Financing of land purchase by small‐scale farmers

Abstract

Binswanger attributes the problem facing poor people in financing land purchase to the inclusion of a real capital gains component in the price of land. This article attributes it largely to a cash flow problem which arises from positive inflation rates. The Ricardian rent return to land in South African agriculture is estimated at between 4 and 5 per cent while the Land Bank's interest rate is 15 per cent. Interest payments on a bond can therefore not be met from rents to land alone. If, as an extreme situation, the expected inflation rate were zero, farmers might have been able to borrow funds at 4 to 5 per cent. To bring debt servicing in line with projected cash flows in the real situation, mortgage interest rates could be subsidised; or, in an alternative affirmative action, the state could contribute towards the purchase price of land. These alternatives are discussed.

Notes

Respectively University of Natal and Development Bank of Southern Africa.