KAMPALA – Farmers continue to report shortage of capital and credit as their single most constraint to improving production. Part of the reasons is that financing agriculture is still unappealing to financial institutions.
According to Uganda Development Bank (UDB), several sector challenges are responsible for the trend. For instance, the bank notes that private sector credit to agriculture has remained around Shs1.8 trillion for over 10 years, because of obstacles to productivity, production and farmers’ incomes.
On the other hand, credit to the agricultural sector registered the highest growth, as regards financial resources extended to the private sector, yet it remains low at 12.9 per cent of total credit extended as at December 2018.
“On average, about 7.5 per cent of the 12 per cent to 13 per cent is concentrated in secondary production that is agro-processing and trade which the finance sector deems risky. The bias against primary agricultural production has been attributed to a litany of issues emanating from farmers, financial service providers and the general value chain,” a UDB document reads in part.
The finance sector scores the agricultural sector as risky hence the high cost of credit. It lacks information on farmers’ production history, a situation that leaves banks wondering whether the loans will be paid.
“Overwhelming reliance on cash in agriculture related transactions means that farmers are unable to produce formal transaction histories of inputs and records of sales. This immediately limits their ability to access credit because financial institutions are unable to assess their needs for credit and evaluate their ability to pay back the loans,” Mr Raghav Prasad, Mastercard division president, Sub-Saharan Africa says.
What is also happening is that farmers lack collateral security, which is needed to acquire loans. The industry, on the other hand, does not have alternative security that farmers can use.
Farmers are also inadequate as regards to human capital. This means they are limited in terms of managing their processes or even seeking out business opportunities. Banks believe this makes farmers poor at marketing, planning finances, using business plans or business records.
The blame does not entirely lie with farmers. Current credit lines are not working because banks are yet to fully understand the agricultural value chains and this is why the structure of loans used by banks does not suit Uganda’s typical farmer in terms of cost. The available funds, UDB notes, are short term with average tenure of five years and at an average cost of 20 per cent per year.
Intervention
The failure of financial institutions to fully adapt to financing agriculture has forced government to intervene, having put its own efforts on addressing market failures.
Government increased funding from Shs480bn in 2015/2016 to Shs1 trillion which is about 3.2 per cent of the financial year 2019/2020 budget.
Pelum Uganda, in its 2018 study on Contribution of the 2017/2018 budget to the attainment of the agricultural sector strategic plan, views this figure as way below the 10 per cent that government declared it would allocate in the Maputo declaration. Government insists it has put in place other interventions including the agricultural insurance scheme that uses Shs5bn every year to pay 50 per cent of premiums for farmers’ losses and recapitalizing UDB with an additional Shs103.5bn this financial year.
In another effort to provide medium, and long-term financing to agriculture and agro processing, government alongside commercial banks and other financial institutions set up the Agricultural Credit Facility (ACF) in 2009. No maximum loan amount with interest rates capped at 12 per cent.
“Everyone interested in farming qualifies for the loan. You must have an account in the bank, you must be credible that is borrow and pay back well. We finance almost all activities in the value chain, apart from traders importing, unless it is grain trade. We do not finance purchase of land, planting trees or refinancing an existing loan,” Ms Rosette Bamwiine, head of marketing ACF says.
Minister of Finance Planning and Economic Development Matia Kasaija, during the budget speech reading said the facility disbursed Shs332b by March 31, 2019, to finance 551 eligible projects.
This enabled borrowers to establish large capacity agro processing facilities, expand grain trade and investment in warehousing and expanding farm infrastructure.
Prof Emmanuel Tumusiime Mutebile, governor Bank of Uganda says they will continue to work with government and commercial banks in promoting affordable agricultural finance through ACF were they are encouraging all borrowers to take advantage of it.
