Why banks fear to finance agriculture

Jun 28, 2009

ON June 18, Syda Bbumba, while speaking at a dinner to mark the official cross-listing of Equity Bank Uganda on the Uganda Securities Exchange, urged banks to expand their loan portfolios to the agricultural sector.

Nathan Were

ON June 18, Syda Bbumba, while speaking at a dinner to mark the official cross-listing of Equity Bank Uganda on the Uganda Securities Exchange, urged banks to expand their loan portfolios to the agricultural sector.

Bbumba reiterated the Government’s intentions to invest in agriculture and asked commercial banks to offer cheap loans to farmers.

In Uganda, available statistics indicate that agriculture employs over 80% of the total population and its contribution to the gross domestic product is unparalleled.

While this is true, the Government financing to the sector has been low, compared to the other sectors of the economy such as security.

Though the sector has been prioritised by the Government, the resource envelope has not matched the level of prioritisation.

To make matters worse, farms are far away from bank branches; with poor road networks, recovery, verification and tracking costs for agricultural lending are extremely high, compared to other sectors.

This affects the banks’ profitability and has partly affected lending to the sector.
The agricultural sector requires strategic reforms but specific emphasis should be placed on improving roads in the rural areas. Secondly, agricultural research and farmer extension services need to be scaled up to promote value addition.

Thirdly, market information should be availed to farmers on the local and domestic demands of different food items together with prices.

There is also need to establish an insurance scheme to cater for production pitfalls. Set up guarantee funds and finally, focus on supporting value chains.

If these reforms can be implemented, the private sector can be lured to invest in the sector through commercial farming.

The magnitude of risk is likely to reduce and thus banks may move in to finance agricultural production with better terms designed for rural farmers.

Otherwise, if things continue the way they are, the sh60b Agriculture Credit Facility that has been set up by the Government, may end up in somebody’s pocket and not to the farmers.

The writer works with a microfinance institution

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