Lending to small-scale farmers in South Africa: A case for best practices in formal institutions

The lack of access to agricultural credit is a constraint to the development of the small-scale segment of the agricultural sector. The challenge for formal financial institutions is to provide agricultural credit that meets the unique demands of the entire agricultural sector (both commercial and emerging sectors). Although small-scale farmers face a number of challenges, lack of capital for investment contributes significantly to the lowering of smallscale farmers' productivity levels. The challenge of access to agricultural credit from formal financial institutions is longstanding. Although some improvements have been made, a large proportion of small-scale farmers are yet to be reached by these institutions. One of the ways in which formal institutions can promote access to credit for small-scale farmers is to adopt best practices in lending. The study sought to establish whether formal finance institutions in South Africa adhere to best practices in their agricultural lending operations for small-scale farmers.;The study adopted a qualitative approach that utilised primary and secondary information obtained from reports, manuals and other relevant documents in the public domain as well indepth interviews with key role-players from the major formal finance institutions.;The results of the study revealed that formal financial institutions in South Africa have not found appropriate delivery modalities that encourage and support agricultural finance accessibility among small-scale farmers. There have been considerable developments in terms of product type and product design in order to meet the demands of small and medium enterprises as well as agricultural clients. However, there still seems to remain gaps in terms of the different categories of emerging farmers that can be adequately financed by formal finance institutions. The loan appraisal process in formal finance institutions is based on the bankability of the farm enterprise and there is a heavy reliance on 'traditional' collateral requirement. There are few examples of collateral alternatives and substitutes that are used in practice and are usually of lesser value but also burdensome on the part of formal financial institutions (thus, a need for equity contributions remains necessary). Given the nature of the formal finance institutions considered in the study viz. commercial banks and the Land Bank; with their highly competitive and sophisticated corporate environment, and operations underpinned by a strictly business approach -- there is little room left for a developmental agenda in terms of their lending practices.;Though private sector institutions play a significant role in theSouth African economy, the role of the state remains quite large with regard to the ambitionof a developmental state. It is within this dynamism that the public-private dichotomy of agricultural finance arises. There is also a gap in terms of providing the much needed non-financial support, such as access to markets, technical skills, or collateral alternatives. The environment within which formal finance institutions provide agricultural credit has changed, and agricultural lenders need to identify the arising opportunities in small-scale farmer development. The current status quo in small-scale agricultural lending best practices in South Africa leaves much room for development.;A review of literature indicates that there are countries whose formal financial institutions have achieved some success in improving access to finance for small-scale farmers. Hence, it is important to find out what these institutions have done, particularly the best practices they have adopted in this regard. Best practices in agricultural finance are the innovative methods/techniques/and procedures that address the supply- and demand-side constraints and challenges (from both the finance and agricultural sectors' perspectives) and thus improve the levels of access to agricultural finance. The response of formal finance institutions to the risks and uncertainties inherent in the sector is to enforce stringent collateral requirements that are restrictive for small-scale farmers.