Financing In Agriculture

FINANCING OF AGRICULTURE

1. INTRODUCTION

This paper will discuss on the status and facilities available for the financing of agriculture, the commercial viability of agricultural investments, and the prospects and future directions in the financing of agriculture in Malaysia. Focus will be given on the financing of food production as this is the main issue of concern currently being addressed in the country.

2. STATUS OF AGRICULTURAL FINANCING IN MALAYSIA.

The main providers of agricultural finance in Malaysia are the commercial banks, finance companies, merchant banks, Felda, Sabah Development Bank, Bank Pertanian Malaysia (BPM), Bank Rakyat, and farmers, fishermen and other agrobased organisations. The total loans extended by these institutions for the financing of agricultural production in Malaysia amounted to RM12.7 billion as at the end of 1998 (Table 1).

Table 1

Loans Extended For Agricultural Production

As At 31 December, 1998

Institution	RM Million	Market Share
Commercial Financial Institutions	7,717.8	60.6%
- Commercial banks	6,178.4	48.5%
- Finance companies	927.7	7.3%
- Merchant banks	611.7	4.8%
Development Agencies	2,968.3	23.3%
- Felda	2,888.4	22.7%
- Sabah Development Bank	79.9	0.6%
Rural Credit Institutions	2,048.3	16.1%
- Bank Pertanian Malaysia	1,909.3	15.0%
- Bank Rakyat	45.6	0.4%
- Farmers, Fishermen and Agrobased Organisations	93.4	0.7%
Total	12,734.4	100.0%

It can be seen from the above Table 1 that commercial banks, finance companies and merchant banks are the main suppliers of agricultural finance for agricultural production in Malaysia. Together the amount provided was RM7.7 billion as at the end of 1998. This represented 60.6% of the total amount.

Generally, commercial banks, finance companies and merchant banks in Malaysia are less inclined in the financing of agricultural, production (food), due mainly to the higher risk and the longer pay back period of such projects. At the end of 1998, the total loans extended by the group for agricultural production represented only about 2% of its total loan portfolio. Instead, they are more inclined in the financing of huge commercial and large scale projects such as oil palm (RM3.2 billion as at 30 September, 1999), forestry and logging (RM1.4 billion), and agrobased manufacturing industries (RM13.9 billion) such as rubber processing and rubber products, palm oil processing, wood products, food, beverages and tobacco. Breakdown on the financing of agrobased manufacturing industries by the group is given in (Table 2).

Table 2

Financing of Agrobased Manufacturing Industries

by Commercial Banks, Finance Companies and Merchant Banks

As at 30 September, 1999

Type of Industry	RM Million	%
Rubber processing and products	525.4	3.8%
Palm oil processing	1,809.8	13.0%
Food, beverages and tobacco	4311	30.9%
Wood and wood products	7,291.9	52.3%
Total	13,938.1	100.0%

In addition to the commercial financial institutions above, two other government-established institutions are the next major providers of finance for agricultural production. These two agencies are FELDA (Federal Land Development Authority) and Bank Pertanian Malaysia (Agricultural Bank of Malaysia).

FELDA (Federal Land Development Authority), though is not a financial institution per se, contributed RM2.9 billion ( 22.7%) of the amount in the form of long-term advance to settlers and participants to plant and maintain their oil-palm, cocoa and rubber smallholdings in the various land development schemes undertaken by this institution.

Bank Pertanian Malaysia (BPM), which was established by the Government of Malaysia in 1969 with the primary objective of promoting sound agricultural development in Malaysia, contributed RM1.9 billion or 15% of the total loans extended to the agricultural sector. The loans extended by BPM are mainly for the financing of small and medium scale projects. A substantial amount of these loans went for the financing of food production. As the end of December 1999, a total of RM594.6 million was extended by BPM for the financing of projects involved in food production. This amount accounted for 23% of the total loans extended by the banking sector (RM2.6 billion ) for food production. (Table 3).

