The Development Bank of Ethiopia (DBE) has introduced a new loan procedure to finance the commercial farm sector, which has seen many ups and downs in recent months. The move came three weeks after the state-owned Bank restarted giving loans to commercial farm investments.
About 260 loan applications from farmers in different parts of the country are under review by the Bank following the loan reinstatement.
Commercial farms’ underperformance and non-competitiveness and the absence of subsidies and risk fund schemes were the major reasons for the change in the Bank’s loan procedures. The procedure consists of 16 parts, dealing with, customer selection and screening, documentation and loan disbursement.
Some of the issues introduced by the procedure caused disappointment among commercial farm investors. One of the issues raised was that, contrary to previous experiences, the new procedure does not take into account land that has been developed ahead of loan processing.
Land that has already been developed cannot be considered as an in-kind equity contribution, according to the loan procedure.
“This is ridiculous,” says a commercial farmer who has a cotton farm in Gambella. “It is our own asset.”
DBE representatives say revaluing land that is not familiar prior to development is tricky.
“It would be a very subjective,” said Hailu Misganaw, communications director of DBE.
Two months ago, a task force from different government agencies discovered that one-fifth of the 3.3 billion Br loans disbursed by the two state-owned banks, DBE and Commercial Bank of Ethiopia, to commercial farmers, was misappropriated and used for other purposes.
There are over 4,900 commercial farms in Ethiopia, accounting for five percent of the country’s agricultural production. Commercial farms occupy over 2.4 million hectares throughout the country.
The new procedure has also changed the existing fund allocation system. Under the new procedure, funds allotted for land development, building construction, vehicles, and machinery will not be directly released to the commercial farmers. Instead, the money will be given to the contractors or the suppliers.
“We are the ones who hold the burden of paying the debt,” said a commercial farm owner. “It deters the growth of commercial farming.”
However, the Bank’s director does not agree.
“This is the best way to reduce fund diversion,” Hailu argues. “We can’t simply give away money after all the issues that were brought to light.”
Following the allegations of loan mismanagement and partiality on the part of the Bank, a report released by the task force exposed that 16pc of loan given to the commercial farms were used for unintended purposes. However, this is only a fraction of the investment expended on the farms.
Owing to the absence of a clear legal framework, the Bank will also require major shareholders, who owns greater than or equal to 10pc of the capital, of private limited companies to present a personal guarantee.
“There is no way to hold shareholders responsible if they default on a loan unless we use such mechanisms,” Hailu noted. “It is the best way to reduce financial risk arising from unpaid loans.”
Last year, DBE’s non-performing loans were over 50pc, ten times higher than the minimum legal requirement set by National Bank of Ethiopia.
Yemane Seifu, head of the Commercial Farmers Association, which has over 200 members, thinks this specific rule is against the country’s legal framework.
“This is very discouraging for new entrants,” said Yemane.
The Bank will also raise the interest rate on commercial farm loans from 8.5pc to 12pc, based on the productivity of the farms.
“Charging such amounts of interest to exporters is terrible,” said Yemane. “The biggest bank in the country, CBE, charges 7.5pc to any exporters.”
DBE, however, charges a 9.5pc interest rate if farms manage to sell 60pc of their production on the export market.
“The rate is sound,” explained Hailu.”The farms are rewarding if they are used appropriately.”
Commercial farms were introduced to Ethiopia four decades ago when the government piloted state and research farms based on the Yugoslavian model. This paved the way for the foundation of private commercial, state and institutional farms throughout the country.
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