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Agriculture - Why the sector is yet to be a 'darling' for lenders!

Agriculture - why the sector is yet to be a ‘darling’ for lenders

Growing up as a kid in Kigezi in the Fifties and Sixities, you could not help but fall in love with Agriculture. Whichever side you looked you would see healthy crops – Maize, sorghum, potatoes, tomatoes, Arabic coffee and you name it. The soils were fertile, the seasons were predictable and rains were not as erratic. People would grow enough food for consumption, store surpluses in granaries, and then sell the rest to towns through the cooperatives. If you wanted credit you would simply go to your local shopkeeper who would advance you money to be repaid on harvesting. Defaulting or Collateral was never in the credit vocabulary of that time.


But those good old days have gone and maybe will never come back. The soils have deteriorated, the rains are erratic and unpredictable, and there are many more mouths to feed. You rarely heard of people going hungry let alone dying of hunger as it is the case today.


It is said that almost 90% of the population still, directly and indirectly, rely on agriculture for survival. And you don’t have to look very far to appreciate the importance of Agriculture to the economy. Just walk down to Owino Market, Nakawa Market or Kalerwe on Gayaza Road and see the thousands of people milling around, buying, selling, and transporting all sorts of agricultural products.


The agriculture sector currently generates more than 80% of exports. Luckily for the country, the world is hungrier and it is said that over one billion people are underfed and malnourished. The East African region has also had its share of famine and Ethiopia has just appealed for food aid to feed about 6 million people because of crop failure. Tragic as this may appear and, given our agricultural potential, these tragedies present us an opportunity to boost our exports and exploit our agricultural potential. And here lies the biggest challenge. Exploiting our potential has been and remains elusive as past experience has shown. In the first place it requires a radical transformation of our agricultural practices. But a radical agricultural transformation requires considerable resources and overcoming a host of other negative environmental factors over which the government and the population have little or no control. Perhaps that is why, unfortunately, past government intervention and support from the private sector have not made any noticeable impact.


 It is, however, important to note that past government initiatives targeting improvement and transformation of agriculture have been bedevilled by pitfalls that could have been avoided. Among the failed government backed schemes are the Rural Farmers Scheme managed by the former Uganda Commercial Bank and Entandikwa or start up capital. Political interference, corruption and mismanagement are said to have contributed significantly towards the failure of these schemes.


Currently the Newspapers are awash with stories about corruption and frauds in NAADS (National Agricultural Advisory Development Services) and it is therefore likely to fail like its predecessor schemes. It has also been reported in newspapers that the North –West Smallholder Agricultural Development Project has closed with little impact registered. According to the media, the project was worth a massive 50.9 billion shillings and was meant to benefit small farmers in the districts of Arua, Adjumani, Koboko, Moyo and Nebbi. The funds had been obtained from the African Development Bank and it would appear that corruption and mismanagement has been responsible for the failure of this project as well.


Why Agriculture is not a darling for lenders

As stated in the foregoing paragraphs, the importance of agriculture to the economy cannot be over emphasised. It employs more than 80% of the population and is therefore a priority area in government poverty alleviation programmes as evidenced by massive investments to this sector. This would therefore, under normal circumstances, be a darling of the lending institutions. Despite all this, however, very few lending institutions are keen on lending to this sector. And this should not surprise anyone. Lenders are not charitable organisations and it does not matter whether they are Commercial Banks, Development Banks, MFIs or SACCOs. Agricultural lending is extremely risky. There is no point in lending money knowing very well you are unlikely to recover it.


A prudent lending manager worth his name should not lend if prospects for repayment of both principal and interest are less than sixty percent. Unfortunately, past performance of agricultural credit has not been encouraging since recovery rates in most cases have been very low, hence there is very little appetite for anyone to lend to agriculture. Moreover, Agriculture is competing with other sectors of the economy that are comparatively less risky such as commerce. Here prospects of recovery are much higher and repayment is accomplished within a shorter period of time.


In spite of all the risks involved in Agriculture, however, the sector is too important to ignore. It is therefore imperative that conditions be created by both the government and the private sector to make agricultural lending more attractive by addressing the many challenges the sector currently faces.


Current challenges facing agricultural sector

There is no question that corruption has been, and remains, a big impediment to agricultural transformation. No effort must therefore be spared in eliminating this vice if progress has to be achieved. But we must also recognise that there other initiatives that have failed because of other factors over which lenders and farmers have little or no control. Chief among the hazards facing agriculture these days are:

  • Long dry spells leading to shortage of water for crops and animals
  • Erratic rains and unpredictable seasons
  • Heavy rains that cause floods and destroy crops
  • Crop pests such as the Banana wilt disease that have devastated plantations in Western and Central Uganda or the potato pest that has invaded Soroti and Kabale districts
  • Lack of storage facilities and depressed prices when there is a bumper harvest
  • Poor road network and lack of transport from the rural areas
  • Lack of collateral and poor land tenure systems
  • Illiteracy on the part of the majority especially the peasant farmers
  • Lack of knowledge in modern farming methods  and marketing
  • Lack of skilled manpower on the part of lending institutions and means to screen, monitor, and enforce loan contracts in a cost effective manner
  • Poor credit culture. People seem to think that money obtained under government backed credit schemes should not be repaid. It is normally viewed as payback for votes during elections


The list of challenges above is by no means exhaustive but is an indicator of how massive the task of improving agriculture is. Some of the problems agriculture faces at the moment are within our control and can easily be rectified within the short-term. There are however others that require massive investment and can only be solved in the medium and long terms.         


