16 th AFRACA GENERAL ASSEMBLY MEETING

1. 16th AFRACA GENERAL ASSEMBLY MEETING EXPERIENCE OF STATE OWNED DEVELOPMENT FINANCE INSTITUTIONS IN OUTREACH: A CASE STUDY OF THE AGRICULTURAL DEVELOPMENT BANK OF ZIMBABWE (AGRIBANK) BY S.M.T. MALABA CHIEF EXECUTIVE OFFICER AGRICULTURAL DEVELOPMENT BANK OF ZIMBABWE WHITE SANDS HOTEL DAR ES SALAAM, TANZANIA 24-28TH NOVEMBER, 2008

2. 1. PRESENTATION LAYOUT • Historical Background • Macro Economic Developments • Banking Industry Overview • Impact of Branch Network • Lessons learnt • Conclusion

3. 2. HISTORICAL BACKGROUND • History of the institution dates back to 1924 with the establishment of the Land and Agricultural Bank in the then Southern Rhodesia • In 1971 the Land and Agricultural Bank was transformed into the Agricultural Finance Corporation (AFC) • A.FC. was converted into a fully fledged Commercial Bank in December 1999 as Agribank • In October 2003 Govt decided to transform the Bank further into an Agricultural Development Bank but with loan granting and deposit taking functions.

4. Mandate of the Bank was to:- • Play a pivotal role in the Land Reform and agricultural development • Create and develop innovative financial products to reach a large number of farmers • Leverage private business sector investment funds into the agricultural sector • Develop and nurture indigenous commercial farmers • Be a transparent and efficient distributor of resources

5. Modus Operandi of the Bank: • Bank operates under a legal framework whereby Govt. owns 100% of the Bank • Ministry of Finance and Agriculture maintain 50% shareholding apiece • Bank operates as a loan granting & deposit taking financial institution, subject to the supervision of the Reserve Bank of Zimbabwe • Bank is registered and operates in terms of the Banking Act of Zimbabwe

6. Main business of the Bank is the provision of agricultural loans, retail banking services, discounting of bills, treasury services, corporate banking and ancilliary services • Agribank inherited AFC’s assets and liabilities at formation • Main asset inherited was the extensive branch network • Bank had to invest in a robust ICT and banking system which required extensive outlays in foreign currency.

7. Branch network which was expected to create a comparative advantage in terms of deposit mobilisation did not yield desired results • Bank did not have the requisite banking skills and appropriate technology • Govt. did not inject funding into the Bank as it was operating as a Commercial Bank

8. 3. MACRO ECONOMIC DEVELOPMENTS • Economy experienced serious macro economic challenges since 1997 • Cumulative decline in real G.D.P. of about 50% over the period 1998 to 2007 • Crisis triggered by crash of the Zimbabwe dollar on the 14th November 1997 following unbudgeted gratuity payments to former war veterans and decision by I.M.F. not to provide B.O.P. support • Crisis worsened by Govt’s military intervention in the D.R.C. in 1998 and the hostility arising from the fast track Land Reform programme of 2000

9. Contraction of Gross Domestic Product largely due to decline in output of key sectors such as Agriculture, Mining and Manufacturing • Productive sectors have been adversely affected by hyper inflation, foreign currency shortages, erratic fuel and electricity supplies, price controls, critical input and equipment shortages

10. Resultant large budget deficits were financed through domestic banking sector borrowing with limited recourse to foreign financing • Industry capacity utilisation estimated to have declined to below 25%, whilst economy has become largely informalised.

11. TABLE 1: ZIMBABWE KEY ECONOMIC INDICATORS: 2000- 2007

12. Macro economic environment characterised by high inflation rates, shortages of foreign currency, high money supply growth and diminishing industrial capacity utilisation • Real G.D.P. estimated to have declined by 6,2% in 2007 and annual inflation has accelerated to 231m% by July 2008 from 66 212% in December 2007

13. B.O.P. Position continued to deteriorate due to a misaligned exchange rate, absence of B.O.P. support and high domestic inflation • Quasi fiscal operations of the Central Bank in terms of concessionary funding mechanisms have resulted in high monetary growth not linked to economic output • Agricultural Sector Productivity Enhancement Facility (ASPEF)

14. Basic Commodity Supply Side Intervention Facility (The BACOSSI Facility) • Agricultural Mechanisation Programme • Price Support schemes to exporters, subsidised credit and exchange rates to Government & Public Enterprises

15. 4. BANKING INDUSTRY OVERVIEW • Composition of registered Deposit taking institutions as at 30 June 2008 Source: RBZ

16. Zimbabwe has a fairly well developed & diverse finance system • R.B.Z. in January 2007 issued a Financial Inclusion Framework with the main objective being to promote financial inclusion to ensure access to financial services by marginalised communities. • The objectives were to be achieved by expanding the outreach of development financial institutions such as the People’s Own Savings Bank (POSB), ZIMPOST, and Agribank whilst microfinance services would be enhanced through the establishment of microfinance banks.

