By Ronnie Wonder
The agricultural sector employs 80% of Uganda’s rural population, but it has often been shunned by financiers, due to high risks associated with it such as crop failure, floods, droughts, pests and diseases. The sector’s productivity challenges can be reversed through increased financing of large scale projects. Despite the sector contributing 20% to the country’s GDP, lending to the sector accounts to just about 7% of the total credit available to the private sector – mostly short term capital. Will the Agricultural Credit Facility available (ACF) through the Bank of Uganda (BoU) help farmers reap from what they sow?
BoU’s Head of Agricultural Credit Rosette Bamwine, spoke to The CEO Magazine on the bank’s efforts to support this vital sector in light of public outcry that the low up take of this credit facility is premised on the lack of adequate public sensitization.
How does this facility operate and what are its objectives?
The ACF was set up by the Government of Uganda (GoU) in 2009 in partnership with Commercial Banks, Credit Institutions Uganda Development Bank Limited (UDBL), Micro Deposit Taking Institutions (MDIs), all referred to as Participating Financial Institutions (PFIs). BoU is the fund administrator.
The facility’s key objective is to promote commercialization of agriculture through provision of medium and long term loans focusing on value addition (Agro-processing), Agriculture, Modernisation and Mechanisation.
The loans are disbursed to farmers and agro processors through the PFIs. The facility operates on a refinance basis in that the PFIs disburse the whole loan amount to the final borrower (sub- borrower) and applies to BoU for the 50% GoU contribution.
Who can access this facility?
Private sector businesses or individuals operating in Uganda and engaged in agriculture and agro processing of raw materials and intermediate products originating from crop and livestock production, fish farming, poultry farming / breeding, bee keeping are eligible for financing.
Which projects are eligible for financing?
The acquisition of agricultural machinery and equipment/ fixed assets for agro- processing, agriculture mechanization and modernization, post handling equipment, storage facilities and any other related agricultural and agro processing machinery and equipment.
However, agricultural inputs required for primary production will be considered provided this component does not exceed 20% of the total project cost for each eligible borrower.
The scheme is not available for financing working capital for trading in agricultural commodities, the purchasing of land, engaging in forestry and refinancing existing loan facilities.
What are the terms and conditions one should take note of?
Sub loan amounts are determined n the basis of assessments and appraisal of project costs and genuine credit needs in accordance with the lending policy of the PFI and are designated in Uganda Shillings. The PFIs then disburse the total loan amount (100%) to the sub-borrower on the following terms;
a. Loan Amount
The maximum loan amount to a single borrower is up to Ushs 2.1 billion. This amount can be increased to Ushs 5 billion on a case by case basis – for eligible projects that add significant value to the agricultural sector and the economy at large.
b. Loan Term & Grace Period
The maximum loan period should not exceed 8 years, minimum should be 6 months and grace period is up to a maximum of 3 years
c. Interest Rate
To the final borrower, this is up to 12% per annum. The 50% GoU contribution is disbursed to the PFIs at zero interest (interest free) though rates are subject to review by stakeholders.
d. Facility Fees
Fees charged by PFIs to eligible borrowers should not exceed 0.5% of the total loan amount. Legal documentation and registration costs are borne by the borrower
How can an aspiring farmer in the rural country side with no access to a financial institution and knowledge of agribusiness benefit from this facility?
The core objective of this facility is to promote and support commercializaton and mechanization which are ideally large scale project.
However, aspiring farmers can organize themselves into registered and well managed Savings and Credit Cooperative Organizations, Village Banks and other linkages with clear objectives for which they seek support
What are the achievements, challenges, opportunities and future of this facility?
As at December 31, 2014, 18 financial institutions participated in this undertaking, with 295 eligible projects across the country benefiting. The outstanding loan portfolio amounts to Ushs 158.5 billion of which GoU contributed Ushs 77.9 billion, PFIs contributed Ushs 80.5 billion. Out of this, SMEs comprise 58% (loans amounting 200 million and below).
Challenges and Solutions
• Poor documentation and the complete lack of records since credit provision is pegged on past performance. Farmers should keep records.
• PFIs, being partners in this endeavor are not doing enough to sensitise the masses and thus should do more for mutual benefits that may prevail.
• Poor and complete lack of storage facilities renders farm products to spoil before reaching the market. The ware house receipt system is helping out but modern storage facilities should be erected
• Long project cycles may not attract financing as the turnaround may be uncertain. Short/ medium project cycles should be
• Lack of suitable product to meet rural small scale farmers. A memorandum of understanding will be reviewed to enable institutions like Post Bank support small farmers.
• MDIs are not doing enough with sensitization perhaps owing to financial constraints but a memorandum of understanding is to be reviewed to enable them have their own schemes as they work with micro farmers.
• Many micro farmers do lack appropriate collateral to access credit. Provisions should be made to allow those with chattels to use them collateral instruments.
Way forward
The steady growth in the portfolio is attributable to the confidence gained by PFIs after venturing into agricultural finance under the ACF guarantee.
We are playing our role increasing agricultural productivity through agro processing, acquisition of machinery, and equipment, tractors, irrigation and green house facilities, farm expansion, storage facilities and refrigerators among others with the bulk of funds going to Agro- Processing but everyone should contribute to promote agribusiness.