Table 3

Loans Extended For Agricultural Food Production

As At 31 December, 1999

(RM Million)

Sector	Commercial		Bank Pertanian		Total
	Financial Institutions		Malaysia
	Value	%	Value	%	Value
Food crops	1,024.0	78.8	276.0	21.2	1,300.0
Livestock	789.7	82.2	171.5	17.8	961.2
Fisheries	177.8	54.7	147.1	45.3	324.9
Total	1,991.5	77.0	594.6	23.0	2,586.1

3. FINANCING FACILITIES

The facilities available for financing agriculture can be broadly classified into two categories, namely special funds made available by the government through special schemes and for specific purposes and commercial funds from commercial financial institutions.

Special Funds:

From time to time, the government established schemes and provided funds for lending to the agricultural sector. Loans from these funds can be considered as incentives to promote investments in priority agricultural sectors. The incentives usually take the forms of low interest rate, longer duration of financing and higher margin of financing. These schemes are open to all institutions and companies incorporated in Malaysia as long as the ownership by Malaysians is more than 50%.

Currently, there are three such funds and they are given out through both commercial banks and development financial institutions. These are Fund For Food, Fund for Small And Medium Scale Industries and Fund for Rehabilitation of Small and Medium Scale Industries. Disbursement of these funds are done through the institutions but regulated by the Central Bank of Malaysia.

The Fund For Food Scheme was introduced in 1993 for the financing of food production, processing, distribution and marketing. So far, three funds have been launched and the total amount allocated for the scheme is RM1 billion. The objectives of this scheme are to promote food production, to reduce the import of food and to stabilise food prices.

Interest rate charged under the scheme is only 4% per annum. The maximum financing is 90% of total project cost, subject to a maximum of RM3 million per customer. The maximum loan duration is 8 years. For more information on the policy of the scheme, please refer to Appendix 1. As at the end of 1999, 2,765 loans amounting to RM730.2 million were approved under the scheme (Table 4).

Table 4

Loans Approved Under Fund For Food Scheme

As at 31 December, 1999

(RM Million)

Sector	Banking Sector		Bank Pertanian		Total
	No.	Value	No.	Value	No.	Value
Food crops	368	79.3	828	88.4	1,196	167.7
Livestock	313	175.9	626	185.7	939	361.6
Fisheries	203	67.4	331	58.6	534	126
Food processing	53	36.9	28	24.8	81	61.7
Marketing and distribution	7	7.4	8	5.8	15	13.2
Total	944	366.9	1,821	363.3	2,765	730.2

The Fund For Small and Medium Scale Industries was introduced in late 1997 to promote and revitalise investment in the small and medium scale industries (both in the agricultural and non-agricultural sector) recovering from the economic crisis. Under this scheme, loans are provided for the financing of manufacturing, services and agrobased industries. A total fund of RM1.5 billion was allocated for the scheme.

The interest rate charged under the scheme is 6.5% per annum. The maximum financing is 75% of total project cost subject to a maximum of RM5 million per customer. The loan duration is up to a maximum of 7 years but not exceeding 31-12-2005. Information on the scheme is given in Appendix 2.

The total amount of loans approved under the scheme for the financing of agrobased industries (agricultural sector ) as at the end of 1999 was RM352 million with the rest going to the non-agricultural sector.

The Fund For Rehabilitation of Small and Medium Industries was introduced in 1998 to rehabilitate companies which encountered financial problems during the economic crisis. A fund of RM500 million was allocated for the scheme. The terms and conditions of this scheme are generally similar to the Fund For Small and Medium Industries, except that loans are given for the purpose of rehabilitation of problem projects.

In addition to the above, there are several other special credit schemes provided by Bank Pertanian, namely for padi, tobacco, fruits, vegetables, fisheries, other short-term crops and farm machineries. Funding for these schemes comes from the government. These schemes are specially designed to promote growth in these area, promote mechanisation and automation and increased participation of the Bumiputra community in agrobased industries.

