land Bank. Land Bank will on-lend the funds to
participating financial intermediaries (PFIs) which comply with eligibility criteria agreed
with the World Bank. The PFIs will on-lend funds to eligible agriculture enterprises,
commercial and emerging farmers, communal property associations and other eligible
borrowers supported under the Land Bank’s CB and CDB business lines. Currently, the
wholesale line under CDB primarily focuses on lending to emerging farmers, however,
over the life of the project this may change to include other wholesale loans under CDB.
Window 2: Financing to integrate emerging farmers into established value chains. This
window will provide a line of credit to Land Bank to finance direct lending to emerging
farmers for integrated value chain finance. For direct lending to value chain
finance/development projects, Land Bank will finance eligible emerging farmers and
agriculture enterprises in collaboration with large agriculture corporates and/or technical
partners in a targeted value chain.
15
44. It is expected that 70 percent of LOC funds will be used to support wholesale
lending and 30 percent will be used for direct lending to emerging farmers for their
integration in established value chains. However, this ratio will be kept flexible in both
directions to allow for adjustments based on market and portfolio developments in the bank’s CB
and CDB business lines.
45. Consistent with Land Bank’s pricing policies, the interest rates to intermediaries in
wholesale financing and for borrowers through direct financing will be determined by the
customer segment.
Window 1: Commercial farmers under CB. Land Bank will on-lend funds to PFIs at
interest rates that take into account at minimum Land Bank’s cost of funding, operating
costs and an appropriate credit risk margin.
Window 1: Emerging farmers under CDB. For these farmers, Land Bank will on-lend
funds to intermediaries at interest rates that will allow the bank to at least cover its
average costs of funds.
Window 2: Emerging farmers in established value chains. The pricing for direct lending
by Land Bank to integrate emerging farmers in established value chains will be market-
based. Land Bank aims to implement the new approach to scale-up financing for
emerging farmers in a commercially viable and sustainable manner. Thus, pricing for this
financing will cover Land Bank’s cost of funding, operating costs and an appropriate
credit risk margin.
46. The interest rates to final borrowers will be market-based to ensure sustainability
and avoid creating interest rate distortions in the market. The PFIs for both commercial and
emerging farmers will be able to freely set their interest rates, which are expected to cover at
least the cost of funding, operational costs and an appropriate credit risk premium based on the
credit assessment of the borrower.
47. The lower interest rates for emerging farmers under wholesale finance facility will
allow Land Bank and the PFIs to finance clients that would otherwise be excluded from
formal sector financing. While on-lending for emerging farmers will initially be at average cost
of funds, these farmers are expected to be able to graduate to commercial funding after a period
of five years, underlining the sustainability of the program. Moreover, Land Bank is currently
reviewing its wholesale finance facility to emerging farmers pricing policy to allow Land Bank
to at least break-even on pricing by covering at least its average cost of funds and operating
costs. In addition, interest rates for emerging farmers under CDB will be subject to continuous
review to ensure that the objectives of the program are achieved while ensuring Land Bank’s
sustainability.
48. To meet its wholesale lending objectives under CB and CDB business lines, Land
Bank is currently engaged with a broad range of intermediaries. Those include agricultural
cooperatives, large agricultural companies, and credit providers. These intermediaries have a
credit provider license and are supervised under the National Credit Act by the National Credit
Regulator. The intermediaries are primarily providing credit to their clients with whom they have
existing business relationships in the form of input supplies contracts, off-take agreements etc.
and provide technical advisory services specifically to emerging farmers. Currently, Land Bank
16
is working with ten intermediaries who are engaged under both CB and CDB. In addition,
additional intermediaries in the pipeline are expected to operate for both CB and CDB. These
intermediaries are providing financing for sugar cane, grain, citrus, fruits, vegetables and
livestock. The intermediaries are geographically spread across all provinces.
49. In addition to financing, the intermediaries provide intensive and high-quality
extension services, particularly to emerging farmers. Since Land Bank’s intermediaries have
been engaged in agricultural activities for the past several decades, they have developed a unique
comparative advantage in providing extension services to farmers specifically tailored to their
individual needs. These extension services include training, skills development and mentoring of
smallholder beneficiaries and range from hands-on advice on crop selection, plantation, inputs
needs and harvesting to training on agriculture marketing, business planning etc. For the
wholesale finance facility to emerging farmers, these extension services are embedded in the
financing, recognizing the fact that emerging farmers need financing as well as technical
assistance to succeed. A review of extension services in South Africa found that these programs
have proved successful in establishing commercially successful emerging farmers (see Annex 7
for more details).
50. While all interested PFIs of Land Bank will ultimately be appraised, Land Bank
and the World Bank initially selected six intermediaries that are operating in both the CB
and CDB business line and assessed them against the eligibility criteria. The eligibility
criteria took into consideration Land Bank’s selection criteria for intermediaries and the
recommendations on financial intermediary financing under the World Bank’s Operational
Policy OP10. The OP10 policy requires an assurance that all PFIs in a World Bank financed
LOC are viable financial institutions determined by: (a) adequate profitability, capital, and
portfolio quality as confirmed by audited financial statements; (b) acceptable level of loan
collections; (c) appropriate capacity, including staffing, for carrying out subproject appraisal
(including environmental assessment) and for supervising subproject implementation; (d)
capacity to mobilize domestic resources; (e) adequate managerial autonomy and commercially
oriented governance; and (f) appropriate prudential policies, administrative structure, and
business procedures. Annex 8 contains the detailed eligibility criteria for PFI participation in the
LOC. Land Bank will enter into Sub-Loan Agreements (SLA) with the selected PFIs, which will
specify terms and conditions on the use of the LOC as agreed between Land Bank and IBRD.
PFIs will not be obliged to draw on the available funding, and interest costs and other fees will
only be charged upon accessing the LOC.
51. Based on the assessment, two intermediaries fully meet the eligibility criteria and
three generally meet the criteria for participation in LOC. Of the six intermediaries
appraised during preparation, two intermediaries fully meet the eligibility criteria; two
intermediaries generally meet the eligibility criteria except for capital structure; and one
intermediary generally meets the eligibility criteria, however it needs to improve the quality of
its loan portfolio and cash flows going forward. One intermediary does not meet the eligibility
criteria at this moment, however it can participate as intermediary once the issues identified in
the due diligence are resolved. Annex 8 describes the eligibility criteria in more detail.
52. The available LOC funding will be used based on a drawdown mechanism. Once
PFIs are approved for funding from Land Bank, they receive a drawdown facility of the
approved amount with a fixed maturity, for example five years, which they can use to finance
projects complying with the agreed eligibility requirements. Loans to final beneficiaries will be
17
provided by PFIs from the drawdown facility up to the amount and maturity approved. Land
Bank will receive funding from the LOC based on the submission of internally approved
drawdown facilities for intermediaries in line with the eligibility criteria or the submission of
interim financial reports. There will be a limit of 25 percent of the LOC facility per intermediary
to encourage the participation of several PFIs in the project. In case a PFI is unable to utilize the
facility, the unutilized amount can be allocated to other PFIs. PFIs will need to comply with the
ongoing eligibility criteria during their participation in the LOC (see Annex 8). The repayments
will be collected in a revolving fund and will be used to provide funding for new sub-loans.
53. Specific criteria for the sub-loans to final borrowers as well as eligible borrowers
were agreed between Land Bank and the World Bank. The sub-loans to final borrowers
under the CDB and CB business line will follow Land Bank criteria as well as additional criteria
agreed between Land Bank and IBRD, aimed at meeting the project objectives. The final
borrowers under the LOC will be primarily those supported under Land Bank’s CDB and CB
business lines and complying with the respective eligibility criteria, described in Annex 2.
54. For direct lending to emerging farmers, Land Bank will work with a number of
corporate and technical partners to facilitate capacity development and value chain
integration. The project will support Land Bank’s new development lending initiative which
provides direct loans to emerging farmers that are part of a larger value chain integration project.
The emphasis is on emerging farmer sustainability through targeted technical assistance within a
specific value chain. These interventions can take different forms depending on the specificity of
the value chain. Land Bank is considering a number of value chain financing projects in the
grains, winery, horticulture and livestock sectors. As foreseen in its approved restructuring, Land
Bank will hire additional staff with VCF/project finance expertise to develop and scale up this
initiative. For illustrative examples of different value chain financing modalities see Annex 2.
55. The technical assistance needs of Land Bank and beneficiaries are being met
through different sources outside the proposed project. Land Bank needs to further
strengthen its institutional model and development impact while ensuring sustainability.
Currently, Land Bank is receiving substantial funding from the African Development Bank
(AfDB) to help address current and potential technical assistance needs. These funds are still
partially unutilized and have been used to date to develop Land Bank’s Environmental and
Social Management System (ESMS) which was a recommendation by the team during
preparation. Additionally, Land Bank is committed to using its own internal resources for further
institutional strengthening and aligning its risk management practices with international
standards. Following the completion of the organizational review, Land Bank has engaged
external experts to improve its business procedures and risk management models. The support
already provided to Land Bank is deemed sufficient based on Land Bank’s current capacity.
56. The technical assistance needs of emerging farmers under the wholesale finance
facility to emerging farmers are met by Land Bank’s intermediaries. As specified earlier,
intermediaries are effectively providing targeted extension services to emerging farmers. For the
wholesale finance facility to emerging farmers, these extensions services are embedded in the
financing provided by intermediaries. Moreover for direct lending, as foreseen in its approved
restructuring plan, Land Bank will hire additional staff with VCF/project finance expertise to
develop and scale up this initiative. The project, therefore, does not include a separate technical
assistance component.
18
B. Project Financing
57. The project will be financed through Investment Project Financing (IPF) in the
amount of US$93 million on IBRD terms, to be implemented over five years.
58. The loan to Land Bank will be converted from US$ into local currency. Land Bank
has indicated a preference for long-term funding (an amortizing loan with a final maturity of 25
years with 4 years grace period) in ZAR based on a variable spread over a floating Jibar 3 month
rate. IBRD financing in ZAR can be made available to Land Bank through the currency
conversion options embedded in the loan, subject to the availability of a liquid swap market in
ZAR at the time of disbursement. Indicative pricing based on market conditions at that time has
been discussed with Land Bank, along with an explanation of the conversion options.
C. Project Cost and Financing
Project Components Project cost IBRD or IDA
Financing % Financing
1. Line of Credit for Agricultural Financing
Total Costs
US$93 million
IBRD
100%
Total Project Costs
Front-End Fees
Total Financing Required
US$93 million
US$93 million
IBRD 100%
D. Lessons Learned and Reflected in the Project Design
59. International experience related to development finance institutions shows that a
wholesale model leads to a better performance compared to a focus on retail lending. In a
wholesale-only model the DFI provides incentives to private sector financial intermediaries to
enter new markets or expand services to existing markets by providing funding, other financial
products, and linked technical assistance which increases the attractiveness of these markets
and/or makes bank credit feasible, for example, by providing term funds to allow longer-term
funding for investment projects. Under the wholesale lending approach, DFIs tend to have lower
operating costs because the PFIs select and assess the loan applications of end-customers.
Through PFIs, DFIs can reach a larger number of end-customers and cover more locations
without incurring high operating costs. The model also promotes the growth of PFIs, which
become extensions of the DFI, and helps reach under-served sectors and clients. Furthermore,
credit risk is partially absorbed by the PFIs.
60. Operating a DFI on a retail basis has numerous disadvantages. First, a retail-oriented
DFI has to have an extensive retail infrastructure which entails significant capital and ongoing
operational costs for the establishment, staffing and operation of a branch network and attendant
back office costs. Second, DFIs following a retail-model are often perceived as an arm of the
government by clients, potentially leading to worse repayment discipline and therewith
potentially large contingent fiscal liabilities. Third, if the DFI has access to deposit funding,
discipline in terms of transparency, governance requirements, and performance is required to not
endanger deposits. In addition, compliance costs with prudential regulations would increase
because any DFI taking deposits should be regulated and supervised similarly as commercial
19
banks. Finally, credit risk exposure and credit losses of the DFI can increase in a retail model as
a result of its direct credit exposure to end-users without the insulation provided by wholesale
lending to other institutions (where the capital of the retail borrower stands between the DFI and
any losses). The focus of this project on financing wholesale lending by Land Bank to its CB and
CDB business lines is therefore supported by international experience.
61. LOCs should be based on commercial principles. DFIs that are fully operationally and
financially self-sustaining perform better. For example, the Development Bank of Southern
Africa (DBSA) needed to be recapitalized in 2011 because of political pressure to work more
with poorer segments of society and to take on more risk at subsidized rates beyond its financial
capacity. The DBSA case demonstrates that rather than encouraging the dilution of DBSA’s
mandate, the authorities would have been better advised to provide subsidies to those
municipalities that were unable to afford the market-conforming financing otherwise available
from DBSA. The project fully incorporates commercial principles.
62. Experience based on other World Bank financed LOCs shows that the LOC terms
should allow for flexibility. The Turkey Access to Finance for SMEs Project (P082822) was
designed to allow for operational adjustments as needed to ensure effective implementation. The
loan terms were flexible and they could be granted for working-capital and investment purposes.
There were also no restrictions on eligible sectors because historical experience suggests that
unviable projects receive financing merely by virtue of the sector requirements. The Land Bank
FIL will support investment and working capital loans, and the allocation of funds between the
CB and CDB business lines will remain flexible to accommodate market and portfolio
developments.
63. Evidence from other countries reveals how the authorities have grappled with
avoiding situations where DFIs ‘crowd out’ the private sector and thereby impair their
impact. To avoid cross-subsidization and crowding out the Mexican DFIs have moved away
from lending at subsidized interest rates to lending on market-conforming terms. NAFIN’s
second-tier lending model was based on granting credit at longer maturities and lower costs than
typically available in the Mexican market, reflecting its ability to raise capital at sovereign
interest rates. With the reduction of the spread between sovereign interest rates and inter-bank
rates, these subsidized rates became less attractive, eventually leading NAFIN to create an
innovative program that increases demand for its funding without having to rely on interest rate
subsidies. FIRA’s initial practice of providing directed credit at lower-than-market rates and
subsidized credit guarantees was marked by high administrative costs, widespread strategic
defaults induced by debt-forgiveness programs, and failure to reach the intended clientele,
resulting in significant fiscal costs. Its strategy has shifted to establishing partnerships between
large agribusiness companies and primary producers, and in the process creating new financial
and risk management instruments attractive to private-sector financial intermediaries. In Brazil,
long-term loans are subsidized by the Treasury as a result of BNDES refinancing itself with the
government at a directed long-term rate which is lower than the corresponding yield on
government bond issues. Such subsidies eventually impact the federal public debt and have given
rise to concerns due to ‘crowding out’ of commercial banks. The fear is that favored borrowers
which already have access to the credit markets have turned to BNDES solely to reduce their
financing costs, and that there is low impact associated with BNDES’s lending (i.e. the private
market would in any case have funded these companies if BNDES had not). In recent years,
BNDES has ramped up schemes supporting access to finance for SMEs which do not involve
subsidized lending.
20
64. Experience from other WBG projects suggests that projects should build on existing
supply chain relationships if possible or encourage new relationships to develop. The
productive partnership model, which has been implemented in countries such as Papua New
Guinea, Bolivia, and Colombia, has primarily served to facilitate or strengthen value chain
relationships between farmers and agribusinesses with complementary products and services
through the extension of short-term in-kind credit and relevant technical assistance. In these
instances, the relationships and services did not exist or were limited in nature and needed
external support to scale up. In contrast, Land Bank already works with a number of PFIs that
have long-standing relationships with commercial and emerging farmers through which targeted
technical assistance and credit is extended for inputs and machinery. In South Africa, these
private-sector led relationships have proven to be more beneficial for farmers (refer to Annex 7)
than similar government-led grant programs. In addition, the focus in this project is more on the
extension of long-term credit compared to the productive partnership model.
65. The experience with the AfDB line of credit to Land Bank indicates a high demand
for funds with 50 percent disbursement since 2013, yet disbursement under the REM
business line has been slow. Due to the high risk and extensive need for technical support to
emerging famers in addition to financing, the growth of the REM portfolio has been slow,
especially in its initial stages. While growth is expected to be stronger now that an initial
portfolio and experience has been built, expanding the REM portfolio sustainably has remained
challenging. It is expected that Land Bank’s new approach to facilitate integration of emerging
farmers in established value chains in a commercially viable manner may help in opening new
opportunities to expand support to emerging farmers. In addition, a significant amount of AfDB
funds for technical assistance (US$1 million) remain available to meet Land Bank’s institutional
needs.
IV. IMPLEMENTATION
A. Institutional and Implementation Arrangements
66. The IBRD loan of US$93 million consists of one component: Line of Credit for
Agricultural Financing (US$93 million).
67. The loan will be extended to Land Bank as the borrower and implementing agency
with a guarantee of the Republic of South Africa. Land Bank will use the funds under the
LOC component for on-lending to PFIs. The arrangement will be governed by the following
formal agreements: (i) loan agreement between IBRD and Land Bank, (ii) guarantee agreement
between IBRD and the Republic of South Africa, and (iii) Sub-Loan Agreements between Land
Bank and PFIs. Land Bank will pay a guarantee fee to National Treasury. The envisaged flow of
funds under the LOC component is depicted in Figure 2.
Figure 2: Flow of Funds
21
68. Land Bank will be responsible for project implementation and monitoring. The
Chief Financial Officer has been designated as the primary counterpart for the project in Land
Bank. He will be supported by the respective operational teams to monitor project
implementation and report to the World Bank. Dedicated staff in Land Bank has been identified
for managing all aspects of the project, including reporting on implementation progress and
monitoring and evaluation, ensuring compliance with environmental and social safeguards as
well as with financial management and procurement arrangements. Extensive supervision by the
World Bank team is planned during project implementation to support Land Bank and the PFIs.
Detailed implementation arrangements are described in Annex 4.
B. Results Monitoring and Evaluation
69. Land Bank will monitor and evaluate progress against the proposed indicators
through regular reports. Land Bank will report on the PDO and intermediate indicators as set
out in Annex 1 on a semi-annual basis. The data will come from Land Bank’s internal reports
and from information provided by the PFIs. Land Bank will prepare quarterly Interim Financial
Reports for the project. The specific reporting templates will be defined in the Project’s
Operational Manual. Land Bank’s financial performance will be audited annually by the Auditor
General.
C. Sustainability
70. The sustainability of the project will be ensured by Land Bank’s as well as the
government’s commitment to increase financing for the agricultural sector, and specifically
to emerging farmers. Achieving the NDP’s job creation and poverty reduction goals will not be
possible without substantial progress in rural and agricultural development. The government’s
commitment to the sector and the importance of affordable access to financing for emerging
farmers to succeed will ensure that the project’s objectives will remain at the center of the
government’s reform agenda. In addition, while the World Bank can play a catalytic role by
providing Land Bank with medium-term financing, which is scarce and costly at this stage, it is
expected that in the future, Land Bank will be able to secure such funding directly from the
market. This will ensure sustainability of the operation in the longer term. In addition, it is
expected that the emerging farmers financed by Land Bank will transition to commercial farming
over the course of about five years, further supporting sustainability of the project and Land
Bank overall.
22
V. KEY RISKS AND MITIGATION MEASURES
A. Overall Risk Rating and Explanation of Key Risks
71. The overall project implementation risk is Moderate primarily due to potentially
conflicting interests among stakeholders, Land Bank’s internal governance, a new lending
engagement in South Africa after a considerable time, and the scope of Land Bank’s and
the PFI’s capacity. As a fully government-owned institution, Land Bank can be mandated by
the government to support specific industries and companies, which may affect the sustainability
of the bank. However, in 2009 the supervision of Land Bank was transferred to National
Treasury and since then Land Bank has implemented a comprehensive strategy to put the bank
on a sustainable path. The strategy is further enhanced by the recent organizational review
undertaken and being implemented by Land Bank. Furthermore, the project is designed to
mitigate governance risks through the inclusion of specific eligibility criteria for sub-loans to
ensure appropriate fund utilization. However, due to recent political upheaval in South Africa,
including at National Treasury, there could be implications for the oversight over Land Bank in
the long term. PFIs who on-lend through Window 1 will make credit decisions based on their
own credit risk assessment and commercial considerations. The direct financing by Land Bank
through Window 2 will only be in partnership with corporate and/or technical partners where
there is a clear business case to support targeted value chains. The project signifies a new lending
engagement in South Africa after a considerable time in a new sector which poses challenges
regarding the understanding of WBG’s policies, procedures and fiduciary arrangements. The
project responds to specific client demand and NT’s strong interest in the project. During
implementation the World Bank team will work closely with government institutions and Land
Bank to strengthen the understanding of WBG fiduciary arrangements. Moreover, the project
complements the active WBG engagement with the government on achieving its rural
development and financial inclusion objectives through the reimbursable advisory services
program on rural development and the World Bank executed Trust Fund on the Financial Sector
Development and Reform Program, which will help in continuing the policy dialogue on key
reforms. In regards to capacity, Land Bank is a new WBG client and not familiar with the
WBG’s fiduciary arrangements. These arrangements could place a higher burden on Land
Bank’s normal operating procedures. By extension, the WBG’s fiduciary requirements could
also place a higher burden on the PFIs capacity to disburse the funds. In addition, PFIs could
face challenges to scale-up their financing and/ or advisory support in line with the needs of the
project or there could be inadequate demand for the services at the price at which it is offered.
