Mon. Sep 21st, 2020

Supporting Farmers

Bank of Uganda farm loans explained

6 min read
Rosette Bamwine explaining the farmer’s loan

Rosette Bamwine appearing before a radio talk show to explain the farmer’s loan. Photo by Shabibah Nakirigya

By Shabibah Nakirigya
The government of Uganda in partnership with Participating Financial Institutions (PFIs) i.e. Commercial Banks, Micro Deposit-Taking Institutions (MDIs), Credit Institutions (CIs) and Uganda Development Bank Limited instituted the Agricultural Credit Facility (ACF/Scheme) in 2009 whose operations commenced in 2010.
The scheme is administered by the Bank of Uganda and its operations are guided by a Memorandum of Understanding signed by all the stakeholders.
The government is represented by the ministry of Finance Planning and Economic Development (MoFPED).
The key objective of the scheme is to facilitate the provision of medium and long term loans to projects engaged in agriculture and agro-processing as well as grain traders on more favourable terms than are usually available in financial institutions focusing on commercialisation, modernisation and value addition.
In the excerpts below, Rosette Bamwine the head credit analysis and marketing, agricultural credit facility at Bank of Uganda reveals that the scheme among others intends to improve food security and PFI’s confidence in lending to the agricultural sector.
Seeds of Gold: Who is intended to benefit from it and how big is it?
Bamwine: Everyone along the agricultural value chain i.e. all farmers from small scale to large scale , agricultural processors, importers of agricultural inputs, grain traders, ranchers, breeders, among others. It is a revolving facility whereby repayments are ploughed back and the government also releases funds every year (when necessary), which are combined with the funds from the PFIs to finance the eligible projects.
Seeds of Gold: What is its purpose and repayment model?
Bamwine: Eligible activities under the ACF scheme include farming, and agro-processing as well as working capital for grain trade and investment in grain post-harvest infrastructure. Credit provided under the scheme is used to finance: agricultural machinery, post-harvest handling equipment, storage facilities, agro processing machinery and equipment, purchase of grain, land opening, paddocking, agricultural inputs such as pesticides and fertilisers; biological assets in poultry and piggery, cows and goats for restocking the farm as well as crop husbandry and any other agricultural and agro-processing related activities. Working capital is extended up to 20 per cent of the total project cost.
The ACF scheme operates on a refinance basis and loans are accessed by farmers and agro-processors through PFIs. The maximum loan amount to a single borrower is Shs2.1b, although this amount may be increased up to Shs5b on a case by case basis. The maximum loan period should not exceed eight years while the minimum should not be less than six months.
Grace period is capped at a maximum of three years, depending on the project requirements. The interest rate to the borrower is fixed at 12 per cent per annum with the 50 per cent (for commercial banks and UDB) or 70 per cent (for CIs and MDIs). Loan processing fees charged by PFIs to eligible borrowers should not exceed 0.5 per cent of the total loan amount with legal documentation and registration costs being borne by the borrowers.
However, for the grain trade facility, the interest rate is fixed at 15 per cent per annum with a maximum loan period of two years and no grace period.
Seeds of Gold: There are many banks currently offering agriculture credit in the market. How different is this?
Bamwine: The ACF offers more favourable terms than are available on the market. These include:
I. It is a risk sharing facility in a way that the government provides 50 per cent of any loan given to the client through commercial banks and UDBL and 70 per cent for the CIs and MDIs.
II. Lower interest rate fixed at 12 per cent per annum and 15 per cent for grain trade.
Seeds of Gold: Most of the farmers are in rural areas how closely are you prepared to monitor the banks’ services reaching these farmers?
Bamwine: The scheme is a partnership between the financial institutions and the government and most of these FIs have branches in rural areas thus easing the outreach.
There are also various forms of media that reach all parts of the country such as newspapers, social media, radios, TVs among others.
Benefits of the scheme 
• Increased level of confidence in agricultural finance to the PFIs resulting into increased lending to the agricultural sector even without the government guarantee.
• Development of innovative financial products in agricultural finance & improved risk management tools by PFIs and development partners.
• Increased access to affordable credit facilities from PFIs by farmers and agro-processors
• Increased productivity and value to agricultural projects resulting into improved food security and produce that attract better prices thus boosting farmers’ income.
• Increase in employment levels – more people employed in commercial farms and other Agribusinesses.
Challenges 
• High systemic risks from the environment (drought, flood & disease) and markets (price volatility, trade policy & trade practices affecting exports & market access).
• Inadequate rural infrastructure and socio-economic conditions at the farmer level.
• Limited awareness of the scheme by prospective beneficiaries.
• Lack of Collateral by prospective borrowers.
• Some PFIs are still risk averse on lending to the agricultural sector and prefer giving their own funds under commercial terms.
• Holistic Approach: Commercialization and modernization of agriculture requires much more than access to affordable sources of finance e.g. need of genuine inputs and favourable policies and market among others.

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