GROWING CONFIDENCE IN AGRICULTURAL LENDING
A new World Bank report “Growing Africa: Unlocking the Potential of Agribusiness,” says that Africa’s farmers and agribusinesses could create a trillion-dollar food market by 2030 if they can expand their access to more capital, electricity, better technology and irrigated land to grow high-value nutritious foods.
The potential of agriculture to reduce poverty and catalyse development in Africa is appealing but the reality to date points to several factors impeding African agribusiness and market development. In Uganda, the Agricultural Business Initiative Trust (aBi Trust ) currently in its third year of operation has identified low smallholder agricultural productivity, inadequate agricultural finance, poor marketing strategies and inadequate trade opportunities as factors that are holding back that potential.
This is in addition to inadequate storage facilities and assembling points, limited agro-processing and manufacturing (low value-addition activities), less consultative government policy formulation and policy reversals, poor quality standards of agricultural commodities, and slow pace of agricultural export diversification.
The financing for agriculture in Uganda has improved over the last several years as illustrated by the growing confidence of institutions that have worked with different partners to improve financial services for agribusiness. However, a lot still has to be accomplished.
FINCA Uganda Limited (MDI) was the first licensed Microfinance Deposit-taking Institution (MDI) in 2004; it provides life-changing financial services to Uganda's lowest-income entrepreneurs with the aim of creating jobs, building assets, and improving their standard of living.
In January 2010, FINCA Uganda signed onto the Agribusiness Loan Guarantee Scheme, under the aBi Trust. In its three years of operation, FINCA Uganda’s has registered remarkable overall performance on the scheme standing out in terms of volume and value of loans. It is this performance that formed the basis for raising the MDI’s limit to accommodate its wide scope of financial products. It is important to note that due to a slowdown in the economy and particularly difficult market conditions, 2012 was not a good year for the financial sector.
The regulated financial services sector faced some challenges that led to a slower than anticipated growth coupled with changes in technology to help improve its efficiency. It specifically recorded a decline in portfolio quality; illustrated by an increase in the ratio of NPA from 1.6 in June 2011 to 3.9 in June 2012, a deterioration that was largely driven by the construction sector.
A positive lending trend, however small, in a sector which is still perceived to be one of the riskiest in the financial services industry has had a positive impact and led to some tangible results. aBi Trust Annual Report 2012 records several success stories that point to change in attitude among financial institutions. This increase in confidence goes hand in hand with some other positive trends such as competitiveness and investment as the following case study that profiles Mr. Willy Oloya illustrates.
A Traders Tale
Mr. Willy Oloya is a trader and rice processor with over 22 years ‘experience in the rice trade. A resident of Gulu in Northern Uganda, Willy Oloya has other agricultural interests including maize and oilseeds to a smaller extent though his primary trade is in rice.
Oloya opened his account with FINCA in 2009. At the time he had a 10 ton rice huller machine and wanted to access credit to acquire a 60 ton rice huller machine to build a rice factory. His asset base and profits have since grown from USh 10M to USh 50M. As the demand for rice grew Mr. Oloya quickly recognized that he did not have the capacity to open up more land for the raw material, and that he would have to rely on the farmer communities to produce and supply to him. In order to sustain his growing business Willy has collaborated with several farmer groups, which he has categorized according to the volumes they deliver. In turn, he has linked other commercial farmers to FINCA to access credit to increase productivity.
Trading as M/S NILE SAFARI MILLERS, Oloya reports that the loan has enabled rice production financing at different stages hence increasing rice output and production from 25,000 metric tons (2011) to 200,000 metric tons (2012) since he works with many more suppliers than those he has linked to the MDI. He currently associates with 2,280 members from 108 farmer groups, located in three Districts of Gulu, Amuru and Nwoya to whom he provides the following services:
i. Identifies stage at which they are for most suitable financing needs;
ii. Supports their crop selection process, primarily rice which has more stable prices than other cereals e.g. maize;
iii. Has a permanent staff to provide farmers with relevant information on the enterprise they are promoting;
iv. Hires consultants and Agricultural extension workers to guide farmers on best practices in rice production and post-harvest handling trainings and advice;
v. Avails farmers small machinery at a fee to support the land opening process;
vi. Provides, at a fee, hulling and storage facilities.
To ensure that he is the farmers’ primary trader, Mr. Oloya has set up buying centers nearer to where the groups are located and contracts farmers on a seasonal commission basis. In addition, he offers farmers other services like planting, weeding, harvesting, storage and marketing. He states that these interventions explain why 99% of the farmers fulfill their commitments to him.
The farmer groups identified by Mr. Oloya are in turn approached by the MDI which trains them three to four times on various aspects of agribusiness - saving, accessing finances and record keeping. It also appraises them for facilities which are sometimes simultaneously done with the training. Finally, the MDI identifies those who are ready for financing either in groups or individually and finances them.
In 2012, 16 groups were identified by Mr. Oloya, out of which the MDI financed 10 groups with 292 members, with the rest being further developed. Out of these groups, five were visited and the findings from the visits are mixed results.
The results from the visits outlined below provide interesting lessons for different stakeholders, including ALGC. While the loans were welcomed by all farmer groups, perceptions of their utility and actual utilization differed from group to group. In the case of Owoo Commercial Farmers, the FINCA facilities were considered beneficial and had been repaid by the time of the visit. Similarly, Aringolo Group had in addition to the loan which they had repaid benefited from the use of tractors to open up land.
ALGC is now aBi Finance Limited a finance arm of aBi, it manages an endowment fund that was set up to ensure that the Trust exists in perpetuity and with the objective of providing funding for the aBi Trust to enable it execute its programmes activities in a sustainable manner as well as promoting provision of credit facilities to agricultural based small and medium sized enterprises.