Land Bank’s ongoing effort to align its mandate with the objectives of the NDP, progress in
implementing key changes following the organizational review, well-developed lending criteria,
and a thorough due diligence of the PFIs including estimates for absorptive capacity are the key
measures incorporated in the project design to reduce the probability and impact of these risks.
VI. APPRAISAL SUMMARY
A. Economic and Financial Analysis
Financial Analysis
72. The financial analysis projects that Land Bank will grow its loan book considerably
through 2020. The strongest growth is expected in the development portfolio. The development
23
portfolio provides financing to the disadvantaged population in line with Broad-Based Black
Economic Empowerment (BBBEE) and emerging farmers and is represented in both the CB and
CDB business lines (see Annex 3 for a detailed analysis of Land Bank’s financial performance as
well as Annex 6).
Economic Analysis
73. This economic analysis aims to assess the contributions of both the CDB and CB
business lines to job creation and income generation, among others. In particular, the
economic analysis aims to quantify the costs and benefits that accrue from providing a line of
credit for agricultural financing, separately for the CDB and CB business lines. The Net Present
Value (NPV) and Economic Rate of Return (ERR) are calculated for each business line with a
number of sensitivity checks. The analysis is based on data and assumptions provided by Land
Bank and expert opinion. Further details on the methodology, assumptions, and data used in the
economic analysis are provided in Annex 6.
74. Overall, the ERR of the line of credit component of the project is expected to be 31
percent. The NPV is expected to be approximately ZAR 317 million assuming a discount rate of
10 percent (ZAR 248 million assuming a discount rate of 12 percent) as shown in Table 1. The
positive valuation indicates that the returns on investment exceed the returns that could be
otherwise earned by World Bank financing. As such, the improvements in the income of end-
borrowers and the monetized value of jobs created, net of interest costs paid by end-borrowers,
outweigh the cost of investment under this component.
B. Technical
75. The technical design of the project is closely linked to the NDP which highlights
agricultural development and successful land reform as key pillars of the strategy for
integrated and inclusive rural development. Importantly, the design incorporates World Bank
technical expertise and international good practices on financing through DFIs using wholesale
mechanisms. The LOC is based on commercial principles and includes flexible terms to adjust to
changing needs of the project. The project design is based on extensive consultations with Land
Bank, NT and other relevant stakeholders. The project builds on lessons learned from the
implementation of previous LOC projects.
C. Financial Management
76. Land Bank’s financial management (FM) system will be used for the
implementation of the project, with the already laid down oversight arrangements by
National Treasury and the Land Bank Board. The Systems Applications & Products (SAP)
accounting system is capable of producing periodic reports for monitoring the financial aspects
of the project. Reliance can be placed on the oversight functions of the organization, namely, the
internal audit function. The reviews are carried out independently and objectively. The internal
audit function plays an oversight function in the disbursement of the loans to ensure that policies
are implemented as intended.
77. Land Bank will maintain a Rand designated account for the implementation of the
Bank financed component. Disbursements into the designated account will be based on interim
financial reports. Disbursements and oversight on the intermediaries will be done based on Land
Bank’s credit policy.
24
78. The annual financial statements will be audited by the office of the Auditor General.
The audit will be undertaken in accordance with international standards on auditing promulgated
by the International Federation of Accounts (IFAC) and audit reports will be submitted to the
World Bank within six months after the financial year-end, 30 September each year. The FM
arrangements meet the Bank’s minimum requirements under OP/BP 10.00 Financial
Management.
D. Procurement
79. The South Africa Land Bank Financial Intermediation Loan (FIL) received World
Bank management clearance on March 14, 2016 to proceed as an early adopter of the
World Bank’s New Procurement Framework (NPF). Specifically, the operation is a FIL
where the final recipients of loan funds are private sector enterprises to which the New
Procurement Framework does not apply as per Section I.1 of the World Bank Policy,
“Procurement in IPF and Other Operational Procurement Matters”. Independent oversight for
providing assurance that funds have been used for the intended purpose will rely on the external
audit conducted by the Auditor General of South Africa. The Sub-Loan Agreements (SLAs)
between Land Bank and the PFIs will include the World Bank’s audit rights and the Anti-
Corruption Guidelines of January 2011, which will also be made applicable to all beneficiaries of
the sub-loans. The World Bank is not required to have any new implementing rules and/or
documents and neither will the World Bank be required to provide any additional resources for
implementation support and monitoring. Land Bank in turn is not required to have any additional
capacity to apply the NPF.
E. Social and Environment (including Safeguards)
80. The project has been categorized as a Financial Intermediary Loan (FI-2) with
moderate environmental and social risks and impacts according to the World Bank’s
Performance Standards (PS) for the Private Sector Projects (OP/BP 4.03). The Project has
been categorized as a Financial Intermediary Loan (FI-2) according to the World Bank’s
Performance Standards for the Private Sector Projects (OP/BP 4.03). Project activities to be
supported by the FIL will mainly focus on agriculture and agri-business which involves the
cultivation of sugarcane, citrus-fruits, grain and processing of food products which are likely to
generate minimal environmental and social risks and impacts that are site-specific, largely
reversible and can be readily addressed through mitigation measures. The specific nature, scope
and location of the agriculture and agri-business activities will be known during implementation
when the PFIs receive loan applications from the beneficiaries. Land Bank will be required to
manage the environmental and social risks of the FIL-supported activities consistent with the
requirements of the OP/BP 4.03 and applicable national environmental and social laws and
regulations, while the PFIs will have the responsibility of screening loan applications for
environmental and social risks and impacts and manage the risks and impacts in a manner
consistent with the procedures stipulated in the Environmental and Social Management System.
81. The following World Bank Performance Standards have been applied: PS1:
Assessment and Management of Environmental and Social Risks and Impacts, PS2: Labor and
Working Conditions, PS3: Resource Efficiency and Pollution Prevention, PS4: Community
Health, Safety and Security, and PS5: Land Acquisition and Involuntary Resettlement. PSI, PS3
and PS4 are applied because of the inherent nature of environmental and social impacts
associated with agriculture and agri-business operations which will likely generate point and
25
non-point source pollution from run off emanating from the use of pesticides/herbicides in
controlling weed infestation on farms and potential increased use of fertilizer to increase crop
productivity, effluent discharges and solid waste generated from agro-processing activities, noise
and air emissions from agro-processing facilities, occupational health and safety of workers due
to lack of or in-use of Personal Protective Equipment (PPE), soil erosion from poor or lack of
proper site drainage, and contamination of water (both surface and ground water) from oil spills.
PS1 is applied to prevent and manage the potential environmental risks and impacts.
Beneficiaries of the sub-loans will be required to carry out environmental and social assessments
equivalent to the level of risk assessed by the PFIs and prepare appropriate safeguard instruments
to mitigate the impacts in compliance with the World Bank’s PSs and national environmental
laws and regulations. PS2 is applied as beneficiaries to the loan will engage in agriculture and
agro-processing activities which should comply with national laws on worker health and safety.
PS3 is applied to ensure proper management and appropriate application of fertilizers as well as
availability of well-established pest mitigation measures through Pest Management Plans. PS4 is
applied to ensure that effective protection is ensured against risks emanating from agro-
processes, gas releases from agro-processing facilities, chemical hazards, fire and explosions,
and that community relations are maintained. PS5 is applied because although Land Bank will
not finance the acquisition of land under the project, intensification of agriculture on existing
holdings could result in land tenants’ relocation within a specific property. Based on feedback
during field visits, the likelihood of such on-farm relocations is low.
82. Land Bank has established procedures for collecting a range of detailed data on
financial intermediary performance. Information collected at the various levels incorporates
social indicators, including detailed information on the number of emerging farmers, their assets,
racial demographics of the work force, status, ownership, and amount of land (including
differentiation among usage). Land Bank also requires licenses such as: water use licenses,
environmental impact assessments, and land title. With the development of an Operational
Manual, which includes an Environmental and Social Annex, this data collection can be
systematized into monitoring on social and environmental safeguards and social sustainability
with some modifications to existing practices. The consolidated monitoring and evaluation
reports track metrics related to the mentoring programs designed to build capacity of emerging
farmers. Indicators used are: number of farmers receiving financial and technical mentorship,
attending training programs, and participating in other skills building activities.
83. The sub-loans to be financed under the project will be subjected by the PFIs to an
environmental and social screening process using procedures described in the
Environmental and Social Operational Manual.42
This will ensure that the environmental and
social risks of the sub-projects are adequately screened and appropriate mitigation measures are
developed to avoid, minimize or offset any risks and impacts likely to occur during
implementation. The Environmental and Social Operational Manual will guide the PFIs in the
screening process. Land Bank will be responsible for providing overall oversight and monitoring
to ensure that the screening process at the PFIs is adequately carried out and appropriate
environmental and social measures are carried out by the beneficiaries.
84. Land Bank has a commitment to environmental management through the corporate
Environmental and Social Management System which was approved by the Land Bank
42
The ESOM will establish procedures to operationalize the Land Bank’s ESMS and provide guidance to the PIFs
on screening and mitigating environmental and social risks to ensure compliance with the World Bank PSs.
26
Board in 2015, and through the credit application review and monitoring processes. During
project preparation, the World Bank assessed the capacity and knowledge of Land Bank to
implement the Environmental and Social Management System (environmental screening,
assessment, mitigation, review, monitoring and reporting) across the PFIs. The assessment also
took note of Land Bank’s effectiveness in implementing, monitoring and reporting in relation to
its corporate Environmental and Social Management System. The assessment looked at any
potential gaps between Land Bank’s ESMS and the World Bank’s PSs. Land Bank has an
environmental and social coordinator who oversees the implementation of the sub-projects. The
overall capacity and knowledge related to the application of World Bank Performance Standards
is generally good and based on the team’s assessment, Land Bank’s Environmental and Social
Management System is adequate. Technical assistance to strengthen the capacity will be
provided through the AfDB loan.
F. World Bank Grievance Redress
85. Under the project, the communities and individuals who believe that they are
adversely affected by a World Bank (WB) supported project may submit complaints to
existing project-level grievance redress mechanisms or the WB’s Grievance Redress
Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to
address project-related concerns. Project affected communities and individuals may submit their
complaint to the WB’s independent Inspection Panel which determines whether harm occurred,
or could occur, as a result of WB non-compliance with its policies and procedures. Complaints
may be submitted at any time after concerns have been brought directly to the World Bank's
attention, and Bank Management has been given an opportunity to respond. For information on
how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS),
please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the
World Bank Inspection Panel, please visit www.inspectionpanel.org.
27
Annex 1: Results Framework and Monitoring
Country: Republic of South Africa
Project Name: Land Bank Financial Intermediation Project (P150008) .
Results Framework
Project Development Objectives
PDO Statement
The project’s development objective is to sustainably scale up Land Bank’s financing, specifically to benefit emerging farmers.
Project Development Objective Indicators
Cumulative Target Values
Indicator Name Baseline YR1 YR2 YR3 YR4 YR5
Volume of wholesale loans disbursed under
the project.
(Amount(USD))
0
18,600,000
39,525,000
44,175,000
55,800,000
65,100,000
Volume of direct value chain loans
disbursed under the project.
(Amount(USD))
0
0
6,975,000
20,925,000
27,900,000
27,900,000
Direct project beneficiaries.
(Number) 0 22 198 528 858 1100
Total NPL rate under the credit line.
(Percentage) N/A <10 <10 <10 <10 <10
Intermediate Results Indicators
Cumulative Target Values
Indicator Name Baseline YR1 YR2 YR3 YR4 YR5
Increase in outstanding loan portfolio of 37,796,688,000 1.50 10.00 10.00 10.00 10.00
28
Land Bank.
(Percentage)
Increase in CB outstanding loan portfolio.
(Percentage - Sub-Type: Breakdown) 31,607,333,000 1.50 10.00 10.00 10.00 10.00
Increase in REM outstanding loan
portfolio.
(Percentage - Sub-Type: Breakdown)
489,051,000 10.00 25.00 25.00 25.00 20.00
Total NPL rate for Land Bank.
(Percentage) 3.72 <10 <10 <10 <10 <10
Land Bank liabilities that are long-term
(over 1 year).
(Percentage)
31 33 35 37 40 40
Return on Average Assets.
(Percentage) 1.12
1.12 1.12 1.12 1.12 1.12
Return on Average Equity.
(Percentage) 6.78 6.78 6.78 6.78 6.78 6.78
Indicator Description
Project Development Objective Indicators
Indicator Name Description (indicator definition etc.) Frequency Data Source / Methodology Responsibility for Data
Collection
Volume of wholesale loans
disbursed under the project.
(minimum)
Volume of wholesale loans disbursed
under the project for REM and CB.
Semi-Annual Land Bank Land Bank
Volume of direct value
chain loans disbursed under
the project. (minimum)
Volume of direct value chain loans
disbursed under the project.
Semi-Annual Land Bank Land Bank
Direct project beneficiaries.
(minimum)
Number of beneficiaries, as defined by
Land Bank. The estimate includes the
borrowing farmers as well as the on-farm
Annual Land Bank Land Bank
29
workers.43
Total NPL rate under the
credit line. (maximum)
NPLs = loans more than 90 days past due /
gross loans. Indicator values are not
cumulative.
Semi-Annual Land Bank Land Bank
Intermediate Results Indicators
Indicator Name Description (indicator definition etc.) Frequency Data Source / Methodology Responsibility for Data
Collection
Increase in outstanding loan
portfolio of Land Bank.
(minimum)
Increase in Land Bank’s total (CB and
CDB) outstanding loan portfolio. Baseline
in ZAR.
Annual Audited financial
statements
Land Bank
Increase in CB outstanding
loan portfolio. (minimum)
Increase in CB outstanding loan portfolio.
CB includes Growth – Corporate, Agro-
processing, Corporate Direct, Intermediary
SLA, and Intermediary Non-SLA.
Baseline in ZAR.
Annual Audited financial
statements
Land Bank
Increase in REM
outstanding loan portfolio.
(minimum)
Increase in total REM outstanding loan
portfolio. Baseline in ZAR.
Annual Audited financial
statements
Land Bank
Total NPL rate for Land
Bank. (maximum)
NPL rate based on Land Bank’s definition.
Indicator values are not cumulative.
Annual Audited financial
statements
Land Bank
Land Bank liabilities that
are long-term (over 1 year).
(Percentage) (minimum)
All liabilities over 1 year relative to total
liabilities
Annual Audited financial
statements and Land Bank
management information
system
Land Bank
Return on Average Assets.
(minimum)
Total comprehensive income for the year /
[(Latest reporting year Total Assets +
Previous year Total Assets) / 2]. Indicator
values are not cumulative.
Annual Audited financial
statements
Land Bank
43
Of note, the number of on-farm workers depends crucially on the type of farming as some activities are more labor-intensive than others. In addition, larger farms
are more mechanized and therefore require less on-farm workers than smaller, emerging farms.
30
Return on Average Equity.
(minimum)
Total comprehensive income for the year /
[(Latest reporting year Capital and
Reserves + Previous year Capital and
Reserves) / 2]. Indicator values are not
cumulative.
Annual Audited financial
statements
Land Bank
31
Annex 2: Detailed Project Description
REPUBLIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
1. The project will sustainably scale up Land Bank’s financing, specifically to
benefit emerging farmers. This will be achieved by providing long-term financing for Land
Bank, which will facilitate a broader and deeper financial intermediation by Land Bank and
diversify its funding sources away from government.
2. The project will address market failures in the provision of agricultural
financing, access to finance for previously disadvantaged emerging farmers, and limited
availability of medium to long-term financing. Commercial bank financing for agriculture
amounts to 1 percent of commercial banks’ loan book (ZAR 2,753 billion) which is low
compared to farmers reported demand. In addition, financing from commercial banks can
typically not be accessed by emerging farmers due to a lack of adequate collateral. The
project will support Land Bank in addressing these market gaps by providing additional
resources to specifically finance emerging farmers in a sustainable manner. In addition, Land
Bank predominantly relies on short-term funding sources for lending to the agricultural
sector due to limited availability of medium and long-term financing. The availability of
long-term financing under the project will help Land Bank in improving its asset-liability
management and deepening its financial intermediation capacity.
3. Moreover, the project will support Land Bank in piloting its new approach to
scale up financing for emerging farmers by facilitating their integration into established
value chains. South Africa’s agriculture sector is characterized by dualism: a modern,
market-oriented capital intensive farming sector consisting of a small number of large
commercial farms (around 40,000 farming units44
) and a large number of subsistence and
small-scale or emerging farms, many in the former homeland areas. Recent government
policies and programs on land reform, such as restitution, tenure reform and AgriBEE, have
assisted historically disadvantaged emerging farmers’ access to land, credit and technical
assistance. In spite of these programs, large knowledge and skills gaps persist and emerging
farmers lack financing and operate largely outside of the established agriculture value chains.
However, partnerships with corporates and technical partners operating in the same value
chain have demonstrated the potential for sustainably integrating emerging farmers into
established value chains. This project will support Land Bank’s initiative to finance such
projects, by directly lending to emerging farmers within a structured value chain project.
4. The project is a financial intermediary loan (FIL) of US$93 million to Land
Bank as the borrower and implementing agency with a guarantee of the Republic of
South Africa. The project has one component: a Line of Credit for Agricultural Financing in
the amount of US$93 million.
44
Department of Agriculture, Forestry and Fisheries (DAFF): Abstract of Agricultural Statistics, 2010.
32
Component 1: Line of Credit for Agricultural Financing (US$93 million).
5. The objectives of the LOC component are to:
Support Land Bank in refocusing its operations on wholesale lending. As explained
in section I.B., Land Bank uses both wholesale and direct lending under the Corporate
banking (CB) and Commercial Development banking (CDB) business lines. Given
Land Bank’s limited branch network and based on international best practices for
Development Finance Institutions (DFIs), wholesale lending is more sustainable
because it helps Land Bank leverage a network of financial intermediaries without
incurring significant operating costs. In addition, wholesale lending allows Land
Bank to play a market enabling role because it permits agricultural borrowers to build
credit history with financial intermediaries and improve their financial records for
commercial loans, thus improving their ability to gain access to credit. The LOC will
help Land Bank in expanding wholesale lending to both commercial and emerging
farmers under the CB and CDB business lines respectively. Through supporting the
CB business line, the LOC will support employment generation for poor farm
workers employed on the commercial farms supported. The CB business line also
contains a large and growing developmental portfolio in line with BBBEE, therefore
making an important contribution to the NDP and Land Bank’s development goals.
Support Land Bank’s new approach to help integrate emerging farmers into
established value chains. Based on the outcomes of its organizational review, Land
Bank decided to scale up financing support to emerging farmers in a sustainable and
commercially viable manner through partnerships with large agriculture corporates
that emphasize integrating emerging farmers in established value chains. The
approach is anchored in identifying high-potential value chain projects in a given
geographic region and securing buy-in from large agriculture corporates or technical
partners to assist in supporting emerging farmers’ integration into the chain. The
agriculture corporates will provide technical support (directly or indirectly) to the
emerging farmers, building up their capacity to be sustainable suppliers to the chain.
Land Bank has identified potential value chain projects and agriculture corporates to
partner with in the grains, winery, horticulture and livestock sectors for this type of
financing. The success of these initiatives is expected to have a demonstrative effect
in the medium term helping to bring in commercial banks’ financing for such
initiatives and agriculture in general which is currently very limited.
