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WORKSHOP

Future Diretion and Business Opportunities in Food


Production in NAP3’

Paper 4

Financing Food Production Projects by the Banking


Sector

15-16 November ’99,Legend Hotel


Jalan Putra Kuala Lumpur

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ABSTRACT
FINANCING OF AGRICULTURAL FOOD
PRODUCTIONBY THE BANKING SECTOR

The contribution of commercial banks, finance companies and merchant


banks in the financing of food production, particularly the small and
medium scale projects, is marginal. This is due mainly to the hinger risk
and the lower profitability, in the financing of food production as
compared to manufacturing,property, construction, transport and other
sectors.

The responsibility of financing food production, particulary the small and


medium scale projects,is left mainly to Bank Pertanian Malaysia. As at
the end of June 1999, a total of RM582 million was extended by BPM in
the financing of various food project covering
paddy,fruits,vegetables,spices,fisheries,livestock,food
processing,marketing and distribution.

The financing of food production by the banking sector was given a boost
with the launching of the Fund For Food Scheme by the Government in
January 1993. The primary objectives of the scheme are to increase food
production, reduce food imports and stabilize food prices, A total of RM1
billion was allocated, and by the end of June 1999, 59% or RM 585.9
million was extended under the scheme.

With the introduction of the Fund For Food Scheme, funds are made
available for financing food projects under more attractive terms and
conditions.This has greatly improved the accessibility of credit to the
existing and potential entrepreneurs engaged in food production.The
banking sector could play a bigger and more effective role if the
prospects and viability of the industy could be further improved under the
Third National Agricultural Policy.

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FINANCING OF AGRICULTURAL FOOD PRODUCTION
BY THE BANKING SECTOR

1. INTRODUCTION

This paper discusses on the financing of food production by the banking


sector; the Fund For Food Scheme; the problems and issues involved; and
how to increase the role and effectiveness of the banking sector in the
financing of food production.

2. FINANCING OF FOOD PRODUCTION

The contribution of commercial banks, finance companies and merchant


banks as a group to the financing of food production, particulary the
small and medium scale projects,is marginal. Total loans extended by the
group for the financing of the agricultural sector amounted to RM7.7
billion as at the end of March. This constituted only about 1.9% of the
RM402.3 billion total loans extended by the group.

Most of the loans extended by the group to the agricultural sector were
for the financing of oil palm, rubber, cocoa, forestry and logging projects,
which together accounted for RM5.7 billion or 74 % of the total loans
extended. The loans extended for food production were mainly for the
financing of livestock and fisheries projects amounting to RM811.7
million and RM165.4 million respectively.

Commercial banks and finance companies were less inclined in the


financing of small and medium scale entrepreneurs engaged in food
production. This is due mainly to the higher risk and the lower
profitability food production as compared to the manufacturing, property,
construction, transport and other sectors.

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Table 1
Financing of food Production, Processing and Marketing by
BPM As at 30 June,1999

Type Amount (RM)


Food Crops 260,990,965
Paddy 83,583,366
Fruits 85,998,775
Vegetables 28,478,293
Spices 5,711,531
Others 57,219,000
Fisheries 150,401,073
Fishing 116,147,425
Aquaculture 34,253,648
Livestock 170,707,690
Cattle 39,500,777
Chicken 107,104,881
Others 24,102,032
Total 582,099,728
Total loans of BPM 1,895,167,417
Share of total loans 31%

The responbility of financing the food sector, particularly the small and
medium scale project, is left to Bank Pertanian Malaysia. Established in
1969, BPM started is operations with the financing of paddy production
in the Muda areas. Ever since it has remained the main financier of paddy
production, the staple food crop in Malaysia. As at the end of June 1999,
it loans to paddy production amounted to RM83.6 million covering
28,498 farmers.

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From paddy production, BPM gradually extended its role to the financing
of other food project. By the end of June 1999, it had extended RM 582
million for financing the food sector. This constituted about 31% of the
total loans extended by BPM to the agricultural sector, that is RM 1.9
billion for 83,118 agrobased entrepreneurs.

Of the RM582 mllion credit extended to the food sectors, RM 251 million
was for financing of paddy, fruits, vegetables, spices and other food
crops; RM150 million for fishing and aquaculture projects; and RM 171
million for poulty, cattle and other livestock projects. Please refer to
Table 1.

3. FUND FOR FOOD (3F)

The financing of food production was given a boost in January 1993 with
the launching of the Fund For Food Scheme by the Government. The
primary objectivies of the scheme are to increase food production, reduce
food imports and stabilize the rising food prices. The scheme started with
a fund of RM300 provided by Bank Negara Malaysia in 1993, followed
by a second fund of RM400 million in 1997 and a third fund of RM300
million in 1999. Altogether, a total fund of RM1billion has been set aside
for the financing of food production, processing, marketing and
distribution under the scheme.

The first and second funds are open for the participation of commercial
banks, tier 1 finance companies, Bank Islam, Bank Pertanian, Bank
Pembangunan and Bank Industri. The third fund, however, was solely
allocated to BPM for financing food projects.

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Objectives

The objectives of 3F area as follows:

(i) To promote primary production including aquaculture, animal


husbandry, vegetables and fruits.
(ii) To promote the production of related food products covering
mainly processed food, provided the raw materials are sourced
from domestic sources.
(iii) To promote the efficient marketing and distribution of food and
food products.

