In part this is because of the state of the economy as farmers have to deal with parallel exchange rates, high inflation and, overall, a lack of cash in the system, or at least in those parts of the system that most people can access. But it’s also to do with a lack of appropriate financial instruments suited to the growth of small and medium scale farming following land reform.
At the end of last year, we investigated the challenges of agricultural financing and some of the solutions that are evolving in Chikombedzi, Mvurwi, Matobo, Masvingo and Gutu. Some of the results are presented in the following blogs. This one starts with a discussion of loans and credit. It will be followed by two blogs on remittances and savings, with the series ending on a summary of the findings and some indications for ways forward. These were rapid investigations and explorations of case studies through many interviews across our sites; a more in-depth examination must wait, but on each theme some important conclusions emerge.
Credit and loans
Since the 1970s, micro-finance became a buzzword for development practice across the world. Leveraging small amounts for relatively poor people has, it is claimed, worked wonders for alleviating poverty, empowering women and encouraging investment. Experiences from Asia, notably Bangladesh, are held up as exemplars. But the success stories of micro-financing have not always been supported by more detailed research. High interest rates, extreme indebtedness and unclear impacts on poverty reduction and empowerment are pointed to. The specific interventions of small-scale credit loans have been given way to a broader set of activities grouped under the term, ‘financial inclusion’. This has received equivalent hype, with a fintech-philanthropy-development complex emerging.
In Zimbabwe however, beyond a few small donor-led projects, micro-finance has not taken off to the same extent. The structure of financial institutions and the biases of the past loom large. Zimbabwe’s financial sector, especially those elements supporting agriculture, has not moved with the times. Land reform has created a whole swathe of potential new customers desperate for financing options, yet the main banks, including those heavily supported by the state, fail to offer suitable financial packages and the restrictions and requirements are impossible to fulfil for most. Loan options are generally large, significant collateral is required and payment requirements are challenging, especially in a high inflationary setting.
Despite the revamping in 2021 of the government-owned Agribank into AFC Holdings, with banking, leasing and insurance arms, very few farmers in our sample areas have been able to take loans through either Agribank or CBZ, where USD5000 ‘microfinance’ loans are offered. In Mvurwi – a high potential area where the need for financing is the highest in all of our sites very few were able to take out a loan, especially amongst small-scale A1 farmers. And all of those who did complained about the process (incredibly bureaucratic), the requirements (the need to offer houses or cars as collateral in the absence of land-based collateral options that banks will accept) and the interest rates (prohibitive, they claimed). Most farming is as a result self-financed, limiting the level of investment.
As someone put it during our interviews, “These loans are for the few people who read newspapers, not us”. In order to widen access to finance, the Ministry of Women’s Affairs has developed the ‘Women’s Bank’ and a scheme of training and mentoring for women as part of ‘empowerment’ programmes. Loan financing is linked to rotational savings schemes – the focus of a future blog – and the development of chicken, goat and gardening projects but the overall impact is extremely limited, even if the intention and focus is a good one.
Some aid-funded programmes have attempted to provide a complement to the failing commercial system, for example through the Africa Enterprise Challenge Fund (AECF), which was launched in 2008 at the World Economic Forum. This is a Nairobi-based outfit (also with offices in Abidjan and Dar es Salaam) and has been owned by AGRA since 2017. It is backed by aid donors/philanthropists and US$392m has been raised to date, supporting both agricultural and energy businesses in 26 countries across Africa. The aim is to provide soft loan funds to businesses allow them to grow in a resilient way and by 2021 about US$130m had been invested in 200 agribusinesses.
In Zimbabwe, they provided loans to relatively large agri-businesses such as agro-dealers, market traders, wholesalers, day-old chick producers and others, aimed at ‘de-risking’ their businesses and encouraging growth and investment. One profiled success story was a woman entrepreneur who has developed a large goat farm. Such financing of course completely by-passed the majority of small operators and farmers needing finance as these potential clients were deemed too difficult to access or too risky. Many of the beneficiaries were already-rich black businesspeople, frequently with good connections to others forms of patronage support or former white farmers who had moved away from direct production but were now focusing on other parts of the value chain.
While supporting a particular vision of the agricultural sector (I’d say an outdated one), the main beneficiaries of these highly subsidised ‘loans’, financed through aid, were already (relatively) well-off, even if there were wider benefits through employment and wider ‘development impact’. And, yet, despite the generous subsidies to these businesses, many failed – yes in part because of the incredibly difficult economic conditions for any business in Zimbabwe today – but significantly also because they were largely not geared to the current realities of the agricultural sector and harked back to the old dualism, where large-scale farm businesses dominated ‘commercial’ agriculture.
Limited options for agricultural financing
In the absence of appropriate financing options, farmers in the land reform areas, both A1 and A2, have turned to other options. The following sections profile a few.