Commercial Funds

Another source of fund is the normal deposits of commercial financial institutions and development financial institutions. These deposits come from the depositors of the institutions and are regulated by market forces, mainly the interest rate. The amount of deposits being mobilised depends on the ability of the institutions to attract them, and normally a certain amount is made available for lending to the agricultural sector. (Table 5)

Table 5

Direction of Credit to Non-Financial Private Sector

	Annual change		As at end-1999p
	1998	1999p	As at end-1999p
	RM billion			% share
Loans and advances	-12.3	-8.0	438.9	73.7
Agriculture	0.1	1.2	10.2	1.7
Mining & quarrying Manufacturing Housing Construction Business services General commerce Transport & storage Purchaase of shares Consumption credit Others Investment in corporate securities	0.4 -0.7 6.2 1.0 0.3 -15.5 1.8 -7.2 -5.5 6.8 12.8	-0.3 -1.5 5.7 -7.3 10.9 0.2 0.2 -5.3 -0.5 -11.3 11.7	1.4 56.0 71.1 85.5 20.8 17.7 14.2 23.2 50.7 88.1 156.8	0.2 9.4 11.9 14.4 3.5 3.0 2.4 3.9 8.5 14.8 26.3
Total	0.5	3.7	595.7	100.0

Source : Bank Negara Annual Report 1999

Loans under this fund are basically market and profit driven, hence the terms and conditions of these loans are based on commercial consideration. The interest rates charged are normally higher based on a certain margin above the base lending rate.

The amount to be tapped from the commercial financial institutions is enormous. The Ministry of Agriculture, Malaysia, has made it known that in order for the Third National Agricultural Policy (1998 - 2010) to be successful in transforming the Malaysian agricultural scene, total private sector investment must be in the region of RM21.393 billion compared to the government sector investment of RM11.039 billion. This suggests, among other things, that a proportionatly higher amount of funds for lending to agricultural project will have to come from the commercial financial institutions.

Recent developments in the Malaysian banking industry is the merger of the commercial financial institutions in Malaysia into 10 "viable and resilient" banks. This would see them emerging as having stronger financial standing and being better-managed, thus giving them more freedom to take advantage of opportunities in both the domestic and international market. The merger would also enable these institutions to provide one stop financial services centres or financial supermarket, as well as complementing or enhancing existing services.

Of more significant development is the increasing role of the capital market in providing funds to the industries in Malaysia. The capital market has lately become a major competitor to banks in providing funds to industry especially for financing of large-scale projects with long gestation periods, agricultural projects ( such as oil palm and fruits plantation ) included. Banks now will have to compete more on funds and projects to finance not only among themselves but also with the capital market.

Whichever one looks of it, with the new vision in agriculture and opportunities provided under the Third National Agricultural Policy, it is inevitable that the commercial financial institutions will have to review and revisit their attitude on lending to agriculture. By not doing so, they will "miss the boat". It is proposed here that each of the institution should set aside a certain amount of personnel and funds, possibly a special unit as well, to cater solely for this purpose.

4. COMMERCIAL VIABILITY OF AGRICULTURAL PROJECT

Agricultural projects being less viable has often been the reason being given for lower investment in agriculture, particularly for food production. Nonetheless, the commercial viability of agricultural projects, just like any other projects in other industries, should be determined by the normal measuring standard, including market availability and management capability. They can be made even more viable if there are adequate financial resources to implement the projects successfully. While it is admitted that the risks in agricultural investments are higher due to various factors, such risks are only very real in as far as the effect weather and natural disasters (flood, drought) have on the production of the primary produce. This is the main factor that has turned off potential investors. While it is still true that weather and natural disasters have discouraged the potential investors, especially in less developed agriculture, this is not necessarily so now. With the introduction of high-technology farming and rapid advancement in the field of bio-technology, the adverse effect of weather on agricultural production have been minimised. For instance, the usage of glasshouses allows for the regulation of temperatures to the desired level and prevent attack of insects on the crops.

