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Falling Interest Rates. Farmers to benefit
Jun 07 2011
The Agricultural Development Bank (ADB), the leading financier of agricultural activities in the country, says it will pass on the benefits of falling interest rates to its core captive market, agriculture.
Although the bank effectively ceased to be a development financier of the agricultural sector in 2004 when Bank of Ghana enforced universal banking, it has remained committed to the sector which has been largely neglected by financial institutions in the country.
Officials of the bank told the GRAPHIC BUSINESS in an exclusive interview that the worse risk borrower in the agricultural sector paid the base rate as interest, thus by extension, farmers and other players in the agricultural value chain would be paying anything up to 20 per cent as their cost of borrowing effective this month.
Officials of the bank told the GRAPHIC BUSINESS that agriculture continued to attract the lowest average interest rates despite the inherent high risk associated with the sector.
This discriminatory pricing policy of the bank in favour of agriculture is expected to continue with borrowers in the sector with the obvious beneficiaries of lower rates as the base rate of the ADB Traditional economic theory, generally matches higher risk with declines. higher interest rates.
The Policy and Strategy Implementation Coordinator, Dr Henry Shirazu Alhassan and the Head of Corporate and Specialised Credits, Mr Robert Karikari Darko, jointly told the paper that in spite of the numerous challenges confronting the sector that made financing it sticky, ADB was determined to grow its agric portfolio to about 40 per cent of its total lending portfolio in the next couple of years.
“We lend across all types of farming and products regardless of the scale and amount; when it comes to agric, we don’t have a restricted appetite,” Mr Darko stated.
The financing of majority of agricultural activity in the country is linked to the Agricultural Development Bank, which lends to the smallest player in the value chain to the largest, including peasant farmers, livestock farmers, poultry farmers, as well as the cultivation of maize, cocoa and cashew.
In spite of these assurances and the palpable increased devotion of funding to agriculture by the bank which has its branches spread across the country, agricultural sector players still listed ‘Access to credit’ as the second top challenge in the Business Barometer survey conducted by the Association of Ghana Industries (AGI).
The President of the AGI, Nana Owusu Afari, therefore, said if the country placed so much premium on agriculture, it should direct more financing into the sector, which employs many Ghanaians.
But records show that last year, ADB’s lending to its core agricultural sector reached GH¢174.2 million from GH¢105.3 million in 2009, an increase of 64.5 per cent. This means that the share of agriculture in the bank’s credit portfolio increased from 24.1 per cent in 2009 to 28.9 per cent in 2010.
The almost 30 per cent ADB agric portfolio, according to industry statistics, is equivalent to about 80 per cent of the total banking industry portfolio devoted to agriculture, which in itself includes a gamut of activities such as financing the importation of fertiliser that would rather pass as trade finance on the books of ADB.
The almost 30 per cent ADB agric portfolio, according to industry statistics, is equivalent to about 80 per cent of the total banking industry portfolio devoted to agriculture. It is worth noting that the industry data on agriculture financing by some other banks includes a gamut of activities such as financing the importation of fertiliser that would rather pass as trade finance on the books of ADB.
Currently, though, ADB had been offering significant concession for its agric portfolio which enjoyed cross subsidies from the other banking activities of the bank, a situation that required urgent attention from the sole owner of the bank, the government, to enable the bank to remain the largest financier of agriculture, Mr Darko said.
Currently, though, ADB had been offering significant concession for its agric portfolio which enjoyed cross subsidies from the other banking activities of the bank, a deliberate strategy by government to place more funds of its with the bank would greatly assist ADB in pricing even lower to the agric sector and also remain the largest financier of agriculture, Mr Darko said.
Dr Alhassan explained that the bank had since its inception in 1965 been enjoying some level of medium term to long term financing support from the government to enable it to continue its financial intermediation in the risky agricultural sector.
However, the conversion from a development bank into a universal bank in 2004 which came about because of the government’s inability over the last few years to provide such financing had hindered the bank’s ability to offer the medium to long term financing that the agricultural sector so badly needs.
Good banking thrives on appropriately matching (directing) short term funds with (into) short term lending and vice versa. ADB has been modifying this rule to the benefit of farmers and fishermen.
However, with its new status as profit oriented universal bank, this concession is set to change as the bank now relies more on depositors funds, rather than on government facilities, to create credit.
“Most proposals require between seven and eight years financing with at least a two-year moratorium. But as a bank, we want to limit the mismatch between depositors funds and lending,” the head of corporate and specialised credits stated.
Thus banks would normally match term of loans with the term of depoits that they hold.
“However, most new business proposals prudently require between seven and eight years financing with at least a two-year moratorium.
But as a bank, we want to limit the mismatch between depositors funds and lending,” and this is major problem to lend long for agric sector, the Head of Corporate and Specialised credits stated.
HOW TO IMPROVE AGRIC FINANCING
While supporting the position of channeling more financing to the sector, the two agric credit experts said there was the need for a concerted effort, including a change of mindset on the part of the farmer that credit was a gift that did not require to be repaid.
“In Ghana, we do not perceive agriculture as a business and this mentality needs to change. Most farmers see facilities from the government – from the state-owned ADB – as a grant which didn’t need to be paid back. This kind of mentality is pervasive in the sector and needs to change,” they said.
Also most agricultural productivity in the country tend to be seasonal and as such have cash flow gaps which did not make them bankable. The advice of Dr Alhassan and Mr Darko is that the country needed to think through its entire agricultural value chain and plug the linkages as with production, storage, processing and marketing among others.
Also most agricultural productivity in the country tends to be seasonal and as such have cash flow swings which is a challenge for debt structuring and repayment. The advice of Dr Alhassan and Mr Darko is that the country needed to think through its entire agricultural value chain and plug the linkages as with production, storage, processing and marketing among others.
“There should be concerted public-private partnerships to develop programmes to support agriculture,” Mr Darko said, adding that there needed to be off-takers within the value chain to guarantee prices and markets to remove some of the risks.
Dr Alhassan also called on the few scheme loans from institutions such as the International Fund for Agricultural Development (IFAD) and the African Development Bank (AfDB) meant for poverty alleviation to be well designed to help lift the beneficiaries out of poverty.
The challenge with such funds included the fact that although it was poverty centred, the international bodies gave conditionalities, such as requirements for the bank to lend to scheme beneficiaries using the bank’s credit assessment procedures which makes it difficult for beneficiaries to meet those requirements.
Indeed, a number of industry watchers are of the opinion that government should, as matter of fairness, lodge almost its funds for agricultural development irrespective of their sources with the ADB which had stayed with the sector, rather than lodging funds with some banks which had nothing at all to do with the sector.
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