Private financing for farmers is proving difficult due to the legal structure of the 99-year leases granted to new farmers.
This persistent stalemate between the Zimbabwe Bankers Association (BAZ) and the government calls for a frank discussion on the merits of the current legal structure and ways to improve it to unlock private sector finance for farmers.
As part of the land reform program, the government reallocated land to new farmers through a 99-year lease on the land.
The use of a lease structure created a problem for new farmers as they could not use their land as collateral to finance loans for farming activities.
Recognizing this fact, the government has started to play an active role in financing new farmers through various input programs.
Unfortunately, this support has proven to be costly for the government, which has limited and tight funding.
The government had to resort to issuing treasury bills which increased the money supply and stoked the fires of inflation.
With all the support of the government, the new Zimbabwean farmers have not developed any self-financing capacity and are still dependent on government input programs.
Banks have to meet regulatory requirements for lending to customers.
A key requirement is the need for collateral to give the bank coverage for loans in the event of customer default.
Due to a historical imbalance of opportunity, few Zimbabweans have accumulated assets that can be used as collateral for loans.
Former white farmers held title to their land and used their farmland as collateral for loans. Current 99-year leaseholders are only allowed to use their land for a specified period of time and cannot transfer that land to anyone because the land is owned by the government.
It is understandable that the government is reluctant to immediately transfer full title to new farmers as this could trigger land sales that could reintroduce concentration of ownership among a few well-endowed individuals.
With this in mind, it becomes essential to assess other ownership structures that can serve the government’s agenda and unlock funds for new farmers.
A glance aside shows that South Africa has developed two distinct legal structures for limited interests that separate ownership from enjoyment / use.
These consist of usufruct – this legal structure allows a person to enjoy the use of a specified property for a specified period or for life, after which the property will be transferred to the declared owner, known as bare owner.
The South African Revenue Service (SARS) has defined a valuation method for these limited interests when:
Market value of the property – 12% valuation factor (assumed annual income) based on the next age of the usufructuary or the limited interest period that is equal to the value of the usufruct.
For example, a US $ 100,000 property subject to lifetime usufruct in favor of a 40-year-old man is equal to 100,000 X 12% X 8,01067 = US $ 96,128 = value of the usufruct
Fideicommissum – this legal structure allows a person to profit from the use of a specified property for a defined period of time or for life, after which the property can be transferred to other specified persons in a specified order. SARS values fideicommissum in the same way as usufruct.
The beauty of a legal usufruct / fideicommissum structure is that the valuation methodologies have already been established. Having a limited interest has a value attached to it because that use / pleasure is precious.
There is no need to reinvent the wheel, the BAZ and other statutory bodies can obtain technical assistance from South Africa regarding the assessment and implementation of these structures of limited interest locally.
In practice, farmer A with land in usufruct / fideicommissum can waive his right to a specific asset as collateral for a loan.
In the event of default, their limited interest will be transferred to the lender of the loan to meet the obligations of the farmer.
The financier must be empowered to sell this limited interest to another interested Farmer B, generating cash that will be used to repay Farmer A’s loan.
Ultimately, farmer A will be able to unlock finance at the cost of assuming all business risk and losing his limited interest if a loan is defaulted.
Farmer B’s taking over the land on commercial terms also ensures continued productivity of the land, as farmer A can also seek finance using the land as collateral.
As a precaution, Zimbabwe has 521,000 hectares (ha) of land under the control of newly resettled farmers.
An instant survey of agricultural land with full title available for sale in Zimbabwe shows properties between US $ 700 and US $ 5,000 / Ha.
Securitization of this land to provide collateral to farmers can unlock at least US $ 261 million as collateral at an assumed limited interest value of US $ 500 / ha.
Financiers can easily give more than $ 100 million in loans to resettled farmers, as they will cover more than twice the credit risk.
For context, Zimbabwe’s total money supply stood at RTGS $ 24.28 billion or $ 285.6 million (at the current USDZWL interbank rate of 85) as of June 4, 2021.
The above resettled land figures are conservative given that a significant portion of resettled land is either unused or under crops not listed above.
Unlocking $ 100 million in funding for farmers will improve the food security situation in Zimbabwe.
Many direct and indirect jobs will be created, while banks and other investors will benefit from the interest income generated by financing Zimbabwean farmers.
This will have positive effects on Zimbabwe’s GDP growth rate with the potential for further upstream and downstream benefits through investments and jobs.
The government must develop policies to support the assessment of limited interests.
Such policies will unlock private sector finance that can influence growth and development for the benefit of all.
They should also consider ways to compensate financiers for defaults, such as allowing land transferability under certain conditions.
Wholesale property assessments should also be carried out to make it easier for financiers and farmers to establish the value of their land.
A new renaissance is looming and now is the time to unlock the dead capital in Zimbabwe.