Of equal important to viabilility, however, is the existence of ready market, availability of capital and most important, the ability of the operator in managing the various production factors above and the potential problems arising thereof. It is for these reasons that the development of agriculture calls for the increased participation of the private sector in providing the capital, expertise, management and networking capability required for the transformation of the Malaysian agriculture into a modern and dynamic "commercial" sector.

Based on the experience of Bank Pertanian Malaysia, some examples of food production projects that can be considered commercially viable are given in Table 6.

Table 6

Commercial Viability of Food Production Projects

Project	ROI	Payback
		Period
1. Vegetables farming	35%	3 years
2. Poultry	15%	5 years
( Production of chicken eggs )
3. Prawn farming	54%	13 months
4. Deep sea fishing	35%	3 years

Further information on the above examples are given in Appendix 3.

5. PROSPECTS AND FUTURE DIRECTIONS

The economy of Malaysia has recovered and is expected to grow positively in the years ahead. The real GDP of the country grew at a rate 5.4% in 1999 after registering a contraction of 7.5% in 1998. It is expected to grow at 5.8% in 2000.

Agricultural production grew at 3.9% in 1999. Based on the Third National Agricultural Policy (1998-2010), the average growth in agriculture is projected at 2.1% per annum from 2000 to 2005 and 2.4% per annum from 2005 to 2010. The value-added in the food sector is projected to grow at 3.1% and 3.5% for the two periods respectively.

The share of agriculture to total GDP is expected to decline based on the projections of the NAP3. In 1995, the share of agriculture to GDP was 13.5%. This is projected to decline to 12.8% in 2000, 9.5% in 2005 and 7.2% in 2010.

Agricultural development in Malaysia is given new focus and directions under the NAP3. The new approach taken by the Ministry of Agriculture in operationalising the NAP3 will help the private sector to clearly see the new opportunities offered by the agricultural sector. A detailed blueprint - from the introduction of a new model for agricultural development, choice of priority crops, to research, production and marketing (domestic and international) - should help investors to pick their choice of where they wanted to come into. Indeed, the opportunities are limitless.

The primary focus of the NAP3 is to increase food production and improve the productivity and competitiveness of the agricultural sector through the implementation of the twin strategic approaches - the agroforestry approach and the product-based approach.

The agroforestry approach integrates agriculture and forestry development. It views agriculture and forestry as mutually compatible and complementary and therefore provides a scope for joint development that can bring about mutual benefits. The approach will bring about a larger productive base for agriculture and forestry, allow for a wider range of agroforestry enterprise mix, optimise resource utilisation and enhance the income generating potential of agroforestry investments.

The product-based approach strives to cater for the specific needs of markets and secure higher value-added production in agriculture. In this approach, key products and markets are identified based on market demand, preferences and potential. These market demand and preferences are then translated into strategies for upstream primary agricultural production to enhance production and marketing of the agricultural produce.

The approach will enhance the development of agricultural industries through the transmission of market signals and consumer preferences upstream to the farm. Agricultural production will be more specialised to meet the needs of various domestic and global market segments. This will encourage the production of high quality and high value produces, facilitate product differentiation and increase value-added of agriculture and forestry products.

Commercial financial institutions have an important role to play in supporting the implementation of the NAP3 and the subsequent transformation of agriculture into a modern and dynamic commercial sector. They must take up the challenge because a greater portion of financing to achieve the purpose is expected to come from them. With the new emphasis on agriculture, they will have more confident in this sector and will rise to the occasion to meet the challenge. The challenge calls for a comprehensive and integrative approach in the financing of agriculture by the banking sector. The banking sector could play a positive role by adopting the following strategies:-

Give more emphasis in the financing of food production. Preferably, minimum targets should be set for this purpose.

