Despite rendering livelihoods for greater than half of Uganda’s working inhabitants and contributing practically 35 per cent of export earnings in accordance with Uganda Bureau of Statistics estimates (UBOS), agriculture stays unattractive to significant, prudent financing.
Agricultural Finance Year Book, 2022, put collectively by Economic Policy Research Centre (EPRC) and members of the Agricultural Finance Platform corroborate the aforementioned state of affairs.
Analysis of recent agricultural mortgage disbursements by class of Regulated Financial Institutions (RFIs) reveals that industrial banks are nonetheless the primary contributors to new mortgage advances to Uganda’s agricultural sector, accounting for over 60 p.c, with Credit Institutions, Micro-deposit taking Institutions and lower-level monetary establishments contributing the remaining half.
“Although having wider geographical spread and greater capacities to adopt technological innovations and mobilise financing for on-lending, commercial banks mainly target large-scale farms and agricultural firms involved in commodity processing,” reveals the 2022 Agricultural Finance Year Book, applauded by Finance Minister Matia Kasaija as providing in-depth evaluation of the agricultural financing panorama in Uganda.
Additionally, EPRC researchers additionally discovered that RFI have stringent mortgage necessities and restricted outreach exterior city areas. These attributes restrict access of small-holder farmers to Agricultural Credit Financing (ACF) and different sources for agriculture held by industrial banks.
Despite authorities’s interventions to de-risk the agriculture sector and appeal to personal credit score, banks nonetheless label farmers as ‘risky.’ PHOTO/File
As if that’s not dangerous sufficient RFIs additionally concern that ACF lending yields far decrease curiosity returns and earnings earnings in comparison with different agricultural/business merchandise, constraining the uptake of the loans disbursed to farmers and agro-processors at extra beneficial phrases than are normally available underneath standard banks.
Ignored retailers
According to 2020 UBOS statistics, barely greater than seven p.c of households within the nation get capital for business growth from Savings and Credit Cooperatives (SACCOs). This is already greater than the variety of folks with formal accounts with industrial banks within the nation. In different phrases, smallholder farmers – most of whom are major producers of crops and livestock –access credit score from native SACCOs, Village Saving and Loan Associations (VSLAs).
They additionally rely on Rotating Savings and Credit Associations, Community-Based Organisations and members of the family as an alternative of ACF – which comes on the tail finish, if in any respect. Sadly, these farmers would slightly access exorbitant companies of money lenders than endure labourious paper work required of ACF channeled by industrial banks.
Sector consultants and researchers advocate that authorities devises extra useful monetary supply mechanisms to deepen uptake of ACF – the nation’s largest public-private programme for agricultural credit score supply whose rate of interest exceeds 12 per cent for small holder farmers – a cut price in comparison with 20-30 p.c lending charges charged exterior the ACF association.
These supply mechanisms, in accordance with sector researchers, might entail tier 1 Participating Financial Institution (PFIs) liaising with decrease Tiers, similar to SACCOs and VSLAs, to instantly ship ACF funds.
Bleeding value-chain
The evaluation of agriculture sector worth chain additionally disclosed that the volumes of credit score circulate in direction of manufacturing and agro-processing have been highest whereas credit score circulate in direction of agricultural leasing has remained persistently meagre, confirming the fears that major producers – small holder farmers within the worth chain stay a foot observe within the grand scheme of issues. This giant decline in disbursement of recent loans for agriculture in the course of the interval emanated from the emergence of the Covid-19 pandemic in 2020 and the resultant measures undertaken by monetary establishments to cut back well being dangers and keep capital and liquidity buffers.
Consequently, banks elevated their funding in authorities.
Data reveals that, total, since reopening of the financial system in 2021 following the Covid-19 financial slowdown of 2020, agricultural credit score circulate in direction of manufacturing, processing and leasing registered vital recoveries.
Private sector credit score circulate to the agro-processing section registered the very best restoration in agricultural mortgage disbursements, rising by twofold from Shs186 billion in 2020 to Shs357 billion by December 2022, in accordance with the 2022 12 months e book evaluation.
According to BoU evaluation, fast growth of credit score for agro-processing was partly enabled by alternatives that emerged for agro-processing which the onset of the Covid-19 pandemic curtailed meals access and distribution and elevated demand for maize flour.
