How credit guarantee schemes can help agri players handle risk
Agriculture’s vital contribution to South Africa’s growth, prosperity, and social cohesion is firmly established, but securing funding for investment and development is an ever-present challenge. The economic landscape is becoming increasingly volatile, making for a riskier lending environment, which can slow down institutional funding decisions. Against this background, credit insurance schemes can be very helpful to agri players keen to act on trade opportunities without incurring lengthy delays. Harvest SA spoke to Credit Guarantee’s Louis Korkie to find out more.
“Credit insurance supports financing mechanisms as it secures against non- payment from debtors,” says Korkie.
“Beyond securing against non- payment, risk assessment for credit facilities provide a good indication to suppliers of the risk profile of the debtors, which provides confidence to the credit provider. It is an insurance that provides financiers or suppliers directly with cash flow relief.”
Korkie comments, “One of the themes running through the culture of our entity can be summed up in the Zulu expression: Umuntu ngumuntu ngabantu – ‘I am because we are.’ We all rely on each other to grow and build this beautiful country of ours. Traditionally, financial institutions have taken a more reserved or cautious approach. We need to develop into strategic enablers through innovation, firstly through the way we assess risk and by actually building products that are customised to the agricultural industry in terms of pricing structures that are adapted to seasonality and climate risk.”
In assessing risk, Korkie says, institutions can’t rely purely on the financials anymore.
“We have to use agri data models to build clients’ risk profiles better. One benefit we enjoy is that we have access to aggregated data based on underwriting over a hundred thousand clients. This enables us to see the broad spectrum and feed it back into a risk assessment profile. At the moment, farmers don’t have access to risk assessment itself, as we are not a credit bureau, but they would benefit from us doing a risk assessment on their behalf.”
This is where the concept of Ubuntu comes in: “Risk assessment shouldn’t be a one-sided operation that lies with a single institution. The risk is broad, and the development of a risk-assessment culture in the agri space can equip farmers with the tools to manage their own risk, to the point. This can only take place through a personalised approach between lenders and agri players, including not only farmers themselves, but all the players in the agri value chain, including suppliers of vital inputs such as seed, energy, and agrochemicals.
New-generation risk assessment
Korkie observes that the new generation of farmers tends to go to university in a complementary field such as economics, accounting, or agricultural economics.
“There is a shift from parental knowledge transfer to a more formalised education. As these youngsters take over from their parents, there is a trend of converting from sole proprietorships to private companies, specifically for the continuity of businesses within families. Overall, farmers are increasingly using smart farming principles to take things to the next level.”
From an operational risk perspective, this is an improvement at industry level.
“Now there’s a proper management team in place, more diversification, seasonality, and farming at scale. However, there is now a systemic risk – if a larger business fails, it can impact the sector as a whole. This is why it’s necessary for the risk management industry to have measures in place like credit committees and debtor visits to meet personally with farmers and understand their challenges.”
This hands-on approach enables institutions like CGIC to gain visibility into the real operational and financial risks that players face within the agri space. “The difficulty with relying on financial statements to profile farmers is seasonality. If a farmer is auditing their financials in February, before the harvest season, that statement isn’t going to look very strong – there’s hardly any inventory, not much cash, and so forth. What we need to know in addition to that is how big is the land, how diversified is the farming taking place on it, do you have summer and winter crops, what are your tilling practices, are you reliant on rainfall or irrigation?
“Those are the kinds of things we look at to get to know farmers better and tailor our products accordingly. Farmers are generally committed to making payments – non-payment tends to occur only when there’s a bad harvest. The challenge, then, is how to support the farmer to make it to the next season.”
Plugging the cashflow gap
The way trade credit insurance helps to achieve this is by insuring the farmer’s debtors such as suppliers of energy, fuel, pesticides, fertilisers, and so forth. To keep those players happy, CGIC can plug the cashflow gap so that the farmer can receive the product and trade can continue.
“How we assess risk, broadly speaking, is the financial aspect, the industry, and then the jockeys behind the business – the farmers themselves. That’s why the personal touch plays such an important role. Before you even get to the risk, we do assessments in the beginning. Our expert analysis of the creditworthiness of a debtor can create confidence with suppliers upfront.
“If a debtor does get to a critical stage, we have a critical risk unit that sits together with all the stakeholders to see how we can continue supporting the business to get to the next season.”
Global trade with confidence
When it comes to global competition, credit guarantees can be a powerful tool.
Korkie explains: “Debtor insurance can be used as a security, which helps clients access more funding. This in turn gives us better insight into who the debtors are, which provides security for the banks. In terms of specific working capital solutions, there are facilities such as trade finance and invoice discounting, which CGIC insures in the short term.”
“Trade finance allows the debtor to get the working capital solution so they can get their stock, while invoice discounting provides relief to the supplier, who can sell their invoices to the bank and get their cash immediately. With the right pool of credit insurance, trade finance and invoice discounting, in order to have a bundle of a financing structure to make yourself competitive.”
Korkie sums up: “In reality, farmers must make trades. We can come with insights based on underwriting across Africa and internationally to partner with farmers and instill them with confidence as to where they can safely trade.”
