Agriculture bank long overdue
Posted Monday, February 24 2014 at 15:01
The resolution by Cabinet to set up an agriculture bank to boost commercial farming and ease access to credit, especially for small-scale farmers, is a welcome measure. Shortage of capital and credit is the single biggest constraint to improving farming in Uganda, especially for women and youth groups who find other lines of credit, particularly from commercial banks inaccessible, ineffective and expensive.
Whereas Uganda has experienced a rapid growth of the financial sector that has deeply penetrated the rural areas, the contribution of these formal financial institutions to agricultural credit has remained low. The Uganda Census of Agriculture 2010 by the Uganda Bureau of Statistics indicates that only about 10 per cent of agriculture households had received credit in the past five years. Of this, 61 per cent had accessed credit through informal financial institutions, 29 per cent through semi informal institutions while only 10 per cent had accessed credit through the formal financial institutions.
Farmers fear to get loans from the participating financial institutions because of the harsh consequences when they default on payments. Also, the repayment period, which does not usually coincide with the harvest season, prevents them from accessing the much-needed credit to boost their productivity. Many rely heavily on informal institutions which often offer limited credit to substantially improve farmers’ productivity. The Savings and Credit Cooperative Organisations (Saccos) have remained the most common source of agricultural financing with close to 22 per cent of farming households accessing credit from them.
The government has in the past embarked on a number of initiatives to improve financing agriculture, including the Uganda Cooperative Alliance model and the Agriculture Credit Facility for commercialising agriculture through provision of subsidised medium and long-term loans for agriculture. Though these inititives yielded some good results, there are constraints due to lack of clear guidelines. The major constraint with the Agriculture Credit Facility is its focus on short-term investments where returns can be obtained quickly and yet agriculture requires medium and long-term investments. The interest rate, which is currently between 10 -12 per cent, is very high.
Challenges faced by the Agriculture Credit Facility need to be adequately addressed by the government if the proposed bank is to save farmers. The agriculture bank should, ultimately, transform agriculture and ease the financing burden faced by majority of Ugandan farmers by focusing on farmers’ credit needs.