Publication Date: 23/08/2018

SA’s commercial banks have been surprisingly mute about the expropriation without compensation debate. But as the Land Bank makes clear, any ham-fisted government policy risks causing a series of dominoes to topple that could have disastrous consequences for the lenders. Here’s what experts in and around the banking sector are thinking about land …

Banks in SA, with R160bn on loan to the agricultural sector and more than R1-trillion in property loans, have a lot to lose if the land debate — specifically, the threat to expropriate land without compensation — does not go their way.

It’s a critical point, as property is the predominant source of collateral for bank loans and the foundation of wealth creation for many.

But because the transformation of the farming sector has been too slow, the public demand for the road blocks to be dismantled has escalated.

There are three prongs to the debate. First is restitution: those who were evicted from their land as they were in the “wrong” race group have the right to get their land back — but a commercial bank might have lent money to the current owner in good faith.

Second, there are people who are unable to find suitable land — typically emerging black farmers. Third is the problem of finding proper, acceptable quality housing for people who don’t have it.

There’s no hiding the fact that land reform has not been a success to date. No less than 17-million South Africans in the former bantustans do not have security of tenure. A Green Paper in 2011 talked of “total system failure”.

So compromises were always needed to make restitution a reality. It was never going to be easy to keep the financial sector and existing property owners happy.

But in rushing to the wrong remedy, the government risks destroying everything.

The Land Bank, the government-run bank that provides nearly a third of all the money lent to commercial farmers, warned this week of “grim consequences” of poorly executed land policies.

Chair Arthur Moloto says the Land Bank has borrowed R41bn from external funders, and if the bank’s operations are hit by expropriation, those lenders could immediately demand the repayment of R9bn. It could then trigger a mass default, requiring the bank to repay the entire R41bn — money it doesn’t have. Which means the government would have to step in and find R41bn.

However, amid a debate that could do serious damage to their lending books, the commercial banks have been surprisingly mute, unwilling to take a seat at the debate. Over the past week, the FM has polled banking executives on this issue.

Former FirstRand chair Laurie Dippenaar, now retired, says only a few very strongly capitalised farms can operate without bank loans, and uncertainty will make it harder for banks to lend.

“There is some scope for expropriation. Those buildings in the Joburg CBD and Hillbrow which present health hazards could be on the list. But I would be sorry to see a successful working farm expropriated.”

Speaking last week at Standard Bank’s half-year results presentation, CEO Sim Tshabalala said there is no need for moral panic. Government’s intentions on land are completely rational, he said.

Leon Louw, executive director of the Free Market Foundation, disagrees.

“The view that transformation is not taking place fast enough is just a cliché and platitude.

“Is it rational to say that property needs to be taken from white people and given to blacks as there has been no progress in economic development? The black middle class has increased from 700,000 in 1994 to nearly 7-million,” he says.

Louw says black people now account for the majority of property purchases, new credit cards and other measures of middle-class success. In only a tiny minority of cases has land been the vehicle to build prosperity.

Nedbank CEO Mike Brown says the land debate has already had a negative impact on overall investor sentiment, economic activity and job creation.

“It is vital that this sensitive issue is handled properly to ensure no lasting impact on economic growth and food security,” says Brown.

At the same time, Nedbank says it supports the need for historical redress. It just doesn’t say how this should happen in a way that preserves the economy.

The reluctance of the banks to enter into this debate is notable, given that it sounds as if the government has already decided to curtail property rights. With so much on the line, why aren’t the banks being more vocal?

The Banking Association South Africa MD Cas Coovadia says nobody should be surprised by the rhetoric in the run-up to next year’s election. Behind the scenes the banks are negotiating, however, and will make presentations to parliament about how this could be handled.

Coovadia says if the banks’ stance is to fight for all the pillars of the market economy, and ignore the context of SA’s problems, the industry will be shooting itself in the foot. “I can tell you none of our members is arguing for no expropriation in any circumstances, and we all want to do more to help emerging farmers in particular.”

Coovadia would like to see a land indaba in which everyone thrashes out all the issues — not just expropriation, but also a full land audit, a final settlement of security of tenure and an analysis of whether everyone has title deeds in areas where people do not yet have freehold. A lot of wealth was created in the UK when tenants were allowed to buy their houses and flats from local councils.

Jacko Maree, former CEO of Standard Bank and one of Cyril Ramaphosa’s presidential envoys, says the first question he gets from every potential investor in the country is on the status of land reform. “But at least investors in emerging markets are familiar with risk, and have invested in Brazil, Russia or China, which have their own constitutional ambiguities.”

Buccaneer investors are one thing, ratings agencies quite another. The big three — S&P, Moody’s and Fitch — have not yet signalled a high level of discomfort. But it might contribute to a downgrade, of both sovereign and bank paper: perhaps not in isolation but in combination with the medium-term budget policy statement, if that proves too populist or just exposes how financially stretched the SA fiscus has become.

The problem is, the government hasn’t shown it understands how commercial land ownership works.