A girl sells greens in Kalerwe market. PHOTO/MICHAEL KAKUMIRIZI
This, coupled with the then rising inflow of refugees from neighbouring international locations, catalysed want for investments in grain processing for worth addition. As such, banks elevated financing for acquisition of milling machines for maize, wheat, rice and different grain commodities.
After agro-processing, agricultural credit score circulate to the manufacturing section additionally registered vital enchancment, rising by 22 p.c from Shs290 billion in 2020 to Shs355 billion by December 2022, going by the 2022 Year Book evaluation.
This restoration is basically buoyed by amendments to the ACF Memorandum of Agreement (2018) that allowed for financing of agricultural inputs, farm growth, and by the revitalisation of efforts to operationalise the Block Allocation Product, a mortgage product underneath the ACF that targets smallholder farmers and micro-borrowers engaged in major manufacturing.
Whereas the circulate of credit score in direction of agricultural leasing additionally improved, its quantity has remained persistently meagre in comparison with lending for different actions; with annual new mortgage disbursements for leases averaging solely Shs10 billion within the research.
Further constraining progress in agricultural leasing are unfavourable tax legal guidelines for leases related to the shortcoming of lessors to say capital allowances on leased property. In addition, due to capability gaps, significantly restricted native leasing experience inside Uganda’s monetary sector, banks want providing asset loans slightly than leases.
Stagnant long run credit score
Did you recognize that new loans disbursed to the agriculture sector will not be solely largely short-term in nature, but in addition mature in lower than one 12 months? The EPRC researchers additionally observe that whereas the amount of recent short-term mortgage disbursements repayable in lower than one 12 months declined by 28 p.c, from Shs296 billion in 2021 to Shs212 billion in 2022, quick time period credit score of this nature nonetheless contributed 48 p.c in whole new agricultural credit score disbursement by 2022.
The researchers additionally discovered that progress of the medium-term credit score to the agriculture sector repayable inside three years grew by 20 p.c, rising from Shs147 billion in 2021 to Shs177 billion in 2022. On the opposite hand, long-term credit score repayable past three years stagnated at Shs53 billion within the final three years.
“The above trends in agricultural lending reflect the riskiness of the sector despite past Government interventions to de-risk it and attract private credit,” reads the sector evaluation report.
Meanwhile, the report observes that Insurance scheme, industrial banks stay reluctant to usher in affected person capital whereas the banks and different RFIs are little interested in agricultural de-risking programmes, such because the ACF, attributable to prolonged mortgage write-off processes, and to lack of authorized framework for the operation of Credit Guarantee schemes.
Policy choices
Adopting digital channels in disbursing credit score to the agricultural sector to extend outreach whereas limiting service prices is one thing that authorities should take into account.
Already use of monetary technological (FinTech) improvements for disbursement of recent loans to the agriculture sector quickly elevated following the emergence of Covid-19 in 2020, with particularly progress in company banking. Nevertheless, disbursement of recent loans stays decrease than their pre-Covid-19 ranges.
The report additionally factors out that authorities ought to increase web connectivity and infrastructure, cut back cost of web and energy, guarantee energy reliability, and cut back taxes on smartphone devices to extend uptake of agricultural credit score by new digital channels.
To handle limitations that restrict advances for agricultural leases, EPRC researchers and sector analysts concur that authorities ought to streamline and ease taxation associated to leases; and put in place strong authorized and regulatory frameworks for agricultural leases that can allow RFIs to simply situation leases.
Government ought to streamline the Agricultural Credit Guarantee schemes. Terms and circumstances ought to be clearly spelt out for the operation of the schemes that can appeal to personal capital to the agriculture sector.
The govt director of Federation for Small and Medium sized Enterprise (FSME), Mr John Walugembe, says the bureaucracies round accessing credit score ought to be dropped because the system is a delay for majority would-be beneficiaries of ACF.
The report additional recommends that, contemplating that majority of agricultural debtors who’re small-holder farmers receive their credit score largely from Tier IV monetary establishments, authorities ought to institute fast measures to include decrease Tier (Tier IV) monetary establishments into the supply of the Agricultural Credit Facility loans. This will entail working with the Uganda Microfinance Regulatory Authority to hyperlink registered microfinance establishments with Bank of Uganda regulated monetary establishments.