33
Box 1: Trends in Development Finance Institution Practices
Based on the Global Survey of Development Banks (World Bank Policy Research Working Paper 5969, 2012),
a survey of 90 DFIs across the World, several trends for the DFI sector can be identified (although there are
obviously counterexamples for each trend). The survey included a range of DFIs across all regions and with
different mandates. Out of the DFIs with a specific mandate, the majority were focused on agricultural
activities. Some of the main trends based on the survey are:
While the majority of DFIs are entirely government-owned, mixed public-private capital structures are
becoming more common;
DFIs still serve as the largest source of long-term credit for agriculture, housing, and infrastructure
in emerging economies;
The majority of DFIs are not accepting deposits from the general public, but raise funding from the
wholesale and capital market. This allows DFIs to focus on their lending operations, avoid direct
competition with the private sector, and limit the potential exposure of taxpayers to losses. In addition,
governments tend to move away from direct budget transfers, preferring to guarantee the debt and
liabilities of the institution;
The credit model used by DFIs is trending away from mixed wholesale/ retail towards a wholesale-
only model;
Governments seek to make DFIs self-sustaining and insulate them from political interference. Only
half of all DFIs offer credit at subsidized interest rates;
The trend is for DFIs to be profitable and have non-performing loan (NPL) ratios of below 5 percent,
reflecting greater wholesale credit activity (all wholesale-DFIs had NPL ratios below 5 percent), better
governance, professionalization of management, and stronger risk management practices; and
Regulation and supervision of DFIs is being strengthened, with the favored model now to require DFIs
to comply with commercial banking regulations. The clear majority of DFIs are regulated and supervised
by the same authority that supervises private commercial banks.
6. To achieve the above objectives, Land Bank will provide both wholesale finance
to participating PFIs for on-lending to commercial and emerging farmers and direct
financing, in partnership with large agriculture corporates, to emerging farmers to support
their integration in established value chains. It will do so through two main financing
windows:
Window 1: Wholesale finance to commercial and emerging farmers. This window
will provide a wholesale line of credit to Land Bank. Land Bank will on-lend the
funds to participating financial intermediaries (PFIs) which comply with eligibility
criteria agreed with the World Bank. The PFIs will on-lend funds to eligible
agriculture enterprises, commercial and emerging farmers, communal property
associations and other eligible borrowers supported under the Land Bank’s CB and
CDB business lines. Currently, the wholesale line under CDB primarily includes the
emerging farmer’s portfolio, however, over the life of the project this may change to
include other wholesale loans under CDB.
Window 2: Financing to integrate emerging farmers into established value chains.
This window will provide a line of credit to Land Bank to finance direct lending to
emerging farmers for integrated value chain finance. For direct lending to value chain
finance/development projects, Land Bank will finance eligible emerging farmers and
agriculture enterprises in collaboration with large agriculture corporates and/or
technical partners in a targeted value chain.
34
7. It is expected that 70 percent of LOC funds will be used to support wholesale
lending and 30 percent will be used for direct lending to emerging farmers for their
integration in established value chains. However, this ratio will be kept flexible in both
directions to allow for adjustments based on market and portfolio developments in the Land
Bank’s CB and CDB business lines.
8. The below figure presents the project design and implementation arrangements:
Figure 1: Project Design
Pricing
9. Consistent with Land Bank’s pricing policies, the interest rates to intermediaries
in wholesale financing and for borrowers through direct financing will be determined
by the customer segment.
Window 1: Commercial farmers under CB. Land Bank will on-lend funds to PFIs at
interest rates that take into account at minimum Land Bank’s cost of funding,
operating costs and an appropriate credit risk margin.
Window 1: Emerging farmers under CDB. For these farmers, Land Bank will on-
lend funds to intermediaries at interest rates that will allow the bank to at least cover
its average costs of funds.
Window 2: Emerging farmers in established value chains. The pricing for direct
lending by Land Bank to integrate emerging farmers in established value chains will
be market-based. Land Bank aims to implement the new approach to scale-up
financing for emerging farmers in a commercially viable and sustainable manner.
Thus, pricing for this financing will cover Land Bank’s cost of funding, operating
costs and an appropriate credit risk margin.
35
10. The interest rates to final borrowers will be market-based to ensure
sustainability and avoid creating interest rate distortions in the market. The PFIs for
both commercial and emerging farmers will be able to freely set their interest rates, which are
expected to cover at least the cost of funding, operational costs and an appropriate credit risk
premium based on the credit assessment of the borrower. At the same time, Land Bank will
discuss appropriate margins with the PFIs to ensure that any interest advantages are passed
on to the final borrowers.
11. The lower interest rates for emerging farmers under CDB will allow Land Bank
and the PFIs to finance clients that would otherwise be excluded from formal sector
financing. While on-lending for emerging farmers will initially be at average cost of funds,
these farmers are expected to be able to graduate to commercial funding after a period of five
years, underlining the sustainability of the program. Moreover, Land Bank is currently
reviewing its wholesale finance facility to emerging farmers pricing policy to allow Land
Bank to breakeven on pricing by covering at least its average cost of funds and operating
costs. In addition, interest rates for emerging farmers under the wholesale finance facility
will be subject to continuous review to ensure that the objectives of the program are
achieved. Figure 2 shows Land Bank’s previous and new pricing structure for the wholesale
finance facility for emerging farmers.
Figure 2: Changes in REM pricing
36
12. The PFIs will assume full credit risk for all final borrowers and sub-loans that
they have financed under CB. For the wholesale finance facility to emerging farmers, Land
Bank currently shares credit risk with the PFIs. The agreement is such that for the first 5
percent of non-performing loans, Land Bank takes 50 percent of the loss, between 5 and 10
percent, Land Bank takes 30 percent of the loss, and above 10 percent, Land Bank does not
share in the loss. This arrangement will be reviewed during project implementation in case it
should no longer be required.
Eligibility Criteria for PFIs
13. To meet its wholesale lending objectives under CB and CDB, Land Bank is
currently engaged with a broad range of intermediaries. Those include agricultural
cooperatives, large agricultural companies, and credit providers. These intermediaries have a
credit provider license and are supervised under the National Credit Act by the National
Credit Regulator. The intermediaries are primarily providing credit to their clients with
whom they have existing business relationships in the form of input supplies contracts, off-
take agreements etc. and provide technical advisory services specifically to emerging
farmers. Currently, Land Bank is working with ten intermediaries who are engaged under
both CB and CDB. In addition, additional intermediaries in the pipeline are expected to
operate for both CB and CDB. These intermediaries are providing financing for sugar cane,
grain, citrus, fruits, vegetables and livestock. The intermediaries are geographically spread
across all provinces.
14. In addition to financing, the intermediaries provide intensive and high quality
extension services, particularly to emerging farmers. Since Land Bank’s intermediaries
have been engaged in agricultural activities for the past several decades, they have developed
a unique comparative advantage in providing extension services to farmers specifically
tailored to their individual needs. These extension services include training, skills
development and mentoring of smallholder beneficiaries and range from hands-on advice on
crop selection, plantation, inputs needs and harvesting to training on agriculture marketing,
business planning etc. For the wholesale finance facility to emerging farmers, these extension
services are embedded in the financing, recognizing the fact that emerging farmers need
financing as well as technical assistance to succeed. A review of extension services in South
Africa found that these programs have proved successful in establishing commercially
successful emerging farmers (see Annex 7 for more details).
15. While all interested PFIs of Land Bank will ultimately be appraised, Land Bank
and the World Bank initially selected six intermediaries that are operating in both the
CB and CDB sub-business line under CDB and assessed them against the eligibility
criteria. The eligibility criteria took into consideration Land Bank’s selection criteria for
intermediaries and the recommendations on financial intermediary financing under the World
Bank’s Operational Policy OP10. The OP10 policy requires an assurance that all PFIs in a
World Bank financed LOC are viable financial institutions determined by: (a) adequate
profitability, capital, and portfolio quality as confirmed by audited financial statements; (b)
acceptable level of loan collections; (c) appropriate capacity, including staffing, for carrying
out subproject appraisal (including environmental assessment) and for supervising subproject
implementation; (d) capacity to mobilize domestic resources; (e) adequate managerial
autonomy and commercially oriented governance; and (f) appropriate prudential policies,
administrative structure, and business procedures. Annex 8 contains the detailed eligibility
37
criteria for PFI participation in the LOC. Land Bank will enter into Sub-Loan Agreements
(SLA) with the selected PFIs, which will specify terms and conditions on the use of the LOC
as agreed between Land Bank and IBRD. PFIs will not be obliged to draw on the available
funding, and interest costs and other fees will only be charged upon accessing the LOC.
16. The available LOC funding will be used based on a drawdown mechanism. Once
PFIs are approved for funding from Land Bank, they receive a drawdown facility of the
approved amount with a fixed maturity, e.g. five years, which they can use to finance
projects complying with the agreed eligibility requirements. Loans to final beneficiaries will
be provided by PFIs from the drawdown facility up to the amount and maturity approved.
Land Bank will receive funding from the LOC based on the submission of internally
approved drawdown facilities for intermediaries in line with the eligibility criteria. There will
be a limit of 25 percent of LOC facility per intermediary to encourage the participation of
several PFIs in the project. In case a PFI is unable to utilize the facility, the unutilized
amount can be allocated to other PFIs. PFIs will need to comply with the ongoing eligibility
criteria during their participation in the LOC (see Annex 8). The repayments will be collected
in a revolving fund and will be used to provide funding for new sub-loans.
17. Land Bank will be responsible for the supervision of credit lines provided under
the project. This includes assessing and monitoring PFI compliance with eligibility criteria,
supervision of withdrawal applications and sub-loans, and reporting on the credit line
implementation progress. It also involves reviewing PFI’s audited financial statements on an
annual basis, reviewing PFI loan books, and periodic on-site supervision and monitoring. The
PFIs will be expected to report on their sub-loan portfolio and key financial and performance
indicators to Land Bank on a semi-annual basis to facilitate the monitoring and supervision
process.
Direct lending to integrate emerging farmers into established value chains
18. For direct lending to emerging farmers, Land Bank will work with a number of
corporate and technical partners to facilitate capacity development and value chain
integration. The project will support Land Bank’s new development lending initiative which
provides direct loans to emerging farmers that are part of a larger value chain integration
project. The emphasis is on emerging farmer sustainability through targeted technical
assistance within a specific value chain. These interventions can take different forms
depending on the specificity of the value chain. For example, Land Bank is interested in
partnering with a large wine exporter that has expressed an interest in bringing in emerging
farmers to expand their wine production and bottling capacity. In this scenario, Land Bank
would finance this project, ensuring medium to long-term financing to the farmers to
establish new vineyards and the bottling plant. The wine exporter would be part-owner in the
bottling facility and ensure the specific technical guidance for vineyard set up and bottling
plant building and management. Other equity investors would be invited to invest in the
project. A second scenario, a more traditional value chain financing model, would involve
partnering with a large corporate food retailer that is interested sourcing fruits and vegetables
from new emerging farmers. In this case, the food retailer would provide the extension
services to the emerging farmers ensuring that they meet their quality specifications for
purchase. Land Bank would provide working capital and investment loans to the farmers
backed by the retailer’s contracts. As foreseen in its approved restructuring, Land Bank will
38
hire additional staff with VCF/project finance expertise to develop and scale up this
initiative.
Eligibility Criteria for Sub-loans, Sub-borrowers and Direct lending
19. Under window 1, the sub-loans to final borrowers under the CB and CDB
business line will follow Land Bank criteria as well as the following additional criteria
to meet the project objectives:
The sub-loans will finance investment and working capital loans. Land Bank will not
support sub-projects under this project through equity participation or other financial
instruments;
Sub-projects will be targeted towards the agriculture sector and agribusinesses;
The sub-loan will be denominated in South Africa Rand;
Limits on Sub-Loan Amounts. Not more than ZAR 5 million of IBRD loan proceeds
should be directed towards a single beneficiary or group of related borrowers under
the wholesale finance facility to emerging farmers. The limit on sub-loan amounts will
be ZAR 75 million for CB and CDB;
Maturities of investment loans would be up to maximum ten years, with grace period
determined by the PFI. Maturities of working capital loans would be up to four years;
PFIs will assume full credit risk for all final borrowers and sub-loans that they have
financed under CB and CDB. For the wholesale finance facility to emerging farmers,
Land Bank will share the credit risk with the PFIs according to its credit policies;
Interest rates will be freely determined by the PFIs; and
Goods and works on the IBRD's negative list will not be eligible for financing.
20. Under window 2, the loans will follow Land Bank criteria as well as the
following additional criteria to meet project objectives:
The IBRD loan proceeds will finance investment and working capital loans. Land
Bank will not support value chain financing (VCF)/development projects under this
project through equity participation or other financial instruments;
The loans will be used for growth and developmental purposes with the aim of
integrating emerging farmers into structured and well-established value chains;
Partners within the VCF/developmental projects shall be secured with service level
agreements outlining the conditions of partner contributions prior to the granting of
Land Bank loans;
Not more than ZAR 100 million of IBRD loan proceeds should be allocated to one
VCF/development project;
Maturities of investment loans would be up to maximum ten years, with grace period
determined by the Land Bank. Maturities of working capital loans would be up to four
years;
Interest rates will be determined by Land Bank to cover Land Bank’s cost of funding,
operating costs and an appropriate credit risk margin.
Goods and works on the IBRD's negative list will not be eligible for financing.
21. The final borrowers under the LOC will be primarily those supported under
Land Bank’s CB and CDB business lines. The eligibility criteria for final borrowers under
39
the wholesale finance facility to emerging farmers will meet Land Bank criteria (see Box 2)
and include the following:
Private companies (defined as more than 50 percent private ownership or private
control), communal associations providing goods and services in the agriculture
sector;
Final borrower, after receipt of the sub-loan, should generate enough cash during the
pay-back period of the sub-loan to maintain a sufficient debt service coverage ratio;
Final borrower must maintain a reasonable level of debt to equity ratio throughout the
payback period of the sub-loan;
Final borrowers and sub-projects will be physically located within South Africa.
Box 2: Land Bank criteria for borrowers financed under the wholesale finance facility to emerging
farmers (previously REM)
To be eligible to borrow under the wholesale finance facility to emerging farmers, borrowers must fulfil the
following criteria according to Land Bank’s credit policy:
Black, historically disadvantaged South African citizens or a juristic person in which 100 percent of the
shareholding or members’ interest is held by black, historically disadvantaged South African citizens;
Farm on a full-time basis (if the client does not farm on a full-time basis, a full-time manager is
mandatory);
Active in primary agriculture;
Total assets must not exceed South African Rand 3 million prior to assistance at current market value;
Located in priority areas determined by government priority or the Bank’s own concentration limits;
Unable to secure traditional finance due to a lack of traditional forms of security;
Have access to either own, family owned, communal or leased land for the duration of the loan;
Lack managerial, financial, and/or agricultural skills;
Have the ability to produce crop that, together with alternative sources of income, will cover living
expenses, loan repayments and build up capital;
Have an off-take agreement in place or are contract farmers;
Involved in a project where all participants have a meaningful share of the risk;
The applicant or directors, members or trustees if it is a legal entity must have practical farming experience,
are adequately motivated to farm, will be actively involved in the venture and have acceptable technical
support for the venture;
The area in which the farming enterprise is situated must show a significant degree of social cohesion; and
Can be assisted with acquisition of land through lease agreement based on business plan.
22. Requirements for borrowers under CB as stipulated by Land Bank’s credit
policies are as follows:
Be a small, medium or large business focused on secondary agriculture that is a:
o Manufacturer of agricultural intermediary goods;
o Manufacturer or processor of agricultural commodities, or an entity trading in
agricultural goods or commodities either on wholesale or retail level;
o Traditional agribusiness that focus on production support and market entry; or
o Agricultural cooperative.
Have a solvent balance sheet;
Have a viable business plan that is sustainable and realistic;
Be able to adequately secure or mitigate exposure.
40
23. To ensure smooth implementation of the LOC, IBRD will undertake prior
review of two sub-loans for each PFI. During project implementation, IBRD together with
Land Bank will prior review two sub-loans for each PFI to ensure that PFIs are adequately
complying with the LOC eligibility criteria. In addition, IBRD will prior review one loan
under direct financing by Land Bank. The details on prior review will be specified in the
Operational Manual. The prior review will help address any initial gaps that PFIs may have
in applying the LOC criteria and will help manage risks.
24. The technical assistance needs of Land Bank and beneficiaries are being met
through different sources outside the proposed project. Land Bank needs to further
strengthen its institutional model and development impact while ensuring sustainability.
Currently, Land Bank is receiving substantial funding from the African Development Bank
(AfDB) to help address current and potential technical assistance needs. These funds are still
partially unutilized and have been used to date to develop Land Bank’s Environmental and
Social Management System (ESMS) which was a recommendation by the team during
preparation. Additionally, Land Bank is committed to using its own internal resources for
further institutional strengthening and aligning its risk management practices with
international standards. Following the completion of the organizational review, Land Bank
has engaged external experts to improve its business procedures and risk management
models. The support already provided to Land Bank is deemed sufficient based on Land
Bank’s current capacity.
25. The technical assistance needs of emerging farmers under the wholesale finance
facility are met by Land Bank’s intermediaries. As specified earlier, intermediaries are
effectively providing targeted extension services to emerging farmers. For the wholesale
finance facility to emerging farmers, these extensions services are embedded in the financing
provided by intermediaries. Moreover for direct lending, as foreseen in its approved
restructuring plan, Land Bank will hire additional staff with VCF/project finance expertise to
develop and scale up this initiative. The project, therefore, does not include a separate
technical assistance component.
41
Annex 3: Assessment of Land Bank
REPUBLIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
1. The World Bank Operational Policy OP 10 requires an assurance that all financial
institutions and participating financial intermediaries (PFIs) in a World Bank financed credit
line are viable financial institutions determined by: (a) adequate profitability, capital, and
portfolio quality as confirmed by audited financial statements acceptable to IBRD; (b)
acceptable level of loan collections; (c) appropriate capacity, including staffing, for carrying
out subproject appraisal (including environmental assessment) and for supervising subproject
implementation; (d) capacity to mobilize domestic resources; (e) adequate managerial
autonomy and commercially oriented governance; and (f) appropriate prudential policies,
administrative structure, and business procedures.
2. Land Bank is the borrower and implementing agency under the project. For the
current project, the World Bank performed its financial due diligence of Land Bank in
accordance with the established criteria set by OP 10 and confirmed its compliance with the
criteria. Unless otherwise stated, the financial analysis in this review is based on Land Bank
IFRS statements audited by the Auditor-General (AG) of South Africa. For the 2015, 2014
and 2013 IFRS statements, the AG has provided an unqualified opinion.
Overview of Land Bank
3. Land Bank was established in 1912 and is governed by the Land and Agricultural
Development Bank Act of 2002. Land Bank was given a mandate of 11 aspects, which fall
into five broader areas: (i) access of the historically disadvantaged population to land, (ii)
agriculture productivity, growth and job creation; (iii) gender equity; (iv) environmental
sustainability; and (v) food security. The NDP published in 2011 continues to call for a key
role of Land Bank in providing financial support to land reform beneficiaries and to help
them overcome difficulties in entry into commercial farming.45
4. Land Bank is a non-deposit taking institution fully owned by the South African
Government and supervised by the National Treasury.46
Currently key development finance
institutions in South Africa are supervised by National Treasury.47
Thus, Land Bank follows
prudential guidelines as issued by its Board of Directors. It is consequently not prudentially
supervised by the South African Reserve Bank (SARB). The bank is audited by the Auditor
General of South Africa.
5. As the leading development financial institution in the rural and agriculture sector in
South Africa, Land Bank had an approximately 29 percent market share in agricultural
financing as of July 2015. The bank48
has achieved a significant turnaround during the past
five years. It is now on a sustainable trajectory with profits of ZAR 420 million in 2014/15
45
National Development Plan, p 200. 46
In 2008, the administrative and supervisory powers over the Land Bank were transferred from the Minister of
Agriculture and Land Affairs to the Minister of Finance. 47
These include the Development Bank of Southern Africa (DBSA), the Public Investment Corporation (PIC)
and the Land Bank. 48
Source of financial information is Land Bank’s 2014 and 2015 Annual Report. Per the report, Land Bank
Group includes REM, RCB, B&CB, LDFU, and LBLIC. Land Bank only includes REM, RCB, B&CB and
Group Capital.
42
(up 61 percent from 2013/14), and a Return on Average Assets of 1.12 percent and a Return
on Average Equity of 6.78 percent. Total assets stood at ZAR 39.4 billion in 2014/15 with a
performing loan book of ZAR 36 billion. Non-performing loans (NPLs) under Land Bank
methodology were at 3.72 percent in 2014/15 and the cost-to-income ratio was 54.9 percent.
Fitch Ratings upgraded Land Bank from AA to AA+ in January 2014. The rating was
maintained at AA+ in December 2015. Moody’s Investor Services has assigned Land Bank a
credit rating of Aa1.za in May 2016. The bank does not take general deposits and funds itself
mainly through the debt and capital markets, issuing instruments such as promissory notes.