How to make agriculture lending more attractive

Agricultural lending can be made more attractive if the majority of challenges above are addressed, something I believe to some extent to be within our abilities to do.


Long Dry Spells

For instance the problems of long dry spells can be minimised by introducing irrigation. Can you imagine that farmers living along river Nile also cry about long dry spells when water is just a few meters away from their gardens? What a shame when the same waters are being utilised in Sudan and Egypt for irrigation! Secondly why cant we harvest water during the rainy season and use it during the dry season so that we have fresh foods through out the year? It has been raining close to six months now and we are just letting water run off to the lake with no attempt to store it for later use.

Lack of storage facilities

There is also the issue of lack of storage facilities. When we have bumper harvests we have nowhere to store excess grains. We simply leave it in gardens to rot. Farmers are also sometimes forced to sell at extremely depressed prices during bumper harvests. The government and the private sector can work together in constructing silos in all parts of the country. They can also establish an organised marketing system that guarantees minimum prices instead of leaving it to the vagaries of open markets.


There has been a bumper harvest of maize this season and a kilogram of maize is being sold at a miserable shillings 100. If farmers have acquired loans for this purpose it is unlikely that they would be able to repay such loans.


Poor Road/Railway Net work

In general the country’s road net work is in a sorry state especially during the wet season. Rail transport is almost non existent. It is therefore difficult to transport food crops from rural areas to urban centres. It is therefore not uncommon for food to rot in rural areas for lack of transport. More investment in the transport sector would greatly alleviate the difficulties currently faced by farmers. The rehabilitation of Kasese and Pakwach Railway lines would greatly boost agricultural production in these fertile hinterlands.


Lack of collateral and poor land systems

Most of the farmers have no property to give as collateral for any borrowing. Land in most parts of the country is fragmented and therefore unsuitable for commercial agriculture.The current land Bill seems to have worsened the situation as both the Landlord and the squatters can not use the land for borrowing. Will lending institutions rely solely on the borrower’s reputation? Only time will tell. The recently passed land bill must be reviewed to take into account the interests of both the lender and borrower if agriculture is not going to be starved of fresh credit.


Farmers using rudimentary tools

The majority of our small farmers are using hand hoes and a few are using oxen. This type of agricultural production has been referred to as being ‘inefficient and full of drudgery’. This has been cited as one of the reasons why the youths avoid farming leading to their exodus into urban areas. The exodus into urban areas has not only created labour shortage in rural areas but has also aggravated unemployment problems in urban areas. These unemployed youths are responsible for high incidences of crime. The government and the private sector must start financing large scale mechanized agriculture for sustainable agricultural production and exports. Large scale mechanized agriculture will not only attract youths and provide employment but can also support a vibrant manufacturing sector for agricultural products


Training for lenders and borrowers

Agricultural lending is more complex than the traditional lending because of lack of certainty. For instance if you lend to a shopkeeper to replenish his stock, it is easy to work out his cash-flows. He can easily estimate his costs, his buying and selling prices, his net margins and he will easily schedule his repayments for principal and interest. Compare this with a farmer who is going to grow maize. He will borrow at the beginning of the planting season, plant the seeds, wait for the maize to grow and then harvest after three, four or 5 months. The assumption here is that the weather will be friendly. He will get adequate rainfall, moderate sunshine and that there will be no glut in the market when maize is harvested for sale. Because of adverse climatic conditions these days it is unlikely that conditions will favour you.


It is therefore important for loan officers to acquire skills that enable them appreciate the uniqueness of agricultural lending. These skills and knowledge will enable them work out more realistic cash inflows and out flows. These cash flows will take into account the seasonal nature of the farmers’ incomes. Credit will be disbursed at the beginning of the planting season and then align the repayment programme to cash inflows on harvesting. In other words the farmer should start repayment only when he has harvested and started selling crops.

Farmers have to be trained in modern farming methods and have to be equipped with entrepreneurial skills so as to capitalize on potential business opportunities. Introduction to elementary booking would help farmers assess the profitability of their farming enterprises.



As explained, agriculture is the most important sector of the economy and therefore demands serious attention from the government and the private sector. Considerable financial resources have already been committed though there isn’t that much to show for it. The government in particular must redouble its efforts in fighting corruption which has to a large extent contributed to the failure of agricultural projects. They can then improve on the infrastructure like road and railway construction, introduce mechanized agriculture, introduce irrigation schemes, harvest water, improve on extension services and generally make agriculture the most attractive sector for investment. Signs are that food production is not keeping pace with rapid world population growth. If the above is done there is no reason why agriculture cannot become a ‘darling’ for the lenders.



