Tobacco Boom: Missing Creativity at Commercial Banks; and Imperative for ‘Better Contracting’

Under the Second Republic last year, Zimbabwe produced its largest ever tobacco crop of 296 million kg, with 85 per cent of it coming from smallholder farmers of which 60 per cent are beneficiaries of the land reform. Smallholder farmers contributed 60% of the record $1.2 billion which the country received from tobacco exports in 2023, up from $975 million in 2022.

Rising exports are now moving into the centre of the growing farming boom which has seen the agricultural sector transformed from a US$2 billion industry to over US$8 billion in less than five years.

Zimbabwe is Africa’s largest tobacco producer, and the crop is one of the country’s main foreign currency earners. With last year’s record harvest, Zimbabwe regained its spot as one of the world’s top 10 exporters of tobacco, alongside mega producer China, India, Brazil, the United States and Indonesia.

The land reform reshaped the contours of production and supply – where 1,500 large-scale white commercial farmers once dominated, nearly 150,000 smallholder farmers now account for 85 per cent of the tobacco crop. 

These record-breaking achievements are a testament to the skill, hard work, and productivity of Zimbabwe’s small scale farmers. They also point to the skill with which Zimbabwe has tapped into alternative markets, in particular China, post land reform.

However, financing agricultural production still remains a key challenge, 25 years after land reform.

There appears to be a distinct lack of imagination and innovation with a banking system apparently out of synch with reality and still insistent on pre-land reform patterns of financing that are no longer fit for purpose, reinforcing biases of the past. This lack of imagination means banks are stuck on a commercial system that is failing the agriculture sector, and neoliberal credit assessment models which have so far failed to respond to the new land tenure systems. These credit assessment models insist on land titling at the fore of collateral security, disregarding the social capital built up in the A1 and A2 areas.

In 25 years, there’s practically no creative financial product on the market responding to the changed/changing agrarian structure in the country to serve what is essentially a vast new market for banks consisting of thousands of new farmers, desperate for financing options.

There are undoubtedly a lot of very knowledgeable people at banks looking at how they can adapt to the new realities of the Zimbabwean economy, and the evolving agricultural sector that underpins it.  

Save for a few so-called ‘micro-finance’ products by mainstream banks, most offering loans of up to $5,000, the banking system has all but failed to serve this new class of customer through a lack of innovation and creativity to deliver a vision for the future for the banking business and their agricultural customers.

Establishing a culture of imagination and creativity is not only a challenge that agricultural financing faces, but indeed banks themselves. The banking system as it currently serves the agricultural sector needs a more fundamental re-examination of the model and service offering to deliver suitable products tailored to the new market. The risk to banks as they are currently set up to serve agriculture is that failure of creativity may end up in irrelevancy. In the tobacco sub-sector, this amounts to largely excluding themselves from a multi-million dollar market – one of the country’s top foreign currency earners. Risk averse practices and compliance requirements end up serving as no more than convenient excuses for maintaining the status quo.

The contract system for tobacco has to an extent managed to fill the financing gap, but remains imperfect and in need of betterment. About 95% of Zimbabwe’s crop is financed through the contract system.

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. The high current rate of indebtedness amongst tobacco growers is most likely to worsen with producers expected to see more limited access to credit for production on the back of a difficult El Nino season, which according to Tobacco Industry and Marketing Board , has already seen the number of growers drop, cultivated areas decline 3% to 113,000 hectares from 117,000 hectares last year, production estimated to fall to about 235 million kilograms, and is likely to cost farmers 20% or more of their usual earnings.

After export earnings, a significant portion of the proceeds are also used to pay off offshore loans used to finance tobacco contract schemes, further diminishing net earnings. Reduced availability and access to credit will compound the El Nino induced dampening effect on the boom underway in the tobacco sector in particular, and agriculture sector in general.

There’s a risk that long-term future growth could slow down in view of this credit crisis and lack of financial resources for agricultural production. Questions remain – can the country maintain and expand output, driving long-term growth that sustains these levels of record breaking production without a sustainable financing framework underpinning that production? Is the financing framework, as it is currently configured, viable in building economically sustainable livelihoods amongst small scale tobacco farmers?

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. This follows on the US$30 million horticulture revolving fund to boost production and tackle challenges related to the unavailability of appropriately structured financing for short to long term expenditures.

This is helpful, but there will have to be lessons drawn from the horticulture revolving fund which according to the Horticultural Development Council , has seen limited uptake by growers for a number of reasons, including the onerous bureaucratic process of approval. It will remain to be seen whether the proposed tobacco revolving fund 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.

Miles Mudzviti is the Executive Director of the Africa Centre for Rural Economy (ACRE), and also a smallholder farmer in Chivhu, 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/WhatsApp: +263 717 567 242