Land Bank Business Model
6. Land Bank is engaged in both wholesale lending through intermediaries as well as
direct lending. Intermediaries are mainly credit providers, cooperatives, or agri-businesses. In
2015, Land Bank undertook an organizational review following conditions set by NT
pursuant to the issue of a government guarantee, aimed at enabling the Land Bank to raise
longer term funding. The review focused on identifying opportunities for (i) optimizing
operational efficiencies and cost reduction; (ii) developing an appropriate funding model for
an agricultural DFI; and (iii) improving sustainability of Land Bank’s capital base. The
review was completed in August 2015 and subsequently an implementation plan was
approved by Land Bank’s Board.
7. The new strategy adopted by Land Bank, based on the outcomes of organizational
review, envisions following four strategic pillars to further align Land Bank mandate with the
development objectives of South African agriculture sector as laid down in the NDP:
(i) Sector growth support to accelerate growth in high-potential regions and
crops by targeting emerging commercial farmers that require financing for new
farm development, expansion projects and acquisitions.
(ii) Supply chain development focusing on agro-processing by targeting agro
enterprises that require capital expansion and commercial farmers moving up the
value chain.
(iii) Production expansion and intensification to support next generation
farming by targeting established commercial farmers with potential for expansion
or yield improvement.
(iv) Agri-Innovation to spur agri-innovation by targeting enterprises with
evolutionary agri-technology or products.
8. Land Bank has started implementing the new strategy and key changes are planned
over a two-year period in line with the priorities of Land Bank. Key changes focus on: (i) a
strategy to optimize the retail commercial banking segment of Land Bank the long term
viability of which was a concern owing to loan losses and significantly high operational
costs; (ii) new initiatives to potentially expand the development portfolio of Land Bank for
emerging farmers49
in a sustainable and commercially viable manner by adopting a project
finance approach in partnership with large corporates and intermediaries to integrate the
emerging farmers into established value chains; and (iii) steps to align Land Bank financial
soundness indicators, credit appraisal processes and risk management practices with
international standards.
49
In addition to existing wholesale lending.
43
9. Following the adoption of this new strategy, Land Bank has two main business lines:
Corporate Banking (CB) and Commercial Development Banking (CDB).50
The new CDB
business line is a combination of previous Retail Emerging Markets (REM) and Retail
Commercial Banking (RCB) business lines. In 2014/15, CB accounted for 83.6 percent of the
bank’s loan book and CDB accounted for 16.4 percent, of which 1.3 percent was composed
of loans provided under REM51
.
10. Under CDB, the wholesale finance facility continues to focus on lending to emerging
farmers for development purposes. Farmers supported under this facility typically have no or
limited access to commercial funding and little or no collateral, but can be commercially
sustainable and viable with financing support. Subsistence farmers are not supported under
REM. Lending is based on cash-flows and non-financial support (end to end on-farm
support) is provided by Land Bank intermediaries and agricultural specialists based in Land
Bank branches. The wholesale finance facility to emerging farmers offers production
financing, installment sale finance, and medium-term loans. The total wholesale finance
facility portfolio to emerging farmers amounted to ZAR 489 million in 2014/15 (increase of
ZAR 97 million in that year).
11. Under CDB, the RCB business line which was exclusively focused on direct lending
to medium scale farmers, through 27 Agriculture Finance Centers (AFCs), has been
significantly restructured to improve its long term sustainability. RCB was loss-making due
to high operating costs of the large branch network and had NPLs of 11 percent in 2014/15.
RCB was losing clients to commercial banks and agricultural enterprises who started to lend
in that space and could offer a wider range of products. The competitiveness and long-term
viability of RCB was therefore questionable. The new strategy aims at consolidating the
branch network into 9 provincial offices in strategically important geographical locations
which will also result in a reduction in operating costs. Importantly, the consolidated branch
network’s role will specifically focus on facilitating effective partnerships in their respective
regions with corporate retailers, emerging farmers, government programs, as well as
technical and financial intermediaries to leverage on high impact and high value chain
finance deals.
12. Importantly, as part of the new strategy, Land Bank has decided to scale up financing
support to emerging farmers in a sustainable and commercially viable manner through
partnerships with large agriculture corporates that emphasize integrating emerging farmers in
established value chains. The approach is anchored in identifying high-potential value chain
projects in a given geographic region and securing buy-in from large agriculture corporates
or technical partners to assist in supporting emerging farmers’ integration into the chain. The
agriculture corporates will provide technical support (directly or indirectly) to the emerging
farmers, building up their capacity to be sustainable suppliers to the chain. Land Bank has
identified potential value chain projects and agriculture corporates to partner with in the
grains, winery, horticulture and livestock sectors for this type of financing.
50
The new Corporate Banking unit is the former Business and Commercial Banking unit. 51
Information in Land Bank’s 2015 Annual Report is disaggregated by former three business lines i.e. B&CB,
RCB and REM. For the purpose of analysis in this section, the financial information for RCB and REM is
consolidated where appropriate.
44
13. The CB business line (formerly B&CB) is the corporate part of the bank and the most
viable business line. The CB business line involves both direct and wholesale lending.
Lending takes place primarily through intermediaries (cooperatives and agri-businesses). CB
operates through two offices in Pretoria and Cape Town. The total portfolio of CB amounted
to ZAR 31 billion in 2014/15.
14. Under the CB business line, Land Bank on-lends funds to its intermediaries at market
related rates while under wholesale finance facility to emerging farmers under CDB, Land
Bank has decided to on-lend funds to intermediaries at subsidized interest rates (though Land
Bank at least covers its average costs of funds). Land Bank is currently reviewing its
wholesale finance facility to emerging farmers pricing policy to allow Land Bank to
breakeven on pricing by covering at least its average cost of funds and operating costs. Upon
graduation from the program, which Land Bank expects to be within five years from the first
engagement with the emerging farmer, it is expected that these clients will be able to pay
market rates.
15. Both business lines contain a development portfolio with “development” referring to
a focus on supporting historically disadvantaged population in line with Broad-Based Black
Economic Empowerment (BBBEE). The total development portfolio of CDB is projected at
1.4 billion in 2016.
Capital Adequacy, Portfolio Quality and Profitability
Table 1: Overview of Land Bank Financial Performance as of end March 2015 Group
1 Bank
Return on Average Assets (ROAA) 0.76 1.12 Return on Average Equity (ROAE) 4.05 6.78
Cost to Income Ratio 56.11 54.93
Non-performing loan (NPL) ratio52
3.72 3.72
Short-term53
liabilities / total financial liabilities 69.25 69.17
Short-term assets / total financial assets 36.11 36.60
Capital Adequacy (capital to total liabilities) 23.13 20.34
Capital Adequacy including Govt. Guarantee 39.83 37.13
1 Land Bank Group includes Land Bank, Land Bank Insurance Limited and Land Bank Life Insurance Company Limited.
Capital
16. Land Bank’s capital consists of contributions made by the South African government
from the budget. National Treasury has injected capital to the tune of ZAR 3.5 billion since
2009. In the absence of any statutory regulation prescribing the minimum level of capital
adequacy ratio54
maintained by Land Bank, the bank uses a 20 percent benchmark which is
informed by National Treasury’s guarantee conditions. As of March 2015, Land Bank has a
capital to total asset ratio of 16.9 percent and capital adequacy ratio (total equity to total
liabilities and guarantee) of 37.1 percent (25.9 percent in 2014). The increase is primarily due
52
NPLs are based on Land Bank methodology. 53
Short-term is defined as 12 months or less. 54
CAR calculation is based on National Treasury requirements for the guarantee and is calculated by summing
total equity and dividing by total liabilities and the amount of guarantee.
45
to a guarantee of ZAR 4 billion provided by National Treasury. It is expected that a further
increase in capital will likely be met through retained earnings. Importantly, following the
organizational review, Land Bank is taking steps to align Land Bank financial soundness
indicators including capital adequacy with international standards. From FY2016, Land Bank
will adopt a minimum capital adequacy ratio based on the Basel II standardized approach
framework.
Portfolio Quality
17. There are three particularly noteworthy aspects as regards the assets side of Land
Bank’s balance sheet: (i) a relatively high level of loans (93.1 percent of total assets) due to
significant growth in the loan portfolio since 2011; (ii) declining but adequate levels of cash
on hand and cash equivalents (3.5 percent of total assets) and (iii) a relatively small and
stable level of investments (1.4 percent of total assets).
Table 2: Land Bank Asset Composition (in %)
2012 2013 2014 2015
Loans as % of total assets 89.0 90.8 93.4 93.1
Cash on hand and due from credit
institutions as % of total assets
7.4 5.6 3.4 3.5
Investments as % of total assets 1.0 1.0 1.0 1.4
18. Land Bank’s loan portfolio grew by about 10.3 percent, 22.3 percent, 24.1 percent
and 45 percent during 2015, 2014, 2013 and 2012 respectively in line with the bank’s
turnaround strategy. About 87 percent of the growth in the loan book in 2015 is attributed to
the CB business line. The loan portfolio has performed relatively well compared to prior
years when the bank was dealing with a legacy of high NPLs. NPLs (defined under Land
Bank methodology- see Box 1 below) remain below 5 percent compared to the peak of
22.5 percent in 2009; this is due to consistent efforts to clean up the bank’s balance sheet as
part of a strategy adopted in 2009 and partly due to recent significant growth in the loan
portfolio. Of note, NPLs are highest in the bank’s previous RCB business line at 11 percent
in 2015 though lower from 12 percent in 2014. The bank regularly monitors past due loans
for all business segments to recognize early problems in the portfolio.55
In order to
standardize its NPL definition and methodology, Land Bank adopted IFRS 9 – Financial
Instruments in April 2015 under which all accounts past due by more than 90 days are
classified as NPLs. Due to this change NPLs are projected to grow to 10 percent by 2019.
55
The information on restructured/ renegotiated loans is not available.
46
Box 1: Land Bank’s new and previous NPL methodology
New NPL methodology
With the adoption of IFRS 9 from April 01, 2015, the Bank now classifies its loans in three distinct stages:
- Stage 1: Performing loans (typically loans that are current, or overdue for less than 30 days)
- Stage 2: Under-performing loans (typically loans that are past due for more than 30 days); and
- Stage 3: Non-performing loans (typically loans that are past due for more than 90 days).
Previous NPL methodology
NPLs are accounts downgraded in terms of Land Bank’s Asset Quality Classification Policy as follows:
- Retail accounts impaired for more than 24 months;
- B & CB accounts impaired for more than 6 months;
- Retail accounts in arrears by at least two (2) annual contractual instalments;
- Retail and B & CB accounts displaying a balance past the final due date; and
- Accounts with the following Arrears Management Classification (AMS) categories:
I. Legal
II. Debt collection
III. Insolvency
IV. Pre-legal with AMS classification:
–Debt collection
–Deceased
–Write-off or unprocessed.
19. The current provisioning coverage for NPLs is moderate with an absolute decline in
provision levels compared to previous years, partly due to an absolute decline in the level of
NPLs. The bank’s capital at risk (i.e. NPLs net of provision to capital) is moderate at 6.8
percent with significant improvement from 28 percent in 2011 due to the decline in NPLs
and injection of capital by NT.
Table 3: Land Bank – Analysis of NPLs, Renegotiated Loans and Provision (in %)
2011 2012 2013 2014 2015
NPLs to gross loans 11.1 6.4 4.9 3.21 3.72
Provisions to gross loans 3.9 1.7 2.0 1.6 2.5
Provisions to NPLs 35.0 39.7 41.2 51.3 67.8
Specific Provisions to NPLs 30 27 30 38.0 41.0
NPLs net of provision to capital
(negative value implies NPLs are more than
100% covered by provisions)
28.2 17.8 15.6 9.3 6.80
Note: NPLs are based on Land Bank methodology and do not include LDFU loans.
20. Land Bank has single party exposure limits for each business segment (see Box 2
below). As at end March 2014, the bank has one client under CB for which the highest single
exposure is 47.1 percent, which is above the maximum limit of 25 percent of capital defined
by Land Bank’s credit risk policy. However, this client is categorized as a strategic partner
and the breach in limit was approved by the Land Bank Board.56
Besides, the top 20
56
Land Bank revised its Credit Concentration Policy in May 2014 to define exposure limits in excess of 25
percent of capital for strategic partner loans wherein strategic partner is defined as partner that
contributes/enables Land Bank to achieve its strategic commercial and development objectives. The change in
47
borrowers under CB account for 50.2 percent of the total CB loan portfolio, representing a
relatively high concentration. However, this concentration is also partly attributed to the
wholesale nature of lending under CB.
Box 2: Land Bank Single Party Exposure Limits
REM
Single obligor R3 million
Project Finance R5 million
CDB
Single borrower and/or group of related borrowers may not exceed 10 percent of the Bank’s capital and
reserves calculated as of the end of each calendar quarter or R150 million (the lesser will apply).
B&CB
The aggregate of all loans and/or commitments extended by the Bank’s Business & Corporate Banking
Division, to a single borrower and/or group of borrowers may not exceed 25 percent of the Bank’s capital
and reserves calculated as of the end of each calendar quarter.
Profitability
21. As shown below, earnings are positive and have improved significantly compared to
losses in 2009. The bank’s cost to income ratio has improved significantly. The recent
decline in the cost to income ratio is primarily due to a 6.5 percent decrease in staff costs and
increase in interest income owing to rapid growth in the loan portfolio. The bank is currently
reviewing its overall strategy to further reduce its operating costs. Although Land Bank does
not have a mandate to maximize profitability, a positive net interest margin contributes to its
sustainability.
Table 4: Land Bank – Analysis of Profitability (in %)
2012 2013 2014 2015
ROAA 1.00 0.57 0.80 1.12
ROAE 4.76 3.08 4.77 6.78
NIM57
3.25 2.95 2.92 2.82
Cost to Income58
77.33 67.71 59.5 54.93
policy is also motivated by the ongoing consolidation in South Africa’s agriculture sector through mergers and
acquisitions among large corporates. 57
Net interest income/average total assets. 58
Operating cost to operating income.
48
Funding
22. Land Bank is a non-deposit taking institution that funds its operations predominantly
through short-term funding sources for lending to the agricultural sector due to limited
availability of medium and long-term financing. As shown below, short-term promissory
notes accounted for 40.5 percent of the bank’s liability structure in 2015 (reduced from 69.2
percent in 2013). As highlighted in table 2, there is a refinancing risk since short-term
liabilities account for approximately 69 percent of total financial liabilities, however this
ratio has improved compared to 75 percent in 2014. In 2013, the bank also received a ZAR 1
billion credit line from the AfDB to fund its lending portfolio. In addition in March 2015,
National Treasury provided a ZAR 4 billion government guarantee to Land Bank to obtain
funding from the financial market with an appropriate tenor to help lengthen the maturity
profile of Land Bank’s financial liabilities. Under this project, Land Bank is looking to
diversify its funding base and to increase the maturity profile of its liabilities.
49
Figure 1: Land Bank Liabilities Structure
Credit appraisal and monitoring, risk management and internal control
23. Land Bank has detailed policies and procedures for credit appraisal and monitoring.
The bank has a Board Credit Risk Committee, a Credit Risk Management Committee and
Retail Credit Committees each of which have their specified mandates and approve credit up
to certain thresholds.
Box 3: Land Bank Credit Approval Limits
Up to ZAR 20 million Commercial Credit Committee
Between ZAR 20 million and ZAR 250 million CRMC
Between ZAR 250 million and ZAR 1billion Board Credit and Investment Committee
Above ZAR 1 billion Board
24. The credit analysis process includes an internal rating system of nine grades to guide
decision-making, pricing, and monitoring on an individual and portfolio basis. The bank has
a Credit Risk Monitoring Committee which monitors the credit risk taking activities and
overall credit risk management. The bank also has a credit risk monitoring department which
monitors the implementation of credit risk policies at committee levels and within each
business segment. Though the bank has detailed policies and procedures for credit appraisal,
the application of these procedures can be strengthened further to ensure consistency in credit
evaluation processes across different clients. Under the new strategy, Land Bank is
strengthening its credit appraisal and credit risk processes in line with international standards.
25. Land Bank uses an enterprise risk management framework to set the risk management
strategy across the organization. Following the organizational review, Land Bank is in the
process of strengthening the risk management function to allow for better segregation
between operations and portfolio monitoring. The risk function will be spread across the risk
department and investment management services (including client contract administration,
portfolio performance management, workout and restructuring). The bank has a risk
management department that is headed by the Executive Manager, Risk and monitors credit
risk, compliance risk, liquidity/market risk, operational risk and systems risk across the bank.
26. Land Bank’s internal controls appear to be well managed, based on a presentation by
the head of the internal audit department and a review of the bank’s management letters for
2013. The internal audit department consists of 12 staff including the head of internal audit
50
and possesses relevant qualifications and experience in internal audit, IT audit and forensic
investigation. The head of internal audit reports to the Audit Committee which consists of
independent directors. The internal audit department has a well-developed annual audit plan
and a three year plan approved by the audit committee.
Managerial Autonomy and Governance
27. Land Bank is fully owned by the South African Government. It is supervised by
National Treasury and follows prudential guidelines as issued by its Board of Directors. It is
consequently not prudentially supervised by the SARB. The bank is audited by the Auditor
General. The Board has 12 members (10 non-executive directors, the Chief Executive Officer
(CEO), and the Chief Financial Officer (CFO)) and is appointed by the Minister of Finance.
In addition to the Board, five committees chaired by non-executive directors sat in 2014/15:
Audit, Risk, Credit, ALCO and Human Resources and Remuneration. The bank has units
providing typical business and corporate support functions including, among others, strategy,
treasury, risk, IT, and legal.
28. Being a fully government-owned institution, Land Bank can be mandated by the
government to support specific industries and companies, which may affect the sustainability
of the bank. This was evidenced by the Department of Agriculture’s support for the REM
business line, which was not sustainable from Land Bank’s perspective. However, in 2009
the supervision of Land Bank was transferred to National Treasury and since then Land Bank
has implemented a comprehensive strategy that has put the bank on a sustainable path.
Furthermore, the government and Land Bank are undertaking a strategic review of Land
Bank’s future direction. Questions of strategic importance that may need to be addressed are
the comparative advantage of wholesale versus retail lending, the long-term sustainability of
currently unprofitable business lines, and the balancing between financial sustainability and
achieving development impact.
29. Land Bank’s middle and senior management team make a positive impression.59
The
individuals with whom the due diligence team met have relevant expertise and are familiar
with international banking practices. The bank is making noteworthy progress in
implementing international practices; this process is primarily led by management team
members and middle management who have relevant industry and development finance
experience.
Prudential Policies, Administrative Structure and Business Procedures
30. National Treasury supervises key development finance institutions60
in South Africa
including Land Bank. The supervisory approach differs markedly from SARB which adopted
the Basel III supervisory framework in January 2013 in accordance with the reform agenda
of international standard setting bodies such as the Group of Twenty (G-20) Forum, the
Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (Basel
Committee). The main quantitative prudential criteria followed by Land Bank include a
minimum capital adequacy ratio of 20 percent defined under Land Bank methodology as sum
59
The three members of the management board with whom the due diligence team met were the CEO, the CFO
and the COO. 60
These include the Development Bank of Southern Africa, the Public Investment Corporation and Land Bank.
51
of total equity to total liabilities and the amount of guarantee by National Treasury.
Additional criteria include a minimum liquidity ratio of 7.5 percent defined as liquid assets to
short-term debt, a single party exposure limit of 25 percent of total capital, etc. As part of
new strategy, in 2016 Land Bank has aligned its capital adequacy, liquidity, NPLs
methodology and risk management functions with Basel II framework.
31. Since Land Bank is not governed by SARB’s commercial banking laws and
regulations and is not subject to external regulatory oversight by the SARB, the main
principles and areas of Land Bank activities are set out under the aforementioned Land Bank
Act and the by-laws. In addition, Land Bank is a registered credit provider under the National
Credit Act and follows the requirements set out by National Credit Regulator. Land Bank has
detailed procedures relating to credit appraisal and monitoring, risk management and internal
controls.
52
Annex 4: Implementation Arrangements
REPUBLIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
Project Institutional and Implementation Arrangements
Project administration mechanisms
1. Land Bank will be responsible for project implementation and monitoring. The
Chief Financial Officer has been designated as the primary counterpart for the project in
Land Bank. He will be supported by a dedicated staff to manage the day-to-day coordination
with the World Bank team. They will interact with the Chief Operating Officer and the
respective operational teams to monitor project implementation and report to the World
Bank. Dedicated staff in Land Bank have been identified for managing all aspects of the
project, including reporting on implementation progress and monitoring and evaluation,
ensuring compliance with environmental and social safeguards as well as with financial
management and procurement arrangements. Extensive supervision by the World Bank team
is planned during project implementation to support Land Bank and the PFIs. Figure 1
describes the project administration arrangements.
