Banks and financial services companies exist to do more than just create value for their shareholders.
This is true of all companies.
Business organizations, regardless of their size and location, have a moral right to make the world a better place for those who host them. This may sound like a grandiose statement, but it is truthful. Banks and businesses may not change the world in their individual capacity. However, they have a responsibility to look after the communities where they operate.
- Banks and other forms of business enterprise collectively known as private capital have a role to play in solving a longstanding problem in Africa which is hunger.
- Banks and private capital have a responsibility beyond the so called corporate social responsibility to tackle social issues plaguing the continent. Hunger is the most glaring of the social problems in Africa.
- The responsibilities of banks, business organizations, and private capital have been captured in corporate social responsibility (CSR) but also in environmental, social, governance (ESG) principles.
This responsibility has been formally inculcated into the operations of business entities through either corporate social responsibility (CSR) or environmental, social, and governance (ESG) principles. All these are noble initiatives and there can be no doubt as to the altruistic motives business entities have for engaging in these initiatives.
The world is not short of problems, and Africa has more than its fair share.
One of the most topical of Africa’s problems is food insecurity. Food should not be a problem for Africa given its vast swathes of arable and fertile lands. The population of the continent should provide the labor needed to grow food on the continent to the extent that it is self-sufficient in terms of food and even exporting agricultural produce to other parts of the world. Like every other industry, agriculture requires support and nurturing to flourish. This is in the same manner, for instance, that mining requires the right kind of legislation and regulation to thrive. Agriculture is no different. For agriculture to thrive on the African continent, it requires a deep and sincere respect for the rule of law and property rights. These things ordinarily should go without saying; however, in parts of the African continent, they need to be reiterated.
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Agriculture requires money to develop and thrive. Capital, financing, and support for it to take off to the extent that food security becomes a reality and not an elusive dream. World Vision has some interesting facts on food insecurity in Africa. One in five people in Africa faced hunger in 2020, according to the non-profit organization.
“Conflict, drought, and economic woes triggered by the COVID-19 pandemic are reversing years of progress. As of 2020, more than one-third of the continent’s population was undernourished. In the whole of Africa, 282 million people were experiencing hunger, more than double the proportion of any other region in the world.”
The organisation adds, “Conditions are deteriorating across East Africa, where 7.2 million people are at risk of starvation and another 26.5 million face acute food insecurity. At least 12.8 million children in the region are acutely malnourished.”
- Hunger should not be a prominent problem for the African continent due to its vast swathes of arable and fertile land.
- Hunger in Africa can be eliminated in conjunction with banks, business organizations, and private capital through their collective effort and support for the agricultural sector.
- Agriculture in Africa is failing to eliminate hunger because the critical resource at its core, which is land is highly emotive and sensitive on the continent.
To the south of the African continent, food insecurity is being fueled by successive crop failures which are adversely affecting agricultural production. The United Nations estimates that more than 37 million people are facing acute hunger, with approximately seven million children under the age of five acutely malnourished in the region.
On August 2, 2022, the UN made a call for US$132 million to respond to Africa’s health needs and to prevent a food crisis. Erratic weather patterns and severe droughts are some of the reasons cited by the UN for the food insecurity problem in Africa.
Why is agriculture so important? The World Bank estimates that “Healthy, sustainable, and inclusive food systems are critical to achieving the world’s development goals. Agricultural development is one of the most powerful tools to end extreme poverty, boost shared prosperity, and feed a projected 9.7 billion people by 2050.
Growth in the agriculture sector is two to four times more effective in raising incomes among the poorest compared to other sectors. Agriculture is also crucial to economic growth: it accounts for 4% of global gross domestic product (GDP) and in some developing countries, it can account for more than 25% of GDP.”
Agriculture not only eliminates hunger, but its support and success will lead to the attainment of the world’s development goals, end poverty, and boost shared prosperity. CGAP, which published an article about “The Role of Financial Services in Reducing Hunger”, states that for the majority of the 1.4 billion of the world’s poor living on less than US$1.25 a day, agriculture is the main source of income and employment.