Promote and support mechanization, automation and the use of appropriate technology to improve efficiency, productivity and competitiveness of the agricultural sector.

Promote Malaysia as the regional center for the production, processing and distribution of halal food.

Support the growth of both upstream and downstream activities in agricultural production. This will help in providing the neccessary inputs and raw materials at competitive costs and the creation of additional market outlets for agricultural produces.

Of the total RM1 billion allocated for food production under the 3F by the government there is a balance of RM210 million not being utilised yet as at the end of 1999, the amount being a portion of the final RM300 million allocated in September 1999. The response to the utilisation of this Fund, apart from the initial problems encountered in obtaining such fund, has been good. In order to serve as an accelerator in achieving the food production target, the government should consider increasing the amount of fund. The amount requested for this purpose through the Eighth Malaysia Plan is RM400 million. The RM3 million limit per project should also be raised to at least RM5 million per project. The scope of commodities covered by the fund as well as the activities rrelated to the commodities must be widened, i.e the list of eligible commodities must be expanded. Participating commercial financial institutions, on the other hand, must constantly review their terms and conditions whenever possible to enable the funds to reach a wider coverage of potential investors.

With the new vision and high expectation generated by the Third Natinal Agricultural policy, Bank Pertanian Malaysia being the only bank in the country specilising in agriculture, will transform and reorientate itself (e.g: structure, status, financial strength ) in order to meet the challenges ahead, the most immediate is to increase the quality of services to be rendered. The contribution from the private sector is critical to the success of the Third National Agricultural Policy. The Bank will therefore set up a special unit manned by specially-trained staff to handle business dealings with potential investors and clients from the private sector.

6. CONCLUSION

With onset of globalisation and liberalisation, there is an urgent need to increase food production and improve the efficiency, productivity and competitiveness of the agricultural sector. There is a need to transform agriculture into a modern and dynamic commercial sector. This calls for the increased participation of the banking and corporate sectors as well as the strategic cooperation between them and the Government, the farmers and potential investors as partners in agricultural development.

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APPENDIX 1

FUND FOR FOOD

Objectives:

To promote primary food production (including sea-food, animal husbandry, vegetables and fruits).
To promote the production of related food products covering mainly processed food, provided the raw materials are sourced from domestic sources,
To promote the efficient distribution of food and food products.

2. Eligibility:

Malaysian citizens residing in Malaysia.
Malaysian owned institutions and companies ( > 51% ownership).

3. Loan limits:

Maximum loan: RM3 million per loanee
Minimum loan: RM10,000 per project

4. Maximum financing:

90% of project cost

5. Interest rate:

4% per annum

6. Duration:

Up to 8 years

7. Collateral:

Fully secured

8. Projects and items eligible for financing

Crops:
Vegetables
Tea
Paddy
Fruits (banana, mango, guava, watermelon, papaya, pineapple, sugar cane, coffee, cocoa, star fruits, salak).
Roselle
Maize
Tapioca
Keledek
Serai wangi
Daun kesum
Pandan
Production of seeds and planting equipment for food crops.

Livestock:
Cattle
Goats
Buffaloes
Chickens
Ducks
Quails
Sheep
Deer
Rabbits
Ostrich
Honey bees

Fisheries:
Coastal fishing
Cage farming
Aquaculture
Prawn farming
Penetasan dan pembiakan keluaran akuatik termasuk ketam, tiram, rumpai laut, clam and kerang.

Biotechnology:
Production of food or food ingredients
Production of feed or feed supplements
Production of cell cultures for food, food ingredients, feed or feed supplements.
Production of seed, planting materials, fish fry and breeder stocks for food production.
Land purchase can be financed up to 20% of total project cost.

9. Projects/Items that cannot be financed:

Labour cost
Purchase of shares or existing assets
Refinancing
Take over of existing projects.
Project for exports exceeding 50% of total production.
Projects where raw materials are imported.

