The Steinhoff Saga Management review - University of Stellenbosch Business School

January – June 2020

Financing developing farmers of South Africa: How collaborative partnerships can help

By Dr Langelihle Simela and Dr Nyankomo Marwa

  • AUG 2020
30 minutes to read


The challenge to make partnerships work

Companies partner because they have key complementarities that they want to leverage. One example of this is a partnership between a state agency and a commercial bank to provide financing to developing farmers.

However, up to 70% of such partnerships fail. This is despite the fact that there is ample guidance on how to establish such partnerships. These guidelines typically cover drawing up a business plan, seeking common ground, establishing formal structures for alliance management, and defining metrics to measure the value of the partnership. However, these basics alone will not enable partners to leverage their complementary strengths and assets and so it is necessary to know the critical success factors (CSFs) for such collaborative partnerships to succeed.

It is generally accepted that effective financing of developing farmers can be best achieved through partnerships, particularly between government and private sector institutions. Although various institutions offer finance to developing farmers, not many of them are partnerships committed to the equitable sharing of costs, risks and rewards.

The Small Enterprise Finance Agency (Sefa) is a government agency that was established to work in strategic alliances and partnerships to finance the developing sector, which includes emerging farmers. However, Sefa has experienced a poor uptake of some of its products.r. This implies that some critical success factors may have been overlooked when partnerships between Sefa and the commercial financiers were established.

Companies partner because they have key complementarities that they want to leverage … However, up to 70% of such partnerships fail.

This leads to the following question: What are the critical success factors that a financing agency such as Sefa and commercial banks should consider as they enter into partnerships to support developing farmers?

Financing the developing agricultural sector

Evidence suggests that collaboration between the public and private sectors is the way forward in terms of financing agricultural transformation in South Africa. Sefa wants to achieve this by offering financial products in partnership with commercial banks. The agency’s products aimed at de-risking lending to developing farmers therefore includes:

  • Khula Credit Guarantee Scheme: The scheme issues credit guarantee products to lenders (commercial banks and other financial institutions) for SMME borrowers who do not have the collateral required by lenders.
  • Land Reform Empowerment Facility (LREF): The LREF is a wholesale financing facility through which Sefa lends money to commercial banks and other reputable agricultural lenders for on-lending to land reform beneficiaries. It is capitalised by the former Department of Rural Development and Land Reform and supported by the European Union. Sefa assists beneficiaries with training and skills development by means of a training grant.
  • Post Loan Business Support and Institutional Strengthening: This product provides non-financial support to SMME businesses via intermediaries and also directly to the intermediaries. To provide these services, Sefa leverages the resources of government agencies such as SEDA and Productivity SA.

Sefa would like to strengthen alliances and partnerships in order to enhance the uptake of its products. This study investigated the critical success factors (CSFs) for collaborative partnerships between Sefa and commercial banks in order to finance developing farmers.

Why developing farmers need financing

During the apartheid era in South Africa, institutions such as the Land Bank, control boards and cooperatives provided farmers with easy access to finance, production information and marketing information. This credit environment nurtured the development of the commercial farming sector.

After the deregulation of the agricultural sector in 1996, financing concessions to the agricultural sector were phased out and direct support to agriculture, including equipment subsidies, drought relief, financing of agricultural research, was discontinued or scaled down. Financing agriculture became highly risky. Uncompetitive farmers fell by the wayside and were bought out by astute ones who expanded. The number of commercial farmers dropped significantly.

Prior to the democratic dispensation in South Africa, black farmers did not have access to comprehensive support to enable them to enter mainstream agriculture. Many entered mainstream agriculture from the early 1990s as beneficiaries of the land reform programmes, which provided subsidies to purchase land. However, these programmes did not provide enough working capital to achieve optimal production and generate recurrent income. Also, developing farmers cannot raise working capital from commercial financiers as land tenure restrictions do not permit land reform beneficiaries to use the land as collateral.

