FIRST National Bank (FNB) and the aid agency USAid have announced a R300m guarantee scheme to support lending to black emerging farmers and agribusinesses over the next seven years.

The agreement was signed by USAid's southern Africa director, Carleene Dei, and Sizwe Nxasana, CEO of FNB parent FirstRand Bank, in the presence of US Treasury Secretary Henry Paulson and Science and Technology Minister Mosibudi Mangena in Cape Town on Friday.

"It is very important to have economic growth with inclusion," Paulson said. "The idea is to get capital to the people and to entrepreneurs."

South African financial institutions have been reluctant to lend to the emerging farming sector because land reform ownership structures make it difficult to put up land as collateral for loans.

Although SA's banks have undertaken to collectively increase their lending into agriculture to R1,5bn by December next year, there have been few successful loan finance arrangements between the private sector and emerging farmers.

Commenting on risk factors, FNB's head of enterprise development, Heather Lowe, said ownership structures that resulted from land reform contributed to the risk. However, the plan was not to simply fund beneficiaries of land reform.

"An important part of risk mitigation is to ensure that farmers receive nonfinancial support, such as mentorship and training, and to help them get their businesses in order.

"Although the risk is halved with USAid's contribution, borrowers will have to go through the normal agricultural credit application. We are still using depositors' money and we also have to look after the interests of USAid," Lowe said.

Land reform efforts of the government have generally benefited communities, as opposed to individuals, and the transfer of land has gone through community property associations -- making it difficult to offer land as collateral against enterprise lending from the private sector.

Earlier this year, Agriculture and Land Affairs Minister Lulu Xingwana said that she reserved the right to veto any sale of land transferred under land reform. This meant it was unlikely to be available as collateral.

Commenting on the announcement, the acting director-general of land affairs, Thozi Gwanya, said the department would back the FNB-USAid agreement provided that there was an assurance it would not lead to overindebtedness among emerging farmers.

"We would like to know how many black people are going to benefit from the scheme," Gwanya said.

"SA's banks did say they would increase their lending to agriculture to R1,5bn by December next year and that they have already spent R700m of that amount, but when the government asked them about it they could not say how many black people have benefited from those loans."

Nxasana said the target for this scheme was black farmers in the middle segment of the spectrum, but communities would also benefit if they formed entities such as companies that could enter into loan agreements.

He said FNB was developing a range of solutions through various service level agreements with outside agencies, such as USAid, to provide guarantees for the portion of the risk that would ordinarily be covered through bonds on assets and property.

The loans provided through the scheme would attract interest rates that were risk-related, but would not be "prohibitive", Nxasana said.

The guarantee scheme would contribute to FNB exceeding its financial sector charter targets of R375m by December next year.

The bank said it would allow it to achieve two of its black economic empowerment targets: volume-based lending to increase the number of emerging farmers as clients; and to increase its rand-value target through large black economic empowerment ventures.

"The importance of bringing emerging farmers into SA's mainstream farming economy cannot be overstated," Nxasana said.

By Neels Blom, BusinessDay JHB