17. TABLE 2: CURRENT BRANCH NETWORK Source: RBZ

18. Majority of bank branches are concentrated in the urban areas with 333 branches being in urban areas where 34,8% of the population resides • Rural communities are serviced by 44 branches (11,7% of total branch network) despite 65,2% of the population residing in rural areas. • On average 12 000 urban dwellers are serviced by a single branch while in the rural areas one branch serves 120 000 people

19. TABLE 3: PROVINCIAL DISPERSION OF BANKS & BRANCHES Source: RBZ

20. Agribank has the widest branch network with 56 branches whilst ZB Bank has the second largest branch network with only 29 branches • Agribank has the majority of its branches in the rural areas whilst the rest of the Banking Sector has about 50% of branches located in Harare and Bulawayo • Commercial Banks have reduced their rural outreach as a result of the reduction in commercial farming after the Land Reform Programme

21. Banking institutions have advised the RBZ that they shun establishing branches in the rural areas for the following factors:- • High information, transaction and monitoring costs • Inaccessibility due to poor infrastructure network • Dispersed and intermittent demand for financial services • Seasonality in deposits • Lack of acceptable collateral in the absence of legal Title to Land

22. IMPACT OF BRANCH NETWORK 1. STRATEGIC PLAN • Bank in its 2007-2010 Strategic Plan identified the provision of diversified and complimentary banking services with the goal of consolidating Agribank’s branch network in the rural and remote areas as well as mobilising deposits as one of its Key Result Areas • Strategic Intent was “to capture the big market inconvenienced by the withdrawal of established traditional banks from the rural areas”

23. Bank’s medium term objectives were thus: • Branch Network Expansion • Open 2 branches in 2007; • Open 2 branches in 2008; • Open 2 branches in 2009 • Rural Branch Upgrade • Refurbish & expand 4 N.B.O’s in 2007 • Refurbish & expand 4 N.B.O’s in 2008 • Refurbish & expand 4 N.B.O’s in 2009

24. Intensification of Deposit Mobilisation • Increase from 3,8% • 5% in 2007 • 7% in 2008 • 10% in 2009 • Establish a fully fledged Corporate & Executive Banking Department by end of 2007 • Institute strategies of cash collection from remote and unbanked areas through mobile cash units and linkages with other agencies

25. i) Strategic Plan • The said objectives were premised on Government injecting resources for the expansion programme • In 2007 Bank was able to open two new urban branches and one National Banking Office & upgrade two NBOs • In terms of deposit Mobilisation, Agribank’s market share declined from 3,8% in December 2006 to 2% in 2007 • Bank in 2008 decided to halt its geographical expansion and instead focus on generating profits from Corporate & Executive Banking Departments

26. ii) Comparative Analysis on Market Share • Agribank’s asset base declined from 5% in 2006 to about 3,8% in 2007 in relation to total industry assets. • Other Banks were able to benefit from fixed assets, equities and property revaluations • Banks were able to improve balance sheet structures from inflation aligned property revaluations

27. In terms of liabilities to the public, the Bank’s market share declined from 3,9% in December 2006 to 3,8% in 2007. • Larger banks who are foreign controlled, Standard Chartered, Barclays Bank and Stanbic Bank and the three local banks with holding companies CBZ Bank, ZB Bank and F.B.C. account for over 80% of the market share • Bigger Banks are able to attract large corporate deposits cheaply and therefore have greater flexibility in pricing their assets

28. Also benefit from strong brand recognition • Agribank has not benefited from its branch network in terms of deposit mobilisation and asset growth • Market surveys perceive the Bank as an inefficient Govt. Bank created to serve new farmers under the Land Reform Programme

29. iii) Comparative Analysis on Financial Performance • In comparison to its competitors, Agribank has performed poorly in financial terms • Agribank as a state owned institution has suffered from a weak balance sheet due to insufficient capitalisation from the shareholders • This has affected the Bank’s ability to underwrite business

30. Wide branch network has been a major cost item through staff salaries, CIT and ICT costs • As a D.F.I. with a Mandate to provide banking to the rural and marginalised members of society, it is not easy to simply close unprofitable branches as the competitor banks have done • Poor performance of the agricultural sector has not been beneficial to the Bank’s performance

31. Table 4: Financial Performance of Selected Banks in Zimbabwe at June 2008 Financial Performance (to June 2008) and Balance Sheet Size (as at September 2008) of Selected Competitor Banks Figures in Z$ Trillions

32. Agribank’s earnings are lower than those of competition due to low capital base • Return on assets of 4% is testimony of the low yield the Bank obtains on its main assets, farming loans which are price controlled • Cost to income ratio of 72% is high compared to the market • Return on equity reflects the distortions of a low capital base

33. 6. LESSONS LEARNT • A growth strategy in a hyperinflationary environment is not sustainable • Agribank’s strategy of financial inclusion was adversely affected by inflation and the inability to secure infrastructural funding from Government • Adequate capitalisation is key to bank sustainability • Growth and sustainability are directly linked to capital

34. Banking requires shareholders with deep pockets and more so in a inflationary environment • Competing demands for Govt. funding for social programmes such as health, education and social services have tended to push rural finance down the ladder of Government priorities

35. Governments must be prepared to shed shareholding to foreign or private capital to boost resources • Private banks outperform public banks in terms of profitability and operating efficiency • Underperforming units should be closed • In the case of Agribank, Corporate and Executive Banking Units allowed the Bank to diversify earnings • Within the context of Zimbabwe, banks with holding company structures are able to diversify earnings in avenues such as equities trading, asset management and agricultural insurance.

36. 7. CONCLUSION • D.F.I’s are important vehicles for providing long term finance and banking services to marginalised sectors if countries are to alleviate rural poverty and achieve economic growth • Role of the shareholder in ensuring that the DFI is adequately capitalised is much more important for State owned institutions than private Banks. • State must provide adequate resources for social and developmental Mandates such as financial inclusion • Alternatively if the state can’t provide then it must relinquish part of its shareholding to local or foreign partners