Recently, mining minister Gwede Mantashe said there should be a 12,000ha cap on farm size — yet it is the larger farms that are internationally competitive.

Nonetheless, it is disastrous for the banks when lists of farms, already earmarked for expropriation, are circulated, as the AfriForum lobby group has done.

The danger, says Louw, is that expropriation of property could be extended to include all assets — such as shares and unit trusts — if the constitutional amendment is ambiguous enough.

Such a move would affect all race groups. The National African Federated Chamber of Commerce says it is opposed to any attempt to remove black property rights. It adds that any constitutional amendment will outlast the current debate, current politicians and current land reform demands.

As has been repeatedly pointed out, section 25 of the constitution already makes it abundantly clear that expropriation of property is permissible for land redistribution or to achieve some other public purpose.

Tshabalala is one who believes there is no need for a constitutional amendment, given that section 25 already has a public-interest clause. “It is hard for us to argue against anything which concerns dignity and human rights as directly as this,” says Tshabalala.

Because many property owners use their land productively, have paid market value for it, owe money on bonds taken out to pay for that property or need access to property for housing, section 25 prohibits the arbitrary deprivation of property as well as the expropriation of property without payment of just and equitable compensation which has either been agreed upon or which has been decided by a court of law.

The risk to the banks is that expropriation without compensation, if used widely, will put the security of tenure at risk. That could mean banks will no longer be able to rely on property as security for their loans.

Raymond Parsons, author of the recently published book Good Capitalism, Bad Capitalism, says the question of expropriation without compensation has been so badly handled that, despite the efforts of ANC spin doctors, the genie is out of the bottle and generalised uncertainty prevails.

Parsons says the dilemma is that while it is helpful to allow extensive debate to better manage expectations, it also prolongs the uncertainty. And uncertainty is bad for the confidence in banks.

It is easy to blame the banks and the commercial farmers for setting up roadblocks. But Omri van Zyl, executive director of Agri SA, says there are numerous initiatives to support sustainable land reform: for example, more than 104,000 people have benefited from development programmes such as training courses, mentorship programmes and social development initiatives.

“But farming is one of the most difficult jobs in the world,” he says. “SA is a semi-arid country with very little highly fertile land, so to get going and commercialise is difficult, and becoming internationally competitive is even more difficult.

“Farming is in one’s blood. Dealing with capital risk, environmental issues, market fluctuations, crime and very poor infrastructure is not easy.”

Banking group Absa has proposed several different ways in which it can contribute to sustainable land reform.

One would be the establishment of a special rural land reform fund, to establish a new class of black commercial farmers — and a cohort of future clients. It also proposes an “urban land reform fund” to build affordable housing — which is also in the interests of the banks.

Absa also moots a “land administration agency” as a public-private partnership, which could undertake the land audit The Banking Association wants. This would create an up-to-date land records system, which hardly exists in some of the old former homeland areas. Absa would also hope to streamline the now cumbersome process through which land claims are assessed.

Though Absa talks of a national dialogue, this could be a protracted process. Coovadia’s proposed land indaba might prove far more efficient — even if it’s almost too late to convene it.

The markets are playing a waiting game. Until now, the rand has weakened about 15% this year to about R14.50 — in part, a response to the land debate, but it could have been a lot worse.

Banking shares have also lost ground. Absa has lost 9.9%, Standard Bank 4.5%, FirstRand 3.6% and Nedbank 0.5%. All remain relatively cheap, on a price-to-earnings ratio, compared with other sectors.

But the market would be a lot more jittery if it believed there was a high probability of a Zimbabwe-style land grab.

SA’s institutions and constitution remain strong, but Zimbabwe and Venezuela both show what can happen when there is abuse of power and key institutions are weakened.

Certainly there would have been more concern if Jacob Zuma had proposed such a constitutional amendment.

But even so, the banks might be naive to presume that Cyril Ramaphosa, a successful businessman (who was on the boards of FirstRand and Standard Bank at one stage) is on their side.

Tom Boardman, former CEO of Nedbank, says an amendment could be the thin end of the wedge on ownership rights. If there is any ambiguity about land tenure, bank finance can’t be given, he says.

Boardman says property ownership in rural trust lands — where there is no freehold title — also needs to form part of the debate. He says that, unfortunately, too often land reform has led to land lying fallow.

A 2016 survey by the Financial & Fiscal Commission, a quasi-government body set up to advise on the constitution, shows just how true this is.

That survey, of the impact of land reform in 850 cases in KwaZulu-Natal, Mpumalanga and the Eastern Cape, found that after land was transferred, most farms showed little or no agricultural activity. Productivity fell through the floor, as the “crop production area” dropped by 79%. The number of jobs on the farms fell by 84%, with the remaining commercial farms being the main employment option left for people. Of course, it is the current model of land reform that has failed — not the concept of land reform itself.

The combined thinking of the banks, including the Land Bank, with organisations such as Agri SA and the relevant government departments, could lead to a more robust model with skills transfers and a commercially driven financing model for the emerging farming sector. But the banks have to get out of their laager and begin speaking about what options could work.