Should you go for a loan to start farming?

A number of bottlenecks have hindered development of agriculture. Improving the quality of the yield by adopting better and modern farming technologies is the desire of many a farmer.
A major challenge is access to credit to implement the changes and keep a sustained yield on the market.
Financial institutions are reluctant to fund agricultural activities, especially in the production phase, because their risk profile is high.
However, some institutions are taking the initiative in agricultural credit.

Value chain approach
Evans Nakhokho, who manages agricultural credit at Centenary Bank, says the essence of agricultural value chain approach is to offer credit for all activities in the entire process.
“A crop like sorghum has farmers who grow it, traders who buy in bulk, and off-takers like beer companies. They all need credit to finance their activities.”
Agricultural value chain finance ensures the flow of funds to and within the chain to buy inputs, improve efficiency, add value to the produce and secure sales.
Many farmers work on land, which is less than three acres, making access to financing difficult because of unsufficient collateral to guarantee a loan.
The small holdings also make it difficult to sustain quantity of produce needed by big buyers.
As such, farmers have formed loose federations for the purpose of getting credit.

Patrick Bakunda, chief executive officer, Uganda Central Co-operative Financial Services Limited (UCCFS), says the organisation lends money to all kinds of cooperatives and federations.
“As long as farmers are part of a Sacco, or Area Co-operative Enterprise, and these groupings are our members, we lend them money,” he explains.
“Most Saccos are agricultural in nature involved in crop production and livestock farming,”
UCCFS also provides money to federations and cooperatives to buy produce from farmers to sell to bulk buyers like the World Food Programme (WFP).

Low credit offered
With credit facilities from as low as Shs100,000, Nakhokho says the bank offers start-up capital at the input stage of the value chain. “Consistency on the market is important to a farmer. This means that to harvest in time, a farmer has to plant on time. Our loan provides the farmer with the money to purchase seeds and fertilisers and hire labour.”
When it comes to small-scale farmers, UCCFS offers their Saccos a loan range of Shs5m to Shs500m. It charges an interest of 13 per cent per annum; however, the Saccos charge an interest of 2.5 to 3 per cent annually.

Security and benefits
Although farmers are aware of bank loans, the collateral demanded is often too steep for them. Administrative costs of facilitating the loan also have to be taken into consideration and are borne by the client.
Most banks only take collateral on titled land. Yet, in rural areas, families have owned land for generations without any form of documentation. Or, like in the northern region, it is held communally.

But Nakhokho assures farmers that as a bank, they accept movable and immovable collateral. “Movable chattels include animals, in the case of credit for livestock farming. If land is offered as collateral, we accept land titles, land agreements, and wills,” he says.
Consistency of the yield is important to a farmer’s livelihood. To be successful, farmers need not only quantity, but also quality and market presence.
For instance, maize growers in Kapchorwa sell their produce to WFP in bulk. Sorghum growers in Apac sell to Uganda Breweries. Constantly, farmers have to raise quantities as per their agreements.

Challenges
Agriculture is a high risk business with long maturation periods and exposure to weather vagaries. Because of its seasonal nature, farming requires tailored financial services that take into consideration price fluctuations and crop failure.
UCCFS encourages farmers to have incomes separate from agriculture. “If for some reason, the crop fails, we extend the loan period,” says Bakunda. “However, the main concern is that the beneficiaries of the loans have other sources of income to sustain them during that period.”

“Our main concern is if something goes wrong, how do we recover the lost money, and should we refinance the loan?” says Nakhokho.
Overall, even with financial institutions coming up to offer credit to farmers, there is need for extension services in the rural areas. Bakunda says that one of the biggest challenges is that some Saccos are not financially literate.
“Their reporting, auditing and internal control systems are not up-to-date. And because of this, most of them do not qualify for the agricultural loans that we offer.”

Different loan types

Production loans facilitate the planting process to ensure the quality of produce. Quality controls are put in place to ensure that seeds and other inputs are genuine by stipulating that they should be bought from a particular supplier.
The revolving production loan is for those who grow crops that need to be planted continuously. It becomes bothersome to reapply for a loan every three months so there is a limit of three years.
A fixed asset and equipment loan goes into buying farm implements meant to help the farmer sustain a high and quality yield. The repayment period is longer‑five years.
A marketing loan is mainly for investors who buy produce in bulk and bring it to the towns, or carry out further processing and refining to customer specifications.

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