Figure 1: Project Administration Arrangements
Land Bank: CFO
Fiduciary
Environmental / Social Procurement
Financial Management
Operational
Head of Commercial Development Banking
Head of Corporate Banking
Designated staff
53
Financial Management, Disbursements and Procurement
Financial Management
2. The World Bank’s financial management team conducted a financial
management assessment of Land Bank, the implementing entity of the project. The
objective of the assessment was to determine whether the financial management
arrangements: (a) are capable of correctly and completely recording all transactions and
balances relating to the project; (b) will facilitate the preparation of regular, accurate,
reliable, and timely financial statements; (c) will safeguard the project entity assets; and (d)
will be subjected to auditing arrangements acceptable to the World Bank. The assessment
complied with the Financial Management Manual for World Bank-Financed Investment
Operations that was issued (retrofitted) on February 4, 2015 and the Africa Region Financial
Management (AFTFM) Financial Management Assessment and Risk Rating Principles.
3. The conclusion of the assessment is that the financial management arrangements
meet the World Bank’s minimum requirements under OP/BP10.00. The overall residual
risk rating for Land Bank is Low.
Project Description
4. The project is a financial intermediary loan of US$ 93 million to Land Bank and
is meant to scale up financing, specifically to emerging farmers. This will be achieved by
providing long-term financing for Land Bank, which will facilitate a broader and deeper
financial intermediation by Land Bank and diversify its funding sources away from
government. The project will address market failures in the provision of agricultural
financing, access to finance for previously disadvantaged emerging farmers, and limited
availability of medium to long-term financing. The project has one component: a Line of
Credit for Agricultural Financing in the amount of US$ 93 million.
5. For the FM implementation of the project, Land Bank will use its existing FM system
with appropriate oversight by the Board and the National Treasury.
6. The following table shows the identified FM risks and the proposed mitigation
measures. The Risk Mitigation Assessment Risk Ratings are: H (High), S (Substantial), M
(Moderate), L (Low).
Table 1. Financial Management Risk Assessment and Mitigation
Description of Risk Risk Mitigation Measures
incorporated in Project
Implementation
Condition of
Effectiveness
(Yes/No)
Residual
Risk/ (Risk)
rating
INHERENT RISKS
Country Level
There is no perceived risk.
SA’s institutional and regulatory
framework is robust, transparent, with
a system of accountability and judicial
independence.
No Low
54
Description of Risk Risk Mitigation Measures
incorporated in Project
Implementation
Condition of
Effectiveness
(Yes/No)
Residual
Risk/ (Risk)
rating
Entity Level
The entity is not familiar with and
therefore has limited knowledge of the
World Bank’s FM and Disbursement
policies and procedures.
The World Bank will conduct a
comprehensive training on the FM
and Disbursement policies and
procedures by effectiveness of the
Loan Agreement.
No Low
Project Level
Due to the nature of the lending
operation, there is a risk of
irrecoverable debts.
The entity has rigorous credit
policies that led to low write-offs of
debts.
No Low
Overall Inherent Risk Residual Risk: Low
CONTROL RISK
Budgeting
There is no perceived risk.
The entity has a comprehensive
budgeting process.
No Low
Accounting and financial reporting
No identified risk at this stage.
Land Bank prepares monthly financial
statements which are reviewed and
approved by appropriate governance
committees. The entity uses the SAP
accounting software, which is capable
of producing the required financial
reports. The Finance unit is staffed
with professionally qualified
accountants as the heads of different
units.
No Low
Internal Control
No identified risk at this stage.
The entity has an effective Internal
Audit Unit, whose Head has
unrestricted access to the Chairman of
the Audit Committee. Furthermore, the
reviews of the audit reports have
revealed a healthy control
environment.
No Low
Funds Flow
There is a risk of no timely
disbursements to the beneficiaries as a
result of likely delays in the credit
approval process.
This is mitigated by the sound credit
policies and its adherence to them.
Furthermore, the internal audit
attends the adherence to the policies.
No Low
Auditing
No specific audit risk. PFMA requires
Land Bank to produce and submit
annual audited financial statements by
the 31 May of each year.
No Low
Overall Control Risk Low
Overall Risk Low
55
7. Strengths. The entity has matured FM systems that can manage any operation. The
oversight function played by the different governance committees, the Board, and the
government can be relied upon.
8. Weaknesses. It is the first time that the entity will be involved in the implementation
of a World Bank financed project and hence there is no familiarity with the World Bank’s
fiduciary guidelines.
9. Budgeting. The budgeting process starts at six months into the next financial year by
distribution of the budget guidelines to all business units. The guidelines provide guidance on
the key assumptions to be used on the budgeting process. For the loan books, projections for
the next two financial years (2016/17 and 2017/18) are prepared based on the forecast loan
book of the current financial year end (2015). The loan book projections are informed by
Land Bank’s growth strategy as agreed by the Executive Committee and the Board. This
growth is measured based on the net performing loan book taking into account the projected
payouts, planned disbursements and new business opportunities. The rest of the organization
follows a zero base budgeting process. The budgeting review and verification process is done
by the Finance Unit together with all related business units before it is presented to Exco for
approval. Once the Exco approves the budget it is presented to the Audit Committee, and
then forwarded to the Board for approval. The budget is subsequently submitted to the
National Treasury together with the three year plan. The sampled intermediaries also have
adequate budgeting arrangements.
10. Accounting. The financial management responsibility rests with the Chief Financial
Officer. The entity will use its own computerized accounting software called SAP to record
and report on the use of the loan proceeds. SAP is reputable and sophisticated software and
reliance can be placed on it. The visited intermediaries also have reliable computerized
accounting software. The Finance Unit has competent staff to handle the FM function with
appropriate segregation of duties. The senior managers are qualified chartered accountants.
11. Internal Control. Due diligence on lending to PFIs will be governed by the entity’s
credit management framework which includes amongst the policies: a credit policy, risk
grading policy, risk appetite policy, arrear management policy, and bad debt recovery policy.
These policies spell out the processes followed in evaluating and approving the applications,
monitoring mechanisms on active loans, and reporting and further disbursing to the
intermediaries.
12. Internal Audit. The internal audit department is headed by the Head Internal Audit,
who is a qualified chartered accountant. The Head Internal Audit reports to the Board
functionally, through the Internal Audit Committee, and to the CEO administratively. The
internal audit executes its functions through the approved annual plans. Review of the
internal audit reports for the year under review (2014/2015) indicated that reliance can be
placed on the internal audit as well as the internal control environment. The last independent
quality assessment review carried out by The Institute of Internal Auditors was in 2013 and
the organization received “GC” (General Conforms). The internal audit also attends the
evaluation and award process for the loans as an observer.
56
13. Financial Reporting. The project will produce and submit unaudited interim
financial reports (IFRs) to the World Bank on a quarterly basis. These reports are designed to
provide sufficiently detailed information and will include:
A narrative summary of the project implementation highlights
Sources and uses of funds by disbursement categories
The Designated Account Activity statement
Land Bank’s accounting system is capable of producing the quarterly reports. The
assessment noted that the organization produces monthly management accounts for the Exco
and quarterly report for submission to the National Treasury.
14. Auditing arrangements. The Public Financial Management Act of South Africa
stipulates that Land Bank prepares and submits the Annual Financial Statements (AFS) to the
National Treasury and the Office of the Auditor General by May 31st each year. The AFS are
supported by a comprehensive operational and performance information report. The AFS are
prepared in accordance with International Financial Reporting Standards (IFRS) and the
audit is conducted with the International Standards on Auditing. Land Bank has received
unqualified audit reports in the year ended 2013, 2014, and 2015. The review of the
management letters, performance information and internal audit reports gave assurance that
reliance can be placed on the governance processes.
15. Land Bank’s audited financial statements will be acceptable to the Bank without a
requirement for a separate audit report for the project. Land Bank will prepare the audit terms
of reference in consultation with the World Bank to ensure adequate coverage of the scope of
the audit and confirm that the World Bank’s fund have been used for the intended purposes.
The audit report will be submitted to the World Bank within six months of the end of the
financial year, namely, September 30 each year. The submission will include the auditors’
report, management letter, and management responses thereto as an attachment to the annual
financial statements.
16. Office of the Auditor General. Reliance can be placed on the office of the Auditor
General. Audits are carried out based on International Standards on Auditing and the office
observes standards set in INTOSAI (International Organization of Supreme Audit
Institutions). Audit reports undergo rigorous processes before they are issued to the public.
The report is presented to the audit committee which is comprised of qualified independent
members for review and endorsement.
17. Governance and Accountability. Land Bank’s governance arrangements and the
oversight provided by the government through the National Treasury, various government
departments, parliament through the portfolio committees and as well as the general public
are considered adequate for the implementation of the project. The organization has a “tip-off
and anonymous” (whistle blowing) policy to encourage staff and the public at large to report
on suspected irregularities.
18. Overall conclusion. Based on the proposal to use Land Bank’s FM system for
accounting and reporting on the project’s use of funds, the overall conclusion of the
assessment of the system is that the proposed FM arrangements meet the World Bank’s
minimum requirements for financial management under OP 10.00.
57
Disbursements
19. Funds flow and disbursement arrangements. Upon the signing of the Loan
Agreement, the World Bank will open a Loan account in its books, in the name of the lender
for the signed amount of US$93 million. Funds will flow from the World Bank Loan
Account through the World Bank’s Treasury upon the request from the borrower into a Rand
denominated Designated Account (DA) maintained by Land Bank at a preapproved
commercial or financial institution acceptable to the World Bank. Land Bank will disburse
through this account to the approved intermediaries.
20. Disbursement arrangements. The project will use the Advance Disbursement
method whereby withdrawals from the loan account will be deposited in the DA for payment
of the World Bank financed eligible expenditures. Disbursements from the loan account will
be based on quarterly IFRs which will contain a 2 quarterly forecast to indicate the approved
amount to be drawn down from the loan account.
(i) Upon effectiveness of the loan agreement and the submission of a withdrawal
application, signed electronically by the authorized signatories whom would have been
formally mandated to sign applications, the World Bank will disburse an amount equivalent
to six months expenditures into the DA based on the prior approved cash flow forecast in the
IFR. Subsequent disbursements will be based on three or six months estimated expenditures,
taking into account the balance in the DA at the end of each quarterly reporting period. The
reimbursement disbursement method can be an alternate should the entity use its own funds
to pay World Bank eligible expenditures as well as the use of the direct payment method of
disbursement whereby the World Bank will pay directly to a third party.
(ii) Retroactive financing of an amount not exceeding 20 percent of the total loan amount
could be made for eligible expenditures under the Project. Such financing covers a period of
a date not exceeding 12 months prior to the signing of the loan agreement. Payment for
retroactive financing is for activities that comply with the World Bank guidelines and
procedures for the Project, including fiduciary arrangements (for procurement, financial
management, anti-corruption, social and environmental safeguards), and other criteria and
arrangements agreed to with the Bank. If the existing agreements between Land Bank and
eligible PFIs do not include the requirements agreed with the Bank, Land Bank agrees to
incorporate the new requirements through an addendum to the pre-existing agreements.
(iii) On-lending to the intermediaries will be based on the organization’s credit policy
whereby applications will be received, assessed and approved.
(iv) The use of funds in the DA for eligible expenditures will be reported on in the quarterly
IFR’s together with the submission of the authorized Applications for Withdrawal. At this
stage the expenditures will be recorded in the World Bank’s loan account as utilized.
Unutilized funds at the end of the project will have to be returned by the Borrower to the
World Bank’s loan account and will therefore not form part of the final loan amount to be
repaid.
Procurement
58
21. The South Africa Land Bank Financial Intermediation Loan (FIL) received World
Bank management’s clearance on March 14, 2016 to proceed as an early adopter of the
World Bank’s New Procurement Framework (NPF). Specifically, the operation is a FIL
where the final recipients of loan funds are private sector enterprises to which the New
Procurement Framework does not apply as per Section I.1 of the World Bank Policy,
“Procurement in IPF and Other Operational Procurement Matters”. Independent oversight for
providing assurance that funds have been used for the intended purpose will rely on the
external audit conducted by the Auditor General of South Africa. The Sub-Loan Agreements
(SLAs) between Land Bank and the PFIs will include the World Bank’s audit rights and the
Anti-Corruption Guidelines of January 2011, which will also be made applicable to all
beneficiaries of the sub-loans.
Environmental and Social (including safeguards)
22. In line with OP/BP 4.03 World Bank’s Performance Standards for the Private Sector
Projects, the Project is classified as F1-2 implying that the environmental and social risks and
impacts generated from implementing the sub-loans are moderate. The World Bank’s
Performance Standards for the Private Sector Projects will apply and would prevail in case
the national environmental policies are not consistent with the World Bank PSs. The
Performance Standards that are applicable to the Project include, PS1: Assessment and
Management of Environmental and Social Risks and Impacts, PS2: Labor and Working
Conditions, PS3: Resource Efficiency and Pollution Prevention, PS4: Community Health,
Safety and Security, and PS5: Land Acquisition and Involuntary Resettlement. PS1 and PS3
are applied because of Land Bank’s involvement in financing agricultural activities that
could potentially have harmful consequences on the environment, including through
pollution. PS2 and PS4 are applied to Land Bank and its intermediaries to ensure that the
labor and working conditions as well as the health, safety and security standards are
adequate. PS5 applies because Land Bank is financing projects of land reform beneficiaries
even though Land Bank is not supporting land acquisition under the REM program.
Environmental
23. Environmental risks and impacts inherent to the agriculture and agribusiness industry
are largely related to effluent discharges from use of pesticides/herbicides in controlling
weed infestation, use of fertilizer to increase crop productivity, pollution of soil and water
resources from runoff, occupational health and safety of workers, efficient use of water and
energy resources, solid waste disposal, and noise and air emission from industrial facilities.
Institutional Framework
24. Land Bank has a commitment to environmental and social management through the
Environmental and Social Management System which was approved by the Land Bank
Board in 2015, and through the credit application review and monitoring processes. The
Environmental and Social Management System (ESMS) is anchored in the national
environmental and social laws and regulations, particularly the National Environmental
Management Act (Act 107 of 198). The World Bank’s due diligence assessed the capacity
and knowledge of Land Bank to implement the Environmental and Social Management
System (environmental screening, assessment, mitigation, review, monitoring and reporting)
59
across the PFIs, and the effectiveness in implementing, monitoring and reporting according
to its ESMS. Furthermore, the World Bank assessed the screening occurring in the context of
loan applications on land status and various social indicators. The assessment also reviewed
any potential gaps between Land Bank’s ESMS and the World Bank’s PSs. Land Bank has
an environmental and social coordinator who oversees the implementation of the sub-
projects. The overall capacity and knowledge related to the application of World Bank
Performance Standards is generally good and based on the team’s assessment, Land Bank’s
Environmental and Social Management System is adequate. Technical assistance will be
provided to strengthen the capacity and knowledge of Land Bank through the existing AfDB
loan.
25. Screening for environmental risks and impacts is carried out by the Land Bank during
the credit approval process. Mitigation measures to address the risks and impacts are also
identified through this process. Compliance monitoring and enforcement is carried out by the
Department of Environmental Affairs, Department of Water Affairs and the Department of
Agriculture following their respective mandates in accordance with the EIA licenses, Water
Licenses and Soil Conservation Act. Land Bank has staff in the field who report on other
aspects of compliance with loans, including provision of detailed information on the limiting
factors on agricultural productivity, and on livelihoods. Compliance monitoring and
enforcement is carried out by the Department of Environmental Affairs, Department of
Agriculture, and the Department of Water Affairs. The main impediment to effective and
meaningful implementation and enforcement of the environmental and environmental related
laws are due to the fragmentation among regularity institutions and licensing agencies to the
effect that no single institution can take enforcement actions effectively. The Environmental
and Social Operational Manual will guide Land Bank in screening, monitoring and reporting
of the sub-loans.
Implementation of the Environmental and Social Management System
26. PFIs will use procedures included in the Environmental and Social Operational
Manual in reviewing and appraising the sub-loans, and to inform the beneficiaries of
environmental requirements for sub-loan appraisal, so that the subprojects can be
implemented in an environmentally sound manner. The procedures and requirements will
incorporate the Republic of South Africa regulatory requirements for Environmental Review
and the World Bank’s Performance Standards for Private Sector. The procedures will
primarily comprise of Environmental Screening, Environmental Impact Assessment, and
Environmental Mitigation where necessary. The Environmental Screening will be carried out
by the PFIs at an early stage in their sub-loan review procedures to determine the appropriate
environmental risk category for the enterprises, and may require the contracting of external
expertise in carrying out the appropriate E&S instrument depending on the level of risk and
impact of the sub-loan on the environment. Following screening, an Environmental Impact
Assessment (EIA) in line with the environmental classification of the sub-project may be
recommended.
27. The beneficiaries will be responsible for carrying out any environmental analysis and
for confirming that the proposed sub-projects comply with the national environmental laws
and regulations, and the World Bank’s Performance Standards for the Private Sector, and for
obtaining the necessary clearance from the appropriate licensing authorities. Once the
analysis is performed and recommendations incorporated into the sub-project, the PFI will
60
appraise the proposed sub-loan package which would include, where appropriate, an
environmental mitigation plan. The implementation of the mitigation plan will be monitored
by the PFI. The overall review process will be monitored by Land Bank.
Social
28. Land Bank has established procedures for collecting a range of detailed data on
financial intermediary performance. This data collection could be systematized into
monitoring on social safeguards and social sustainability with some modifications to existing
practices.
29. A review of documentation filed by the intermediaries indicates a number of social
dimensions on which information is collected. Submission memos for loans include detailed
information on the number of emerging farmers, their assets, racial demographics of
commercial firms’ work force (including breakdown between employees and management),
status, ownership, and amount of land (including differentiation among usage).
30. The consolidated monitoring and evaluation reports track metrics related to the
mentoring programs designed to build capacity of emerging farmers. Indicators used are:
number of farmers receiving financial and technical mentorship, attending training programs,
and participating in other skills building activities. On the grassroots level, approximately
thirty Agricultural and Environmental Services (AES) officers monitor performance of
farmers who are loan recipients and provide detailed reporting on land use, other debts, farm
income, etc. The AES officers are the first interface between the farmer and the financial
system. Land Bank utilizes a Production Value and Inspection Report (known as Form 90).
This report could be readily adapted to incorporate reporting on environmental and social
safeguards.
31. Site visits were conducted during preparation to the six Land Bank financial
intermediaries that were appraised during project preparation. An additional site visit was
conducted to a prospective Land Bank client which can be considered based on its operations
as a typical example of a Land Bank client, although they do not provide credit to their
clients/ beneficiaries. The site visits demonstrated the extent to which the intermediaries
work closely with their clients. Support includes: provision of extension services, mentoring
(as mentioned above), community social programs, and local infrastructure. During the site
visit, stakeholders demonstrated detailed anecdotal knowledge of the success or failure of
various emerging farmers in the vicinity. The REM program does not finance acquisition of
land, though intensification of use is supported. REM program participants lease their land.
32. The AES officers in the field work closely with colleagues in the Department of
Water Affairs, Department of Environmental Affairs, Department of Agriculture and
Department of Rural Development and Land Reform. Land Bank requires licenses such as:
water use licenses, environmental impact assessments, and land title. In practice and in the
field, AES officers’ normal inspection of farms may identify compliance issues to other
colleagues with responsibility for enforcement, although Land Bank staff has no authority or
jurisdiction in those areas. Enhancements in implementation of the safeguard guidelines
adopted by Land Bank could build upon these existing practices with a formalized referral
system to appropriate authority.
61
33. Information collected by Land Bank at the various levels incorporates social
indicators, but these indicators are not tracked or analyzed systematically from the earliest
point of entry to ongoing monitoring. There is an opportunity to use this information to
measure the success of various interventions intended to improve livelihoods of emerging
farmers as well as to monitor land usage more generally. Integrating social impact and social
safeguards indicators into an overall M&E system will be addressed through an integrated
Operational Manual for the project.
Monitoring & Evaluation
34. Land Bank will monitor and evaluate progress against the proposed indicators
through regular reports. Land Bank will report on the PDO and intermediate indicators as set
out in Annex 1 on a semi-annual basis. The data will come from Land Bank’s internal reports
and from information provided by the PFIs. The specific reporting templates will be defined
in the Project’s Operational Manual. Land Bank’s financial performance will be audited
annually by the Auditor General.