The report adds that at least 80% of the food consumed in the developing world, which includes Africa, is grown on smallholder farms. The report notes that improving famer access to financial services will lead them to make more profitable investments.
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Lending to agriculture is an interesting proposition.
- Banks, business organizations, and private capital can improve the agriculture industry in Africa by providing sector specific funding that is tailored to the continent.
- Support for agriculture especially in Africa is crucial to not only eliminating hunger but poverty as well.
- In some countries in Africa, agriculture is central to the economy. This is especially true in the case of Zimbabwe. The southern African country’s economy until the late 1990s was deeply integrated around the agriculture sector. It was during this time that the sector thrived so much that the country was virtually food secure and was responsible for the food security of economic bloc of countries in southern Africa.
It requires a skill set that is different and unconventional from what is necessary when dealing with other forms of credit. Taking the case of Zimbabwe, for example. In 1998, the central bank announced that commercial bank lending in 1997 was heavily concentrated in the agriculture sector.
At least 80% of loans underwritten by commercial banks in 1997 and 1998 were made to the agriculture sector of Zimbabwe. This was just before the Fast-Track Land Reform Program commenced. After the land reform program, bank credit to the farming sector had fallen to just under 5% by 2003. Lending to the agriculture sector since then has been a contentious affair. Banks have been reluctant to provide the kind of financial support that they did prior. For banks to provide long-term financial support to farmers, they need to have the security of tenure.
Farmers need to be able to pledge the title deeds of their farms as collateral in exchange for loans and credit from the banks. When this security of tenure is absent, credit to the farming sector all but dries up. This is what happened in Zimbabwe and is perhaps the best explanation for why the country went from being Africa’s breadbasket to its basket case.
Zimbabwe went from being food sufficient to a net importer of food because, as the late Zimbabwean economist John Robertson put it, farmland in Zimbabwe ceased to have monetary and market value ever since. When the government of Zimbabwe forcibly took over commercial farms, instead of issuing title deeds to newly resettled farmers, it issued 99-year leases to the said farmers. These 99-year leases, until recently, were not acceptable as collateral for long-term credit, especially in Zimbabwe.
Some banks have begun to accept them. This presents a unique problem because in much of Africa, according to the World Bank and GCAP statistics, 80% of food is produced on smallholder farms. It is highly likely that these smallholder farms are not titled. This is not just unique to Zimbabwe.
What, then, should banks and smallholder farmers do to create mutually beneficial relationships?
Where satisfactory title is not immediately clear to lenders, banks should innovate. That is their job. There are alternate means of securing credit facilities for smallholder farmers who produce most of the food that the continent consumes. Mohamed Yunus and his Grameen Bank come to mind.
- Banks in countries like Zimbabwe when tenure of land tends to be questionable and shaky experience difficulties in providing long term credit to farmers who grow food.
- Not all farmland in Zimbabwe is titled especially after the Fast Track Land Reform Program. Banks, business organizations, and private capital are uneasy about lending to farmers against collateral whose title is unclear.
- The challenges around tenure of land and property rights in some countries in Africa places a strong demand on banks, business organizations, and private capital to innovate to provide finance to agriculture to eliminate.
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The Indian visionary came up with a way to extend bank credit to borrowers who would never be given the time of day in a conventional bank if they wanted to take out a loan. Yunus’ innovative credit model involved lending money to groups of small businesspeople who would be guarantors of each other’s debts in return for getting credit facilities. In doing so, the Grameen Bank was able to lend to borrowers who would otherwise be considered undesirable.
Banks in Africa could adopt similar models in their agricultural business lending units. It must never be forgotten that banks are financial intermediaries both in terms of purpose and function. This means that they connect borrowers to depositors. In economic lingo, banks connect surplus units to deficit units. In performing their role as financial intermediaries, banks deal with information asymmetry between borrowers and depositors.
These two parties do not usually know enough about each other to either borrow or lend to each other of their own accord and, as such, employ the services of banks to do their bidding for them. Banks have a stronger appreciation of their ideal borrower in the agricultural space. They can use that information to develop smallholder farmers and grow them into large-scale commercial farmers.
Institutions can do this to ensure that agriculture thrives and hunger is eliminated from the African continent.