Various regulations prevent reckless lending by commercial financing institutions. This means financing will only be provided to clients who can prove repayment ability, provide security and are experienced producers, given the high risks associated with lending to agriculture. From a review of the commercial banks’ lending to the developing agricultural sector, it is clear that the banks can only effectively address these risks through multi-stakeholder collaborations.

It is generally accepted that effective financing of developing farmers can be best achieved through partnerships, particularly between government and private sector institutions.

Sources of finance for developing farmers in South Africa

In the developing world, lending to developing farmers by commercial banks is low. South African developing farmers have access to grants, concessional loans and commercial funding from various government and private sector institutions. At national level, the government has a number of programmes to support developing farmers to access land and to procure agricultural assets and working capital. The Land Bank offers a low interest rate facility for short-term credit to farmers. At provincial level, various development finance institutions offer finance to the agriculture sector. Sadly, there is limited coordination among role players involved in financing developing farmers.

Commercial financiers are increasingly playing a role in financing developing farmers, especially to comply with the Financial Sector Code’s sub-element of black agriculture financing. To minimise the risks associated with lending to developing farmers, commercial banks partner with other stakeholders who provide de-risking or risk-sharing financial instruments such as credit guarantees, insurance, concessional loans, training and mentorship as well as offtake agreements. Sefa offers at least three such products, and hence it is important to understand how its collaboration with commercial financiers can be be improved.

Very few studies have been conducted on collaborative partnerships aimed at financing agriculture particularly. It therefore makes sense to look at the critical success factors of these financing partnership models. The approach of this study was to determine the critical success factors (CSFs) for such partnerships and then to identify those that would be beneficial for Sefa/bank partnerships.

Prior to the democratic dispensation in South Africa, black farmers did not have access to comprehensive support to enable them to enter mainstream agriculture.

Partnership-related critical success factors

Firms enter into partnerships because they expect to reap certain benefits, such as risk and cost sharing, cost reduction, resource and knowledge acquisition, product and service development, speed-to-market, flexibility, collective lobbying and countering competition.

The quality of the relationship between the parties in a collaborative partnership is important. There must be trust, good communication, strong cooperation, interdependence and an acknowledgement of power positions in the relationship. The role players should believe that every action that each company takes should be for the benefit of both. When problems arise, they should find solutions together.

The maintenance and growth of the relationship is often a function of how well the firms receive the benefits in comparison to their expectations. The relationship is likely to grow as long as both firms keep realising benefits not otherwise attainable outside the partnership. For the partnership to flourish, firms should lower barriers and work together towards a common goal.

In this context, Sefa partners with commercial banks with the strategic intent to benefit from the mutual goal of providing affordable finance to developing farmers. This presupposes a high level of interdependence between the institutions given that Sefa does not have the capacity to provide and manage credit to the extent that banks do while the banks cannot provide cheaper funding nor de-risk lending to the extent that Sefa can. The two organisations therefore need to work together to share costs, risks and rewards.

Task-related critical success factors

Task-related CSFs refer to the specific tasks that a partnership has to undertake – such as sharing resources to gain synergy and advantage, acquiring more specialisation and new capabilities, and increasing the speed with which the partners can accomplish their tasks. It is essential that the partners agree on their respective task-related CSFs.

Having a common goal is not enough to make the partnership work. What the one party brings to the table might not be significant in scope or be supported by policies that translate potential opportunities into real ones for the partners. The transactional costs – such as drawing up legal documents, monitoring a partner’s activities and enforcing its obligations – may be too high. Also, public entities tend to be protective of their scarce resources. There are also concerns that private partners could divert resources from development priorities, generate exorbitant transaction costs or compromise the public partner’s  mandate.

Product-related critical success factors

Worldwide, the focus has shifted from aid to the use of blended finance and PPPs to attract private sector finance for development initiatives. This means using scarce public sector finance to attract private sector finance to help eradicate poverty, reduce inequality and realise human rights. Blended finance products that would be relevant for financing developing agriculture include funding for technical assistance, gurantee funds, concessional loans and grants to address demand and supply side constraints, as and well as progressive partnerships to enable holistic support to the developing farmers.