62
Annex 5: Implementation Support Plan
REPUBLIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
Strategy and Approach for Implementation Support
1. This implementation support plan (ISP) describes how the World Bank will support the
risk mitigation measures and provide the technical advice necessary to help the client achieve the
PDO. This ISP also identifies the minimum requirements to meet the World Bank’s fiduciary
obligations. It has been developed based on the nature of the project and its risk profile. Formal
implementation support visits and field visits will be carried out semi-annually and focus on the
areas detailed below. Given that Land Bank is a new client and that the PFIs are not familiar with
World Bank procedures, supervision will be intensive in the first years of implementation and go
beyond the two formal implementation support visits as needed. This will be facilitated through
leveraging synergies with supervision visits to other projects under implementation in South
Africa and the sub-region.
2. There will be strong coordination between the Land Bank and the World Bank, the
borrower and the implementing agency. The World Bank task team will bring a comprehensive
set of instruments and expertise to advice on project activities. It will work closely with Land
Bank to ensure project success. The team plans two implementation support visits on average per
year to South Africa as well as additional visits facilitated by leveraging synergies with
supervision visits to other projects under implementation in South Africa and the sub-region, as
well as ongoing dialogue via video and audio conferences and email.
3. In addition to implementation support visits and ongoing engagement, the World Bank
project team will carefully monitor the progress of project implementation and achievement of
results via formal and informal reporting channels. Formal reporting channels include
Implementation Status and Results reports (ISRs), and results monitoring reports supplied by
Land Bank (more detail in Monitoring and Evaluation below). Informal channels include
interaction with direct beneficiaries of the project, reports from local media, and country
economic analysis.
4. The project team will also take a flexible approach to ensure that it meets client needs as
circumstances evolve. The World Bank will continue a close policy dialogue with the
implementing agency, NT, DAFF, DRDLR, and other stakeholders.
5. Financial Management. The World Bank will conduct risk-based financial management
supervision, initially after every six months (as part of implementation support visits), and later
at appropriate intervals based on assessed risk. During project implementation, the World Bank
will supervise the project’s FM arrangements in the following ways: i) review the project’s
quarterly unaudited interim financial reports, the internal audit reports, the annual audited
financial statements complemented by the operational and performance information report , the
auditor’s report, and remedial actions recommended in the auditor’s management letters; ii)
during the World Bank’s onsite implementation support visits, review project accounting and
internal control systems, budgeting and financial planning arrangements, and disbursement
management and financial flows, as applicable; and iii) at other times when applicable,
participate in discussions with the client, checking that payments are done strictly in accordance
with contract provisions, and look into any areas requiring attention.
63
6. Procurement. The operation is a FIL where the final recipients of loan funds are private
sector enterprises to which the New Procurement Framework does not apply as per Section I.1 of
the Bank Policy, “Procurement in IPF and Other Operational Procurement Matters”. Independent
oversight for providing assurance that funds have been used for the intended purpose will rely on
the external audit conducted by the Auditor General of South Africa. There will be no
procurement implementation support missions.
7. Safeguards. During project implementation, the World Bank will semi-annually
supervise the project’s environmental and social safeguard arrangements in the following ways:
1) review of Land Bank’s Form 90 (Production Value and Inspection Report), documentation
submitted by intermediaries on social dimensions, reports from Land Bank’s AES officers from
on-site visits, and any environmental reports from the Department of Environmental Affairs,
Department of Agriculture, and the Department of Water Affairs, and 2) assess compliance with
the Operational Manual. The World Bank will also seek updates on the support from AfDB
targeted at further strengthening Land Bank’s environmental and social management capacity.
8. Monitoring and Evaluation. The indicators primarily focus on measuring behavior
change at Land Bank, not at the beneficiary-level. The World Bank will review the updated
result framework submitted semi-annually by Land Bank as part of progress reports. The team
leader will discuss the progress and deviations with Land Bank to identify any areas where
additional help from the World Bank is needed. Land Bank and World Bank will also use results
data to build awareness of project results among key beneficiaries and counterparts. An impact
evaluation would be the primary tool to collect beneficiary-level data and evaluate outcomes.
However, such an evaluation is not incorporated into this project. The results framework
evaluates the changes within Land Bank as a result of the project.
9. The tables below detail the key areas of focus of the implementation support activities for
the first 48 months of the project’s implementation. These have been determined based on
conversations with the client and an understanding of the priority activities to be implemented
during the first year of the project. Future updates will be based on progress on project activities,
timing of major new activities, and the expertise required to address any issues that arise, among
other things.
64
Implementation Support Plan
Time Focus Skills Needed Resource
Estimate
Partner Role
Year 1 Project/Task
Management
TTL / Financial Sector
Specialist (HQ)
12 weeks CFO
Implementation Support Financial Sector Specialist
(Pretoria)
8 weeks CFO
Financial Management
Supervision
Financial Management
Specialist (Pretoria)
2 weeks Financial Management
Performance Standards
Supervision
Environmental & Social
Specialists (HQ + Pretoria)
2 weeks Economic Research &
Business Intelligence
Dept (Environmental
& Social focused-
team member)
Agriculture Value Chain
Specialists (2)
GFADR 1 week
(each)
CFO
Treasury transactions for
conversion to ZAR
Treasury Specialist
(HQ)
1 week Treasury
Years 2
– 5
Project/Task
Management
TTL / Financial Sector
Specialist (HQ)
24 weeks CFO
Implementation Support Financial Sector Specialist
(Pretoria)
16 weeks CFO
Financial Management
Supervision
Financial Management
Specialist (Pretoria)
4 weeks Financial Management
Performance Standards
Supervision
Environmental & Social
Specialists (HQ + Pretoria)
4 weeks Economic Research &
Business Intelligence
Agriculture Value Chain
Specialists (2)
GFADR 3 week
(each)
CFO
Treasury transactions for
conversion to ZAR
Treasury Specialist
(HQ)
3 week Treasury
Skills Mix Required (over 60 month period)
Skills Needed Number of Staff
Weeks
Number of Trips Comments
TTL/Financial Sector
Specialist
36 10 Based in HQ
Financial Sector Specialist 24 0 Based in Pretoria
Financial Management
Specialist (Pretoria)
6 0 Based in Pretoria
Environmental Specialist 6 0 Based in Pretoria
Social Specialist 6 10 Based in HQ
Agriculture Specialist (2) 8 (total) 6 (total) Based in HQ
Treasury 4 1 Based in HQ
Name Institution/Country Role
Land Bank Development Bank / South Africa Borrower and Implementing
Agency
65
Annex 6: Economic and Financial Analysis
REPULIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
A. Financial Analysis
1. The financial analysis projects that Land Bank will grow its loan book considerably
through 2020. The strongest growth is expected in the development portfolio. The development
portfolio provides financing to the disadvantaged population in line with Broad-Based Black
Economic Empowerment (BBBEE) and emerging farmers and is represented in both the CB and
CDB business lines.
2. Based on Land Bank’s decision to at least cover its costs of funds for new wholesale
loans to emerging farmers under CDB, it is projected that Land Bank can significantly
improve the financial sustainability of the wholesale finance facility to emerging farmers on
a cost-recovery basis by 2020. By realigning its operations around four strategic pillars, and
charging average cost of funds (currently at 7.5 percent) on new loans, Land Bank is projected to
break even on its wholesale finance facility to emerging farmers by FY2020 with regard to
recovering its average cost of funds. However, even under the new scenario, the previous REM
business line will not recover its operational expenses or charge credit risk premiums unless the
pricing policy is revised further.61
Given that the previous REM portfolio is small at this stage
compared to the overall loan portfolio and will remain so, even with its projected growth through
2020, this will have limited impact on the overall financial sustainability of Land Bank.
B. Economic Analysis
3. The project objective is to sustainably scale up Land Bank’s financing, specifically
to benefit emerging farmers. The project has one component: a line of credit for agricultural
financing in the amount of US$93 million, with 70 percent of the funding intended for wholesale
lending (about US$65 million) and 30 percent for direct lending (about US$28 million) although
the ratios will be kept flexible.
4. The economic analysis aims to assess the contributions of wholesale lending under
the CB and CDB business lines to job creation and income generation.62
In particular, the
economic analysis aims to quantify the costs and benefits that accrue from providing a line of
credit for agricultural financing by calculating the Net Present Value (NPV) and Economic Rate
of Return (ERR). The analysis is based on Land Bank data and information, including for the
estimates on job creation and income generation which Land Bank estimates based on its
beneficiary information.
5. The economic analysis does not assess the contribution of direct lending. Given this
is a new line of business, no sufficient data exists on which to base the analysis. A potential
analysis is further complicated by the fact that likely only a small number of projects will be
financed in this window and the contributions to job creation and income generation will depend
on the exact project.
The analytical model
61
The net loss ratio for the REM business line is assumed to be 2 percent. 62
For ease of calculation, the economic analysis assumes a loan amount of US$95 million.
66
6. The model considers the net cost and benefits of agricultural financing due to the
World Bank’s line of credit for wholesale agricultural financing. While Land Bank plans to
significantly grow its loan book, particularly the development loan portfolio, this analysis is
limited to the net cost and benefits arising directly from the US$65 million line of credit for
wholesale lending under this project. For simplicity, a disbursement equivalent to US$65 million
in ZAR is assumed, with the equivalent in ZAR of US$13 million being disbursed in each of the
first five years. All calculations are in ZAR. For ease of conversion and comparison, an exchange
rate of US$1 = ZAR 15 is assumed.63
Given the structure of the loan, the economic analysis
considers the net cost and benefits over 15 years, the life of the loan. The economic analysis
assumes that 80 percent of the disbursement (about US$ 52 million) will go to farmers in the CB
business line and 20 percent (about US$ 13 million) to farmers in the wholesale finance facility
to emerging farmers under the CDB business lines. Both components undergo the same step-by-
step process and for the overall results, the two components are added up. To arrive at the cash-
flow for a given year, net revenues minus net costs are calculated. The size of the cash-flow is
calculated according to the parameters explained in the text and reported in Tables 2 and 3.
7. The cost component of the analysis considers the net cost for Land Bank in
extending wholesale loans to PFIs which on-lend to end-borrowers. In particular, the cost
component models the cost of the World Bank line of credit to Land Bank while taking into
consideration the interest and fees Land Bank earns from extending wholesale loans to PFIs as
well as any net losses Land Bank incurs on its loans. Specifically, total net costs for each year are
calculated as follows (categories in parenthesis represent income and reduce net costs):
Interest due to World Bank from Land Bank
+ Guarantee fee due to National Treasury from Land Bank
+ (Fees earned by Land Bank from PFIs)
+ (Interest earned by Land Bank from PFIs)
+ Net loss to Land Bank
= Total net costs
8. The benefit component of the analysis considers the net benefits arising from the
loan to income generation, job creation, and tax revenue while accounting for the interest
payments made by the end-borrowers. The net benefits are calculated based on the estimated
difference in cash flow to beneficiaries, i.e. both the end-borrowers of the loan and the monetized
value of the new jobs created. As a result of the project, individual farmers, the end-borrowers of
the funds, will be able to expand their production and/or improve their productivity. This revenue
additionality due to the loan, compared to the counterfactual of no loan, translates into an
increase in value added and creates additional jobs for a specified number of years after which
the loan has been granted to the end-borrower. 64
In particular, total net benefits for each year are
calculated as follows (categories in parenthesis represent an expense and reduce net benefits):
Additional value-added for end-borrower of loan after taxes
+ Tax income
63
The end 2015 exchange rate is US$1 = ZAR 15.48. 64
The net increase in value added to the end-borrower depends on the interest rate charged relative to the revenue
additionality. And while the revenue additionality for the end-borrowers ends after the specified number of years,
the level of revenue for end-borrowers is assumed to be permanently higher.
67
+ Monetized value of jobs created
+ (Interest payments by end-borrower of loan)
= Total net revenues
9. Total net revenue is calculated at the individual farmer level and summed up over
the number of farmers receiving a loan in each year to arrive at the aggregated numbers
for each year. The number of farmers receiving a loan depends on the overall allocation of
money to the CB and CDB business line and the average loan size and specified number of years
for repayment. Loans are extended to end-borrowers on a rolling basis. Tax income and the
monetized value of jobs created are a function of the additional revenue to the end-borrower (tax
income = tax base times tax rate times revenue additionality; monetized value of jobs created =
jobs created per ZAR times revenue additionality). Revenue additionality to the end-borrower in
each year is calculated as follows: revenue with loan minus revenue without loan (the
counterfactual; different growth rates in revenue with and without loan for specified number of
years). Value-added additionality is calculated as the difference in revenue with loan multiplied
by (1 minus average cost fraction; i.e. percent that will result in value added) and revenue
without loan multiplied by (1 minus average cost fraction). Taxes are subtracted from the
additional value added to arrive as value added for end-borrower of loan after taxes. Interest
payments by end borrowers of the loan are equal to the size of the loan times the interest rate.
10. According to the economic analysis, the ERR of this component is expected to be 31
percent. The NPV is expected to be approximately ZAR 317 million (US$20.4 million)
assuming a discount rate of 10 percent (ZAR 248 million or US$16.0 million assuming a
discount rate of 12 percent) as shown in Table 1. The positive valuation indicates that the returns
on investment exceed the returns that could be otherwise earned by World Bank financing. As
such, the improvements in the income of end-borrowers and the monetized value of jobs created,
net of interest costs paid by end-borrowers, outweigh the cost of investment under this
component.
Table 1: Economic Analysis
NPV (10% discount rate) ZAR 317 million
NPV (12% discount rate) ZAR 248 million
ERR 31%
11. The number of jobs created by this subcomponent is estimated to be 8,086 over 15
years.
12. The economic analysis of the line of credit is based on the following assumptions.
The assumptions for the cost component of the analysis are summarized in Table 2 and the
assumptions for the benefit component in Table 3.
Data and assumptions on the characteristics of the average CB and CDB farmer are
estimates based on existing Land Bank data and supplemented with expert opinion. In
many cases, numbers were adjusted downwards to arrive at more conservative estimates.
68
The average annual revenue growth without a loan is assumed to be 6 percent, in line
with South Africa’s current CPI-based inflation. Wage growth is assumed to be 8 percent
based on the fact that minimum farmworker wage legislation mandates increases in the
minimum farmworker wage of at least CPI plus 1.5 percent per year.
The average annual additional growth increase due to the loan is based on the assumption
that farmers will need to earn at least the cost of the loan to justify the expense of the
loan. It is furthermore assumed that the growth rate increase of CDB farmers is higher
than for CB farmers since they are starting from a smaller base.
Table 2: Cost Component Assumptions
CDB
(ZAR 150
million)
CB
(ZAR 600
million)
Interest rate due to World Bank by Land Bank (% of loan)65
7.75% 7.75%
Guarantee fee due to National Treasury by Land Bank (% of loan) 0.33% 0.33%
Interest rate charged to PFIs by Land Bank (% of loan) 7.50% 8.75%
Fees charged to PFIs by Land Bank (% of loan) 1.00% 0.50%
Net loss ratio (% of loan) 2.00% 1.00%
Table 3: Benefit Component Assumptions66
CDB CB
Average loan size ZAR 2,000,000 ZAR 10,000,000
Average annual revenue ZAR 1,500,000 ZAR 10,000,000
Average costs (% of revenue) 90% 80%
Average annual growth without loan 6.0% 6.0%
Average annual additional growth increase due to loan 13.0% 11.0%
Number of years that see additional growth increase due to loan
5
5
Tax base (% of end-borrowers) 20% 20%
Tax rate 29% 29%
Average number of employees per end-borrower (FTE)
30
5
Average annual salary per employee ZAR 25,000 ZAR 36,000
Average annual growth in wages 8% 8%
Jobs created per ZAR increase in revenue 0.0000050 0.0000005
Interest rate charged to end-borrowers by PFIs (% of loan) – base case 11.50% 10.75%
65
Based on current market rates and the assumption that Land Bank will select the option of financing based on a 3-
month Jibar plus spread. 66
Assumptions based on Land Bank estimates from beneficiary information.
69
13. A sensitivity analysis tests the robustness of the economic analysis with regard to
changes in key assumptions. The findings of the sensitivity analysis are summarized in Box 1
and assume that the variable in question changes while the values of all other variables remain
unchanged.
Box 1: Sensitivity Analysis for Key Assumptions
1. Additional sales growth due to loan
a 2 percentage point increase (decrease) results in an increase (decrease) of the ERR to 46%
(16%)
2. Wage growth
a 2 percentage point increase (decrease) results in an increase (decrease) of the ERR to 32%
(31%)
3. Net loss ratio
a doubling of the ratio to 2% for CB and 4% for CDB results in a decrease of the ERR to 24%
14. The sensitivity analysis reveals that the major impact on the ERR for this
subcomponent under the base case scenario comes from the additional sales growth
assumption. Changes in sales growth additionally affect the increase in income for each end-
borrower as well as the number of jobs created as a result of it. The doubling of the net loss ratio
also has a potentially significant effect while changes in wage growth have a limited effect.
C. Rationale for public financing
15. Access to financial services is consistently raised as a critical constraint by the
private sector in South Africa, particularly in agriculture. The project addresses the
following market failures, justifying public financing, as follows:
i. Agricultural lending amounts to about 1 percent of commercial bank’s total loan book of
ZAR 2,970 billion67
. Commercial bank financing for agriculture is therefore
comparatively low while farmer’s demand for affordable financing appears to be large.
The resulting financing gap justifies public financing given that it will play a critical role
in expanding financing for agricultural development and help them become more
sustainable, grow and create jobs.
ii. Without adequate collateral, emerging farmers face challenges in accessing credit from
traditional commercial banks. The Land Bank’s development portfolio is designed to
specifically provide financing to disadvantaged population in line with Broad-Based
Black Economic Empowerment (BBBEE) and emerging farmers who do not have
collateral as security so that these farmers can later become commercially viable.
iii. Land Bank predominantly relies on short-term funding sources for lending to the
agricultural sector due to limited availability of medium and long-term financing. The
availability of long-term financing under the project will help Land Bank in improving its
asset-liability management and deepening its financial intermediation capacity.
D. World Bank’s value added
67
DAFF: Abstract of Agricultural Statistics, 2014.
70
16. The World Bank has significant international experience helping development
banks to achieve their developmental objectives in a sustainable manner. In particular the
World Bank has helped development banks in establishing/expanding their wholesale financing
mechanism, which is one of the focus areas under this project. With the support of the World
Bank, Land Bank will be able to access long-term funds which will reduce its reliance on
government funding sources and will help Land Bank in deepening its financial intermediation
capacity. In addition, the project will help Land Bank increase financing for its development
portfolio which supports disadvantaged population in line with Broad-Based Black Economic
Empowerment (BBBEE) and emerging farmers and land reform beneficiaries. Under the project
all financing will be channeled to the development portion of Land Bank’s portfolio.
71
Annex 7: Financial Sector, Agricultural Financing and Extension Services Overview
REPUBLIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
Financial Sector Overview
1. South Africa has an advanced and diversified financial sector, comparable to those in
developed countries. The sector includes a sophisticated banking sector, well-established capital
markets, and one of the deepest insurance and pension markets in the world. As of end 2014,
total assets of financial institutions constitute approximately 292 percent of GDP. The banking
sector constitutes approximately 36 percent of the financial system assets, with pension funds
and long-term insurers contributing 35 and 18 percent, respectively.68
Table 1: Snapshot of financial institutions in South Africa
Dec. 2011 Dec. 2012 Dec. 2013 Dec. 2014
Assets R 8.18 tn R 9.25 tn R 10.25 tn R 11.76 tn
Of which…: Banks 3.43 tn 3.68 tn 3.87 tn 4.18 tn
Long-term insurers 1.80 tn 2.06 tn 2.31 tn 2.27 tn
Pension funds (public &
private)
2.86 tn 3.34 tn 3.77 tn 4.20 tn
Sources: SARB Bulletin, Bloomberg, BIS, Haver, World Bank, South Africa FSAP Dec 2014.
2. As shown in Figure 1, the ability of the financial sector to channel funds to the private
sector (ratio of private sector credit to GDP), is markedly higher than in peer countries and is the
highest in the region. Domestic bank deposits/GDP, on the other hand, is only modestly higher
compared to the peer countries but remains significantly higher than the region.
Figure 1: Domestic Bank Deposits and Private Credit / GDP comparison69
68
South Africa FSAP Report December 2014. 69
The expected median is a result of a regression framework that takes specific country characteristics into account
to arrive at predicted values for a certain level of development. The ‘peer countries average’ is composed of values
for Kenya, Brazil, Nigeria, Angola and Mozambique. Source: Finstats 2015 database.
