Expropriation without compensation may lead to a massive failure by the Land Bank to recover loans and drive widespread bankruptcy and ultimately a major economic crisis.

Ian Matthews‚ head of business development at independent investment banking firm Bravura‚ said it would be critical for expropriation without compensation to be cautiously implemented so that the country’s financial systems were not toppled through lack of foresight.

Matthews said that in the Land Bank’s 2018 annual report‚ released earlier this week‚ the top risk on a list of 18 principal risks was the issue of land reform and the impact of the possibility of expropriation without compensation.

In that report‚ Land Bank chairperson Arthur Moloto said that expropriation of land without compensation could bankrupt the bank by setting off a domino effect of defaults that could make the Land Bank liable to immediately repay its entire R41bn funding portfolio due‚ which it would not be able to settle.

Matthews had warned earlier this year against the systemic impact that land expropriation policies would have on South Africa’s broad banking system. He said Moloto’s statement confirmed that this was a very real threat.

According to Matthews‚ it was the Land Bank’s view that the land reform process might have a potential positive result if more land was brought into production.

He said given the Land Bank’s promising financials for 2018‚ showing growth‚ sound governance and a solid strategy towards sector transformation through considered and appropriate means‚ it would be foolhardy for the South African government to act hastily.

Matthews said the effect of expropriation without compensation on the Land Bank’s carefully constructed and considered funding and transformation strategy was far more complex than the South African government might have considered.

“In the Land Bank’s financial report‚ Moloto states that investors would lose their investment appetite. Any funding would be expected to come at an added risk premium due to perceived higher risk levels.”

The Land Bank largely depends on funding sourced from the capital and debt markets and depends on commercial investors to fund its commercial and development loan activities. “Any funding would be expected to come at an added risk premium due to perceived higher risk levels.”

Matthews said downward pressure would be exerted on the bank’s thin interest margins and levels of profitability. This would further contribute to a deterioration of its financial sustainability. “We need to ensure that the economy is rigorously protected from negative impacts in order to ensure a sustainable agricultural sector that provides strong agricultural production‚ employment creation and food security.”