From a review of the commercial banks’ lending to the developing agricultural sector, it is clear that the banks can only effectively address these risks through multi-stakeholder collaborations.

How was the study conducted?

First, a total of 41 critical success factors were identified from an extensive review of literature on partnerships for financing. These CSFs addressed three main partnership issues, namely partnership design, task execution, and products and services.

The Delphi technique was used to develop a list of prioritised critical success factors for Sefa/commercial bank collaborative partnerships to finance developing farmers. This research method facilitates decision-making among experts where there is lack of empirical evidence. The method involves identifying a panel of experts to deliberate on the issue at hand in two to three rounds until they reach convergence. After each round of questions, the panel is given feedback from the responses in the previous round and asked to re-evaluate their responses in light of the feedback. In this study, high-level decision-makers in the agri-financing industry with experience of working in financing partnerships with developing farmers were targeted. A total of 18 panellists participated in the first-round Delphi survey while 12 participated in the second-round survey.

Based on the data gathered from the two rounds of surveys, average rating, criticality and significance indices were calculated for each CSF and the tests for convergence were performed. Key themes and patterns were identified in a process of data reduction and meaning making. Inductive reasoning from the comments made by the panellists was used to explain the design-phase CSFs for collaborative partnerships between Sefa and commercial banks aimed at financing developing farmers.

The net effect of the financing environment post deregulation was the elimination of earlier support to agriculture and the growing role of commercial banks in financing agriculture.

Based on the Pareto principle, CSFs should be the 20% key areas in which things must go right when establishing the partnership to ensure an 80% success rate for the partnership. If these CSFs are not adequately addressed then the partnership would fail. The CSFs would therefore consist of those factors that, if addressed when the partnership between the banks and Sefa is being formed, would lead to improved transparency, shared objectives and increased trust to enable impactful lending to otherwise financially excluded SMEs.

Let us take a closer look at the recommended critical success factors.


Partnership design critical success factors


Partnership design issue (i.e. problem being solved) Proposed critical success factor (i.e. a single, implementable idea)
Partnership brokerage 1. Using external brokers to facilitate the establishment of the partnership, OR

2. Using internal brokers from within Sefa and commercial bank to facilitate the establishment of the partnership

Defining the strategic intent and created value of the partnership 3. Reaching mutual understanding and acceptance of the strategic intent of the partnership

4. Reaching agreement on the created value for each of the partners

5. Reaching mutual understanding and acceptance of the contribution of each partner to the created value of the partnership

Ensuring strategic and organisational fit 6. Co-creating a partnering agreement that sets out clear roles and responsibilities in line with partnership objectives and a governance/decision-making structure that ensures proper accountability and efficient delivery

7. Ensuring buy-in from principals and key decision-makers of both institutions

8. Involving right from the start those individuals and teams that should drive the partnership. Adequate support and empowerment should be provided by the principals of the partnering institutions to carry out the tasks assigned to them.

Embedding the partnership 9. Allowing banks to be the lead organisation in the partnership, which should reduce points of interaction and potential conflict arising from partner differences

10. Starting small and phasing in the partnership so that the partners can learn about each other, develop effective relationships, build trust, and test and adjust the partnership’s operational and governance arrangements before moving to more ambitious plans

Boundary management 11. Using external or internal brokers to facilitate the establishment of the partnership as well as to provide support through research, monitoring, reviewing and evaluating the partnership over time
Communication 12. Participating in joint planning and goal setting

13. Sharing relevant, adequate, accurate and credible information

Trust 14. See 10 above

15. Developing appropriate metrics that are pegged on partnership goals as well as partnership progress, and systematically working to achieve them

16. Building an ongoing review, including ‘health checks’, to assess the partnership, and to determine and implement changes to improve its effectiveness

17. Avoiding fault finding in the partnership by emphasising inquiry rather than judgement, acknowledging that in interdependent relationships, difficulties usually result from the actions (or inaction) of both sides

18. Providing an exit strategy in the contract, in case the partnership proves unsuccessful or the objectives are ultimately achieved

Partnership experience 19. See 10 above

20. Acquiring partnership management capability by articulating, sharing and internalising partnership knowledge in the form of best practices


Task-related critical success factors


Partnership management capability 21. See 20 above

22. Using a dedicated partnership management function with expertise to embed partnership capability and culture across the organisation

Expertise and technological capabilities 23. Using personnel with appropriate expertise to manage the partnership (see 22 above).