John Muhimbise (FCIB)  



Views: 111

Tags: finance

Comment by Mugisa Jared on May 12, 2011 at 13:41

Good views Bwana Muhimbise.

I appreciate the effort you have put in to have this write up. I also agree with you on the way forward. I would like to observe the following:

  1. That given the uncertainity of the agriculture sector, it will be necessary for donors and governments to heavily invest into crop insurance. Then the lender or your pudent manager will be motivated to lend to the (small) farmer. I personally find this very crucial for risk management in agriculture lending.
  2. You have rightly observed that people are are not harvesting rain water and that even those along the rivers are not doing irrigation. I would have loved that you suggest concrete measures that can be taken to encourage or introduce the idea of irrigation among such poor folks. How do we go about the impedements that have humpered them to take on the technology?
  3. Concerning lack of storage facilities, I personally believe there is need for more research on how the suggested Silos can be helpful to the small holder farmers. I have knowledge that there is a very good storage facility in Masindi. I also have experience that the majority of the small holder farmers in Masindi do not use this storage facility. Instead, traders from as far as Lira etc use the facility while the produce of the farmers in Masindi are rotting in their homes. I also know of storage facilities that were constructed during those old good cooperative days that ended up consuming space for nothing and eventually went to the dogs while farmers were producing in the neighbourhoods of those facilities. Instead of asking the government to build Silos ( which are very expensive), I would advocate for an approach that would mobilize the farmers to get more organized to build the stores by themselves. Of course, the government can support the organized farmers groups in constructing the stores mainly availing motivating policies. Here, I am trying to be a rebel against government direct support to, and involvement with the farmers that has always been abused and misappropriated as exemplified in what you quoted on the RF Scheme, Entandikwa and the current NAADS.
  4. I did not understand quite well how large scale agriculture can attract the youth. I know the youth that you have described under the section of 'farmers using rudementary tools' as a vulnerable section of the population that do not even posses land due to the partriarchical arrangements - your father will give you land when you marry, and are still lacking capital. My understanding of large scale mechanization means that you rely more on machines to do work instead of ( youth) human labour. I agree that the youth may find jobs in the agro based industies though. For this matter therefore, I would begin to lobby government to also look into policies that promote agro-based industrial initiatives that will employ the youth.
  5. On the issue of government to fight corruption, I hope you are not talking about the president ( or state) and state (anti-corruption) agencies as one of my friend here believes. Taking a different view, my vision of a fairly free corrupt nation is when civil society is so empowered to hold those practicing corruption accountable. I see a break through when we ( the kind of organized farmers I talk about in my point 3 above) and other civil society stage the fight against corruption not the other way around. Therefore, the struggle should begin with how you - Mr. Muhimbise and me can help the vulnerable to get more strengthened and empowered. We can open a discussion on this.

Oh! you have reminded me to read the Land Bill. Thank you and keep it up.

Comment by Macrines Nyapendi on May 13, 2011 at 15:10

This great John,but i think increased population growth and urbanisation have eaten up huge chunks of arable land mainly in the districts of Mukono, Wakiso and Mpigi.These three districts used to contribute 35% of coffee  but now they produce 15%. All the coffee,banana and cocoa plantation in these districts have been replaced by housing estates, universities and schools.

Comment by Muhimbise John on May 13, 2011 at 16:36

Jared, Thanks for your nice comments. I do entirely agree with you regarding crop insurance because it would reduce risks for both farmer and lender. I have heard that it works in other countries and therefore dont see why it cant work here. 2) That's why we are discussing these issues in Agri-Profocus! Looking at the membership we have experts in agriculture and other sectors. We must not discuss issues, make resolutions and simply leave it at that. We must implement them! I was recently in some villages in Kabale and was impressed by the water harvesting that has been done under the auspices of ROTUM? These are poor people who have been organised together and asked them for some small contribution and the response has been impressive! Almost each homestead now has a 20000 litre tank and  are using the water for drinking,washing and I saw some greens and cabbages as well!

3) We need to find out why people in these places dont use the storage facilities and work out solutions! How come Lira people use them and locals dont? Is it a question of cost,ignorance?

4) How many youths does Madhavani, Ugachic,Jesa Farm and other large scale farmers employ directly and indirectly? Thousands and thousands! Kakira Sugar works employs thousands in planting,harvesting and manufacturing! Indirectly - Thousands - Retailers, wholesalers of Kakira Sugar! The same applies to Ugachic, Jesa Farm, and other commecial farmers

5) Fighting corruption must be done by all Ugandans but the President being No.1 citizen has more responsibility. If he reprimands high profile people in his circle involved in corruption scandals,the small fish will think more than twice before getting involved! The president must make the cost of corruption extremely high!


Thanks Jared for your contribution! We will meet one of these days and have a chat!


Comment by Mugisa Jared on May 13, 2011 at 19:03

Dear John,

Thanks for the feedback. I think my fears on point 4 of your clarifications are now settled.

Kind regards.

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