0.0
20.0
40.0
60.0
80.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Domestic Bank Deposits / GDP (%)
Value Observed Regional Average
Income Group Average Expected median
Peer Group Average
0.0
20.0
40.0
60.0
80.0
100.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Private Credit / GDP (%)
Value Observed Regional Average
Income Group Average Expected median
Peer Group Average
Source: FinStats
72
3. As shown in Figure 2, credit growth in South Africa has gradually increased over the past
five years, from 1.8 percent in 2010, to an average of 7.8 percent in the first ten months of 2015,
having declined from 8.4 percent in 2014. Whist corporate sector borrowing registered firm
growth in 2015, household borrowing remained subdued and concentrated in the mortgage
market.
Figure 2: Total loans and advances to the private sector
Source: SARB Quarterly Bulletin December 2015
Banking Overview
4. Commercial banks dominate the South African financial system, with assets amounting to
ZAR 4,179 billion as of December 31, 201470
. Loans and advances were the largest portion of
banking-sector assets and amounted to ZAR 3,156 billion as at December 31, 2014 up from ZAR
2,898 billion in 2013. As of the end of January 2015, 17 banks were registered with the South
African Reserve Bank (down from 30 at year-end 2002), of which ten are local banks and six
foreign. Furthermore, 3 mutual banks, 2 co-operative banks, 14 branches of international banks
and 40 representative offices operate in South Africa.71
5. The banking sector is dominated by four major financial conglomerates. These groups
have extensive interest in primarily banking, asset management, insurance and securities. The
insurance industry is also dominated by four large conglomerates with the same characteristics.
These internationally active conglomerates are listed on either the Johannesburg Stock
Exchange, the London Stock Exchange or have a dual listing. The banking operations of the
conglomerates are structured under a bank controlling company. Interests in the other sectors
such as insurance, asset management and securities are also structured under the bank controlling
company, but legislation provides that the activities of the bank controlling company should be
predominantly in the business of banking.
6. Asset concentration in the South African banking industry is high. Four banks (Standard
Bank, Absa Bank, FirstRand Bank and Nedbank), two of which are foreign owned, account for
over 80 percent of total banking assets as of end 2014. These big four expanded internationally,
70
SARB. Banking Supervision Department Annual Report, 2014. 71
SARB. Quarterly Bulletin, March 2015.
Source: SARB Quarterly Bulletin June 2013
73
especially in the SADC region, where they acquired substantial market shares. To address the
issue of concentration, the Competition Commission launched a Banking Enquiry in 2006 that
resulted in recommendations to address problems of restrictive interbank arrangements, barriers
to entry in the payments systems and measures of consumer protection.
7. Overall, the South African financial sector remains sound, though recent developments
have highlighted vulnerabilities in the system. In addition, the financial system continues to feel
some of the consequences of the global financial crisis. In August 2014, the sixth-largest bank in
South Africa, African Bank Limited, which focused on unsecured consumer lending, failed and
had to be resolved. Following the bank failure, all major South Africa banks received a rating
downgrade. The wholesale funding market has not been seriously affected in the aftermath of
the failure though funding costs have increased. Recently the four largest banks were further
downgraded on the back of the sovereign debt downgrade to a notch above junk grade.
8. It is expected that NPLs in unsecured lending will increase over the coming year because
of rising interest rates, a continuously weakening economy, high unemployment (25.5 percent as
of the third quarter 2015, youth unemployment of 49.9 percent72
), and the high level of
household debt which will increase pressure on households’ debt repayments.
9. South Africa's financial system has been affected by the US Federal Reserve Bank's
tapering of Quantitative Easing (QE) post financial crisis. The expectation of tapering of QE and
then the actual tapering that started in January 2014 resulted in significant outflows from bond
and equity markets. Amplifying the impact of QE tapering in South Africa is the prevalence of
significant domestic risks as noted above. Because of its wide current account deficit, South
Africa is dependent on portfolio inflows, the cost of which have increased as a result of global
conditions. Yields on ten-year government bonds increased by about 200 basis points (bps). The
South African Rand has also been affected by these latest developments with a depreciation of
almost 23 percent from January to December 2015. SARB tested the resilience of banks against a
possible increase in sovereign yields in 2014 and noted that banks appear to be sufficiently
resilient to withstand a 500bps increase in yields without having to raise additional capital or
increase liquidity buffers in its Financial Stability Review. The Monetary Policy Committee
raised the benchmark interest rate in several steps in 2014 and 2015; it currently stands at 6.25
percent, due to rising inflation and the weakening of the Rand. Given the worsening economic
fundamentals, the hike in interest rates could also affect credit quality going forward.
10. Regulatory capital over risk weighted assets was at 14.7 percent at end 2014 (15.6
percent in 2013). Tier 1 capital to risk weighted assets was 11.92 percent in 2014 (12.4 percent in
2013). Despite a more challenging economic environment, banks remain profitable (albeit
showing some pressure) with the RoA at 1.06 percent and the RoE at 14.5 percent at end 2014
(1.1 percent and 14.7 percent in 2013).
11. The percentage of NPLs to gross loans has decreased from 5.9 percent in 2009, at the
height of the global and domestic economic downturn, to 3.3 percent at end 2014. Provisions
relative to NPLs increased to 49 percent at end 2014, which is relatively low in international
comparisons.
72
SARB quarterly bulletin December 2015
74
Table A2: Financial Stability Indicators
2011 2012 2013 2014
Asset Quality
NPL’s to Gross Loan Portfolio 4.7% 4.0% 3.7% 3.3%
Provisions to NPL’s 34.9% 40.3% 45.7% 48.9%
Profitability
ROA 1.1% 1.3% 1.1% 1.1%
ROE 15.8% 17.7% 14.8% 14.5%
Cost-to-income 54.9% 52.9% 53.5% 54.4%
Net interest income ratio 3.7% 3.8% 3.9% 3.8%
Capital Adequacy
Regulatory Capital to Risk-Weighted
Assets
14.9% 15.9% 15.6% 14.7%
Liquidity
Liquid Assets / Deposits & Short-Term
Funding
12.7% 12.1% 12.3% 12.2%
12. Through a combination of market-friendly interventions by the public and private sectors,
the “banked” population in South Africa has grown from about 25 percent in 1994 to 77 percent
in 2015, up from 67 percent in 2012 and remaining flat at 75 percent in 2013 and 2014
(FinScope 2015). Financial inclusion improved modestly from 2014 to 2015 (from 86 percent to
87 percent). This increase is mostly attributed to an increase in banking, which was prompted by
continued implementation of the South African Social Security Agency grant program.
Additionally, the Mzansi account initiative initiated the opening of 6 million new accounts
amongst the low income population. That said, the results of this initiative have been mixed as
most banks involved reported losses on the accounts due to low usage and high dormancy.
Significant challenges persist in expanding access: it remains far easier to open a bank account
for salaried South Africans compared to non-salaried individuals. Furthermore, consumer
indebtedness remains high, with approximately 9.5 million consumers in arrears of three months
or more. These indebted consumers tend to be higher income earners; there is little evidence that
they are concentrated in a specific sector. At the same time, lending to SMEs remains low, the
availability of savings and insurance products is still relatively limited, and the uptake of the
mobile banking and payment products in the country also remains very low.
Insurance and Pensions Overview
13. The insurance sector in South Africa, while smaller than the banking sector, plays an
important role in credit intermediation. Insurance penetration – measured as premiums to GDP –
is among the highest globally at an estimated 15 percent of GDP as of 2013. Premiums and
underwriting profits have increased over the past two years with the latter being positively
impacted by a reduction in claims. Insurers earned an investment return of 16 percent in 2013,73
which is slightly higher than the previous year. According to the Association for Savings and
Investment South Africa, the life insurance (long-term) industry held record assets of
ZAR 2.2 trillion at the end of 2014, an increase of 10 percent from ZAR 2.2 trillion at the end of
2013. The long-term sector reported an overall premium growth of 14.6 percent in 2013.74
There
73
SARB. Financial Stability Report, March 2014. 74
Ibid.
Source: SARB Quarterly Bulletin June 2013
Source: SARB Banking Supervision Annual Report 2014 Liquid Assets = cash + balances at central bank + short-term negotiable securities; Deposits & ST Funding = current
accounts, savings deposits, call deposits, fixed and notice deposits, negotiable CDs
75
are 79 life insurance licensees holding these assets, but like the banking sector, the insurance
market is essentially dominated by four players: Old Mutual, Sanlam, Liberty and Momentum in
the form of MMI Holdings. The short-term (non-life) insurance sector also posted positive
results in 2010 and 2011, after sharp declines in 2008 and 2009. Gross premiums for the short-
term (non-life) insurance sector also increased similar amounts (8.5 percent) in 2012 and 2013,
while underwriting results decreased by 4 percent in 2013 (6 percent in 2012).75
14. In the pension sector, the institutional investor base is well developed in South Africa,
with pension assets at 110 percent of GDP in 2013. During the 2012 financial year, membership
in retirement funds increased to 15 million members and total assets exceeded ZAR 2 trillion.
The retirement fund sector covers most employees in the formal sector through occupational
retirement fund arrangements (“quasi-mandatory”), pension funds, provident funds, umbrella
funds, retirement annuity funds and preservation funds. Voluntary retirement savings are
supported by tax incentives, largely limited to middle and upper income workers and cover over
60 percent of workers in the formal sector.
Equity Markets Overview
15. The market capitalization/GDP of the Johannesburg Stock Exchange (JSE) exceeds that
of major emerging stock markets, such as Russia or China, and reached 160 percent of GDP in
2012.76
The market capitalization of all listed securities amounted to ZAR 11.5 billion77
as of
October 2014. This ranks the JSE among the 20 largest stock exchanges in the world in terms of
market capitalization. A total of 427 companies were listed on the South African stock market as
of July 2014. Liquidity, measured on the basis of equity turnover as a percentage of market
capitalization, amounted to 46 percent for the year ended on March 31, 2012. Stock exchange
performance was seriously hampered by the financial crisis as it is largely driven by
commodities. Predominant players on the bond market are the central government and to a lesser
extent municipalities. Non-government issuers also issue bonds as well as parastatals,
corporations, commercial banks, mortgage houses and asset finance houses.
Overview of Agricultural Finance Suppliers and Customers
16. “Agricultural finance refers to financial services, including savings, transfers, insurance
and loans, potentially needed by the agricultural sector, meaning farming and farm-related
activities including input supply, processing, wholesaling, and marketing. Most of these
activities are conducted in rural areas, but large processing facilities and agribusinesses, as well
as (many) largely subsistence-level smallholders, are also located in urban and peri-urban
areas.”78
Demand Side of Agricultural Finance
17. In South Africa, the users of agricultural finance include large scale, exclusively
commercial farming (about 40,000 farming units as of 200779
) and small scale, predominantly
75
Ibid. 76
Economist Intelligence Unit. “South Africa Financial Services Industry Report,” July 2014. 77
SARB Quarterly Bulletin December 2014
78
‘Policy Brief on Agricultural Finance in Africa’, Making Finance Work for Africa, March 2012. 79
DAFF: Abstract of Agricultural Statistics, 2010. p.5.
76
non-commercial farming. The former group’s financing needs are generally well-serviced,
unlike the needs of the small scale farmers. The small scale farmers can be further sub-divided
into three groups:
(a) non-commercial smallholders (‘subsistence farmers’): They represent approximately 65
– 85 percent of producers, or 2.5 – 3.5 million. They are usually the largest percentage of
producers. These farmers, typically, produce only staples for their own consumption,
have very limited access to land and external inputs/services, are the poorest and most
vulnerable, and are heavily dependent on off-farm income.
(b) smallholders in loose value chains (‘emergent farmers’): They represent approximately
10 – 20 percent of producers, or 350,000 – 700,000. This group is smaller but still
represents a significant, percentage of producers. These farmers generally produce some
surplus staples and non-staples (‘cash crops’), market opportunistically, have greater (but
still limited) access to land and external inputs/services than subsistence farmers, and are
also less poor and vulnerable, but still substantially, dependent on off-farm income.
(c) commercial smallholders in tight value chains (‘small scale commercial farmers’): This
subset of farmers is a relatively small minority of producers, of less than 1 percent of
producers, or about 11,000 – 15,000. They are mostly in the cane sugar industry, but also
in cotton and some other sub-sectors, including livestock/poultry, annual grain/oilseed
crops and horticulture (fruit, wine and vegetables). They produce mainly non-staples for
marketing through agreed buyer(s), have greater access to land and external
inputs/services than other smallholders; and are the least poor, vulnerable and dependent
on off-farm income.
18. As Figure 3 illustrates, approximately half of the country’s small farmers are found in
KwaZulu-Natal, the Free State, and Gauteng (51 percent cumulatively), with the Eastern Cape
and North-West contributing a further 29 percent and the other four provinces the remaining 20
percent.
Figure 3: Distribution by province of ‘emergent’ and ‘small commercial’ farmers,
South Africa, 2010
19. According FinScope’s 2010 Small Business Survey, 53.4 percent urban small farmers
used banks’ services versus 38.4 percent of their rural counterparts. Nearly half of small farmers
used formal savings and/or transmission services and about 30 percent formal insurance services,
but only a small percentage used formal credit services (5.6 percent), only 2.5 percent from a
bank. Similar to micro and small enterprises, family and friends were the most frequently tapped
E.Cape 15%
Free State 17%
Gauteng 17%
KZN 17%
Limpopo 4%
Mpumalanga 9%
N.Cape 4%
N.West 14%
W.Cape 3%
Geographical distribution
E.Cape Free State Gauteng KZN Limpopo Mpumalanga N.Cape N.West W.Cape
Source: FinScope Small Business Survey 2010
77
source of credit. Informal savings and credit groups more often served as a vehicle for saving the
funds required for annual agricultural inputs than as a source of loans for this purpose.
20. The table below highlights the main needs of these farmers. (Brackets indicate where the
demand for a service category by subsistence farmers is possible, but unlikely to be widespread.)
Table 3: Typical financial services by farmer profile80
Service
category
Financial goal Subsistence
farmers
Emergent
farmers
Small scale
commercial
farmers
Savings Have money to pay for farming
inputs at right time X X X
Large purchases, investments in
fixed/movable assets (X) X X
Credit Have money to pay for farming
inputs at right time (X) X X
Large purchases, investments in
fixed/movable assets (X) X X
Transmission Receipt of harvest
payments/payments from clients
X X
Payments to input suppliers (X) X X
Insurance Crop/livestock insurance X X
Fixed/movable asset insurance X X
21. These small-scale farmers face a number of challenges securing adequate financing to
grow their businesses. The key challenges include:
(a) Lack of collateral security: Small farmers in informal rural areas and land reform
beneficiaries are restricted from using the land that they farm as collateral for bank loans.
This makes lending more difficult because acceptable alternative sources of physical or
financial security (per the banks’ definitions) are generally limited or absent.
(b) High costs to users of formal financial services: The “costs of financial services” usually
refer to direct transaction and interest charges. The “cost of finance” was ranked fourth
among the obstacles to growth by small farmers in the Tipoy 201081
survey. In addition
to these costs, farmers in low-income rural communities, who are relatively far from
formal financial institution and poorly educated, are also subject to economic costs (i.e.,
opportunity, agency), regulatory and compliance costs (i.e., Know Your Customer
requirements), social/cultural costs (i.e., being part of a network to improve access), and
psychological costs (i.e., stress of debt).
(c) Financial literacy:82
The low-income community has limited familiarity with formal
financial products and sources for formal help, which can restrict the ability of small
producers to bargain with large up- and downstream value chain players.
80
FinMark Trust. “The Status of Agricultural and Rural Financial Services in South Africa.” March 2013. 81
Tipoy, C.K. (2010), Small Farmers in South Africa, Centre for Inclusive Banking in South Africa. 82
Financial literacy is typically defined as the combination of consumers’/ investors’ understanding of formal
financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to
78
Supply side of agricultural finance
22. At the policy level, there is no comprehensive strategy or specific laws / regulations on
agricultural finance other than the Land and Agricultural Development Bank Act, which governs
Land Bank. There is also no single coordinating body advocating on behalf of agricultural
finance. Instead, the government delivers grants for specific purposes through different
agencies, which at times counteract one another because the agencies have their own strategies
and objectives. The main national government-sponsored grant programs are for: a) land
acquisition (administered by DRDLR), b) moveable equipment and fixed improvement (CASP
grant administered by DAFF), and c) working capital (MAFISA program administered by
DAFF). Although DAFF reported in 2010 to have assisted approximately 11,000 small farmers
and land reform beneficiaries, there is little evidence that any of the government institutions have
successfully reached large numbers of targeted clients.
23. Despite the absence of a coordinated policy framework and champion entity for
agricultural finance, there are a different options available for financing farmers, namely
agricultural-focused government institutions (i.e., AgriSETA, DRDLR, and DAFF), government-
sponsored credit guarantee schemes (i.e., Khula Credit Guarantee Scheme), national and
provincial wholesale development finance institutions, commercial financial institutions, formal
micro-finance institutions (MFIs), informal MFIs (i.e., rotating savings and credit associations,
village savings and loans associations), cooperative banks/financial services cooperatives, and
agricultural cooperatives. However, the vast majority of these suppliers are not specifically
dedicated to the rural or agricultural sector with the exception of a select few (i.e., AgriSETA,
Land Bank). Therefore, the breadth and depth of the products and services available for farmer’s
specific needs remains limited and they are not targeted to small-scale farmers. Table 483
provides an overview of the various suppliers available to farmers. The table is meant to
highlight the prominent suppliers of finance, not to be an exhaustive list.
24. Total farming debt as of end of 2014 is ZAR 116, 576 million, of which 57 percent or
ZAR 66,345 million was from commercial banks, 26 percent or ZAR 30,580 million was from
Land Bank, and the remaining 17 percent was from agricultural cooperatives, DAFF, private
citizens, other financial institutions, and other debt sources.84
State grants for land totaled ZAR
13.6 billion from 2008 – 2012 and ZAR 3.4 billion for fixed improvements and moveable
equipment from 2004 – 2012.85
DAFF is the largest lender of working capital through the
MAFISA program. The annual value of these loans has averaged approximately ZAR 900
million in recent years. The total value of annual lending to the land reform beneficiaries and
small farmers by other DFIs and commercial banks is not known but estimated to be half the
value of the MAFISA loans.
25. Furthermore, the stark shortage of working capital for small scale farmers is more
obvious when compared to commercial farmers. On average, commercial farmers borrow 40
percent of the combined value of their farms’ land, fixed improvements and moveable equipment
make informed choices, to know where to go for help and to take other effective actions to improve their financial
well-being (Messy, F. and Monitcone., 2012., The Status of Financial Education in Africa, OECD Working Papers),
such as keeping adequate financial records and being able to analyze and deduce business strategy from such
records. 83
FinMark Trust. “The Status of Agricultural and Rural Financial Services in South Africa.” March 2013. 84
DAFF: Abstract of Agricultural Statistics, 2015. 85
Center for Inclusive Business at the University of Pretoria: The Microfinance Review, 2013.
79
for annual inputs. In contrast, the small scale farmers borrow less than ZAR 1.5 billion, which is
less than 10 percent of the ZAR 18 billion that the state has spent acquiring land, fixed, and
moveable assets for historically disadvantaged farmers.
