While agriculture’s share of national GDP has fallen below 30 percent over the last 40 years, about 70 percent of the population derives their livelihood from agriculture. Therefore, increasing the productivity of our farms will have a huge ripple effect throughout the economy.
While there are many components to increasing the productivity of our rural areas, agricultural finance is easily the silver bullet that will tie all these components together.
The Bank of Uganda’s latest State of the Economy report showed that of the total private sector credit as of April 2024, agriculture accounted for 11.8 percent behind unsecured loans to individuals, trade, and manufacturing. Given how many people rely on agriculture for their livelihood, one would have expected these figures to reflect this reality, but no.
For historical reasons, the way we practice agriculture—smallholder, subsistence farming—does not immediately lend itself to formal financing.
To engage with the sector, traditional banks need to have a sufficient guarantee of payback, which means predictable cashflows and the ability to attach property to recover the loan in case of default.
At PostBank, we have dedicated resources to this challenge for the last two decades, which is why we are easily the biggest lender to the sector. During that period, we have made some interesting discoveries and devised innovative solutions to mitigate the sector’s unique risks.
First, the agriculture sector is a whole value chain that starts with input dealers and goes through the primary producer to the retailer or exporter. In between these two ends are the aggregators, transporters, traders, and processors, to name but a few.
We have made some serious inroads into the producer part of the value chain, which constitutes a major component of our Agriculture portfolio, with over 68% ‘’sh183b’ dedicated to agriculture.
While others may focus on the easier and more lucrative parts of the value chain, it would be difficult to ignore the initial producer.
From a financing perspective, these provide unique challenges that require a different mindset from that of traditional bankers. Most farmers are small producers working less than five-acre pieces of land, have little to no collateral, employ traditional, low-yielding farming methods, and are at the mercy of the weather, whose patterns have been rapidly changing lately.
There are clearly knowledge gaps among our farmers, and we have tried to mitigate these by conducting farmer forums around the country. At these forums, we not only educate farmers on better agricultural practices but also link them to credible suppliers and traders and educate them about our financial solutions tailored to the sector. We also encourage them to associate to improve their bargaining power with suppliers and off-takers of their produce.
For instance, we have seasonal working capital loans with a tenure of two to four months to help farmers prepare their fields and maintain and harvest the crop. These can be as little as sh700,000 an acre. We used to have challenges with farmers diverting resources to other needs. Still, we have mitigated this by ensuring personal bankers with agricultural knowledge handle agriculture financing, timely seasonal financing, and phasing out the disbursement of specific loan amounts upon attainment of certain milestones.
Given the small size of our farmers and the dispersed nature of their farms, this can be a very costly endeavor.
For agricultural financing to work, other partners in the sector must support the effort. We have found valuable partners in the field who insure, subsidize our operations, and provide extension services, and even the government has supported the commercialization of Agriculture by providing access to affordable credit under the Agricultural Credit Facility (ACF) below commercial lending rates. Partnerships help derisk the sector and make financing the sector a more viable proposition.
Eligible projects funded by the bank under ACF are those involved in primary agriculture, agro-processing, and grain trade and pulses, with a maximum duration of eight years and two years for grain trade and pulses at a rate of 12 percent per annum and 15 percent per annum, respectively. ACF currently accounts for 43% of our agricultural lending portfolio.
While we do not intend to lose our leadership in financing the primary producers, the bank’s strategy for growing the agriculture business is focusing on four value chains that include Coffee, Cattle (especially Dairy), Poultry, and Grain (maize, rice, sorghum, barley, wheat, millet).
Looking forward, our experience tells us that to have more vibrant agricultural financing, there need to be more partners to cushion the risk: partners in extension services, training, and climate change mitigation, to name but a few
We believe more effort should be directed towards implementing the warehouse receipt system. This would support farmers in achieving better returns on investment, increase our market share in agricultural financing—especially trade financing—and provide our customers with an alternative to land-based security for loan access. We can improve their funding options by allowing farmers to bulk their produce and use it as collateral.
Our experience shows that agricultural financing provides near limitless possibilities, if only because we work from a low base. Our loan Agriculture loan book has grown by over 70% since 2021 and is settled to double to sh200b by the end of next year since 2020. While it has been a steep learning curve, the lessons are transferable to the sector and can benefit the overall economy with the right support from the government and other partners.