Eligibility

The scheme is open to Malaysian owned companies (at least 51%


ownership) and residents residing in Malaysia engaged in new projects
or expansion of existing projects for food production, processing,
marketing and distribution.

Loans are given for the financing of capital expenses such at the
purchase or construction of buildings, equipment, vehicles, land
clearing and preparation as well working capital. The purchase of land
can be financed up to a maximum of 20% of total poject coast.

The following expenditures are however not eligible for financing:

• Labor cost
• Purchase of shares or existing assets
• Refinancing
• Takeover of existing projects
• Projects for exports exceeding 50% of total production.
• Projects where most of the raw materials are imported.

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Loan amount

Maximum financing can be up to 90% of total project cost,


subject to a maximum of RM3 million and a minimum of
RM10,000 per customer.

Interest rate

4% per annum.

Duration

Up to a maximum of 8 year.

Collateral

All loans must be adequately secured.

Total loans approved by the banking sector under 3F as at the


end of June 1999 amounted to RM585.9 million for 2118
entrepreneus. Of this amount, RM301 million was approved for
financing animal husbandry, RM136.2 million for food crops,
RM94.1 million for fisheries. RM44.4 million for food
processing and RM10.3 million for marketing and distribution
of food. Please refer Table 2.

The commercial banks and finance companies as a group


accounted for about 55% or RM320.6 million of the total loans
extended under the scheme. The balance of 45% or RM265.3
millon was provided by Bank Pertanian Malaysia. Please refer
Table 3.

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Table 2

Loans Approvals by Participating Financial Institutions


Under 3F As at 30 June,1999

Sector Number Amount


(RM Million)
Animal husbandry 725 301.0

Food crops 936 136.2

Fisheries 391 94.1

Food processing 55 44.4

Marketing and distribution 11 10.3


Total 2118 585.9

Table 3

Loan Approvals by BPM under 3F


As at 30 June,1999

Sector Number Amount


(RM Million)
Animal husbandry 495 142.2

Food crops 623 69.2

Fisheries 236 39.8

Food processing 14 12.4

Marketing and distribution 3 1.7


Total 1371 265.3

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4. ISSUES

Risk of Financing

The risk of finaning food projects is high due mainly to the


problems of perishability of food crops, uncertainty and
fluctuation of prices, outbreak of diseases and natural disasters
which are beyond the control of the entrepreneurs. To minimize
the risk of financing, bankers are inevitably cautious and take
great pains to ensure that the projects financed are technically
feasible and financially viable, the risks are under control and
the loans are adequately secured. This pratice may, to a certain
extent, come in the way of potential entrepreneurs from getting
the necessary credit to finance their projects.

The entrepreneurs themselves can play a great part in reducing


the risk of financing by careful and taking the necessary steps to
ensure successfull implementation before embarking on
borrowing money to finance their projects.

The risk of financing could be reduced by insuring the projects


financed. However, not all food projects can be insured, the
coverage is often limited and the premiums are high.

Accessibility of credit

The availability and accessibility of credit for the financing of


food projects have been greatly improved with the launching of
the Fund For Food Scheme where the terms and conditions are
more attractive. The interest rate is now 4%, maximum
financing is 90% of total project cost and the duration of
repayment is up to 8 years.

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However, loans given up under 3F still need to be secured with
sufficient collateral or guarantee. This condition is necessary
since bankers have to the prudent in lending their money. They
have to ensure that whatever funds they lend out are collected.
Otherwise, they will end up losing money and fail as a viable
financial institution.

The end for control can only be overcome if the risk of


financing can be eliminated or the risk can be passed to or
underwritten by a third party such as the Government or Credit
Guarantee Corporation. Otherwise, the condition on collateral
or guarantee will always be there.

Lack of expertise in food financing.

A comman reason cited by the commercial banks and finance


companies for not extending loans for food production is lack of
expertise. If this is the real reasons, then the solution is simple.
They would have to recruit officers with the relevant
agricultural background and providing them with the relevant
training on food financing. However, they must be willing to set
aside a certain amount of funds for financing small and medium
scale entrepreneurs engaged in food production even though
such financing is risky and less profitable.

Prospects and viability of the industry

For the banking sector to play a bigger and more effective role,
the prospects of food production must be good and the industry
must be viable. Otherwise, there will be little demand for credit
and the risk of financing food production will be high.

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To improve the demand and effectiveness of credit, steps be
taken to enhance the prospects and viability of the industry. The
economic conditions and basic infrastructures such as financial
incentives, research and development, training and extension,
drainage and irrigation as well as marketing, storage and
distribution must be there to support and promote the industry.
The economics and viability of projects could be enhanced by
improving the systems of management, production and
marketing through area zoning by commodity, mini-estates and
contract farming.

6. CONCLUSION

The role of the banking sector in financing food production can


be more effective if the market and economic conditions and
the basic infrastructures are in place to support and promote the
industry. Credit by itself is not effective as an instrument of
development. The other basic ingredients for the successful
implementation of projects must be there. The responsibility to
make credit effective in the development of food production
does not lie with the bankers alone but the Government and
entrepreneurs as well.

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