Capital Liberation: Mutapa Fund and AFC's Impact on Smallholder Tobacco Farmer Prosperity
Miles Mudzviti
On mission for economically and environmentally sustainable rural livelihoods @ACRE
This is the second (first here) of two blogs focusing on why the Mutapa Investment Fund must leverage its assets for profitable impact investment that is aligned with national objectives, primarily in agriculture and allied sectors.
This year marks a critical milestone for Zimbabwe’s premier agricultural financier, the AFC as it celebrates 100 years of "financing and transforming the nation's agriculture sector".
Originally the Agricultural Finance Corporation until its rebranding and restructuring by the government last year as AFC Holdings Ltd, the organisation during its existence has witnessed significant changes in the socio-political and economic conditions in the country, from colonialism into independence; and the transformation of a narrow, racially biased large-scale agricultural sector to a new, smallholder driven and broadened agrarian structure via land reform in the post-independence era.
AFC is now part of the newly restructured national sovereign wealth fund, the Mutapa Investment Fund, as one of several major agricultural and allied sector concerns vested in the SWF by the government.
What the next 100 years hold for this institution depends on what its new owners will determine for it as they rationalise the portfolio, and determine their strategic investment plan, which strategy must ultimately be determined by government policy initiatives. Policy must be geared to long-term initiatives to reform and refine multi-level capital markets that support agricultural development in rural areas and build a sound rural financial market for sustainable economic growth.
Lack of credit for smallholder farmers – the case of tobacco
The central role of agricultural productivity in the over-all pattern of rural development is universally recognized. Lack of credit has been a significant and binding constraint for resettled A1, A2 and communal smallholder farmers, in particular tobacco growers, limiting investment in productivity enhancing technology and inputs.
The rise of non-banking market entrants into the agriculture sector and the contract production financing model in the tobacco sub-sector in particular, was largely disintermediation of the traditional banks. About 95% of Zimbabwe’s crop is financed through the contract system (Tobacco Industry Marketing Board, 2023).
Last year, smallholder farmers - 60 per cent of whom are beneficiaries of the land reform - provided 85 per cent of a record breaking tobacco haul of 296 million kgs, delivering a record $1.2 billion bounty which the country received from tobacco exports in 2023, up from $975 million in 2022. (Ministry of Lands, Agriculture, Fisheries, Water and Rural Development, May 2022).
In spite of this, tobacco growers associations continue to raise the alarm on growing levels of indebtedness amongst farmers, citing an ‘exploitative’ contract financing system characterised by an imbalance of power skewed towards contractors (Zimbabwe Tobacco Growers Association, 2024).
The capital constraint for smallholder farmers has become more acute because of the size distribution of commercial banking’s status quo, which has maintained the financial system’s bias toward larger transactions suited to large scale titled commercial farming, failing to respond to the changing realities of the agricultural sector, now dominated by smallholder farmers, the majority of whom are beneficiaries of the land reform, without title.
A bold institutional innovation for a strategic investment
This perennial challenge of financing agricultural production now needs a bold institutional solution to meet the new agricultural reality which now exists on the ground. It will provide succour for thousands of new agricultural customers desperate for financing needs that have so far remained unmet by the existing financial structure.
When market forces fail to provide a service that is needed and potentially profitable, it is appropriate for government to help create the market. A National Rural Bank (NRB), especially designed to meet the problem of financing agricultural productivity, including tobacco production, falls into such a category. This will be a bold step to provide a truly effective system of providing credit to the rural population, mobilise savings, and solve the problem of providing credit to small scale farmers. The NRB would be a tailored solution to an urgent need.
Tobacco is the country’s most important agricultural export by a wide margin, contributing on average 18 percent of the total exports annually, accounts for between 14 and 20 percent of the agriculture GDP, and 11.7 percent of the national GDP (Reserve Bank of Zimbabwe, 2022).
The smallholder tobacco sector is a significant market offering a vast opportunity, and investing in financing smallholder tobacco farmers is a strategic investment, one that has become absolutely imperative. It offers an opportunity for the AFC to reimagine and reinvent its role in a transformed agricultural sector.
The primary goals of the NRB will be to deliver credit, payment, and savings opportunities to small scale farmers and rural communities not well served by banks, and to provide financing throughout rural centres for businesses too small to attract the interest of the normal commercial banking communities.