24. Using appropriate fin-techs to reduce transaction costs, provide a cost-effective and secure method for financial transactions, and generate the required reports

Accountability 25. Adhering to standards that the partners have adopted and documented (compliance)

26. Sharing information on decisions and actions that have been taken as well as the performance and outcomes thereof (transparency)

27. Taking into account the other partner’s considerations in decision-making and showing how that affected the ultimate decisions and subsequent actions (responsiveness)

Appropriate financial products See under critical success factors for products and services below.
Established customer base 28. Encouraging banks to collaborate with farmer organisations, use agents and leverage group lending to distribute loans and collect repayments, and leveraging structured agricultural value chains for developing farmers
Industry attractiveness 29. Developing a funding mix for the South African agri-sector that is tailored to developing farmers, includes innovative ways to access private-sector finance and links the farmers to input supplies and agro-processing.

30. Encouraging banks to contribute to agri-policy development


Product and service-related critical success factors


Guarantee funds 31. Providing guarantee funds that are reasonably priced to reflect expected losses

32. Doing research to generate information on what reasonable pricing entails and what a successful guarantee scheme constitutes

33. Building the credit histories and understand the developing farmers’ credit worthiness (credit scoring), which will help to reduce reliance on guarantees for groups of farmers who score highly

Concessional loans 34. Offering concessional loans that target pro-reform enterprises and have a limited duration

35. Channelling concessional loans through commercial financial institutions, allocating the loans to economically viable farmers, and curbing opportunities for corruption

36. Using subsidies for support services and infrastructure that would de-risk lending to agriculture, and enabling the private sector to provide credit at market rates

Grant funding to address supply-side constraints 37. Seeking and securing grants to spend on long-term, strategic market-building activities, which will enable the private sector to lend to developing farmers. These activities include the development of innovative new lending models for developing farmers.
Demand-side technical support 38. Providing comprehensive and well-co-ordinated technical support for developing farmers, which includes financial literacy, regulatory and quality standard compliance, and governance
Progressive partnerships 39. Bringing other risk-sharing and technical support partners to the Sefa/banks partnership in order to lower the cost of service, reduce information asymmetry and promote a long-term view of the sector. These partners can include value chain actors, insurance companies and fin-tech providers.
Data 40. Developing and enabling the use of appropriate fin-tech products and solutions to enhance the credit scoring capabilities of financing institutions (see 37 above).

41. Mining available data to better understand farmer behaviour in terms of credit usage

Collaborative partnerships can drive investment in agriculture to help feed the world’s growing population.

What did the study find in terms of CSFs for partnership design?

Defining the strategic intent and created value of the partnership: This CSF emerged as the most critical for partnership design. Hence, there should be deliberate effort at senior management level to define the strategic intent and explain the created value of the partnership, given that Sefa is the main risk-sharing partner for SMME financing in South Africa. This highlights the importance of strategic fit or partner complementarity between state-owned enterprises and the private sector. Thus, while the state and private sector may express willingness to collaborate, effective models that benefit the farmers and align with both state and private sector objectives are yet to be designed.

Trust: Interestingly, while lack of trust is usually a key reason for poor collaboration between the state-owned and private sector entities, trust factors did not feature among the top-tier factors in this study. This corresponds with research that says partners should start with clearly defined and mutually-agreed objectives and responsibilities, then take a risk and implement the partnership with the aim of building trust through the collaboration. Building trust can help to reduce transaction costs, induce desirable behaviour, reduce the extent of contracting and facilitate dispute resolution.

Communication: Communication ranked highly in this study. This was implicit in the panellists’ use of phrases like “alignment of processes”, “understanding”, “outline intentions upfront”, “reach agreement”, and “have a clear view” in their comments. Two communication aspects that were not captured in the literature review but came through from the panellists were safeguarding confidential information and conflict resolution.

