Agricultural finance needs strong farmers’ cooperatives
The primary consideration in a bank’s lending decision is the capacity of the borrower to repay borrowed funds and therefore the reliability of the borrower’s income. A prospective borrower whose income cannot be reasonably assured commonly gets their loan applications rejected. This is the major dilemma of Ugandan farmers, and others in similar markets. Agricultural finance banks would hardly be sustainable in the African context, for this same reason. And yet, without interventions that transform a typical farmer into an attractive borrower for the bank, agricultural finance may never reach remarkable levels.
A couple of things tend to make most banks shy away from financing agricultural initiatives such as these below.
Lack of business records
One dilemma that banks face with farmers is the general lack of business records. This is mainly due to the large number of farmers that are engaged in subsistence farming. They accounted for 43 per cent of Uganda’s working population by 2014. Such farmers lack any incentive to keep farm records. Whenever they wish to upgrade their enterprises and require capital from banks, there is a total lack of financial and other information against which banks can underwrite credit to them.
Farmers relying on unpredictable weather patterns
Perhaps even more damning is the fact that agriculture in Uganda, as for the rest of Sub-Saharan Africa, is mainly rain-fed. By end of 2017, Uganda’s ratio of cultivated area under irrigation to the irrigation potential was only 0.5 percent.
Rain-fed agriculture is prone to heightened risk of loss of farm produce due to adverse weather conditions such as excessive rain or sunshine.
Such loss usually necessitates additional short term credit by the financing bank to be availed to farmers to help them rectify the disparities arising from poor weather conditions, for example by re-planting crops when planted seed has been destroyed by too much rain before it germinates. Such extra funding is an element of higher credit risk and therefore banks are not ready to finance agricultural enterprises.
High price volatility
Also, most agricultural commodity markets are characterised by a high degree of price volatility. First, agricultural output varies from period to period because of natural shocks such as weather and pests. Second, demand elasticities are relatively small with respect to price and supply elasticities are also low, at least in the short run.
In order to get supply and demand back into balance after a supply shock, prices have to vary rather strongly, especially if stocks are low. Such instability in prices renders projection of future cash flows of agricultural enterprises difficult to reliably do. Banks therefore find difficulty in funding relevant activities.
Lack of good collateral
Where farmers do not have secure tenure to the land they farm, this land is inadmissible to banks as collateral for credit. About 65 per cent of Uganda’s land is held under customary tenure and this is largely unacceptable as collateral for bank loans.
Also, falling back on such land for sell to recover loans would come with huge socio-political challenges for banks. Often, farmers lack alternative collateral items to secure loans.
Difficulty in monitoring farmer’s activities
To the above constraints, in addition to others that cannot be exhausted in this space, is added the fact that monitoring business activities of farmers is difficult. It is important to monitor and ensure that borrowers apply borrowed funds to the purpose for which the loan facilities have been appraised.
This offers guarantee for generation of funds to facilitate repayment. Against prevalent lack of farm records, there is no verifiable evidence of resources utilisation on most farms and therefore bank personnel are unable to track the manner in which borrowed funds have been applied to funded activities.
If we had in place an extensive network of farmers’ cooperative societies however, they would help to consolidate efforts of both the government and banks to develop a credit worthy clientele of farmers.
Cooperatives would offer platforms for collective accountability for borrowed funds and facilitate farmer monitoring by banks, owing to their grass-root and socially embedded structures in farming communities.
In some cases, farm inputs are sourced through cooperatives and since farmers sell their produce through the same cooperatives as well, there would be a reliable set of farm activity information for banks to rely on for lending.
Cooperatives could also play a key role in negotiating fair prices for farm outputs and therefore minimise price volatilities. In advanced models of their operation, they could even be co-guarantors of loans to farmers, against their would-be huge asset bases.
Banks could even delegate the responsibility of joint recovery of funds lent to member farmers to cooperatives. Without such collective treatment of farmers enabled by cooperatives, it is very difficult for individual ones to satisfy banks’ credit rating frameworks and access loans.
Raymond is a Chartered Risk Analyst and risk management consultant