80
Table 4: Major micro-level financial service providers in South Africa and services offered
Products & services available to
customers
Institutions Gra
nts
Savi
ngs
acco
unt/
ser
vice
Fixe
d D
epos
it a
ccou
nt
Tran
sact
iona
l acc
ount
Bran
chle
ss b
anki
ng s
olut
ion
(m
obile
, PO
S)
Pers
onal
loan
s m
ainl
y fo
r co
nsum
ptio
n
Pers
onal
loan
s fo
r ent
erpr
ise
pu
rpos
es
Shor
t ter
m p
rodu
ctio
n lo
ans
Med
ium
term
Agr
ic L
oans
(Mov
eabl
e as
sets
)
Med
ium
term
Agr
ic lo
ans
(Orc
hard
s)
Long
term
loan
s (la
nd)
Equi
ty F
inan
ce
Who
lesa
le fi
nanc
e
Fina
nce
for s
econ
dary
se
ctor
s
(e.g
agr
o pr
oces
sing
)
Tran
sact
iona
l cap
abili
ty
(loan
link
ed c
ard)
Cash
han
dlin
g ca
pabi
lity
Crop
ins
uran
ce
Agr
i-ass
et in
sura
nce
Fune
ral i
nsur
ance
ST h
ouse
hold
insu
ranc
e in
c bu
sine
ss (s
tock
, etc
)
Cred
it lif
e in
sura
nce
Commercial Banks Absa Bank & Insurance Company
Standard Bank First National Bank Nedbank Capitec Bank African Bank Co-operative Banks Ditsobotla Co-operative Bank Government DFIs Land Bank Khula (now part of SEFA) SAMAF (now part of SEFA) National Empowerment Fund Industrial Development Corporation (now part of SEFA)
Development Bank of Southern Africa
Small Enterprise Finance Agency (SEFA)
Post Bank (South African Post Office)
Ithala (provincial) CASIDRA (provincial) Mpumalanga Economic Growth Agency (MEGA) (provincial)
Insurance companies Santam Mutual & Federal Zurich Hollard Momentum Developmental Microfinance Institutions
Small Enterprise Foundation Marang Women’s Development Business Off-takers/ buyers Pick ‘n Pay (and Ackerman Foundation)
Registered Credit providers (4,000)
Informal services Stokvels/ROSCAS/ASCAS Financial Service Co-operatives Family and friends Burial societies Mashonisas/loan sharks
81
Overview of Agricultural Extension Services86
26. Agricultural extension services in South Africa have a long history dating back to 1902.
In the earliest form, foreign scientists were imported into South Africa to provide technical
support services to the farmers without any central coordination. Over time it evolved to be more
home-grown and include demonstration trains, study tours, one-on-one advisory services,
financing schemes and scientific research. The responsibility for these services also changed
numerous times. Responsible agencies have included the Department of Agriculture,
Agricultural Development Institutions, the National Department of Education, the Department of
Lands, the Department of Credit and Land Tenure, the Department of Native Affairs, and most
recently, the Ministry of Rural Development and Land Affairs.
27. The effectiveness of the services have been mixed and poorly managed over the last 113
years. According to the Department of Agriculture’s 2008 report, “The state of extension and
advisory service within the agricultural Public Service: A Need for Recovery” the “capacity of
provinces to deliver quality extension services to farmers varies and to some it is already
suffocating.” The report provides a sober assessment of the state of the South Africa’s extension
services.87
28. In 2007, the largest proportion of extension officials are from Limpopo Province which
constitutes 30 percent of the total followed by Eastern Cape Province at 28 percent and KwaZulu
Natal at 16 percent. The Gauteng and Northern Cape Provinces have the smallest number of
appointed extension personnel, less than 2 percent of the total staff pool. Only 427 out of the
2,155 staff (20 percent) have a degree or higher qualification. About 1,728 out of 2,155 (80
percent) of the extension personnel have a diploma qualification. Overall 8 out of 10 are
insufficiently qualified to operate as Agricultural Advisors or Subject Matter Experts, which only
require bachelor’s degrees in agriculture to work at the provincial or national level. Only
Gauteng and Free State Provinces have a good percentage of officials with degree qualifications
and higher. The Eastern Cape and KwaZulu Natal has the lowest percentage of extension
officials with degree qualifications and higher. In 6 out of 9 provinces, female extension officials
are more educated than their male counterparts. It is only in Free State, Gauteng and Western
Cape where male officials are more educated than their female counterparts.
29. According to the report, very few extension officials have been exposed to formal skills
programs which are crucial to the delivery of product and services to farmers. Of the total pool
of 2,155, only 204 (9 percent) had completed training in communication, 238 (11 percent) had
completed project management, 140 (6 percent) had completed computer training and 143 (7
percent) had completed training related to people management and empowerment. Less than 25
percent of extension staff were exposed to technical training programs since joining public
service.
30. Table 5 presents the projected ratio of extension personnel to farmers based on
extrapolated farmer populations. The table illustrates that each of the provinces are severally
86
This section is a summary of a World Bank background note on “Review of Agriculture Advisory Service in
South Africa” (April 2015). 87 This report flows from the Extension indaba (important conference held by the izinDuna, or principal men, of the
Zulu or Xhosa peoples of South Africa) held earlier in 2008.
82
understaffed by the more conservative measure of 1 extension officer to 250 farmers. Currently
the Eastern Cape, KwaZulu Natal, Limpopo and Mpumalanga have the highest shortfall of
extension personnel given the number of communal farmers in these provinces as well as
projects emerging as a result of the land reform program through CASP and other initiatives. Per
the 1:500 ratio, the Free State, Gauteng, and North West Provinces are sufficiently staffed. These
are also the provinces with more highly qualified staff.
Table 5: Projected staffing needs
Province Current No. of extension
officials
Suggested number based on different ratios 1: 500 1: 250
Eastern Cape 623 1 344 2 688 Free State 70 52 103 Gauteng 29 19 38 KwaZulu Natal 360 710 1 419 Limpopo 666 1181 2 361 Mpumalanga 189 337 675 Northern Cape 23 26 52 North West 137 129 257 Western Cape 58 61 123 Total 2 155 3 559 7 706
31. Figure 4 shows the trend in government expenditure on farmer support, extension
(included in farmer support and development expenditure) and the land reform for rural
development programs of government since 2004/5. Average expenditure on farmer support and
development over the past five years was ZAR 4,405 million per year with extension services
representing roughly 55 percent. The expenditure by the Department of Land Affairs on the
Land Reform for Agriculture program is roughly the same as the combined expenditure on
extension by DAFF and the provincial departments (after accounting for conditional grant
transfers between DAFF and the provincial departments). The expenditure on extension
translates to a spending intensity ratio of about ZAR 47,000 (2010 values88
) per commercial
farmer, or ZAR 4,000 (2010 values) per farm worker.
88
2010 Year-end exchange rate US$1 = ZAR 6.58
83
Figure 4: Government expenditure on extension and farmer support
Source: RSA 2004-2014
Extension Service Providers
32. Currently, there are four sources of extension service providers.
I. Universities: There are nine universities that have faculties of agriculture in South
Africa, only three of which have programs dedicated to extension training. The total
researcher capacity in Full-time Equivalent staff was reported to be 140 persons, or 18
percent of the total researcher capacity in agricultural sciences in the country (Flaherty et
al, 2010). Another five Universities of Technology offer agricultural training; mainly
focused on agricultural production and management qualifications. There are 12
agricultural colleges, nine of which offer higher education qualifications. These
qualifications are generally production related three-year diplomas in agriculture. Most
colleges are also involved in farmer training. With the exception of Grootfontein (which
is managed by DAFF), the agricultural colleges are managed by their respective
Provincial Departments of Agriculture. Under the competitive funding base for
agricultural research in the country many faculties of agriculture have developed centers
of excellence in particular fields in competition to the services traditionally provided by
the Agricultural Research Council. These centers of excellence at the faculties of
agriculture serve as a potential source of support to farmer settlement either through
training or outright service provision.
II. State funded agencies: In S. Worth’s 2012 paper on extension services89
, he identified
three state-funded agencies: Agri-TV, the Agricultural Research Council, and the Agri-
business Development Agency (Kwazulu Natal). The Agricultural Research Council
supports small holder agriculture but is seriously understaffed (operating with only 443
researchers versus the recommended 750). A number of development agencies exist at
the national and provincial levels, however, information (capacity and number) on these
agencies is very limited.
89
Agricultural Extension In South Africa: Status Quo report: Discussion Document.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000R million (2010)
Farmer Support and Development
Extension
Land reform
84
III. Private Sector Extension Services: According to Worth (2012) one of the implicit
behaviors among farmers when they reach a state of self-reliance or where their
knowledge and skills in their particular field outstrip those available from the State, they
become willing to fund research and extension specific to their primary production focus.
This behavior manifests itself collectively and commodity-based agricultural support
organizations are created. Experts at universities or the government have transitioned to
set up private consulting and/or services providing this support. They offer a wide range
of agricultural related services including technical production advice, marketing,
infrastructure development (e.g. irrigation), business management and research. Within
this larger group are commodity organizations, organized agriculture organizations, non-
government organizations, and private consultants.
Commodity: Approximately 33 commodity organizations currently exist in South
Africa. Generically these services include producer representation, industry
promotion, information sharing, quality assurance, industry transformation, research
(either directing, funding, or conducting), extension, production support, industry
development, institutional capacity building. These services are largely funded
through membership fees, proceeds from trust funds and through levy income. Some
of these organizations have well established farmer support programs aimed at new
entrants to farming and have become preferred service providers to departmental
farmer settlement programs. With sufficient funding, many private-sector firms can
organize, manage and deliver extension services more efficiently than government
agencies.
Organized Agriculture: There are only two institutions that exist within this sphere:
AgriSA the Transvaal Agricultural Union and NAFU. These organizations serve as
the mouthpiece for farmers at the national level, with the purpose of ensuring the best
possible financial and social position for the farmer within the national economy.
Non-Government Organizations (NGO): There are 16 NGO’s focusing on
agriculture, 23 on rural development, and 10 that deal with land issues. The services
provided by these institutions generally range from skills development to legal
support.
Private consultants: Worth identified 29 private sector consultants consisting of
individuals, associations and companies. The scope of their services is diverse,
ranging from input supply to agricultural and rural development support.
IV. Agri-business & banks: Another source of support to farmers is commercial banks and
agri-business industries. Commercial banks have well-established agricultural divisions
dedicated to provide financial support to commercial farmers, but obviously at
commercial principles. Although banks do not promote themselves as extension service
providers, they do possess the potential to assist in the provision of access to technical
support to their clients. The Agribusiness sector provides technical support services to
commercial farmers with supply contracts in the interest of securing produce of the
appropriate quality, etc., and in so doing serve as another source of technical support
available to farmers, albeit to more skilled farmers, but in many cases not exclusively so.
All the major commercial banks have an agricultural division specializing in tailor made
financial services to the farming community. These include specialist services from
agricultural economists and advisors including support in the development of business
85
plans, insurance services and grain trading on Safex. They assist in linking their clients
with service providers at co-operatives, commodity organizations and input suppliers in
this respect. They are also involved with joint venture finance for developing agriculture,
where they administrate the financial scheme of assistance to the project, whilst the
mentorship, training and management is provided through a subsidiary.
Land Bank Support to Emerging Farmers
33. Land Bank falls within the last category of agribusinesses and banks. Land Bank’s
mandate was reformulated in 2002 to effect a change in the patterns of land ownership, by
promoting greater participation in the agricultural sector by historically disadvantaged persons
and an increase in ownership of agricultural land by such persons, through the provision of
appropriate financial services. Land Bank outsources the provision of technical support to third
parties preferring not to have the in-house capacity to do so.
34. The REM program of Land Bank is one of several public programs that provide financing
to emerging farmers. Two such programs belong to DAFF. One of these, MAFISA, is very
similar to the REM program. It offers short term credit to emerging farmers on terms similar to
those offered under REM. MAFISA originally provided wholesale financing through nine
intermediaries, which has decreased to three. Established with an endowment of ZAR 1 billion in
2004, MAFISA has provided loans to approximately 5,000 disadvantaged farmers — most
somewhat smaller than REM’s typical client, but still in the category of emerging farmers. Some
of the MAFISA endowment has been returned to NT and the remaining funds have been
relocated to the Land Bank. Because REM and MAFISA are so similar, and because Land Bank
has greater capacity to manage such a program, many observers believe that the two programs
should be merged into one program under the Land Bank. A second program of DAFF offers
grants to support short-term operating expenses and small operating needs such as machinery.
These grants are managed at the provincial level and come from funds that are transferred from
the national to provincial level under CASP.
35. Land Bank gives low, medium and high-risk clients access to a full range of long,
medium and short-term loans to meet all financial needs, including land and equipment
purchases, asset improvement and production credit. A series of tailor made programs and
products have been developed specific to the needs of previously-disadvantaged people in the
sector. The development of the requisite business plan needed to apply for a loan is done through
intermediaries (i.e., co-operatives, commodity organizations, NGOs, private consultants, etc.).
The experience with this arrangement has been positive.
36. Since Land Bank has no in-house technical support capacity, technical support to farmers
from intermediaries includes training, skills development and mentoring of smallholder
beneficiaries. The commodity organizations, many of which fund their operations from trust
funds and funding sourced from the programs of DAFF and the Department of Rural
Development and Land Affairs, have proved successful in establishing commercially successful
historically disadvantaged farmers. There are several examples of such successful small farmer
development programs in South Africa. While the number of clients served by Land Bank
through this approach is currently small, it is the most cost effective way of providing the
technical support under this scenario. The technical support provided by the intermediaries is of
high quality compared to other available programs, but it is cost-intensive. If the number of
86
clients were to grow significantly the burden on the financial resources of the intermediary
services of the commodity organizations specifically may become unsustainable absent an
increase in support from government programs.
Consolidating government support for extension services
37. The existence of the somewhat parallel efforts of government departments has led to
fragmentation of effort and inefficiency and has caused frictions and problems in
implementation. The current setup between national and provincial departments of agriculture
does not lend itself to effective central coordination of the available capacity in government and
an institutional solution needs to be created to fill this void. A mechanism was developed in
2004 to coordinate the support for these various programs (and an operational manual for such
coordination was developed and agreed) but it has never been implemented.
38. Consolidating the financial support initiatives of DAFF and DRDLR would circumvent
these problems. The existence of an efficient public service extension service would go a long
way to assist Land Bank. It is clear that the extension services capacity provided by government
faces enormous challenges in providing adequate support to farmers. In the meantime, the
current model of utilizing the intermediaries is the best approach that Land Bank could use.
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Annex 8: PFI Due Diligence Criteria and Summary
REPUBLIC OF SOUTH AFRICA: Land Bank Financial Intermediation Project
1. The World Bank Operational Policy OP10 requires an assurance that all financial
institutions and participating financial intermediaries (PFIs) in a World Bank financed
credit line are viable financial institutions determined by: (a) adequate profitability, capital,
and portfolio quality as confirmed by audited financial statements acceptable to IBRD; (b)
acceptable level of loan collections; (c) appropriate capacity, including staffing, for carrying out
subproject appraisal (including environmental assessment) and for supervising subproject
implementation; (d) capacity to mobilize domestic resources; (e) adequate managerial autonomy
and commercially oriented governance; and (f) appropriate prudential policies, administrative
structure, and business procedures.
2. The success of a credit line operation critically depends on the effectiveness and
quality of the participating financial intermediaries (PFIs). Strong and capable PFIs, which
are in a stable financial condition with proper capacity to appraise and carry the credit risk, are
more likely to deliver funds effectively and efficiently to viable subprojects, which are consistent
with project objectives.
Due Diligence Eligibility Criteria
3. The eligibility criteria assessed in the due diligence process follow the general
guidance provided under World Bank Operational Policy OP10 and Land Bank selection
criteria for intermediaries. The potential PFIs under the project are agricultural cooperatives,
large agricultural companies, and credit providers that have a credit provider license, are
supervised under the National Credit Act by the National Credit Regulator (NCR) of South
Africa and maintain externally audited financial accounts based on IFRS. The following specific
eligibility criteria are developed to take into consideration the peculiar nature of the potential
PFIs while following the general guidance under OP10.
- Good governance and management quality – commercially oriented governance;
experienced management and good practices; existence and effectiveness of business and
risk related committees.
- Adequate Capital structure and leverage – quality of capital; acceptable level of
leverage and debt service coverage.
- Appropriate Asset Structure and profitability -- including acceptable risk profile; type
and diversification of asset structure; well diversified and stable earnings; level and
growth trends of operating costs and expenses should be well managed.
- Adequate Liquidity and funding structure – appropriate liquidity levels. Good funding
structure without heavy concentration and capacity to mobilize domestic resources.
- Adequate Credit appraisal and monitoring capacity and lending portfolio quality –
appropriate credit appraisal process and well defined procedures; policies/effectiveness of
loan underwriting; adequate staffing for carrying out subproject appraisals and for
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supervising subprojects implementation that would meet the requirements for effective
participation in the Credit Line; asset/loan classification and provisioning practices; level
and severity of non-performing loans; timely identification and collection of problem
loans.
- Appropriate financial risk management and internal controls – adequate organization
and institutional capacity for its specific risk profile; well defined and prudent policies
and written procedures and effective execution for management of all types of financial
risks (liquidity, credit, currency, interest rate and market risk).
- Appropriate internal audit function – organization of internal audit; quality of
reporting and responsiveness to audit suggestions; follow-up on any noted issues.
- Compliance with NCR regulations and other applicable laws and regulations. The
National Credit Regulator (NCR) was established as regulator under the National Credit
Act 34 of 2005 (the Act) and is responsible for the regulation of the South African credit
industry. The NCR is tasked with the registration of credit providers, credit bureaus and
debt counsellors; and enforcement of compliance with the Act. The regulations issued by
the NCR for credit providers primarily relate to ensuring adequate financial consumer
protection and submission of audited annual financial statements by credit providers. The
NCR regulations do not prescribe any prudential limits for the supervision of credit
providers. Therefore, to ensure the financial soundness of PFIs, the due diligence criteria
define specific financial performance criteria described below that PFIs need to comply
with on an ongoing basis.
Ongoing Eligibility Criteria
4. In addition, each PFI will be required to demonstrate ongoing compliance with the
following financial performance indicators throughout its participation in the line of credit.
On-going Financial Performance Criteria90
Average total asset to average total equity (equity multiplier)1
Interest coverage ratio (EBITDA to Interest expense)
Non-performing loans more than 90 days past due to total loans
Liquidity ratio defined as current assets to current liabilities
Maximum exposure to one borrower or group of related borrowers by intermediary relative to
total equity
Maximum exposure to intermediary related parties relative to total equity
1. Due to recent changes in business models for some of Land Bank intermediaries such as Unigrow and Akwandze
in which the lending is undertaken by a subsidiary that is structured as a financing entity, the corporate leverage
ratio criteria based on total debt to equity may not reflect the business model appropriately. For these intermediaries
total capital to total assets or average total assets to average total capital will be used.
90
Values are defined in the Operational Manual.
89
5. In addition to the above eligibility criteria, the LOC has well-defined sub-loan
eligibility criteria. These criteria include a limit on maximum loan sizes to a single sub-
borrower or group of related borrowers to ensure that credit risk is diversified across a large
number of sub-borrowers. The LOC also limits lending to related parties by PFIs.
6. Given the need to support Land Bank in expanding its wholesale lending to
commercial and emerging farmers, an intermediary that is not fully meeting the eligibility
criteria may be accepted as a PFI providing that it is willing to sign the Memorandum of
Understanding (MOU) in which it will commit to an agreed Action Plan91
that will bring it in
full compliance in an agreed time. Also some of Land Bank’s intermediaries have established
fully-owned subsidiaries to undertake financial services on behalf of the Group. In these cases,
guarantees may also be provided by the parent company if the subsidiary is not fully meeting the
eligibility criteria, in particular regarding the capital structure. Land Bank in the process of its
annual credit review and the World Bank during supervision missions will do regular check-ups
to make sure that the PFI is making the expected progress in the agreed timeframe.
7. Land Bank and the World Bank initially selected six intermediaries that are
operating in both the corporate banking and REM sub-business lines and assessed them
against the eligibility criteria. Akwandze, Humansdorp, Lona Citrus, TWK, GWK and
Unigrow Financial Services (fully owned subsidiary of Afgri Group) were selected to start the
due diligence assessment and the World Bank team appraised these PFIs during project
preparation. Additional PFIs interested in the LOC will be appraised during project
implementation.
8. The appraisal of TWK, Lona Citrus, Unigrow, Akwandze, GWK and Humansdorp
included a detailed assessment of whether the potential intermediary meets the eligibility
criteria (as specified above). The due diligence review process included:
Interviews with senior management regarding the intermediary organization, business
strategy, ownership and governance structure.
Interviews with senior management on the intermediary’s financial condition and
profitability, including a review of related policy documents of the intermediary.
Review of externally audited financial statements as of 2012, 2013, 2014 and 2015.
Interviews with senior management on lending policies, procedures and practices and
internal controls.
9. Based on the assessment, two intermediaries fully meet the eligibility criteria and
three generally meet the criteria. Two intermediaries generally meet the eligibility criteria
except for capital structure; and one intermediary generally meets the eligibility criteria, however
it needs to improve the quality of its loan portfolio and cash flows going forward. One
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For example, an intermediary with a capital structure in which the total asset to total equity ratio is more than the
agreed maximum, the PFI would be asked to commit to improving the capital structure in the agreed time frame
and/or where applicable guarantee is provided by the parent company. An intermediary that has high credit
concentration will be asked to diversify the credit portfolio in the agreed time frame. An intermediary with an NPL
level considered too high will be asked to reduce the level of impaired loans to less than eight percent in the agreed
time frame. Some minor, but important, improvements related to risk management functions could also be subject
of an MOU.
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intermediary does not meet the eligibility criteria at this moment, however it can participate as
intermediary once the issues identified in the due diligence are resolved.