The relationship is likely to grow as long as both firms keep realising benefits not otherwise attainable outside the partnership.

Conflict management: This must be incorporated in the partnership design. Various researchers found that having a common goal and quality communication increased the chances of a successful partnership. Similarly, where there was trust, partnership problems seemed temporary and could be resolved. The findings confirm the importance of defining strategic intent and setting common goals as a way to minimise the likelihood of conflict.

Embedding the partnership: Embedding the partnership can only happen once the partnership goals have been defined and the structures, processes and programmes have been accepted by the partners. Hence, CSFs related to embedding the partnership ranked lower than those for partnership design. It is important that the partners know how to handle potential setbacks and how to accumulate interaction value. Building interaction value is an ongoing process that culminates in partnership capabilities. Internal partnership brokerage was strongly supported among the partnership-embedding CSFs. This makes sense given that in large institutions, institutional memory of how things are done is soon lost with labour migration. A partnership management function within the institutions can help to ensure that partnership information and learnings are used to build partnership capability.

Partnership experience: It was asked why, after more than 10 years of Sefa’s existence, the agency and commercial banks had not developed a workable partnership model for Sefa’s products. This may imply that as much as Sefa and the banks have been collaborating, they have not done so well enough to develop partnership capability in order to provide finance to developing farmers. Knowledge of alliance capability is pertinent for the Sefa/commercial banks partnerships given the lack of information about the management of such relationships.

Having a common goal is not enough to make the partnership work.

What did the study find in terms of CSFs for partnership tasks?

Developing a funding mix: The task-related factors either facilitate or inhibit the successful completion of desired partnership objectives. Given that the main task at hand is the financing of developing farmers, it is not surprising that developing a funding mix is ranked highly. The South African agri-sector is currently exploring ways to narrow the gap between developing farmers’ financing needs and the funding that is available to them through the establishment of an agri-development agency.

Lending to developing farmers: There seems to be a lack of understanding developing farmers’ appetite for bank credit in South Africa, coupled with minimal lending to them. There are indications that commercial banks are the lenders of last resort to developing farmers after grant funding and other softer loans. Hence, there is a strong need to understand the farmers’ needs and the products that would suit them.

Transparency and compliance: Partner-to-partner accountability ranked highly in this study. Transparency implies accounting for decisions and actions taken whereas compliance implies being held responsible for the same. Another component of accountability, namely responsiveness, which refers to inclusiveness, assurances, reflection, listening and flexibility, was not as highly rated. The acknowledged differences between state-owned and private sector institutions as well as the history of the slow uptake of Sefa’s products by financial institutions suggest that such accountability issues are critical for the Sefa/commercial bank relationship. Interestingly, there is far less literature on partner-to-partner accountability compared to other partnership issues.

Industry attractiveness: Safeguarding industry attractiveness by advocating for a policy environment that is conducive for economic growth ranked highly among the enablers of Sefa/commercial bank partnerships. This is important given the direct relationship between the level of confidence in the sector and the level of investment in the sector. Advocacy for progressive policies and programmes that promote effective partnership models to encourage inclusive financing is therefore essential.

Worldwide, the focus has shifted from aid to the use of blended finance and PPPs to attract private sector finance for development initiatives.

What did the study find in terms of CSFs for partnership products and services?

Progressive partnerships: Partnerships for enabling technical support and other services that de-risk lending to developing farmers were seen as quite critical. This has led to a strong focus on blended finance models and progressive partnerships to manage risks, reduce transaction costs, improve transparency and use limited public sector finance to leverage private sector investments into agriculture. However, partnerships for inclusive financing of agriculture still need to mature.

Technical support: Technical support includes advice, assistance and/or training for the developing farmers. This support can help to reduce transaction costs and operational risks, and increase developmental impact. Digital tools and platforms have the potential to generate new networks and forms of cooperation, and help to overcome information asymmetry. However, the farmers’ access to digital platforms and digital inclusion still have a long way to go.