APPENDIX 2

FUND FOR SMALL AND MEDIUM SCALE INDUSTRIES

Objective:

To promote new investment in small and medium scale industries engaged in manufacturing, agrobased industries and services for exports, import substitution and the growth of new industries (including high tech industries).

Eligibility

Malaysian owned institution and companies (> 50% ownership)
Malaysian citizens residing in Malaysia
Paid up capital < RM10 million

3. Projects and items eligible for financing

Manufacturing
All projects for expansion especially export oriented and food-based projects.

Agrobased industries
Purchase of farm equipment and machinery
Farm development
Construction of buildings
Research and development
Food processing, packaging and canning.

Services
Design, packaging, marketing and advertising
Research and development

4. Loan limits

Minimum RM50,000 per project
Maximum RM5 million per loanee

5. Maximum financing

75% of total project cost

6. Interest rate

6.5% per annum

7. Duration

Maturity up to 31-12-2005

8. Collateral

Fully secured.

9. Projects that cannot be financed:

Refinancing
Purchase of shares or existing assets
Takeovers

APPENDIX 3

EXAMPLES OF VIABLE FOOD PRODUCTION PROJECTS

A. VEGETABLE FARMING

1. Project: The cultivation of low and highland vegetables.

2. Project size: 25 acres

3. Technology: Conventional method with the use of plastic shade and hydroponics system.

4. Project costs:

Fixed costs: RM 1,168,000

Operation costs: RM 500,000

Total costs: RM 1.668,000

Cost of production per acre: RM 66,720

5. Financing plan:

Equity: RM 668,000

Loan: RM 1,168,000

Total: RM 1.668,000

6. Project profitability:

Return on investment: 35%

Pay back period: 3 years

7. Potential problems:

Susceptible to disease and severe weather conditions such as prolonged drought and heavy rainfall.
Labour intensive and highly dependence on foreign workers.
Perishable produce.
Subject to frequent price fluctuation which is beyond producers' control.
High capital investment.
Constant increase in the prices of inputs is eroding profit margin and competitiveness of the industry.

B. POULTRY FARMING

1. Project: Production of chicken eggs.

2. Project size:

940,000 birds
Production of 700,000 eggs per day.

3. Total project cost : RM43.8 million

4. Project profitability:

Return on investment: 15%

Pay back period: 5 years.

5. Potential problems:

Outbreak of diseases.
Fluctuation of prices of inputs, feed and eggs.
Dependent on imported feed resources and parental stock.
Labour shortage

C. PRAWN FARMING

1. Project: Rearing of tiger prawns

2. Project size: 8 ponds of 2.5 acres each

3. Project costs:

Fixed costs: RM 1,300,000

Operation costs: RM 930,000

Total: RM 2,230,000

4. Project profitability:

Return on investment: 54%

Play back period: 13 months

5. Potential problems:

Outbreak of diseases.
Changes in water quality due to heavy rain, flood and pollution.
Breakdown of electricity.
Supply of healthy fries and high quality feed.

D. DEEP-SEA FISHING

1. Project: Deep-sea fishing using a fishing vessel with a gross tonnage of 286 GMT.

2. Project costs:

Capital expenditure:

Boat (34.0 m x 7.3 m x 4.0 m ) RM 500,000
Engine ( 2 units @ 470 hp / unit ) RM 700,000
Fishing nets ( 70.0 m x 50.0 m @ 3 sets ) RM 100,000
Freezers ( 21.0 m x 7.3 m x 3.0 m ) RM 90,000
Equipments RM 900,000
Total RM 2,290,000

Annual operation costs: RM 1,040,000

3. Project profitability:

Return on investment: 35% per annum

Pay back period: 3 years

4. Potential problems:

Problem of morale and motivation as the crews have to spend a long time at sea ( more than 3 weeks ).
Lack of skilled workforce.
Uncertainty in fish catches.