The Government of Zimbabwe’s National Development Strategy (NDS) 1 for the period 2021–2025 is premised on four critical guiding principles, with the first being a recognition that bold and transformative measures are required to underpin the drive towards the attainment of Vision 2030. The strategy emphasises that ‘slow and incremental change will not deliver the transformation that the people of Zimbabwe deserve.’
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Structuring the National Rural Bank
The NRB can be set up as a subsidiary of the AFC and will be a bold, timely, and necessary initiative focused on specific areas that are not presently well served by existing financial institutions – smallholder farmers - in particular tobacco growers; and the rural communities who constitute the backbone of agricultural production in the country, and a sector that provides the livelihood for a significant portion of the country, either directly or indirectly.
The AFC, and ultimately its new owner, Mutapa as a long-term investor for high developmental impact, are well placed to play a very significant role going forward to optimise the long-term agricultural transformation that is already underway in this country. Mutapa must be bold to match a bold new reality for agriculture, and ultimately, rural economic development.
The NRB is in line with the broad objectives of the Tobacco Value Chain Transformation Plan to accelerate localization of tobacco funding through reforming, restructuring and rebuilding existing institutions in order to optimise tobacco value chain financing, and has set the goal to raise net export benefits from tobacco from the current 12,5 percent of total export earnings to 70 percent by 2025.
It dovetails with the RBZ’s National Financial Inclusion Strategy 2022 – 2026 (NFIS II) which seeks to promote sustainable livelihoods, create wealth and employment, in line with the Vision 2030 of an ‘Prosperous Upper Middle Income Economy’ – ‘leaving no one and no place behind’.
The NRB is not to be viewed as a significant countercyclical force, rather as a strategically placed institution that fills a gap in the ongoing institutional structure. It may well provide part of the institutional setting in which a climate of opportunity replaces stagnation for many segments of the A1 and A2 resettled farmers, as well as communal growers through new and innovative loan products and savings approaches for agriculture and rural areas.
The Tobacco Revolving Fund and lessons from Horticulture
Whilst government has promised a US$60 million revolving fund to support tobacco farmers and relieve them from contractors, aiming to anchor growth to 300 million kilogrammes by 2025 and tackle challenges related to the unavailability of appropriately structured financing for short to long term expenditures, it is unlikely this facility can truly meet the financing needs of the majority of smallholder farmers who have driven the tobacco boom to date, and are the critical element in sustaining that production in the long-term.
We draw on experiences from the US$30 million horticulture revolving fund, which according to the Horticulture Development Council, has seen limited uptake by growers for a number of reasons, including the onerous bureaucratic process of approval, which the majority of smallholder farmers are ill-equipped to meet.
NRB can lead new era of economic empowerment and development
The NRB can support the development of unique financial products responsive to the new agrarian structure, which suit customers’ needs, with the potential to become a catalyst and engine of growth, accelerating rural industrialisation and modernisation as well as a network for financial inclusion.
The AFC and Mutapa can now play a role in institutional innovation that can in turn drive product innovation to promote market broadening policies aimed at increasing the size, depth, and breadth of the financial markets. It is now in the public interest to foster the creation of a new entrant into the agricultural finance sector as a profit-seeking banking institution that specializes in financing smallholder farmers, rural enterprises and serves the rural population.
The continued vitality of the tobacco sub-sector depends on the economic sustainability of small scale growers, as well as the continual entrance of new growers, and such a bank has a role to play in supporting this strategic sector.
We must thoroughly examine the potential benefits of a rural bank in the agricultural transformation agenda as a vital resource for smallholder farmers, and to ensure sufficient institutional credit for the agricultural sector in pursuit of sustainable growth
The NRB holds the potential to revolutionize the financial landscape for the rural economy and smallholder farmers, leading a new era of economic empowerment and developmental progress.
The Africa Centre for Rural Economy (ACRE) is publishing a background note which looks at the state of financing in the tobacco sub-sector, and provides the rationale for—and views on the structure, chartering, organization, financing, and supervision of such a National Rural Bank.
Miles Mudzviti is the Acting Executive Director of the Africa Centre for Rural Economy (ACRE), and also a smallholder farmer in Chivhu, where he lives and works, 140 kms south of Harare. ACRE is a non-profit organisation for the rural economy that connects innovative policy analysis, solutions, and stakeholder action towards the goal of inclusive and sustainable rural economic transformation in Zimbabwe and Africa. Email: miles@acrecentre.org Calls: +263 717 567 242 WhatsApp: +263 717 912 309