- Numerous risks. In fact, Ugandan commercial banks have acknowledged that from past experiences, they have been careful about extending credit to agriculture because of the numerous risks, including lack of usable collateral, high transaction costs due to remoteness of clients, low output, poor infrastructure and inconsistency in production.
A 2018 World Bank Report titled ‘Closing the potential-performance divide in Ugandan agriculture’ revealed that the sector contributes 25 per cent of national GDP and employs 70 per cent of the Ugandan population.
The sector also supports economic growth and economic inclusion, particularly for women and youth. Noteworthy, however, is that small-scale farmers are the majority constituting about 85 per cent of the farming community, with 12 per cent being medium scale farmers while 3 per cent are large scale farmers.
In addition, agricultural output primarily comes from smallholder subsistence farmers, who own an average farmland area of 2.5 hectares and are not commercial or mechanised. This means they continue to attract little attention from commercial banks.
In fact, Ugandan commercial banks have acknowledged that from past experiences, they have been careful about extending credit to agriculture because of the numerous risks, including lack of usable collateral, high transaction costs due to remoteness of clients, low output, poor infrastructure and inconsistency in production.
Some of the other major challenges facing the sector include lack of linkage between research and farmers, low use of fertilizers, low coverage of irrigation, land fragmentation, low level of value addition, lack of agricultural machinery as well as vectors and diseases and adverse weather conditions.
As a result, farmers face challenges in accessing credit from banks as the conditions for farming are dynamic and, therefore, considered high risk. This has necessitated the debate on how financing of agriculture can be made attractive to financial service providers.
There has been effort by the government, which set up the Agricultural Credit Facility (ACF) at Bank of Uganda (BoU) in partnership with commercial banks, Uganda Development Bank (UDB) and MDIs. The basic goal is to support mechanisation of agriculture and boost agro-processing through facilitating acquisition of the requisite machinery and equipment. The facility targets medium to large-scale commercial farmers.
As of March 31, the scheme had registered total disbursements amounting to Shs332.04 billion extended to 551 eligible projects across the country. The government had contributed Shs167.79 billion while the remainder is contributed by banks.
There is a plan to introduce a block allocation of up to Shs1.5 billion to the participating financial institutions, to particularly address the needs of the small and micro-borrowers. This is expected to allow for the extension of collateral-free loan facilities of up to Shs20 million to commercially viable small and micro-enterprises.
The private sector needs to further de-risk the agricultural sector so as to encourage private lenders to consider increasing their lending to small scale farmers.
The Uganda Bankers Association (UBA) believes that there is need for a deliberate conversation by all stakeholders about more financing of this sector leveraging on several perspectives for mitigating risk, including market incentives, technology, insurance, research, specific policy frameworks and a wider support and collaborative framework to ensure sustainable growth and investment in the agriculture sector of Uganda.
This year, the UBA Annual Bankers Conference under the theme: ‘De-Risking Financing and Investment in Agriculture to promote decent youth employment and inclusive growth,’ will be held on July 16 and the aim is to have deliberate conversations on how financial institutions can better support the agriculture sector.
The conference is expected to focus on limiting factors constraining the financing of this sector and innovative ways of addressing these constraints in order to unlock the flow of credit plus commercial agriculture and agro-processing.
Ms Amito is the head communications & Corporate Affairs, Uganda Bankers