Crop contracting. This is now an increasingly important form of finance. In our Mvurwi study site private contracting from a whole range of companies dominates tobacco growing, with most companies (e.g., ZLT, MTC, Boost Africa) supplying inputs, fuel sources for curing (mostly coal) and some offering cash for working capital including for labour hiring for weeding, planting and harvesting (Shasha/MTC). Most contracts in the A1 areas are offered for one hectare of tobacco, but some can negotiate more depending on their sales history, while on the medium-scale A2 farms, larger amounts are offered and some companies provide cash (up to US$7500) in exchange for collateral guarantees agreed through legal affidavits. Nearly a dozen companies compete for custom in Mvurwi making it a highly competitive market, although one prone to side-selling and the undermining of the contract system. Those who get blacklisted cannot get contract finance in the future, although getting a grower number for a relative is relatively easy. As we have shown in previous work, contracting is important for those who are neither rich (who sell directly for better prices) or very poor (who often deem contracting terms too risky). Tobacco contracting with private companies requires registration, so it restricts some who don’t have the right paperwork (such as former farmworkers), although many manage to get onto someone’s registration card. What most complain about is the dangers of being tied to a company arrangement. “You are perpetually indebted. It is like being bonded to someone, they can just set the terms”, a tobacco farmer commented. Many complain about the payment system too, especially when portions are paid in local currency (RTGS) rather than US dollars, and so payments are subject to depreciation due to inflation.
Command agriculture. Command agriculture is a form of contracting, in this case run by the state with its backing meaning the strictures of private bank finance could be avoided. Through CBZ the government backed the loans. The major crop-focused effort targeted larger farmers with irrigation willing to grow maize or wheat. With military involvement in logistical arrangements, the whole programme was highly political. The overall aim was to produce food for the nation and get the A2 farms in particular moving. To some extent the command system worked as production increased, although the possibilities of a ‘command’ approach in a neoliberal economy are constrained. However, access to this finance was highly constrained. In our sample in Mvurwi, very few benefited from this state-led form of contracting and those who did complained about the late and partial delivery of the package. The command system was also highly corrupt, as those with connections could jump the queue and get preferential terms. Repayment rates were low and the hit to the exchequer was massive. In sum, the command system has not served the wider population well, although a few have benefited significantly.
Financial agents. Outside the areas where contracting is important and for those who command subsidies do not reach, a whole spectrum of financial agents offer loan facilities to farmers. These include registered commercial operators, such as Wicord, FMC and Tottengram, who offer short-term loans with high interest rates (currently around 15% per month or at least 100% per year). These are offered to those who are deemed trustworthy; so, for example Tottengram specialises in offering loans to civil servants. Some require proof of assets in case of default, while others are more flexible. Retailers such as Edgars and Truworths always used to offer loans, operating more as banks than clothes shops for many, but they are contracting this loan business due to the difficulties of the market. For most loans, The terms are harsh, and many will only approach such firms in an emergency. Some such firms are respectable, registered and just operating in a difficult market, but some are less scrupulous. One company operated in one of our sites offered loans to farmers on seemingly quite good terms, but the methods used on defaulters were brutal, with metal sheets removed from houses, goats and cattle impounded at night and so on. This caused much resentment, and the owner was tackled at gunpoint and chased from the township.
Informal financiers. Probably the dominant form of loan/credit support comes from informal arrangements. These may be businesspeople offering money to tobacco growers in Mvurwi, often through a guarantor whose house, car or other asset is tied into the agreement through an affidavit. They may also be more informally arranged via what are called locally ‘tobacco touts’. They come from Harare, and offer money for tillage services, cash for labour and so on, and are paid in tobacco that they subsequently sell on the auction floors for a significant profit. In the past, agrodealers and other local businesspeople would offer credit, but in this period of economic instability this has basically ceased as it’s too risky. Other small sources of finance may come through NGO projects and church groups, usually linked to savings clubs and livelihood projects of different sorts (see a later blog), but these amounts are very small and do not result in significant investments.
All these financing options are in US dollars (or Rands) and not in the local currency (RTGS). This provides some hedge against inflation, but not completely. RTGS are only useful for paying government bills, and some supermarkets offer a higher exchange rate significantly higher than the bank rate making it worthwhile paying in local currency. However, for all intents and purposes Zimbabwe is a dollarized economy, but one with high inflation and complex currency exchange systems making negotiating loans and credit extremely difficult.
Zimbabwe’s agricultural financing system is not fit-for-purpose
In sum, the current system of agricultural loans and credit in Zimbabwe is inadequate and often inappropriate.
Those who gain access to formal credit from banks are already relatively well off, and can offer the necessary collateral, while the core beneficiaries of the command agriculture system are highly connected political elites, again already rich. The few schemes offered by banks, for example for women, provide a small drop in the ocean with demand far outstripping supply.
Small-scale farmers benefit from private contracting, but only for certain crops like tobacco, and the terms are always restrictive, binding people to a particular company relationship. As another form of contracting, a ‘hub and spoke’ model is being promoted by donors and others for horticulture, citrus and other high-value export crops, with a central estate and smallholder outgrowers. But this is possible for few crops in few places and reinforces a dependency on the owners of the core estate (often foreign or ‘white’ capital) and its markets (usually exclusive, export markets), much as the sugar model does (see here, here and here), with many implications for accumulation dynamics and the political-economic relations between agribusiness capital and smallholders.
In the absence of financing for investment in agriculture, this leaves few other options. Financial agents and informal financiers exist, but do not provide the sort of finance that would sustain long-term investment in agriculture; they are more appropriate for dealing with an emergency when money is urgently needed.
Unlike other parts of the world, where micro-finance loan systems have driven down poverty, encouraging entrepreneurship and development, Zimbabwe’s agricultural finance system is simply not fit-for-purpose. Some major rethinking is needed, yet the government, aid donors and others seem bereft of ideas, despite widespread experience of alternative financing systems around the world. Hopefully this blog series will inspire someone to take up the challenge!
In the absence of effective credit and finance, whether formal or informal, people must turn to other sources. As has been the case for many decades, remittances are vital for helping people invest and support farming. This is the subject of the next blog.Business