Guarantee funds: The panellists supported the use of credit guarantees but were concerned that Sefa might not have enough funding for its guarantee scheme. Guarantee funds are important for developing farmers who have limited conventional security. Yet the state seems to ignore this in many of its farmer financing schemes. Instead, the government prefers direct lending or grant funding to beneficiaries, despite the fact that it is weak at screening loan applications. Also, direct lending and grants tend to distort credit markets, and may lead to the collapse of agricultural credit and reduce the appetite for commercial loans as the farmers await grants and cheaper credit from the state. Furthermore, guarantee repayments constituted less than 8% of the total running cost of the fund, implying high overhead costs with low direct expenditure on the fund’s primary objective. Political interference in the management of the fund is a possibility. While noting the advantages of government-provided guarantee schemes, there is a call to carefully evaluate the use of public funds for such schemes and to ensure that their performance is aligned with developmental goals.

Based on the Pareto principle, CSFs should be the 20% key areas in which things must go right when establishing the partnership to ensure an 80% success rate for the partnership.

Concessional loans and grants: The panellists agreed that concessional loans for developing farmers should be provided, with long tenor, allowing them to build up equity. Generally, the government is reluctant to offer concessional loans through commercial banks for fear of subsidising the banks’ earnings – hence the preference for direct funding of farmers through equity grants and direct lending. The downside is that the state is not set up for credit assessment and the provision of loans. Therefore, concessional loans to farmers should rather be disbursed through commercial banks. The banks should be allowed to recover the cost of lending in a fair and transparent manner. The efficacy of commercial banks to handle concessional loans is exemplified in the success of Sefa’s LREF. Over the years, the South African government has provided grants to farmers through various programmes. However, not many of these collaborative partnerships have been successful. Given the poor success rate and diminishing government funds, there is now a keener interest in blended finance models to provide developing farmers with access to affordable finance and to reduce their reliance on grants.

Funding for supply-side constraints: Funding to address supply-side constraints has not gained much traction. To address supply-side constraints, donors should have transparent long-term strategies and collaborate to build sustainable smallholder finance markets. This would include easier access for grantees to grants from multiple donors, access to other sources of private capital and long-term government subsidies, and better reporting. It is said that donors should provide grants for advocacy and policy liaison, knowledge base development, the support of progressive partnerships and priming markets for investment in order to create an environment that allows smallholder finance to scale up quickly and inclusively. Donors should also consider providing grants and concessional capital to individual financial service providers and lenders to offset the costs of developing innovative financing models.

Closing remarks

The findings indicated that defining the strategic intent and created value of the partnership was critical for successful Sefa/commercial bank partnerships. Strategic and organisational fit, which enable partners to align and collaborate, was also deemed highly critical. This was followed by transparency and compliance with partnership rules.

… direct lending and grants tend to distort credit markets, and may lead to the collapse of agricultural credit and reduce the appetite for commercial loans as the farmers await grants and cheaper credit from the state.

The main service that the Sefa/commercial banks partnerships should provide is demand-side support, including a funding mix, to raise the productivity of developing farmers in collaboration with relevant sector partners. The principal product would be guarantee funds to de-risk lending to such farmers. Guarantee funds have been used extensively in the developed and developing world to improve the performance of financial intermediation in the SME sector. It is therefore suggested that government should direct more funding to guarantee funds.

Interestingly, trust, partnership experience and partnership brokerage did not rank as highly as they are positioned in other studies. There was strong support for using internal as opposed to external brokers when formalising such partnerships, with a view of retaining much of the partnership building capability within the institutions.

These critical success factors will be useful for the national policy framework for collaborative financing of developing farmers that is currently being developed in South Africa.

  • This article is based on the MPhil in Development Finance research assignment of USB alumnus Dr Langelihle Simela. The title of her assignment is “Critical success factors for collaborative partnerships between sefa and commercial banks for financing developing farmers of South Africa”.
  • Her study leader was Dr Nyankomo Marwa, Senior Lecturer in Econometrics and Development Finance at USB.

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